Ask Tim & Tim

YFP 349: Your Top 3 Questions Answered by a CERTIFIED FINANCIAL PLANNER™

Posted on by YFP Media

YFP’s Tim Baker addresses key questions from the community, covering retirement savings, cost of living, and the importance of the nest egg calculation.

Episode Summary

On this week’s episode of the YFP Podcast, host Tim Ulbrich is joined by YFP Co-Founder and Certified Financial Planner, Tim Baker, to dive into some of the most common questions from the YFP community. He covers topics ranging from debt repayment to investing and retirement planning in three key questions:

How much do I need to save in order to retire? How do I determine what is enough?
The intricacies of cost of living and understanding the income you’ll have in retirement.
Why the nest egg calculation is crucial in financial planning.

Our discussion also delves into the pros and cons of paying off low-interest debt, such as student and auto loans, versus investing. Tim Baker also shares the strategies for prioritizing debt repayment, retirement savings, and saving for a house down payment.

In a particularly insightful segment, Tim and Tim tackle a question from a listener with a $200,000 student loan balance, where Public Service Loan Forgiveness (PSLF) isn’t an option. Tim Baker shares his perspective on weighing the decision between paying off the loans and pursuing forgiveness over 20-25 years, including the potential tax implications.

Join us as we navigate the complexities of financial planning and empower you to make informed decisions for a secure financial future.

About Today’s Guest

Tim Baker is the Co-Founder and Director of Financial Planning at Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 12,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements.

Tim attended the United States Military Academy majoring in International Relations and branching Armor. After his military career, he worked as a logistician with a major retailer and a construction company. After much deliberation, Tim decided to make a pivot in his career and joined a small independent financial planning firm in 2012. In 2016, he launched his own financial planning firm Script Financial and in 2019 merged with Your Financial Pharmacist. Tim now lives in Columbus, Ohio with his wife (Shay), two kids (Olivia and Liam), and dog (Benji).

Key Points from the Episode

Debt repayment, investing, and retirement planning.
Retirement savings and investment strategies.
Retirement planning and nest egg calculation.
Retirement planning and the “Nest Egg Exercise” to connect long-term goals with current actions.
Prioritizing debt and investing strategies.
Prioritizing debt payoff vs. investing for financial freedom.
Financial planning and prioritizing goals.
Managing $200,000 in student loans without PSLF.
Student loan debt and financial planning.

Episode Highlights

“I think what, what sometimes happens, Tim, is that we try, we try to do a lot. We try to do a little bit of a lot of things versus a lot of like one or two things. Yeah. So I think working with a planner to help you prioritize is going to be really important.” – Tim Baker

“So I think the best thing, and we we’ve done this a lot, and when we speak, Tim, the best I think way to determine if we’re on track to retire is to do a nest egg nest egg calculation” – Tim Baker

“But I do think that that push and pull between today and tomorrow is really important. So let’s focus on that trip to wherever; let’s focus on the down payment for a real estate property or whatever that is, like those things, I think, have to be part of the plan as well.” – Tim Baker

“The cons of paying off debt, I think, is the opportunity costs of, like, what you might miss in terms of if you were to invest that, especially if the interest rates are really low, and then just kind of just overall money,less money for investments. The pros, I think, of investing, is potentially higher returns, although not guaranteed, compounding growth, potential tax benefits, if you’re putting in things like 401Ks and IRAs.” – Tim Baker

Links Mentioned in Today’s Episode

Episode 272 – How Much is Enough
YFP Planning – www.yfpplanning.com
YFP+ – yourfinancialpharmacist.com/membership
Subscribe to the YFP Newsletter
YFP Open House on March 14, 2024 at 8:30pm EST – yourfinancialpharmacist.com/openhouse
YFP Disclaimer
Tim Ulbrich on LinkedIn
Tim Baker on LinkedIn

Episode Transcript

Tim Ulbrich 00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, YFP Co-Founder, Director of Financial Planning and Certified Financial Planner Tim Baker joins me to answer your top three financial questions. During the show we tackle pros and cons of paying off low interest rate debt versus investing strategies to optimize student loan repayment for those not pursuing Public Service Loan Forgiveness and how to determine how much one needs to save for retirement. Before we jump into the show, I want to make sure that you’re aware of our next YFP Open House that I’m hosting on Thursday, March 14 at 8:30pm. Eastern. If you’re wondering how working one-on-one with a financial planner can help you achieve your financial goals, the best place to begin is by signing up for our open house. You can do so by visiting YourFinancialPharmacist.com/openhouse.

During this open house, we’ll help you gain clarity on your vision for living a rich life and how the financial plan can become the engine for achieving that vision. We’ll also help you determine how much is enough when it comes to retirement planning whether or not you’re on track. I’ll be taking the group through nest egg calculation. You can learn about the nuts and bolts of hiring a financial planner including what to look for different types of planners that are available and why fee-only planning matters.

And finally, we’ll cover an overview of YFP services, including our financial planning, and tax and accounting services. Make sure to sign up to attend live. We won’t be recording this workshop. For those that attend, they’ll receive an interactive workbook as well as a free resource: Where Should My Next Dollar Go? that will help you assess your overall financial well being and provide clarity on how to efficiently deploy cash, avoid overspending and prioritize various goals. Again, you can register for this Open House on Thursday, March 14 at 8:30pm Eastern by visiting YourFinancialPharmacist.com/openhouse. Alright, let’s jump into today’s episode.

Tim Ulbrich 02:04

Hi there, Tim Ulbrich here. Welcome to this week’s episode of the YFP Podcast. I’m excited to welcome Tim Baker back to the mic as we’re gonna put him on the hot seat with some rapid fire Q&A with some of those common questions that we get from our community, including those around debt repayment, investment, and retirement planning. Hey, Tim, it’s been a while since we’ve had you on the show, what’s new, what’s exciting?

Tim Baker 02:24

What’s new? We’re in the throes of tax season. So I’m, we’re busy there. I’m talking to a lot of potential clients coming on board. Baby number three is about a month away, Tim. So we’re preparing for that. I joke we have about 1000 projects that we have to complete before the baby gets here. So you know, kind of maneuver in my my wife’s lifts list here. So but yeah, all good. Thanks. No complaints.

Tim Ulbrich 02:55

Well, we’re excited to jump into these questions. I know it’s a busy season for you, busy season here for YFP as you mentioned in the midst of tax season. And, you know, we’ve been, we’ll talk at the end of this episode about our YFP Plus community, our new community that we’ve been offering now for a few months. And it’s been really exciting to see the questions and the engagement that that group has, and one another jumping in answering those questions. And we wanted to pull three of the most common questions that we get, whether it’s inside of that community, whether it’s, Tim, questions that we get when we’re speaking that come up on repeat. And so they may be variations of these, but you know, common questions around things like hey, how much do I need to have saved for retirement? What are the pros and cons of paying off debt versus investing? That’s probably the most common question that we get. And, you know, what should I do with my student loans? And how can I best optimize the repayment strategy? So let’s jump into these one by one. Tim, the first question that we have is a big one, but how much do I need to save in order to retire? How much is enough? And how do I begin to determine what that number is?

Tim Baker 03:57

Yeah, so I mean, it depends. Just gotta get that out of the way, right. I mean, this is such a multivariable thing. I think it’s just really hard to determine, you know, without a, you know, pretty deep level analysis to be honest Tim, you know, I know, you know, I’ll talk through some rules of thumb here and things like that. But, you know, like I was talking to a couple last night, and, you know, I think the the wife, the pharmacist was, like, you know, I kind of want the same level of comfort in retirement that I have today in terms of like my standard of living and the husband, the spouse, was like, I could live in a tent and be completely content. You know, so like, so like, that’s, that’s a big thing. You know, like if, if what your need is in retirement, you know, you could have enough saved today, Tim, like it’s it really don’t know. So the variables there, some of the variables could be you know, the standard of living the time in retirement. There’s a lot of clients that we work with that like, will say like, Hey, like I don’t know how long I’m going to be around because of my family history. So we, you know, we put that in, in in play, taxes, inflation unexpected, you know, expenses, a lot of that can be medical, even the inability to work so that, you know, a lot of people, when they’re when they’re doing this calculus, they’ll say, Oh, I’ll work till 70. Or I’ll work part time. And the stats say that 40% of the people out there are going to going to stop working earlier than they think that they do. So you know, what I always do, there’s, there’s lots of fancy ways to kind of calculate this. And you know, if you’ve ever heard of Monte Carlo analysis, this is where we, we simulate portfolio returns 1000s of simulations and say, with, you know, X percent probability of success, we typically want, anywhere from 70 to 80% probability of success, you might say, Tim, why not 100%. Typically, if we’re, if we’re lower than, you know, 70%, we’re going to adjust the plan accordingly, in real time to get it to the end of that.

So I think the best thing that and we we’ve done this a lot, and when we speak, Tim, the best I think way to determine if we’re on track to retire is to do a nest egg nest egg calculation. And this was really born out of, Tim, like, back in the day, when I started advising people on their on their, you know, retirement stuff. What I learned from a mentor is we would say, hey, based on your based on these assumptions, you need $3.5 million to retire. And then we would just move on to the next thing. And I would see the, the look in people’s eyes were like, that number just didn’t hit the mark at all, like it was just like, it was kind of equated to like student loans where it’s just like Monopoly money, that doesn’t make any sense to me at all. So what I started to do is I would take that number, and then I would kind of use another time value of money calculation to discount it back to a number. So if you’re the client, Tim, a number for Tim in 2024, that actually is digestible to you, that’s palatable to you that says, okay, like that makes sense. And typically, what we’re doing is that we’re comparing, you know, what you’re putting into your 401 K, your IRAs, what you already have, you know what your allocation is, so we can kind of make some assumptions on performance returns, how long you’re going to work. And then we can say, hey, you’re on track by this amount of dollars per month, or you’re off track by this amount of dollars per month. And obviously, that that hill gets steeper, if we’re off track, the closer that we get to our target. So, to me that that’s a huge thing to actually connect the dots to, like when I ask people like, are they on track? A lot of people say I have no idea or they’ll say, like, I’m using a calculator, that typically is not a great indicator of where they’re at. So, but I think a lot of this goes back to kind of, you know, move the answer forward is like, you know, what do you need, you know. A lot of the estimates, you know, a lot of the estimates will say, you know, a lot of retirement planners will say, hey, you need 70 to 80% of your pre-retirement income in retirement. And that’s typically the reason for that. It’s like, you’re typically saving 20, 30% of your income, pre retirement, like so leading up to the years of retirement. And you’re not doing that in retirement. So, but a lot of that, Tim, also misses the mark, right? Because it’s like, alright, well, if I’m, like, 20-30 years from retirement, what does that even mean to me? Right. But if you take, you know, I did a kind of a, an example here, if you’re making $125,000 today, and you have a 30 year career ahead of you, and you get a 3% cost of living adjustment every year, in 30 years, that equals $303,400.00. Three or three 400.

Tim Ulbrich 08:55

Almost hard to believe, right? When you when you put the numbers on that.

Tim Baker 08:58

Yep, But then if you look back 30 years, like look back at, like, what a total cost of like a house was or like, what the… you know what I mean? Like, so you have to, you know, it’s perspective, right? So, so 30% of that $303 is about $212. So, essentially, what you need is $212 for 30 straight years, so every year $212. And then we had to, you know, account for inflation and things like that.

Tim Ulbrich 09:22

$212,000?

Tim Baker 09:24

$212,000. Right. So you need a portfolio. So if you just do it in simple terms to earn 12 times 30 Like, that’s kind of like, that’s a very, you know, linear way to look at it. But then you have to, you know, factor in things, you know, like variable expenses and things like that. So, what a lot of people will point to which, I don’t love it, because I think it can steer people wrong, but I think at least gets a like a foundation of where to think about this is the 4% rule. So the 4% rule is, you can withdrawal 4% of your savings in the first year retirement adjusted for inflation ever year thereafter, to ensure that your saving, you have enough saved for 30 years. So the way to kind of backwards plan to that is if you multiply your annual retirement expenses, so let’s say you need 40, that let’s say you need $60,000 per year, let’s say 20,000 of that comes from Social Security, then we need $40,000. $40,000 times 25 years, so we’re just doing the 4% inverted is a million dollars, or a million dollars times, you know, point 0.44% is that $40,000. So that’s a way to look at it. But again, like, I don’t know, if that does a great job of, you know, planning for longevity, you know, there’s a lot of there’s a lot of errors in that, you know, in that assumption, but I think it’s a good place to start thinking about this. So, I mean, it’s a, it’s a really big question that has a lot of, you know, at anytime that you look at something over, you know, 2030 years, I guess, if you’re closer to this, maybe maybe the questions a little bit easier to answer, but, you know, looking at expenses, you know, looking at budget, the budget never goes away, you know, people are like ugh budget, you know, scenario analysis, I think all of those things kind of play into this.

Tim Ulbrich 11:10

Again, this is why I love as you mentioned, the the nest egg exercise, you can see the connections that people start to make in that exercise. Now, of course, especially if we’re looking over a long horizon, right, 20-30 years out, or even if it’s 10 years out, like things are going to change, this is not a one and done, you know, type of thing. We’ve got to be looking at it on a regular basis. But when you’re able to take people from that overwhelming shock number, right, 3 million, 4 million, 5 million to as you said, Hey, here’s what we need to be doing this year and actually, this month. Like this is what we need to be doing based on what we have saved, based on a set of assumptions that we obviously have to think through and think about risk tolerance, capacity, all those kinds of things, based on what we choose to assume or not with Social Security, you know, based on what you’re getting through your employer, all these things are going to feed into where we at currently, and what do we need to be doing per month. And, you know, I did this recently, during an Open House that we did in February, I’ll be doing it again, in our next open house coming up on on March 14, again, you can register for that yourfinancialpharmacist.com/openhouse.

And what’s fascinating about that is I can see this come to life, when people start to just see how these numbers are calculated and see the assumptions in place. Because, again, we’re actually making it mean something today, right? When we look at a number per month, we can start to see how that does or doesn’t fit in with the budget, we might not like that number. But we can start to actually work with that. And in fact, sometimes we find out through this exercise that people are over saving, you know, and there’s a conversation to be had there about, hey, how do we feel about it? What other goals are happening? And might we shift around, you know, different priorities? And then you can toggle some of these factors like, Hey, I said, I wanted to retire at 67. But what happens if it’s 62? Or 58? Or, you know, hey, I’d like the work that I’m doing, and I don’t really see myself going from full time did nothing for 30 years. What if I’m working part time and having an income? And these changed things significantly when you look at these calculations.

Tim Baker 13:08

Yeah, I mean, if I do say so myself, I think it’s a great tool. I think it was born out of like the misconnection between that big number in the future and what we’re doing today. And I think to your point, like being able to, like toggle those levers and pull those levers, you know, whether it’s, you know, working longer working less, you know, dialing back things, you know, down up things like I think it’s really cool to see. And to your point, yeah, we’ve had a lot of clients that have definitely, you know, we talk about, you know, living a wealthy life today and will live in a wealthy life tomorrow. Sometimes the calculus shows that they’re really focused on living a wealthy life tomorrow, in spite of today, meaning like, you know, I think it’s rare for a financial planner to say like, Hey, you’re saving too much for retirement. But I do think that that push and pull between today and tomorrow is really important. So like, let’s focus on that trip to wherever let’s focus on you know, that, you know, down payment for a real estate property or whatever that is, like the like those things, I think, have to be part of the, of the plan as well. So yeah, it’s a great question to ask. It’s just really hard to, to to answer without, you know, a lot of detail. A lot of, you know, what’s the balance sheet look like? What are the goals and, you know, go on from there.

Tim Ulbrich 13:14

It is.

Tim Ulbrich 14:34

If listeners want to dig deeper on this topic, first love to have you join us at the Open House. Second, we’ve covered this as a stand alone topic on the episode on the podcast before Episode 272. Tim and I talked about how much is enough and how do you determine that. We’ll link to that to the show notes. Make sure to check out that episode as well. Our second question we have as I mentioned before, probably the most common question that I get when I’m presenting is Hey, what are the pros and cons of paying off low interest debt, such as a student loan or auto loan versus investing. Furthermore, how do you think about prioritizing strategies for paying down debt, saving for retirement and saving for a house down payment? Tim, I’ll add to this before you jump in here that this is a really common question that we see, especially among, you know, those within that first 10 years of graduation, right. They’ve got a lot of things that are coming at them. I’ve got, you know, a bunch of student loans, I’m looking at buying a home, you’re telling me that I should be investing in saving for the future? I need an emergency fund. How do I begin to prioritize and weigh all these things? And, again, before you say, it depends, like, I think this is an example question where the value of planning is so important, because we got to get all those things out of our head on the paper, so we can start to plan. So what are your thoughts here?

