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Category: Financial Planning / Podcast

YFP 371: 5 Wealth-Building Strategies to Become a Seven Figure Pharmacist

Posted on by YFP Media

Tim Ulbrich, YFP Co-Founder and CEO shares five wealth-building strategies to include in your own financial plan.

Episode Summary

In this episode, Tim Ulbrich, YFP Co-Founder and CEO, shares five wealth-building strategies you can incorporate into your own financial plan. Drawing from his own financial journey, these strategies have been tested, refined, and used by Tim and his wife, Jess.

From setting savings goals to tracking net worth monthly to increasing your financial IQ, Tim makes setting up your financial path for success more attainable.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

  • Wealth-building strategies for pharmacists with student loan debt. [0:00]
  • Financial struggles and debt repayment for pharmacists. [3:21]
  • Financial planning for pharmacists, focusing on strategies for success. [8:28]
  • Tracking net worth and setting savings buckets for financial goals. [12:33]
  • Financial planning, saving, and investing for pharmacists. [17:41]
  • Wealth-building strategies and financial planning. [22:33]

Episode Highlights

“And I had realized that despite the amazing opportunities that graduating with a pharmacy degree had offered, there was a little discussed truth among practitioners in the field. And that is that most pharmacists make a good income, but have significant student loan debt and feel like, hey, there should be more here; I shouldn’t feel as stressed and overwhelmed as I do with my financial situation.” – Tim Ulbrich [2:52]

“But it takes a lot of intention, time and effort to translate that income, to making sure that we’re actually progressing in our financial plan and finding the ever so important balance between saving for the future while also living a rich life today and investing in those things that are most meaningful to us.” – Tim Ulbrich [6:46]

“We learned a very important lesson that there is no such thing as arrived. When it comes to the financial plan, there is always an opportunity to grow and learn.” – Tim Ulbrich [7:25]

“These strategies are not overly complicated. It doesn’t have to include fancy spreadsheets and nuanced investment vehicles. It doesn’t take an exorbitant amount of time. And it doesn’t mean that you have to live on rice and beans. I did it and you can do it too.” – Tim Ulbrich [9:36]

“I want you to take a step back and ask yourself a few questions. What am I trying to accomplish? What’s the purpose? What does success look like? After all, money is a tool for living a rich life. And it’s up to you to decide what that rich life looks like.” – Tim Ulbrich [12:04]

“Resist the urge to try to do too much. And eventually getting to a place of frustration where you don’t make much progress at all. What is the one next move that you can make? This is a marathon, not a sprint, one step after another over a long period of time will yield big results.” – Tim Ulbrich [25:44]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey guys, welcome to this week’s episode of the YFP Podcast. I gotta admit, I’m pumped up for this one, I’m going to be talking through five wealth building strategies that you should employ in your own financial plan. No theory, no textbook stuff here. These are all strategies, all five of them, that Jess and I have tested, refined and used in our own financial plan. Now, before I get into these five wealth building strategies, I have two goals for this episode that I want to share with you. First, my hope and desire is to motivate and inspire you to take action. It is so easy to become overwhelmed, and fall into that paralysis analysis when it comes to the financial plan. So for those of you that are listening, that are feeling overwhelmed, or anxious, or frustrated, maybe stuck, or just this lingering, nagging feeling that there’s something more that could be done, I want to be a source of inspiration through sharing my own journey, and encouraging you on your journey as well. Now, that doesn’t mean it’s going to be easy. That doesn’t mean that you’re not going to have some mistakes and roadblocks along the way, there certainly will be. My second goal is to give you specific strategies that you can implement, starting today in your own plan; to take the motivation and to then take action that can yield results as you take steps in applying this to your own situation. 

Tim Ulbrich  01:25

Okay, let’s jump in. I’m going to start with my own story that really begins back in 2009. 2009. So at this point in time, I had just finished my PGY one residency, I was making a whopping $31,000. At the time, thankfully, residents make a little bit more these days. And I finally had reached the other side, right? Ready to cash in on the mystical, six figure pharmacist income that I often thought about during pharmacy school. Now, everything was looking good. Until I realized that I overlooked one very important minor detail. And that was that I was broke. No not broke, broke, but definitely high earner high income broke. My wife Jess and I were in spectacular shape on the surface. But underneath our lifestyle and this new six figure income, really our finances underneath that had a different story, we had over $200,000 of student loan debt that was almost all my student loan debt. Actually, the vast majority of that $185,000 or so was my student loan debt. We had a house at this point with almost no equity. We had very little in savings. And we soon had a growing family to support today we’ve got four boys, our oldest was born in 2011. So there was a lot of things that were going on and happening financially, perhaps some of you can relate to that. And I had realized that despite the amazing opportunities that graduating with the pharmacy degree had offered, there was a little discussed truth among practitioners in the field. And that is that most pharmacists make a good income, but find themselves in exactly the same boat that I’m describing, right. Earning a good income, significant student loan debt and feeling like, hey, there should be more here, they shouldn’t feel as stressed and overwhelmed as I do with my financial situation. Now, as I reflect on that journey, I am certainly grateful for the experiences I’ve had, and for what I have learned along the way. I also feel though, the fear and anxiety coming up when acknowledging that my perception of the six figure income and the reality of what it could be, were two very different things. Now it took me four humbling years, hopefully it won’t take you as long but it took me four humbling years to realize that this six figure income wasn’t all that it was cracked up to be. Now one book in particular, if you’ve listened to the podcast before, you’ve heard me talk about this book, but one book at this point in time 2012, 2013 hit me at the perfect moment. It was a wake up call that I needed. And that book was The Millionaire Next Door by Dr. Tom Stanley. We’ll link to that in the show notes. And that book taught me a very important lesson. And that lesson being that net worth, not income, net worth is a much better indicator of your financial health. Now more to come on this here and a little bit but understand for the time being that net worth is your assets what you own, minus your liabilities what you owe, and it paints a nice picture of what did or didn’t happen with your income, right, that’s earned. And after reading this book, I decided that it was time to put pen to paper and do our own calculation. Now when I did this, the assets column, right, on the left hand side of the paper, I had the liabilities on the right hand side of the paper and the left side was pretty blank. Didn’t have a whole lot of assets at that point a little bit in a 401K,little bit in an IRA, we had some value in the home that that was offset by the liability. But the right side the liabilities, what we owed, there was a laundry list of things that are highlighted by none other than that couple $100,000 of student loan debt that I mentioned, most of which was at a fixed interest rate of 6.8%. A number I will never forget. I know many of you are perhaps facing a similar situation. Now this calculation, this net worth calculation at the time, showed that just four years after graduating from pharmacy school, finishing up my residency, had earned about a half a million dollars of income. But I had a net worth, again, assets minus liabilities of negative $225,000. Ouch, right? Ouch. I was overwhelmed with student loan debt. I was confused about how to best save and invest for the future, I was frustrated by the fact that, hey, we’re making a good income. But we’re not progressing financially as quickly as we should be, or at least as I thought we should be. So if you are like most pharmacists that I talked with, perhaps your journey may include something similar. You might even be there right now, some of you have gone down this journey before or perhaps for students listening. It’s something that you’re thinking about in the future. And, you know, as I think about this, it wouldn’t be so frustrating if you didn’t do everything that perhaps you were told was the right quote, “right thing to do.” Right, you got the degree, you landed the high paying job, you started making some of those smart decisions, some of you have already purchased a home, you’ve been investing, maybe you got that reliable car, and you’re finally reaping the benefits of all that hard work. But it takes a lot more intention, time and effort to translate that income, to making sure that we’re actually progressing in our financial plan and finding the ever so important balance between saving for the future, taking care of our future selves, living a rich life today and investing in those things that are most meaningful to us.

Now, thankfully, for our story, there’s a happy ending. Three years after that point where we realize, hey, we’re making a good income, but the net worth is negative, it’s not showing, we decided through that time period to really get serious, to stop messing around, to take control of our financial future. And in the fall of 2015, we hit submit on the very last payment of that $200,000 of student loan debt. I still have the screenshot saved at the time. Navient was the loan servicer, it’s an image I’ll never forget. Now to get there. We had to sever self teach ourselves personal finance. This was what led to me starting the Your Financial Pharmacist Community shortly thereafter, in 2015. And we made several mistakes along the way. And I’m going to talk about some of those here in just a little bit. Now, at the time, no one in our sphere no one in our community is really talking about this. And it was hard. It was hard, but it was worth it. Now, a little bit more on this story, when we hit submit on that last student loan payment is the fall of 2015, it sure felt like we had arrived financially finally, right? That would be the first however, of many times that we would learn a very important lesson that there is no such thing as arrived. When it comes to the financial plan, there is always an opportunity to grow and learn. Once we had crossed the line from a negative net worth to zero, and eventually working towards positive, it was go time it was time to play offense. Right. Finally, we could begin to play offense with a financial plan. And through methodical savings, investing, diligent spending, planning, and working our butt off building a business, we would eventually cross a net worth of $1 million in 2020. That’s right, negative 225,000 in 2012, to a net worth north of 1 million and approximately eight years. And I want pharmacists like yourself to be fully armed and empowered with the knowledge and tools needed, again, to find that balance between living a rich life today. And tomorrow, you can get there. But in addition to your income, it’s going to require that you have the right mindset, some strategy, and you have habits and behaviors in place that will help you to achieve success, it can be done. And that’s why I’m excited to share some of these strategies with you. It’s not complicated or overly complicated. It doesn’t have to include fancy spreadsheets and nuance investment vehicles. It doesn’t take an exorbitant amount of time. And it doesn’t mean that you have to live on rice and beans. I did it and you can do it too.

Tim Ulbrich  09:56

I recently had the chance to talk with a group of pharmacists and I asked them to reflect on a question that was intended to help them clarify what matters most to them in their lives and how their financial plan can support those different areas. And here are just a few of the responses that I received. From that group of pharmacists, quote, “I would love to travel the world give generously, and fund my kids hopes.” Another was, “to take my kids to see the world.” Another,  “to have a home in space and time to host family and friends often.” Another, “to volunteer locally, spend time with family and learn new skills.” Another,  “To open my new business.” “Working part time without the fear of finances would allow me to volunteer more and do something more passionate about.” Another: “To create a community center for people who use drugs to help provide basic social needs and treatment.” Yes, yes. And yes. Notice what you don’t hear here. You don’t hear people talking about having a pristine, zero based budget. Yes, I think that’s important to help us execute, but that’s not what people are talking about. You don’t hear people talking about having a certain amount of money in the bank. You don’t hear people talking about having a complicated time intensive investment strategy. You don’t hear people talking about their 4.6% high yield savings account and how advantageous that is over another one that’s only 4%. You don’t hear any comments about how to optimize public service loan forgiveness or other student loan strategies. And while there’s nothing wrong with those things, right, I myself like a good budget, like a good student loan repayment strategy, things we talked about often in the show, it’s important to remember that these things aren’t the end goals and determinants of success, but rather steps that are along the way to support again, living that rich life today and tomorrow. So before I get into these five strategies, and before you go all Type A pharmacist on me and start making moves, hitting and checking things off that list, I want you to take a step back and ask yourself a few questions. What am I trying to accomplish? What’s the purpose? What does success look like? Right? After all, money is a tool for living a rich life. And it’s up to you to decide what that rich life looks like. Okay, so let’s jump into these five wealth building strategies, it’s time to take action. Again, none of that fluffy and practical stuff. I’ve implemented all of these in my financial plan. Step number one, you probably saw it was coming based on my discussion of net worth. Step number one is you have to be tracking your net worth. As I mentioned, and that book, The Millionaire Next Door, one of the quotes from that book from the author Tom Stanley is, quote, “one of the reasons that millionaires are economically successful is that they think differently.” And what he’s referring to is that those who build wealth realize that income is not the metric of success, but rather a tool for building wealth, right, and it’s worth repeating the calculation we talked about before, net worth what you own, minus what you owe, so your assets minus your liability. Net worth not income. But net worth is the true indicator of your financial health. And if you understand and respect this calculation, it will propel your financial plan. Discovering net worth was a mindset shift and a pivot point in our own financial planning journey. Now for Jess and I, we update a net worth tracking sheet once per month, which allows us to take a step back and see the overall trajectory and bigger picture, while also focusing on the short term goals. And I have this tracking sheet along with several other resources. I’ll reference throughout the podcast available in a Google Drive, a toolbox. We’ll link to that in the show notes. You can go to that toolbox to access those for free, you can make a copy, edit, customize, make it your own, and be able to implement it in your own financial situation. It’s a very simple spreadsheet. Again, nothing fancy, right, we have a list of all of our assets, all of our liabilities. So this includes things like our emergency funds, various business accounts, kids 529 accounts, all our retirement accounts, different real estate that we own, and so forth. All assets, all liabilities, once a month. This is the big view picture of are we tracking, are we trending in the right direction. So that’s wealth building strategy number one.

Number two, you’ve heard me talk about this on the show before is setting up savings buckets. I love savings buckets. All about intentionality. Once Jess and I are on the same page with our financial goals for a given year, it’s then time to write them down and prioritize them accordingly so that we can start to implement a plan to achieve them, right? Otherwise, it’s a hope, a wish or a dream. So for each goal that we have for the year, we defined several things. First, the amount that is needed to achieve that goal. So for example, if we were to say, hey, we want to refinish the basement, it’s a goal we’re working on here in 2024, we got to put a budget to that we gotta put a number to it. And we got to put eventually a timeline to it. So first, we have to have an amount needed to achieve the goal. Second, is we have to identify the current amount we have saved towards a goal, sometimes that’s a zero. Sometimes that might be a portion of the goal. The third thing is then the gap between the amount needed and the amount saved. Right? This is common sense stuff. And the fourth thing is the monthly contribution needed to close the gap. That’s the key. So we have to know where we’re going, how much do we need? When do we need it? What do we already have saved? What’s the gap? What’s the timeline difference and a monthly contribution that’s going to help us get there because then we can implement that, right, we can do something with that, to be able to put ourselves on track to achieve it. Now, I mentioned the tool box before, there’s another resource in there. I have our savings buckets spreadsheet that you can again, nothing complicated, you can download it, you’ll see it’s just a sheet that outlines different priorities, what the status is, what the goal is, what’s the current funding? What’s the amount, what’s the gap, and what’s the contribution needed to get there with some notes for each of those items as well. So once we have this from here, once we have a prioritized list of our goals, we can then work the budget, or the spending plan, whatever you want to call it to determine how much is available each month to allocate towards the goals and make any necessary adjustments. Now just to give you some context of things that we’re thinking about here, right, this would be items like home improvements, saving and retirement accounts, putting money away into an HSA saving for vacations, saving for a future car purchase, right? These are the types of goals and things that we’re working on. And once we have this prioritized list, and we can begin to weave it into the monthly spending plan, based on hey, we know what you’re gonna make, we know the fixed expenses, the discretionary expenses, we know what’s leftover, then we can allocate whatever is projected to be left over towards the goals we’ve already defined in advance. And this is where the buckets come in. Because once we do this work, we can set up savings buckets. Now we use Ally Online Bank, this is not commercial for Ally, you can do this with many other banks, or you can track it on your own, to have a bucket for each goal. Except for those things that go directly to outside accounts. Right. So I don’t want things like IRA savings, HSAs, 529s to be sitting around in a high yield savings account. But I want those to go to work as quickly as possible for us. But for everything else, right. I mentioned several of these: vacation, home improvement projects, saving for educational expenses, not for future like 529. But for us, that would be homeschool expenses and things that we know are coming throughout the year could be gifts, insurance payments. I said vacations, vehicles, etc. emergency fund savings, right. So when I log on to our Ally online savings accounts, I see all these buckets, which are really just virtual buckets within a high yield savings account that we can then identify and earmark. It’s so important that if we think we’re saving for something, let’s actually do the accounting for it and create the bucket that allows us to see the progress made. This can sound complicated, don’t let it fool you. It’s not complicated. This system took us about 15 to 20 minutes set up. Once we had already done the work right, which is the hard work is talking about the goals and prioritizing the goals. So that’s number two, setting up the bucket system. 

Tim Ulbrich  18:51

Number three in our list of five wealth building strategies, is creating a legacy folder again, something I have talked about in the podcast before. And while a legacy folder isn’t going to directly move the needle on your net worth, don’t underestimate what it can offer in terms of peace of mind. And knowing that in the event in an emergency, all your financial documents are organized and in one location. So think of the legacy folder as a one stop shop where you have all of your important financial information, records and systems such that if someone else had access, needed access in the event of emergency, something happened to you, they could quickly pick up where you left off. So our legacy folder is a combination of a shared Google Drive folder, and a fireproof safe at home. Right. So I think about things like passports, birth certificates, etc. copy of estate planning documents, those are going to be inside of a safe, and then we’ve got other things that are on a shared Google Drive. So our financial planning team at YFP has shared access to the Google Drive as well as family who would be caring for our boys in the event that something happened to us, and then we use One Password as a tool to share and store all of our passwords. You can access again in the toolbox resource I mentioned already, we’ll link to that show notes: YourFinancialPharmacist.com/toolbox, I have a legacy folder table of contents that we use that you can download, make a copy, modify and make it your own. 

Tim Ulbrich  20:25

Alright, number four on our list of five, upping your financial IQ. So here are just some of the questions I’ve received recently, from pharmacists in our community: how much should I save for retirement? How can I best save and invest for the future? What should my asset allocation be? Do I need a life or disability insurance policy? How can I optimize student loan or other debt payments?  Should I save and invest or pay down debt instead? If any of these sound familiar, this is real life stuff. And know that you aren’t alone if several of these questions are swirling around in your mind as well. And as I reflect on my own journey, I realized that knowledge, along with community and accountability, was a key missing ingredient early on. You know, despite being a personal finance nerd today, my financial IQ early in my pharmacy career was very limited. When I was just finishing up my pharmacy school training in 2008, residency 2009. At the time, I could not tell you the difference between a 401K and an IRA a stock versus a bond secured versus unsecured debt, unsubsidized versus subsidized loans, a tax credit versus a deduction, right, the list goes on and on. And my ignorance, my lack of financial IQ led to mistakes and really led to a delay in our progress. But that really wasn’t my fault as I reflect on the journey. Now, taking responsibility of that and learning those things. Certainly, there’s an opportunity there. But know that for many of us, we just don’t have that background. Right, that strong fine foundation and financial literacy, our K-12 system, to be frank does an atrocious job of prioritizing financial literacy. And while I’m grateful for my AP Calculus class, and how that saved me from having to take a semester of calculus in pharmacy school, I use very little calculus in my life today. But contrast that with personal finance, which I use in some form, or fashion every single day. So why do we invest so little time in financial literacy, knowing that its application will be wide for everyone? That’s a great question, right. And it’s a tragedy, but it’s one that we have to overcome, and we can take responsibility to overcome. And so the good news is that we can make progress here we can up our financial IQ if we’re willing to invest some time and energy and I’m not talking about an AP course level type of time, just a little bit of time invested is going to yield big benefits. I hope you continue to listen to podcasts, attend our webinars, read our newsletters, I think those are great ways that you can stay engaged and increase your financial IQ. 

Tim Ulbrich  23:04

Alright, number five on our list of five wealth building strategies is respect the power of compound interest and time value of money. If you aren’t in awe of that time value of money, you haven’t spent enough time nerding out on a savings calculators. As Albert Einstein is credited with saying compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it. This quote should pique our curiosity about the power of investing, more specifically, the power of compound interest in time value of money. It’s one of those financial jargon terms compound interest, time value, money that we throw around, that we know is important, but may not be sure what it exactly means and why it matters. And simply compound interest is the process by which an investment grows exponentially over time, because both the original investment and the interest gain earn interest over time. So we save a little bit today, it grows and then the future growth is the initial savings plus the growth plus the growth plus the growth and we continue that over and over again. And you can use a simple compound interest calculator, we have one available on our website, we’ll link to that in the show notes. Just to see that what would it mean for you when it comes to savings and where you’re at and how much you have saved? And how will that project out into the future? So what we know, which is something we’ve all heard before is that the earlier we save, the less aggressive we have to be in saving, right? And that’s where we really start to see the magic of compound interest and time value of money do its thing. 

Tim Ulbrich  24:44

Alright, so those are five wealth building strategies that I think you can implement in your own financial plan. And it’s it’s your turn now, right and as you start to implement your plan, let me give you two words of encouragement First, avoid analysis paralysis by identifying what the next move the one next move you can make. Remember, this is a marathon, not a sprint, and I just talked about a whole lot of things. And some of you are probably gonna want to this long checklist and start moving things forward. Resist the urge to try to do too much. And eventually getting to a place of frustration where you don’t make much progress at all. What is the one next move that you can make? This is a marathon, not a sprint, one step after another over a long period of time will yield big results. That’s what Darren Hardy is talking about, in his book, The Compound Effect when he says that small, smart choices, plus consistency plus time equals radical difference, small smart choices, plus consistency, plus time equals a radical difference. So that’s the first note of encouragement. The second one is your journey will inevitably include mistakes, trust me, I’ve made my fair share. Here are just a few I’ve paid too much student loan debt, because I didn’t understand the different options that were available such as loan forgiveness and refinancing. Second, I bought a home to be frank by just a little bit too early, without having enough equity in that home and a renting situation would have been fine for a little bit longer. Third, delaying the purchase of term life insurance with young children. Fourth, delaying the establishment of estate planning documents. Fifth, cashing out a small but still a pre tax retirement fund. And finally buying a car that at the time, we really had no interest in buying. So since mistakes will happen, right? It’s part of the journey, we must learn to give ourselves some grace. You’ve got this, I’m cheering you on. And I hope that you will continue to engage with our community as you go through your own journey. If you have a question that you have, in the moment, a roadblock that you’re facing, a win that you want to share, just an ear to listen of something that’s frustrating you in the moment, send us an email. I would love to hear from you [email protected]. And for those of you that are listening, saying hey, I really could use some help one on one, and really moving the financial plan forward to take all these different priorities no matter where you are in your journey, whether that’s a mid career pharmacist like myself, someone who’s approaching retirement, someone who’s a little bit early in their career, we’d love to have the opportunity to talk with you further. To learn more about our fee only financial planning and tax planning services and to determine whether or not they’re a good fit. You can book a free discovery call by going to yourfinancialpharmacist.com you’ll see a link to do so there to learn more about the services and to again, see whether or not that’s a good fit for your own financial plan. Thanks so much for listening. As always, I hope you found this episode helpful. And we’ll catch you again next week. Take care. 

