financial planning

6 Boring Financial Moves Worth Making

Posted on by yfpadmin

6 Boring Financial Moves Worth Making

The following is a guest post from Dr. Jeffrey Keimer. Dr. Keimer is a 2011 graduate of Albany College of Pharmacy and Health Sciences and pharmacy manager for a regional drugstore chain in Vermont. He and his wife Alex have been pursuing financial independence since 2016. Check out Jeff’s new book, FIRE Rx: The Pharmacist’s Guide to Financial Independence to learn how to create an actionable plan to reach financial independence.

Today’s the day.

You’ve spent the better part of a decade getting your PharmD, passed your boards, and got the job. But today’s the day it’s supposed to all pay off; for today, you finally get that sweet first paycheck as a pharmacist.

Welcome to the club!

But now what?

Well…whatever you want, right? After all, the world’s your oyster now that you’re making good money. Live it up! And even if you don’t have the money on hand to do what you want right now, you’ve got a big income to support a big credit limit. Charge it!

Unfortunately, a lot of us (myself included) buy into this mindset and fall into a financial quagmire because of it. What starts as something innocuous like “I’ve worked hard for a long time and now I’m going to treat myself” has a funny way of becoming “Wow, I make six figures and live paycheck to paycheck!” And if you don’t believe that’s a thing, tell that to the majority of high-earning Millennials who report living that life.

It doesn’t have to be that way though. There are moves you can make to protect yourself from such first-world problems. But here’s the rub, most pharmacists (and people in general) don’t like making some of these financial moves because they can be boring, tedious, and might be outside your comfort zone. If you can get past that though, these moves could pay off in the long run.

So with that, let’s dive in!

1. Make and Keep a Budget

This one’s probably the most essential thing you can do to keep your finances on track. Knowing how much money’s coming in, how much is going out, and what can be saved is elemental to the financial plan. If you aren’t budgeting, I’d dare say that you’re going to find it very difficult, if not impossible, to meet most of your bigger financial goals.

So why does this one top our list?

In truth, budgeting can be one of the most boring activities that fall under the broad umbrella of things considered “adulting.” It requires you to take an accurate accounting of not just the money you have coming in, but the money that’s going out and where it’s going. Poring over pay stubs, bank statements, and credit card bills to get all this data isn’t just recommended, it’s required. Oh, and you’ll probably need to make a spreadsheet or two.

Sounds like fun, doesn’t it?

And that’s just what goes into making an initial budget. To make budgeting work for you, you need to get in the habit of sitting down with all these numbers regularly (usually once a month, if not more often). Like a diet, success with budgeting is only going to occur when you practice it consistently for the long run. Fortunately, budgeting isn’t that hard to do and there’s even more than one way to do it.

For most of us, the thought of budgeting invokes a picture of sitting down with your finances once a month, going over your income and expenses, and seeing if there’s money left over to put toward goals. This kind of process, known as “zero-based budgeting,” is the most basic form of budgeting you can do and will likely be the first budgeting style you try. It can also be a pretty tedious process as you need to dissect each month’s spending and see how it compares to the goals you set for yourself ahead of time. For instance, say you want to set a budget of $150 a month for clothes, and this month you only spent $135. Great! The extra $15 can be added to the amount you can save this month. Conversely, if you went over budget in that category by $15, hopefully, you underspent in another category. If not, you’ll need to dip into existing savings to cover the shortfall.

Given the fact you need to repeat this process for every spending category, month after month, it’s not hard to see why many people don’t care for it. Still, it must be done. Don’t fret though, there are plenty of tools available to help you out along the way. For starters, you can avoid having to make a budget spreadsheet yourself and get one for free right here at YFP. This template will walk you through the steps required to make your first budget. Beyond that, there are some excellent platforms available to keep you on track. I was a big fan of the app Mint when I was getting started as it automatically drew all the data I needed from my accounts, aggregated it, and presented it to me on a clean interface.

Using that app, I was also able to get a handle on my spending trends over time and better predict my spending in the more variable categories (ie. food, clothes, entertainment, etc.) which allowed me to pursue a more convenient budgeting style. By knowing what I usually spent in those variable categories and seeing a consistency over time, I could also (in theory) treat the whole lot of them as a single line item. This led me to create a budget for myself which is sometimes referred to as a “reverse budget” in which money for savings is taken out first (in my case every pay period), and then you live off what’s leftover. It’s kind of like living paycheck to paycheck, but without worrying about how you’re going to pay the rent. For me, this style has worked very well as it involves little work beyond the initial setup. I get paid, my spreadsheet tells me how much extra I should have, and I send that money toward goals. The only time I revisit the numbers on the spreadsheet is when they change. That’s it! If you’ve been using a zero-based budget for a while or happen to have a few years of data showing relatively consistent spending, migrating over to a reverse budget might help you keep things going long term.

However you decide to do it, the bottom line here is you need to budget. Full stop. All of the other things we’re going to talk about in this post can be crucial to the financial plan, but they pale in comparison to the importance of budgeting. If you’re not already doing it, get started today!

2. Protect Thyself!

Ok, I tried to give this one a more exciting title, but this section encompasses the most boring things you can do as part of the financial plan. In this bucket, you’ll find riveting topics such as insurance policies, designating a power of attorney, and even writing a will! Hoo boy!

Pumped? Yeah, I didn’t think so.

But the truth is, taking steps to secure yourself against life’s uncertainties is never a fun exercise, and sometimes the process can even be a little uncomfortable. It’s worth it though, and you really should consider taking action here. After all, stuff happens in life and even the best-laid plans can get torn to shreds by the unforeseen.

When it comes to insurance, most of us are pretty familiar with health, home, and auto policies, and these are all essential and may even be legally required to have in some cases. But what about insurance that protects your income and those who depend on that income? Life and disability insurance policies typically aren’t given the kind of attention and essential label that the above do, but for many of us, they probably should. After all, your income is the lifeblood of you and your family’s financial plan, and securing it is important! It’s tough to think about dying prematurely or losing the ability to work, but preparing for the worst is always a good move.

Life insurance can be a pretty complicated topic, especially when you consider the fact that many policies out there combine insurance with investing. Rather than getting into the weeds on the pros and cons of different types of policies (for that, check out my other post Life Insurance for Pharmacists: The Ultimate Guide), I’ll just say that the most important thing to consider here is getting a death benefit sized to your situation for the lowest amount of premium from a reputable insurance company. And given the importance of getting that sizing right, it’s probably not a bad idea to work with an advisor or agent when getting a policy.

Be forewarned though, policies that have investing components such as whole life or universal life tend to have MAJOR financial incentives for the agents selling them. As such, those agents (who may also call themselves financial advisors) may not be acting in your best interest when pitching them to you. For most new pharmacists, these types of policies are rarely the best option. In general, term life policies that meet your basic need for insurance are what to look for.

If life insurance is a good fit for your financial plan, then you’ll want to consider getting disability insurance as well. Thankfully, disability insurance is a little more straightforward. At a basic level, you need to choose how long you want to receive benefits, the amount you’d receive, and how long it will take before benefits kick in (also known as the elimination period). In addition, you may want to get a policy that’s specified as “own occupation” disability insurance because receipt of disability insurance otherwise is predicated on the idea that you can’t work, period. Unless you have an own-occupation policy, disability payments can be denied if you could reasonably work in a different capacity, even at a much lower rate of pay. For more on disability insurance, be sure to check out this must-read on the YFP blog, Disability Insurance for Pharmacists: The Ultimate Guide.

Finally, when it comes to protecting you and your family in the event of the unthinkable, having other plans in place such as a durable power of attorney, will, and/or estate plan can go a long way. These things can make your wishes known in the event you’re unable to say them yourself. For more on this, be sure to listen to YFP Podcast Episode 222: Why Estate Planning is Such an Important Part of the Financial Plan.

3. Tackle Debt

Once you’ve started to budget, getting out of debt tends to be one of the first financial goals people set for themselves. After all, being debt-free is pretty awesome.

So why does this one make the list? Because while being debt-free can be exciting, getting there can be a pretty boring process. On top of that, if you have student loans you are trying to pay off, an optimal strategy may involve a suboptimal amount of paperwork to boot.

For most of us, eliminating a substantial amount of debt boils down to following a budget and applying the savings from that budget consistently. Put in the work, grind it out, and the debt will eventually be gone. That said, there are ways to optimize the process.

There are two main strategies for straight debt pay off: the avalanche and the snowball. The avalanche strategy involves you paying off debts in order of smallest to largest. With the snowball method, you’ll pay off the debt that has the highest interest rate first, eventually working your way down to the lowest interest rate. There probably won’t be much of a difference between the two in terms of how quickly you’ll pay off the debt, but these strategies do provide a roadmap to get you from start to finish.

But while the path to get rid of most types of debt can be straightforward, the best path to get rid of your student loans can be a little less clear. Depending on the type of loans you have, your employment status, and your level of discretionary income, you may find that the optimal strategy for addressing your loans is a lot different than simply grinding them away. For more on that, be sure to check out Tim Church’s comprehensive book, The Pharmacist’s Guide to Conquering Student Loans as well as the excellent post The Ultimate Guide to Pay Back Pharmacy School Loans.

If, after carefully considering all of the payoff strategies available to you, you decide that simply paying them off is the best course of action, visit the refinancing hub at YFP so you don’t pay a dime of interest more than you need to. You might be able to get some extra cash too!

4. Avoid More Debt

Once you get out of debt, it’s only natural to feel that your financial picture has relaxed a bit. After all, these are bills you’ve likely eliminated from your life forever. But now that they’re gone, it’s incredibly important that you don’t replace them with new ones. Believe me, keeping up with the boring grind that got you out of debt after paying everything off is easier said than done.

There’s a theory in economics known as the “wealth effect” which shares that as the value of people’s assets rise, they tend to spend more. I would argue that the same can be said when you get rid of debt. Your net worth rises and the cash flow available from your biggest asset (your income) increases. Taken together, the pressure to upgrade your lifestyle goes up as well. After all, you can afford nicer things now, denying yourself these pleasures would be on you alone, not the fact you have a loan payment due.

This is something I started to struggle with once the only debt I had in my life became my mortgage. With all the other big monthly bills gone, the amount of extra cash available every paycheck seemed to give me license to spend a lot more than I had previously. While my experience in personal finance taught me to avoid credit card debt like the plague (and I do), it’s a lot harder to keep thoughts of buying a nicer car or considering a home upgrade at bay; both of which have a nasty habit of getting you back into debt. Add temptingly low-interest rates into the mix and, well, you get the picture.

5. Force Yourself to Save More

Going hand in hand with keeping yourself out of debt is then using that money to save more. This can be tough because unlike getting out of debt, saving money doesn’t have a well-defined endpoint and the goal you set for yourself can shift over time. In addition, unless you’re in a group that likes to share financial successes, getting external validation (and motivation) about your savings habits is unlikely. After all, people see nice stuff, not nice balance sheets.

Thankfully, there’s a concept I’m going to borrow from the Financial Independence, Retire Early (FIRE) movement that we can use here to make savings a little less boring and give you a better-defined goal to work with. It’s called the “four percent rule.” In a nutshell, the four percent rule sets the amount you need to save to be considered financially independent as 25 times your annual expenses.

How does that make saving less boring? Easy. With a defined goal in mind, you can give your savings journey milestones to get excited about! For example, getting to a point where you have $100,000 in your investment accounts can sound pretty good on its own, but it can be much more meaningful in the context of where you are in your journey to financial independence; arguably the end goal for everyone taking charge of their financial futures.

6. Be Honest With Yourself as an Investor

Finally, I wanted to touch on this one not just because it fits the theme of boring things to do, but because I think as pharmacists (like other highly compensated professionals), we can easily fall into the trap of thinking we’re smarter than we are when it comes to investing. I’ve been guilty of this. But despite what you may hear in the news about small “investors” making scads of money on the latest meme stocks or cryptos, the truth is that day trading the market is a great way to lose money over the long run, or worse. For most investors, following a boring, buy-and-hold style of investing using a diversified mix of quality assets that aligns with your risk tolerance is typically a much better play.

Conclusion

The bottom line is that the path to long-term wealth and financial prosperity isn’t always sexy. Along the way, there are things you’ll need to do that are, frankly, quite boring. But if you can get past that and put in the work to make and keep a financial plan that allows you to build wealth in a secure, consistent way, you’ll be well on your way to reaching financial independence.

Need help figuring out which financial move to make next?

If you’re interested in having support on your financial journey, I encourage you to book a free discovery call with the team at YFP Planning. YFP Planning is a fee-only, comprehensive, high-touch financial planning firm that’s dedicated to serving pharmacy professionals like you.

You can book a free call to see if YFP Planning is the right fit for you.

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7 Things to Consider Before Starting a 529 Plan

Posted on by yfpadmin

The following is a guest post from Dr. Jeffrey Keimer. Dr. Keimer is a 2011 graduate of Albany College of Pharmacy and Health Sciences and pharmacy manager for a regional drugstore chain in Vermont. He and his wife Alex have been pursuing financial independence since 2016. Check out Jeff’s new book, FIRE Rx: The Pharmacist’s Guide to Financial Independence to learn how to create an actionable plan to reach financial independence.

Let’s face it, paying for college stinks. Whether you are in school, you’re trying to keep up with your child’s tuition which tends to increase by twice the rate of inflation every year, or you’ve graduated and are facing paying back student loans, the cost of higher education can be a tremendous burden.

So what can you do about it?

Well, the first, and most obvious answer here is you need to save for it. Sure, there are other things you can do to reduce the cost of college such as scholarship hacking (i.e., applying for every scholarship under the sun in the hope you get some) or taking a job with a college offering tuition reimbursement as a benefit, but those kinds of silver bullets aren’t the norm. No, chances are you’re going to need to start thinking about college expenses well in advance and start saving sooner rather than later.

Thankfully, the government gives college savers a helping hand in the form of tax-advantaged savings vehicles; the two most popular choices are the Coverdell Education Savings Account and the 529 plan. In this post, we’re going to do a deep dive into the more popular latter option: the 529.

What is a 529 Plan?

In a nutshell, a 529 plan is simply an account that allows money to be invested and grow tax-free for future education expenses. This is similar to other tax-advantaged accounts like an IRA or 401(k). Unlike those plans, money in a 529 plan can only be withdrawn (without penalty) to pay for qualified education expenses. If the expense qualifies, the money coming out of the plan also comes out tax-free. What’s more, contributions made to 529 plans can have some tax benefits too depending on your state (more on this later). In this respect, the 529 falls somewhere in between a Roth IRA and an HSA in terms of preferential tax treatment.