Tim Baker 15:46

Yeah, I mean, I always look at debt as like a spectrum. I think you have, you know, good debt, which, you know, I would I would categorize as, like a mortgage. I would still put student loan debt in there, because, you know, a mortgage is a, you know, typically appreciating an asset that you can, that you’re living in, raise a family. Student loans, typically, you know, the price of doing business to become a pharmacist, you know, higher levels of of income, you know, post degree. But then as you go like, like auto loans, again, again, these are used assets that are typically depreciating. You’re typically paying higher interest than you have in the past, but it serves a function of like getting you to work. But then as you go, it might be things like, debt for furniture or other types of personal loans. And then credit card debt is typically at that, you know, other end of the spectrum of bad debt, where it’s, you know, you’re typically, this is the purchase of of wants not necessarily needs, or, you know, it’s there because of a lack of an emergency fund or kind of planning, planning for those unexpected things. So, you know, I think like, where you sit, where you draw the line between good debt and bad debt, it’s going to different be different for everybody. You know, typically, it’s, it’s the car to the right is good debt. So car, student loans, mortgages, are okay. And then everything for the left is not. Some people will put cars like a bad debt. So I think it just depends on what your again, what your goals are, what your what your aspect of debt. You know, I was asked recently by a prospective client about like, you know, hey, was watching something that Dave Ramsey said about paying off, you know, a mortgage that’s less than 3%. And he’s very, paints with a broad brush and said, like, you know, really any debt, you’re kind of a slave to the master is kind of how he describes it. And I think like, there’s a psychological thing of this, like, if you if you feel like that debt, is preventing you to be financially free, that I would treat that differently than something else, you know, like, I have no qualms about sitting on my two and a half percent mortgage for 30 years, I just don’t. So I think if we look at this, like the pros of paying off debt, versus invest in, you know, the paying off debt, it’s a guaranteed return, right? So if your debt is 6%, that’s, you know, you’re not necessarily gonna get that in the market consistently. So it’s a guaranteed return. I think it reduces financial stress. So eliminating debt can reduce stress and kind of simplify your finances. You do, I think, if you are completely debt free, I think you can you operate differently, you think you look at the world a little bit differently than if you have, you know, multiple liabilities. That’s kind of, you know, weighing on you and we see this with student loans, Tim, right. Like, you know, I feel suffocated, because I have this $200,000 in debt. The cons of paying off debt, I think, is the opportunity costs of like, what you might miss in terms of like, if you were to invest that, you know, especially if the interest rates are really low, and then just kind of just overall money, you know, less money for investments. The pros, I think of investing is potentially higher returns, although not guaranteed, compounding growth, potential tax benefits, if you’re putting in things like 401Ks and IRAs, The cons are again, market risk, there’s no guarantee. And, you know, complexity, like you know, if you’re just paying off debt, you know, a lot of people will make investing more interesting or sexier than it needs to be I look at as an as an investment as it should be super boring, but not everyone does that. A lot of people don’t do that. So that’s, that’s kind of my, there is no right or wrong answer. I kind of have my own biases.

When I’m working with a client, I’ll look at their risk tolerance. I’ll look at what their goals are. I’ll look at like, what are they saying to me? If they’re saying things like, this debt keeps me up at night, I’m gonna treat that very differently than if someone’s like, yeah, like it’s whatever. But there is a mathematical component to that as well. In terms of prioritize and financial strategies or just get the financial, like, what do we do, you know, for paying down debt versus saving, you know, I was speaking to, you know, a prospective client the other day, and they have real estate, they have some investments, they have a brokerage account, no emergency fund. So like, we’re we’re doing steps, six, seven, and eight, before we’re doing step one, really. So building an emergency fund, having a high yield savings account with, you know, those non-discretionary, you think expensives, just stowed away. Super important. That’s, that’s a foundational thing. I think from there, it’s also like the consumer debt, so like credit cards, you know, furniture debt, whatever that looks like, I think is really important, because it’s typically higher nterest that you want to get get out from underneath.

I would also put taken advantage of the employer match up there, like, you know, most of the time, I think that is really, really important to get the free money. But still see people that don’t take advantage of that. And then I think looking at higher interest debt, paying that off. So, you know, maybe that is a car, you know, we’re seeing, you know, car rates, I think you you mentioned it in YFP plus community, just what those rate rates are. Shocking, you know, they’re high. So I assume, yeah, I would I, I would pay that off before I would go into the market. So I think that that to me, and again, like the one thing that the questioner asked, you know, it’s like, what about saving for retirement, again, I kind of look at, get the match. And then I look at it as that as you are navigating these other things to me, in the back of your mind, it should be a race to 10%. Like, get the match, which may be 5%. But then you really want to get to 10% as quickly as possible, and then assess from there. And then I think, like, to me saving for a house down payment. That’s a really tough one to prioritize, Tim, because oftentimes with this one, like, like you’re, you, you rationalize it, you know, you rationalize your decision. So like, it’s a super emotional decision, once you start going down the path of looking at houses, being a Zillow warrior, actually go into houses, like those timelines get cut overnight. And I always joke, like, I was talking to a prospective client. And they were like, Yeah, I want to buy a house in the next two or three years. And I talked to them two weeks later, and they were under contract. So to me, like, if that’s important for you, I would put that to the top, you know, put that at the top of the list, you know, and prioritize that. I think what, what sometimes happens, Tim, is that we try, we try to do a lot. We try to do a little bit of a lot of things versus a lot of like one or two things. Yeah. So I think working with a planner to help you prioritize is going to be really important. And it’s hard to do. Sometimes it’s hard to do that when you’re stuck inside your own head, or even with like a spouse. So sometimes that you know that that third party objective viewpoint to help you guide guide that conversation, I think is important. But again, there’s really no right or wrong answer here. It’s just tailoring to like when I say it depends. What I mean by that is, you know, it depends on what your balance sheet are, like, what your balance sheet looks like, and what your goals are. And unfortunately, you can’t like look at a neighbor or a colleague, because like you’re going to be different. You are a unique snowflake. So you know, your your experience, your life experience, your your finances are going to be different than than everybody else’s. And I think, you know, developing a plan that navigates that is super important.

Tim Ulbrich 22:39

Yeah, Tim, the visual that comes to mind, as you’re talking and I alluded to this, when I asked the question is, you know, we so often live with all of these competing priorities that are swirling in our minds, right? Guilty as charged. And it really is a step that often is hard work. But it’s really important because we’re a third party can be so helpful for us to kind of get out of our own way and make sure we’re looking at all the factors, making sure we’re not thinking of things in a silo. But it’s like, we got to put all the puzzle pieces out, we got to get them out of the box. So we can start to figure out how they actually come together. And then to implement the plan, looking at our cash flow, looking at our goals and things to actually begin to execute on that. But we tend to go into execution mode, without really considering all the pieces and parts and how they impact one another. And this sounds easy, but it’s not right. You know, in this question, you know, we’re thinking about paying down debt, you know, and that could be more than one type of debt. We’re thinking about, hey, when might we buy a home we think about saving for retirement, when you look at the percentage of take home pay that these things will take up it is huge. These are these are big decisions. And we’re not even talking about other types of goals, right vacation, travel, what else is going on the financial plan, so I feel like there’s such an important step here of, before you start running in any one direction. Hey, let’s get on with This down on the paper. You know, you did this for Jess and I back in the day, like, let’s create a prioritized list of these. What’s the target? What’s the goal? How much do we need? What priority, how much per month? And then we start to actually create the buckets and the mechanism and the thing to actually make these come to life. And when you’re doing that, and you’re automating that, I can’t even adequately describe the feelings that come when you know that that system is in place working for you.

Tim Baker 25:26

Yeah and I think like to go back to the first question, like, we’ve had conversations with clients that like, you know, they’re saving so much for retirement, and they’re like, we can actually do a little bit less than get into the house sooner. Right. So like, like, if you think about it, like, my, my Pop Pop back in the day, like he had a pension, there was no such thing as 401k is like, all of these other things that have like, like, made financial, you know, even my parents, like, it’s very different. Now, you go into the workforce, and you have 30,000 things that are like, like, vying for your attention and your your dollars. And it’s just different than what it was before. And now, like the onus, especially on retirement is up to you versus like, your employer. But it’s also like, a lot of the advice that that you’re getting is from, like, the old generation of like, hey, buy a house, make sure you’re saving for it, and those are all good things. But the world is different now. And I’m not saying that, like, that’s, that’s bad, that’s bad advice. But like, you got to kind of have to, like, you know, walk to your own tune, so to speak. And I think like, a lot of people get get anxiety because they’re like, I’m not like, I’m not doing enough here. I’m not doing enough here. And, you know, I think like, if you’re doing a plan, you’re doing enough, right.

And I think part of the part of the great thing about plan is that you are slowing down in the day to day of like busy living and objectively looking at your situation and reflecting, self reflecting or forcing to reflect of like, Hey, are we on the track that we’re supposed to be on. And also to like, celebrate the wins, like, you know, when we start with a client, you know, the the first two meetings that we go through is what we call Get Organized, where we’re building out a nice clean balance sheet of all the assets that we own, minus all the liabilities that we owe. That’s our first data points. Think of that as like the before picture. And then the second meeting is what we call Script Your Plan is all about, okay, now that we know where we’re at, where are we going, so let’s talk about you want to buy a house, you want to have a family, you want to be able to retire at this age, you want to be able to, you know, build your real estate empire, you want to be able to do XY and Z. And once we have those two foundational thing in place, the answer “it depends,” then transforms to this is what I think you should do because I know what your balance sheet looks like, I know what your goals are. And this is the you know, the the objective advice that we think is in your best interest. So like, that’s going to be different for everyone. And I think like that, you know, tracking that from data point one to three, you know, two years, three years in the future, we start to see quantifiably the benefit, we think, you know, net worth is the best measure of that, the benefit from a net worth perspective, but then also the qualitative benefits of like, wow, like, I took that trip, I am spending more time with my family, like we had a family sooner than I thought, we bought the house. You know, I thought it was gonna take us five years, we did it live in less time. So to me, those are the benefits of, of, again, working on a plan, working with a planner to help prioritize all these things, right?

Because, you know, we talked about this in the in the tax world, we feel that working with one of our CFPs and a CPA side by side and stacking years of intentional financial planning and intentional tax planning will get you to where you need to, you know, be quicker. But you know, I was working, I was working, talking to one of our planning clients that’s considering tax, and they have a tax person, but they’re just you know, and it’s a question of filing separately and filing jointly. They’re just looking at it from the perspective of tax. They’re not thinking about how that affects how the filing status affects the student loan payment. So to me, you can’t look at these things in a vacuum. They they’re all interconnected. And I think as you go, that becomes, you know, more true and more obvious. So, again, I’m biased though, right?

Tim Ulbrich 29:33

It’s great stuff. And that’s why I’m glad you brought up the quantitative, qualitative stuff because yes, it translates into actual dollars and cents net worth is the indicator that we’re, you know, looking at most assets, what you own minus liabilities what you owe, but it’s also is the qualitative stuff, are we achieving that living a rich life and also as I alluded to, just the mental clarity and the peace of mind that comes from like, I know that I’ve thought about these or I know that me and my partner or spouse I thought about these together. And we have a plan like targeted dollar amount to that. But that really is incredible. And for folks that want to learn more about our one-on-one financial planning service, you can go to YFPplanning.com. Let’s have a conversation with you to learn more about that service, learn more about what you have going on in your own individual plan and see whether or not that service is a good fit again, YFPplanning.com. From there, you can click on the link to book a free discovery call. Alright, Tim, question number three. If PSLF, Public Service Loan Forgiveness, is not an option for me, what should I do with $200,000 of student loans? How do I wait paying them off versus pursuing 20 to 25 years of forgiveness, which would then result in what we call what others call the tax bomb? So what are your thoughts here?

Tim Baker 30:49

Yeah, and again, forgive the continued commercial, Tim, but like, I think when you’re dealing with six figures worth of debt $200,000, I do think some type of an analysis is really important, especially with like, the moving goal posts, that are the student loan repayment plans, and then the strategies that are out there. So I think, you know, this is a math equation that comes from the analysis, but I think you have to also overlay how you feel about the debt, right? So again, if you’re like, like, I need to get through this, like, ASAP, like, it’s a weight on me versus like, it is what it is, I think that with the math equation is going to color how like, I would advise you as your planner. So I would say back in the day, you know, when we would look at a potentially non PSLF, you know, strategy. So, just to remind everyone PSLF, you know, was implemented in 2007. And the so that means that, you know, the first the first time someone was able to be forgiven was 2017. So you had to, you had to work, you had your loans had to be federal, you had to be in the right type of a repayment plan, you had to work for a non-profits 501C3, the government. You paid, you know, 10 years worth of payments didn’t have to be consecutive, and then you were forgiven tax free. You can, you’re eligible for forgiveness, you’re still eligible forgiveness outside of PSLF, we call it non PSLF. The, it’s a little bit different, you still have to have the right loans and the right plan, it doesn’t matter who you work for. So you can work for a for-profit. But instead of paying it for 10 years, you are paying it for 20 or 25 years of their graduate loans. And then that forgiveness amount is taxable in the year forgiveness, whereas PSLF, it’s a tax free event. So in before, you know, the new, the new plan, the save plan, typically the calculus was if your debt to income ratio was higher than two to one. So meaning I made 100,000 and I had $300,000 in debt, my debt to income ratio was three to one in that case, then a non-PSLF strategy was on the table. Because by the time we looked at $300,000, and a standard or even a refi, by the time we looked at that compared to a an income driven plan, plus, you know, a couple $100, or whatever that was invested for a tax bomb, what you paid per month, and what you paid in total was less than what you would pay in standard.

Now with the save plan and the payments a little bit different that it’s it’s it’s changed a little bit. So I would say that, you know, and the other thing that’s changed, too, Tim, is that, you know, we’re, if if we were looking at non-PSLF, we were also looking at like, typically a refi. So like if we, if our rates were 6% Wait it, you know, you might be able to go out. And for the same 10 year, find a 4.5% or 5%. So you’d get a little bit of a better rate. That’s changed too, right. So now what we’re having a way is a non peel PSLF strategy, versus staying in the federal system with potentially a better interest rate, but meet just maybe keeping the standard, you know, the standard plan. So if you have $200,000 in debt, the standard plan is going to be $2,171 for 10 years. So I think the play here is potentially looking at a refi which I don’t know if you’re necessarily going to be you know, I would look at a 10 year if you can go a little bit more aggressive seven year, five year. But your your, you know, your your payments going to go up accordingly. So, again, the goalposts have changed a little bit here. You know, I would say that, you know, I would say that probably a non-PSLF strategy here if I’m assuming you’re making $125, $130, is probably not the way to go. So probably something in the standard, maybe even being more aggressive in the standard or, again, looking at refis if rates come down, you know. I’m not sure what the 10 year if you do an apples to apples, but there are some benefit, there are still benefits to staying in the federal that I wouldn’t want there to be a pretty, pretty significant interest rate decrease for me to move off into a private loan. And that’s irreversible. So before Tammy, we would just say, Hey, this is kind of the rules of thumb, this is the way to look at it. But it’s a lot different because of the new save plan, the interest rates, etc. You know, so that’s basically where we’re at today.

Tim Ulbrich 35:35

Yeah, I think as you pointed out, the income of this individual is a really important piece of information we don’t have, right because if they’re making $180k, versus they’re making $95k, that’s going to impact that debt to income ratio. And to your point with the new save plan, that ratio, in effect has gotten more favorable. What I mean by that, is because of the change in the plan, the debt to income threshold could potentially be lower and it might make sense to pursue a non PSLF pathway. And, you know, let’s zoom back out, right? We’ve been kind of preaching on not not getting into the silos have to decisions, when you’re talking about hey, do we go more aggressive? Do we not that gets back to conversations about cash flow? What does the budget actually support? What other goals are in mind? You know, are we someone who graduated in their mid to late 20s? Or is this someone that pharmacy’s a second career, and they’re behind on investing in retirement – all of those things, just a few examples are going to impact, right, what decision we make with the student loans and how it ties into other decisions that are happening in the financial plan. So, Tim, great stuff.

These are just a few of the types of questions and conversations that we are seeing inside of our new online community called YFP Plus if you’re not already familiar with YFP Plus, we’d love to have you check out that community. Inside you’ll find exclusive on demand courses, We’ve got weekly live events, we have monthly themes and challenges. So for example, this past month in February, we were talking all about preparing for Uncle Sam and taxes bringing in Sean our CPA into the community. For the month of March, it’s all about FIRE: Financial Independence, Retire Early. We’ve got several events lined up throughout the month, the space to ask questions of our financial planners and our tax professionals and to be in a community of other like minded individuals. It’s really an incredible community. We hope you’ll check it out and use our 30 day free trial to determine whether or not it’s a good long term fit for you. You can do that by going to yourfinancialpharmacist.com/membership to get more information on YFP Plus. Again, yourfinancialpharmacist.com/membership. Thanks so much for joining us. We’ll see you next week. Take care.

Tim Ulbrich 37:37

[DISCLAIMER]

As we conclude this week’s podcast and important reminder that the content on this show is provided you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

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YFP 076: Investing Q&A Episode

Posted on by yfpadmin

Investing Q&A

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 Community in 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.

Mentioned on the Show

Policygenius
YFP Facebook Group
YFP Episode 075: DIY, Robo or Hire A Planner?
YFP Episode 074: Evaluating Your 401(k) Plan
YFP Episode 073: How to Determine the Priority of Investing
YFP Episode 072: Investing Mind Tricks: How Behavioral Bias Affects Our Decisions
YFP Email
YFP Episode 026: Baby Stepping Your Financial Plan – The 2 Things to Focus on First
YFP Episode 068: Pros/Cons of the Dave Ramsey 7 Baby Steps
YFP Episode 070: Pre-Planning for Tax Season
Seven Figure Pharmacist by Tim Church and Tim Ulbrich
Tim Baker’s Student/Resident Package
Simple Wealth, Inevitable Wealth: How You and Your Financial Advisor Can Grow Your Fortune in Stock Mutual Funds by Nick Murray
The Laws of Wealth: Psychology and the Secret to Investing Success by Daniel Crosby
The Index Revolution: Why Investors Should Join It Now by Charles Ellis
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.