Tim Ulbrich  27:51

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

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YFP 370: Your Retirement Questions Answered with Tim Baker, CFP

Posted on by YFP Media

Tim Baker, CFP and YFP Director of Planning answers questions from the YFP community on saving and preparing for retirement. This episode is brought to you by First Horizon.

Episode Summary

Planning and preparing for retirement can feel overwhelming. In this episode, Tim Baker, CFP®, RICP®, RLP®, makes the steps to planning for retirement more manageable. He answers three questions from the YFP community on retirement planning, including:

  • How to determine the optimal amount to save for retirement
  • Strategies for dealing with market downturns during retirement
  • How different investment options impact retirement savings

This episode is brought to you by First Horizon.

About Today’s Guest

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

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

Key Points from the Episode

  • Retirement planning, investment options, and home loans for pharmacists. [0:00]
  • Retirement planning, including determining optimal savings amount and factors to consider. [2:24]
  • Retirement planning, nest egg calculation, and potential deficits. [5:51]
  • Retirement planning, including nest egg calculation and goal setting. [12:46]
  • Strategies for dealing with market downturns during retirement. [19:33]
  • Managing investment risk through asset allocation and flexibility. [24:25]
  • Retirement planning, investment options, and their impact on savings. [28:42]
  • Traditional portfolio allocation and retirement savings with emphasis on asset allocation and tax considerations. [32:49]
  • Retirement planning for pharmacists, including asset allocation and tax strategies. [37:30]

Episode Highlights

“I think the big thing is how do you define optimal [savings for retirement]? And then the factors are so important. What type of lifestyle do you want? I think what most people want is to live a similar lifestyle to what they’re living as they’re working. So they don’t necessarily want to be more lavish. But they don’t necessarily want to give up things either.” – Tim Baker [4:27]

“The nest egg calculation, to me, that’s the best way to make that big number, the kind of unknown, a little bit more digestible.” – Tim Baker [9:37]

“I think a lot of people think that they have control over when they’ll retire and they don’t. There’s a stat that says 40% of people don’t work to their expected retirement age, either because of health issues, or they were eliminated from a job, etc.” -Tim Baker [11:12]

“I think the best time to plan for retirement is now and the sooner you can kind of look at where you’re at and be able to adjust where you need to go, the better.” – Tim Baker [11:44]

“When you talk about the nest egg calculation, that is where the value really lies. The short answer of how do you determine the amount of savings needed for retirement? Nest egg calculation, three words.” – Tim Ulbrich [13:39]

“So, you know, and again, the most successful retirees are the ones that are most flexible.” – Tim Baker [25:45]

“It’s being in the right asset allocation. It’s keeping your expenses low. And being consistent with that structure. I think we’ll get people through any of the seasons that you’ll see over the course of an investing career.” – Tim Baker [28:28]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week we take questions from the YFP community on retirement planning, we discuss how to determine the optimal amount to save for retirement strategies for dealing with market downturns during retirement, and how different investment options such as stocks, bonds, and real estate can impact your retirement savings. Let’s hear from today’s sponsor First Horizon and then we’ll jump into the show.

Tim Ulbrich  00:31

Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. For several years now we’ve been partnering with First Horizon who offers a professional home loan option AKA a doctor or pharmacist loan that requires a 3% downpayment for single family home or townhome for first time homebuyers, has no PMI, and offers a 30 year fixed rate mortgage on home loans up to $766,550 in most areas. The pharmacist home loan is available in all states except Alaska and Hawaii, and can be used to purchase condos as well, however, rates may be higher and a condo review has to be completed. While I’ve personally worked with First Horizon before and had a great experience with Tony and his team, don’t just take it from me. Here’s what Payton from Tyler, Texas had to say about his experience with First Horizon: “Aaron, Cindy, and Marilyn were very easy to work with. As a first time homebuyer, I shopped around for lenders at the onset of the process, Aaron was always very quick to reply and provide me with any details I requested in order to move forward and my decision to select a lender. Once I selected First Horizon, Marilyn and Cindy did a great job of keeping my wife and I informed of the process. Closing was a breeze yesterday at the title office. And I sincerely appreciate the team going above and beyond to keep my interest rate locked despite extending closing due to negotiations with the seller. I’ve already shared my positive experience with many pharmacists on the groups. And I look forward my brother, also a pharmacist, refinancing with you guys when he decides to.” So to check out the requirements for First Horizon’s pharmacists home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan again, that’s yourfinancialpharmacist.com/home-loan. 

Tim Ulbrich  02:24

Tim Baker Good to have you back on the show.

Tim Baker  02:27

Good to be back. Tim, how’s it going?

Tim Ulbrich  02:29

It’s going well. I’m looking forward to this episode. We’re gonna be talking about retirement planning – a topic that we’re seeing a ton of interest in getting lots of questions about. You did a webinar recently around retirement planning. Lots of engagement that came from that. So we want to answer some of the most common questions we’re getting from the YFP community around retirement planning. And we’re gonna go through four different questions around how do we determine how much is enough? What are some of the strategies to deal with market downturns while you’re in retirement, I know something that you’ve talked about before of that important window before leading up to an after? And how we think about the investment strategies. We’ll talk about some of the different investment options that can impact retirement savings, and then we’ll wrap up by talking about some of the health care costs in retirement. So let’s start with the first question, Tim, which is how do you determine the optimal amount saving needed for retirement? And really, what are the factors that should be considered when setting what this number is what the goal is?

Tim Baker  03:24

Yeah, so huge question, Tim. I think, you know, I’m going to answer the question with with a question is, like, define optimal? Yeah. Right. So like, optimal? Well, we’ve talked about, you know, is, you know, should die with zero be the goal. And, you know, what am I mean by that is, there are a lot of people that, you know, they’ll save, save and save, and maybe the goal is to pass on some, you know, money to their heirs. You know, I always I think I’ve said it said this on the podcast before my parents have said to me, like, hey, we want to make sure that like when we die, like we we give, we give you and your siblings some money, and I’m like, I don’t expect that I don’t really need that. I’m not really banking on that at all. And maybe when I’m older, I would want the same thing for my you know, for my kids, but the die was zero concept is it’s kind of like, you know, you can’t take it with you type of thing. So you’re you’re kind of spending on your portfolio, you’re giving it away, etc, etc. And maybe there’s some, you know, maybe there’s some somewhere in between where you don’t want to be right on the on the needle there. You don’t want to be with zero. So you maybe you have a little bit more cushion. So, you know, I think I think that would be the big thing is like how do you define optimal? And then the factors I think are so important. So like, what type of lifestyle do you want? I think in a vacuum, what most people I think want is to kind of live a similar right lifestyle than what they’re living as they’re as they’re working. So they don’t necessarily want to be more lavish. They don’t necessarily want to give up things either. Unfortunately, some people have to give up things just because of you know, poor planning or they have to work longer. So you know, what, where do you want to live? What’s the geography? What’s your housing situation, that’s going to be the biggest fixed expense. The biggest expense in retirement typically is housing. You know, what are your hobbies? Activities? Are you taking care of grandkids? Are you? Are you jet setting? Are you working? Are you not working? Are you volunteering? Consulting? What does that look like? And, you know, I think from there is, you know, estimating, you know what your retirement expenses would look like? So I mentioned like, what are the fixed expenses? What are the variable expenses, which could be big trips, maybe you’re paying for kids’ weddings, maybe it’s a medical expense. And really kind of zeroing in on that. Unfortunately, Tim the B word doesn’t ever go away. Right. So understanding what your budget looks like, is, is I think an integral part of of retirement planning. There are there are rules of things and way that you can slice it, there’s some planners that will look at the tax return, and then assume like, whatever’s on last year’s tax return is what I need for this coming year. And that’s kind of a very top down approach. A bottom up approaches a budget, you can use, use a rule of thumb, like a replacement ratio. So hey, if I make $100,000 and 70, or 80% replacement ratio means that I need $70-$80,000, you know, in that in that year of retirement. Looking at accounting for inflation, so do you think inflation is going to go up? It’s going to go back down to kind of the 3% levels? The big question is, is like what’s the retirement duration? Nobody knows that, right? So, you know, some people are like, Oh, I’m gonna, you know, retire at 65. And I, maybe I have a good five or 10 years on me, most people, you know, live longer when they want, they think they’re gonna retire. And that’s probably the trickiest part about all this, unlike, you know, other types of planning that are similar to this, like education planning, we kind of know that, hey, our goal was to kind of get through four years, maybe eight years of, you know, education. Here, it could be five years, it could be 45 years. We just don’t know. And that’s kind of the the major wildcard, but then understanding like, what are your sources of retirement? Is it social security? Is it a pension? Is it a, is it an annuity that you buy? Is it your traditional portfolio? Is there other types of you know, is it real estate income, whether your cash flow in real estate, or it’s a liquidation event? Are you selling a business? Is there a part time work there? So I think all of these play into play a part in it, and then I kind of how you distribute the cash also plays and how you handle taxes. So from a distribution perspective, you know, are you looking at, you know, what we’ve talked about in the past, which is a floor and strategy, which is very conservative strategy. Is it a bucket? You know, where, you know, in this, this will be, you know, another question that we have, it’s like, how do we account for like volatility or, you know, in the market? You know, is it a bucket strategy? Or is it the systemic withdrawal strategy, where it’s, Hey, we’re distributing 4%, no matter what, or we’re being flexible, depending on what interest rates what the markets doing? So lots of different lots of different ways to kind of, you know, go about this, but I think defining like, what optimal is for you is going to be important. And again, that’s why a lot of people are like, I just want to, you know, die with zero, that plays.I think the best place to start in terms of the optimal amount of savings needed for retirement to answer that question is, I think starting with a nest egg calculation is the best the best way. It is the, it is the best way, in my estimation, to deconstruct a problem and problem is not the right word, but a scenario that is years in the future, that’s a big freakin number. So, and when I was talking about this, like when we would do retirement planning at my past firm, you’d be the client and we would say, Okay, now now’s the time to talk about your retirement. Based on our time value of money calculation, you need $3.65 million to retire. Alright, let’s talk about your insurance, onto the next thing. And we could see kind of like, maybe the color come out of your face, maybe that little glossy, you know, glassy eyed look, and just, it didn’t connect with people. So, you know, it got me thinking, how can I make this number impactful to you today in 2024? So a nest egg calculation, which says, Okay, this is the number $3.65 million, but then what does that mean to me today? And we compare it to what’s currently in your retirement portfolio? What’s your contribution rate? How was it allocated? And then how does it compare, you know, to what you potentially need. So where are we running a deficit, meaning we’re behind on that $3.65 million? Or are we ahead meaning that we’re, you know, we’re overfunded? So to me, that’s, that’s the starting place. And again, it’s not a perfect, it’s not a perfect calculation, there’s a lot of assumptions in there in terms of investment returns and inflation and actually, when you’re going to retire and when you’re potentially going to die, we’re estimating all that which you would do anyway, in any type of, you know, scenario analysis. But to me, that’s the best way I think, to make that big number that kind of unknown, a little bit more digestible. There’s other ways that you can look at it, where there’s Monte Carlo analysis where you’re looking at, you know, a randomize portfolio return or other things that are related to you know, economic variables that you can say, hey, we’re going to run 1000s of scenarios and what it shows you is, hey, you’re a 85% chance of success. And that one chance of success means is that there are assets left, at the end of the plan, whether you set that for age 90, 95, 100, or whatever that is, that kind of is the next level. The rule of thumb is, you know, what people have heard of is a 4% rule. So, you know, if you’re, if you’re looking at your optimal savings plan, and you have $500,000, in retirement, if you use 4%, that means you have $20,000, over a 25-30 year return. So you might say, Hey, that’s not enough. I need more. So obviously, the right way to reverse engineer that, Tim, is to say, Okay, what do you need, if it’s 40,000, use a 25x, ROI, you need a million dollars, and that’s just a 4% rule inverted. So to me in terms of practical things that I wish I would have a listener, you know, it’s like, okay, are you getting the match, get to that race to the 10%. So your employee contribution, again, this is a vacuum. You know, I’ve talked with prospective clients that had lots of credit card debt, and other things that are going on, I wouldn’t necessarily prescribe this for them, but you know, get to the 10% employee contribution, then eventually, you know, get to a phase where you’re maxing out, and then use IRAs or brokerage accounts to kind of supplement along the way as you can. So, but remember that this is a problem set, Tim, that I think a lot of people think that they have control over that they that they don’t. You know, there’s a there’s a stat that says 40% of people don’t work to their expected retirement age, either because of health issues, or they were eliminated from a job, etc. You know, those types of things, I think where in my mind, I’m like, probably work till I’m 70 and Shay is 65. But, you know, I could lose my marbles was between, you know, before that, like, who knows? So, you know, I think I think, the best time again, I’m a planner, so I’m biased, but I think the best time to plan is now and the sooner you can kind of look at where you’re at and kind of be able to adjust where you need to go, the better. You know, one of the things that I would always kind of lament working with at my last firm was that we only worked with like pre retirees and retirees. So people would come off the street, and they’d say, Hey, I’m 55 years old, I’d like to retire in the next five years, I have $50,000, to my name, I have credit card debt, but like, it was almost like doesn’t, it doesn’t add up the math is not mathing. And so those are yeah, those are all the kinds of things that go into this. And it’s, it’s a huge thing to kind of deconstruct but I think, you know, looking at this as in a vacuum is not necessary ideal. You want to look at all the different parts. We talked about this with our own plans, and kind of, you know, where we’re trending and things like, you know, but it’s, it’s a big question, I think, and there’s just a lot of ways that kind of, you know, look at it. Yeah,

Tim Ulbrich  12:46

The thoughts that are coming to mind, as you’re talking, Tim, is I think there’s risk here to oversimplify this and be overconfident in this. And what I mean by the over over simplification is like, you can run numbers in a calculator. But if you’re not having some of the important discussions and questions of the inputs into that calculator, then we’re not doing the work that needs to be done, right. You mentioned like what what do we mean by optimal? Like, what does that actually look like? What does it mean to be living a wealthy life and retirement? As you mentioned, some huge variables of are we working at all? Are we working part time? You know, is this 55? Is this 64? You know, might we be caring for elderly parents? What does travel look like? What are all these things? And then, you know, when we think about even that word, retirement, I think can carry meaning that you and I might look at that word and say it means two very different things, right. And so, you know, when you talk about the nest egg calculation, to me that that is where the value really lies, to me the short answer of how do you determine the amount of savings needed for retirement? Nest egg calculation, three words. But to do the nest egg calculation and put in all the inputs and variables, which again, as you mentioned, are assumptions and things might change and move. And there are things that we think we have control over that we don’t, but it’s the closest we can get, and we can modify or update that look at it over time. In order to put the numbers in the calculator, we got to have some really good conversations. And this, to me is really where the planning comes to base, we’re not just trying to shove money away into accounts that were, you know, like, somebody said, I should put money in a 401 K, or an IRA or an HSA or whatever. Or we’re looking at these big scary numbers in the future thinking, Am I ever gonna get there? Looking at the individual variables, having the discussion and the conversations, answering those questions, plugging those in. And then as you mentioned, bringing it back to today. So important. Especially for the people that you know, for someone who’s two, three years out from retirement, that may not be as critical as for someone who’s in the middle of their career, or even in the front half of their career where, you know, we got to come up with a number that I can actually put my arms around and do something with today because otherwise I’m gonna look at this number 30 years in the future 20 or 40 years in the future and say, the math just doesn’t even seem possible.

Tim Baker  14:58

Yeah, in one of the things that when we go through the Script Your Plan, which is our second second meeting, and the way that we kind of start building a financial plan, we go through what’s called a Get Organized meeting, which is we bring up the client portal. And we’re basically trying to get to like a clean snapshot of what the balance sheet looks like. So the assets, the things that you own, minus the liabilities, the things that you owe equals your net worth. And our job is to hope, you know, the idea is to kind of grow that quantifably to get your, you know, your net worth grow over time. The second piece of that is Script Your Plan, which is all about like goal setting, right? So it’s like, Okay, now that we know where we’re at, where are we going? And with those two things in place, that that answer of it depends that I always give, Tim transforms into this is given your balance sheet, given your goals, Tim, this is what I think you should do. So it’s no more It depends. Because like, we know, you, we know what your goals are, we know what your passion is, this is what your goals are. But part of that Script Your Plan exercise, when we would kind of talk about a timeline, you know, we I would ask the question of, hey, like, it’s July 2024, let’s fast forward a year, what is success? And you know, what does success look like? And then we go three years, five years, 10 years, 30 years. The further you get out, you know, the further away that you go, the harder it is for you to kind of imagine that self. So with retirement planning, you know, the way that you know, with the way that I would do this, it’s like, I kind of, you know, I would say, hey, let’s get into the DeLorean. Let’s go 88 miles per hour, rev it up, we get out in, let’s see, 2054. So it’s 30 years from now, what does success look like? And for a lot of people, it’s like, I don’t know. So I’m like, okay, like, how much? How would your dad, you know, if I’m, if I’m 40. My dad’s like, imagine yourself, as your dad, like, pitch yourself, as a seventy year old, what does success look like? So it’s just like, the next day where we’re trying to, like, equate the numbers in from a from a Script Your Plan from a lifestyle perspective is, the further that gets out, the harder it is for us to kind of relate to our 10 year older self,  20 year older self, 30 year older self. So if there is a group or a person that you know, very closely that you can say, okay, like, if I’m in their shoes, and you probably do that, anyway, I’m like, oh, like, when I’m retired, I’m not going to do what my parents are gonna are doing, or I am going to do what my parents would do. So you can kind of like, take that, but even 10 years out, Tim, if you look 10 years back, from, you know, if you look back to 2014, how much of your life has changed over those 10 years,. You know, like, like, things like time flies, but, you know, to me, it’s like, you look at, you know, time is so hard for us, as humans can conceptualize. And it’s no different in in something like this. So I think it’s like, really kind of going through those, like thought experiments and, you know, kind of assessing, because I think so much of this is really about the numbers. But when you deconstruct this, it’s really not. You know, I think, you know, if you’re working with a financial planner, again, shameless plug, I think the numbers are going to be fine. Especially if you have enough time, you know, the longer that you’re engaged with, with a plan, the more success, you know, you know, whatever version of success. It’s the people that don’t, I think is where you kind of run into problems. But to me, it’s really important to kind of deconstruct like, the answer that question is what is optimal, and then plan around that, you know, the nice thing about, you know, having decades so to speak in a financial planner, is that the micro things that you do today really steer that frigget to where you can have success, you know, in the long run, so. But it’s an interesting, you know, it’s an interesting problem set, because it is a huge number. And it’s far in the future for a lot of people, it just, it doesn’t seem real, you know, I have a lot of people that, you know, will work with us in their 20s and 30s. Like, I’ll never be able to retire. And when we show them how, you know, the math to get to that, like, I think that’s transformative. Now, I think the second piece of that is like, okay, like, what is a happy retirement? What’s a successful retirement and I think people are starting to figure that out, but it’s not necessarily a destination, right? It’s just the next chapter. And, you know, especially with sometimes pharmacists, or like highly, you know, people that are higher achievers, you know, their role and identity gets really tied up together. And it’s like, okay, if you step away from your career as a pharmacist, like, who are you? What do you do? Like you know, and that and that for some people can be really difficult to kind of again, unbolt.

Tim Ulbrich  15:42

Tim, one thing I want to say and separate topic for another day that we can dive deeper into, we’ve talked about in the show before, but when you talk about time, being hard to really, you know, wrap our mind around, especially for folks that are early in their career, you know, your 2014 examples, a really good one when I think back to 2014, like it’s a distant memory and and it feels like Yeah, we were doing some savings and things now, but if it weren’t for things like automation, you could see how a 10 year period slips by you without having the intention out. This is why we believe so firmly in automation is an important part of plan. Yes, we got to do the hard work up front. Yes, we got to check in periodically. But once we start to kind of remove ourselves from that equation, and we do that hard work, and then we turn it on, whether it’s automatic contributions, it could be automatic savings buckets or other things, that’s where we’re gonna start to really see the progress and prevent this scenario where we say, How did those 10 years go by? And I didn’t make much progress on my retirement planning?

Tim Baker  19:32

Yeah. Yeah, I think it’s so important, because we just get into this, like, autopilot and you wake up. It’s like, where did that? Where did it go? 

Tim Ulbrich  19:56

Yeah. Alright, second question we have is, what are some strategies for dealing with market downturns during retirement? If we even zoom this out a little bit more? I’m guessing this person might be asking, you know, given the volatility, certainly the markets had a good run lately, but it’s been pretty volatile, right, you know, over the last couple of years. So for those that are, you know, in what you call that eye of the storm, around retirement, or coming up on, just got to retirement, or maybe they’ve been in retirement for a period of time? How do we address and deal with some of the market volatility?