Before opening one, there are several things to consider; and most, if not all, will depend on your situation. What follows is a brief overview of seven main considerations before starting a 529 plan and it is not an all-inclusive list. As always, if you have questions about how best to incorporate these concepts into your financial plan, make sure to reach out to a financial professional like those at YFP Planning.

Let’s dive in.

What to Consider Before Starting a 529 Plan

1. Which Type of 529 Plan is Right for You?

Like many things in life, even those trying to save for college can find themselves facing the tyranny of choice. Case in point, as of when this post was written, there are 150 different plans considered to be 529 plans. But fear not! We’ll help you sort through it.

First off, you need to decide on the general type of 529 plan you want. While the term “529 Plan” is sometimes used as a catch-all for these savings vehicles, there are only two distinct types of plans governed by section 529 of the Internal Revenue Code: prepaid tuition plans and savings plans.

With a prepaid tuition plan, you do just that: pre-pay tuition. The idea here is that since the price of college tuition tends to increase quite a bit over time, it’s better to prepay to lock in tuition prices at today’s rates. In addition, by using a prepaid plan, there can be far less guesswork in the planning process. Sounds good, right? There’s a catch.

As you may have guessed, when you pre-pay tuition, you’re pre-paying at an institution’s (or institutions’) going rate. As such, you may be limiting where the funds in the account can be spent. After all, you can’t pre-pay 4 years’ worth of tuition for an inexpensive state school and then expect Harvard to say you’re all paid up for there as well. What happens with prepaid plans is that the pre-payment is based on the tuition rates at schools either in a particular state or within a private network of schools outlined by the plan; and to use the prepaid plan as intended, the beneficiary would need to attend one of the covered schools. If the beneficiary chooses to go somewhere else (or doesn’t get into a prepaid school) options are generally limited to changing the beneficiary of the account, rolling the account value into a 529 savings plan, or getting a refund (usually with fees applied).

On the other hand, 529 savings plans offer much more flexibility. With a savings plan, you’re able to use account funds for qualifying expenses at thousands of colleges and universities in the US and abroad as well as private/religious K-12 tuition (up to $10,000 annually). In addition, money added to a savings plan can be invested, similar to a workplace retirement plan, allowing you to grow the account faster when compared to a prepaid plan. Finally, unlike prepaid tuition plans, where participation can be restricted depending on the beneficiary’s state of residence, 529 savings plans are generally open to anyone.

However, not all 529 savings plans are created equal and some are, objectively, better than others. Separating the wheat from the chaff here can be a kind of daunting process too as savings plans comprise the vast majority of available 529 plans and there are several variables to consider for each; such as state-specific tax breaks, plan fees, and investment choice. What’s more, unlike a prepaid tuition plan where the amount you need to save is explicit, market returns (which are relatively unpredictable) are going to play a more central role in the plan’s success. Given the added uncertainty, a savings plan might not work for everyone.

Finally, I should note that while many people choose to use one type of plan or the other exclusively, there’s no law saying you can’t use both. For some, combining the greater certainty of the prepaid plan with the flexibility of a savings plan by investing in both can be a good fit.

2. Should You Use an In-State 529?

Once you’ve decided the kind of 529 plan you want to use, it’s time to start narrowing the list of available plans to the one best suited for the plan’s beneficiary, and you! Generally, the next step here is to decide whether or not to use a plan specific to your state of residence.

Unlike other tax-advantaged accounts such as IRAs and HSAs, the federal government doesn’t offer any tax incentives for 529 contributions. However, depending on your state of residence, contributions made to a 529 plan can have state income tax incentives such as deductions or credits. Here’s where things can get a little challenging. The rules surrounding state tax incentives are, much like state pharmacy laws, kind of a patchwork across the country.

For instance, in my home state of Vermont, my wife and I get a 10% tax credit on up to $5,000 worth of 529 contributions per beneficiary per year as long as we make those contributions to the official in-state 529 plan. If we lived in Pennsylvania though, we could get a tax deduction on up to $30,000 worth of contributions per beneficiary per year and it doesn’t matter what 529 plan we use. But on the flip side, if we lived in California, it doesn’t matter how much we contribute or what plan we contribute to because California doesn’t offer any tax incentives for 529 contributions.

As you can see, the relative value of these tax incentives can vary a lot from state to state. You could live in a state that heavily rewards saving for college…or not so much. When choosing a 529 plan, paying attention to how your state treats contributions can help you avoid leaving money on the table allowing you to save for college much more efficiently.

3. Is Your In-State Plan a Good Investment?

A saying in the investment world is “don’t let the tax tail wag the investment dog” and I think it’s extremely relevant when choosing a 529 savings plan. When it comes to investments, 529 savings plans share a lot in common with workplace retirement plans such as 401(k)s. They both limit your choice of investments to a short menu of options and tend to offer the same types of investments no matter where you go. Typically, this means an age-based allocation strategy (similar to a retirement plan’s target-date fund) and some stock, bond, and cash choices for those who want a more custom portfolio.

So if there’s not much difference between savings plans in terms of what they offer, why should an investor care about which plan they choose?

Fees!

Just as I said in an earlier post on investing basics, fees can have an enormous impact on your overall investment returns. Their effect on the performance of a 529 savings plan is no different. While many plans offer solid low-cost investment options, some do not. And worse yet, some plans charge high admin or advisor fees on top of those already charged by the funds you invest in. Yikes!

So going back to the old investing adage “don’t let the tax tail wag the investment dog,” the presence of high fees within your in-state options is a good reason to think twice before investing. After all, getting a couple of hundred dollars back in taxes but losing thousands due to fees over time is the very definition of penny-wise, pound-foolish.

It’s for this reason that many people who choose to use a 529 savings plan opt for an out-of-state plan. Once you’ve decided to invest outside the limited options provided by your state, you’re free to choose whatever plan you want; some of which explicitly market themselves as low-fee options.

In addition, depending on your state, it may be possible to invest in the in-state option, get a tax break, and then later, move the investment to a more fee-friendly out-of-state plan (so-called “deduct and dash”). Yes, it’s possible to have your cake and eat it too. This sort of thing isn’t allowed in all states though, and doing so in the wrong state might cause tax penalties. Be sure to check first with a CPA or another qualified tax professional before pursuing such a plan.

4. What Types of Expenses are Covered?

When I was in college, I spent a whole lot of money on a variety of things that were loosely affiliated with my status as a full-time student. However, a number of those expenses that I would’ve considered to be “college-related” wouldn’t have been considered qualified higher education expenses covered by a 529 savings plan. Here’s a short list of what would’ve made the cut:

Tuition and fees
Room and board (limited to the costs published by the college attended)
Textbooks
Computers (related to schooling only, sorry no gaming or crypto mining rigs)
Student loan repayment ($10k lifetime max per beneficiary as of 2021)
Tuition for private or religious K-12 education (up to $10k per year)

But what about other things such as transportation or the cost of an internet connection for the apartment? Surely those are “education-related expenses” and would be covered, right? Wrong! This is where people trying to pay for everything related to a child’s schooling can get into trouble when using 529 funds.

So what happens if money from a 529 savings plan gets tapped for a non-qualified expense? First off, relax, no one from the government is going to come and break down your door about it. However, you will owe ordinary income tax on the portion of the withdrawal that comes from account earnings as well as a 10% penalty; very similar to what would happen if you withdrew from a Roth IRA before age 59 ½.

5. What are Your Plan’s Contribution Limits?

So just how much money can you squirrel away in a 529 savings plan? Well, the most accurate answer here is “it depends.” Contribution limits are set not by the federal government, but instead by the states, and it ends up being another legal patchwork across the country. In addition, contribution limits are not based on some yearly amount that you can put in, but by a limit on the balance of the account. Once the account’s value reaches the prescribed limit, no more contributions can be made until the balance falls back below it.

On the other hand, even states boasting the lowest allowable balances let you build up quite the war chest before the limits are reached. For example, as of 2021, even the strictest of state-sponsored plans have a limit of $235,000 per beneficiary; quite a bit if you ask me. And if that weren’t enough, some states will even let you have over half a million in a 529. At that point, if you can’t pay for college, you’re doing it wrong.

6. Is “Front Loading” Contributions the Right Move?

Another question often asked about 529 plans is whether you should front-load the contributions (aka. lump sum invest) or spread them out over time (aka dollar cost average). Fortunately, there’s some guidance on this and generally speaking, it’s better to invest as much as you can as early as possible. As the adage goes “time in the market beats timing the market.” The more time your investments have to grow, the better chance you have for those investments to grow.

In addition, the IRS makes a special exception for 529 contributions when it comes to gift taxes. Normally when you give money to a child, there’s a $15,000 per year cap per person, per child ($30,000 for couples filing jointly). However, the IRS makes an exception for gifts going to 529 accounts, allowing you to front-load 5 years of contributions into one. This could mean up to $150,000 going into a 529 account in a single year! Now I know what you’re thinking, that sounds pretty baller even on a pharmacist’s salary, but hear me out. Given the exception, front-loading a 529 account like this can be a very good play for those receiving an inheritance or other significant windfall. While it won’t keep you from paying taxes on the money you get, it can keep that money growing tax-free and for a good cause.

7. What if My Kid Doesn’t Use It?

Finally, when thinking about using a 529 as part of the financial plan, you should consider what to do with it if the original beneficiary doesn’t use all the money in it to fund their education. Or who knows, maybe they don’t use any of it! What happens then?

Fortunately, the 529 isn’t a use-it-or-lose-it type of savings vehicle like the flexible spending account (FSA) you may have at work for healthcare expenses. The money saved in one will continue to be there regardless of what your kid chooses to do in life. So if they don’t use it all does it make sense to just cash it out? Maybe, but transferring the account to someone else will probably make more sense when you consider the taxes and penalties you’d have to pay on such a move.

So how does that work? Well, it could be as simple as just changing the name of the beneficiary on the account. First kid not going to use the money? Now that money belongs to the second kid. Done. You could even name yourself as the new beneficiary to help fund yourself going back to school, something that may become necessary in the future. As Yuval Noah Harari points out in his book, 21 Lessons for the 21st Century, the speed at which new technologies are disrupting old industries these days may make it difficult for anyone to stay in the same profession for 40 years; especially those in highly specialized ones such as pharmacy. Given that, utilizing a 529 account to fund not just your childrens’ but further your education by taking advantage of their ease of transferability can help protect you and your family from this kind of uncertainty.

But what if the person you want to name as a beneficiary already has their own 529 account? No worries, you can just combine the accounts once a year through a rollover. A rollover can also be a good choice if you move states and the new state you’re in has a better plan.

Conclusion

Overall, 529 plans can be a solid choice as a savings vehicle for future education expenses. With their preferential tax treatment, high contribution limits, and ease of transferability, choosing to use a 529 plan versus alternatives such as a taxable brokerage account can make a lot of sense.

529 Plans aren’t without their drawbacks though. The quality and tax benefits of 529 plans can vary from state to state, with some states making investments in their 529 almost a no-brainer and others…well, not so much. In addition, the requirement to spend 529 money on “qualified higher education expenses” only without incurring a significant penalty, can definitely be a turn-off for those who don’t care for restrictions on their savings.

Need help determining how to best save for your child’s education?

In the end, the suitability of a 529 plan as a savings vehicle is going to come down to your family’s financial plan. The seven considerations I’ve spoken to above are good for getting an appreciation of these types of plans and how they might fit into your plan. But it’s no substitute for doing in-depth research or working with a financial professional. If you think you need more help deciding whether a 529 plan is a good fit or which one to choose, feel free to reach out to the team of fee-only, comprehensive CERTIFIED FINANCIAL PLANNERS TM at YFP Planning. They can walk you through all the ins and outs of saving for college and getting the most from your customized financial plan.

You can book a free discovery meeting with our team to see if YFP Planning is the right fit for you.

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How To Build a 6 Figure Rental Portfolio in Less Than 3 Hours a Week

Posted on by yfpadmin

How to Build a 6 Figure Rental Portfolio in Less Than 3 Hours a Week

The following is a guest post from Dr. Ryan Chaw. Ryan is a full-time pharmacist who built a rental portfolio on the side, going from zero to $10,755 per month in just 4 years. He is the founder of Newbie Real Estate Investing where he teaches others his system: how to find a college town to invest near, analyzing a deal, generating tenant leads through strong marketing tactics, and how to self-manage college tenants so everything is hands off and automated.

For most new investors, real estate is like a dragon.

It’s big, scary, and you’re afraid of getting burned.

Even scarier is having a bunch of immature college students renting out your bedrooms. But that’s exactly what I specialize in.

“Aren’t you worried the students will trash your house?”

This is a question I get asked all the time whenever I tell somebody that I invest in the student housing market.

My answer is always the same…

“Absolutely not. No way. Nope.”

In fact, thinking that college students will trash your house is one of the biggest myths of college town real estate investing.

Unfortunately, this myth is what holds most real estate investors back from one of the most lucrative markets in all of real estate investing: renting out by the room to college students.

You’re probably wondering right now, “Huh? I don’t understand. How’s that a myth?”

I’ll cover that later in this article, but let’s first talk about why I chose student housing.

How to Start Investing in Real Estate in a College Town

Most real estate investors leave half of their cash on the table when they rent out their house only as a single unit rather than renting by the bedrooms.

For example, here’s what one of my houses would have made if I rented it out only as one unit:

Source: Rentometer.com

But by renting out each bedroom separately, here’s what it’s actually making:

I doubled my rental income by renting by the bedroom.

Because I own 4 of these houses, I’m now making $10,755 per month in rental income!

It wasn’t always like this though. I started out as a typical pharmacist. I graduated in 2015 with my Doctorate of Pharmacy and worked two jobs as a retail and hospital pharmacist. I quickly realized that I didn’t want to work as a pharmacist until I was 65 after talking to an older pharmacist colleague. He told me, “Honestly, I just come here for a paycheck now. I wish I could have retired a lot sooner.”

I realized that while pharmacists typically make over 6 figures, this alone isn’t enough to achieve financial independence.

My inspiration to get into real estate came from my grandpa who had purchased several rentals in the SF Bay Area back in the 50s before Silicon Valley existed. As we all know, Bay Area prices went up like crazy, so Grandpa Chaw was able to retire early and live mostly off the income from his rentals.

I knew I wanted to get into real estate as soon as possible because it’s truly a time game. You buy as soon as you can, then wait for it to grow over time (as your rent goes up, your property price goes up, and you write off tons of money in taxes). When I got my pharmacist license, I decided to work a lot of overtime to save up for my first downpayment, which I used to buy my first rental in 2016.

Unfortunately, I made a lot of mistakes on my first rental and lost over $30,000!