Sponsor: While paying off debt, buying a home and saving for retirement can be MUCH more exciting than ensuring the proper insurance coverage is in place, having the right coverage — not too much and not too little — is essential. And for pharmacists, our greatest tool to achieving our financial goals is our income. And that’s where disability insurance comes in. It protects your lost income if you’re sidelined by an illness or injury. And PolicyGenius is the easy way to get it done. They compare quotes from the top disability insurance companies to find you the best price. So if you rely on your income to get by, compare disability insurance quotes by visiting PolicyGenius.com. PolicyGenius will help you protect your paycheck at a price that makes sense. You can get started online right now. PolicyGenius. The easy way to compare and buy disability insurance.

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.

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YFP 071: Ask Tim & Tim

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Ask Tim & Tim

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.

Mentioned on the Show

CommonBond
YFP Facebook Group
Have a question about investing? Ask us!
YFP Episode 70: Pre-Planning for Tax Season with Paul Eikenburg
Nate Hedrick, Real Estate RPH
YFP Episode 69: Carissa Explains It All: How One Pharmacist is Accelerating Her Financial Goals Through Rodan & Fields
YFP Episode 63: Intro Into the Side Hustle Series
YFP Episode 38: The Happy PharmD’s Journey to Becoming Debt Free with Alex Barker
Tony Guerra’s Pharmacy Leaders Podcast
YFP Episode 53: One Pharmacist’s Journey From Financial Ignorance to Financial Independence with Tony Guerra
Nuts and Bolts to Hiring a Financial Planner Guide
YFP Episode 15: Financial Planning Series Interview with Tim Baker (Part 1)
YFP Episode 16: Financial Planning Series Benefits of a Financial Planner (Part 2)
YFP Episode 17: Financial Planning Series Questions to Ask – Hiring a Planner (Part 3)
YFP Episode 62: The ‘Other’ Forgiveness
YFP Episode 18: Maximizing the Benefits of Public Service Loan Forgiveness
YFP Student Loan Course
Schedule a Tax Review
Student Loan Refinance Calculator
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Episode Transcript

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!

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YFP 049: Ask Tim & Tim Theme Hour (Pay Off the Home Early or Invest?)

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On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take a listener question from Michael in Columbus, OH that has stimulated lots of conversation and debate in the YFP Facebook Group…’should I pay off my house early or would I be better off refinancing, extending the term and investing the difference?’

If you have a question you would like to have featured on the show, shoot us an email at [email protected]

Mentioned on the Show

YFP Episode 015 – West Point to CFP: Tim Baker’s Journey to Becoming a Fee-Only Financial Planner for Pharmacists
YFP Episode 016 – 3 Reasons Why Pharmacists Should Consider Hiring a Financial Planner
YFP Episode 017 – Essential Questions to Ask Before Hiring a Financial Planner
YFP Episode 040 – 10 Things Every Pharmacist Should Know About Home Buying – Part 1
YFP Episode 041 – 10 Things Every Pharmacist Should Know About Home Buying – Part 2
The Millionaire Next Door by Thomas Stanley
Simple Savings Calculator by Bankrate
How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings by Dayana Yochim and Jonathan Todd

Episode Transcript

Tim Ulbrich: Hey, what’s up everybody? Welcome to Episode 049 of the Your Financial Pharmacist podcast. Excited to be alongside Tim Baker as we tackle a great listener question about paying off a home early versus investing the difference for the future. Now, if you don’t own a home, and you’re thinking, you know what, this question doesn’t apply to me, before you hit stop on the play of this podcast, let me encourage you to stay with us. I think this question is really applicable to anybody that’s debating whether or not they should focus on debt repayment, whether that be student loans or in this case, a mortgage, versus investing in the future. So Tim Baker, hard to believe here we are, Episode 049, and that means we’re turning the corner next week on Episode 050 and somewhat of a spoiler alert — almost hitting 50,000 downloads of the podcast. Hard to believe, right?

Tim Baker: Yeah, we always joke, we’re not really sure if that is a good thing or like how we’re doing in the podcast world. But I think 50,000 downloads is a lot. So yeah, I’m excited. I think the podcast has been a great avenue for us to interact with our audiences, and I think it’s been successful so far.

Tim Ulbrich: Yeah, I would agree. And you know, I’m with you. I don’t know what that number means. I don’t know if 50,000, 100,000, 10,000, whatever. But as long as we hear from the listeners that hey, it’s good content that’s providing value and it’s helping, we’re going to keep doing it.
Tim Baker: Definitely.

Tim Ulbrich: And I think we’re having fun doing it. So how often do you get something like this question about the pros and cons of paying down debt, whether it’s student loans or in this case, a mortgage, versus investing? It seems like it comes up all the time, right?

Tim Baker: Yeah, and I definitely get it more in YFP circles than with Script Financial clients. I think ultimately, with a lot of clients I’m working with, it’s still kind of definitely foundational. But it does come up. It’s the same situation with student loans. Do I pay off the student loans? Or do I invest the difference? Like what do I do there? And it’s a tough — you know, you can do the math, which we’re going to go through the example today, but I would say that for this, there’s really no real right answer. I think for this one, there probably is. But it can be definitely shades of gray in terms of which way you go. And I think you know, for this particular question, you got to make sure you have all the information and the advice, like where’s it coming from, that type of thing. But yeah, I mean, it’s a tough one to kind of navigate.

Tim Ulbrich: Absolutely. So let’s jump in and hear the question from Michael in Columbus, Ohio.

Michael: Hey, Tim and Tim. This is Michael from Columbus, Ohio. I have a question about the benefit of paying off a home mortgage. I met with my adviser last week, and he mentioned it would be more beneficial to refinance to a 30-year loan, although I only have five years left on my current one. His rationale was that the banks are giving you the money for next to nothing. And investing the difference in the mortgage payment over 30 years would far exceed the amount of interest that would be paid on a loan. This is completely opposite from everything I know about eliminating debt. What are your thoughts?

Tim Ulbrich: So thank you to Michael for submitting your question on this Ask Tim & Tim episode, we appreciate it. And just a quick shoutout to Michael, he actually was one of my good friends and classmates at Ohio Northern University Class of 2008 — go Polar Bears — so excited you’re a part of the YFP community, really appreciate you taking the time to submit this question because I think it’s probably something that many others are thinking about, and I know something that Jess and I are talking about regularly in terms of whether or not we should pay off the home earlier or whether we should be focusing on other financial goals. So before we jump in and dissect this question, let me first point you to episodes 040 and 041 where we talked about 10 things every pharmacist should know about home buying because in this episode, we’re not going to focus so much on the logistics of home buying itself but rather how to balance the repayment of a mortgage versus other financial goals such as investing. So if you’re listening, and you have other questions about home buying, make sure to check out episodes 040 and 041 where we talk in detail with the Real Estate RPH Dr. Nate Hedrick about home buying. OK, so a couple things I want to recap about Michael’s question, and actually, I want to add in some additional details that he provided on the Facebook page, on the YFP Facebook page, in the Facebook group that is going to help us and be important as we talk about the context of this question. So obviously we know and we heard from Michael, he’s got five years on his current mortgage, which is awesome to begin with, approximately $90,000 left to pay back. And that interest rate, the current interest on his home mortgage is 3.49%. So the suggestion that he got from a financial advisor was to refinance to a 30-year loan, so instead of paying it off in five years, refinance a 30-year loan, which would bring down the monthly payment from approximately $1,500 per month, what he’s paying now, to $500 per month and then invest the difference, which of course would be $1,000 per month that he could then free up and invest. Now, one last piece of information that’s important. If you look at the current 30-year mortgage interest rates, it’s about 4.75%. So his current mortgage rate, 3.49%. He’s got five years left, $90,000 to pay back versus refinancing to a 30-year loan, which would bring up the rate to 4.75%. OK, so Tim, as we start to look at this, I think what would be helpful is if we could spend just a minute or two and break down the math, and let’s get out of the weeds on math, and let’s actually talk about all the other factors that we need to consider on top of the math. So when I look at this, I really am thinking about two different options here that Michael has or that he’s ultimately considering. Option A is to pay off the mortgage, $90,000, pay it off in five years at the current rate, 3.49%, and invest that current mortgage payment, which would be $1,500 a month. After he’s done paying it off in five years, take that entire amount and invest it, $1,500 per month going forward. Option B would be instead of paying it off in five years, would be to refinance to a 30-year mortgage, which would lower the payment from $1,500 down to $500 and investing the difference right away, $1,000 per month rather than waiting five years to invest the full amount. So talk us through the math on those two options, and then we’ll talk through some of the other variables to consider on top of that.

Tim Baker: Yeah, I actually think this is the best way to do it. Obviously, you’re going to have different things that could go on. I mean, he could move and you know, get another mortgage, and that obviously throws a wrench in it. But I think for the best apples-to-apples comparison, Option A, which would be stay the course, you know, pay it off over five years and then invest the $1,500 versus go with the advisor’s advice is probably the best way to measure it. So if we break down the math, for the stay the course Option A scenario, if he were to pay five years to the completion of his loan, he’s going to pay an additional $8,000 in interest paid. So what he actually saves over the course of that is $1.215 million. And basically, the net of that — so if we take out the interest paid, he’s going to net $1.207 million. If we compare that to the advice of his advisor, if he pushes out the loan from five years left and basically refinances it with a 30-year mortgage at 4.75, the interest that he’s going to pay over those 30 years is actually $79,000. So the savings that he gains on this is $1.219, so that is a net of $1.14. So if you compare those two, the net is $1.207 with Option A, and then $1.14 with Option B, which is the refinance.

Tim Ulbrich: Yeah, and I think that’s important. And for those listening, remember what we’re talking about here, the context of Michael’s situation. So five years left on a payoff. Now, the other assumption we made here was an annual rate of return on the investing side of 7%. So I’m going to ask Tim Baker about that in a minute and why we used that number. But remember here, we’re talking about a five-year repayment period. So if somebody’s listening, and you’ve got 20 or 25 years left on your mortgage, I think one of the lessons here to learn is do the math, run the numbers, and obviously, the greater the difference of these rates between your mortgage rate and what you might accrue investing and/or the time period that you have on the payback, obviously these numbers are going to shift and be different. But here what we actually see if we’re looking at this is what I think is the closest apples-to-apples comparison. Both resulting in him paying $1,500 a month over the next 30 years, whether that be Option A, stay the course, all of that going to the mortgage for five years and then all of that for the remaining 25 going toward investing versus Option B, which is the advisor advice, which would be refinancing on a 30-year and balancing that between mortgage and investing over the total 30 years. So I think for me, that’s the apples-to-apples where you as the individual are putting $1,500 a month. And what we see here is actually Option A, pay off the house, and then invest beyond that for the next 25 years, that math actually comes out in favor of that, although for your situation, those numbers may be off or differ slightly. Now, before we talk about the other variables to consider — because I think there’s lots of variables to consider, even if the math wasn’t favorable in terms of paying off the home, Tim Baker, talk us through the 7% because some people might be wondering, why are you using 7% when it comes to the assumed average rate of return on the investing side?

Tim Baker: Typically, when I do any type of calculations for you know, long-term investments, I typically use 7%. Now, with the market has shown over long periods of time — this is not, you know, buying in and out of different types of stocks, it’s basically buying the market and having it take care of you over long periods of time. It will typically return 10%, you know, as an annual rate of return, on average, and then 7% is basically what that is if you take out inflation. So 7 — I’ve seen some people use 7, 8% — that’s typically the best, kind of the — I wouldn’t say industry standard — but that’s typically what I see a lot of advisors use when they’re saying, OK, let’s do a nest egg calculation, how much do you use? And that’s typically what the market will return over long periods of time.

Tim Ulbrich: Yeah. I think that’s important context because obviously, when we look at a mortgage payment or student loan payment, that’s typically a fixed interest rate. You know exactly what you’re going to get if you pay it off early, which obviously when we look at the investing side, we’re making some assumptions. And here, we’re using that 7% number. So just to recap here on the math, for Michael’s situation if we’re comparing that Option A of pay off in five years and then take the whole mortgage payment and invest it over 25 years beyond that, versus Option B, the advisor advice being refinance to 30 years, invest some of it and then pay off the house over 30 years, here the math actually comes out in favor of paying off the home early. Now…

Tim Baker: Which we were surprised by that.

Tim Ulbrich: We were. And I think that to me, because as I look back at the discussion on the Facebook group, myself included, I jumped to conclusions right away. Now, people who know me, you know I’m going to air on the side of pay it off, but I think the assumption is whether you’re on the side of pay it off or whether you’re on the side of invest it, do the math, right? Do the math, and then after you do the math, start to ask yourself, what are the other variables beyond the math that you need to consider? So Tim Baker, when I think about debt repayment, whether it’s a home or student loans, versus investing, beyond the math, usually the No. 1 variable I’m looking at is what is somebody’s feelings toward the debt? And what peace of mind, if any, might they have about getting that off their shoulders? And so as you look at this situation here, even in the context of you working with clients, how do you typically talk somebody through that? And how does that factor in as a variable?

Tim Baker: Yeah, I mean, I think it comes down to — we talk about this a lot in the student loan course — it kind of comes down to like, well, how does this particular debt make you feel? Some people, they look at mortgage debt and they’re like, well, you know, it’s a use asset, I know it’s going to appreciate over the long term, so it’s OK. I don’t mind having that for 20, 30 years. Now, it might change, you know, if he’s been paying this for 25 years or 15 years or whatever the circumstances for this and then to push it out again, that might be a different factor. But I typically — and this is kind of where I think, you know, having a conversation, me asking questions and getting the heck out the way and saying, and you know, I don’t work with Michael, but you know, some of the questions I would ask him is how does he feel, how does he feel about the debt, the mortgage debt? And I know Tim, you have what he originally wrote on Facebook in terms of his feelings towards that. So can you read that off real quick?

Tim Ulbrich: Yeah, I think it’s a great post. It gives us some insight, I think, into how he’s feeling about it overall. So he says, and this was in response to what you had asked him about fees and whatnot involved, and he said, ‘We haven’t decided what to do yet. The idea of having no mortgage in five years or less sounds amazing. However, I know that the best opportunity to create wealth is now so the money has time to grow and compound.’

Tim Baker: So I guess like I would say that, and be like, yes that is true. And obviously in this situation, we saw that that wasn’t true. Now I guess if you use a little different assumption, maybe 8% or if the interest rates weren’t that different for the house, maybe that were true. But in this case, it’s not necessarily the best play. But you know, if I hear a client, say things like ‘amazing’ or ‘anxious’ on the other end of the spectrum, to me, that carries weight. And the math is one thing, but you know, the idea for Michael not to have a mortgage — and we always preach financial freedom. What is one of the big probably milestones to create financial freedom for yourself? It’s probably paying the mortgage off. Now, having $1.1, $1.2 million in the bank is not too bad either, but I think that has to play a part in this. And you know, I just, I cringe at some of these advisors and the advice because I know that it’s probably not necessarily what’s in the best interest or it’s tone deaf to what the client actually wants. So I think that’s the point of the question and the thread that we went through was OK, what are some of the other competing factors that are going on here?

Tim Ulbrich: Yeah, I think there’s so much blanket advice out there too.

Tim Baker: Yeah.

Tim Ulbrich: I think that’s why it was so enlightening to actually run the numbers. Like, you know, if the interest rate market here were three years ago when you could refinance on a 2.75, this math looks different, right?

Tim Baker: Sure.

Tim Ulbrich: Or if you’re assuming 8 or 9 or 10% on the investments or you’re assuming 20 years on a mortgage, so I think that’s a great take-home point for the listeners is to run the numbers first. Don’t get hung up on only the numbers, but you’ve got to see the math. But then layer on all these other things that we’re talking about because for me personally, even if this situation were to be different and let’s say that the advisor advice would net $1.2, and you know, paying it off in five years and going with Option A would net $1.1, personally, I’m probably still going to pay it off because of all these other benefits. Somebody else might look at that and be like, ‘Tim, you’re crazy. You’re leaving $100,000 on the table.’ And what I would say to that is, you know, for me personally, and as I think about peace of mind and flexibility and options and all these other things, is I look at the difference of $100,000, which is going to be further minimized, that difference, when we think about, oh by the way, investing’s not done in 30 years. That’s going to be taken out another 20 or 30 or 40 more, you know, now we’re talking about the difference of what is the total of maybe $3 million versus $2.9 or $2.8, whatever. I’m going to take that trade all day. But other people might have different beliefs or philosophies, which is OK. I think it’s a matter of doing the math then evaluating what it means for your own personal situation. So I think we would take some flack from people on the Facebook group if we didn’t address the tax advantages of home ownership. And so how, if at all, would you factor that in terms of being a plus for carrying out a mortgage for as long as you can?