Tim Baker  21:11

Yeah, so this is market risks, and you really don’t have any control over at all outside of like, taking all your money out, you know, take your investment ball home, and, you know, and go home, right? So like, this is where people get scared, they’ll go to cash, and they typically are selling low, but then they like, oh, the markets good now, and, you know, dip my toe back in, and they’re buying high. So you know, what you’re talking about a sequence risk where is where it’s basically, you know, when the timing of your retirement, and the distribution of your retirement accounts, matters a lot. Probably more so than most of the other investment or the retirement risks that are there. So to kind of zoom out of this first, Tim, this question is, you know, what are some so the question is, what are some strategies for dealing with market downturns during retirement. So what we’re assuming here is that you are no longer in that accumulation phase, you are in the deaccumulation, that withdrawal phase. But I think like the, the, my thoughts is, are consistent no matter where you’re at. You know, to me, the big things that I look at from a retirement portfolio is I want to make sure that you’re in the right allocation, and that you’re driving the expenses down as much as possible related to your portfolio. Now, what I’m taking, typically talking about here is like expense ratio. So the right allocation is probably the optimal, you know, the optimal term in and I think, if you look at the rule of thumb, that I don’t love is the rule of thumb in terms of like, how you should have your portfolio allocated is, you take 110, you subtract your age, and that’s the amount of stocks or equities you should be in your portfolio. So if I’m 40, you take 110, minus 40. And I should be in a 70%, stock portfolio and a and a 30%, bond portfolio, which I think and it’s very much a linear thing. So as you as you age, go, 60/40, 50/50, etc, etc. I think that that’s wrong. I don’t think that that’s a great rule of thumb. I think that, to me, I look at this almost as like a, my, my strategy or my thought process is more like a cliff. So my thought is like, you know, if I’m 40 years old, and I have 30% of my allocation in bonds, I think that’s a mistake. And if we, if we zoom out, you know, if you look at stocks, and again, not all stocks are created equal, but in broad strokes, stocks are typically there’s a higher potential for growth, with a lot more volatility. Bonds or fixed income, there’s less potential for growth, but less volatility. So there’s more of an exponential growth with stocks and more of a linear growth of bonds. So, to me, what you give up during the accumulation phase, if you’re in your 40s, is you give up a lot of the market, the market is still gonna go up, but I equate it to like, if you’re in mostly equities, it’s gonna be kind of Rocky Mountain in terms of ups and downs. If you put bonds and there’s more Appalachian Mountains, there’s a little bit more, you know, you know, there’s less ups less downs, but they’re still they’re still that. So to me, I think that, uh, mostly equity, you know, again, this is not investment advice, but I think like maybe mainly in equities in your accumulation phase. And then when you get to five to ten years before and after your retirement age, that’s when you’re going to, that’s when you’re really going to manage the sequence of return risks that you mentioned. So think of that as like the eye of the storm. So let’s assume that my retirement age is 65. And I’m being as conservative from a timeline perspective, at 55. That’s when I really am going to kind of that’s what that’s the cliff where I’m going to say, Okay, I’m now no longer going to be mostly in equities. That’s where I’m going to be the most conservative and go to bonds. So instead of this glide path, where I’m going from 100% equities to 80, 90, basically, I’m not doing that over a period of years, I’m doing that right when I hit 55, and that’s where I’m going into more of a balanced portfolio, which could be a 60/40, or 50/50. And then over those years in that either storm, so 55, to 75. And the most conservative sense, that’s when you’re gonna be the most conservative in terms of your balanced portfolio. And then when you come out of the eye of the storm, that’s when you start ramping up the equities, again, whether that’s 60/40, 70/30, 80/20, which is very different than kind of the, you know, most people, it’s like, oh, you’re in your 80s, you should be in a 20/80 portfolio or whatever. And a lot of people, it’s, it’s not sustainable. So the the eye of the storm is to kind of get through the sequence of return risk. So, you know, and again, the most successful retirees are the ones that are most flexible. So if you go through like the subprime mortgage crisis, or the.com crisis, and your portfolio goes from a million to 700,000, and then you’re drawing $50,000, you know, for the next couple years, the portfolio and a lot of cases are going to fail. If you were to delay your retirement and wait for the market to recover two years later, it’s completely different scenario. So that to me, is what we’re talking about here. So you know, the strategies for dealing that is, I think the best thing is the being the right allocation is to not do what you’re feeling. So I always talk about do the opposite of how you’re feeling. So if you get scared, a lot of people should go cash and a lot of ways you should be doubling down and investing. Another thing that we’ve talked about in the in the in this forum, Tim, is something like an annuity, which is hard to really wrap people’s minds around, but like if I can peel off $300,000 from my portfolio, to supplement Social Security to say, Okay, come hell or high water, I’m gonna have the steady check between social security in my annuity, regardless of what’s going on. For that, for a lot of people, that’s a peace of mind. So like the the market volatility is not as as big a concern, because I’m like, I don’t I have all my basic necessities, necessities handled. Right. So the mental thing of like an annuity might be might be a big thing. Being flexible, as I mentioned in, it could be a bucketing approach where you’re like, hey, my, my near term bucket, my zero to five year bucket is spoken for me and I have that in cash or tips, I’m good. So I don’t care what the market does, you know, as long as it’s recovered in the next five years for me to kind of replenish that bucket. And this is where we’re basically have a short term and medium term, and then a long term bucket. So short term, zero to five, medium term, six to 15, long term 15 plus, and then those buckets kind of replenish themselves as time goes. If there’s, if we’re in a time where the market crashes, but I still have $100-$200,000 in my cash bucket, I don’t really care, I’m hoping the market will return in that period of time to replenish that cash bucket. And typically, it should. A lot of the most, you know, the Great Depression in the Great Recession, you know, those recover those market recoveries aren’t decades. They are typically, you know, two to six years, two to seven years, that type of thing. So that could be that can be something as well. So, you know, the market, the market does what the market does. And I think those are that are best positioned like they they understand that. It’s not, you know, we’re not trying to like game the market, outside of very few people in the history of the market can can beat the market and kind of, you know, foreshadow what’s going to come. So it’s, it’s being in the right asset allocation. It’s keeping your expenses low. And being consistent with that structure. I think we’ll get people through any of the see any of the seasons that you’ll see over the course of an investing career.

Tim Ulbrich  28:42

Tim, let me mention a few resources for people that want to dig deeper, and this will link to these in the show notes. It’s been a while but we did a whole series on retirement planning, digging into the question of how much is enough, some of the alphabet soup of different accounts, building a retirement paycheck, things that you’ve been talking about that was episodes 272 through 275. Again, we’ll link to that in the show notes. And then 305, episode 305. We did a primer on annuities, a lot of myths, conceptions around annuities, we try to break those down, understanding what they are: fees, costs. That was a great episode. Again, we’ll link to it in the show notes. And then several of the risks that you’ve talked about, we put together a guide that’s all around understanding retirement risks. So it’s Retirement Roadblocks: Identifying and Managing 10 Common Risks. It’s a free guide that we have available. One of the most popular resources we have, again, that will be linked to in the show notes as well. Tim, one thing that struck me is you were talking you mentioned flexibility, right is a key. And this is a piece I think that pharmacists have a benefit of, right. Many pharmacists work in a position, whether that be hospital, whether that be community practice where they have an opportunity to do something like PRN shifts or work part time and make a good income. And so, you know, maybe the game game plan was a full retirement at 55, but because of some of the things that you talked about, maybe they either choose to work longer, full time or hey, if they want to pick up 15-20 hours, making $60-$65 bucks an hour, a lot of pharmacists have the opportunity to do that. And so I think that flexibility piece can be really important, specifically to our audiences as they’re thinking about retirement.

Tim Baker  30:12

Yeah. And what I This, to me, this stat still like is unbelievable to me. So this was these two stats were put out by a paper called The Power of Working Longer published in January 2018, by Stanford’s Institute for Economic Policy Research. And basically, it makes the case for working longer. That’s the best, you know, medicine for if you have a shortfall shortfall in income for retirement. But we talked about sequence risk Tim, so we know the market. So like, let’s say, you know, you know, 65, in, you know, 20 years from now, not quite there yet. But say the market is not going great. Deferring retirement by three to six months is like saving 1% more of salary for 30 years. Deferred retirement by one month is like saving 1% more of salary for the final 10 years. So, to me, there’s I know there’s a lot of pharmacists that are listening to this that I speak to, they’re like, I need to retire as quickly as possible. And I get it, I get it, I understand. But but to me, like the people that are most flexible from a lifestyle, from a timing, are going to be the most successful in terms of their retirement. So if you have a lever that you can pull that you can consult or you can do, you know, you can do a shift or medical, right, whatever that is, you know, whatever that that is like that’s going to benefit you and over and help the overall retirement picture. So those would be two stats, I would leave you with us on this question.

Tim Ulbrich  31:44

That’s great. And it’s a balance, right? We talked about this all the time, it’s a balance between, hey, you make enough of these concessions. And you could always argue, hey, I should keep working longer, right? So we’ve got to get back to like, what’s the why, what’s the purpose, but also be in tune with those numbers, which aren’t wild when you talk about one month of employment, and the impact that it has in terms of dollars that could have been saved. Our next question: how to different investment options such as stocks, bonds, real estate impact retirement savings? And I think, Tim, this is a really interesting question, because one of the things we lose sight of when we talk about nest egg calculations, retirement planning, we talked about these big numbers, 3 million, 4 million, 5 million, is that not all dollars are created equal? Right? Both in how are they invested, and the types of investments in which they’re in and then eventually, how they’re utilized to build the retirement paycheck. So what are your thoughts here in terms of how do different investment options impact retirement savings?

Tim Baker  32:37

Yeah, so this question is really about like asset classes. So when we talk about a traditional portfolio, you know, there’s a, we talked about a high level, you know, a 90/10 portfolio and it would be 90% in stocks or equities and 10% in bonds or fixed income. That 90% you can, you can draw even a finer line, you can have large cap, mid cap, small cap, you could have international funds, you could have emerging market, you could have commodities, you could have, you know, you could have sector funds that are just in biopharmaceuticals or whatever. You could have digital assets. So, the big news this year was that they released spot Bitcoin ETFs. Last week, Tim, they released nine, eight or nine spot theoreum ETFs, which have come on the market and started trading last Tuesday. So that can be part of your your asset allocation now, because they’re, they’re in ETFs. The bonds at 10%, you could buy a total market bond, or you could buy different types. You could buy munis, you could buy treasuries, you can buy a total market and international bond, like there’s lots of ways to kind of, you know, slice it. But you can also talk to, you know, real estate, you know, one of the things is like, you know, is it real? Is it real estate, you can hold real estate in a mutual fund or an ETF, or you can hold it directly. So, to me, this kind of goes back to the one of the earlier questions is, you know, the more stocks, there’s the potential for more growth, but more volatility and risk, the more bonds less potential for growth, but less volatility and risk. So I think, at a baseline, being in the right, asset allocation from a traditional portfolio is really important. And this is what I’m talking about is, you know, should you be in an all equity or, you know, a 9010, and then hit that cliff and then go to a 60/40 or 50/50. That’s what I’m going to talk about from a traditional, but the things that we have to overlay, Tim, and I was talking about this with you a couple of weeks ago, I was kind of lamenting the fact that we talked about like tax allocation with retirement with your, your investment assets. So we kind of talked about we went a little bit in column A, Column B, Column C. Column A would be pre you know, like traditional. So pre tax, so these are, you know, traditional 401 K traditional IRA, etc. Then you want a little bit in Roth, which is kind of tax free since you’ve already paid  the taxes. So this is like And when you pour out a Roth, if you have a million dollars, all that million is yours because you’ve already paid the tax man. And then the last one is a taxable account. So I was looking at my taxable account as a percentage of my portfolio, I’m like, oh, that’s exactly where I want. Now, I don’t have any designs on retirement before 59 and a half. So I don’t really need, that’s typically what you use a taxable account for the purpose of retirement. But I know like when I sell my real estate, that’s probably going to go into a taxable account. So like, like, right now, I know the plan is, it’s kind of unequal scales, though, they’ll be equaled out in the future, or when I sell my share of our business like that will probably go into partly a savings account, but partly a long term investment, you know, in the form of a taxable account. So to me, that plays a part of this as well. So I think the the idea is to be in the right asset allocation, as opposed to what I talked about, typically, the one that you’re it’s going to be more stock heavy is going to have more volatility. So the closer you are to retirement, or in retirement, the less you’re going to want to have, although it’s still needed for the kind of that longevity risk of like not live outliving your savings. Real estate, it’s going to be typically how you know how your whole net, whether you are a landlord, or if it’s in a fund. But the things that we haven’t really talked about this, as part of this is things like digital assets, things like commodities, cash – right now, Tim, you could, you know, with our cash accounts at YFP, it’s paying like 5.1%. So I’m looking at that, and like, if I’m a retiree, if I can park, my short term bucket there, I’m pretty happy with that return. Now, I know inflation has been ticking up higher. So maybe need a little bit more to offset that. But these are all the things that kind of construct the retirement, you know, savings and retirement assets. And I think, you know, doing it with a traditional portfolio, but then overlay in some of the other things that you have going on, you know, if you have a pension, that’s going to affect how you retire, you know, your allocation is, because if you have a if you have a pension plus social security, you might not have to be super conservative, because you might say like, Hey, my, most of my things are handled, or if I buy an annuity, I can be more aggressive, because I’m not going to have to withdrawal that as aggressively as if I didn’t have that annuity or that pension. So there’s lots of different things. But I think the rule of thumb is kind of looked at your stock to bond, you know, ratio, and understand that with stocks, again, more growth, more volatility. With bonds, less growth, less volatility.

Tim Ulbrich  37:30

And I think you just gave a great example there, why blanket asset allocation recommendations don’t work, right? Because, you know, if someone’s listening, and they have a pension, and they have social security, or maybe they have an annuity, like the floor that they’ve created, is completely different from someone else that maybe doesn’t have a pension or annuity, And therefore, they’re going to rely more on withdrawing from their investments. So how much risk they take with the remaining amount of whatever’s investable, and whatever buckets they have, could be very different based on you know, what those are? And I think this question gets at a couple different aspects of asset allocation, which you talked about nicely, but also a conversation. We don’t have enough, which is that d cumulation. Building that paycheck from what buckets are we taking from and how do we do that? And what order tax strategies all those things? And I think for people are listening that maybe have done the hard work, are nearing retirement, have two, three $4 million saved whatever the number is. That’s great. Now, hey, are we thinking about the decumulation side of this?

Tim Baker  38:30

Yeah, and that was one of the reasons, Tim, after going through the CFP coursework, you know, I decided to do the Ri CP, which is Retirement Income Certified Professional, because it really tackles that question that the CFP I don’t think does the best job. CFP is all about, okay, accumulation of accumulated assets and what that looks like. But once you get to that, that’s not the destination, then the next chapter, how do you take these buckets of money and build a sustainable, sustainable paycheck over time? Unknown, right. And actually, one of the open questions in in that is like, if you do build a floor for a client, and they’re, you know, they’re a 75 year old, but their allocation is something like 90/10 or 80/20. A lot of regulators will look at that and be like, that doesn’t look right. But you know, the justification, that’s why you can’t have a blanket, you know, yeah, one rule for everyone. The justification is like, we really don’t have to draw that much from that portfolio. Because, right, the floor is the floor, right? So I remember that being kind of like, oh, that’s odd. Because, you know, again, most, most planners, they kind of they go, they get social security in place. And then they say, Okay, what’s the total return? What’s the best optimal way to get the portfolio through the all the retirement years, but it’s much more nuanced than that. And I think, you know, it’s important to understand that.

Tim Ulbrich  39:54

And that’s why for the pharmacists that are listening, that are working for an employer, like the VA or whoever that still has a pension plan, be grateful for that. They’re not they’re not common, but it’s gonna play a huge role when it comes to building that floor  and creating that retirement paycheck. We’ve got lots more retirement questions. I’m gonna hit pause there. We’ll tackle more of those in future episodes, we’ve done a lot of information in a short period of time again, we got more resources. If you’re listening to this, and I want to learn more, make sure to check out the YFP podcast again, we’ll link to some of these older episodes in the show notes. You can go back and learn more, we’ve got more information on the YFP blog as well. We have more webinars that will be forthcoming related to retirement retirement planning that Tim and the rest of the team will be leading. So be on the lookout for those as well. For those that are listening and said, Hey, I really could use some one on one help with a qualified, certified financial planner, we’d love to have the opportunity to talk with you to learn more about your situation to see whether or not what we offer is a good fit in the form of fee only financial planning and or tax planning. If you’re interested in a discovery call with Tim Baker to learn more about the services, you can go to yourfinancialpharmacist.com you’ll see a link there to book a discovery call. Thanks so much for listening, Tim. Great stuff. We’ll catch you again next week.

Tim Baker  41:03

Sounds good.

Tim Ulbrich  41:06

Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single family home or townhome for first time homebuyers and has no PMI on a 30 year fixed rate mortgage. To learn more about the requirements for First Horizon’s Pharmacist Home Loan, and to get started with the pre approval process, you can visit yourfinancialpharmacists.com/home-loan again, that’s yourfinancialpharmacist.com/home-loan. 

Tim Ulbrich  41:51

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

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YFP 369: 10 Common Tax Blunders To Avoid (From 2023 Filings)

Posted on by YFP Media

Sean Richards, CPA and Director of YFP Tax, talks about the 10 common tax blunders he saw and how to remedy those mistakes to optimize taxes in the year ahead.

Episode Summary

July might not seem like the time of year to think about your taxes, but for Sean Richards, CPA and Director of YFP Tax, it’s a great time to make projections for the year ahead and remedy any blunders from last year’s return. 

Reviewing 10 common mistakes he saw made with taxes in 2023, Sean breaks down ways to optimize your tax plan from utilizing HSAs, to adjusting withholdings, to making sure any side-income is planned for appropriately. Sean’s biggest piece of advice: planning ahead can help avoid these mistakes and can optimize your tax situation.

About Today’s Guest

Sean Richards, CPA, received his undergraduate degree in Corporate Finance and Accounting, as well as his Master of Accountancy, from Bentley University in Waltham, MA. Sean has been a Certified Public Accountant (CPA) since 2015 and is currently pursuing his Enrolled Agent certification. Prior to joining the YFP team, Sean was the Senior Treasury Manager at PRA Group, a global debt buyer based in Norfolk, VA. He began his career at American Tower Corporation where, over 10 years, he held several positions in audit, treasury and accounting.

As the Director of YFP Tax, Sean focuses on broadening the company’s existing tax planning and preparation operations, as well as developing and launching new accounting offerings, including bookkeeping, payroll, and fractional CFO services.

Key Points from the Episode

  • Tax blunders and optimizing tax situations with a CPA and tax director. [0:00]
  • Common tax mistakes and how to avoid them. [3:13]
  • Tax planning strategies and common blunders to avoid. [9:33]
  • Optimizing retirement contributions and HSA benefits. [12:59]
  • Tax deductions and filing status, with a focus on maximizing savings. [17:31]
  • Tax planning strategies for side income sources. [22:05]
  • Tax blunders to avoid, including not making estimated tax payments. [26:14]
  • Tax planning for small business owners, including extension deadlines and investment activity. [32:18]
  • Tax planning and law changes, including energy credits and potential future rate increases. [35:44]
  • Tax planning for pharmacists and households across the country. [41:34]

Episode Highlights

“Doing a projection mid year and identifying that you’re going to have a surprise bill or refund at the end of the year, or at least beginning to see that it’s trending in that direction allows you to begin fixing all those problems before they even become problems.” -Sean Richards [7:38]

“For small business owners or for a side hustle, when we’re doing projections about where you expect the business to land in profit and loss this year, and you have a pretty good idea, or at least you hope you do. But that can always change for anybody, not none of us can see the future. But the point here is, at least giving it some thought and trying to come up with a number and planning accordingly.” – Sean Richards [24:16]

“It all comes down to planning. To the extent you’re able to identify any kind of gaps in where you expect to owe money at the end of the year and can close them now whether that’s making estimated payments directly to the IRS or adjusting your withholdings, it’s much better to fix it now and get ahead of it.” – Sean Richards [31:57]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. On today’s episode, I welcome CPA and YFP Director of Tax, Sean Richards, onto the show to discuss the 10 most common tax blunders that he saw pharmacists making during the recent tax season so that you can avoid these mistakes and optimize your tax situation. To learn more about our tax and accounting services you can visit yfptax.com. Alright, let’s jump into my interview with YFP Director of Tax Sean Richards.

Tim Ulbrich  00:41

Sean, welcome back to the show.

Sean Richards  00:43

Thanks for having me. It’s always a pleasure to be here.

Tim Ulbrich  00:46

So have you had a chance to recharge, recover? It’s now July. Tax season is behind us. But I know that work can linger on, that’s the nature of the business. How are you feeling at this point in the year?

Sean Richards  00:58

Yeah, I’m feeling good. Projection season. I mean, by the time this comes out, we’ll probably be in full swing there. But our projection season is going to be kicking off soon for most folks. But again, you know, we have some folks that are more complicated that we’re still kind of wrapping up 2023. Now, all by design, that’s where we’re taking the time in the summer where other accountants might be sleeping, I am catching up on some sleep, but also using the time to wrap up some of the more complicated returns, make sure we’re optimizing things for those folks. Maybe those projections are a little bit later in the year. So yeah, I’m feeling pretty good. I mean, there’s a little bit 23 stuff still in the works, but mostly close the book there. Looking a lot towards 24 and even 25 and beyond. So feeling refreshed.

Tim Ulbrich  01:38

Well, I’m convinced you’re gonna look back at this season of life as a blur at some point. I mean, you got young kids, tax season and owning business in that season. That’s a lot going on at once. So kudos to you and the work that you and the others have been doing on the team. So give us a rundown. You mentioned there’s some work still to be done individual business extensions. That would include Tim and myself as well. So we’re a couple of the stragglers, but how many returns have you in the team done this year on the federal and state side?

Sean Richards  01:50

On the federal side, we’ve probably locked down about 160 returns or households at least. So you got to factor in that you’re gonna have, you know, if you’re filing separate there, that’s that’s double on those returns. And then for each one of those, I mean, I’d say for each one, you probably average at least a state, because some folks have more states, some folks are in states like New Hampshire that don’t have state income taxes. So probably at least double that on the state side. And then you know, some some couple dozen or not, maybe not a couple of those in but a few business returns on top of that, and yeah, it definitely adds up quite a bit. So there’s only a couple hanging out there right now. If you’re listening, by the time you’re listening, you’re probably actually going to be filed unless you’re Tim Baker and haven’t submitted any of your documentation yet, but everybody else should be all set by the time you’re hearing this. So yeah, we did quite a bit this year. Maybe not as many number wise as before, but definitely, you know, more complex returns where we’re able to get in there and really do that maximization during the year. It’s awesome. 

Tim Ulbrich  03:13

does Ohio still win the award for the most difficult state to deal with? Or do we have a new winner this year? 