I got a call from one of my tenants one night who said, “You’ve got to fix this. Sewage is pouring out of the kitchen sink and it’s all over the floor now.” I hired a clean-up crew and a plumber to assess the situation. It turned out that I needed to replace the whole sewage line. This cost me $9,000! I had to pay for the repairs out of pocket since this happened only 2 months after I purchased the property and I didn’t have much rental income.

On top of that, I didn’t realize the house had virtually no AC system. I ended up having to install a mini-split HVAC system which cost me $15,000.

Lastly, I had a vacancy for 8 months because I had no idea how to advertise my bedrooms. This cost me $5,200 ($650 per month x 8 months).

At the end of it all, I was feeling very depressed and discouraged. I was tired of having to take calls during my lunch breaks and late nights on weekends. I thought I had made a huge mistake investing in real estate. But I kept at it because I knew if my grandpa could do it, I could do it too. Over the next 4 years and after much trial and error, I created a system for student housing that I now teach to others. The system allowed me to cut the amount of time spent on my rentals to less than an hour a week. I’ll summarize the steps below.

There are 7 steps to creating your own student housing model that will significantly reduce the amount of time you spend on your rental properties.

Step #1: Do your research ahead of time.

Check your local city laws first to make sure everything you’re thinking of doing is legal. Some cities may require you to get a business license to rent by the bedroom. During this COVID-19 pandemic also check the college website to confirm they are scheduling on-campus learning (most colleges have some on-campus activities, whether it be with labs or experiential programs). Luckily, most graduate school students still need access to on-campus buildings to do their research.

Step #2: Choose a college based on enrollment data, college ranking, and the programs that are offered there.

You need to make sure to choose a college with a good market size to rent your bedrooms out to. Consider targeting more Ivy League type colleges because most students that go to those types of colleges received straight A’s in high school and are therefore more serious about completing their studies. Ivy League type colleges also offer opportunities for higher degrees such as medical school, pharmacy school, and nursing school. These types of students likely don’t want to waste their time partying in college. Finally, because these colleges are so popular, most of the students will be from out of the city, state, or even country, so they are definitely searching for a place to stay close to the college.

Step #3 Make your place attractive to college students.

I try to find properties that are in close proximity to campus so that I can charge premium pricing. I also look for houses with plenty of parking. This allows the college students to bring a car so they can drive to their experiential functions such as health fairs for pharmacy, nursing, and medical students. Check out the neighborhood to make sure it’s a good area so the parents feel safe letting their children stay there.

Step #4: Calculate your rental amount and know how much to charge if you put two people in one bedroom (like a couple).

If you are cheaper than on-campus housing, then you automatically have market demand. Because you provide more room and more privacy than on-campus dormitories and charge cheaper rent, it makes sense for a lot of students to just stay in one of your bedrooms. Keep in mind that putting couples into a single bedroom will allow you to charge more for that bedroom.

Step #5: Know what to look for when deciding if you can add or convert a room to a bedroom.

Whenever you can create an extra bedroom, that’s another $500-$700 in additional rental income per month. This is huge! Even adding one extra bedroom will pay for the majority of repairs and expenses that come up on your house throughout the year. Doing this step also typically allows you to at least double the amount of rental income and cash flow you make on the property.

Step #6: Market your bedrooms well to create urgency and demand.

You need to know how to create demand and urgency by highlighting the benefits of staying in your bedrooms vs on-campus housing. And, you have to advertise in the areas where your target market (i.e. college students) hang out. If you have a lot of students interested in renting out a bedroom at your property, you’ve really got the upper hand. You can choose the best tenant out of a large pool of applications. Consequently, it’s really important to get your marketing right so that you can be picky in choosing a tenant.

Step #7: Create systems and teams to help you self-manage the properties to save yourself a lot of money.

Personally, I spend less than an hour a week managing my rentals because I have systems in place for it. I empower my tenants to take on certain responsibilities. Payments are made through a phone app called Zelle since students are tech savvy. I’m able to manage my rentals while working as a full-time pharmacist job because I have these systems in place. And the best part is that I don’t have to waste 8-12% of my revenue on hiring a property manager.

Now that we covered the 7 steps, let’s go through the most important part of this process: how I completely avoid problem tenants to reduce my work load even more.

Marketing

As mentioned earlier, I do targeted marketing toward the type of students I want to attract. I’m looking specifically for the types of tenants who are more concerned about passing their midterms and finals than throwing wild house parties.

Screening

I screen social media accounts. You don’t want people who smoke, drink a lot of alcohol, do drugs, or party nonstop. Any of these types are hard a “no” for me.

Be strategic in pairing up housemates

I strategically pair up college students. This creates a balance so that even if there are a couple of immature college students in a property, they’re kept in check by the more mature, professional college students. I then also have at least a few people at every house who take on responsibilities to maintain the house. Sometimes I’ll have a tenant who may be messier, but his/her mess gets cleaned up by their parents or the other tenants.

Set yourself up for success

I minimize common space and turn those spaces into additional bedrooms. Not only does this boost my profit, but there literally will be no space to throw a large party.

That’s how simple this can be!

I believe real estate investing should be fun, simple, and enjoyable rather than this big, intimidating beast you have to slay. It also allows you to give back and provide affordable housing. If you’re interested in learning more about how student rentals can shortcut your way to financial independence, I offer a free PDF guide on how to do this and in my emails I offer you quick practical tips on how to determine the best location to invest in, red flags to watch out for, and how to create automated systems that you can implement in your own real estate portfolio at www.newbierealestateinvesting.com.

Ready to take the next step in your real estate investing journey?

One of the most important aspects of real estate investing is building your team and that all starts with finding the right real estate agent.

But as a busy pharmacist, researching, vetting, and connecting with real estate agents can be tough.

That’s why we partnered with our good friend Nate Hedrick, The Real Estate RPh, to offer a free home buying concierge service. As a pharmacist and real estate agent himself, Nate’s got the insider’s view. He has a unique perspective on the home buying process and has used it to help many pharmacists achieve their real estate dreams.

With this service, Nate helps you craft a plan that works within your budget and financial goals, connects you with a pro that you can trust, and helps you stay the course.

Click here learn more about this free home buying concierge service and to book a free call with Nate.

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These Tax Benefits Get Unlocked When You Have or Adopt a Child

Posted on by yfpadmin

These Tax Benefits Get Unlocked When You Have or Adopt a Child

The post is for educational purposes and does not constitute financial advice.

Everyone talks about how much it costs to have or raise a child, and for good reason! Having or adopting a child is not an inexpensive thing to do. You may be surprised at how much you spend after factoring in the accumulated costs of necessities like healthcare, food, housing, and clothing on top of activities, sports, and the toys that they have to have. According to a 2015 report from the U.S. Department of Agriculture, middle-income married couples could spend $233,610 to raise a child until they are 18. After adding in inflation, the cost rises to $284,570!

That’s obviously no small chunk of change.

The good news, aside from the immense amount of joy they can bring into your life? Having or adopting a child can unlock several key moves you can make that can help to lower your tax bill and allow you save for future tuition expenses.

1. Child Tax Credit

Taxpayers who claim at least one child as a dependent on their tax return may be eligible to receive the Child Tax Credit (CTC). The Child Tax Credit is different from a tax deduction. A tax deduction reduces your taxable income, but a credit actually lowers your tax liability or the amount that you owe the IRS. For example, if you have a $5,000 tax bill and are eligible for the Child Tax Credit, you’d owe $3,000 instead. Another amazing feature of this credit is that you’re eligible to receive a refund for up to $1,400, so if the credit brings your tax liability below zero, you could receive a refund up to that amount. Woohoo!

For 2020, the Child Tax Credit is capped at $2,000 for each qualifying child and begins to phase out for those earning $200,000 filing single and $400,000 married filing jointly. To qualify for this credit, you must have earned at least $2,500 in the tax year.

Check out this IRS tool to see if you have a child that would qualify for you for this credit.

2. Child Care Credit

Paying for childcare is a huge expense that parents and caregivers have to face. According to the Center for American Progress, the average cost of center-based child care for an infant in the United States is $1,230 per month. With a family care center or in-home daycare, average costs are around $800 per month. If you have multiple children, you’re obviously looking at a larger bill.

Fortunately, there is the Child and Dependent Care Expenses Credit to hopefully provide some relief to families that are paying for out-of-pocket child care expenses come tax time. The Child and Dependent Care Expenses Credit is designed as a non-refundable tax credit that can cover 20% to 35% of your expenses. Qualified expenses include babysitters, preschool or nursery school, day camp or summer camp, daycare costs, and before and after school care. There are no income restrictions for claiming this credit, however it is capped at $3,000 for one child and $6,000 for two or more dependents that live with you for more than half of the year.

The caveat is that you can only claim this credit if you are working or are looking for work during the time of care, so babysitter expenses for date nights out (or in, thanks COVID!) don’t count. Additionally, you can’t claim payments to your spouse, the parent of the dependent child, a dependent listed on your tax return or your child who is 18 years or younger whether they are listed as a dependent on your return or not. Additionally, you can’t combine this credit with expenses that were paid with pre-tax money from a dependent care flexible spending account. To use the Child and Dependent Care Expenses Credit, Form 2441 must be filled out when filing your taxes. In order to claim payments made to a care provider, you must provide their name, address and Taxpayer Identification Number or a Tax ID number for a preschool or daycare.

3. Adoption Tax Credit

Adopting a child today can cost up to $50,000. The cost is dependent on the country you are adopting the child from, the type of agency or adoption professional you work with, and medical, travel, or other adoption expenses you may incur.

The Adoption Tax Credit is in place to help relieve some of the expenses you may have during the adoption process. This tax credit is non-refundable meaning that it can help lower your tax liability, however you won’t receive a refund because of it. The credit is also only available for the tax liability for that year, although if you have a remaining balance on the credit you’re able to carry that excess forward for up to five years. For 2020, the maximum credit adoptive parents are able to claim is $14,300 per eligible child (child has to be under the age of 18 or mentally or physically incapable of caring for himself or herself). Additionally, there is an income limit and phase-outs on the credit. If your MAGI is below $214,520 then you’re able to claim the full credit. If your income falls between $214,520 to $254,520 you can receive partial credit. However, if your income is above $254,520 then you’re unable to claim the credit.

According to the IRS, the Adoption Tax Credit can be used for the following adoption-related expenses: necessary adoption fees, court costs and attorney fees, travel expenses including meals and lodging, and other expenses that are directly related to the legal adoption of a child. These expenses can count toward the credit even before a child has been identified for the adoption. You can still use this credit for qualified adoption related expenses even if the adoption falls through and never finalizes.

Additionally, some employers offer employer-provided adoption benefits to pay for qualified adoption expenses. These benefits can be excluded from your taxable income for up to $14,300 in 2020, however, you cannot double-dip by using the same expenses in the exclusion as you’re claiming in the credit.

The timing of using the Adoption Tax Credit can vary depending on when you pay the expenses, if and when the adoption was finalized, and whether it’s a domestic or foreign adoption. It’s best to consult with a tax professional to ensure that you’re claiming the credit correctly.

4. Dependent Care Flexible Spending Account

You may have heard of a Flexible Spending Account that allows you to save pre-tax dollars from your pay into an account that can be used for qualified medical expenses, but did you know that a similar account is available to pay for child care costs?

A Dependent Care Flexible Spending Account (DCFSA) is an account offered through your employer where you can use the funds to pay for qualified child care costs. You authorize your employer to hold a certain amount of money on a pre-tax basis each pay period that is then deposited into this account. Unlike an HSA, you cannot spend the money directly from the account. Instead, you have to pay out-of-pocket for the expense, submit the expense and then receive reimbursement.

Qualified expenses that can be covered with a DCFSA include before and after school care, babysitting or nanny expenses, daycare/nursery/preschool costs or summer day camp. It’s important to note that the child or children receiving care must be under 13 years old. You can also use this account to pay for care for your spouse or another adult that is claimed as a dependent on your taxes, who cannot take care of themself and that lives in your home.

Expenses that do not qualify include paying for education or tuition fees, overnight camps, expenses for children over 13, field trips, or transportation to or from the dependent care provider.

You can contribute up to $5,000 per year if you’re married and filing jointly. If filing single, you can contribute $2,500 per year. This can be a powerful way to save money for expenses that you know you’ll need to pay for. Because the money comes out of your paycheck pre-tax, you’re lowering your MAGI and ultimately your tax bill.

However, this money doesn’t rollover. Like the healthcare FSA, you have to use it or lose it, so only contribute an amount that you know you’ll use throughout the year.

5. 529 Plan

Depending on your financial goals and plan, saving for your child’s or children’s education may be a top priority for you. One of the most popular ways to do so is with a 529 plan.

There are two types of 529 plans: 529 college savings plans and 529 prepaid plans. 529 college savings plans are the most widely used. Money is contributed after tax, grows tax-free, and is distributed tax-free as long as it’s used for qualified expenses. 529 plans are generally run by your state, however, you don’t have to use that plan and can choose another plan instead.

529 prepaid plans allow you to prepay for a partial or total amount of tuition, but this type of plan isn’t available in every state. While 529 prepaid plans are also tax-deferred, it often doesn’t cover as many expenses as the 529 college savings plan does. According to Saving for College, if you opt for the prepaid plan you may have to pay a premium for tuition and you may not have enough money saved for future tuition costs.

You’re able to open a 529 plan at any time and there aren’t any income phaseouts or age limits on contributions or when the funds have to be used. In the past, 529 plans were only available for undergraduate, graduate, medical, and law school, but that changed in 2018. Now 529 plans can also be used for tuition costs for K-12 education (up to $10,000 per year per child) in addition to higher education costs. Qualified expenses for 529 college savings plans include tuition and fees, books, supplies, equipment, room, and board (if the student is enrolled at least half time), and computer or software equipment, among a few others. However, 529 prepaid plans often only cover tuition and room and board.

Another feature of the 529 plan is that you can choose from a few dozen investment options and can mix funds depending on your risk tolerance. Many plans also have age-based options where the money is invested more aggressively when the child is younger and moves to more conservative allocations as the child gets closer to college age. Another perk of the 529 plan is that many states also allow you to take a tax deduction or tax credit for your contributions which could in turn lower your modified adjusted gross income (MAGI) and tax liability.

When it comes time to fill out FAFSA (Free Application for Federal Student Aid), as long as the 529 plan is owned by a dependent student or a dependent student’s parents, it’s reported as a parent’s asset and the distributions are ignored. This allows you to receive more favorable federal financial aid than if it were added to the student’s assets.