Tim Baker: Yeah, I don’t know. I mean, I hear taxes like a big mover of the needle for a lot of things that we do financially, but I really think it should be a secondary thing. Like obviously, you know, the bigger that your estate is or the bigger that your balance sheet is, we’re talking a lot more money, but I think just to have a mortgage to have a mortgage to get a tax break, I don’t know. I mean, I think there are other things that you can do. I think with the new tax code, you know, they’re capping that. So $10,000 basically per household is what you get. So it doesn’t really help you too much in high cost of living areas, which Columbus, Ohio, is not. But I think it definitely plays a part in this, the tax advantage and being able to write off that interest. But I think that is very much a tertiary thing that, you know, should be considered. And obviously, we just went through tax season and somebody had to pay Uncle Sam a lot more out of pocket than they’re used to saying, ‘Tim, you’re crazy,’ but I mean, I think real estate can be great from you know, basically, sheltering assets that are tax advantaged. But I think in this particular scenario, to me, it wouldn’t be a major factor in my decision because again, we were talking about do we pay this thing off in five years and be free of debt? Or do we just have it hang over us for 30 years? And obviously, I’m a little bit biased as well, but I think the tax situation should be considered but not necessarily the main driver.

Tim Ulbrich: Before we continue with the rest of today’s episode, here’s a quick message from our sponsor.

Sponsor: Today’s episode of the Your Financial Pharmacist podcast is sponsored by “Seven Figure Pharmacist,” the No. 1 financial resources for pharmacists and pharmacy students. Written by pharmacists for pharmacists, “Seven Figure Pharmacist” will help you get on the path towards building wealth and achieving financial freedom. Specifically, you will learn about how to manage multiple competing financial priorities, strategies to eliminate your student loans and other debt, how to increase your income, the basics of investing, and what to look for when hiring a financial advisor. Head on over to sevenfigurepharmacist.com and use the coupon code “YFP” for 15% off your order of the book.

Tim Ulbrich: And now back to today’s episode of the Your Financial Pharmacist podcast.

Tim Ulbrich: I’m with you, and I think two thoughts I had there is I remember, Tim, when you and I did a session at APhA back in Nashville, you had the group literally close their eyes and kind of visualize how they felt about a situation where they no longer have their student loans. And I think for me, for those listening — unless you’re driving of course, don’t do that — but I think whether it’s student loans, credit card debt, mortgage debt, whatever, like visualize this scenario to get a pulse of how you would feel, and let that be a factor in decision-making and really embrace the emotional part of that decision. You know, the other part I was just thinking about, Tim, as you were talking, is thinking back to “The Millionaire Next Door” by Tom Stanley. And you know, as I read through that book, I can’t imagine people that achieve net worth of $1 million or $10 million, like, are they thinking about taxes? Of course. They’re trying to maximize ways that they can take advantage in a legal way and minimize their tax burden. Of course. But is that a primary factor of why they became a millionaire? Probably not, right?

Tim Baker: Yeah.

Tim Ulbrich: So is it a consideration? Yes. But should it be driving decisions? And I think, especially with this situation, again, interest rates are coming up a little bit, which is a variable that you have to consider. In five years, who knows? Maybe they’ll be higher, maybe they’ll be lower. But again, I think all the more reason to look at the math.

Tim Baker: Well, and I think the other thing to consider with the tax question is that it’s not, it’s not set in stone that you get the interest on your house is written off every year. It’s just like our conversation about, you know, PSLF and the longevity of that program and that it’s not a guarantee and could the law change? Absolutely. And I think the same is true — now, I think it would be tough for people to swallow that, and obviously, from a political standpoint, it would be tough to move on for that because it does encourage home ownership and all that, but that’s not necessarily a guarantee, either. And I think the new tax code moves in that direction in terms of capping some of it. So that’s something to keep in mind as well.

Tim Ulbrich: So what about — you know, one of the other things I was thinking about, Tim, is in terms of timeline towards the potential date for retirement and how that factors in. So obviously, we know Michael graduates 2008, so he’s — doing some quick — about 10 years or so into his career. And how might this equation differ for you when you’re talking with a client in terms of somebody who’s a new grad versus somebody who’s maybe 20 or 30 years out and a little bit closer to retirement?

Tim Baker: Yeah, so obviously where you are on the spectrum of like your financial maturity I think is probably a good conversation or a good thing to look at. You know, someone that is early 30s, late 20s, that mid-30s maybe, you still have, you know, 30+ years until you can retire. So you have a lot of time to basically right any wrongs. That’s one of the reasons that I love working with young professionals because at previous firms, you could walk in 55 years old with $30,000 in credit card debt and maybe $50,000 in an IRA and say, I want to retire in five years, and it’s not going to happen. It’s just not going to happen. So with younger people, I think that the time can be a double-edged sword. You can use it for good but then wake up one day and be 55 and like, what have I done? So you know, in this particular case, you know, refinancing a mortgage at Michael’s age, obviously it puts him kind of back in line with what probably a lot of his peer group is doing in terms of their ability to work through the debt and pay it off close to retirement age, I feel like that’s what a lot of people is do is they’ll buy a house and as they’re approaching or ending the accumulation stage of gathering stuff and they’re kind of into this protection phase, you know, it flips because now you have this large asset that you own wholly. If you’re later stage of life, maybe this makes a little bit more sense because you can essentially direct more dollars towards your retirements investments that you’re not really afforded once you get clear of the debt. So I think that timing question is important to recognize. And we kind of see this in student loans is we’re like, you know, for some people that are all-in on their student loans, you know, they can be hyper-focused for five, 10 years, but then they still basically have a good part of their career in front of them to begin building assets. For some people, that’s not the case. So maybe in this situation, you’re kind of, you’re fenced in essentially. You’re saying, OK, I’m going to split the difference and put that $1,000 towards the investments and allow that to grow knowing that when I get to that — those things kind of merge — when I get to that finish line, the house is paid in 30 years, but then I also have that nest egg of $1.1 million. So I think that is probably where it makes sense to look at that. But even then, I think I would look at that on a case-by-case basis because you can have people that are in that stage of life and just know that I don’t want the debt hanging over me. And you know, I’ll be as aggressive as I can. And then when I get through it, I know I need to shift my focus from debt destruction to wealth creation, when that’s basically putting that $1,000 or $1,500 like clockwork into the investments and get it to work. So I think it’s a conversation to be had, but to your point, Tim, like I just, you know — and I don’t know if it’s blanket, I don’t want to overly bash someone else’s advice, it’s just not something that, to me, makes a whole lot of sense for this particular case.

Tim Ulbrich: Yeah, and I think as we look at other factors we know about Michael’s situation through comments and discussion on the Facebook group, I think it further kind of points us in the direction — validating the math in this case — but even further pointing us in the direction of the payoff of the mortgage is that we know — Michael shared within the community that he works the Kroger company, and so they’ve had some recent cuts in hours and whanot, which obviously has resulted in a reduction of pay and I think has inserted a component of uncertainty. Obviously, he’s employable. He’s been working for 10 years and whatnot, so I think other options could be on the table, but I think one of the things I could tell is on the back of his mind is that, what is the long-term career play here? And how certain do I feel in terms of being able to depend upon this income? Or do I want to depend upon this income versus having some flexibility and options? Now, the counterargument to that would be well, if you refinance your mortgage, you’re actually freeing up cash that you could use for flexibility if needed within the next five years. I guess I would counter-counterargument that, and say, yes, but if you can really see the next five years through, from there on out, you’ve got flexibility at $1,500 a month that here, we’ve assumed you’ve invested. But what if just life happens? You have options. What if he decides that he wants to work part-time and get involved in real estate investing? Or he wants to do something else? Or there’s further job cuts and they can’t move? He has options with that amount being freed up. And I think Sandy inside the Facebook group nailed this component that everyone must consider when it comes to flexibility. And she said, ‘I wouldn’t have a good feeling about that at all. Only five years left, to committing to 30 more years at a higher interest? And I constantly think, what happens if a catastrophic thing happens to someone in my family and I have to stop working to care for them? I want that mortgage gone ASAP because that is one less thing I want on my plate, worrying if I’m going to lose my house on top of everything else. The thought of committing to that 30 years or more makes me nervous for you.’ So one component I think to think about in terms of this idea of flexibility. Now, Tim, I want to wrap up here by really digging into us thinking about two important factors here: fees when it comes to advisors and investing and making sure we’re factoring that in, and then also the potential bias of where the advice is coming from. So talk me through at least first that option of fees associated with the investing, how much of an impact that can have and making sure you’re also accounting for any fees that are associated with the advising side of it.

Tim Baker: Yeah, so I mean, when I first saw this post, I was like, I kind of, like, cringe a little bit because to me, this is a blatant play to you know, to get the client investing. You know, you see an opportunity there to get the client investing, which basically helps the advisor from a compensation standpoint. So you know, most advisors out there are paid based on assets under management. So as an example, the example that I tell clients, you know, when I explain my fee structure, which is based on income and net worth. So I had a pharmacist at Hopkins where at my last firm, I charged based on assets under management for everything. And you know, I was managing about $100,000 of their portfolio, an IRA, they left Hopkins and they rolled over another $100,000, and my fee essentially doubled. So I was being charged 1% on $100,000. And then the next day, I was being charged, I was charged 1% on $200,000. So the conflict there is obviously, what stirs the drink, what wags the dog’s tail in a lot of advisor’s, their recommendation, is skewed by the fact that they want you to get into investing. And that’s not a bad thing, to get into investing as early as possible, but when you’re looking at things like the balance sheet, and you’re trying to figure out, OK, what’s the best path forward to grow and protect income, grow and protect net worth while keeping the client’s goals in mind? Sometimes, the investments are going to be a secondary thing. It’s not going to be the main thing, or at least for the early part of the client’s financial life. So when I saw this, I’m like, uh, this is like an attempt to basically grow the client’s AUM and charge him there. So he did confirm that his advisor charges based on AUM, so basically, what that means is if he’s putting in $1,000 every year, you know, it’s growing by $12,000 plus how the investment is actually performing. And at the end of the scenario, at the end of the situation, we said that the basically what he would have is what? $1.1 million, right, Tim?

Tim Ulbrich: Yeah, right about there. Yep.

Tim Baker: So if you charge — if you basically take $1.1 million, and you charge 1% on that, that’s $11,000 per year that he’s basically taking out of that account as basically his compensation. Now, the thing to make notice of that or to take note of is that studies have shown even a 1% AUM can erode your ability to build wealth over time. So we say that it’s $1.1 million, but I’ve read studies that up to two-thirds of that sum can be eroded if you put in a 1% AUM fee every year, which sounds crazy. It sounds like that would be false, but we probably can link a few articles, and I think I might have shared one with him, is it doesn’t sound like a lot, 1%, but over 30 years, it can really add up. And it’s worth noting — and my thing with him was, you know, what are all the facts? So if you take out 1% — and obviously, the same would be true if he were to pay it off in five years and then for 25 years, put in $1,500. It would still be on the same fee agreement. He’s still going to be charged that 1%, but I think the, all the conflicts of interest need to be on the table. And I think advisors do a good job of not actually disclosing what those are. And that, to me, is unfortunate.

Tim Ulbrich: Yeah, and I think just asking yourself the question, not necessarily that somebody’s necessarily giving you bad advice, but asking yourself the question: Where is the potential bias coming from? And making sure you’re doing your due diligence and homework to vet that and make sure the recommendation is really the best for your personal situation. And we will link to that article in the show notes and also put a link to a simple savings calculator because I think it’s helpful for people to run some own assumptions themselves and say, hey, if I were to save $1,000 per month for the next 30 years, and let’s say in one situation I get 7%, the other situation I get 6% because of an AUM fee, what’s the difference of that? And I think those numbers and seeing those numbers is really puts a point of emphasis to the discussion we just had about the impact that fees can have because it’s not just the 1% that Michael would have on this $1.1 or $1.2 million in 30 years. It’s the 1% that’s happening over the course of the next 30 years, each and every year. And this situation, again, we don’t know enough about the advisor relationship to say it’s a bad one at all. And we’re not suggesting that. I think we’re just trying to look at the question objectively. But if we take a step back, if somebody’s charging on an AUM model, they do not have a financial motive to tell you to pay off your home or pay off your student loans. But they do have a financial motive to help you grow your investment side, which growing your investment, as you said, is not inherently bad. You just need to look at it in the context of other financial goals. I would also point listeners here, Tim, to episodes 015, 016, and 017, which were still three of my favorite episodes where you and I dissected the financial planning industry, what to look for, questions to ask, how they get paid. And so we’ll link to those in the show notes as well. Now, last question I have for you is obviously, we’re looking at this, we’re looking at Michael’s question in the vacuum, and I know a little bit about Michael’s situation, so I know he has built a good foundation. But we wouldn’t want to also overlook, you know — before we’re talking about paying off the house early or investing the difference, we also would want to still be looking at, hey, where are you at with the other foundational items? Is there credit card debt? Where’s the student loan debt at? Emergency funds, correct? Looking at some of those other pieces?

Tim Baker: Yeah, that and you know, insurance. I think, you know, we talk about a lot of this is growing wealth, accumulating wealth, but how are we protecting it? If we’re going to putting $1,000 a month into your investment portfolio, is there proper life insurance in place? Is there proper disability insurance? What does the consumer debt look like? What’s the emergency fund look like? Are we funding some of those other goals that he has, like maybe it’s vacationing, maybe it’s starting a side business. All these things are important, and obviously they fall on a scale of what’s more important than the next, but I think having that in place is — and at least being asked the question — is ultimately important too. So yeah, the protection of the overall financial balance sheet and the emergency funds I think would be the things that I would look at, even before I would look at growing that nest egg because I think those are, again, kind of the foundational things that we need to have in place before we get into the market and start doing damage there. So that would be the place that I would look at as well.

Tim Ulbrich: So there you have it, Michael, our thoughts on your question. We appreciate you taking the time to submit it, being a part of the community. For those of you that are not yet a part of the YFP Facebook group, you’re missing out on some great conversation, discussion, encouraging one another, people posing questions, getting answers, getting input, different perspectives. So highly encourage you to check that out. We’d love to have you as a part of that community. And Tim, as we wrap up here on a topic that relates to home buying, I also want to give a shoutout to the work that Nate Hedrick is doing over at Real Estate RPH. We had a chance to talk with him last week, obviously we had him on in episodes 040 and 041. We also had him on the blog. And his blog over at Real Estate RPH and the community that he’s building really addressing everything from first-time home buying to real estate investing, I think he’s got a lot of great direction, content and work that he’s doing that would resonate with our community and I think — would you agree? — we had a good conversation with him with some great ideas coming.

Tim Baker: Yeah, great guy, easy to work. I mean, he knows his stuff, and I’ve directed a few clients his way who are going through the home buying process. I wish we had a Nate in every city, and maybe that’s something that we’ll work on. But you know, I think if you haven’t read his stuff or if you’re not following him, check him out and listen to the podcast episode to get a feeling for kind of his voice and his brand and definitely an up-front guy and like, hopefully we have some collaboration here in the future, more collaboration, I would say.

Tim Ulbrich: So for those that haven’t hit yet, or haven’t yet hit stop on the podcast, I think we have to give them an update on the puppy news in your household because you’ve talked about Rover and dogsitting and the desire to get a puppy. So give us the update.

Tim Baker: Yeah, so we — and I talked about, I think I talked about Leo more than I’ve talked about my daughter Olivia on the podcast, which I joke about. But we did Rover last year, and we’re still doing it, and we watched a dog, Leo, and just loved this dog and we actually got a puppy from kind of the same breeder. We had to go the hypoallergenic and things in our household, so we got Benji over the weekend. And Benji is a little Golden Doodle that is a ball of energy and part of the Baker family. And Olivia, who’s 3, is super stoked. She’s bragging about it to her friends about that Benji is her best friend, so it’s super cute. So yeah, our family is growing for sure, the YFP family is growing.

Tim Ulbrich: So we need a picture on the Facebook page — you, Shay, Olivia, Benji, so get us something out there.

Tim Baker: Yes.

Tim Ulbrich: And this is actually going to be a test to see if Jess actually listens to the podcast or not. I don’t think she does. So Jess and the boys have been heckling me for months about getting — it’s been a cat, a dog, both, whatever — and I think I’m finally about to cave on a Golden. So if she’s listening, I’m into the commitment, we’re going to do it. It’s a matter of time, so we’ll let the group know when that happens as well.

Tim Baker: So if Jess listens to this, basically does that unlock the dog?

Tim Ulbrich: That’s it.

Tim Baker: OK. Alright.

Tim Ulbrich: And it’s right there, so if she doesn’t, it’s not happening I guess, right?

Tim Baker: Right. And I can’t tamper, right? It has to come naturally if she listens to it.

Tim Ulbrich: It has to come, yeah, because it really is too big assumptions. One, does she listen? And two, does she actually listen all the way through? So we’re going to find out. Well good stuff, really appreciate it, Tim, as always and to the YFP community, constantly we’re appreciative of this group and what we’ve been able to do in providing great content and the feedback that you’ve given us, so thank you all. We look forward to next week’s episode.

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YFP 043: Ask Tim & Tim Theme Hour (Investing 101)

Posted on by yfpadmin

On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take three YFP community member questions about investing. We discuss investment terminology, considerations for choosing investments, where non-retirement accounts come into play and the pros/cons of target date funds.