Sean Richards  03:20

No, Ohio still number one, as far as most difficult, just given the different municipalities and how you know, some of them are part of the RITA system some of them are completely not not the worst as far as the worst state tax liability that probably be somewhere out west California, Oregon’s up there but yeah, Ohio, I think still is the most annoying. 

Tim Ulbrich  03:41

Our tax liability here in Ohio very friendly, especially for small business owners. Grateful for that. But the bureaucracy of the RITA system, known as the regional income tax authority, shout out to them for listening wish I can assure you they’re not listening. But makes it very difficult because not everyone is in a RITA and just the complexities of dealing with that. So certainly feel for you and others during the season when you’re dealing with the nuances of a system like that. So anyways, not what we’re here to talk about. Let’s jump into the most common mistakes that you saw pharmacists making, the blunders during the tax season. Really an opportunity for us to learn and opportunities, were in the middle of the year. And we’ll talk about the importance of doing projections and looking ahead, but as we hear some of these common mistakes or blunders, it’s a great reminder of what tax planning can we be doing throughout the year. So we’ve compiled 10 I’m sure there’s many more and there’s some layers within each one of these but let’s jump into our list number one, on the list. Perhaps the most common probably will always be the most common is getting a surprise bill or refund at filing. What’s the usual cause here, Sean of some of these unwelcome surprises.

Sean Richards  04:56

And the reason we always have this number one we probably always will unless there’s some sort of broad tax reform in this country is that there’s so many different things that can cause that to happen, that I couldn’t even begin to answer. I mean, I can give some examples, you know, you could under withhold, you could have a side gig and not have, not plan accordingly. But, I mean, we have 10 things on this list, or I guess nine, not including that first one. And they all can kind of result in that number one issue of getting that big refund back, which, you know, that one might surprise some folks, because you might hear that and think, Well, what’s wrong with getting a huge refund back. But if you’re getting $5,000, back in April, that’s $5,000, that you could have been utilizing more efficiently, evenly throughout the course of the year. So you know, that side or the worst side, even, you know, the other opposite is owing that at the end of the year, and nobody wants to have that. So there’s just so many different things. We’re gonna hit on a bunch of them while we talk through this. But I mean, to even start talking about what the causes of that could be. I could be here all day. 

Tim Ulbrich  06:00

Endless possibilities, we’ll get to those throughout the list of 10 of where the most common ones are coming from. As you mentioned, it’s the surprise bill that causes the most pain, right? Even though this year, the number of people that reached out to us post tax deadline, say, hey, I’m interested in learning about what you offer for tax services. If they came after the tax filing deadline, I can assure you that most of them were because, hey, I just got through that that was a mess. I owed money. I don’t want to ever do that again. Right. So the good news is, there are remedies to that problem. There are solutions we can put in place, there are planning that can be done. And changes are going to happen. You know, as we think about the things that can result in those surprise bills that might be causing that to be the case. And so we can with diligent planning, be able to make sure hopefully, that doesn’t happen again in the future. So to that point number two on our list, which is the remedy to the surprise biller refund. Number two is not performing a tax projection. And Sean, talk to us about why this is important, when the projection should happen, what we’re looking at in doing that projection, and to be frank, most people aren’t doing this. 

Sean Richards  07:10

Most people aren’t. I mean, pretty much anybody I talked to who’s not a client working with us, has never really even heard of doing this or they’ve done something like it, but it’s not as formal of a process. And it may not be fair to start with number one being the overarching problem for all tax returns. And then number two sort of being the solution. And if you didn’t do that, that’s our, our issue. But frankly, I mean, not doing this piece really is the biggest second issue because doing a projection mid year and identifying that you’re going to have a surprise bill or refund at the end of the year, or at least beginning to start to see that it’s trending in that direction allows you to begin fixing all those problems before they even become problems really. And so a tax projection is basically just doing a little bit of an estimate of what your your where you expect your tax return to be at filing time. And as silly as that sounds or as simple as it sounds, it’s not something that a lot of people do. And a lot of it’s because you know, tax returns, there’s a lot of complicated or not complicated, but there’s just a lot of different inputs that come into it, you have your credits and your deductions, and you have various sources of income and having all those pieces kind of in your brain and trying to think about how they’re all being covered off. And then getting to the end of the year. And throwing it all on paper is is just chaotic. So doing something around this time of year, or at least mid year for your kind of tax cycle. So if you’re filing every year around tax day, or in the springtime, mid year, July, August, great time to be doing it. If you’re maybe extending and you’re more complicated, and you’re filing a little bit later in the year, you know, you can kind of flex accordingly. But basically, you want to give yourself enough time where you’ve seen enough of the year that you know kind of what’s been going on, what you expect to have happen throughout the rest of the year and maybe even early next year. But you also have enough time to make adjustments based on that. So you don’t want to do it too early. You also don’t want to do it too late. And ideally, you want to have your prior year return kind of solidified and everything to use as a basis. So yeah, I mean, again, it’s it sounds like a simple kind of concept. But it’s something that a lot of people don’t do, and just that one little activity will open up so many areas for you to improve your tax situation every year. It’s outstanding. 

Tim Ulbrich  09:33

These are the situation that again, there are endless possibilities. Right. You know, I’m thinking of the common ones that I’ve heard you talk about, hey, we bought a rental property. We switched jobs, you know, significant change in income. Got married. We had a child. Started a business, a side hustle. I mean, there’s there’s so many things that can adjust and change what our tax liability is going to be. I mean, I just lived this firsthand with you, Sean. As we think about our situation, we pay quarterly estimated taxes when it comes to the business income. When went to go make our first quarter payment, you know, we did kind of rough rough calculations number. We’ve got a well oiled machine process system that you’ve helped us develop internally. Made that payment. And then we said, hey, when we get to the quarter to like, based on what happened last year, my individual situation, I’ve got four kids single, single income in the household, let’s do a projection. And then from there, figure out what is the amount that we should be looking at based on Q2. And the reason why that was really important in my own plan is, as we had suspected, I probably didn’t need to make a Q2 payment or a very big one, because of what we made in Q1 and what the liability was projecting to be for the rest of the year. So to your point, we’ve got to have that return, complete or near complete. We’ve got to have some idea of what may or may not be coming here in the second half of the year. And then you’ve got some cool software that you can run some analyses. And we can put a visual to this, which I think really helps people understand how the tax liabilities work and how we want to think about making these payments.

Sean Richards  11:02

Yeah, I agree seeing it visually and kind of understanding Ah, okay, that’s where that comes into the equation. And this is where this is going to kind of fall into it. And I mean, even something like that. My first question back to you is, you know, what do you expect? I mean, I guess the answer is coming from me as your accountant. But what do you expect your business to have in profit or loss at the end of the year? And a lot of people don’t even really think about the fact that they have to answer that question first before we can even get to that. So it really starts getting you thinking about all the different inputs that ultimately work their way into that one little line on your return.

Tim Ulbrich  11:05

And this is where you can see like, hey, if we pull the lever, and we max out the HSA, or we put money into more into the traditional 401k, whatever might be the outcome, like what does it actually change when we get to the bottom and we look at the tax liability. So really powerful if we can get that projection process in place. So that was number two on our list of 10 common tax blunders to avoid. Number three on list is undervaluing the power of the HSA. We’ve talked at length on this show about health savings accounts. We’ll link to in the show notes our previous episodes on HSAs. Talk to us, Sean, it surprises me a little bit to be honest, that we’re still seeing the HSA be underutilized.

Sean Richards  12:16

Yeah, I think it’s one of those things and I think you, you certainly don’t see it once you’re kind of working with us. And you’ve been able to kind of see the power, hear us talk about it, or visually show, hey, this is what could have been or anything like that. But I think it really kind of comes down to sort of just the education in the country broadly about some of these things like 401K, HSA kind of everything. You know, you get thrown into your first job out of college, and you have to sign 1000 pieces of paper in your onboarding stuff from HR and put you know what percentage of this you want and traditional Roth and all these numbers kind of get thrown out there, and you lose the benefits or you think, hey, maybe I’ll I’ll throw some percentage here and some percentage here and some percentage here. And that’s, you know, obviously a pretty good strategy as far as spreading things out and stuff, but HSAs have a triple tax benefit. Most if any other retirement vehicles have that. So by not maximizing that HSA, if you have that available to you, you’re really losing out, even if you are kind of spreading the love to other places first, I mean, you want to really be able to get that triple benefit there before you start going elsewhere. So when I say triple tax benefit, when you make your contributions this year, or if they’re coming out of your paycheck, that’s a tax deduction, or it’s coming out of your taxable income, reducing your taxable income, the growth of the investment tax free. And then when you take it out, assuming it’s for qualified expenses, also tax free. So usually you’re getting one maybe two of those, like you tax free now, but then you pay the tax in the future, or vice versa. This is the only one that has that that triple, so it’s awesome. The one thing I will say there is that on the flip side, I’ll see plenty of times where you know, you get excited and sign up for the first time and might miss you know, you’re working a couple jobs or something and over contribute. So it as long as it’s something that you catch, not a problem, we can fix that even if we get past the end of the year, you know, you can have those things returned. But something to try to get ahead of, as I say with great power comes great responsibility. So a lot of power with the HSA. But rules just like everything else to keep track of and limits and everything. So you just want to make sure that you’re staying on top of those two.

Tim Ulbrich  14:28

Yeah, tracking expenses, are they qualified, making sure you’re using it appropriately? All important things. You know, I like to refer to the HSA as a legal tax avoidance vehicle. Right. So that’s a good one. To your point, we don’t see that in other accounts. And so, you know, I think there’s always the debate of, Hey, am I actually going to potentially need these funds for qualified health care expenses, and if so great, we can get the tax benefits. If not, and or I’m not projecting that I’m gonna need it, then there’s some options to use this as, you know what we call kind of a stealth IRA potentially, another option when it comes to long term savings and investing. Alright, so that’s number three. undervaluing the power of the HSA on our list of 10 Common tax blunders to avoid. Number four is not optimizing retirement contributions. Tell us more here. 

Sean Richards  15:21

So, that kind of follows the HSA thing, as you were sort of alluding to there. And HSA is kind of like a retirement vehicle. It’s sort of intended as being used for health expenses, but it can also kind of be used as a retirement vehicle. So that is, can fall under this umbrella. But what I’m talking about here is, you know, you hear IRAs, 401Ks. Another great example of where you start your first job, they start throwing all these things out at you, you know that there’s tax benefits, you know that you should be putting money into these things, but how to actually optimize that. And not only that, but how to actually optimize it for whatever your broader financial strategy is. Because I’ll have folks come to me and say, Hey, should I max out my 401K? Well, first off, do you mean traditional 401k? Or do you mean Roth 401k? Traditional, you’ll have the tax savings now, Roth you get in the future. And you know, that begins to go back to well, though, the question that I’ll get is, Well, which one should I do? And the answer is, you know, what is your broader financial plan? Where do you think you’re going to be? I mean, I’ll tell you now, as the tax guy, traditional 401k is going to give you the tax savings now, you look good, I guess, when we do our returns, but is that really what’s going to be the best for you and your financial situation, given where you expect to be in the future. So knowing that breakdown, I mean, even just I talk about IRAs and 401K’s people use those interchangeably. They’re very, very different. They’re very, very similar. They have, you know, similar components, where you have traditional and Roth to choose from, you can have pre tax components and non pre tax components. But they’re very different in the sense that there’s different limits that apply to them. There’s different phase outs, whether you’re in, you know, make more income and everything. So just understanding even Hey, what, what options do you have? Let’s start with that. And then from there, what are your financial goals? And how can we make the options available to you best suit those financial goals? So there’s just a lot being left on the table there. And I think it all comes back to you know, not planning ahead of time. 

Tim Ulbrich  17:26

And Sean, your your example of you know, when somebody comes to you and says, Hey, should I do Roth? Should I do traditional? And you say, it depends without saying it depends, like Tim Baker says it depends. But that’s really what you’re getting to is it does depends, because we can’t make that decision in a silo. And this is why we believe so much in the value of having a CFP and a CPA on your team that can communicate and talk with one another and really look at these decisions, you know, as you’re making a decision on what investment contribution or if you’re approaching retirement, and you’re thinking about the withdrawal phase that has tax implications, has planning implications, you put those two together, and we can start to look at the whole picture and make that decision that’s optimal. Number five, I’m curious about this one, Sean. So you’re referring to number five as quote, wasting itemized deductions? I’m curious, because it feels like with the rise in the amount of the standard deduction, that itemized deductions maybe aren’t as prevalent or common. So what are you referring to here?

Sean Richards  18:27

Well, that actually is what you just said, is actually one of the things that I’m kind of getting at there. And that’s kind of not factoring in the fact that the standard deduction is getting higher every year, and it kind of continues to go that way. And so, you know, traditionally, we’ve all kind of had this idea of once you buy a house, you’re gonna itemize deductions, and you have all these sort of miscellaneous deductions that come into play. But a few years ago with the the tax law changes, and the Tax Cut and Jobs Act, a lot of that stuff went away, and a lot of the deductions were either limited or or outright removed in favor of that standard reduction going up. And when I say wasting, you know, there’s a couple of different things here, but particularly, what you just said is, if you have a lot of itemized deductions, but they don’t hit that standard deduction amount, and you end up still taking the standard deduction, which is what we would typically do, you know, barring any other kinds of reasons why we couldn’t, a lot of folks feel like they’ve lost their itemized deductions. They’re like, wait a minute, wait a minute. So you’re telling me I, I put $1,000 towards charity last year, I paid this much toward my mortgage, and I paid this much in taxes, and I’m not, I don’t get credit for that?

Tim Ulbrich  19:35

That’s what the standard deduction is! 

Sean Richards  19:36

Yeah. And it’s hard to say, you know, you don’t get credit for it. But the standard deduction is more, so we’re going to take that and, you know, that’s, that’s what’s gonna give you the best savings. Now, there are ways to maximize that if you do kind of look at it ahead of time. You might have the ability to do something that we call bunching where you say, hey, let’s try to pull itemized deductions into one year and itemize then and then have less than another year and take advantage of that higher standard deduction. Or you know, you have PSLF is a huge thing, right, of course, with pharmacists. And typically when we have folks that are doing PSLF, we want to look at filing status and potentially filing separately. And when you file separately, you that brings in new itemized deduction, when you itemize, your spouse can’t take the standard deduction, vice versa. So you have situations there where you have one spouse that’s paying a bunch towards mortgage interest. But at the end of the day, you both take the standard deduction, there’s just a lot of things that can kind of come into play there. And that’s one of the ones that you really don’t have a lot of flexibility with after the fact. I mean, that’s the case with a lot of tax stuff. But this in particular is one of those things that you really want to think about it ahead of time, like where what filing status, are we going to be possibly filing as, what’s the standard deduction, what do we have for itemized deductions and try to maximize it as best you can? Because there’s nothing worse than telling somebody, yeah, that money that you donated, I mean, it’s great for you morally, but it’s not gonna help your taxes this year.

Tim Ulbrich  21:04

So Sean, let’s talk about bunching a little bit more, I think this is something we’re seeing more common among our clients and questions, and maybe just an awareness and an education about who this might be a good fit for. So if I’m following this correctly, if we if we look to 2024, the standard deduction for married filing jointly is going up to $29,200. So if someone’s listening, and they were to itemize, which again, it wouldn’t make sense if it’s below the $29,200. But if they weren’t itemizing, it’s $25k, $26k, $20k. Somewhere in that range, or ish, like, that’s where you start to look at and say, Oh, are there opportunities that, hey, maybe some of the giving we have planned for next year, or other things that we could push into this year? Maybe we itemize one year? And then the next year we go standard? Am I following that? right? 

Sean Richards  21:50

Exactly. And it’s one of those things, this is an example where the visual, I think, makes the most sense, because we can put a couple examples next to each other and say, like, Hey, this is what it’ll look like if we take the standard deduction every year. But this is what it looks like if we sort of shift these things around. And for some folks, you might not even have the ability to make those changes, right. Like if you’re, if the primary driver of your itemized deductions is your mortgage interest, and you’re not really doing any charitable contributions, there’s only so much you can really do about your mortgage, that I mean, maybe you can prepay interest or something, but that’s not going to change a lot. You have other folks who may have, you know, mortgage or lower mortgage interest, taxes get capped at 10k, too, as of right now, with the with the law changes I was talking about earlier. But you also so you might have some people who have a huge number of charitable contributions, and they can pull that lever and like you were kind of saying, hey, maybe we pull them into this year, or defer to next year. But the big thing I’ll say there is that a lot of people will then kind of come back to me and say, well, that doesn’t fit my giving strategy. I, I do a certain percentage every month, and it goes that way. And I don’t want to change that because that would change, you know, the way that the church is able to use my money or something like that. And that’s perfectly fine. I just want to have those discussions ahead of time, and be all on the same page and say, Hey, we’re making this decision for a reason, not looking back and saying, ah wish we had done this, you know, last year, maybe next year.

Tim Ulbrich  23:20

As we talked about all the time on the financial planning side of the business, right? financial decisions, or combination of the math, and how do we emotionally feel about those decisions, right? Same thing here, we might look at the giving strategy and say, You know what, we’re willing to give up a little bit of potential tax savings, because we want to give in this matter, so be it. Let’s just look at the options and what we have available. Number six is not saving for taxes when earning additional income. I’m laughing because I know this comes up all the time where you know, side hustlers, new business owners, people that are launching something, they’ve got some revenue, and then there’s a oh, crap moment, right?

Sean Richards  23:52

Yeah. And this one is tough because I mean, no one has a crystal ball. Right? So as I was just saying on one of the ones before, my question to you, when we’re doing projections is where you expect the business to land in profit and loss this year, and you have a pretty good idea, or at least you hope you do. But that can always change for anybody, not none of us can see the future. But the point here is, at least giving it some thought and trying to come up with a number and planning accordingly. And the biggest thing I would say here is not only just thinking about it, kind of in a one track mind, really thinking about the many different implications that side income can have. If you have self employment income, you’re going to have regular ordinary income tax on that just like you would if you’re working a W2 job, but you’re also going to have self employment tax on that, which is basically the government’s way of saying hey, we want the FICA that you’d be paying, we’re withholding as an employee and the FICA that you usually don’t see your employer pay for you in a W2 job. And that’s, you know, 17%. So all of a sudden you have that plus your ordinary income tax rate and you’re looking at 30 something percent at the end of the year. And now again, there’s different deductions that come into play, there’s a lot more that go into the broader calculation, but at least you know, getting ahead of that and saying, Okay, I’m expecting my business to earn 50k this year of of net profit. I’m going to have to pay income tax on that, self employment tax on that, state tax on that, at least saying, Alright, this is what I expect my liability to be at the worst. And putting aside a percentage of that or something. Again, and I probably sound like a broken record, it all comes back to planning and projecting and thinking ahead, because nobody wants to get to the end of the year and have their accountant say, Awesome work. First time, you know, doing the side gig, you made a bunch of money, now you owe a bunch of taxes. So again, just getting ahead of that putting the money aside, doing the math on it, thinking about those other taxes. If it’s rental income, you don’t have self employment tax, but you have passive loss limitations. So if you have a rental property, and you have a lot of losses there, you’re not necessarily going to be able to take those against your active income because of different limitations. So probably now starting to put people to sleep. But it all goes back to really trying to think about where those other side income sources are, and what is possibly going to hit your return at the end of the year.

Tim Ulbrich  26:13

Yeah, and, you know, to be fair, we also have to be realistic, right? So for new business owners, new side hustlers, you know, you can only do so much planning. Now, once you’ve got a couple years under your belt, you kind of get an idea where things are going, you know, just like we do in the business, you do some projections, even then we get it wrong, but we’re within the realm, right, because we’ve done it for seven or eight years, when someone’s launching a brand new business, your side hustle, you know, they may think they’re going to earn $50,000. And they end up earning two. Or they think they’re going to earn two and earn 50. Because they just don’t know, right at that point. So I think in those cases, you know, you don’t have a great bookkeeping system, that’s going to take time for that to build up, of course, but the point being set aside a percentage of the income to be conservative, call it potential tax. And then as you get further along, there’s going to be more detail to be done and what those projections are, but just don’t spend it all and have nothing there for tax.

Sean Richards  27:08

Right. Just put something there. And the other thing that that you mentioned that I almost forgot about is the fact that I’m kind of just broadly saying, Hey, Tim, what’s your profit gonna be in your business at the end of the year? For a lot of folks, you know, just figuring that out is difficult, you might be able to say, hey, I have a client that’s going to pay me $10,000 this year. And so I’m going to $10,000 of income. Well, yeah, that’s true. But we’re also going to have expenses. And the first question I get are, well, what expenses can I deduct? So asking those questions now, and talking about the different things that are deductible, what fits as a legitimate business expense, all those things is much better than at the end of the year, sending me a 1099 and saying, Hey, I made 10 grand. I don’t have any expenses. Let’s try to figure it out. Right. It’s just trying to get ahead of those things and thinking about it now. That’s where you can start making decisions and not being reactive.

Tim Ulbrich  28:03

Number seven, on our list of common tax blunders to avoid, many of these coming from the 2023 filing year that we just wrapped up is not making estimated tax payments. And, you know, the question here being, I think, who does need to be making estimated tax payments and what’s the blunder here? 