But what if your child decides not to attend college? You have the option to change the name of the beneficiary on the account to someone else in the family, like a brother, sister, cousin, or parent. Remember, there is no age limit on using money from a 529 plan so you can pass this money through your family for as long as you want. If you don’t want to give the money to another family member or save it for a future grandchild, you can withdraw it but you’ll have to pay taxes on any growth earnings as well as a 10% penalty.

6. Coverdell Education Savings Account (ESA)

If a tax-advantaged 529 plan doesn’t seem like a good fit for you, there is another option to save for your child’s education. Formerly known as the Education IRA, the Coverdell Education Savings Account (ESA) is a tax-deferred trust or custodial account designed to help families pay for education expenses. Money contributed to a Coverdell ESA grows tax-free and is distributed tax-free as long as the money is used for a qualified expense. The ESA can be used to cover the cost of tuition, fees, books, and sometimes room and board for higher education as well as elementary and secondary education (K-12).

Anyone can create a Coverdell ESA account through a brokerage account, bank, credit union or mutual fund company, however the beneficiary must be younger than 18 years old at the time it’s opened. Depending on your income, you can contribute $2,000 total per year to a beneficiary.

Your contribution limit begins to phase out if your modified adjusted gross income (MAGI) is between $95,000 and $110,000 for single filers or $190,000 to $220,000 for joint filers. If your MAGI is more than $110,00 (filing single) or $220,000 (filing jointly) then you can’t make any contributions. You also can’t make any contributions to the account after the beneficiary is 18.

Unlike a 529 plan, the funds must be dispersed by the time the beneficiary is 30 years old (except for a special needs beneficiary). If the distributions are higher than the education expenses of the account holder then a portion of those earnings would be taxed to the beneficiary. If the funds aren’t used in their entirety there are options to either roll them over to a family member’s Coverdell ESA account, transfer them to a 529 plan or withdraw them. If the funds are withdrawn and not used to pay for a qualified expense, the earnings would be counted as taxable income and an additional 10% would be changed as a penalty.

One of the benefits of choosing a Coverdell ESA comes down to investment options. With this account, you can self-direct your investments and choose from a range of individual, international or domestic stocks, bonds, mutual funds, exchange-traded funds (ETFs) and real estate investments. These options vary depending on where the account is opened. You’re able to adjust your investment portfolio as many times as you’d like.

Conclusion

Between dependent care flexible savings accounts, child care or child tax credits, and options to grow your money while you save for your child’s education, there are a lot of powerful tax moves that should be considered once you have or adopt kids. It’s important to take a step back and analyze your tax strategy so that you can decide which options are going to work best for your financial plan.

If you want to check out more money tips to consider when having or adopting a child, check out the comprehensive checklist below.

Need Help Trying to Determine Which Tax Moves to Consider?

Trying to navigate the possible tax moves for your situation can be overwhelming. If you need help analyzing which moves work best for your family, how you can get the most out of saving for your child’s education or with your overall financial plan, you can book a free call with one of our CERTIFIED FINANCIAL PLANNERS^TM.

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10 Financial Benefits for Federal Pharmacists You Wish You Had

Posted on by yfpadmin

10 Financial Benefits for Federal Pharmacists You Wish You Had

The post is for educational purposes and does not constitute financial advice. The post may contain affiliate links through which YFP receives compensation.

The federal government is one of the largest employers of pharmacists and offers many unique practice opportunities beyond traditional roles.

Besides the Veterans Health Administration and the Indian Health Service, federal pharmacists also are employed at the Centers for Disease Control and Prevention, the Federal Drug Administration, the National Institutes of Health, the Department of Defense through one of the military branches, and the Department of Justice in the Federal Prison Bureau.

Pharmacists tend to find their work extremely satisfying with the hours and flexibility in schedule being among the top reasons which are something I can personally attest to after spending nearly a decade in a government position.

But beyond these factors that can positively contribute to one’s quality of life, there are also some huge financial perks of being a federal pharmacist.

While salaries are usually less than those in community pharmacy positions, the gap isn’t that wide. However, it’s really the employee benefits in combination with one’s salary that make the total compensation package so generous.

1. Federal Employment Retirement System (FERS) Annuity

As a federal pharmacist, your retirement plan has three components: a FERS basic benefit plan, Social Security, and the TSP (Thrift Savings Plan) which I’ll discuss later on. Contributing to your basic benefit plan each pay period is mandatory and the amount you contribute depends on when you were hired with those starting in 2013 and 2014 paying a higher percentage than those with an earlier start date.

The FERS basic benefit plan is essentially a pension paid out as a monthly annuity which is pretty amazing in a world where these are basically extinct. Remember, this is in addition to any social security income you are entitled to.

How much will I get?

Your benefit is calculated using a pretty straightforward formula:

1.1% x High-3 x Years of Service = Basic Annuity Annual Payment

If you retire before age 62 or at age 62 with less than 20 years of service the 1.1% multiple is reduced to 1.0%. Your “High-3” is your highest average salary for three consecutive years which is usually the last three years of your service. This number is based on your average rates of basic pay which does not include bonuses, overtime, allowances, or special pay for recruitment or retention purposes.

Length of service takes into consideration all periods of creditable civilian and military service and only years and months are used in this calculation, so odd days you worked beyond a month are dropped.

Here’s an example of this calculation: Let’s say you are 62 years old, have been a federal employee for 30 years and your “High-3” salary is $150,000. This would result in an annual annuity of $49,500.

If you don’t want to worry about all the rules check out the FERs Retirement calculator below.

FERS Retirement Calculator

When can I retire?

To be eligible to receive the basic retirement annuity you have to meet two conditions. First, there is a minimum number of service years. If you retire at 62, that number is 5, 20 years if you retire at 60, and 30 years if you want to retire at your minimum retirement age (MRA) and that happens to be prior to age 60.

You can also retire at your MRA with 10 years of service, but your benefit is reduced by 5% per year every year you are under 62 unless you have 20 years of service and your benefit starts when you reach age 60 or later.

The second condition to retire is to reach your MRA and this depends on when you were born. If you are a millennial or Gen Z, then your MRA is 57. Sorry FIRE folks!

Check out this table to find out what your FERS minimum retirement age (MRA) is:

2. Access to the Thrift Savings Plan

The Thrift Savings Plan (TSP) is essentially the 401(k) equivalent for federal employees. It’s subject to the same contribution limits as other employer-sponsored plans at $19,500 with the option for $6,500 catch-up contributions if you’re 50 or older for 2020.

However, unlike many 401(k) plans there are some unique features and benefits.

First, regardless of how much you contribute, your employer will contribute an automatic 1% of your basic pay. In addition, your agency will match the first 3% you contribute dollar-for-dollar and 50 cents on the dollar for the next 2%. Essentially, you get a match up to 5%.

This is something to pay close attention to especially if you are a new employee as you are automatically enrolled in contributing 3% of your income. Therefore, unless you adjust this promptly when you start, you could be missing out on the additional matching contributions.

There is a 3 year vesting period but this does not include the 1% automatic contributions.

Similar to other employer-sponsored plans you have the option to make traditional contributions or after-tax contributions via the Roth TSP.

When it comes to fund selection, you have two basic choices: Lifecycle or target-date funds and individual funds. The lifecycle funds (L Funds) are a combination of the individual funds and every three months, the target allocations of all the L Funds except L Income are automatically adjusted, gradually shifting them from higher risk and reward to lower risk and reward as they get closer to their target dates.

There are five individual funds that range from government-backed securities to index funds with the objective to match the performance of the major stock and bond indices such as the S&P 500.

While one of the criticisms of the TSP is the lack of fund options especially for savvy investors, others tout the simplicity in the options and find it less challenging to navigate and make decisions.

But beyond the options that exist, the number one feature that sets the TSP apart from other employer-sponsored plans is fees!

The average plan fees for those with 401(k)s range from 0.37% to 1.42%. Compare that to the expense for the C fund in the TSP at 0.042%!

Here’s why that’s a big deal. If you were to invest $500/month over 40 years into two different funds with a similar performance of 7% rate of return, one with an expense of 1% and one with fees similar to the C fund, that fund with an expense of 1% will cost you about $700,000 over that period, significantly lowering your overall rate of return.

That’s the power of fees.

You can see the current expenses of the individual funds within the TSP. One of the major reasons why the fees are so low is that many employees leave money on the table when they separate from federal service prior to becoming vested and that helps offset the administrative costs.

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3. Life Insurance

Working for the federal government means that you’re eligible for the Federal Employees’ Group Life Insurance (FEGLI) program. FEGLI was started in 1954 and is the largest group life insurance program in the world covering over 4 million federal employees and retirees. This program provides basic term life insurance coverage as well as three additional options that can be added on (Standard, Additional and Family).

To give you an idea of cost, for ~$250,000 policy at age 35 would be around $40/month. You can calculate your potential cost based on coverage here.

One of the huge benefits of this program is that it does not require any medical exam prior to being in force. In fact, you are automatically enrolled when you start.

While getting access to affordable life insurance regardless of pre-existing medical conditions is an amazing benefit, the biggest downside is that it’s not portable. This means that if you are terminated or leave federal service for another position, you no longer have coverage. That’s why it’s important to consider a private term life insurance policy as well.

4. Long-term Disability Retirement Benefits

Beyond the life insurance benefit, you also have some protection in the event you became disabled while in federal service. This is known as disability retirement.

To be eligible, there are several requirements that have to be met including:

Completed 18 months of Federal civilian service which is creditable under the Federal Employees Retirement System (FERS);
The disability is expected to last at least one year;
Your agency must certify that it’s unable to accommodate your disabling medical condition in your present position and has considered you for a vacant position in the same agency at the same pay grade or level;
You, or your guardian, must apply before your separation from service or within one year thereafter;
You must apply for social security benefits. Application for disability retirement under FERS requires an application for social security benefits

The amount you’ll receive varies depending on your age and number of years of service. If you meet the requirements for traditional FERS retirement benefit based on age and years of service, then the calculation of benefits is the same.

However, if you are under 62 and not eligible for immediate retirement, the calculation gets a little more complex. For the first 12 months it is 60% of your high-3 minus 100% of your social security benefits you are entitled to and after that the calculation is based on 40% of your high-3.

Benefits are recalculated after 12 months and again at age 62 if the person is under age 62 at the time of disability retirement.

While this does guarantee at least some income beyond social security once you have at least 18 months of service, it’s not going to be similar to your take-home pay as a pharmacist.

Therefore, you should strongly consider an individual long term disability insurance policy as a supplement in order to move your potential replacement income closer to your current pay.

You will notice that when you are applying for policies, you will be asked if you are a federal employee. That’s because most states will not allow you to replace over 60% of your total income and this will essentially be a supplement.

5. HSA Eligibility

There are a variety of health plans that are offered for federal employees including fee-for-service plans (both PPO and non-PPO), health maintenance organizations (HMO), and high deductible health plans (HDHP) which offers a health reimbursement arrangement (HRA) or health savings account (HSA). This large variety of health plans allows federal employees to choose a plan that makes the most sense for themselves and their families.

I explained in a recent blog post Why I’m Not Using My Health Savings Account to Pay for Medical Expenses that choosing to use a PPO instead of the HDHP that was available to me was one of my biggest financial mistakes. This is because I was making high premium payments each month but wasn’t utilizing the majority of coverage that was available and I was missing out on the triple tax benefits that an HSA account boasts.

As mentioned, an HSA is unlocked through a high deductible health plan (HDHP) and can be used as an account to save for medical expenses. An HSA allows you to contribute money on a pre-tax basis to pay for qualified medical expenses, like costs for deductibles, copayments, coinsurance, and other expenses aside from premiums. If you’re using your HSA to pay for a qualified medical cost, you don’t have to pay any taxes on the money that’s withdrawn from the account.

In my opinion, the most powerful aspect of an HSA is that it can be used as a retirement vehicle, like an IRA. What makes an HSA so appealing are those triple tax benefits I mentioned. Triple tax benefits, you guessed it, all have to do with taxes; your HSA contributions lower your adjusted gross income (AGI), the contributions grow tax-free and the distributions are tax-free. If you’re under 65, the distributions are only tax-free if they are being used to pay for a qualified medical expense. If they aren’t, you’ll have to pay a 20% penalty. After age 65, your distributions don’t have to be for qualified medical expenses, but you will have to pay income taxes if they aren’t.

To learn about how I’m leveraging this benefit and how I’m allowing my money to stay in my HSA as long as possible, check out this post.

6. Paid Parental Leave

Paid parental leave varies so much from one employer to the next. Some companies like Netflix offer up to a year off of paid maternity or paternity leave while employees at other companies are “lucky” to get 4 or 6 weeks off, if any.

Due to recent changes, federal pharmacists will be able to receive up to 12 weeks paid parental leave for the birth, adoption or foster of a new child. This benefit is supposed to go into effect October 1, 2020.

7. Raises for additional credentials and board certifications

Federal employees are paid based on their grade and step and will have a GS or General Schedule status. The grade usually pertains to the position and the step is typically determined by initial qualifications at the time employment starts and also the years of service. Therefore, the most common way to get to the next level is often just to keep your job.

However, some federal employers may actually incentivize you to get these as well either in the form of a one-time bonus or even a permanent raise. In the VA they are referred to as Special Achievement Awards.

8. Opportunity to Pursue PSLF

When I graduated from pharmacy school, I made one of the biggest financial mistakes that ended up costing me hundreds of thousands of dollars! That was not pursuing the Public Service Loan Forgiveness (PSLF) program. As a government pharmacist, I was eligible for PSLF but because I wasn’t aware of all of my options and didn’t have a good handle on the program, I ended up paying way more money than I needed to.

Although PSLF has had a rocky past, it is one of the best payoff strategies available for pharmacists. The math doesn’t lie; PSLF is often the most beneficial to the borrower as far as the monthly payment is concerned (it’s the lowest) and the total amount paid over the course of the program (it’s the lowest).

Of course, determining your student loan payoff strategy takes a lot of thought and discussion. To learn more about all of your options, check out this post.

9. Tuition Reimbursement and Repayment Programs

Did you know that working as a federal pharmacist might qualify you for tuition reimbursement or to enroll in a tuition repayment program? These programs essentially provide “free” money typically from your employer or institution in exchange for working for a certain period of time.

Pretty awesome, right?

The programs that tend to provide the most generous reimbursement or repayment are those offered by the federal government through the military, Veterans Health Administration, and the Department of Health.

If you’re a pharmacist who works for or plans to work for one of these organizations, connect with your human resources department to see if you’re eligible. There is generally a set amount of funding for these programs, so even if you aren’t eligible initially, you may be able to reapply in a subsequent year.

Here’s a rundown of federal tuition reimbursement programs that are currently available:

Veterans Health Administration – Education Debt Reduction Program

Eligibility

Pharmacists at facilities that have available funding and critical staffing needs.