If you have a question you would like to have featured on the show, shoot us an e-mail at [email protected]

Mentioned on the Show

Interested in becoming a beta tester for the YFP Student Loan Online Course? Sign up using coupon code LOANRX at https://courses.yourfinancialpharmacist.com/
YFP Episode 002 – Why Every Pharmacist Should Be A Millionaire (Part 1)
YFP Episode 003 – Why Every Pharmacist Should Be A Millionaire (Part 2)
YFP Episode 015 – West Point to CFP: Tim Baker’s Journey to Becoming a Fee-Only Financial Planner for Pharmacists
YFP Episode 016 – 3 Reasons Why Pharmacist’s Should Consider Hiring a Financial Planner
YFP Episode 017 – Essential Questions to Ask Before Hiring a Financial Planner
YFP Episode 026 – Baby Stepping Your Financial Plan – 2 Things to Focus On First
Vanguard Investor Questionnaire
Script Financial Risk Profile Questionnaire

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 043 of the Your Financial Pharmacist podcast. We’re excited to be here with you doing another “Ask Tim & Tim” episode this week. So if you missed last week’s episode, make sure to go back and check it out as we feature two listener questions on student loans. As a reminder, if you have a question you’d like to have featured on the show, shoot us an email at [email protected]. Before we jump into today’s listener’s questions, I want to mention that just this past weekend, we announced that we are looking for 50 beta testers to jump into our YFP online student loan course that we’re getting ready to launch here in a couple months. Now, for the first 50 that sign up, we’re going to be offering the course at half price, so it’s going to be $179 instead of $349 when it will be fully launched early this summer. And you can head on over to courses.yourfinancialpharmacist.com, again that’s courses.yourfinancialpharmacist.com. And if you use the coupon code LOANRX, that will get you 50% off for the first 50 that sign up to be a beta tester. So again, make sure you head on over there quick. We’re going to take the first 50 that come, then we’re going to close it. We’re going to get feedback from that group, make final adjustments, and then we’re going to be launching that course later in June. So again, courses.yourfinancialpharmacist.com, coupon code LOANRX. So Tim Baker, investing. I think we maybe is this the first time we’re actually digging in to talk about investing? I know we get a lot of people that say, ‘Hey, you guys need to be talking about investing a little bit more.’

Tim Baker: Yeah, I think so. We’re very heavy on the loan, or the student loan side. And it’s funny, you talk about us launching the course or at least the beta test group, and those spots are going fast so it’s kind of interesting to see that there’s obviously an interest there, but I think equally in the investment side of things, there’s a lot of interest and I think there’s a lot of people that are confused about how to start and where to begin, and that’s encouraging too because I think we’re looking outside of the world of student loans, and I think it’s something that we need to do. And I think we’re going to be more focused on the investment stuff going forward too.

Tim Ulbrich: Yeah, I think we’ve been hesitant on some level, not because of course we know people are interested in it, but I think one of our concerns especially knowing lots of people are with student loans and trying to build a solid foundation is that is there a concern, are people looking at this topic of investing in a silo. And so I think that’s a good preface to just our conversation as we talk about the investing questions that came in to remind our listeners, hey, to take a step back, that investing is one part of the financial plan and to figure out exactly where it fits in for your own plan. Alright, well let’s jump in with our first listener question on investing, which comes from Latonia from sunny Los Angeles.

Latonia: Hi, Tim and Tim. This is Latonia Lou (?) from sunny Los Angeles, California. I have a couple questions for you today. The first being what strategies do you have for investments in stocks, bonds and real estate? And secondly, what do you recommend for choosing different types of investment options? And what funds do you recommend for retirement and the 401k?

Tim Ulbrich: Thank you, Latonia for submitting your question. We really appreciate it. And I love your question because I think while it’s rather broad, I think it gives us a good launching point to just talk broadly about investments almost an Investing 101, talk over some terminology. And I think here what’s interesting is I hear Latonia’s question is to me, there’s almost a question behind the question. So Tim Baker, before we jump into answering her question and talking more specifically about the terminology and 401ks and Roth IRAs and asset allocation and all that stuff, what are some of the other factors that you want somebody to be thinking about when it comes to their financial situation before they talk goals related to investing?

Tim Baker: Yeah, I think to get back to your point, Tim, of looking at investing in a silo, I think ultimately, before you really dip your toe into the investment waters, you’re going to want really to focus on a few things. One is what does your debt situation look like, particularly the consumer debt. And we talk about this in Episode 026 of baby stepping into your financial plan, the two things to focus on first. What does your consumer debt look like? And also, what’s your emergency fund look like? And I think that’s why we’re a little bit hesitant is we don’t want people to wade down to the waters of investing without really having that sound foundation in place. If you start building a house without the foundation, it’s going to crumble. So ultimately, you want a good emergency fund to have funds available if something hits the fan. And then you want to make sure that your debt situation is in check. And I think like we mentioned last time, a lot of people draw the line of when to invest differently. So some people want to get through their student loans as quickly as possible before they really take a serious step toward investing. Other people have a little bit of a different mentality, so I think having an inventory of that, in a sense, is smart too. With that said, you know, there’s a few types of investing that is worth taking note of is, you know, if you have a retirement plan that offers a match, more often than not, you want to take advantage of that because that’s essentially free money or 100% return on your investment. Anything you put in, you’ll get 100% return. So that’s one thing to consider. But I think also just kind of an overarching, you know, question to ask is what is your appetite for risk? And for a lot of people, that’s really difficult to quantify. And for a lot of people, especially young people that have kind of come to the market maybe in a time of, you know, recession or market volatility, that we as kind of a generation are scared to wade into the waters of investment. And that really shouldn’t be that way, so what I see with a lot of clients is a little bit of a hesitancy to take intelligent risk and put your money into the market. So I know that’s kind of a very big picture look at things, but I think those would be some questions to ask yourself and like I said, easier said than done, right?

Tim Ulbrich: Absolutely. And I think before we jump into Latonia’s question specifically about choosing different types of investment options, to me this is a good place to just provide that reminder of we have to ultimately know what goal we’re shooting for and why we’re shooting for that goal. And I think that’s going to become evident as we begin this discussion because as we get into terminology and we talk matches and asset allocation and tax advantage, vehicles, 401ks, 403bs, Roths, etc. is that I think it can easily become somewhat overwhelming, especially when you consider with all the other priorities that somebody’s working on. And you’ve heard us talk before on this podcast about having a why behind what you’re doing, whether that’s saving for the future or whether that’s paying off debt, and I think that’s critical here because ultimately, we have to know why are we even doing this in the first place? Why are we putting away 10, 15, 20% potentially of our income towards retirement? Why are we choosing asset allocation models and trying to figure out how we can best invest for the future and keep fees down? So I think that purpose and vision of what we’re trying to do, and I would also reference listeners back to the very beginning of the podcast, Episodes 002 and 003, “Why Every Pharmacist Should be a Millionaire,” where you interviewed me, Tim, and we kind of walked through the what is a nest egg calculation. How do you get to that number? And ultimately again, before we talk about what you’re doing this month or next month, ultimately trying to figure out exactly what are we trying to achieve in the future?

Tim Baker: Yeah, definitely.

Tim Ulbrich: Alright, so let me ask the somewhat naive and I guess beginner question about why do we even need to invest in the first place? You know, we’re going to talk about risk and fees and potential for losing money and all of these things, why do we even need to go there to begin with?

Tim Baker: Yeah. I think it’s important to understand that you face major roadblocks when you’re trying to accumulate wealth and build that nest egg that you mentioned. And the two big ones are taxes and the inflation. So if you, what I often tell clients, if you take a dollar and put that under your mattress, so kind of like a savings account that doesn’t offer any type of interest rate, if you put that under your mattress with average inflation, if you wait 25 years and take that dollar out from underneath your mattress, it’s going to be worth about $.46. So that inflation essentially chops your purchasing power in half. So what investing does is allows you to really kind of get ahead of that curve and allow things like capital appreciation and dividends and that whole thing that we talk about on the ugly side of debt, the interest on top of interest, we kind of turn the tables, and we allow that to work in our advantage. And that’s basically what investing is. The other thing I mentioned is taxes. Obviously, no such thing as a free lunch, so the government wants their piece of the pie. So really, your investments are in that arena. So we have to do some tax planning to basically be able to grow your net worth in a way that is most efficient and where you’re paying Uncle Sam the least amount of money as possible. So again, investment is a major player in that space. So for people that say, ‘Hey, I’d rather just sit money in a savings account and let it go and not really have to worry about the investment piece’ — and I don’t see that a whole lot, but I do see some very, very conservative approach to investing — you’re really going to damage your ability to build that nest egg of $2.5 or $3 or $4 million or whatever the amount is, which for many pharmacists out there, that’s where they’re going to need to be in terms of their retirement savings. So the investment piece is hypercritical to make sure that you’re taking advantage of the compounding interest, the capital appreciations, the dividends and all that.

Tim Ulbrich: So once we establish that investing is in part essential to us achieving our financial goals, then the question becomes how do we invest? Where do we put that money to start to achieve those returns that ultimately are going to combat against the issues you mentioned around inflation and taxes? So I think that gets to the basics of the different investment vehicles, which obviously, there’s more than these four. But I think the four that are our audience should really be thinking about at this point: cash, cash equivalent, bonds, stocks and real estate, as Latonia mentioned in her question. So cash and cash equivalents, Tim, how would you broadly define — obviously, we all know what cash is, but I think it’s that term “cash equivalents” that often gets people hung up.

Tim Baker: Yeah, that could be things like different, not mutual funds, money market funds, that type of thing. You’ll want something that is highly that you can get to, in some cases it could be things like commercial paper, these are things that aren’t necessarily near and dear to what a typical individual investor would have. But typically when I explain cash and cash equivalents, it’s cash what everybody and then kind of like a money market fund, which is not necessarily cash. It’s a little bit less liquid, but that’s kind of what I want clients to understand in that regard.

Tim Ulbrich: Yeah, so I think cash and cash equivalents as low-risk, it’s liquid, it’s accessible, obviously at varying degrees. But also with that low risk, you’re probably not going to see much, if any, upside. And I think all of us are probably feeling that right now in some of our savings account with typical banks, which then takes us up one level, so I think of a bond. So bonds, you know, is I think about a bond, I think about a bond as a debt investment. So I have fond memories actually of my great-great-grandmother buying me EE bonds every Christmas, they’d be hanging on the tree. But it’s a debt investment, so whether it’s the federal government, whether it’s a local government, whether it’s a corporation that ultimately is trying to raise money, it’s a debt investment that you take on. And in return for investing in that, you’re guaranteed a certain interest rate or return on your money. And obviously, there’s different time periods, five, 10, 15, 20, 25 years, and historically, what have you seen, Tim, in terms of rates of return and risk levels when you think of bonds?

Tim Baker: Yeah, I mean, they’re kind of all over the place. So I guess it depends on the type of bonds. Most people when they think of bonds, they think of like government bonds. So on the federal side of things, you have things like bills, which are more shorter term, notes, which are T-notes, which are a little bit longer term, and then treasury bonds, which are the longer term bonds. So again, typically with interest rates, interest rates pay a pivotal part. Typically, when interest rates go up, the values of bonds go down and vice versa. So the bonds and the fixed income market, which is another way to say bonds, have struggled of late just because interest rates have been down. But just like stocks, you can have different types of bonds out there. So if YFP was a publicly traded company, and we had stocks, we could also issue a bond offering. So we could say, ‘Hey, listeners, we’re trying to raise money. Here’s a YFP bond, and with a principal of $1,000, but we agree to pay you 4% semi-annually, twice a year on that particular bond.’ So bonds can be very diverse. And you see companies issue bonds, municipalities issue bonds, and everyone has kind of different application that goes along with it. But bonds in a portfolio are typically, they’re cousins to stocks or equities, but they’re typically viewed as a safer approach to investing. So to give you an example, for young people, a typical split in terms of a bond-to-stock ratio might be 80% stocks, 20% bonds. When I’m helping manage my parents’ money, it’s kind of inverted. It’s 20% stocks, 80% bonds, and really the idea behind that is the capital preservation. So bonds are viewed as less risky and less chance for that basically your investment to go to 0. Stocks are more of a wild card where you enjoy more of capital appreciation and dividends, but the dividends aren’t necessarily fixed like an interest payment. So it’s kind of all over the board. I know I’m jumping a little bit into stocks, but I think they’re easier to explain them in tandem. So you know, in the bond market, it kind of depends on terms of return, what you’re looking for, but you’ll get an interest rate that’ll basically provide you income to the portfolio — or when I say income, it’s cash — whereas stocks are more a dividend and capital appreciation play.

Tim Ulbrich: And actually, this is great timing. So last week, you’re sitting down with Jess and I and looking at our overall asset allocation, which is what you were just referring to in terms of distribution between stocks and bonds, and obviously even within those, you get into different funds and so forth. But talk us through, and this in part answers Latonia’s question, talk us through how somebody determines that or in working with a planner determines that. You kind of identify that Jess and I were on full throttle, I think 97% or something equities and really not much at all in the bond market. And we were leaning more towards 90-10ish type of mix. What were some of the factors that were driving you towards that evaluation and getting us to think of different things?

Tim Baker: So typically, what I will do is I will give clients kind of a risk tolerance questionnaire that asks them, I don’t know, eight questions or so. And what that basically does is it spins off this is where your balance should be. So I think for you, Tim, you were 90% in stocks or equities and 10% in bonds or fixed income or cash or cash equivalents. So a 90-10 split. So then my job is to kind of look at it and say, ‘OK, if you were’ — and again, this is talking a very general sense, but if you were a 65-year-old person approaching retirement, and you were a 90-10 split, I would probably would say, that’s a little bit aggressive because what we don’t want to happen is something that happened, what happened in 2008, 2009 where your investments are all tied to the stock market, and then you wake up and you lose 40% of your portfolio. So what I’m basically surveying is your kind of where you’re at in your career, your appetite for risk, and I generally will suggest either staying or sliding a little bit to the left in terms of being more conservative or a little bit to the right in terms of being more aggressive. So there’s a little bit of a science, but a little bit of a kind of an art to it as well. And essentially, what I do is in your guys’ situation, you guys have both your own investments that I’m helping you manage at TD Ameritrade, which is where I custodian, but then you also have, Tim, you have your 401a at the university and a 403b, which have different investments that go into it. So basically, my job is to basically give you a model of that 90-10 split in your Roth IRA that you have at TD Ameritrade and then give you a 90-10 model with the 403b and the 401a. And as you know, when we were kind of going back and forth in the 403b, the little bit of — I don’t want to say sketchy situation — but I kind of went through your prospectuses and things like that, and it was even confusing to me about how the funds are charging and all that kind of stuff, which is a little bit of a different question. But it’s a little bit of art and science together.

Tim Ulbrich: Yeah, and for the listeners to know, he’s being gentle. And it’s humbling for me to admit this, but basically, what we concluded was the 403b that I have is trash. I mean, what did we find on the fee standpoint? That’s insane. Not only was it the number, but then it was even the language within the prospectus. We couldn’t even fully identify where those were coming from and the total amount, right?

Tim Baker: Yeah, it was one of those things where in the disclosures, they say fee about 40 times. And they’re just compounding fees. But the problem is the fees for the funds didn’t match the fees in the prospectus. So, which means basically that there might be other fees that they’re putting into the — yeah, I don’t know. And I think ultimately, we concluded that there’s a number for the 403b that you can call an advisor, so you might call them up and give them the business because — and the problem is like I do this for a living. So if it confuses me, it certainly is going to confuse a pharmacist that basically looks at this maybe an hour a year or two hours a year or once in their life to set it up. So that’s my frustration, that’s kind of like when I approach clients or when I approach any type of like paperwork or agreement, I want brevity and I want basically in plain English because a lot of this stuff is not, and to me, it does nothing but confuses the consumer, and that’s a problem. So getting back to Latonia’s question, ultimately — and I typically will put in cash and cash equivalents and bonds. So like for Tim, if you’re a 90% split, we might have 8% in bonds and 2% in cash, and then 90% in stocks. The real estate item is a different piece. So like I think if you listen to the podcast, we’re all big fans of real estate. You can buy real estate obviously and kind of be your own landlord and do it that way, but you can also buy what’s called a REIT, you can buy a publicly traded REIT, so that’s a Real Estate Investment Trust, which basically pulls together lots of different types of investment property, and then you basically buy shares of that trust. So it’s a way to expose your portfolio to real estate. So typically, my portfolios will have some of that. But again, if you buy an index fund or a S&P 500 index fund, and that’s kind of the next level of investments, a lot of those will have real estate exposure in there. So you know, in terms of the three investment classes, I would say for me, I put bonds and cash equivalents together, and then stocks and those are the two big ones. And then you can slice it as finely as — like I said before we were talking on mic, it could be real estate, it could be merged markets, it could be international. Some people have commodities or a gold allocation. So you can get as complex, but you know, typically you want to keep it simple and go from there.

Tim Ulbrich: Yeah, and they way I look at real estate, and we could talk about this on a lot of other episodes, and I’m not — this is not advice, and I know people will disagree or agree — is that Jess and I are itching to get real estate started, but we’re also looking to other things, saying we need to have these things in place first, and then we’re going to jump into real estate. So I think the timing is key, and for me, obviously we talked about the importance of an employer match and probably getting towards even beyond that and maybe evaluating real estate. So just to go back through those quickly, we talked about cash, cash equivalents, bonds, stocks or what are also known as equities, which essentially is ownership in a company. If you buy stocks in Apple or in Uber or whatever, you actually own a piece of that company. And then you mentioned real estate as well. So we’ve established that investing is important to outpace inflation and to beat taxes. We talked about vehicles by which you can begin to think about how to do that, and we briefly dabbled into asset allocation. Now the question is, where do you begin? Where do you get these things? So obviously you can buy bonds and stocks, etc. in an open market, but most pharmacists are probably going to be thinking, OK, I’m going to start within a 401k or a 403b or Roth IRA or Roth 401k but essentially those being the taxed advantage savings account in which you are then choosing the investments in bonds or stocks or other mutual funds, etc. So Tim Baker, just give us the 30-second kind of high level 401k, 403b, Roth IRA, what they are and how they’re different.