Sean Richards  28:22

Yeah, and I probably could have reworded that a little bit. But estimated tax payments, it kind of follows right after the the question above in the sense that most folks here are probably going to be folks that earn additional income. And when I say additional income, I mean income from sources non W2 where you don’t have those withholdings. So typically you think you get your paycheck every two weeks. And the employer, the payroll company is withholding your share of FICA, federal income tax, state income tax and remitting that to the government. Because think about your least financially savvy friend at the end of the year, if they didn’t have that happening, would they be able to pay their taxes? Probably almost certainly not. Because I see a lot of financially responsible folks who are very, very well educated and great with their cash and they still struggle the to put money aside the end of the year, let alone you know, people who are completely struggling. So the government recognizes this. They want your your cash on a regular basis. And for most folks, that’s going to be withholdings. However, if your withholdings aren’t covering off for whatever reason, whether you’re not withholding enough at your W2 jobs, or as I said is more of the common case you have side income, you should be making estimated payments to supplement it. So the rough rule there is if you are going to owe $1,000 at filing time, you should be paying estimated taxes. The first question I would probably get from someone is am I expected to owe that? And then of course the answer is well, let’s do a projection and find out. But basically, yeah, once you do a projection if you’re looking at this, and you can do it multiple ways where you’re starting with your business, but whatever, you gotta you have to keep in mind all the different pieces, right? Like I, a lot of people will say, Hey, I have this business, how much should I put aside for it and just like the example we just talked about, if I told you to put aside 30% to cover off on your income tax and self employment tax or whatever, that’s not necessarily going to work for you because you might have a ton of credits from children or you might have, you might have bought an EV this year and are getting a big credit. So you have to think about all the components and then look at and say, All right, am I going to owe or am I not going to owe. And when you get to that point, if it’s if it looks like you’re going to owe more than $1,000, either adjust withholdings or you should be paying in regularly. So estimated taxes is basically whatever that balance is that you expect to owe. They just want you to pay that in evenly quarterly throughout the year. It’s not perfectly quarterly because the IRS can’t be that easy about things. But it’s basically saying, Hey, we don’t have withholdings, so send us in that piece that you’re missing, that you should be withholding every few months to supplement. The one big thing I will say here is that a lot of folks will assume, hey, and especially with extensions, right? If you and I’ll say this till the day I die, if you file an extension, it gives you six months to file, but not to pay your ta liability. Like a lot of folks will say, as long as I pay my tax liability by tax day, I’m good to go no matter what. I mean, even if I do an extension, as long as I pay that money, then I’m fine. But the piece that I try to hammer home for folks is that even throughout the year kind of thing, the quarterly thing I was mentioning, so if you’re expected to owe 10 grand, and you go at the end of the year and pay that in April, when you file, the IRS is going to be angry and say hey, you should have been paying that in the year here. And they’re going to slap you. Yeah. So again, broken record, all comes down to planning. But to the extent you’re able to identify any kind of gaps in where you expect to owe money at the end of the year and can close them now whether that’s making estimated payments directly to the IRS or adjusting your withholdings, it’s much better to fix it now and get ahead of it. Then the flip side and trying to you know, request a penalty abatement in the back end.

Tim Ulbrich  32:18

Yeah, just to reinforce a an important point you made, Sean, is that if you do file an extension, which to be clear, like is not a bad thing. 

Sean Richards  32:26

Not at all whatsoever. 

Tim Ulbrich  32:28

Yeah, we really believe as we say over and over again and right over rushed. And there’s a value in the extension process. But that is not a pass on paying your tax that is due. So there’s work that has to be done, when you go to file that extension to figure out like, Hey, do we have a tax liability due, so we can make that payment, but we’re giving ourselves an extended time to be able to finish everything up and actually get the return in.

Sean Richards  32:52

And I mean, that might have even been an extreme example, like if you didn’t file an extension, even which again, I think extensions are one of the most underutilized things in the tax code. But if you didn’t do that, and you still owed at the end of the year and paid all that money in on December 31, the IRS is still going to be mad because they’re still going to say you should have been paying it in January, February, March, April. So the name of the game here is just making sure that you’re not ever getting too far away from where you expect your tax liability to be and what you’ve paid in any given point in the year. 

Tim Ulbrich  33:26

Which is why for the small business owner listening, this is why it is so important to have a system that is operationalized in your business where you have books and records that are being kept, whether it’s quarterly, whether that’s monthly, whatever your business needs, and you’re able to then use that information to feed into what you need to be making in terms of those estimated payments. So I’ll preach that. And I’ll preach it saying, Hey, we have it’s taken us a while to kind of figure this out. And to get into this rhythm and it’s not going to be perfect. It’s going to be you know, messy as you’re developing it. But so important over time as you get some stability in the business to have that type of system and predictability. Number eight on the list is overlooking investment, activity. Activity being the key word here, right?

Sean Richards  34:11

Yeah, so this is a lot I could you know, another example of one where I could spend a whole session or whole podcast going through this. But really, the big thing here is just thinking about the different types of investment activity that you may have. And right like you just said activity is kind of the name of the game here. So just because you have investments doesn’t necessarily mean that you’re going to have a tax liability or any kind of tax implications associated with it. But thinking about what types of activity you had going on in a particular year and making sure you’re getting ahead of that is going to be crucial, especially now with all these different types of types of stock performance incentives that folks have so restricted stock units, RSUs; employee purchase, employee stock purchase programs, ESPP; ISOs, incentive of stock options. All these different things, they’re all great. It’s just one of those things where you want to make sure you’re at least understanding the tax implications beforehand, because for some of those, you know, you won’t actually have a any kind of thing to do necessarily, or liabilities to take care of until you actually go and sell some of those shares. Typically, that’s the case. But again, just understanding how that works, knowing that you might need to get additional information to your accountant, hopefully us, to be able to adjust basis for taxes that you’ve already paid. I’ve seen a lot of people who paid double on some of these things, because they already paid when they were when some of the stocks vested. And then kind of paid taxes on that a second time when they sold those, those stocks. So lots to think about there. I mean, there was higher interest rates last year across the board. So a lot of folks had higher investment income, like interest income and stuff, which is great. But again, just something you want to plan for, there’s usually no withholdings there, you start making good money, the net investment income tax comes in. So that’s just a little additional tax on investment income. But it’s one of those things where the more I talk about it, the more people are probably spinning their heads. But a lot of folks have a lot of different types of investments, whether you think you do or you don’t, you know, even just having a few bank accounts and a couple shares of stocks here and there is enough that if you’re making moves on those, those can really affect your taxes. So just making sure you’re taking advantage of anything. And again, really think about the activity that you had in a year. What did I do? Did I sell anything? Did I buy anything? Did I convert anything? That kind of stuff.

Tim Ulbrich  36:36

We don’t typically think about, you know, interest in high yield savings accounts as being significant enough, right, that we have to plan for it. As you mentioned, we don’t have withholdings, right, that come out of your high yield savings account interest. However, when we think about this past year, especially people may have higher amounts in those accounts for people listening to that $50, $100, $150,000 across high yield savings accounts, earning four and a quarter, four and a half percent. That adds up pretty quickly.

Sean Richards  37:01

That’s literally what it is like, and, you know, we would do projections and get really, really close for folks, but be off by you know, a few $1,000 at the end of the year and looking at and saying, Hey, what what was often our, or what did we miss in our in our assumptions when we were looking at this? And a lot of the times we’re under estimating just simple interest income because people had cash sitting in some of the high yield savings accounts. But if you’re in high tax brackets, and you have that net investment income tax coming in, all the sudden a few $1,000 of income is a few $1,000 of taxes. So yeah, not a bad thing. But just something you want plan for.

Tim Ulbrich  37:39

Number nine on our list of 10 Common tax blunders to avoid from the 2023 filings is misunderstanding some of the tax law changes. What what are you referring to here?

Sean Richards  37:49

Yeah, so this one is going to be a little kind of twofold. So typically, when I’ve been saying tax law changes, the biggest things in the past few years have been energy credits. So the Inflation Reduction Act that Biden signed a couple of years ago, really expanded a lot of EV, green, other types of energy efficient credits. And those have been awesome for many folks, lots of good tax savings there. Again, it expanded a lot of things that apply, and it got rid of a lot of the limits that used to apply for some of these things. So there’s a lot of savings to be had. And tax credits. This is that’s what all of these kind of EV and green credits are, they’re their credits, those are dollar for dollar savings against tax liability, as opposed to a deduction, which just reduces your taxable income and really only reduces your tax by the percentage of your of your rate. These are credits. So it’s bang for your buck, the big deal. The only thing I’ll say on the energy credit side is as much as there’s a lot of room to save, there’s a lot of misunderstandings of, hey, I bought a plug in or a hybrid last year. So where’s my tax credit? Well, some plug in hybrids count, but not all hybrids count. Or, you know, I did this work on my house. And I was expecting to only get this much of a credit, but oh, actually, it was solar. So it’s a 30% credit with no limit, you know, you can have the opposite side of that, and planning accordingly with those things. Again, not that it’s necessarily the worst thing in the world to have a big refund. But if you can think about it ahead of time and say, Hey, I’m buying an Eevee this year, and you know that you’re gonna get 7500 bucks back as a credit. Yep, there’s a pretty good chance you can adjust your withholdings this year and get some of that cash back now and not have to worry about it at the end of the year. The flip side, and this might begin to scare folks, but it is thinking about other kinds of broader tax law changes. And when I think about this, I think of the Tax Cuts and Jobs Act sunsetting. Which it’s supposed to be doing in 2026 or at the end of 2025. So a lot of the was things I was talking about the itemized deduction changes, but one that people might not really even have remembered is the fact that tax brackets all went down when that happened. And in a couple of years, those are supposed to go back to the rates that they were. Will that happen? Who knows, we have no idea who will the President will be what, Congress’s makeup will be. But having an eye on that, and knowing at least now, hey, in two years, we’re expecting these rates are going to go up. So being able to plan accordingly and knowing that, hey, in two years, itemized deductions are going to change quite a bit, or the standard deduction is going to change. Getting ahead of those things. I know, it sounds crazy to be thinking a couple years out in the future. But when we’re talking about projections and thinking about pulling levers, those things actually do start to come into play. So I don’t want to scare folks. But it’s one of those things where, you know, all of a sudden, there’s sweeping tax changes, and it’s kind of swept under the rug because of all the other political turmoil and everything going on. So something Yeah, I just don’t want lost on folks. 

Tim Ulbrich  41:02

It’s interesting. You bring up Sean the tax cut and jobs, I remember the passage of that, and 2016, you know, I filed graduated 2008. So I graduated, filed several years before that was in place, but you don’t think about that, right? As well, when when it’s going in the favorable direction of what that means to cash flow. But it’d be interesting, and we’ll see politically what would happen. You know, you can imagine some of the turmoil if that were to go in the other direction and impact on what could be.

Sean Richards  41:29

Exactly and you know, for most folks, your withholdings likely will adjust accordingly. So you’re probably not going to end up with like a huge tax bill, so to speak. But there’s a pretty good chance that in a couple years, you’re going to be paying in more of every paycheck towards the government. Or even worse, if you have a side gig, you might be having a liability building up that’s bigger than it has been in previous years. And if you don’t have a system for saving, you’ll be in trouble.

Tim Ulbrich  41:30

All right on the homestretch number ten on our list, what would it be if we didn’t talk about some of the real annoying stuff under estimating state and local tax complexities. This is your favorite topic, Sean? 

Sean Richards  42:08

Yeah, it is, because we’re probably what I will maybe not one of the few firms. But you know, there’s not a ton of firms probably that are virtual like we are and work with clients across the entire country, a lot of tax and accounting firms tend to be kind of specific to a regional area. So I’m probably you know, in a smaller minority, in a minority of CPAs that deal with this, but it definitely comes up quite a bit with our client base. And I think that’s a notion of, you know, just people doing a lot of traveling and moving. But especially with a lot of the careers now and being able to work remote. You know, you have people working from home part time, full time you have people doing traveling nursing or even pharmacy related gigs like that. And anytime you’re doing work and you’re crossing state borders, there’s most likely tax implications associated with that. And does that mean that you’re going to necessarily have to pay tax in another state, if you were working there briefly, maybe, probably not. But just understanding the different rules around those things and being able to maximize them too. If you’re living in a state where you’re you’re working in a state and living in a state and one has a higher income tax rate than the other, but you have the ability to kind of choose your residency based on the tax rules, you know, that’s something that you’d want to do ahead of time. So just thinking about those different types of things, making sure you’re withholding enough. Local taxes. There’s other states besides Ohio, but Ohio being the biggest one there. I don’t understand how, folks, you know, just working a job down the street can keep up with all those things, but local taxes, understanding where you live, what the school district taxes are versus the residence town tax versus the city town, you know, all these different taxes, it can be overwhelming, just under estimating how complex some of that stuff can be not having a hand on the wheel. I just talked about all those nine things. And those can all be applied to the federal income tax return. We’ll apply them all to the state and local returns as well. So I’m sure folks living in Florida, Texas, Washington, New Hampshire all shut off. But people in Ohio probably crank the volume on that last one there. So definitely not something to take too lightly. 

Tim Ulbrich  44:22

This is timely, and I was knocking on RITA earlier, but we are dealing with a RITA issue this week. And you know, just some lingering things and it feels like every once in a while we’ll get random notices from them for those that have a business that you sell product, you got sales tax. I mean, there’s just so many layers of things to keep up with. 

Sean Richards  44:39

Exactly and it goes back to kind of understanding the tax calculation and how all these things go together. Yeah, and sometimes visually really is the best way to do that and seeing like if I send an email to someone and say, Hey, in Ohio, you have this federal tax you have this schedule C, you have self employment tax. You also have Ohio tax, that you RITA and then you have a tax where you work, but also where you live. And then you also have a school district tax. People are like, What are you talking about? But when you actually look at where it falls into returns, it makes a lot more sense. So doing that only once a year to me just isn’t sufficient given how complex I see these situations becoming.

Tim Ulbrich  45:19

As Sean mentioned, at YFP Tax, we work with pharmacists, households, and others all across the country. So we have a virtual paperless firm that we’re very proud of. We also obviously supplement that with our financial planning services, which most of our listeners are well familiar with that. If you want to learn more about our comprehensive year round tax planning, what’s involved with that, I think we’ve laid out the case of why that is a good fit and a service that many people should be thinking about. But if you want to determine if it’s a good fit for your situation, you get a YFPtax.com You can learn more and book a free discovery call with my partner, Tim Baker to determine whether or not that’s a service is the right fit for you, Sean, great stuff as always, we’ll be talking more tax throughout the year. Thanks for taking the time to come on.

Sean Richards  46:04

Yeah, thank you. Have a good one.

Tim Ulbrich  46:06

You too.

Tim Ulbrich  46:08

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

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YFP 368: How Much is Enough for Kids College?

Posted on by YFP Media

Tim Baker helps parents navigate saving for their child’s college education, from projecting costs and balancing goals to 529 plans.  

This episode is brought to you by First Horizon.

Episode Summary

Most parents desire to contribute toward their child’s college tuition; however, knowing how much to save and plan for can be a bit of a moving target. How much is enough to save for college?

Tim Baker, YFP Co-Founder and Director of Financial Planning, lays out the financial roadmap to help parents navigate the complexities of college savings. Tim emphasizes the importance of prioritizing college savings, projecting future costs, and balancing these savings with other financial goals. He also breaks down the benefits of starting early and making consistent contributions to make the goal more attainable.

Learn more about education savings options, including 529 plans and Coverdale education savings accounts. Tim also shares the ⅓ rule for funding college education that listeners may find make the reality of saving for their child’s future education more attainable. 

This episode is brought to you by First Horizon.

About Today’s Guest

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

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

Key Points from the Episode

  • Saving for kids’ college, prioritizing investments, and mortgage options for pharmacists. [0:00]
  • Saving for kids’ college, varying opinions on approach. [2:13]
  • Prioritizing investing for kids college amidst other financial goals. [6:05]
  • Financial planning for education costs, including 529 plans and other options. [11:13]
  • Education savings options for kids, including 529 plans and UTMA/Coverdale accounts. [15:41]
  • 529 college savings plans with potential tax benefits and flexibility. [21:08]
  • Saving for college, including 1/3 rule and assumptions. [25:23]
  • Saving for college using 1/3 rule and financial planning tools. [30:02]
  • College savings for a 9-year-old girl, with current balance and projected needs. [34:39]
  • Saving for children’s education expenses. [38:39]
  • Saving for college and financial planning with a certified financial planner. [42:56]

Episode Highlights

“So your retirement should come before your children’s college tuition. There’s no financial aid in retirement, and there’s still a good amount of that, you know, for your kid’s schooling.” – Tim Baker [9:54]

“The further we go in the future, the more uncertainty. But we can make some educated guesses and conjectures. Again, it goes back to the whole idea of, it’s more about planning than the plan, because life happens, things change.” – Tim Baker [13:36]

“Saving for your kid’s college is just like your retirement. It’s like when I say to clients, hey, you need $2 million to retire, you are looking at me like I have 2 million heads. It’s a big number, way in the future. The same thing holds true with education. It just feels more than what it actually is.” – Tim Baker [43:01]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, Tim Baker and I revisit saving for kids college, a topic that is top of mind for both of us in our own financial plans. Before we answer the question how much is enough when it comes to saving for kids college, we discussed the priority for investing, including where kids college savings fits among other goals, and the differences between common vehicles that are used for saving for kids college. Let’s hear a message from today’s sponsor, First Horizon, and then we’ll jump in our discussion of how much is enough when it comes to saving for kids college. 

Tim Ulbrich  00:40

Does saving 20% for a down payment on a home feels like an uphill battle?  It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. For several years now we’ve been partnering with First Horizon, who offers a professional home loan option AKA a doctor or pharmacist loan that requires a 3% downpayment for a single family home or a townhome. For first time homebuyers, has no PMI and offers a 30 year fixed rate mortgage on home loans up to $766,550 in most areas. The pharmacist home loan is available in all states except Alaska and Hawaii, and can be used to purchase condos as well. However, rates may be higher and a condo review has to be completed. While I’ve personally worked with First Horizon before and had a great experience with Tony and his team,  don’t just take it from me. Here’s what Emily from Prattville, Alabama had to say about her experience with First Horizon: “Clear communication and excellent guidance from Gail and Cindy throughout the entire process. I greatly appreciated the fact that everything was digital, because I’m allergic to paper, the ability to upload inside everything digitally made the process very efficient, which I prefer. This was by far the best mortgage process I have experienced. This is my seventh when counting refinances.” So to check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacists.com/ home-loan. 

Tim Ulbrich  02:13

Tim, it’s good to have you back on the show.

Tim Baker  02:15

Good to be back, Tim, how’s it going?

Tim Ulbrich  02:16

It is going well, this is gonna be a fun one. We’re discussing a topic that is top of mind for both of us in our own financial plans. I’ve got four kids 12 and under, you’ve got three kids nine and under. And we’re in that prime window where saving for kids college is getting real, right? We look at our older children and say, Hey, that’s not too far off. And it really begs the question, are we on track? And I don’t know about you. But for me, it feels like early on when the boys were much younger, younger it was this concept of hey, let’s start putting money away. And we’ll worry about that later. Worried about that later is right now.

Tim Baker  02:55

Yeah, life comes at you fast, right, Tim? So, you know, a lot of a lot of people, you know, they might say, hey, I’ll get to that, or, you know, I talk to prospective clients all the time and it’s like, yeah, I really want to, I really want to put money away for my kids college. And I’ve been thinking about it for a while. And, you know, I’m like, Well, how old is your son or daughter? And it’s like, oh, they’re eight? You know, so how long did you think about this? For eight years. So it is one of those things that sometimes that’s true, that holds true for retirement too, Tim so, you know, it’s it’s one of those things where the sooner you bet, you know, the sooner you do it, the better. You know, it makes, it makes the amount that you are, you know, your what you’re trying to do easier to kind of achieve. So, yeah, we’re right in the thick of it and and hoping that, you know, the cost of college, you know, doesn’t continue to kind of inflate at what it has in the past. But you know, no control over that, obviously.

Tim Ulbrich  03:48

Yeah, and we’re going to talk about that specifically because when we get to the part of trying to determine how much is enough, we got to make some assumptions on what is going to be the cost of college into the future. Now for those that are listening, that have kids that are butting up against college, we know what those numbers are going to be or likely be. But for those that have kids that are much, much younger, trying to project out 15, 16, 17 years, what college costs may look like, can certainly be more more challenging. Tim, I want to get your perspective on what seems to be a varying philosophy around saving for kids college. I recently published a poll on LinkedIn asking individuals how are you approaching saving for kids college and there was over 260 people that responded and here Here are the results. 30% said that they plan to fully fund their kids college. 61% said they plan to partially fund and just shy of 10% said you know what? They’re on their own. Kids got to figure it out on their own. So when you hear that and interactions you’ve had with clients and anything surprised you there?

Tim Baker  04:54

Um, I am surprised, I am a little surprised. I feel like, I feel like the 60% of like the partial would have been a lot more. Like that would have been closer to like 80. And they may be like 10 and 10. On, you know, the they’re on their own, or I’m going to do 100%. So that that’s probably the only thing. Because yeah, I talk to clients all the time. And it’s, it’s, it’s, it’s those three things. It’s like, Hey, I went through this. So my kid has to go through it, I went through this, I never want my kid to go through it. And then that in between of like, I want to provide something but I just don’t know what that is. So little surprised by the percentages, honestly, how big of a sample size was that?

Tim Ulbrich  05:37

Over 260 people. So pretty large group that responded. And there was a couple of comments that I think really, you know, drive home some of the differing opinions, and everyone obviously is there on their own journey. One person said, quote, they want to partially fund they referring to the kids, they need to have skin in the game. I’ve also heard of parents giving their kids cash directly for any scholarships they get. That’s a neat way of incentivizing working hard for them. Someone else said, Hey, would love to fully fund, but also need to look at my future and retirement. We’ll talk about that here in a little bit as it relates to the priority of investing, and how we want to think about kids college among other competing financial goals. So we’re going to break today’s discussion into three parts. Part one is going to be just that we’ll talk about the priority of investing, where might kids college fit into the broader part of the financial plan? Certainly, this is not investing advice, but some considerations there. Part two, we’ll talk about the common vehicles. And we’ll spend the most time on the 529 plan. And then part three will really spend time answering the question how much is enough. And I’m excited about that part because this is a piece that we haven’t drilled down into the details as much as the other two and for reference will link to these in the show notes. But we have talked about kids college previously, on the podcast, episode 195, we talked about how to save for your child’s education, and Episode 211, we talked about the ins and outs of the 529 college savings plan. So again, we’ll link to those make sure to check those out for more information. Tim, let’s start with that first part, which is the priority of investing. And I’m gonna go back to the comment that you made that, you know, for some people, especially when they came out with six figures or more of debt, you know, I’m thinking about my own journey of a couple $100,000 of debt, there can be a reaction of, hey, I never want my child to have to go through that either at all or something along those lines. And therefore, I’m going to start shoveling money into kids college savings accounts as early as possible. And not necessarily think about, you know, where that might lie in context with my own retirement savings or emergency funds or other parts of the financial goal. So it begs this question of where does kids college savings fit as a priority as we think about other investment vehicles or options? So what are your thoughts on that?