Benefit

Up to $120,000 over a 5 year period

Army Pharmacist Health Professions Loan Repayment Program

Eligibility

Pharmacists who commit to a period of service when funding is available

Benefit

Up to $120,000 ($40,000 per year over 3 years)

Navy Health Professions Loan Repayment Program

Eligibility

Must be qualified for, or hold an appointment as a commissioned officer, in one of the health professions and sign a written agreement to serve on active duty for a prescribed time period

Benefit

Offers have many variables

Indian Health Service Loan Repayment Program

Eligibility

Two-year service commitment to practice in health facilities serving American Indian and Alaska Native communities. Opportunities are based on Indian health program facilities with the greatest staffing needs

Benefit

$40,000 but can extend contract annually until student loans are paid off

National Institute of Health (NIH) Loan Repayment Program

Eligibility

Two year commitment to conduct biomedical or behavioral research funded by a nonprofit or government institution

Benefit

Up to $50,000 per year

NHSC Substance Use Disorder Workforce Loan Repayment Program

Eligibility

Three years commitment to provide substance use disorder treatment services at NHSC-approved sites

Benefit

$37,500 for part-time and $75,000 for full-time

10. Generous Leave Structure

One of the benefits that I have really appreciated while working for the federal government is the amount of paid time off. First, as a federal employee, you get all 10 federally recognized holidays off assuming you have a typical Monday-Friday schedule. But if you do have to work on one of those days, you get paid double time!

In addition to holidays, you start off accruing 4 hours of annual leave or vacation in addition to 4 hours of sick leave every pay period. This equates to a total of 7.2 weeks of leave as a brand new employee.

Once you hit 3 years of service, your annual leave increases to 6 hours and then to 8 hours per pay period once you reach 15 years of service.

When you become eligible for retirement, any accrued annual leave you have remaining is paid out to you in a lump sum whereas any remaining sick leave counts toward extending your time of service which can increase your overall FERS annuity benefit.

Conclusion

Working as a pharmacist in the federal government carries a lot of benefits that go way beyond your salary. Between possible student loan forgiveness with PSLF, access to TSP and HSA accounts, life and disability insurance, and raises for additional credentials and board certifications plus so many more, there are a lot of reasons to consider working for the government. If you’re currently unemployed, are a recent graduate or you’re looking to make a career change, I highly suggest checking out USA JOBs and sign up to get alerts as new positions become available.

Need Help With Your Financial Plan?

Trying to navigate your federal benefits can be overwhelming. If you need help analyzing how these benefits affect your overall plan or are looking to solidify your financial game plan, you can book a free call with one of our CERTIFIED FINANCIAL PLANNERS^TM.

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How to Save Half of Your Income

Posted on by yfpadmin

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Live on less than you make. The quintessential maxim when it comes to personal finance. It’s incredibly simple advice and touted by just about everyone. But as you know, it’s easier said than done.

Otherwise, couples 34 and younger would have more than $4,727 in savings and those in their 30s would have more than $45,000 in retirement accounts.

While student loans are one of the biggest culprits for these staggering statistics, it’s certainly not the only factor.

You’ve likely heard the rule of thumb to save and invest 10-15% of your income in order to retire at a reasonable age. While that may work for many, it’s way below the typical amount needed for those pursuing FIRE. In fact, it’s not even close!

FIRE stands for Financial Independence, Retire Early where people pursue having enough money so that they are able to, you guessed it, retire early. Those on the path to FIRE usually have the intention of achieving it in their 30s, 40s, or even 50s. You can get a nice overview of FIRE from this post.

To attain FIRE, most people target saving 50-70% of their income and investing it in index funds and or real estate.

Crazy right?

“How is that even possible!?” you may be thinking.

Cue people living in tiny homes, growing their own food and making bicycles their primary means of transportation.

While there are definitely some taking this movement to that extreme, most pharmacists don’t need to do that to make it work. But it may require A LOT of sacrifices depending on how fast you want to achieve FI!

Assuming you’re single and make the median pharmacist salary of $126,000, after an effective tax rate of 30% (federal/state/local/FICA), you are looking at a net income of $88,200.

So in order to save $44,100 a year, you’re looking at $3,675 a month.

Impossible?

No, but certainly not easy!

If you have a non-working spouse or significant other and kids, that can certainly make things even more challenging but there are many people out there who have achieved FIRE making much less than a pharmacist.

So if you’re not quite at the point of saving half your income, here are some key moves to help get you there.

Eliminate credit card debt ASAP

No one ever plans to go into credit card debt. It’s often the result of either overspending or unexpected medical events or emergencies.

Having credit card debt is really a financial emergency in and of itself given the typical ridiculously high-interest rates. If you’re in this situation, you should make it a priority to get rid of it as soon as possible. Remember, you want compound interest working in your favor!.

Pay off student loans or optimize forgiveness

For most pharmacists, this is going to be the biggest barrier to saving at least half of your income. Assuming you were in the 10-year standard repayment plan with an average student loan balance of $170,000 and a 7% average interest rate, your monthly payment would be $1,973.

Talk about a major FIRE hazard!

There’s no single prescription for taking down student loans when pursuing FI but there are some key considerations.

First, if you have a small student loan balance relative to your income and can knock it out fast such as 1-2 years or less, then, by all means, destroy it ASAP.

However, if that’s not the case and assuming you have exhausted the options of any federal, state, or employer tuition reimbursement programs then you have a couple of options.

First, if you’re eligible for the Public Service Loan Forgiveness (PSLF) program that’s great news because it’s very conducive for those on the early retirement path. Since any amount remaining on your loans after 120 monthly payments is forgiven tax-free, your goal should be to pay the least amount as possible in order to maximize the benefit.

Plus, by contributing and maxing out a traditional 401(k), 403(b), or TSP, you can actually lower your adjusted gross income and subsequently your payments since they are income-driven.

If PSLF is off the table, then refinancing can be a great move. The lower the interest rate, then a greater percentage of your payment will go toward principal and can help to accelerate the payoff. And you can do this multiple times if you can continue to get a better rate. Plus, you also get paid to refinance as companies often offer a cash bonus or as an incentive. We have partnered with several companies that have bonuses up to $800.

Even if you refinance student loans and are making extra payments, you are still going to want to be simultaneously contributing to tax-favored retirement accounts if it’s going to take you a number of years to pay off the loans. Remember, time is the most important component when it comes to compound interest and you can’t go back and contribute to the years you missed out on beyond what’s available when you reach 50.

Lastly, if you happen to be in the unfortunate situation where you have a very high debt to income ratio such as 2:1 or greater, then you may actually consider opting for non-PSLF forgiveness. This is where you can have your balance wiped out after making income-driven payments for 20-25 years through the federal loan program.

However, the caveat is that any balance forgiven will be treated as taxable income, therefore you have to prepare for that extra bill along the way. Even with this, it still may make sense financially, especially if it allows you to maximize your retirement accounts.

If you need help figuring out the best student loan strategy for your situation, you can reach out to one of our financial planners for a customized plan.

Work on reducing housing and transportation costs

You’ve probably heard multiple financial experts say you need to stop getting lattes every day because of the significant opportunity cost. While that may be partially true, focusing on bigger wins like reducing the cost of living and transportation can move the needle significantly more and get you closer to your savings goal. That is unless you are frequenting Morton’s Steakhouse.

Beyond downsizing to lower mortgage or rent payments, many people in the FIRE movement have opted to move to places where there is a lower cost of living, sometimes referred to as Geo-Arbitrage. This can be a really tough decision especially if it requires moving away from family and close friends and means leaving a job you really enjoy. However, out of everything you can do save more money, this could be the one that has the greatest impact.

Another thing to consider is refinancing your mortgage. If you are in an adjustable rate mortgage or have a really high fixed rate, getting better terms could save you a couple hundred bucks per month.

Car payments are another big barrier for many to achieve significant savings. Plus, if you’ve got a gas guzzler, your annual operation costs are not going to be cheap. Beyond that cars depreciate and your goal should be to build assets. Many times, it takes a lot of self-reflection about how you view your car. Most people pursuing FIRE think of it as a means from point A to point B and don’t care what anyone else thinks about it.

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You can pay off your cars to eliminate any payment but, depending on your situation, you could also sell or trade in your car and downgrade. If you have more than one vehicle, you could consider eliminating one. Depending on where you live, you may be able to get around on a bicycle, e-scooter, or public transportation.

Review recurring monthly expenses

Are there any subscriptions or monthly services you could nix? Be honest with yourself. Are there some that you don’t use anymore but just haven’t sent the email or made the call to cancel? I’m definitely guilty of that.

While some of these expenses can be pretty small, the sum can add up quickly. These include TV (whether cable or streaming services), internet, gym memberships, Amazon Prime, audio streaming (such as Audible or Spotify), your mobile plan, wholesale club memberships, cloud storage, etc.

I really like the apps Clarity Money and Trim as they can connect to your bank account and identify these expenses and even give you the option to cancel right from the interface.

Eat more at home

Going out to eat can one of the biggest budget busters. One dinner for two could cover a week or more of groceries. Consider meal prepping and packing your lunch.

If my wife and I go out to eat, we try to look for a Groupon or go somewhere during happy hour when the food is cheaper or just get appetizers.

Keep entertainment free or low cost

One of my favorite things to do on the weekends is spearfishing off the beach. It’s an incredible workout, a great way to spend time with friends, and the best part is that it’s free, that is once I bought all the gear. Plus, if I’m successful with harvesting some snapper, my grocery bill goes down.

I also check out free concerts in the area such as the Petty Hearts, which is a Tom Petty and the Heartbreakers cover band. For those of you who don’t know, Tom Petty was a rock icon known for songs such as Freefallin’, The Waiting, and American Girl.

There are a lot of activities you can do for free or that are relatively inexpensive. If you really focus on the things that bring you the most happiness, you’ll probably discover that you don’t have to shell out much cash to do them.

Now if you’re someone who loves to travel you may have to scale back or get creative on how your trips are financed. There is a whole other movement of travel hacking, where people use different credit card points and offers to fund vacations.

Pursue additional income streams

If you’ve made all the moves above and are still struggling to hit your savings goal, you have another lever to pull. Even though your salary may be fixed, your income is not.

Many pharmacists have been featured on our podcast who have one or more side hustles in addition to their full-time position to help fund their financial goals. Some have used their pharmacy skills and knowledge in their side hustles, whereas others have other passions and hobbies they have been able to monetize.

If you need some ideas on how to make additional money, check out the post 19 Ways to Make Extra Money as a Pharmacist in 2020.

Conclusion

Whether or not you’re part of the FIRE movement, you can use many of these tactics to improve your savings rate. While I know there was nothing presented that was particularly profound, hopefully, it made you take a look at your current savings percentage and analyze the actions you need to take.

What I have found after about 5 years of putting 50-60% of my income toward a combination of student loans and savings, it’s all about contentment. Initially, I was concerned that a dramatic shift in my spending would cause my happiness to go down, but in reality, the opposite occurred and made me focus on what’s most important.

What is the one thing you could do that would immediately get you closer to saving half your income?

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Disability Insurance for Pharmacists – The Ultimate Guide

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Disability Insurance for Pharmacists – The Ultimate Guide

The following post contains affiliate links through which YFP or its team members may receive compensation.

I had received another email at work one morning indicating that “Julie” was not going to be in and that coverage would be needed. I knew this wasn’t planned otherwise her clinic would have been closed in advance. I didn’t know her that well so I had no idea the reason she was out but wondered what was going on and if something bad had happened.

A few weeks later it was revealed at a meeting that Julie would not be coming back to work and the reason why. You see, Julie had been struggling with rheumatoid arthritis for a long time and for many years was able to manage her disease and work full-time without any issues. Unfortunately, and unbeknownst to most of her co-workers, her disease had been progressing over the past couple of years causing tremendous pain and stiffness that became so bad that she had to drop to part-time and eventually stop working altogether.

Since she was relatively young and likely expected to work several more years, I had often wondered if she was going to be ok financially. How was she going to be able to support herself and her family without an income?

What is Disability Insurance?

One of the greatest financial assets you have as a pharmacist is your ability to generate an income. Think about how long it took you to get to that point of becoming licensed. Six years? Eight years? Maybe more with residency or fellowship? Think about the energy, the focus, the sacrifices you made. What if that income was suddenly taken away?

Remember, you are going to have projected lifetime earnings in the millions.

Disability insurance is really income insurance. It provides you with money in the event that you are unable to work because of an accident or illness.

In the example below, let’s say a 25-year-old pharmacist wants a policy for approximately 60% of his or her income (~126,000) . A monthly (or annual) premium is paid and if a disability occurs at age 35, that pharmacist would receive $6,250 per month until age 65 when the coverage ends. We will discuss some of these specifics a little later on.

Do Pharmacists Really Need Disability Insurance?

I know what you may be thinking, “As a pharmacist, something pretty bad would have to happen to me to not be able to work.” That may be true. After all, most pharmacists just require their cognitive faculties to be intact, and therefore accommodations could be made in the event of broken bones or limited mobility secondary to an accident. Right? Remember, you are not invincible!

The Social Security Administration predicts that more than 25% of today’s 20-year-old Americans will become disabled before the age of 67. However, almost 70% of those working in the private sector do not have disability insurance. Beyond car accidents, think about potential insidious diseases like Parkinson’s disease, dementia, cancer, or MS. There a lot of health-related scenarios that could occur at a young age and either force you out of the workplace or reduce the time you are able to work.

Besides being able to afford typical bills such as food, mortgage, utilities, etc, think about your student loans. If you still have federal loans then you don’t have to worry because these are discharged in the event that you become permanently disabled. However, what about private loans? Or ones that you refinanced?

Depending on the company, you may still be on the hook for making payments. We have partnered with a number of refinance companies and some such as Commonbond, Earnest, and Sofi will discharge the loan balance similar to the Department of Education.

Therefore, unless you already have substantial wealth or have additional income streams and don’t require an income as a pharmacist to live, you need disability insurance.

Types of Disability Insurance for Pharmacists

Disability insurance is typically classified as short-term or long-term based on the length of the policy. Although not always the case, short-term disability policies are typically up to 5 years and tend to provide you with a monthly benefit very quickly from the time a claim is made. Many times these are offered by your employer or through a pharmacy association.

If you have many working years ahead, then you really should consider a long-term disability insurance policy. Most of these policies can be in force up until age 65-70, which can ensure you will have income until you are eligible to claim social security or other retirement benefits. The time to which benefits are paid once a claim is made is known as the elimination period which will typically be longer (30-180 days) for a long-term disability policy.