Tim Baker: Right. So I always like to do visuals. And you know this, Tim, because I use like the cat gif every time I explain, you know, investments because basically the inception that goes on here, to kind of reiterate what you’re saying, is you have a vessel, if you will, so that basically is the 401k, the 403b, the Roth or whatever, and inside that cup, we’ll call it a cup, you basically have — and for most people, it’s mutual funds. So it could be a stock mutual fund or a bond mutual fund. And inside of that mutual fund are all the different stocks that you hear about, so Apple and Google and Tesla. And then inside the bond mutual fund, you have all of the bonds like a Detroit bond or a Facebook bond or whatever.

Tim Ulbrich: Hopefully not Facebook.

Tim Baker: Yeah, yeah, exactly. So just think about that in terms of the different layers. So to kind of go all the way back to that original cup that we were talking about, the 401k, 403b, those are generally qualified plans that are provided by your employer. Generally, they’re used to incentivize or attract talent. And the 401k, 403b were originally meant to kind of supplement the pension. So a lot of people are saying, ‘What’s a pension?’ My dad worked for the same company for 40 years. He had basically a pension, and that was the golden handcuffs that basically forced him to stay at his job for that long. And it was basically based on his earnings and the amount of years that he worked on. So when the 401k came around, the company said, ‘Well, let’s ditch the pension and move with that.’ So typically, the 401k company will hire a Fidelity, a Vanguard, a Transmerica or whatever, and they’ll say, ‘Hey, we want you to custody our 401k.’ And then employees basically get individual accounts, so they have their own statements, pick their own investments, generally there’s a match, so the employer will say, ‘Hey, if you put in 5%, we’ll put in 5% matched,’ or whatever the case is. But the offer inside of that 401k or that 403b is typically limited. So you might have 10 or 12 or 15 investments inside of that tax advantage account. So anytime you see Roth in front of any of these types of accounts, an IRA, a 401k, a 403b, anytime you see Roth, you want to think after tax, after-tax money. If it doesn’t have Roth in front of it, it’s typically pre-tax money. So what that means is if you put — typically, now, you can put up to $18,500 of your own dollars into a 401k every year. So say you make $100,000 and say for that year, you put in $10,000. What the government basically taxes you all things else being equal is not $100,000, it’s $90,000. So that money basically flows into your account pre-tax. Now what happens when you distribute that in retirement, when it comes out, it basically is taxed upon distribution. So it either has to be taxed going in or taxed going out. So if you have a Roth 401k, it’s taxed going in, so you make $100,000, you put $10,000 into your Roth 401k, so what the government taxes you on is $100,000 of your income, so you don’t get any type of deduction, but when you go to retire, that Roth 401k, when you distribute that, basically it comes out tax-free. So it’s already been taxed going in, so it doesn’t get taxed going out. And that’s the case with the Roth IRA versus the traditional IRA and all that kind of stuff. So again, sp the big difference is between the 401k and the 403b versus the IRAs, the 401k, 403b are employer-provided or employer-managed. The IRAs, the Individual Retirement Accounts, they’re individually managed by you, and that’s basically the main difference.

Tim Ulbrich: That’s good stuff, and I’m glad we broke that down because a lot of times, I’ll talk with pharmacists, and they’ll say, ‘Hey, I’m putting away whatever, 5% of my income, and my employer’s matching the same into say a 401k or a 403b or a Roth 401k or a Roth 403b.’ But then often that conversation stops there. So I think your point of the vessel, the cup, however you want to look at it, is critical that that’s the vehicle, but then within there, you’re then digging into the asset allocation and actually choosing the investments. And while I think you and I are both certainly in the camp of keeping things simple, there’s some basic things you have to know about strategies of asset allocation and how to keep those fees down, etc. that’s going to have a big impact over 30 or 40 years worth of saving. So Latonia, great question. Thank you for submitting it that we can start this conversation. Obviously, we’re going to have lots more content coming in the future around investing. And I think for me, Tim, this really highlights one of the benefits of a financial planner. And I think back to Episodes 015, 016 and 017 where we broke down exactly what those benefits could be, what you should look for. But investing is only one part of a financial plan, but even within that plan, here we’re talking about looking at how do you minimize your fees and how do you determine the asset allocation models? How do you think about strategy of Roth versus 401k, 403b and the timing of that? And what about the distribution side of things, when you finally get there? And again, investing only one piece of it. But I think a really good financial planner can help you unwind some of that and hopefully take some of the confusion off of your mind there. So let’s take a minute to break to hear from today’s sponsor, and then we’re going to jump in with two more listener questions related to investing.

Sponsor: Hello, Tim Baker here. You know me as team member of Your Financial Pharmacist, co-host of the podcast and one-third of the Tim trifecta. But I am also the founder and owner of Script Financial, a fee-only — that means I’m a fiduciary — financial planning firm dedicated to helping pharmacists achieve financial freedom. We work with pharmacists all over the country every day who look at their financial situation and just don’t know where to start. Why is that? They say, ‘Tim, should I focus on this mountain of student loans? Or should I invest? I think I want to buy a home, but I’m not sure how to prioritize that goal or what that process looks like. I know I need insurance, but I’m confused how much or what kind and paralysis. Blue screen of death.’ There’s a better way. So let’s imagine — actually, first let’s queue the motivational piano music. OK good. Let’s imagine — and you can close your eyes as long as you’re not driving or running on the treadmill, and kudos to those that are doing the ladder — but let’s imagine you have clarity over your goals and how you should prioritize them, you know that this Tim has your back when it comes to your exact student loan strategy or how and where to invest, how much and what kinds of insurance that you need, maybe you’re confused about how much tax to withhold — we file taxes now too — and all the things financial. If you like that script that we’re writing for you — that’s a terrible pun, but let’s go with it — if yes, go to yourfinancialpharmacist.com/scriptfinancial and book a free consult to take that first step towards financial freedom.

Tim Ulbrich: And now back to today’s episode of the Your Financial Pharmacist podcast.

Tim Ulbrich: Alright, let’s jump into our second listener question, which comes from Laura from Pennsylvania.

Laura: Hi, Tim and Tim. It’s Laura from Pennsylvania. Can you talk to us a little bit about non-retirement investments? About six years ago, my husband and I started putting money aside in a Scottrade account. Every few months, we pick and choose a few stocks to buy. But I’m wondering, are there other things we can be doing with this money?

Tim Ulbrich: Thank you, Laura, for taking time to submit your question. We appreciate it. And we’re excited. I think it’s a great follow-up from the one that Latonia submitted where we talked a lot about some of the tax advantage savings accounts, 401k, 403b’s, Roth IRAs, etc. Here, we’re really talking about non-retirement accounts. So you mentioned you and your husband putting money aside in a Scottrade account and trying to then determine where you want to invest that money. So Tim Baker, talk us through — what Laura here is referring to is a non-tax advantage retirement account, so essentially putting money into an account in what I often refer to as the open market. So what are some of the places where somebody might do that? And then even some of the implications tax-wise that people need to be in tune with.

Tim Baker: Yeah, so typically, you know, what we usually call this is an individual, or if it’s with her husband, a joint account. You can also call it a brokerage account. So these are typically names for accounts that are the non-retirement, the IRA type of accounts. So typically, these types of accounts, you really want to drill down to what the why is of this account. So when you set up a brokerage account like this, you know, it’s typically because you’ve either maxed out your $18,500 into your Roth, and you’re maxing out into your 401k, your 403b, or you’re maxing out your IRAs, and basically, this is kind of the spillover into the next investment arena. That’s typically where you see it. Another place that you’ll see individuals do this is when I sit down and go through kind of the find-your-why and essentially, what I’m trying to extract is what are the goals or what are the buckets that we need to basically set up and fill over the next 10, 20 or 30 years? And basically have a plan in place for that. So typically, there’s a lot of short-term goals out there like an emergency fund or I need a sinking fund for travel because I want to go see the orca whales, Tim. Or maybe I need a cat fund or a puppy fund, so you should have a cat fund, Tim. I’m going to have a puppy fund, right?

Tim Ulbrich: Yeah.

Tim Baker: Or a gift fund, we talked about that at the end of last year, where people see spikes in spending, and it’s not necessarily accounted for, so maybe there’s a gift/holiday fund. So typically, I see that, which are kind of more of a near-term, I’m going to spend that within the next 12 months, to the other opposite side of the spectrum, which is retirement. Another place that a brokerage account might fall is, hey, Tim, I know that I want to buy a house in five years, four years, whatever the timeline is. So how do I go about properly saving for that? So typically, what I advise clients is if it gets over a certain amount of time, and we don’t just want to put it in a high-yield savings account, maybe it makes sense to then build out a conservative allocation or a moderate allocation to basically use the market to get a little bit more returns. That’s kind of the in-between, kind of the middle ground of saving for or investing for a goal. There is no tax advantage here at all. So you’re basically funding it with after-tax money, and when it comes out, you basically are taxed on your gain. So there’s long-term capital gains, which are basically any gains that you’ve realized after a year. And those have more preferred tax treatment. And then you have short-term capital gains, and this is basically where you’re buying Facebook one day and then selling it the next day, and it all kind of happens under that year time frame. And typically, those are taxed more aggressively than the long term. What the government wants you to do is basically invest, so invest in a company, invest for the long term, so they penalize people that are kind of moving in and out of investments, by the way, the tax it. So that’s one thing to be considered aware of, and there’s different strategies that you can use in terms of your fixed income or wash sales or tax loss harvesting, which is a little bit kind of probably out of the scope of answering this on the podcast, but those are kind of some of the things to be aware of when you’re investing outside of the retirement-type accounts.

Tim Ulbrich: So Tim, the other thing as I hear Laura’s question just quickly, that as somebody myself who just loves the passive investing approach, and I hear the notion of single stock picking, that makes me a little bit nervous. So just talk for a minute about some of the behavioral biases and some of the things to look out for when people might be getting into the area of single stock picking.

Tim Baker: Yeah, so you know, in terms of behavioral bias, the big thing is confidence buys. So if you’re one of those people that said, ‘Hey, I invested in GM way back in the day or when Ford hit the bottom,’ and then basically you bought it at $4 or whatever it was, and now it’s trading where it is now, you basically create this false sense that you’re the next Warren Buffett. And you know, people that do this for a living, professional money managers, mutual funds, myself included, can’t pick stocks. You can’t pick stocks on a consistent basis in a way that is where you’re not spending a ton of money on information or trading or whatever. So I think that’s the big thing is confidence buys. But I often say that your portfolio should be mostly, if not 100% of it, low-cost index funds. For some people — and I work with some clients that they have an itch to scratch, so they’re like, what do you think about Tesla? Or what do you think about this company? I’m like, I don’t pick stocks. But I can give you my opinion in terms of where it’s trading and where I think it might go. But to me, that should be limited — if you do it at all, it should be limited to 5%, maybe 10% of your portfolio because it is, you’re basically gambling. Most people, all people, they don’t know if the stock’s going up or down, left or right of any particular stock. And the problem with picking individual stocks is you’re basically putting your eggs all in one basket. If you pick an index fund, so people are like, well, what the heck’s an index fund? If you pick an index fund, you’re basically buying the market. So it’s — and an S&P 500 index fund is basically all of them, you own stock in all of the companies on the S&P 500. You can buy an index fund for, a bond index fund, you can buy an index fund for different sectors or things like that. So I would say, be cautious when you’re doing individual stocks. You can look like a genius, but over the course of investing career, it’s very spotty at best, even for people that do it for a living.

Tim Ulbrich: Yeah, and I think a good point there, looking like a genius, remember is you hear stories from other people, usually you’re hearing the good ones and not necessarily the bad ones, right? So I tell people all the time I bought Ford at less than $2 a share. I don’t tell them about buying Circuit City penny stock, which who would go to a Circuit City anymore? Right? What a joke.

Tim Baker: Right, exactly.

Tim Ulbrich: Alright, let’s jump into our third and final listener question of the episode, which is focused on investing, and that comes from Wes in North Carolina.

Wes: Hey, Tim and Tim. This is Wes Hartman from Durham, North Carolina. I had a question for you guys regarding investing. There seems to be a lot of different options out there to invest in, but is it even worth me trying to beat the target date funds?

Tim Ulbrich: Thank you, Wes, for submitting your question. Great one as we follow up on the first two related to investing. So here, we’re talking target date funds. And essentially, I think the way I interpret Wes’ question is it worth messing with trying to pick all these different asset allocations so much in stocks and bonds, etc., or should I just pick a target date fund? Would it be easier? So Tim Baker, why don’t we first just break down exactly what a target date fund is.

Tim Baker: So typically, a target date fund, and usually if you have auto-enrollment in your 401k or 403b, which I am a proponent of — so basically, what auto-enroll is you start with your employer, and they automatically put you at deferring 3 or 4 or 5% of your income into your 401k without you having to do anything. So typically, in that case, they’ll put you into a target date fund, basically probably would be based on your age. So you might have a target date fund for 2050 or 2055 or 2045, depending on your age. And what the target date fund essentially just takes a mix of other funds and it builds out an allocation for you that says, OK, if we’re going to retire in 2055, it might be a 90-10 split that we talked about with Tim early on. So it might be aggressive allocation that says, retirement’s a far way off, let’s basically build the allocation out in mostly stocks, equities, and a little bit of bonds. And as the portfolio, so as we passed through 2018 and now it’s 2025, maybe it’s 80-20. 2035, maybe it’s 70-30, and so on and so forth. So it becomes over time, more and more conservative. So for the individual investor, man, you’re looking at it like, man that’s great. That’s exactly what I would want — basically, someone else to do all the work for me. There’s some pros and cons to that. Typically, the advantage is if you have no idea what you’re doing, that’s probably the best thing to do is basically, get started, get the money into the retirement account. And if they don’t pick it for you, it’s your choice, just pick the target fund and call it a day. Probably the big disadvantage are of target funds is they typically are more conservative than I guess what I would normally advise. And it’s also hard to really determine if you’re going to retire at the time you said you’re going to retire. So for me, if I were to say I was going to retire in 2050, it might be 2060 or 2065 by the time that actually happens. I’ve said I’m going to live to at least age 100, so in that case, like that decade or whatever, I’ve lost out a lot of my portfolio’s earning potential because I went conservative too fast. The other thing is that in some cases, the target date funds can be more expensive and not perform as well as maybe some of the other funds that are provided for you. So there’s obviously a cost to basically that kind of turnkey strategy that depends on the actual investment plan that you’re in. And not all of these are created equal. I work with some clients that have amazing 401k’s and amazing 403b’s, and then I work with some others that are really bad and really — maybe the follow-up question is, how do you know if it’s good or bad? And typically, the first thing that I look at is expense ratio. So in my opinion, a 401k or a 403b, along with target date funds, which many of them have now, should also offer an index fund and a total market index fund, an S&P 500 index fund, that basically says, hey, I can buy the entire market and basically you buy the entire bond market and then call it a day. So if you compare, if you have one of those 401k’s that has that available to you, typically, that’s a little bit of a cheaper option. And you know, with a little bit of tweaking or a once-a-year checkin, you could probably do as good or better compared to the target date funds. So those are typically, that’s typically my advice on target date — they’re not bad. They’re not bad, but they’re probably — dependent on the plan — there’s probably some meat left on the bone in terms of what you can do with your funds.

Tim Ulbrich: Yeah, and I’m thinking even just Wes, I know you’ve been engaged in the YFP Facebook group and kind of following your questions, I can tell you like to nerd out on this stuff, which is awesome. And so my gut says probably for you, you’re going to probably look at some of those fees and performance and etc. and say, ‘You know what, I think I can do better. I can get the fees lower, I can get the performance better. I don’t mind rebalancing and checking my portfolio, etc.’ But I think to your point, Tim, that for many people, and I’m even thinking of the conversation that was flying around this weekend on the Facebook group, there seem to be a lot of feelings of, I just don’t know where to get started. And I think for many people, this could be a great place to start, especially if you know, you know what, I’m putting money in my 401k, but from there, I’m overwhelmed, and I’m not ready at this point in time to take action. I think it’s a great place potentially for somebody to get going but probably not ideal, in my opinion. I mean, I think for some people, it could be an option that they’re pursuing. I am thinking, though, of a handful of pharmacists I’ve talked to that open up their portfolio and they don’t realize that they’ve had a bunch of their money in their 401k just sitting in cash and cash equivalents because they haven’t allocated money. And obviously, there’s an opportunity cost of doing that. So I think for some, a great place to start, but for others when you consider, you know, is it too conservative? Does it match your goals? Does it match your risk profile? What’s the fees? What’s the performance? It may or may not be the best option to move forward. The other thing I think worth highlighting here, Tim, is that what I understand of target funds, the philosophy behind them is that they’re designed to be selected in a way that they’re potentially the only savings vehicle. It’s determining that different breakdown of stocks and bonds and etc. And so if somebody has other investments, in a Roth, in CDs, in real estate, etc., it may be throwing off, obviously, that intended asset allocation. And I think, again, working with somebody or taking a step back to say, ‘What’s the overall goal? And across all of my investments, where am I at? What am I trying to achieve?’