Tim Baker  07:56

Yeah, so, you know, I’ve had these conversations where people are like, I really want to get started and, you know, save for Jonny’s education or whatever. But you know, we’re looking at $25,000 in credit card debt, right. So not something that should be a high priority. We have to get through the consumer debt. So obviously, like, if we talk about the baby steps, we want to make sure that consumer debts in check, Tim, we want to make sure we have a proper emergency fund. Still a lot of people don’t, you know, come to the table with that. And that’s something that we have to work on. And what is a proper emergency fund? Where should we put it? It’s not an investment. Those that are based on I think, are the the big things, I’d be looking at it. You know, I think beyond that, you know, I think what most people would agree is shift into retirement and looking at what that looks like, you know, do we have a match? At least get the match? And then I think based on that, and again, I would be doing a retirement projection and a nest egg projection, I’d want to make sure that like some of the wealth protection stuff is sure enough, like, do you have the proper life insurance disability, that we have the state planning documents in place, all that kind of stuff, to then get back into the conversation of okay, what’s the next step after this? So a lot of people again, and the analogy that I like to use is like when you’re on the plane, and, you know, they say, Hey, if we lose cabin pressure and the mask come from, you know, that’s a really crappy situation, that’s not going to be fun. But put your mask on first, right? Put your mask on first before you you, you know, handle your your kids. So that’s going to be the same when we’re talking about retirement and an education plan. So your retirement should be should come before your children’s college tuition. There’s no financial aid in retirement, and there’s still a good amount of that, you know, for your kid’s schooling. We might get to a point Tim, where we’re not going to see the money flow as much for you know, for college loans and financial aid and things like that could be a real thing. reckoning that’s happening. However, I think there will always be alternatives, whether that That’s, you know, community college or trade schools are things that you can do that or at least get started. So that, to me is the big thing. I think when you get into the nuance of, of retirement, you know, the question I would I would ask to that person that clients like, are we on track for retirement? And if we are, obviously, like, let the money flow from an education perspective. If we’re not, that’s where I would want to, you know, and I think what a lot of people to Tim, they, what they do is, it’s not even really a question about what bucket they should fill. Part of it, part of what drives us is the tax benefits related something like a 529. So in Ohio, you can get up to $4,000 per student, regardless of filing status that is per year off of your Ohio State income tax. So a lot of people see that be like, boom, that’s what I’m going to do, or I want to get a portion of that without kind of doing the ABCs of where that should go. So I think outside of the match, I would say get the match. But then there’s probably a little bit more nuance in terms of like, okay, how do we then go from here, in terms of, are we putting more into the retirement? Are we are we putting more, are we starting to kind of, you know, flow monies into education planning.

Tim Ulbrich  11:13

Yeah. And what you’re sharing right there to me is such a good example of the benefit, one of the benefits of comprehensive financial planning. Because at the end of the day, we only have so much income to work with, hopefully, we can increase that income. We can only cut our expenses so much, and we’ve got a certain amount of cash flow, that we’re going to be able to assign to different financial goals, right. That could be building up an emergency fund that could be paying down debt, that could be a real estate purchase, that could be put money in a 529, that could be retirement savings for the future. And so we’re left with this decision of, hey, I’ve got all these balls potentially, to juggle in the air. How am I going to do that? And then what order? Second to it depends, probably the most common thing that we say on this podcast is you can’t make decisions in a silo when it comes to the financial plan. We’ve got to be able to take a step back and look at all the different factors so that we can see, okay, well, if I pull this lever, then what’s the impact of this part of the plan? Right? Because by pulling that driver putting money in a 529, that means we’re not probably doing something else. And are we okay with that or not? Okay with that. And if we project that out, what does that mean, for us in terms of achieving our financial goals? The other thing I would mention, and I know this episode is not focused on what we think is the future of higher ed. But because I spent over a decade in that space, I feel the need to comment, like, when you talk about something like the contraction, potentially, of access to financial aid and student loans, man, you’ve got to believe that if that were to happen in the future, there would be a significant shift in the business model of higher education at large, right? It’s already on the brink, I would say of some level of disruption, if that’s not already happening. And if there’s less resource going into the system, what does that mean, in terms of what the actual infrastructure looks like? The degree offerings, the supply and demand. So I think that is a relevant comment because one of the lingering questions behind all of this, especially for those very, very young kids is, what will this model look like in 15 to 20 years? What will the cost be? And that we need to know, or at least project out to some level to be able to do some assumptions? 

Tim Baker  13:20

And sometimes with uncertainty, Tim, like, we can do one of two things, you know, it’s like, Well, I haven’t seen people do this with retirement, it’s like, I don’t really even know. So they maybe they over save? Or perhaps they just kind of throw their hands up there. And like, okay, whatever I have, I have. So, you know, it is a little bit you know, the further we go in the future, the more uncertainty we have, again, we can make, make some educated guesses and, and conjecture, but again, it goes back to the whole idea of, you know, you want to be you want to, it’s more about planning than the plan, because life happens, things change. And the reason I’m kind of, you know, distracted, like, I’m looking at my numbers, Tim, and we’ll go through this later, but like the numbers for like, Olivia is four year like, they went up from the last time I talked to talked about it. So I’m like, Oh, I gotta update these numbers, because they’re a little bit out of date. And what that means is, like, when I looked at these last month, the inflation numbers associated with education were higher than what they were a month ago. So the tool that I’m using was updated. So I’ve kind of updated my calculator to kind of back into that. So like, it’s planning now again, like for Olivia, who’s going to turn 10 This year, I still have eight years to kind of, you know, plan and figure this out, which makes it easier. The closer we get, obviously, you know, when she’s 16 We’ll have a little bit more of a picture of what education looks like but a whole lot less time to kind of change and plan you know, plan for that. So yeah.

Tim Ulbrich  14:48

So let’s shift gears and talk about the common vehicles. Again, we’ve covered this a little bit on previous episodes that will link to in the show notes, but there are various options out there right when it comes for saving for kids college everything from 529 plans which we’ll spend the majority of our time on, to the Coverdell Education savings accounts, UTMAs, Roth IRAs, heck, you could just open a brokerage account and save that way if people wanted to do that, but there’s clearly some pros and cons to these accounts and perhaps why the 529 has risen to the top for many, as you know, I guess if we get picked the most popular among this group, so tell us at a high level about those common vehicles that are out there and then we get into the 529s more specifically. Yeah,

Tim Baker  15:30

So the Coverdales, and the like the UTMAs and UGMAS are very similar. These are just custodial accounts that are like brokerage brokerage accounts, but they have the minor’s name on there. So the reason the Coverdale is aren’t as popular anymore, it’s because the amount of money that you could put in per year was like two or $3,000. I’ve actually I’ve never I might have seen one Coverdale account in my career in financial planning, so I don’t see them very, very often, the UGMAS and UTMAS, I see more often and actually have one for all three of my kids. And then all of my nieces and nephews is kind of my, like my nephew, Timmy just turned 10 yesterday. So I put money into as you know, he’s, he’s he lives out in Oregon, so I don’t see him as much I don’t really know what he’s into from a from a gift perspective. So I just put some cash into that. And the big thing for that, it’s like, I’m managing the account. I’m the, I’m the guardian on the account, once they age, once they reach the age of majority. So in certain states, that might be 18, other states that might be 19, or 21, that money is theirs, right? So so that for me is going to be a gift when all of my nieces and nephews and my kids like turn that they can use now they could use that for school. But they could also use that for something else, right? There’s not the strings attached like a 529 has where you have to use it for qualified education expenses. So with my daughter I’ve talked about it could be for school, it could be she’s talking about a gap year, I’m like, How do you even know what a gap year is you’re nine. It could be it could be to start a business, whatever that is so and that, and that, for me is a little bit more of a in your face vehicle for me to talk more about money on a long term basis, like right now we talk we have allowance and we have a save, spend and gift, this is kind of in the next thing. So that is a powerful tool, but not necessarily not necessarily just you know, for the purpose of education. Now, the big thing with that is like when they go to spend that money, capital gains tax is going to be a big part of that. So you have to you know, and that’s the same thing with, you know, like a brokerage account, if you’re just managing that for your kids, but their kid’s name isn’t on there. The other one that a lot of people will use is the Roth IRA, because you can take out the basis, you know, tax free penalty free. So you could use a Roth IRA, again, you could use your own Roth IRA, if your kid has like income, you could set up their own Roth IRA. So there’s a little bit of nuance there in terms of how you how you use that. I know a lot of people will use a Roth IRA, just because they don’t like the restrictions of the 529 just being used for qualified education expenses. So that’s something that people could use, I don’t personally use that, like I feel very comfortable with a 529, I feel very comfortable that the it’ll continue to continue to expand in terms of what you can use it for. So that really leaves a 529 in terms of vehicle. So the 529, Tim, is it’s a think of it as like a retirement account, except for education. So you can put after tax dollars in there, it grows tax free, you might get a state income tax deduction, like I mentioned, you can get $4,000 per beneficiary per year per person per beneficiary, in the state of Ohio. Every state’s going to be different, some states don’t have anything, some states have very generous, all all 529s are not created equal. So like you’re just some of them are gonna be really great. We were actually looking at the expenses the other day, and we were surprised that Ohio is a little bit higher than we thought. So you have to be cognizant of that. So you put the money in there, it grows tax free. And then if it’s used for qualified education expenses, which is typically tuition, fees, books, supplies, equipment, room and board, computer or like peripheral equipment or software, internet, that can all be you know, kind of, you know, part of that distribution. So, just like in a in a retirement account, you are kind of saving for, you know, 18 years or 10 years depending when you start so you have that accumulation period, and then that the accumulation period typically in retirement might be 10, 20, 30 years as you know until you until you die if you’re it’s typically four six, maybe eight years depending on what your goal is, you know from from an undergrad to, you know, masters, etc. So, that’s the big thing you put the money in, you invest it, a lot of them have target date funds, a lot of them you can you know you can pay the S&P 500. They grow the that tax free. And again, just to kind of reiterate that is, you know, when you buy when I buy XYZ ETF for my daughter in her in her UTMA account, we buy it at 100 shares, or $100 per share when she goes, You know, when she’s 18. And she’s now cashing that out, maybe that portion of her investment is $400 per share, which is great. But we have to pay the $300 per share capital gains and is going to be long term capital gains on that gain that we have. In the education account that you don’t have that. So that’s one of the benefits along with the state. So the UTMA, and the Coverdale gives you in the brokerage account gives you more flexibility in terms of what you can use it on. But there’s tax consequences, that’s the string. And I feel comfortable Tim, and we can talk about that a little bit more that there are enough outs for me from a 529, you’ll feel comfortable, you know, put in a good amount of money and into that to you know, to have for education, expenses. And if Olivia doesn’t need it, maybe my next kid or even grandkids.

Tim Ulbrich  21:10

Let’s talk about that flexibility for a moment. Because I do think that that is the probably the number one objection. Right. And and, you know, you mentioned the tax differences for those who choose to stay in a savings, you know, UGMA, UTMA or another type of custodian brokerage account. So the way I think about the 529 is this is like a Roth for college, right? It’s after tax dollars going in, it has the potential to grow or lose, right? Anytime we talk about investments and we can lose, but growth, hopefully long term tax free, then we could pull it out use it for qualified educational expenses, which there’s been an expansion of over the last decade or so. And that’s what I want to talk about flexibility because I agree with you. I think there are several things that maybe in the sense of of 529s were more restrictive that they’ve expanded upon. So right you think about what is considered to be a qualified educational expense, that would be one area that comes to mind. The expansion several years ago to allow these to be used for K through 12 private education, that’s a second one I think about. And then more recently, would be the Roth conversion opportunities, which is the third one. So it feels like all signs are pointing in the direction of more flexibility, not less when it comes to the 529s. 

Tim Baker  22:22

I think I think eventually, one of the things that got kicked out, was at the very at the very last minute with the Secure Act 2.0 was like homeschooling like that’s not that’s not you can’t use funds for homeschooling. I do think that, you know, again, like when I started advising people on 529s is back in the day, like you couldn’t use a 529 dollars to buy like a laptop for college. Like that was a restrictive thing. And they’ve they’ve improved upon that. Right now, like before, you couldn’t pay if you had, if you had money in your 529, you couldn’t take that money out and pay off a student loan without a penalty. Yeah, they they changed that now, it’s still restrictive. Like, it’s, I think it’s a $10,000 maximum limit, which is silly, in my opinion, just just use that that’s what it’s for, is that kind of, you know, minimize education expenses, like pay off the loan. Yeah, to your point, the Roth was a big thing that they put in and, and there’s, there’s a lot of, there’s a lot of hoops you got to jump through it has to it has to be open for at least 15 years or longer before you can move those dollars from a 529 into a Roth, right? The last five years worth of contributions are ineligible, right. So like, if you’re, if you put that if you put dollars in at 18, you have to wait until you know they’re past 23 to move those dollars over and the maximum lifetime transfer to a beneficiary is capped at 35,000. Which again, I also think is silly. 

Tim Ulbrich  23:49

Might change. We’ll see. 

Tim Baker  23:50

Yeah. And I think they will, I think I think there’ll be again as as I think it’ll adapt it more as like, if higher education looks a lot different. I think they’ll adapt that. They’ve shown that they will be able to and again at the end at the end of the day for me, Tim, and again, not everyone’s going to think this. But like if my kids don’t need it. Like I’m going to cascade that down to Liam to Zoey and if Zoey doesn’t need it. I’ll probably just let it ride for a grandkid. Or, or grandkids. So to me like I don’t, I’m okay I’m okay with that. Like I don’t need I don’t need to go to like, you know, every kid equally or or even my kids can kind of go down a generation. Not everyone’s okay with that. I had a I had a couple last week, Tim, that we talked about education hadn’t started anything and right off the rip they’re like I don’t want to do a 529 and I said like keep your keep your mind open. And part of it is like the tax, part of it is like are you okay with you know, everyone’s everyone’s like, I don’t know if you know, my kids are going to college, you might be different. We’re just all that’s all like fair, right? So it’s yes, we’re you know, a lot of us are open needs, when they’re one they’re toddler, who knows what they’re gonna grow up to be? But for me, you know, I think and again, I’m not looking at 100% solution. So I don’t necessarily need hundreds of 1000s of dollars, like, you know, if I was doing 100% solution. So this is kind of I look at this as kind of a coupon, you know, for future spending from the from the aspect of college tuition.

Tim Ulbrich  25:23

Yeah, and I think too, the other scenario to consider is, you know, when you talk about keeping options open, it’s like, what is the worst case scenario? It’s a 10% penalty, right, when we look at non qualified withdrawals. And the other thing I would add to the discussion, which by the way, nobody wants to pay a 10% penalty. So let’s be clear. But I would add to the discussion that there has also been an expansion beyond the what we think of the traditional four year degree, right. Trade school, certificate programs, apprenticeships like so I think we’re, that’s another example, we talked about flexibility. And I think, you know, for a lot of people, it feels like in the circles of discussions we have with other families of age around our boys about higher education, it seems like the trades is coming up more and more, as there’s some clear demand and in certain areas. So again, keep the options open. And as you begin to think about what what this looks like for you and your family, certainly there are options out there. And if you do look at the five to nine, we’ve got a great resource on our on our blog, seven things to consider before starting a 529 plan. Or if you already have one open, it’s a good refresher. We’ll link to that blog on the show notes as well. Tim, let’s shift to part three, as I mentioned in the beginning of the show, I’m excited about this. We haven’t really talked about this at length beyond the educational part of where does kids college savings fit and the priority of investing? What are the options available? And part three here is all about how much is enough? Now, just like we talked about when it comes to saving for retirement, same question we got to answer here and shout out to you in the planning team, you’ve built a really cool resource and calculator that we use with our clients that we’ll talk through at a high level here to really answer this question of as I’m saving for my four boys. I’m not flying in the dark, hopefully, because we can put some assumptions in place and determine how much is enough based on those goals? And ultimately, am I on track? Am I not on track? And what should we be doing each and every month to get on track? If that’s the case of where we’re heading? So it feels like Tim, the first step in being able to answer this question of how much enough is to figure out what the goal is? What the goal is back back to the poll question. Right, we started the episode with is, what’s the plan? Is it cover all expenses? Is it a partial fund? Is it a no fund, which I guess we could end the episode right there if that’s the case. But if it’s a partial or full fund, at what level? And we’ll talk about the third, a third, a third rule here in a moment at what level the funding is to be desired, is an important assumption we have to make in these calculations, correct? 

Tim Baker  27:52

I mean, and again, I think a lot of people, it probably is, I’m trying to think, you know, of all the hundreds, if not 1000s, of meetings I’ve had with with clients and prospective clients over a lot of people are like, I don’t know, I want to save something. What is that? And there’s, there’s, there’s a little bit lack of like structure there. It’s rare, where people are, again, it’s going to be on the tails there where it’s like, I’m not worried about at all or like I want to do 100%. So I think in the absence of that structure, it’s just a conversation of like, okay, like, like, here’s a framework. And that’s what we talked about the 1/3 rule, here’s a framework does that sound like? Because the beauty of the 1/3 rule, or at least the way you think about it, is you’re talking about what can I do today, but then you’re also pushing it off to tomorrow, because part of like, your funding is going to come in like future earnings. But then also there is that skin in the game, which I love. I think having skin in the game with this decision to go to college is huge, or even like, you know, giving money to your kids for college is huge, because we’ve seen how wasteful is probably not the correct term, but like how wasteful it can be. When you’re looking at schools out of state, private, when you’re, you know, maybe jumping around in majors, I think having some type of you know, some type of realization that like, Hey, you’re going to be on the hook for some of this. And obviously, pharmacists know this very well, is needed. At least that’s the way that I look at it. So I think in the absence of any type of structure, I think introducing that 1/3 rule is important. 

Tim Ulbrich  29:32

Let’s talk about that rule because I think that if we use that as the baseline, you can adjust whatever you want, right? We’ll talk about the three buckets and we’re gonna assume a third, a third a third, but you know, it could be 40% 20% 40% Right. So once you understand the concept, I think from there you could determine Hey, do I like that? Do I not like that and what adjustments you want to make. So walk us through what that third rule is. 

Tim Baker  29:55

So off the rip, a lot of clients we like they look at the look like what their education costs. And they’re like, no, like, like, this is impossible. If I have a couple dollars, you know, that can, you know, rub together, that would be great. But when you kind of break it down, it’s, it’s not as bad as it as it looks. So like the 1/3 rule basically looks at, okay, when your child goes off to college, the sources of that a paying for college is going to really come from three places. A third of that a third of the of that is going to be come from, like, we say, past income or past savings. So today, in 2024, I’m saving out of my paycheck into my kids 529, and it’s going to grow. So that’s the 529. It could be a Coverdale it could be a Roth, you know, whatever it looks like but it’s, it’s you’re doing something today to spend in the future, just like we talked about with retirement savings. The other bucket the another third comes from what I would say current income. And again, this is this would actually be future income, but like when Olivia is 18, and she’s looking at colleges in, you know, eight years, I’m hopefully still working that YFP, I’m making money, and I’m part of the part of that tuition bill is going to come from the cheque that I’m receiving in eight years. And then the last bucket. And the last third would would be that skin in the game, it would be that outside outside funding, where this is going to be grants, scholarships. And last but not least, loans. So this is where you know, and again, we we talked about it with our kids that they’re going to have some money, but we don’t let them know what that is. My parents were like, you’re on your own. And then they helped us like later it was kind of like a surprise. So we kind of talked about it, but they don’t necessarily know what they’re getting. But that’s those are the three buckets. It’s what you’re you’re saving and investing for future college expenses. And then when your kid is in college, using your your part of your paycheck to pay for tuition. And then the last third coming from grants, scholarships, and student loans.

Tim Ulbrich  31:57

Tim, we’ve had several, I think, at least a couple I can think of episodes we featured where pharmacists have really worked, you know, throughout school, sometimes really aggressively to help pay down. Now, you know, if you’re working at $15-$20 bucks an hour, you can only make such a dent and a couple $100,000 of debt. But that has been a significant contributor to minimizing the debt that they’re having to borrow in any given semester. So in that case, when you think about a child working, would you put that in the final bucket? Or where how do you how do you think of that portion?

Tim Baker  32:33

I would put it in the in the final bucket. Again, I think it’s kind of like their skin in the game. It’s like, Hey, you could you could not be a great student and not get anything or you know, I know a lot of people, there’s money to be out there for you know, we just gave out our first scholarship, you know, obviously on the back end for YFP Gives. But there’s a lot of people that don’t take that, you know, go through that legwork. You know, Olivia’s goal, she wants to swim collegiately that’s her big thing right now. And she just missed her JO time yesterday by a couple of seconds. So she’s, she’s, she’s doing well. And again, I think for her, I think my wife would love it if she got a scholarship for that. But I’m like, you know, if happens, great. If it doesn’t, but to me, it’s a little bit of their, their participation in this whole process, because it is a lot of money. You know, when we look at the numbers we’ve go through, if we kind of go through this calculator, the numbers are staggering, right. And like I just said, like, when I was looking at it, you know, as we were jumping on here, the the four year instate for Olivia went up, you know, when I looked at it last month, and I guess they’re just refreshing their their numbers and then in the tool that I’m using, but you know it, these things go up. So I think having a plan in place is is is the way.

Tim Ulbrich  33:44

So with the third plan of the third rules, a framework of where we get started, obviously everyone can adjust that accordingly. Talk us through then the calculation and how we ultimately get to this point of Hey, are we on track? Are we not on track? Or what do we need to be doing each month to get on track? 