This often brings up the question of whether one needs both a short-term and long-term policy. If you have a good emergency fund and sick leave that can cover the elimination period for a long-term disability policy, then this may negate the need for any short-term policy. Now if your employer offers you short-term at no or very low cost then definitely don’t pass on the benefit.

For the rest of the post, we are going to focus on breaking down the components of long-term disability insurance for pharmacists.

How Premiums Are Determined

I will be honest with you. Disability insurance is not cheap, especially when compared to term life insurance. Before we get into some typical premiums you can expect to pay, let’s break down all of the things that can impact what you will actually pay. And just brace yourself, because there are a lot! The first time I received some quotes, my head was spinning because of all the features and factors they display.

via GIPHY

Coverage Amount

This is one of the biggest determinants of how much you will pay for your long-term policy. How much you need depends on your current income, your savings, and how much you need to maintain a desired lifestyle in the event you can no longer work. A general rule is to consider 60% of your gross income as this should be pretty close to your take-home pay after taxes. If you pay your premiums out of pocket, and not through your employer, your benefits will be tax-free. Typically most companies will have a max of somewhere of 60-70% of gross income.

If you are a government employee, you probably won’t be able to get a policy for 60% of your gross income. The reason is that there are benefits available to you in the event you are disabled. You will have to check your agency and see what you are entitled to. If you are a FERS (Federal Employee Retirement System) employee, which includes all VA pharmacists, check www.opm.com for more information. This is the reason you are asked on your initial application or quote whether you are a government employee.

Benefit Period

How long do you want to receive benefits in the event you become disabled? This will be a key question to answer and what you choose will have a large impact on what you pay. Assuming you have many working years left and have no substantial savings and will depend on earning an income, then you should probably consider choosing a benefit period up until around age 65. But depending on your situation, you may not need something in place until then and could consider a shorter period.

The way most quotes with long-term policies is that they will show you the cost of 5 years, 10 years, and then age 65, 67, or 70 or something similar to that as you can see in the example below.

Elimination Period

As mentioned above, the elimination period or waiting period is the time between when a claim is filed and when you actually start receiving benefits. This is typically 30-365 days. As you can see in the example above, the longer the elimination period, the cheaper your premiums will be. If you have an adequate emergency fund and have built up some paid time off, you may be able to opt for a longer period.

Payment Frequency

Like car and life insurance, you can often shave some money off your premium if you pay annually or biannually. It may not be significant savings, but every little bit helps. You can see the example below of how payment frequency can make an impact.

Age / Health History

Similar to life insurance, your premium will be determined in part by your age and how healthy you are. Your weight, smoking status, past medical history, history of DUI, and any past suspensions of your professional license will also be considered.

Occupation

Most insurance companies have 5-6 occupation classes that are stratified based on the risk of injury with day-to-day activities. Pharmacists and other white-collar professionals are generally in the highest class which has a lower cost of coverage compared to other classes.

Riders

Have you ever tried to purchase a car and notice they always try to upsell you with all the bells and whistles? Long-term disability insurance policies are filled with them! That’s what makes them so complicated. It’s not like term life insurance where you just put in your info and then choose an amount and time frame for the policy to be active. Instead, these policies are jam-packed with extra benefits and features. Some, depending on the policy, are baked in and include all of these benefits while others don’t have them included. This is something to pay close attention to when you are evaluating policies and getting quotes. In addition, because the definitions are not universal, some companies may define riders slightly differently than others.

Let’s break down some of the common ones you will probably see:

Own Occupation

What if you suffered from a disability that affected your critical thinking skills and prevented you from working as a pharmacist, but you could still work in another profession likely at a lower pay? Unless you have a true own occupation rider, you may not get the full benefit or possibly no benefit at all.

This is one of the major distinctions between many workplace offerings and what you can get on your own. Some policies offer own occupation coverage but only for a couple of years. After that point, if you can perform other work, your benefits may cease. This is probably the most important feature you want in a policy and want it to be in force for the whole term of the policy.

Non-cancelable

This rider prevents your insurance company from canceling the policy (unless you aren’t paying your premiums). With a non-cancelable plan, you have the right to renew the policy every year without any increases in the premium or reduction in benefits.

Guaranteed Renewable

Having this in place means that the insurer is obligated to continue providing coverage unchanged as long as the premiums are paid. However, unlike the non-cancelable rider, premiums could go up over time.

Future Purchase Option

You can buy more coverage in the future if your income goes up with this rider. Remember, disability insurance is paid out as a percentage of your income, so you would want this to be increased as your income goes up, unless your expenses stay the same and inflation is non-existent. This rider is also known as benefit increase and may be particularly important when your income is lower initially such as during residency.

Cost of Living

Often referred to as COLA (cost of living adjustment), this rider helps protect your benefits to be protected against inflation over time. The key thing to remember here is that the adjustment for any cost of living does not begin until the disability occurs.

Partial Disability or Residual Benefit

If you become disabled, you may not be able to work full-time or your usual hours, but maybe you can still work part-time. Many policies have this rider in place so that if you experience any reduction in pay because of a disability, you can get a percentage of your benefits.

Waiver of Premium

In the event you become disabled and you start to receive benefits, who would want to continue paying for the policy during that time? That is exactly what this rider does. It eliminates the need to continue paying premiums during the period you are receiving benefits.

Student Loan Rider

This allows you to purchase additional coverage to pay student loan balances while on the claim. Remember, this won’t be necessary if you have federal loans as they will be discharged in the event of permanent disability. Where this could be a consideration is if you are with a student loan lender that does not offer this protection.

Is your head spinning yet after all this jargon? Believe it or not, there are even more options and features that exist that I didn’t even get into! Again, because some companies bake some of these riders into policies and others require you to pay an additional amount in premiums, you have to look at everything when trying to compare multiple quotes.

via GIPHY

How Much Will it Cost?

Remember how I said disability insurance wasn’t cheap? As you can tell by the estimated monthly premiums in the chart below, I wasn’t lying. If you are a female who graduates as a pharmacist at a traditional age of 25 and is relatively healthy, you can expect to pay about $2,112 per year assuming you want a benefit of 60% of your gross income with the additional features mentioned.

You can see that premiums for women are much higher than they are for men. Sorry ladies! This is because companies set their rates based on their claims experience and they have found that they are more likely to pay for claims for their women policyholders.

So what can you do to cut down these costs? As mentioned there are a lot of features you can add or leave off and obviously, the fewer add ons the less you will potentially have to pay. Another thing to consider is maybe you don’t need a benefit of 60% of your income. Your lifestyle may not require that much and perhaps you could live just fine off 40%.

Remember, you can also extend the elimination period and make annual payments to also help cope with the costs. Also, if your employer offers some benefits, you might consider this as well when determining your needs.

The other thing to consider is that if you are not in the best shape and are overweight or have uncontrolled hypertension, becoming healthier prior to submitting your application could also be to your benefit.

I know this can seem like very expensive insurance to have in place and you may not feel like you can afford it. But can you really afford to not have it? Are you willing to take the gamble? Remember, if anything happens to you, how are you going to pay your bills and potentially support those who depend on your income?

What if My Employer Offers Long-Term Disability Insurance?

As I mentioned a few times, it is possible you have some form of this benefit through your job. Besides the coverage amount, benefit duration, and whether they offer true own occupation coverage, one of the biggest things to consider is the portability of the policy. If you were to leave to take another job, would the policy go with you? Remember, if you are in excellent health and leave your job after 5 years, your new employer may not offer it and you could be paying a lot more in premiums simply because of your age.

That’s the major advantage of an individual long-term disability insurance policy. It doesn’t matter where you work or if you change jobs because it follows you and you don’t have to get another evaluation of your health status.

How Do You Purchase?

There are many reputable companies out there that offer quality coverage with the features I talked about. However, it can take a lot of time and energy to get multiple quotes and your phone could be ringing off the hook with offers and reps trying to get your info. That’s why Your Financial Pharmacist has partnered with Policygenius, an online independent broker that helps you get a long-term disability insurance quote from multiple companies for the coverage that’s right for you.

They have a very user-friendly interface and their team helps you through the entire process. You can even get an estimate without entering any of your personal information.

Check out the video below where I walk you through their interface and how quickly you can get an estimate.

Conclusion

Unless you already have substantial wealth or are very close to retirement, long-term disability insurance should be an important part of your financial plan. Although it can be pretty expensive, remember all of the time and effort it took to get to where you are today. In addition, if you are married, have a significant other, or have children, you have to consider how they are affected by your ability to earn an income. No one is invincible and there are so many things that can happen that you can’t predict. Using an online broker such as Policygenius allows you to get multiple quotes from reputable companies and can save you time through the entire process.

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Career Break for Pharmacists: A Practical Guide on Taking a Mini Retirement

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Career Break for Pharmacists: A Practical Guide on How to Take a Mini Retirement

The following is a guest post from Nick Ornella, a full-time pharmacy manager at a large retail pharmacy chain. Nick graduated from Ohio Northern University in 2009 and took a career break in 2016 to travel the world for a year. He currently lives in Cincinnati, Ohio with his wife, Alanna. In 2019, Nick created The Young Professionals Guide to A Year Off, a blog to help others plan a year of traveling. You can contact Nick anytime at [email protected].

Have you ever considered taking a year off from your job? Radical I know. But imagine you could spend the next 365 days however you wanted.

I know what you’re probably thinking. “How could I possibly make that happen with six figures of student loan debt, other bills, and financial priorities?”

Despite how unlikely this may sound, I want you to know it’s possible.

I know it’s possible because I’ve done it.

I took a career break from my job as a retail pharmacist at the age of 31 to travel the world for a year, and it was one of the best decisions of my life. I was satisfied with my pharmacy career at the time, but I wanted more out of life. I wanted my own unique story to tell, and I simply wanted the free time while still young and healthy to do more of what I absolutely love doing, traveling and exploring.

After paying off all my debts, saving a big chunk of money, and getting a leave of absence approved, I traveled through 15 states in America, 15 countries in Europe, and 3 countries in Africa. It was an unforgettable year. I returned to my pharmacist job immediately after, completely refreshed and eager for new challenges.

Taking a career break is a decision that I believe many pharmacists can make and would benefit greatly from.

In this post, I discuss why I think pharmacists should take career breaks and provide a step-by-step practical guide for making it a reality. I also talk about some of the things I have learned from my own journey.

Why take a career break as a pharmacist?

To pursue happiness, the ultimate currency

In his book Happier: Learn the Secrets to Daily Joy and Lasting Fulfillment, Harvard psychology professor Tal Ben-Shahar describes happiness as the “ultimate currency” and states that “Happiness is the highest on the hierarchy of goals, the end towards which all other ends lead.” I believe that the best way to increase happiness is by increasing the proportion of time that you spend doing the activities that mean the most to you, not by pursuing more material wealth and possessions. A career break is how you achieve that time.

To pursue passions outside of a pharmacy career

Unfortunately, many of our own personal goals that would bring us the most happiness are non-money making pursuits and are outside of our pharmacy careers. We cannot earn a living doing them, so we need to create the time for these activities and greater life goals. This is accomplished through a career break. Spending more time with family, doing volunteer work, and traveling are just a few examples of what those greater passions might be.

A career break is also a perfect opportunity to invest a substantial amount of time in a side hustle or other business idea. These pursuits are often very difficult to get off the ground while working full-time, so a career break creates that required time. Who knows? These side hustles could end up being your path to a more fulfilling full-time career.

Studies show that the presence of meaningful relationships is a great indicator of overall happiness. As a pharmacist, it’s sometimes difficult to develop and maintain those meaningful relationships because of unusual pharmacy hours and because pharmacists are often too tired after work to engage with friends and family. A career break creates all that extra time and energy to improve relationships and build new ones.

To help prevent job burnout

With high daily demands and increasing competition among big pharmacies, burnout as a pharmacist is a very real possibility. In a 2014 National Pharmacist Workforce Study, 45% of pharmacists interviewed reported that their job had negatively impacted their mental and emotional health. That’s a lot of unhappy pharmacists.

A 2010 study published in The Journal of Applied Psychology found that overall well-being of college professors rose during and after a sabbatical. I believe that pharmacists would experience similar benefits, live happier lives, and avoid job burnout with a career break.

To help with the saturated pharmacist job market

According to Alex Barker of The Happy PharmD, the supply of pharmacists in the job market is outpacing the demand. And if you’re a retail pharmacist, it’s likely you or a colleague has been affected by recent cuts in hours. This means there are many pharmacists out there looking for jobs and more hours. Pharmacists taking career breaks will help alleviate this over-supply and create job opportunities for other pharmacists.

To infuse the profession with more creativity

The pharmacy world needs more creative thinkers. Many problems within the healthcare industry, like compliance, health literacy, and high costs of medications, require creative solutions. Career breaks will help give pharmacists the free time away from the stresses of work to think deeply about the problems affecting the healthcare industry and come up with those creative solutions.

From an employer’s perspective, to improve company loyalty

Want to improve company loyalty and retain the best pharmacist talent? Offer your pharmacists the opportunity to take a year-long career break. Guarantee them a job with the same number of hours worked per week upon their return. Make them sign a contract saying they will work for you for a certain number of years before or after the break. Maybe even partially subsidize their health insurance for the year. This will help keep your best pharmacists from leaving the company due to burnout and help avoid the high costs of finding a permanent replacement for them.

How to take a career break as a pharmacist

Now that I’ve hopefully convinced you that a career break for a pharmacist is a really good thing, let’s look at the step-by-step process for making it a reality.

Step #1: Get out of debt and stay out of debt

The most important step towards a pharmacist career break is getting out of debt. That means you should pay off all student loan debt, car loans, and credit card debt before leaving your job. That way you’re more financially secure.

Step #2: Save money

There are several big chunks of money you need to save before a career break. Let’s take a close look at each.

Emergency Fund – $15,000

The rules that apply to emergency funds while you are working can be carried over to building an emergency fund for a career break. You need approximately 6 months worth of living expenses set aside to cover any emergencies while gone and for when you return to work. This money will cover any unexpected costs like sickness or car trouble.

Retirement Savings – A Good Start

I think it’s important to get a good start on your retirement savings before taking a career break to help ensure you reach all your future financial goals. But what’s the definition of a “good start”? Some experts suggest having a percentage of your annual salary saved by each age milestone. For example, by the age of 30, you should have 50% of your annual salary saved in retirement funds. But I don’t think that’s realistic for someone wanting to take a career break.

Here’s how I would suggest getting a good start on retirement savings:

1. Figure out how much you’ll want to have saved when you retire.

2. Use YFP’s savings calculator to figure out how much you need to save per month to reach this goal.

3. Set this money aside in your retirement accounts each month while paying off debt and saving for your career break. Make sure to at least get your company’s 401(k) match.