Tim Baker: Yeah, and it becomes more difficult when you’re trying to manage it at a global level, you know, between your own individual investments and then what’s in your employer investments and then by the way, let’s take into account your spouse’s investments. So it can get a little bit complex. But I think ultimately, the one word that I would describe for investing that kind of plays into all these questions is just simplicity. If you can keep it simple, that’s typically the best route to go. In my industry, typically, the more complex it is, generally the more laden it is with fees and the worth it is to the consumer. So there’s some people that look at index funds that are boring — and investing should be boring. The sexier it is, and the more bells and whistles it is, it’s smart beta and alpha and all this other stuff that we try to dress up investing, typically, the worse off the consumer is. So keep it simple, try to come up with an allocation, and I think one of the questions we had here on the notes that we probably didn’t answer, I think I answered it kind of in passing is you know, what tools do you use to kind of figure out how to do risk profiles. So I basically give a risk questionnaire, but it’s based on Vanguard’s risk questionnaire. So if you Google, and maybe we’ll put a link to it on the website, but if you basically Google Vanguard and risk tolerance or risk questionnaire, it outlines basically what your equity to fixed income number should be. So get that number and look at your 401k and if there is an index fund or a bond fund, basically you could slot it into those two things and call it a day or go the target route. Again, this is not investment advice because obviously I don’t know the individual listeners and all the things that are kind of going into effect with you know, goals and debt and all that kind of stuff, but for simplicity’s sakes, that’s basically how I would approach it.

Tim Ulbrich: Well, good stuff, as always. And I know this was one of our longer episodes, but I think long overdue that we dove into some of this information related to investing. So thank you again to Latonia, to Laura, to Wes, we appreciate you taking the time to submit your question to be featured on this Ask Tim & Tim episode of the podcast. And as a small thank you, we’re going to be sending them a personal favorite, a super comfy YFP T-shirt in the mail this week. And as a reminder, if you have a question that you’d like to have featured on the show, just shoot us an email over at [email protected].

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YFP 042: Ask Tim & Tim Theme Hour (Student Loans)

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On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take two YFP community member questions about student loans. We discuss strategies for managing student loans during residency and how soon to refinance or consolidate student loans after graduation.

If you have a question you would like to have featured on the show, shoot us an e-mail at [email protected]

Mentioned on the Show

YFP Episode 014: Turning Student Debt Frustration Into Action (Debt Free Theme Hour w/ Derek Schwartz, PharmD)
Interested in learning more about becoming a beta tester for the YFP Student Loan Online Course? Sign up at https://yourfinancialpharmacist.com/studentloans
YFP Episode 018 – Maximizing the Benefits of the Public Service Loan Forgiveness (PSFL)
YFP Episode 026 – Baby Stepping Your Financial Plan – The 2 Things to Focus On First
YFP Episode 029 – Refinancing Student Loans – Part 1
YFP Episode 030 – Refinancing Student Loans – Part 2

Episode Transcript

Tim Ulbrich: Hey, what’s up everybody? Welcome to Episode 042 of Your Financial Pharmacist podcast. We’re excited to be doing two back-to-back “Ask Tim & Tim” episodes. And between this week and next week’s episode, we’re going to be featuring four listener questions: two this week about student loans and two next week about investing. As a reminder, if you have a question that you want to have featured on the show, shoot us an email at [email protected] and as a small thank you, we’re going to give you a super comfy YFP T-shirt. So Tim Baker, before we jump in to talk about student loans and get to these two questions, which are two really good questions, we need to share some awesome news with the YFP community. Last night, Derek Schwartz, if you remember our guest from Episode 014, 2014 graduate from ONU, Ohio Northern University, currently works with the Kroger Company in Cincinnati — last week, he made his final student loan payment. Three years, four months, paid off $192,000. So just an incredible story.

Tim Baker: Incredible.

Tim Ulbrich: And I still remember that episode and how fun that was.

Tim Baker: Yeah, it’s incredible. It’s amazing what you can do in a short amount of time. You know, I think for a lot of our listeners and a lot of clients I work with, they look at that six figures worth of debt, and they think it’s unsurmountable. And you know, this is another great example of someone that’s putting in the work and elbow grease to get through it. So kudos to Derek. Yeah, I’m just interested to see where he goes from here.

Tim Ulbrich: Yeah, Derek, congratulations. We’re obviously pumped for you, we appreciate you coming on the show and what you did in Episode 014, and we’re excited to see what you do with this lifestyle post-student loan debt. And I’m sure the YFP community’s going to be following that journey as well, so thanks for sharing that good news with us. So Tim Baker, we are here again obviously talking student loans. We’ve talked about this many times on the podcast. But I think it highlights we know how how important this topic is for our listeners that are struggling, obviously, with unprecedented amounts of student loans that they’re coming out with upon graduation. And I think this is a good chance — we’ve highlighted, mentioned, a couple times that, hey, we have a student loan course that’s going to be coming early this summer. And we’re actually getting ready to launch that course with a small group of about 50 beta testers. And for those of you that are interested in learning more about that course, potentially becoming a beta tester, you can head on over to yourfinancialpharmacist.com/studentloans. And Tim, do you just want to give them kind of a quick sneak peek preview into exactly what they’re going to get from that course?

Tim Baker: Yeah, I think the idea behind the course is to really answer a lot of these questions that we get about student loans, so I think there’s a lot of just such haziness about how to even take the first bit of the apple. So really what we’re going to talk about in this course is how do you inventory and just get a proper picture of what you owe and then really how do you assess all the strategies, whether it’s a forgiveness strategy and the PSLF program or maybe a non-PSLF forgiveness strategy, and then really how to optimize that. So when you walk away from the course, the idea is for you to know very precisely ‘This is my student loan strategy. I can walk confidently with it.’ And you know, kind of go down the road of a Derek Schwartz or not. You know, if your move is forgiveness and just be confident in that approach.

Tim Ulbrich: Yeah, we’re super excited about this. It’s been a labor of love with me, you and Tim Church has really taken a lead on a lot of this. And he’s just crushed it. And what I love about the course is I think what we’re hearing from the community members is that there’s so much uncertainty, there’s so much confusion, there’s so much stress around these student loans; ‘I don’t know what to do, I feel like I’m somewhat paralyzed.’ And I think what we’re going to be able to provide in this course is walking away with clarity of, ‘This is the repayment plan, strategy, the best option for your personal situation.’ So again, if you want to learn more what it means to become a beta tester, head on over to yourfinancialpharmacist.com/studentloans, and we’ll get some more information into your hands. Alright, let’s jump into our first listener question that comes from Bethany in Greenville, North Carolina.

Bethany: Hey, Tim and Tim. This is Bethany from Greenville, North Carolina. I had a question about consolidating and refinancing my student loans. How soon after graduation can I do this? And is there a limit to how many times I can refinance? Thanks.

Tim Ulbrich: Alright, thank you, Bethany, for taking the time to submit your question. We appreciate it. It’s a good one. Lots of people wondering about refinancing and consolidation. And obviously, I think your question’s specifically when to do it and is there a time limit to do it is certainly a good one that many others are probably wondering as well. Before we jump into answering, let me just reference listeners back to Episodes 029 and 030, where we talk about refinancing student loans in a lot of detail. And we’re going to hit some of the key points here in addition to answering Bethany’s question directly. So Tim Baker, I guess probably first since she mentioned both refinancing and consolidation, give us the quick breakdown of the difference between those two.

Tim Baker: Yeah, it’s a great question. And sometimes these are used synonymously, and that’s a misconception. I think the difference, you know, so define consolidation. Basically, when you consolidate your loans, you are taking two or more of your federal loans, and you’re making them one. And what happens is is that the loan that is consolidated takes the weighted average of your interest rate. So the example that I give is if you have $100,000 at 5% and then you have another $100,000 at 7%, when you consolidate those two loans into one, you’ll have $200,000 at 6%. So it just takes the weight. So it doesn’t really help you in terms of like you know, getting a better term or better interest rate. Most people do this for convenience sake, or even more importantly than that, they’ll consolidate their loans, so say like a Stafford loan to open up some of these income-driven plans. The income-driven plans would be things like pay-as-you-earn, revised pay-as-you-earn, ICR and IBR. Refinance, on the other side of this, is really when you go out into the marketplace, and you work with companies like SoFi or Earnest or CommonBond or LendKey, so these are some of the private student loan companies that we like. And you go out, and you submit your income and your credit, and they basically come back and say, ‘OK, right now, you’re paying 6%. If you refinance down to a five-year plan or a ten-year plan, we can get you down to 5% or whatever.’ So you’re basically going out into the marketplace to get a better rate. Now, the big thing with this to be aware of is that you are moving from the federal, the rec loans, to the private sector, which is important to know. But those are really the big difference. Consolidation is more of a convenience play/opening up more of the federal repayment plans, the income-driven ones. Refinance is where you’re throwing up the deuces to the federal system and saying, ‘Hey, I’m going to take a look at the private side and see what I can get there.’

Tim Ulbrich: Yeah, and I know Bethany’s question directly being how soon after graduation can I refinance is a good one because I know it seems like students, residents, new practitioners are more aware of refinance options, I think because of the higher interest rates that are out there on some of the federal loans right now, but also probably these companies doing a little bit better job on the marketing side of things as well. So what exactly are the requirements? I mean, how soon can somebody refinance after graduation? And I’m guessing there’s a technical answer to that question, but then maybe there’s also the reality of them being able to qualify for a loan.

Tim Baker: Yeah, so dependent on what strategy you choose — and again, we talked about the two overarching strategies that are out there are forgiveness and the basically nonforgiveness — dependent upon what you choose, is going to really define your timeline. So as an example, if you are looking at the PSLF, and you have a variety of loans, which most borrowers, most clients that I work will have a plethora of loans out there, you’re going to want to consolidate and get your loans into a loan that can get into one of the income-driven repayment plans and start paying or go into repayment as quickly as possible because the idea is to pay, you know, your 120 payments over those 10 years as quickly as possible. So once you graduate and you’re in the grace period, you want to look to get into the active repayment as quickly as possible. Refinance, on the other side, so this is typically where you’re not looking at the public student loan forgiveness program or any forgiveness program. Refinance is probably going to happen a little bit after that because what these private loan companies are going to want to see is income — so obviously, if you are — they want to see a history of income and maybe a history of repayment, so they want to see maybe a couple months of you actively repaying your loan in the federal system for you to get the best rate. Some of these refi companies will honor things like grace periods and that type of thing. But typically in the private refinance, you’re going to have a little bit more of a runway than you would if you’re going through consolidation and public student loan forgiveness.

Tim Ulbrich: Yeah, so I think technically the answer is yes, you can apply as soon as you want after graduation or if somebody’s in residency, but the caveat being it may be difficult to qualify because ultimately, they’re going to want to see probably a track record of payments being made. And also as you think about getting a competitive interest rate, obviously that’s in part determined based on a debt-to-income ratio. So unless there’s a situation where maybe somebody’s coming out as a student, and they have a spouse who aren’t working or a higher income-earning spouse and they can qualify, yes, you can apply, but ultimately, it may be difficult to get those loans over time. What about the limit? Is there any limit to how many times somebody can refinance?

Tim Baker: There isn’t. And, you know, there are some clients that I’ve worked with that have kind of hacked this a little bit. So they will either go out to each of the refi companies that we like and do a deal that way, or you can refi again and then refi again and then refi again all of your loans. So there’s really no limit to that. It will affect your credit score, you know, if you continuously refi because you’re basically doing a hard check on your credit when you go through the refinance program, but there really is no limit. And it’s kind of the same thing if you think about people that are homeowners out there. You can refi your home as many times as you want. Now, you’re going to be paying closing costs and things that aren’t necessarily present in the student loan refi arena, but the idea here is there are companies out there that understand that we have I think $1.3 trillion in student loan debt out there, and there’s interest payments to be had, so they’re going to compete, even actually offer those cash bonuses, so it’s nice for the consumer to be able to look at the landscape and say, ‘OK. Let me choose the best rate available and maybe get a bonus as I’m doing it.’

Tim Ulbrich: So you can hack the system Tim Church-style, right? And do a multiple refinance?

Tim Baker: Exactly.

Tim Ulbrich: I think he probably knows the rates to a T, the most competitive rate that’s out there, he’s got it nailed.

Tim Baker: He’s a machine.

Tim Ulbrich: He is a machine. And I think that’s the play is like, obviously, you want to consider the impact on credit. Just getting rate quotes will not impact your credit, but obviously, going through the process and ultimately refinancing with a company will impact your credit, so I think that’s a good point to be made. But ultimately, you can do it multiple times. Obviously, these companies do offer cash bonuses, so you want to weigh the benefits of that. And obviously, for some people, depending on maybe you were in residency and you decided to refi or shortly after school and your debt-to-income ratio didn’t look great — fast forward two years, rates may have changed, debt-to-income ratio looks difference, obviously, you’re a more competitive applicant in that process. I think it’s also worth here maybe for a minute just talking about what some of our community members may see in a refi is ultimately, these companies will typically throw in front of you a fixed interest rate, which doesn’t change for the life of the loan. So let’s say that’s 3%, 3.5%, 4%, whatever. That’s 4% for the time period that you’ve agreed upon: five years, seven years, 10 years. Or you’ll see a variable rate and actually even some hybrid rates that are out there now. And a variable rate meaning that can change during the life of the loan. So what advice do you have for people in terms of thinking about is a fixed rate the better play? Is a variable rate? What are some of those factors that should be considered?

Tim Baker: I think the big thing is basically the time horizon of the loan. So obviously, the longer that goes out — seven, 10, 15, 20 years — the more risk that you have, you know, interest rate risk. We are in a rising interest rate environment, meaning interest rates are probably going to go up since I guess the Great Recession, we’ve been stuck in lower interest rates, and they’re now finally starting to climb, which is good for savers, but not necessarily great for borrowers. So I think when you’re weighing the variable versus the fixed interest rate, obviously fixed, the information that you have there is known, so you know exactly what you’re going to pay over the course of the term. The variable interest rate, it might be tied to some type of index that will be adjusted annually to some type of index. If it is, it’s a three- or five-year or whatever, if you know that you can pay them off confidently, you might go for the variable just to kind of as that short-term play because you know you’re going to pay them off, so someone like a Derek Schwartz out there. If it’s going to be longer term, to me, if I was counseling a client, I would meet that with a little bit of pause, knowing that probably the rates are going to go through the roof. So it’s one of those things where you take a risk of getting a better interest rate in the near term, but you know, those particular rates could be jacked up, especially if the time horizon of the loan goes out further. So, you know, it’s not necessarily a bad thing to do, but you mentioned the hybrid loan. So the hybrid rates are kind of where you — if people understand what an adjustable rate mortgage is and arm, you basically, it’ll be fixed, the rate will be fixed for a set period of time and then it will adjust annually after that. So that’s another little bit of a hybrid model that will give you some fixed interest and then variable. So you could look at that particular solution to get a lower rate as well.

Tim Ulbrich: Yeah, absolutely. I agree on your input on the variable rate and evaluating that against the fixed. Other things I would throw out there would be looking at what’s your emergency fund situation? Know you have some extra cash if needed. What’s your appetite for that payment potentially changing? Do you have wiggle room or not in your budget? So if you look at your budget right now, and you’re looking at a fixed rate and that payment and say, ‘I’ve really got no room to squeeze out an additional,’ then obviously, that variable rate could be tricky. The other thing I would say is do the math. And we’ve got a great calculator if you go to yourfinancialpharmacist.com/refinance, that’s our page where we have all of our resources associate with refinance on there. You can run the math. So do the math and see, OK, best case scenario, the low end of the variable rate, if this were to stay as is — which to your point, in a short repayment period may be a good play — how much would I be saving against a fixed rate? And is that potential savings worth some of the unknown in the variables that you mentioned?

Tim Baker: Yeah, and I think looking at that dollar sign, you’re basically saying is $10,000 or x amount, is that worth the risk of, you know — and I think to quantify that in some regard can be very powerful.

Tim Ulbrich: So one of the things I want to end on here is if you go to our page, again yourfinancialpharmacist.com/refinance, we’ve got lots of educational resources that will help you out. But there’s some things that we fundamentally believe you should look for in a refinance company. And the good news is as these have become more popular, I think we’re seeing a lot more consistency in the market amongst some of these big players — SoFi, Earnest, CommonBond, LendKey, etc. The things that were looking at are, there should be no origination fee. So in fact, many companies are actually going to give you a cash bonus. But at minimum, you shouldn’t be paying anything to get this loan started. No. 2 is there should be no prepayment penalty. So if you take on a 10-year refi, and you want to get this done in five or seven because you got some extra cash or some additional money, you want to get it done faster, you should have the ability to do that without any penalties for making extra payments. Many of these companies are also going to offer you a lower interest rate with autopay. So if you can do that, of course take advantage of it. And one of the ones we’re always trying to hit home and we think is really important that you evaluate is ensuring that it has protection and a forgiveness clause in the event of a death or long-term disability. So if you only have federal loans, that protection is there for you. If you refinance with a private company, that can be dependent upon the company. And so you want to make sure 1, does the company offer that protection that those loans would be forgiven in the event of a death or permanent disability. And if not, do you have the insurance protection in place, whether that be from a life insurance policy, a disability insurance policy, to cover that in the event that it would occur? And then obviously, you’re going to see some nuances and differences between these companies about types of repayment options that they’ll give you. But ultimately, again, on that page yourfinancialpharmacist.com/refinance, you’ll see all of that information, you’ll see a guide that we have available, and we have links there where you can also click out and get some quotes with companies in a very short period of time. And we’ve got some really competitive cash bonus offers if refinance is the right play for you.