Tim Baker  34:04

So I’m using a combination of our financial planning tool called Right Capital and kind of a calculator I built. And part of it was because I wanted to kind of adapt it to the 1/3 role. So I rely on the calculator really for or the financial plans will really for the likely in the inputs I just, I just looked at so in the tool, you can say hey, I want to send my kid to a two year commuter, a four year in state, a four year out of state, four yearr private school, you can actually put in the school that you want or you can I think it’s hard unless you’re right right up against it. So we we put in a four year in state so like, hey, Ohio State’s right down the street, that would be great. So essentially like when I’m looking at Olivia so Olivia was born on Halloween of 2014. Today’s the 15th of July 2024. So her current age is 9.7 so she’s almost a 10 year old, I think she would say she’s, she is a 10 year old. So we’re saying that at 18, she’s gonna go to college. So what that leaves is essentially 8.3 years before she’s got to move out and get out, and I can turn her bedroom into a man cave. Which she doesn’t like that joke.

Tim Ulbrich  35:18

Second whiskey storage unit.

Tim Baker  35:20

Exactly, exactly. So 8.3 years is our accumulation. That’s what’s left of our accumulation. So we make some assumptions about asset allocation. So in my calculator, I put in like an 80%, equities, 20% in bonds right now, she’s all equities, we have a lot of time. But as we get closer, we’re going to be, you know, to avoid sequence risk we’re going to be more conservative when we get to that five ish years. So maybe when she’s 13, 14 15, that’s when we’ll start to really kind of get more conservative until we until we have to spend it. So I’m using kind of a blended, you know, she’s not, she’s not 100% equities the entire time. So I put 80/20, you know, we use, so that real rate of return is about 4.6%. So that’s kind of some of the, you know, if I change that to 90/10, or 70/30, it would change the calculus. So the input that I was changing, you know, that I was mentioning, when I looked at this last month, a four year in-state for her would be $183,653. 

Tim Ulbrich  36:26

With room and board?

Tim Baker  36:27

Yes. So that’s the need. So in what that means is in, I think right to the end, like today, it’s something like $28,000. But when they extrapolate that out 8.3 years in the future, that’s what’s going to cost that $28,000 With the inflation times four years. So that’s where we get the $183,000. So just as an example, my son, who is five years younger than Olivia, so Liam is five will be five next month already. His four year instate will be $234,393. So it goes from $183,600, to $234,400. Four, and then I don’t have Zoe’s calculated, but her four year end state is $284,900. So $100,000 difference between my oldest and my youngest, there’s essentially a 10 year gap for that between them. But that’s, that’s significant. And that’s why like, we’re hoping some of this changes. But that’s the number that I’m using, you know, to kind of say, Okay, this is what I this is what we need. So, if I were to fully fund it, if I needed to fully fund it, I would essentially need $183,000 in eight, eight years. Or you could say 12, and I’m still, you know, saving during that, but typically, that’s not how it works. So currently, currently, today, Olivia has, I guess it’s called a share. That’s right. So currently, Olivia has $28,629. So and we’re we we put in not quite the $4000, we put in $300 a month or $3,600 per year. So we’re on pace to save $103,000. So if you look at that, I need 183 we’re on pace to save $103k. So that our our percentage now was we’re on track to say 56% of her college. Now, that’s not 100%, which is not our goal, but it’s also a lot higher than the 33%. So like we there’s some delta there. So you know, so I kind of break down if we did want to pay 100% percent, you know, what we would need if we, for us to be on pace to save for 100%. To get to that $183k, I would need $67,634 today. I don’t have that I have $28,000. If I if I lost all the monies in her 529 today, I would essentially need to be saving or investing $1,260 for the next 8.3 years to get to that to get to that 183,000. So because I have that, it’s actually I need to increase my essentially increase my savings from $300 a month to $854 per month to get to that. Now obviously, that’s not something that we want to do. So and then I had the same thing broken down for the 1/3 rule. So 33% of 183,000 is $61,212. So again, when you break it down like that, I’m like that’s actually not that bad. $61,000, like that’s doable. Now, the conversation I had just had with Shay when I ran this was she’s like, well, we should should we start saving less and I’m like, essentially, like the argument could be you could save less or we could we could kind of stick to the status quo. My thought is is like that’s one less bill that I have to worry about in 8.3 years like it’s almost. so there’s a tricky one is correct. So like, I part of me is like, do I just get it too, and maybe we’ll talk about this in the next iteration. So like, do I go to 67%, you know, to get to my to like my two thirds of post and present income for that. And then she has a 1/3. So just to break down the math for 33%, I need $61,212. What you currently need today to be on pace would be I would need $8400 and I have $28,000. So we’re beating that. And then if I had $0, like, if I lost all that money, I would essentially need to be saving so $420. So if you have a 10 year old, and you want to send them to a four year in state and you haven’t saved anything, and you want to save at least a third, you would essentially need to be saving $428 per month, between now and when they go.

And then the last column is kind of the choose your own rule. So if I were to if I were to say, hey, Shay, like, let’s, let’s, you know, we have some room in our budget, you know, retirement looks good, etc. If I were to say, hey, let’s let’s go to that 67, that kind of checks off both for us, I would need $123,000.  I would need today $38,000. We don’t have $38,000, we have $28,000. So that lump sum to get us on track would be putting $9700 and I’m on track. And then we would essentially be needing to pay or invest $438 so I’d need to increase my monthly contribution by about $138. And then I go through the same thing with Liam. So Liam, just in broad strokes not to go through every every every calculation. He has, so his, what we need for him and for four year in state 13 years from now, since he’s five is $234,400 essentially. He has currently $13,800. We’re currently putting in $225. So not as per month, so not as much as Olivia. And then we’re on pace to save one, it will we’ll call it $109,000. So we’re 46% of the way there. We’re on track to be at $46, which is still beating our 33% roll. So we’re I look at this and we were in good shape. I think with Zoe, it’s too early to tell she only has a couple 100 bucks in hers. But that’s kind of the calculus that we’re doing from hey, are we on track or not from a from an education perspective. And again, like if the market if the market loses 30% today, Tim like right now it’s been on a bull market. But if loses 30%, and all of a sudden he doesn’t have $13,800, he has $10k, that changes thing. Right now, over the long period of time, we’re still assuming, you know, a nominal rate of return of 8.8%, which is an 80/20 portfolio, and then we adjusted down for inflation. So that’s kind of the math. I know, it’s kind of hard to follow over the podcast. But hopefully that made sense as I was going through the, the numbers line by line.

Tim Ulbrich  42:56

Yeah, what I love about it is it makes kids college savings much more practical. 

Tim Baker  43:01

And patatable, right? Like you hear those headlines. It’s just like your retirement. It’s like, you know, when I say to clients, it’s like, hey, you need $2 million to retire, you are looking at me like I have 2 million heads, but it’s a big number, way in the future. It’s the same thing holds true with education. It’s just, it feels more than what it actually is.

Tim Ulbrich  43:20

Yeah, makes it digestible with a third rule or some variation of that. I mean, it really it’s a compressed nest egg calculation.  And that’s what I love about it is we’re not flying in the dark. What what do we have saved right now? What’s the goal? We’re gonna put some assumptions in place just like we do with retirement planning. And then what do we need per month to achieve that goal. And that last part, is the piece that is so often missing when we talk about long term savings and investing, right? Whether it’s 10 years or 30 years, some of these numbers, as you mentioned, too, feel big, they feel overwhelming, they feel scary. And what we can relate to and put our arms around is what do we need to be doing per month? Or what is the goal? And then we can look at the rest of the plan, the budget all those things and figure out, can we make this happen? Or can we not make it happen? And then what does that mean, in terms of what they have saved? What does that mean for other financial goals? So yeah, I think if we think about it, in that sense, we really can start to implement this and put a game plan in place and make some adjustments if need be. And context matters, right. So I would think, how you think about this for Olivia versus your youngest, Zoe is very different, right? When you get to the potential for over saving with Olivia well, that’s different with your first and your third because option to transfer, so I think a lot of details to be considered as we look at the individual components of how you approach the 529. 

Tim Baker  44:39

I’ve really enjoyed you know, I’ve been trying to get Olivia kind of more interested in like money and the value of money and, you know, she told me the other day she’s like, you know, when I go back to school, can I buy these like $100 like Nike shoes and I’m like, No, you can’t like it’s like, we’ll spend some money and then you can save some with your money, and there’ll be a cap on what you can do. And even my wife said, like, oh, like she gets money, you know, should we put that in a 529? I’m like, I actually, like when we, when she does her allowance, I say like, Hey, any money that you want to put into your UTMA account, like, I’ll match it. So, and I did the same thing like she, she’s going to, she’s going to donate to YFP Gives. And I’ll match that, right? So I want to I want to incentivize that behavior. But I kind of want the 529 to be like, funded by me and mom, right. So like, I don’t want her spend money to go to the 529. So I’d rather have that money go into an UTMA that she can use it, she could use it for school, which she could use it for a car, a business, a gap year or whatever. But I’ve enjoyed kind of like having some of those conversations with her and kind of seeing some of the lights go on. In terms of like, investments and that’s the thing, like I’ve always struggled with like, should I kind of key them into like what we’re doing on the 529 or should be more of like, a mystery because I really don’t want her to like say like, oh, like mom and dad have it paid for like I don’t, you know, I don’t need to work. My mom took the opposite route. She’s like you have to work because we’re not going to help you at all. But I think I think these types of discussions with your kid, even when they’re young, like mine are is, is positive. And again, like, I grew up, we didn’t really talk about too much about money, like outside of like you’re on your own. But I think building some of those behaviors and kind of mindset around money is important because a lot of people that come through the door to work with us. They’re kind of an image of their parents, right. A lot of them is like, you know, if they had consumer debt issues, it’s probably because their parents did. If they were oversavers, its probably because their parents were. You know, some people look at the parents and say, I don’t want to be like that. And they’re trying to fix it, but like the natural inclination is to spend or save. So I think it’s a good opportunity to at least start the conversation around money with kids. 

Tim Ulbrich  46:58

Great stuff, Tim. And that’s a topic we’re gonna talk more about on the show. One because we haven’t talked about it enough. And two, we’re living it firsthand with our own kids. We’re excited to share that journey as well. Let me wrap up by saying for those that are listening, yes, talking about kids college, but also other parts of the financial plan, saving investing for the future, retirement planning, tax planning, debt pay down and so forth. We’ve got a team of certified financial planners, and Sean Richards, our CPA and tax professional that can help you in working one on one as it relates to your own financial plan. If you’re interested in learning more about the services, you can visit yourfinancialpharmacist.com. From there, you can book a discovery call with Tim to learn more about the services and determine whether or not they’re the right fit. Thanks so much for listening. If you’d like what you’ve heard on this episode, other episodes of the podcast please do us a favor and leave us a rating and review on Apple Podcasts or wherever you listen to the show. Have a great rest of your week. 

Tim Ulbrich  47:51

Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Finanicial Pharmacsit Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single family home or townhome for first time homebuyers and has no PMI on a 30 year fixed rate mortgage. To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the pre approval process, you can visit yourfinancialpharmacist.com/home-loan again, that’s yourfinancialpharmacist.com/home-loan. 

Tim Ulbrich  48:37

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

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YFP 366: Your Medicare and Long-Term Care Questions Answered

Posted on by YFP Media

Tim Baker, YFP Director of Financial Planning, breaks down Medicare and long-term care insurance and what to consider when deciding on a policy.

Episode Summary

Tim Baker, YFP Director of Financial Planning, breaks down the importance of long-term care insurance in retirement planning, highlighting the need to carefully consider the cost of these policies and how they fit into one’s overall financial plan. 

Tim also discusses Medicare parts A, B and D and the importance of understanding the enrollment period to avoid paying penalties.

About Today’s Guest

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

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

Key Points from the Episode

  • Medicare and long-term care insurance with questions from the community. [0:00]
  • Long-term care insurance costs and factors that affect premiums. [4:10]
  • Long-term care insurance policies, including elimination periods and riders. [10:23]
  • Long-term care insurance policies and their importance in retirement planning. [17:28]
  • Medicare penalties for late enrollment, including Part A, B, and D. [23:15]
  • Medicare changes and penalties, with tips for avoiding them. [29:40]

Episode Highlights

“Start assessing what kind of policies you want and what you want to do and what your plan for long term care in your 50s. The sweet spot to purchase a policy is in that 55 to 65 year old range. If you’re too early, you’re paying premiums for a long time and you may not reap the benefit for 20 or 30 years. If you’re too late, you’re paying much more in premiums or you could even be denied. So unlike most health insurance, you can be denied for pre-existing conditions. There’s really that zone, that sweet spot – the Goldilocks zone where you really need to kind of get this just right.” – Tim Baker [4:32]

“A lot of people think you need a 100% solution to put my kids through college or you need 100% solution for this. It’s not about that. It’s really about providing a baseline benefit for you that you can then pull the levers on other parts of your financial plan to form a fully comprehensive plan with regard to long term care.” – Tim Baker [9:58]

“I think the main misconception about long term care is that Medicare is going to cover this and it really doesn’t.” – Tim Baker [23:51]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. On this week’s episode, we take questions from the YFP community on Medicare and long term care insurance – two critical, yet often overlooked, and might I say boring, parts of the financial plan. We discussed when it makes sense to purchase Long Term Care Insurance, what policies typically cost penalties for late enrollment in Medicare and policy changes and trends for both long term care and Medicare that listeners should be aware of when planning for the future. Now as we crossed the midway point of the year, it’s a good time to check up on your financial progress for the year and dust off those goals that you set back at the turn of the new year, which perhaps feels like a distant memory at this point. Whether you’re focused on investing in the future, paying off debt, saving for kids college, or growing a business or side hustle, our team at YFP is ready to help. At YFP we support pharmacists at every stage of their careers to take control their finances, reach their financial goals, and build wealth through comprehensive fee-only financial planning and tax planning. Our team of certified financial planners and our CPA work with pharmacists all across the US and help our clients set their future selves up for success while living a rich life today. You can learn more and book a free discovery call by visiting yourfinancialpharmacist.com. Again, that’s yourfinancialpharmacist.com. 

Tim Ulbrich  01:29

Tim, welcome back to the show.

Tim Baker  01:34

Good to be here, Tim. Let’s do this thing. 

Tim Ulbrich  01:36

All right. So at the time of this going live, we’re actually on our annual YFP mid year break, it’s a week that we take off every year as a team around the Fourth of July a week that we can pause, reflect, get some time with family and friends. So Tim, any any big plans for the family this year? 

Tim Baker  01:52

No, it’s interesting, Tim, I am reading Michael Hyatt’s Free to Focus and he’s like, the way to kind of become focused is to is to do less. So I think it’s a good time to kind of stop and reflect on you know, the the first part of the year and then think about, you know, what’s ahead for the second half of the year, we have some friends coming in town that have young kids, so we’ll be spending the Fourth with them, but kind of just staying home and hanging out. How about you? Any big any big plans for the Ulbrich family?

Tim Ulbrich  02:22

Yeah, we’re hitting the road. We’re going to see Jess has family up in Bowling Green, to do some fireworks, Fourth of July stuff, see her grandma, and then we’re making a trip to Buffalo. My brother and his wife put in a new pool. So we’re gonna we’re gonna enjoy that with them for a couple days and make make the most of the week. Boys are super excited, great, great age for traveling. And it should be. It should be a fun week. So hey, when you when you figure out the Free to Focus, let me know how that works. I need to figure that out. So the genesis for today’s episode is, Tim, you led a webinar for us a couple weeks ago on Medicare and long term care insurance. And you know, this is a topic that I think we often think about, of course, we know it’s important, but it’s one of those topics, both of these topics where we’re like, ah, kind of boring, like, how much do I have to really think about this part of the plan. But as you shared, I mean, the engagement, the questions, the interest was, even exceeded our expectations, which is great. And so we decided, hey, let’s do an episode that focuses specifically on the community members questions around Medicare and long term care. Now, we have talked about both of these topics on the show before. We’ll link to these in the show notes. Episode 329 I brought on Certified Insurance Counselor Josh Workman to talk about Medicare selection and optimization. He had some great insights to share from his experience helping people with Medicare selection. And then episode 296, Tim, you and I talked about five key decisions for long term care insurance. So we’re not going to rehash the background of these topics, make sure to go back and listen to those but rather jump into questions that our community had on these two topics. So, Tim, let’s start with long term care. First question, which is probably I think, the most common question, which is, when do I need this policy? Right. So what is the ideal age range to purchase a long term care policy? 

Tim Baker  04:15

And in the presentation that we did in early June, the I kind of talked about this as like the Goldilocks zone, right? So if you’re too early, it’s not great. If you’re too late, it’s not great. So the way that I have broken this out, Tim, is you start discussing this in your late 40s. Start assessing kind of policies and what you want and what you want to do and kind of what is your plan for long term care in your 50s and then really kind of get the sweet spot to purchase a policy is in that 55 to 65 year old range. If you’re too early, you’re paying premiums for a long time and you may not reap the benefit for 20 or 30 years. If you’re too late, you’re paying much more in premiums or you could even be denied. So unlike most health insurance, you can be denied for pre-existing conditions. So there’s really that, that zone, that sweet spot, so to speak, is the Goldilocks zone where you really need to kind of get this just right. And again, if you’re, you know, if you have chronic issues, maybe you do that earlier. But I think one of the questions we’ll talk about, what do these premiums look like, and I kind of have these different age bands, so we can kind of talk about that. But, you know, started discussing in your late in your late 40s, kind of start assessing, you know, your plan and 50s. And then and then have a policy that meets that plan, you know, in that 55 to 65 year range.

Tim Ulbrich  05:42

So, Tim, we’re officially in the decade, you said end of forties. So something we’ll be thinking about here in the not not too distant future, which is hard to believe. But let’s talk about costs, right? Because I think sometimes these policies certainly can have some sticker shock. Everyone’s situation, of course, is different. But what are we looking at in terms of average premiums of a standard long term care policy?

Tim Baker  06:06

Yeah, so before I get into that, like, I think one of the I think this was Lincoln Financial, you know, did it did a study that that showed, like, what couples are willing to spend on long term care insurance, I think, I think the number was like $2500 to $3,000 per year in premiums. So I had that in the back of my mind, as I was kind of researching, you know, this. So according to the 2023 Long Term Care Insurance Price Index, that’s put out by the American Association for long term care insurance,  AALTCI. General estimates, and this is for this is for a policy that has an initial benefit amount of $165,000, it grows at 3%, compound inflation. So that’s kind of the general baseline. At age 55, for a single male individual, those premiums range from $1700 to $2,100 per year. So obviously, you’re in that that range of $2500 to $3000. Single females, unfortunately, ladies, your premium jumped quite a bit, you tend to live longer than men. Single female, it’s actually $2675 to $3,600. And then a shared benefit, so a couple that kind of combines their benefit together is is $3,000 to $4,800. So that’s at age 55. It jumps age 60, for a single male goes from $2100 to $3000. So that’s up from $1700 from $2100, single female jumps from $2675 to $3600, to $5000. And then the couple $3800 to $5500 combined. And then lastly, it’s 65, single male $2600 to $3135. So that’s a jump from the $2100 to $3000, single male $4230 to $5265, and then the couple $5815 to $7150. So, and I would say, Tim, that the factors are influencing these premiums, the probably the big one here is going to be the inflation protection. So it’s probably the most the most expensive rider that’s out there. And if you actually tie it, I don’t even know if they sell them. I don’t think they sound like this. But they’re they’ve been insurance products in the past to actually tie it to the CPI. I think they don’t necessarily do that. It’s like how you pick a 1% 2% 3% 4%. That’s going to drive the biggest cost to the to the you know, to the premium. Age of purchase, obviously, as we kind of outlined here is a big factor your health so health are healthier individuals will qualify for better rates, the benefit amount and duration. So a highly highly daily benefit or a bigger benefit pool. And a longer, you know, longer period won’t increase your premiums, elimination periods. Will I think it talks about this another in another question, the shorter the elimination periods and think about this as a time deductible or a deductive deductible that’s in time, results in higher premiums. I mentioned the inflation protection and then additional riders so, you know, other things that could be outside of inflation, shared care will increase the cost. So these are kind of the factors but you know, I think almost all being equal, you know, if we were to strip away the 3%, which again, that’s a major rider, I think they’d become a little bit more affordable. And I think if you’re looking at a baseline policy that that will allow you to age in place, meaning like age in your home as long as humanly possible. I think if you can look at these policies almost as like a coupon for that care. Not that you know, we talked about this. A lot of people think like oh, I need 100% solution to put my kids through college or I need 100% solution for this. It’s not about that it’s really about providing a baseline benefit for you that you can then pull the levers on other parts of your financial plan other other, you know, assets that you have to then, you know, form a fully comprehensive plan with regard to long term care.

Tim Ulbrich  10:22

Yeah. And Tim, as you share that, it reminded me of bringing Cameron Huddleston, on the show who wrote mom and dad, we need to talk we had her on episode 321. Navigating some of those financial conversations with aging parents, and some listening might might be thinking about this as the coverage for themselves. Some listening might be thinking about this as, hey, what about my parents, right, that are aging? What what do they have in place, and obviously, there can be a direct line from their coverage or lack thereof and their own financial plan. And so, you know, when you’re talking about the different factors that can affect the cost to me, but I also hear in there is like, we’ve got to zoom out and understand, like, what are the desires and the needs? What what is the goal in terms of long term care, obviously, things may happen or not as we would like them to happen. But having some clarity on you mentioned, like care in the home versus a facility type of care, like, those conversations are going to be really important for us to think about individually, but also with our parents to then look at some of these policies and determine, you know, what we want these policies to be doing in the coverage.

Tim Baker  11:25

Right. Yep, exactly, right.

Tim Ulbrich  11:28

You mentioned riders a couple times before we go to the next question. Can you can you just define that for those that may that may be a new term as they’re looking at insurance policies?