4. By the time you have enough money saved for your career break, you will have a good start on your retirement savings.

5. Plan on working an extra year or two at the back end of your career to make up for the money you don’t save for retirement during your career break.

Career Break Fund – $40,000 for a year long career break

The amount of money you can spend on a career break can vary wildly as it It depends on where you want to live and what you want to do. I think $40,000 is an excellent amount of money to save. This will give you enough money to cover your living expenses with plenty left over for the pursuit of your dreams.

Keep in mind, it’s possible to cut your living expenses way down and make only $20,000 last a whole year. Or you can plan a 6 month career break and spend $20,000. The longer the break, the better, so shoot for one year. And the more money you have saved, the less you have to worry about.

Here’s a quick breakdown of a $40,000 career break budget:

1. $12,000 for housing

2. $5,000 for food

3. $6,000 for health insurance (or only $1,200 for travel insurance)

4. $1,000 for cell phone service

5. $1,500 for car insurance

That makes a grand total of $25,500 for all of these essentials and leaves $14,500 to spend as you please and to pursue your greater life goals.

If you are concerned about missing out on investing for a whole year you could also budget in an additional amount to take advantage of dollar cost averaging but you would have to contribute toward non-retirement accounts.

Step #3: Create the time away from work

There are two ways to create the time away from work: quit your job or get a leave of absence approved. I believe it’s far better to get a leave of absence approved over quitting. That way you have some sort of a guarantee of work to return to at the end of your break.

To get a leave of absence approved, you need to do some research. Check your company’s HR website for the appropriate forms and policies regarding leaves, then get the required signatures. I was a staff pharmacist when I took my leave, and I needed approval from my pharmacy manager, my district supervisor, and someone in the leaves department. Start this process at least 3 months in advance to give your employer plenty of time to find your replacement.

Some quick tips for getting your leave of absence approved:

1. Be the best employee your company has: become a pharmacy manager, work at the store no one else wants to work at, reach all your metric goals. The more valuable you are to them, the more likely they are to approve your leave.

2. Work for a large retail pharmacy chain. They are more likely to have the pharmacists available to cover you while gone and a formal leave of absence policy.

3. Make your leave a win-win situation for both you and your employer: get licensed in a nearby state, get MTM certified, volunteer at a health clinic in Africa, do anything that will make you more valuable to your company.

4. Read this article for a more in-depth look at a leave of absence.

Step #4: Eliminate monthly expenses

Once you are debt free and have all the money saved, it’s time to start eliminating any monthly expenses, like Netflix and gym memberships. By the first day of your career break, the only bills you should have are a cell phone bill, car insurance bill, health insurance or travel insurance bill, and your pharmacist license dues.

If you own a home and plan on traveling, you should strongly consider selling it before your leave. It’s possible to rent it out while you are gone, but I believe there are too many headaches that could arise. If you want to keep your home, you’ll need to factor in the additional costs of your mortgage and all bills related to your home and save that amount of money beforehand.

Step #5: Final preparations

If you plan on traveling for your career break, you need to do the following:

1. Move out of your apartment and store your belongings at a friend or family member’s house.

2. Get required travel vaccines.

3. Purchase travel insurance.

4. Plan out your general travel itinerary and book flights.

If you plan on staying home during your career break, you need to do the following:

1. Make sure you have the money saved to cover your mortgage or rent and utility bills.

2. Purchase health insurance.

3. Plan out how you want to spend your time.

What to do during your career break

Having personal dreams and goals is extremely important for a successful career break. Here are a few tips for figuring out what to do and how to make it successful:

1. Think back to when you were a kid or still in high school or college. What interests did you have then that you would like to pick up again?

2. What areas of your life do you want to improve?

3. Spending more time with friends and family will greatly improve your relationships with them, so how can you spend more time with them?

4. What are your favorite activities outside your pharmacy career? How can you become better at them?

5. Come up with specific goals related to each activity.

Re-entering the pharmacy workforce after a career break

When I got my leave approved, my superiors said they could not guarantee a certain number of hours upon my return and it would all depend on the company needs at the time. If you are one of your company’s best employees, I think it’s possible for you to come right back to full-time work. But be prepared to only work part-time. You will likely have to work your way back up to a staff pharmacist or pharmacy manager position. The most important thing is creating the opportunity to get back to full-time work, and that’s best accomplished through a leave of absence.

I think it’s important to make yourself more valuable and improve your resume while taking a career break. This will increase your job prospects upon your return to work. Improve your pharmacy skills in some way, get additional certifications, and get licensed in another state. If worse comes to worse, you can get a new job or you can move to a different market with better job prospects.

Don’t worry about forgetting how to do your job after a year of being away. It’s like riding a bike and will come back to you naturally after only a day or two. I do suggest doing a couple CE’s on recent drug updates before returning so you’re not behind on clinical information.

Conclusion

I think a career break is quite possible for pharmacists and would greatly improve the happiness levels within the profession.

It’s not an easy thing to pull off, and it’s quite scary at first, but once you jump into it, you’ll realize how amazing it is to have the free time out of the rat race to pursue your greater life goals. The feelings of complete freedom are amazing. I will leave you with a quote that really inspired me to take a career break and make that leap of faith to a happier, more fulfilled life as a pharmacist.

“Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

– Mark Twain

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A Crash Course in 401k Planning (Part 2): An Intro to Stocks, Bonds, and Funds

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A Crash Course in 401(k) Planning (Part 2): An Intro to Stocks, Bonds, and Funds

You got your diploma, passed your boards, and landed that job. You’ve gotten your first big paycheck. Maybe you bought something ridiculous with it. All in all though, you feel like you’re adulting pretty well at this point. So, one morning you decide to make a cup of coffee and do something truly adult: log in to your retirement plan for the first time.

At first, things go pretty well. You make a username. You make a password that makes you laugh a bit. Once you’re in, a dashboard says you have a little over a grand invested! Sweet! But you’re just a bit curious, what is it invested in? You scroll over to the link titled “Investment Options” and click it. The page loads.

Expense Ratios!? Large Cap!? Prospectus!? These aren’t real words!

But they are.

Even though being responsible for your own retirement seems like a daunting task (it is), understanding what you are investing your money in doesn’t have to be. In this post, part 2 of our series on 401k planning, we’re going to talk about the investment products you’re most likely to find in your retirement plan: mutual funds, index funds, target date funds and exchange traded funds. But before we can get into that, we need to talk about the types of financial assets (securities) they’re made of: stocks and bonds.

Stocks

Stocks (aka equities) are your opportunity to become a part owner of a business. By purchasing a portion of a business, known as a share, you have equity in that business, which entitles you to some of that business’s profits. Those profits come to you through an increase in the value of the share you purchased, known as capital gains, or through a direct distribution known as a dividend. Taken together, capital gains and dividends give you, the investor, a return on the money you invested in shares of the company.

For the most part, owning stocks is the main way most people grow wealth through investing in financial assets. Over long periods of time, the potential to grow your wealth by investing in the stock market far exceeds your potential to grow it in something like a bank savings account.

However, there is a trade off.

Unlike a savings account, where the balance will never go down, the value of your investment in a stock (your principal) can go down. Sometimes with a drastic decrease and for no good reason! Don’t believe me? Let’s talk about Snapchat.

From Bloomberg, 2/22/2018:

“In One Tweet, Kylie Jenner Wiped Out $1.3 Billion of SNAP’s Market Value”

That day, if you held shares of Snapchat (ticker symbol SNAP), they would’ve lost 6% of their value in a day from something as small as a tweet from a member of the Kardashian clan. That wasn’t even the worst single day drop for a stock that year! Facebook took the crown for 2018 (and history) with a 12% loss in a day which eroded almost $120 BILLION from their market value. For perspective, that’s almost the entire GDP of Ukraine lost in one day.

But what does all that mean? I thought stocks were supposed to be awesome. Well, over the long term, they can be. But over the short term, they carry substantial risk in the form of ups and downs to share price known as volatility. And, in the case of individual stocks, share prices can actually go to zero if the company goes out of business (cue Enron).

Bonds

Bonds belong to a group of assets known as fixed income. When you buy a bond, you’re not buying ownership but are instead buying debt. Bonds offer you the opportunity to collect interest from someone else, just like Navient gets from you.

In the world of bonds, money is made primarily from the interest you collect, known as yield. For a typical bond investor, this yield is meant to provide a steady source of income and predictable return on investment.

But again, there’s a trade off.

In general, when you take less risk by investing in bonds, there’s generally less opportunity for growth. Over long periods of time, the difference in growth can be monumental.

Bond investing does have its own risks, though, as they also experience volatility.

When interest rates change, bond prices change. This is because when you buy a bond at one interest rate and the interest rate changes the next day, you need to reprice your bond accordingly to make it marketable for sale to other investors. In short, when interest rates rise bond prices go down. And, when rates drop, bond prices go up.

Your bond can also lose value if the people you’re lending money to fail to pay up (they default) or there’s a perceived risk of them doing so. This will drive up the interest rate on the bond and lower the value of the bond you hold. With the exception of US Treasury bonds, this type of risk (credit risk), is said to apply to all bond investments.

Mutual Funds

So with all the risks associated with stocks and bonds, how do you stand a fair shot at making money over the long term? You work in a pharmacy, not a hedge fund. Thankfully, the financial services industry came up with a solution for the layperson a long time ago: the mutual fund.

With a mutual fund, you outsource the job of picking stocks and bonds to people that know what they are doing (or at least, say they know what they’re doing). These funds collect investor money and invest it according to a strategy that they lay out in a statement called a prospectus.

Aside from reducing risk by investing in multiple stocks or bonds (diversification), mutual funds can also make it much easier for you to choose what you want to invest in. Just like how learning drug classes instead of individual drugs made pharmacy school a lot easier, mutual funds make investing easier by breaking the wide world of stocks and bonds into categories called asset classes. For stocks, funds will typically focus on company size (market cap) and investment style (growth vs. value). And, for bonds, credit worthiness and term (length of bond repayment) are the main factors.

So by now we’ve established that mutual funds make investing easier by helping you with diversification and grouping securities into asset classes. So what’s the catch?

Well, there’s a big one: fees.

Since you’re outsourcing the legwork of investing to someone else, they need to get paid right?

But what’s a fair price?

Should you pay them upfront?

Over time?

What about when you cash out?

Well, depending on the fund, you might get hit all 3 ways. And, if you’re not careful, these fees can make a massive difference in your success as an investor. So what do they look like? For that, let’s look at a really bad fund which shall not be named (fake ticker symbol: FTNBN) and it’s snapshot from the site Morningstar.

Compared to most mutual funds out there, the fees on this fund are really high but, for the sake of argument, let’s say you want to invest $10k in this fund. If you were to give these people your money, you’d find yourself $575 poorer in an instant from their sales load. OK…but they are going to make me money in the long run and “beat the market”, right? Wrong!

If you put your money in this fund 20 years ago, not only did its managers fail to beat the market (measured by the S&P 500 index), but you actually lost money over this time period. How? Poor management probably played a role, but you can be sure the ongoing fees they were charging were the main culprit.

You see, that number called the expense ratio is the amount they take out of your investment every year for the privilege of having your money in the fund. If you were in this fund, you were paying a whopping $551/yr for every $10k you had invested with them. The fund managers don’t just get this money when the fund does well; they get it regardless.

You, the investor, just get bigger losses and smaller gains.

Imagine if this fund charged the 3rd type of fee, the redemption fee, where they actually charge you another percentage of whatever you take out. Ridiculous!

To be fair, this fund was one of the most egregious I could find. Many funds today do not charge sales loads or carry heavy expense ratios. But, chances are, they would if it weren’t for a man named Jack Bogle and a crazy idea he had back in the ‘70s.

Index Funds

Remember how I mentioned that fund above failed to beat the S&P 500 index? They’re not alone. It turns out the majority of funds that rely on professionals actively picking stocks don’t beat their benchmark indexes. This is as true today as it was back in the 1970s when Jack Bogle, the founder of Vanguard, decided to open the world’s first S&P 500 index fund.

The premise was simple. If you can’t beat ’em, join ’em.

Instead of relying on “active” stock picking, his fund would simply track the S&P by investing in every company within the index proportional to their size, a process called “passive management.” This did two things:

1. Gave investors a diverse basket of US stocks

2. Cut down on costs since he didn’t have to hire stock pickers

That last one was a game changer. The success of Bogle’s index fund set off an arms race in the fund industry to lower investor costs. So much so that today you can even invest in some of these funds for free. No load, no expense ratio, nothing. Free. Heck yes!

And it’s likely you have some of these funds in your retirement plan!

But wait, there’s more! Not only are they cheap, they make picking investments easier. When investing in index funds, or indexing as it’s called, all you are looking for is an index to track and a cheap fund to do it. Want to own every publicly traded company on the planet? There’s a fund for that. What if you want to target only real estate investment trusts (REITs)? Yeah, you can do that, too! What about bonds? Yes, there are indexes out there with funds you can buy, too. With index funds, it’s easy to make a portfolio that invests in the mix you want.

But, believe it or not, things can get even simpler.

Target Date Funds

Also known as lifecycle funds, target date funds are a lazy investor’s dream. Chances are, you might be invested in one of these already and not even know it. Many retirement plans have an auto enrollment that puts a percentage of your income into a target date fund as the default investment strategy.

Traditionally, as you get closer to retirement you want to shift your portfolio from more risky assets such as stocks into safer assets such as bonds. While this is a pretty straightforward process, many people are uncomfortable with making changes to their nest eggs themselves. So uncomfortable, in fact, that many people hire someone else to do this for them and pay them an ongoing fee. The mutual fund industry took note, and because they also liked money, worked on a solution they could keep in house.

Their bright idea? The target date fund (TDF).

Basically, a mutual fund company markets a number of funds with names looking like this:

As you can see, there’s a date in the name. All you have to do is pick a fund with a date that best matches when you plan to retire, give that fund money, and…go do something else. Maybe brew some beer. You’re done playing money manager.

How?

A TDF is designed to be an all-in-one, set it and forget it, type of product. Over time, the makeup of the fund (its asset allocation) will shift automatically into a mix that’s more appropriate for your expected retirement date using a formula called a “glide path.” To do this, a TDF is typically comprised of other mutual funds and the TDF’s glide path dictates the mix of those funds within the TDF.

But remember, the fund industry likes money. Since TDFs serve as a convenient wrapper for the mix of funds they contain, you may pay a premium for that convenience. So if you’re someone who hates the idea of having to change or rebalance your portfolio, or spending time on it in general and you just want to keep contributing, these can be a great option.