Tim Ulbrich: Alright, let’s take a quick break and hear a minute from our sponsor, and then we’re going to jump into the second listener question focused on student loans.

Sponsor: Student loans are a big problem for pharmacists. With many graduates facing interest rates above 6%, it can be hard to get traction and make progress. If you’re not pursuing the Public Service Loan Forgiveness Program, and you don’t need income-based repayments, refinancing can be a great move and could save you thousands of dollars in interest. Check out our refinance page at yourfinancialpharmacist.com/refinance where you can calculate your savings and check your rate with one of our partner companies that are offering exclusive cash bonuses to the YFP community of up to $450. That’s yourfinancialpharmacist.com/refinance to find out your savings today.

Tim Ulbrich: OK, let’s jump into our second listener question, which comes from Nate in Ohio.

Nate: Hey, Tim and Tim, this is Nate from Akron, Ohio. My question is, what is the best way for me to start managing my student loan debt during residency? And early in the career, what is the most appropriate balance as far as investing and managing student loan? I appreciate any input you have. Thank you.

Tim Ulbrich: Nate, thank you so much for taking the time to submit your question. We appreciate you’ve got a good one, actually two questions here around the best way to start managing student loan debt during residency, a question we get a lot, and the second question, which might be the most common question we get: What’s the most appropriate balance as far as investing and managing student loan debt? So your first one, what’s the best way to start managing student loan debt during residency. I think it’s a great question. You look at the average resident salary out there, obviously dependent upon geographic location, somewhere between $40,000 and $50,000. But we have an average indebtedness now of graduates of about $160,000. So that’s a common thought, and a question that comes out is can I afford residency training? Obviously, what are the financial implications of that? And if I’m in residency training, what do I do about these student loans? So Tim Baker, as you hear that question, obviously you work with a lot of clients that are residents as well. What are you thinking in terms of strategies around paying off student loans during residency training?

Tim Baker: I mean, I think it follows — and I think Nate, this would be a good chance to maybe look at the beta group test for the student loan course — I think that the very first thing, whether you’re a resident or not, is really to look at the inventory. And I break this down in terms of an inventory of what you actually owe and who you owe it to and then also kind of an inventory of your feelings toward those loans. So a lot of people, you know, unless we ask ourselves the questions, how do you feel about these student loans? If it’s like, ‘I feel OK about them, I know they’re going to be around for awhile,’ versus ‘Tim, I can’t sleep at night. I get anxiety.’ And these are things clients tell me about their loans, that’s really going to dictate, I think, how you approach them. I think in residency, the beautiful thing about residency, especially dependent on the approach you take in terms of your strategy, whether that’s, again, the forgiveness play or the non-forgiveness play, is that you can do some damage in residency for both strategies. So to me, the best way to start is to do the inventory. And basically what dictates that is going to be really two things. It’s going to be your NSLDS, basically your report, which basically is an inventory of all your federal loans, and then also your credit report, which is going to basically outline all of your private loans. So I think once you kind of inventory your thoughts and feelings toward the loans and then actually the amount you owe and the interest rate you’re paying, I think that is going to be the first basically jumpoff point to kind of begin the process of saying, ‘OK, how do I begin to, you know, peel this thing back and figure out the best way forward?’

Tim Ulbrich: So once you do your inventory of your loans and you assess your feelings, to me, the question then becomes, are you pursuing Public Service Loan Forgiveness or not?

Tim Baker: Yes.

Tim Ulbrich: And I think that’s a critical question. Nate, your question around residency — what we know about residency training and pharmacy is that about 90 percent of all residencies are in a hospital, health system setting. And of the hospital health systems that are out there, about 80 percent are considered not for-profit institutions, which obviously would be qualifying organizations for residency. So Tim, why is that question of PSLF or no PSLF so important when you think about strategies of attacking student loans or not in residency?

Tim Baker: Yeah, and I think again, one of the things that is not necessarily, you know, completely laid out in front of you is the information about your forthcoming career. And what I mean by that is, you know, if you do a residency, and you work for a 501c3 nonprofit, which is basically what qualifies an institution to be part of the PSLF program, you’re not necessarily sure that you’re going to be, you know, if you’re a PGY1, if you’re going to be nine years in the public service or a PGY2, if you have another eight years in public service. But if you’re pretty confident that you are going to be in the public student loan forgiveness program, and you’re going to be in one of those 501c3, you should start basically your repayment as soon as possible because the way that your repayment is calculated is going to be based on the previous year’s income. So if you’re a PGY1, how much did you make in your P4 year? Probably not much. So that means your payment is going to be close to zero, but you still get qualified payments toward your 10 years. And the same thing when you are a PGY2, it’s going to look back at your PGY1 year and basically look at your income. And your payments are going to increase, but not in terms of what you would normally make as a pharmacist. So there are ways to really optimize your situation to get through really the first third of the PSLF program if you’re in a two-year residency program and you’re working for a nonprofit. So that’s super to note because I think the default in the federal system is if you have a grace period or a deferment period or whatever it is, most people take it because they think it’s in their best interest. Like, ‘Oh, the government is offering this.’ It’s the same thing with some of these repayment plans, which a lot of these federal repayment plans are actually garbage. And that’s one of the things that we talk about in the course is we give you a little bit of shortcut of the ones to look for. But just because the government says, ‘Hey, you know, take these grace periods or these deferment periods,’ doesn’t mean that you should. It’s not necessarily in your best interest. And on the flip side of this, if you look at it from a non-forgiveness play, you know, if you’re a resident, you’re probably not going to want to go into the private refinance sector because it’s going to look at basically your principal and your interest rate, and you might not be able to afford those payments, especially if you’re looking at an average indebtedness of $160,000. That payment’s going to be in the $1,800 range in a standard 10-year plan. So for residents making $40,000 or $50,000, it’s probably not going to be the best move. So, you know, this is kind of where you have a bridge strategy where you’re looking at the income-driven, you know, similar to what you would do in the forgiveness strategy where you would just do an income-driven plan and then when you have more information, you can either pivot and, you know, stay in the federal system or pivot out and refinance at that higher income level.

Tim Ulbrich: Yeah, just to reiterate what you said early on in that response is remember that just because you’re in deferment — or even if you’re making an income-driven plan, depending on that calculation — it’s likely that your loan balance is growing. And I cannot emphasize enough to not just react to the payment that’s put in front of you without thinking about what your overall strategy is. So what do I mean here is obviously, many if not all of your pharmacy student loans are unsubsidized, accruing interest while you’re in school, through any grace periods. But then even if you go into an income-driven repayment plan, because of what Tim mentioned and how they’re looking back into your P4 year to calculate that payment, that payment — depending on your total debt load — probably isn’t going to even cover the interest that’s accruing each month. So I think to the point that was made, if you’re not pursuing Public Service Loan Forgiveness, what can you do to try to at least keep that total balance at bay so when you get out of residency, you can then really start to attack those loans without that loan balance growing during residency training. So I’ve personally seen way too many situations — and obviously, some of them are not preventable because of whatever variables — but too many situations of somebody graduating at $180,000, $190,000, finishing two years of residency, and all of a sudden, that balance is $210,000 or $220,000 because it’s grown over that two-year period.

Tim Baker: And I, you know, have a story with a client I’m working with. She had about I think $75,000 in debt. And that’s what she thought she had. But over the course of all these deferments and periods that she’s taken advantage of, you know, air quotes “taken advantage of,” you know, when I actually did the inventory for her, it was upwards of like $90,000, $95,000. And she was shocked because she’s like, ‘Well I only thought I had $70,000.’ The problem is that the interest has grown, and then kind of a gut punch on top of that is when she basically goes into repayment, now that $95,000, that interest that was capitalized is now going to be interest on top of interest. And that’s kind of a difficult thing to swallow, especially for some people that they look back at their situation and they say, ‘Oh man, I probably could have paid down some of that interest. Or I could have been more mindful of my loans when I was in this period of flux.’ So yeah, super important to be aware of and not just to take kind of the programs or the different status of your loans as they go through, don’t take those just at face value.

Tim Ulbrich: So for those of you that are listening that are either current students or residents or those that may qualify or think you qualify potentially for PSLF, if you’re looking to learn more, Episode 018, we talk about maximizing the benefits of the Public Service Loan Forgiveness program, so we’ll link to that in the show notes. Tim, what are you hearing on the latest and greatest with PSLF? It seems like it’s actually been somewhat quiet for awhile and then there was news that came out last week about some action as people are actually starting to seek that forgiveness.

Tim Baker: Yeah, so the latest news is that was put out is that Congress has authorized or basically earmarked $350 million to borrowers out there that thought they were enrolled, properly enrolled in the PSLF program but then were probably, that were actually in the wrong repayment system. So it’s kind of a two-step process to get into the PSLF program. So this is encouraging, I think, to me because as much as the Department of Education has fumbled this whole program since it was initiated in the Bush administration back in 2007, this is one of the first I think steps where you actually see money set aside, and this sounds like it’s oops money for that, you know, subset of people that raised their hand and said, ‘Hey, I want to be in the PSLF program,’ and thought that they were in it but just didn’t do the, I guess the logistic step properly where they needed to move from a standard or an extended standard into an income-driven plan. So to me, it’s somewhat encouraging. And some of the chatter that I’ve seen is that the $350 million might not be enough, and I guess it depends on who actually that $350 is for, but we’re starting to hear more chatter about people that are actually being forgiven. So the stats that I heard was that 13,000 people applied for forgiveness since you could in October of 2017, only 1,000 was expected to actually be forgiven or be qualified because of some of these errors in the program. So that’s a 7.7% rate, which to me that means that we’re failing in terms of this program. But it sounds like this particular earmark spending will capture some of those people that thought they were in the proper repayment plan but weren’t. So that’s good news.

Tim Ulbrich: Yeah, and one of the things that gets me so fired up about the course that we’re working on is that we really spend a lot of time and detail helping those going through it decide is PSLF the right move or not. If so, what’s a strategy to maximize this? And then really getting into the nitty-gritty of what are the numbers? What do the numbers look like? And if I’m going to assume this risk, what’s the potential upside? So again, those that might be interested in learning more, helping us with beta testing, yourfinancialpharmacist.com/studentloans. So Tim, the million-dollar question, which is Nate’s second half of his question, what’s the most appropriate balance as far as investing and managing student loan debt? And here, obviously it’s also in the context of residency. So what are the factors that somebody needs to consider knowing this answer is highly dependent upon the individual in terms of how might I balance student loan debt versus investing for the future?

Tim Baker: It’s such a great question. I think it’s one of the questions that we get asked the most. And you know, the stock answer that I give is it depends, which is kind of the worst answer to a question ever. And I think one of the things that, you know, in Episode 026, we talk about baby stepping into your financial plan, the two things to focus on first. And really, the two things that I focus on when I look at a client’s financial picture is what does their consumer debt look like, so credit card debt, and what’s their emergency fund. So the student loan piece is a completely different animal, and I think dependent on the strategy that you take I think is going to dictate when you get into the investment world. And there’s lot of different opinions out there of when to invest and when not to invest and how do you do that with student loans. So some of the factors that I would look at in terms of should I be investing or not is what does your debt situation look like. So if you have credit card debt, which a lot of pharmacists will take on credit card debt as they go through school, I see that more and more, if you have credit card debt, go ahead and fold up your investment policy statement, your investment plan and stick that in your back pocket until that is completely paid off. I think the other thing that we have to be mindful of is just what is your attitude towards the student loan debt. So if your attitude is, ‘Man, I need to get out from underneath this as quickly as possible,’ or if you take kind of a Dave Ramsey approach to debt, and you think that most debt outside of the mortgage debt is bad, then you probably are not going to want to invest anytime soon. The other thing is just like interest rates. So if you’re fortunate enough to have loans that your interest rates are super, super, super low, and you’re kind of, ‘Eh, I can deal with the debt,’ then maybe wading into the waters of investing is more important. And I guess I say this all in the context of, you know, also your employer, what they offer in terms of retirement. You’re probably, nine times out of 10 — and this isn’t investment advice — but nine times out of 10, you’re going to want to probably at least put into your 401k or your 403b what your employer is matching because that’s basically a 100% return on your money. So if they match 4%, you probably want to put 4% of income in there. And that’s typically a general rule of thumb. Some other things to be aware of is — I’m trying to think. So one of the stories that I recently saw too is that — I don’t know if you saw this, Tim — is about 20% of students are using parts of their student loan money to buy bitcoin.

Tim Ulbrich: Yes, oh gosh.

Tim Baker: I would probably say that this is not a smart thing to do.

Tim Ulbrich: The crypto lovers are going to send us hate mail, by the way.

Tim Baker: Yeah, so. But yeah, if you were a client of mine, I would probably advise against that. Not because I don’t like cryptocurrency. I think that there is some longevity there, but I don’t think it’s necessarily looked at as a good investment in terms of using money that you’re 6 or 7% on to then put that there.

Tim Ulbrich: I think what all the things you’re saying is why the answer is depends. And to me, this is why it gets me fired up a little bit when a debate’s going on within a Facebook group or something about this topic because for everyone, the answer is different. I mean, there’s so many factors you just outlined: interest rates, philosophy or feelings toward debt, you know, in terms of what options, do I have a match, do I not have a match. Other ones I’m thinking about are what’s your horizon and timeline for saving? So if you’re a nontraditional student, and maybe you’re coming out, starting your career at 40, this answer might be different than somebody who’s graduating at 24. Are you pursuing loan forgiveness or not? If you’re going Tim Church-style, and you’re throwing massive student loan payments on a short period of say a five-year refi, and you can get your rate down to 3.5 or even less, that might differ than if you’re not doing that. So so many variables that come into play, and I think this also speaks to me the power of working with a really good planner that can help ask all these questions and help determine the answers to these. And we didn’t even talk about I guess your tolerance toward risk as being another one here.

Tim Baker: Yeah.

Tim Ulbrich: You know, and it can really help you wade through, you and/or a significant other to come up with a definitive answer to this question, to come up with a plan that can help you work through this and can feel confident in that plan going forward.

Tim Baker: And I think one thing that you kind of, that maybe we didn’t hit on completely is — and I think we’re seeing this now — is if I look at my student loans, and I’m paying 6%, but then I look at what the market has done over the last year, and I’m like, well, it’s up whatever, 15%. You know, isn’t it a no-brainer just to basically pay the least amount on my loans and then go into the market and get my 15%? And it’s not necessarily — I guess the rebuttal of that is it could easily be down 15%, the market could be down 15% next year. So it is a cyclical thing, and you know, right now, people are saying invest because it’s a no-brainer. But then, you know, if we go through kind of another dip in the market, that’s not necessarily a no-brainer. So the no-brainer in terms of what are the facts that I know is that if you pay off — your loans, they’re going to charge you like clockwork 6% every year. So that’s a given. But when you go into the investment market, you do take risks. So you’re not necessarily going to get that elevated return that you think you’re going to get. So although you can make a case that over the long-term, the market is going to take care of you, and it’s going to return 10%, that is true. If you’re looking at your student loans, that’s not necessarily a no-brainer that you’re going to get the return that you’re looking at in terms of the market.

Tim Ulbrich: And I think where this debate gets a little bit interesting is with some of the refi rates we’re seeing out there with people that are getting, that have top credit, that have a really good income-to-debt ratio and that are willing to pay it off in a really aggressive period, you’re getting rates down that low. Still, it depends, is the answer. But obviously, that becomes a little bit different discussion depending on their personal situation. ‘

Tim Baker: But usually if you get rates that low, it means that your $1,800 payment is now — what does Tim Church pay? $3,800 or $4,800? So there’s probably not a lot of money left over to actually go into the market and invest.

Tim Ulbrich: Great point.

Tim Baker: I think his thought, and I think we see this with a lot of millionaire pharmacists that we’ve interviewed is, you know, if you can train yourself to have the behavior to make massive payments towards your debt, you probably can do the same thing towards your investments. So any of that opportunity cost or any of that lost time that you invested, you can probably make up fairly quickly. And again, it just depends on your situation, your appetite for risk and all that. So it’s definitely a murky picture.

Tim Ulbrich: Yeah, don’t forget your timeline, right? So if you’re going to knock these out in three years, that’s a much different situation than if you’re waiting to invest because you’re going to pay them off over 10. So obviously that timeline and compound interest and time that could be lost is a critical factor as well. So Tim, great stuff as always. Thank you again to Nate and Bethany for submitting a question to be featured on this “Ask Tim & Tim” episode of the podcast. And as a small thank you, we’re going to be sending them a super comfy YFP T-shirt. And again, if you have a question you’d like to have featured on the show, make sure you shoot us an email at [email protected]. And we hope you’ll join us again next week as we feature two questions on investing.

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YFP 010: Is Whole Life Insurance a Good Investment Strategy for College Savings?

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What You’ll Learn From This Episode

In Episode 010 of the Your Financial Pharmacist Podcast, we take our very first question on the Ask Tim & Tim segment of the show.

Leighanne from Pennsylvania asks a question about whole life insurance as a strategy for building wealth and saving for college. Here is Leighanne’s question:

What do you think about whole life insurance adding to our financial portfolio as a way to build capital and save for the kids’ college?

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Now that we have our first episode of the Ask Tim & Tim segment under our belt, we are itching to do some more.

Head on over to www.yourfinancialpharmacist.com and half-way down the home page you will see an ‘Ask Tim & Tim’ section to record your question.

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