Exchange Traded Funds

Lastly, you may encounter the newest type of fund in your retirement plan, the exchange traded fund (ETF). An ETF is not all that different than a mutual fund. You get a diverse basket of stocks, you can track an index, and you get charged an expense ratio. But, they are very different in how they’re traded. With a mutual fund, if you want to buy or sell shares you put in an order and that order gets completed by the next day. With an ETF, you can buy or sell your shares instantly just like a stock.

Also, with most mutual funds you need to make an initial investment of a couple thousand dollars. With an ETF, you can invest for whatever the price of a single share costs. This can allow a beginning investor to make a portfolio of many funds without needing a lot of money.

There is one extra “fee” to be aware of though. When you trade a security, be it a stock, bond, or ETF, there’s a cost to facilitate that trade known as the bid-ask spread. In essence, there’s a higher price you can buy a security for and lower price you can sell it for. The difference between those two values, the spread, is the cost paid to the exchange that facilitates the trade. The more something is traded, the more liquid it is said to be, and the lower the spread will be. While not especially important for something you intend to hold long term, it adds a cost to buying and selling that you should keep in mind.

What’s Right for Me?

Now that you have a better understanding of what types of investments are lurking in your retirement plan, the question now is “which one(s) to choose?” Well, just like the decisions surrounding your contributions were very personal, these will also be.

And, there’s no one size fits all approach.

When building your portfolio, there are many factors to consider. Some of the main ones:

Retirement Plan
- Do you plan to retire early or at a traditional age?
- How much do you need to fund your retirement?
Risk Tolerance
- How much risk you’re able to take
- Usually related to your age and expected time to retirement
Risk Capacity
- How much risk you need to take
- Related to your current wealth, savings rate, retirement time frame, etc.
Investment Strategy
- Do you want factor exposure?
Who’s Managing It?
- Are your investments something you want to DIY or are you more comfortable with a professional managing them?

That last point is extremely important because statistically speaking, Americans are horrible at investing on their own.

Why?

Because much of your success as an investor is going to be driven by how you behave in different conditions. If you’ve ever heard the old adage “buy low and sell high” you may be surprised by how many people do the exact opposite. While there are many benefits to the DIY approach in managing your investments, it can sometimes help to have a professional help manage you. Aside from having the knowledge to build a portfolio that meets your needs, a financial planner can help you navigate the ups and downs of your investing career in a way that keeps you on track. If you feel like having that guidance, support and expert knowledge in helping you navigate your investments and portfolio, schedule a free discovery call to see if YFP’s fee-only financial planning services are a good fit for you.

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The FIRE Prescription: How to Retire Early as a Pharmacist

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The FIRE Prescription: How to Retire Early as a Pharmacist

If you’ve started going down the internet’s personal finance rabbit hole, you’ve no doubt crossed paths with the FIRE movement. FIRE (financial independence, retire early) is a concept that’s been gaining a lot of traction lately. What was once considered a fringe topic, mostly covered by blogs such as Mr. Money Mustache or Early Retirement Extreme, has morphed into a widespread movement with mainstream coverage. Some are even calling it “the ultimate life hack.”

But what is it and why should it matter to us, pharmacists?

What is FIRE?

FIRE is based around the concept that it is possible to retire early (ie. before 65) by living off the income generated passively through investments. This is not a new concept. All throughout history, people have done this. You might think of this crowd as the 1%. So why all the buzz now?

Because it turns out, you don’t have to be a 1%’er to make it happen. Say what?!

How?

Because one of the core tenants of the FIRE movement is that the amount of money you need for retirement is purely a function of your expenses and NOT your income. You can control your expenses.

Should You Join the FIRE Movement?

But what about us? As pharmacists, we’ve sunk a lot of time and effort into getting where we are. So much so, that when people ask you what you do, you don’t respond with “Well, I work for company _____ in the _____ department,” you respond with “I’m a pharmacist.” What we do is embedded in our identities. So, you may ask yourself, why should I get into the FIRE movement? Surely, this whole retire early business is something only a cubicle worker who files TPS reports all day would dream about right?

Maybe, maybe not.

Maybe you feel burned out or you’ve just become disillusioned with our profession. That’s what one pharmacist, Jason Long of Tennessee, felt and decided FIRE was the way to go. In a NY Times article covering the FIRE movement, Jason cited burnout and job dissatisfaction as the primary reasons why he adopted a FIRE mindset and called it quits early.

He’s not alone in his feelings about the profession either. According to a recent article in Drug Topics, job satisfaction in pharmacy overall isn’t great with 29% of respondents to their survey indicating that they’d be looking for a new job in the next 12 months. Reasons cited: increased work volume and less help to do it. Factor in a more saturated job market, lower compensation packages, and the potential for Amazon to disrupt the whole industry with its Pillpack acquisition and there are plenty of reasons for a pharmacist to feel like their profession is on the ropes.

But maybe that’s not you. Maybe you love your job and love being a pharmacist. What then? Well, FIRE has something to offer you, too. In a word: options. Personally, I love being a pharmacist (I even work retail if you can believe it). Financial independence without the retire early angle can give you the flexibility to get more from your career. Mid-career residency? Part-time by choice? Want to start a business? In short, there’s a lot of power in not needing a paycheck.

How to Retire Early as a Pharmacist

Now that I’ve talked it up, it’s time to get down to brass tacks and layout a roadmap for FIRE. There are a few important concepts to understand, but before we get into that, I think it’s important to highlight some of the things that FIRE isn’t:

A get rich quick scheme
Some guru’s course
A set formula
Easy

That last one is the big one. FIRE is not something to go for on a whim or halfheartedly. It will not happen overnight. It will involve sacrifice and, probably, a fundamental change in your relationship to money. You need to have a good reason for pursuing FIRE if you’re going to be successful. In short, you’re going to need one heck of a WHY.

Got it? Great.

So how does it work? Like I said before, there are a few concepts that form the basis of the FIRE movement and here’s a good order to introduce them:

Safe Withdrawal Rates and the “4% Rule”
Reducing Expenses and Increasing Savings Rate
Investing
Drawdown

Safe Withdrawal Rates and the “4% Rule”

As mentioned before, FIRE philosophy focuses on expenses being the main variable in determining how much you need to retire. But the question remains: how much do I need? Luckily, the academics have provided that answer with what’s called a “Safe Withdrawal Rate” or SWR.

So what’s that? First, the long answer.

SWR refers to the rate (expressed as a percentage) that a retiree can realistically take out of their retirement portfolio, adjust for inflation every year, and never run out of money. Based on academic research, notably the Trinity study, this number has been said to be 4% when applied to a portfolio consisting of 50% stocks and 50% bonds. In that study, the authors looked at different mixes of stocks and bonds over different 30 year stretches from 1925-1995 to determine the probability of portfolio failure (ie. running out of money) when different withdrawal rates were applied. In all those scenarios, it was determined that a person who took out 4% of the portfolio and then adjusted their subsequent withdrawals for inflation going forward had a 0% chance of running out of money at the end of the 30-year period. From this, we get what’s known as the “4% rule.”

In short, if you divide your yearly expenses by 0.04 (or multiply by 25!) you come up with a portfolio balance (your FIRE number) that can provide a stream of income to cover your expenses for at least 30 years, if not indefinitely. Now, this is somewhat of an oversimplification, which is why 4% being a “rule” needs to be taken more as a guideline, but you get the gist. In today’s environment, SWRs might be lower, but for now, you can estimate your FIRE number like this.

Yearly Expenses*25 = FIRE Number

For perspective, that means $1,000,000 can provide you with a $40,000/yr (plus inflation) forever.

Reducing Expenses

Since how much you spend is what determines how much you need to save, cutting expenses really accelerates the whole process. Frugality is your friend. Just think, if you’re spending $100/month on cable and decide to cut the cord, that’s an extra $30,000 you DON’T need to save. What about a car lease payment? Or a McMansion? Then we’re talking in the hundreds of thousands to MILLIONS less.

Note too, that by cutting expenses, you also free up money to save. The rate that you save (taken as a percentage of income) is what really determines how long it will take for you to reach financial independence. To illustrate this point, we’ll use an early retirement calculator.

Assume Bob is a 24-year-old new practitioner making $120,000/year gross with no prior savings and a 5% rate of return on investments.
If after taxes and expenses, Bob can save $18,000 per year (15%), he will hit financial independence in about 43 years at the age of 67. This is pretty standard retirement savings advice, by the way.
However, if Bob can jack up his savings rate to 30%, he can now retire in 28 years at the age of 52.
And, if Bob goes all-in on FIRE and gets that rate up to 50%, he can retire in a little under 17 years. Just after he turns 40. Bob wins.

See, math can be fun!

But cutting expenses isn’t just about choosing to go without cable or driving a more sensible car, it’s also about getting out of debt. Debts are expenses just like any other and should be dealt with as part of your FIRE plan.

Unfortunately, this is the stage of the FIRE journey that involves the most pain. In a way, it’s like committing to losing weight. Your budget is your diet and you’re only going to get the results you want by sticking to it. Thankfully, maintaining a budget is easier than ever thanks to apps such as YNAB and Mint.

Speaking of debt, even if you’re not fully sold on FIRE, getting out of debt is transformative and something everyone should strive for. I don’t agree with Dave Ramsey on much, but he is right when he says, “the borrower is a slave to the lender.” Debt such as student loans, car loans, credit cards, etc., chains you to work in a way that’s just unhealthy. You can have the greatest job ever, but if you need your whole paycheck to service your debts, your relationship with your work is going to suffer and you’ll probably start resenting it.

That said, there’s one important caveat to getting out of debt that pharmacists should keep in mind. Bringing the full-on beans and rice diet intensity to your student loans may not be the best course of action if you can qualify for loan forgiveness. With FIRE, optimization is key. You may find it more profitable in the long run to forgo paying off your student loans outright if you qualify for some of these programs. Check out this YFP podcast episode on how to optimize forgiveness.

Another way to reduce your expenses could be refinancing your student loans or mortgage. Lowering your monthly payment on your mortgage or student loans will likely save you a lot of money each month. With these additional savings, you could put even more toward knocking out your debt! While student loan refinancing isn’t for everyone especially if you’re pursuing PSLF or non-PSLF loan forgiveness, you could earn up to $800 in a cash bonus from a reputable company YFP has partnered with!

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Investing

The umbrella of “investing” covers a wide range of topics but in this article, I’m only going to briefly touch on the two major types of investments most pharmacists will encounter on their journey to FIRE: paper assets and real estate.

Paper assets are those such as stocks and bonds that you can invest in using 401(k)s, 403(b)s, 457s, IRAs, and brokerage accounts. These are the types of assets that generate truly passive returns and, with a properly diversified portfolio, can make FIRE possible. That said, there’s no one way to go about investing in these.

Within the FIRE community, index investing strategies (aka. indexing), such as those advocated by JL Collins, are quite popular. Central to indexing is the focus on low-cost index mutual funds. What are those? Without getting too much into the weeds, they’re mutual funds that give investors a diverse basket of stocks or bonds (sometimes all of them) at little or no cost. In general, these strategies call for a gradual decline in the proportion of stocks (high risk, higher return) to bonds (low risk, lower return) over time. And, while this isn’t different from the conventional approach to investing, the emphasis on using funds with low costs can make the whole process more efficient. Is indexing the best way to go about FIRE? Maybe, maybe not. However, it is one of the most accessible and can get you started.

Beyond stocks and bonds, many FIRE devotees choose to invest in real estate. In addition to acting as an asset that isn’t correlated with either the stock or bond markets, real estate investing can provide a level of passive income that can decrease the amount of money you need to save in paper assets. While not necessary to FIRE, many investors find real estate to be a worthwhile pursuit and can accelerate your path.

Drawdown

Finally, after amassing your war chest, you need a way to get at it. Since the primary vehicle most people use is a retirement account, how do you get the money out before regular retirement age? Fortunately, the FIRE community’s good at finding loopholes. Between Roth IRA laddering, 72(t) distributions, or simply taking the money out at a lower tax rate and paying the penalty, there are ways to jailbreak your money in a way that makes sense.

How to Join the FIRE Movement

So how do you get started? First and foremost, make a commitment to taking control of your finances and making them a priority. Second, get your spouse or significant other on board (super important!). Third, take action in a way that makes sense for you. Lastly, join others in the FIRE movement by connecting with groups online. FIRE isn’t just a movement but a community.

So, if this all sounds good, I invite you to take charge and change your life.

Welcome to FIRE!

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These Tax Benefits Get Unlocked When You Have or Adopt a Child

1. Child Tax Credit

2. Child Care Credit

3. Adoption Tax Credit

4. Dependent Care Flexible Spending Account

5. 529 Plan

6. Coverdell Education Savings Account (ESA)

Conclusion

Need Help Trying to Determine Which Tax Moves to Consider?

10 Financial Benefits for Federal Pharmacists You Wish You Had

1. Federal Employment Retirement System (FERS) Annuity

FERS Retirement Calculator

2. Access to the Thrift Savings Plan

3. Life Insurance

4. Long-term Disability Retirement Benefits

5. HSA Eligibility

6. Paid Parental Leave

7. Raises for additional credentials and board certifications

8. Opportunity to Pursue PSLF

9. Tuition Reimbursement and Repayment Programs

10. Generous Leave Structure

Conclusion

Need Help With Your Financial Plan?

Eliminate credit card debt ASAP

Pay off student loans or optimize forgiveness

Work on reducing housing and transportation costs

Review recurring monthly expenses

Eat more at home

Keep entertainment free or low cost

Pursue additional income streams

Conclusion

Disability Insurance for Pharmacists – The Ultimate Guide

What is Disability Insurance?

Do Pharmacists Really Need Disability Insurance?

Types of Disability Insurance for Pharmacists

How Premiums Are Determined

How Much Will it Cost?

What if My Employer Offers Long-Term Disability Insurance?

How Do You Purchase?

Conclusion

Career Break for Pharmacists: A Practical Guide on How to Take a Mini Retirement

Why take a career break as a pharmacist?

How to take a career break as a pharmacist

What to do during your career break

Re-entering the pharmacy workforce after a career break

Conclusion

A Crash Course in 401(k) Planning (Part 2): An Intro to Stocks, Bonds, and Funds

Stocks

Bonds

Mutual Funds

Index Funds

Target Date Funds

Exchange Traded Funds

The FIRE Prescription: How to Retire Early as a Pharmacist

What is FIRE?

Should You Join the FIRE Movement?

How to Retire Early as a Pharmacist

Safe Withdrawal Rates and the “4% Rule”

Reducing Expenses

Investing

Drawdown

How to Join the FIRE Movement

Compliance/Legal

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