Tim Baker  11:37

Yes, riders are things that they’re like, the kind of like, add on features. So when an insurance writer, you know, wanting like, like for a life insurance policy, a permanent policy, or a disability policy could be like a waiver of premium. So like, if you have if you’re deemed disabled, you could put a rider in that policy that basically says, if you are disabled, the policy will remain remain in force, however, you don’t have to pay the premium. For for the what we’re talking about is cost of living. As you know, things increase every year and inflation goes up, the policy kind of keeps pace with inflation, or at least there’s a flat rate. So all a writer is is a additional feature that’s bolted onto the policy that makes it more enticing to the policyholder holder. However, it often comes with expense, you know, it comes with an additional premium that’s tied to that. So that’s all rider is.

Tim Ulbrich  12:43

Great stuff. So we talked about what’s the ideal age range, we’ve talked about the average premiums, what goes into that costs, several different factors. You mentioned, some of those riders, age of purchase health, what the actual policy entails elimination period. Let’s talk about elimination period. That was one of the other questions that came through is, you know, is there an elimination period with a long term care policy similar to what folks might be familiar with with a long term disability policy? So if you could first define elimination period? And then answer that question?

Tim Ulbrich  13:11

Tim, as you’re sharing all of these nuances and details regarding long term care insurance policies, you know, as can be the case with buying insurance, right, you pull back the onion. And there’s another question to consider, another question to consider what the policy should be made up of which all informs the cost, right? And what we have to answer the question when it comes to insurance, whether it’s long term care, or long term disability life, whatever we’re talking about is, what do we need? And what do we not need? Right, because obviously, we want to have a certain level of protection, that’s going to protect the rest of our financial plan. But we also don’t want to be overspending on premiums so there’s an opportunity cost that those dollars can be used elsewhere in the financial plan. And I think this is important point to selfishly plug, the work that we do and other fee-only financial planners were when you’re engaging in that work in a fee-only relationship, meaning that you’re paying the advisor for the advice that they’re giving. And there’s not a compensation stream coming from the recommending of products that may or may not be in your best interests, we really can sit down and have these conversations of what do you need, what you not need, without there being a bias in the advice that’s been given. So important.

Tim Baker  13:11

Yeah, so the elimination period, as I mentioned, is kind of like, think of this as like, when you get in a car accident, and you are, so your deductible is $500, or $1,000. You have to pay that, you know, as part to kind of access the policies policy. So if I have a, you know, an accident, and I need work on my car, that cost, you know, $2000, for that, for the policy to pay out that $2000, I have to actually pony up the deductible, which is, you know, 500, or whatever it is. So it’s it kind of what it what it what it’s meant to do is create somewhat of a barrier to care, they don’t want these policies don’t want to be accessed or have claims against if they’re if they’re nominal or minimal. So in a long term care insurance policy, you pay that in time. So to back up, when we talked about when you know, the process of purchase and long term care, I kind of broke this up into five steps, it’s actually deciding when to purchase a policy which we talked about, it’s to choose kind of a monthly benefit. The third one is a truce of deductible, which I’ll break down here in a second and then four and five is that decide how long the benefit will be paid. And then the fifth one is decide, you know, what is what riders you want? Do you want an inflation rider or not? So, to go back to step three of choose a deductible, deductibles come kind of in all shapes and sizes. So in terms of a time you can get a deductible, that is, you know, the elimination period I should say that the deductible and time that is 30, 60, 90, 180 or 365 days out. The most common is 90. So the idea behind this is, once once a professional physician says, you know, Hey, Tim, you need help with assisted daily living, like the task of transferring or eating or whatever, then that’s when the clock starts. So if I have a 90 day elimination period, and the doctor determines that July one, then essentially on October one, and sometimes it takes another month to actually get the benefit, you know, October one or November one, that’s when actually the policy starts to pay out. Now, what I just described was a calendar based a calendar day elimination period, there’s really two types, there’s calendar day. And then there’s service day. So the calendar day is based on the total number of days from the start of needing care, i.e. that physician says, hey, Tim, you need care, regardless of how often you use services, as opposed to a service day elimination period, which is based on the actual number of days he received paid care. So think about when you think about long term care, it’s often intermittent care, you don’t have someone around the clock, maybe they come in, you know, three days a week to clean and help you do some things around the house. So there’s pros and cons on each on each, right. So if you have a service day, service day care, if you have a 90 day service day elimination period, and you receive care three times a week, it would take approximately 30 weeks to meet the 90 day. So we’re versus like, if you have you know, on that first example, July one, I need care, you know, October 1, I’m getting, you know, I’m getting my policy to pay. So, you know, there’s pros and cons of each, you know, typically the calendar days going to be more expensive than the service day. You know, if you if you only need intermittent care, and it’s it’s maybe even less than, you know, weekly, you need it, you know, once a week or whatever it is, and the maybe the service day, you know, works. So this, these these elimination periods is all about trying to find, again, the Goldilocks zone for what type of care you need, what you what you want to pay for your policy, and then adjusting it for that. So that’s the elimination period, Tim. So again, most common is the 90 day. I think, I’m not sure what is more common between service and calendar day, I think if you want more of a known timeline, then calendar is kind of what you want. But then, you know, again, that’s probably going to be more expensive when it comes to paying the premium. That you have the the overlap between advice and the sale of a product, there’s going to be a conflict of interest, because often often that sale of a product, you know, means there’s a commission that’s in place. And yeah, and I’ll bring up one of the things. You know, I feel like when I was presenting, you know, I think the the latest data says that a couple, a couple that’s age, age 65, see if I can bring up the number. A couple that’s a retired couple age 65 can expect to spend after tax $315,000 on health care and medical expenses during retirement.

Tim Ulbrich  19:14

After tax. 

Tim Baker  19:15

Right. So and I think you might look at that be like, Oh, that’s not that bad. But like, a lot of people I look at that. I’m like, that’s a that’s a significant chunk of my, you know, traditional, like portfolio. Right? So and then the thing with this is that, you know, the last time I looked at this a year or two ago, like these numbers, they’ve jumped significantly. So, I think again, you know, if you’re and this is like if you think about like the biggest cost in retirement is really not like health care and medical expenses, it’s housing. So you know, if you think about this plus housing and that’s a significant chunk of a lot of people’s, you know, retirement nest eggs. So the the idea of behind, you know, long term care is to provide a baseline, again, you know, simple math, you know, you could spend $3,000 for 30 years and you know, spend, you know, $90 grand and give you that baseline, and again, you know, it can change. But to me, it’s about, again, getting those products in place for the plan that you’re trying to design without kind of some of those strings that you mentioned that are attached to that. So. Yeah. 

Tim Ulbrich  20:27

Yeah, this is you’re talking, it’s all good reminder for me, you know, my conversation with my parents. We’ve had an open conversation. I know they have a long term care policy, I don’t know the nuances of the policy. I know they’ve been diligent in that work. I know, it’s something they’ve talked about, they’ve they worked through intensely. But obviously, the the next level of that is to really ensure that my brother and I have a understanding of what’s there as well. Before we move on to Medicare, last question, related to long term care is, are there any recent policy changes or trends in long term care insurance that our listeners should be aware of when planning for their future?

Tim Baker  21:06

Yeah, I kind of see three, the big one I mentioned already, is, I think there’s a big push towards the aging in place initiatives, the the longevity of a person of a patient increases, when they can age in their home for as long as possible. And actually, a lot of these policies, Tim, are really designed to provide as much care and benefits to do that. So whether that’s setting up things like ramps or handrails or modifying the home to make it better, to, you know, again, have more of a focus on in home care than in a facility, once you pivot to a facility. You know, it’s it’s, it’s, it’s better for you to stay in home as long as possible. So there’s, there’s a growing focus on aging in place programs. And also that include kind of like wellness interventions like home modifications, and, you know, use of technology to monitor health and provide care remotely, so kind of more of a telehealth type of stuff. The second one is shift into more like hybrid policy. So there’s an increase in preference for hybrid long term care policies, which are often combining long term care benefits with life insurance or annuities. So, you know, if you were to decide to peel off, you know, a couple $100,000, a quarter million dollars of your, of your retirement portfolio to create a baseline floor, so you know, what you get for security plus, what this annuity pays you for the rest of your life, there’s, there are riders that you can put in that also provides long term care. So these policies policies offer more flexibility. And it’s, it’s, it’s less about, like, a lot of people with really annuities and long-cares, like, you know, you kind of lose it if you don’t use it, right. So making them more attractive to consumers, compared to kind of a traditional policy. Right. So that’s, that’s, that’s another one is kind of that hybrid approach. And then the third one, is, we’re starting to see more chatter and action initiatives for public long term care programs. So states, like Washington have introduced public programs, called Washington’s called the Washington Cares Fund, which began payroll contributions in July of 2023. And the basically what they’re trying to do is provide basic long term care benefits to residents. So they have something in place, because I think the the main misconception about long term care is that Medicare is going to cover this and it really doesn’t. So I think certain certain state governments are looking at this as a way to set aside money for residents to have some type of benefit in place for the purpose of providing, you know, long term care.

Tim Ulbrich  24:15

Great stuff, Tim. A topic, we’re going to continue to come back to, as I know, there’s lots of questions out there from the community. And since you mentioned annuities in that second update, and you know, we’ve talked before about that concept of creating a retirement paycheck, creating a floor between social security and annuities, whether or not that’s the right fit is another discussion, but we did talk about annuities on episode 305. Understanding annuities, we did a primer for pharmacists. So if folks are hearing that are like, oh, I want to want to learn more. We’ve covered that before we’ll link to that in the show notes. Tim, let’s shift gears to talk about Medicare. And again, we’ve discussed this briefly on the show before, Episode 329 with Medicare selection and optimization. Many pharmacists are aware of the different parts of Medicare from the work that they do every day. So let’s jump into some specific questions. The first one being for Medicare Part D, is there, (D as in dog), is there a penalty if you delay applying?

Tim Baker  25:14

Yeah, so so Medicare Part D is for a prescription drug plan. So yes, there is a penalty if you delay enrolling in Medicare Part D, the late enrollment penalty is an additional amount added to your Part D premium. And it’s calculated based on the length of time you went without Part D. The big thing here, Tim, is that it’s permanent. So once that penalty hits, it’s gonna hit as long as you have a Part D. So the way they calculate it, this, it’s 1% of the national base premium beneficiary premium for each full month, you went without coverage. So, and this goes up and changes every year. So as an example, the in 2023, the National base beneficiary premium was $32.74. So it’s not a ton of money. 1% of that is 33 cents. But you know, if you miss three months, that’s a whole whole dollar that you’re permanently paying on top of that. So it adds up, it’s one of those things that you don’t want to miss. So this is again, if you if you forego enrolling in Part D, you want to make sure that you do that when you’re you know, general enrollment comes up. So that’s that’s the penalty for part D. 

Tim Ulbrich  26:29

I think getting out in front of this, I’ve observed this time with my father-in-law and in my conversations with Josh, that we had on the show, Episode 329. This is just a big decision. You mentioned the permanent penalty, but also, this is people getting flooded with all types of information. Right? You know, I think there can be a paralysis just with the overwhelming amount of information. So starting this process early, making sure you’re doing research working with professionals that really understand this and have your best interests in mind is, is huge. The second question is what are the potential penalties for late enrollment in Medicare Part A, B, and D, we talked about D already. And are there any exceptions or circumstances where these penalties can be waived?

Tim Baker  27:09

Yeah, so so for Part A, most people don’t pay a premium for Part A, that’s kind of what your, you know, your payroll taxes already where you pay into Medicare while you’re working. However, some people do, do and if that’s the case, you have a monthly premium that may go up by by 10%. And you have to pay the higher premium for twice the number of years, you could have had Part A but you didn’t sign up. So again, most people, they’re going to, they’re going to dodge this because they’re not going to pay a premium for Part B. Again, just like Part D is that there is a penalty, and it’s permanent. So if you don’t sign up for Part B when you’re eligible. So this is your Part A is your hospital insurance, Part B is kind of easier is your outpatient, the penalty is added to your monthly Part B. So you calculate the this by looking at the penalty is 10% of the standard Part B premium. And I think in 2023, that premium was essentially $165, $164.90. So 10% of that, that that can add up, right. So and then the duration, you have to pay this penalty for as long as you have Part B the penalty is permanent and will be added to your premium. So if you delayed signing up for Part B for two years, your penalty would have been 20%- two years times to 10% of the standard premium. So in this example, your monthly premium would be a penalty, it would have been $164.90. But then, because you waited two years, the new premium is $197.88 cents. So more dire than prescription higher premiums, probably more punitive penalty. So this is really important as you are approaching your window. So just a reminder, you know your window, it’s the month before and after your eligibility date, so I should have this here. Here we go. So individuals that age 65, it’s a seven month period. So it’s three months before you turn age 65. The month you turn 65 and then three months after you turn 65 is your general or is your initial enrollment period. And that’s where you really want to make sure that you enroll in A, B and D at a minimum to avoid the penalties.

Tim Ulbrich  29:40

Great stuff there. Last question we have on Medicare, same one we heard on the long term care insurance side. Are there any recent policy changes or trends in Medicare that individuals should be aware of when planning for the future? And I guess we should say as we talked today, there’s a presidential debate tonight. I’m guessing this will become a topic in the presidential elections as it often is. So some of that will be hearsay, but anything that has been solidified or any changes that folks should be aware of?

Tim Baker  30:07

Yeah, and I’m going to answer this, Tim. And I want to go back to some of the exceptions that I didn’t answer for the question before. So the really the only things that I’m seeing for part D in for Medicare is related to part D. So starting this year, the 5% co-insurance requirement for Medicare Part D enrollees will be eliminated. So, I think what they’re what they’re trying to do is, is really go after high cost medications. So this is meant to reduce out of pocket. Beginning in 2025, though, there’ll be a $2000 annual out of pocket spending cap for part D, which will also provide significant savings with regard to high prescription drug costs. And then the two other trends that I’m seeing, is ones around consumer protection. So they really want the government really wants to kind of crack down on deceptive marketing practices. And so they don’t, they don’t want you know, companies that, you know, talk about these plans to kind of mentioned specific plans, and more oversight for like agent and broker monitoring to kind of, to kind of reduce predatory behavior. So kind of, you know, they want to prevent seniors from being pushed into a plan that they don’t necessarily want or need. And then the expansion of telehealth and digital health education is another thing in Medicare that they’re trying to, to focus on. To go back to the second part of the question that I didn’t answer, where the penalties can be waived. There are certain circumstances where the penalties can be waived. So if you are if you or your spouse are still working, and you have health care coverage through your employer, you can sign up for Part A during a special enrollment period without a penalty. And the special enrollment period typically lasts for eight months, after employment ends, or the group health coverage ends, whichever happens first. For part B, it’s the same thing. If you have, you know, coverage through an employer, that that can be, you know, something that, you know, avoids the penalty. And then Part D, if you have if you have like, coverage through your employer or TRICARE, or you’re a veteran, that, that that will waive the penalty. And then if you are in a disaster zone, like a disaster, like they’ll give you like a waiver for the penalty, if you can kind of prove that you were there or the extra help. It’s kind of a low income subsidy. If you didn’t sign up for Medicare, that’s another waiver. But you know, typically, outside of those, you’re gonna you’re gonna see that penalty. So that the kind of round out that second question there, Tim.

Tim Ulbrich  32:49

Great stuff. Tim. Lots of questions and engagement from the community on this topic. Be on the lookout – we have more webinars coming throughout the year, you can always find information on our website, yourfinancialpharmacist.com. If you’re subscribed to our newsletter, you’ll get updates there as well. We’d love to have you attend one of our future webinars covering a wide array of different financial topics for pharmacists at all stages of the career. And if you have a question on these two topics or another question, feel free to send us an email [email protected]. Again, [email protected]. And we’ll try to tackle that on an upcoming episode of the podcast. Now as we cross the midway point of the year, it’s a great time to check up on your financial progress for the year and dust off some of those goals that you set back at the turn of the new year. If you’re like me that perhaps feels like a distant memory at this point in the year. Whether you’re focused on long term care insurance and Medicare like we talked about today, or investing for the future paying off debt saving for kids college growing a business or side hustle. Our team at YFP is ready to help. At YFP we support pharmacists at every stage of their careers to take control of their finances, reach their financial goals and build wealth through comprehensive fee-only financial planning and tax planning. You can learn more and book a free discovery call with Tim Baker by visiting yourfinancialpharmacist.com. Again, that’s yourfinancialpharmacist.com. Tim, great stuff. We’ll be again back again next week.

Tim Baker  34:12

Yeah, sounds good.

Tim Ulbrich  34:16

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

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YFP 358: Top 6 Financial Moves to Make as a Mid-Career Pharmacist

Posted on by YFP Media

YFP Co-Founder and Director of Financial Planning Tim Baker discusses six financial moves for mid-career pharmacists, including re-evaluating the vision for the financial plan.

Episode Summary

Tim Ulbrich is joined by YFP Co-Founder and Director of Financial Planning at YFP, Tim Baker to discuss various financial planning strategies for mid-career pharmacists, including resetting the vision for the financial plan, prioritizing retirement planning and emergency funds, and reevaluating, reviewing and updating insurance policies.

Regularly reviewing and adjusting these funds to account for the various life changes ensures that policies align with current financial goals and circumstances. Tim and Tim also address the importance of having those uncomfortable conversations, such as end-of-life care and inheritance to avoid potential legal and financial issues in the future.

About Today’s Guest

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

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

Key Points from the Episode

  • Financial moves for mid-career pharmacists, including resetting financial goals. [0:00]
  • Financial planning, goal setting, and prioritizing life ambitions. [3:54]
  • Emergency funds and savings goals, including rechecking amounts and locations. [9:17]
  • Emergency funds and retirement planning for mid-career pharmacists. [14:34]
  • Retirement planning and nest egg calculation. [16:46]
  • Social Security benefits and retirement planning for pharmacists. [22:43]
  • Updating estate plans for mid-career individuals. [29:13]
  • Financial planning for aging parents. [33:39]
  • Financial planning for mid-career pharmacists, including insurance checkups and estate planning. [37:48]
  • Insurance planning for pharmacists, including long-term care and property casualty assessments. [41:17]

Episode Highlights

“And I think the other thing is that things change. I think checking up on your financial plan is really, really important.” -Tim Baker [5:08]

“I think it’s really important to kind of recast the vision, recast the organization of your financial plan and go from there.” – Tim Baker [5:52]

“I think one of the things that I would challenge people who are mid-career, from a goal setting perspective is, are you doing the things that make you whole or that you’re passionate about?” – Tim Baker [6:28]

“So, you know, I think being critical and actually like slowing down and saying, is this what I want to do. And then using the resources, the time that you have, the dollars that you have, to kind of right that ship, and because again, we’re here for a very finite amount of time. And it goes by quickly, and it sounds very cliche, but it’s true.” – Tim Baker [8:08]

“I typically say that the estate plan is really important, really, for anybody, But particularly for people that have a spouse, a house, or mouths to feed. So if you have those things, and you don’t have documents in place, I think that that’s probably the biggest thing that we need to look at.” – Tim Baker [32:58]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, Tim Baker joins us back on the mic to talk through six financial moves to make as a mid career pharmacist, we discussed the importance of resetting the vision for the financial plan, how to determine whether or not you’re on track for retirement, gaps to look for in your estate planning and insurance coverage, and much more. For more information and details on each one of these areas, go to yourfinancialpharmacist.com/midcareer. That’s one word again yourfinancialpharmacist.com/midcareer. 

Tim Ulbrich  00:37

Before we jump into this week’s episode, I have a hard truth for you to hear. Making a six figure income is not a financial plan. Yes, you’ve worked hard to get where you are today. Yes, you’re earning a good income. But have you ever wondered, am I on track to retire? How do I prioritize and fund all of these competing financial goals that I have? How do I plan financially for big upcoming life events and changes such as moving, having a child, changing jobs, getting married or retiring? Or perhaps why am I not as far along financially at this point in my career as I thought I would be? The answer may be that your six figure income is not a financial plan. As a pharmacist, you have an incredible tool in your toolbox: your salary. But without a vision and a plan that good income will only go so far. That’s in part why we started Your Financial Pharmacist. At YFP, we support pharmacists at every stage of their careers to take control of their finances, reach their financial goals, and build wealth through comprehensive fee-only financial planning and tax planning. Our team of certified financial planners and our CPA works with pharmacists all across the country to help our clients set their future selves up for success while living their rich lives today. If you’re ready to learn more about how Your Financial Pharmacist can support you on your financial journey, visit your financialpharmacist.com/learn. Again, that’s your financial pharmacists.com/learn. Alright, let’s jump into today’s show. 

Tim Ulbrich  02:05

Tim Baker, good to have you back on the show.

Tim Baker  02:07

Good to be back. Tim. How’s it going? 

Tim Ulbrich  02:09

Good. It’s been a while official congrats on the baby. I know you’re off for a little while. But we’re glad to have you back on the mic. 

Tim Baker  02:17

Yeah, thanks for thanks for hosting, it’s trying to get back in the swing of things with baby here. Sleep’s at a premium. So, it’s all good.

Tim Ulbrich  02:28

Well, this week, we’re talking about moves that mid-career pharmacists should be making things that they should be thinking about. And really whether someone is early in their journey, you know, these are things to be thinking ahead of or those that are actually in this season. Hopefully, this is more of a checklist type of episode where you can go through different parts of the financial plan, or perhaps tune up or look back at some of these items. Tim, it dawned on me though, as we’re preparing for this episode of like, that’s us mid-career, you know, it’s really that that phase where you start to feel like, Hey, we’ve kind of checked off some of those basic foundational items. But there’s this whole other set of issues and things that we need to be thinking about going into the future. So for better or for worse, here we are in the middle of our career, as well. And we’re excited to talk through these six moves that mid-career pharmacists should be making in each one of these we have covered at length, if not once, maybe twice, or three times on the episode before. So we’ll make sure to mention that when we get to these individual items and link to those things in the show notes as well. Tim, I think it makes sense that we start number one, really with the goals. You know, this is an opportunity, I think to reset the vision for the financial plan, there often is a lot of transition that can be happening at this phase, you know, this might be the time where people have kids are getting a little bit older, maybe beginning to think about them moving out of the house, we obviously have to be thinking about taking care of ourselves. Maybe we have elderly parents that we’re trying to prioritize as well. So just a lot of transition, I think an opportunity to take a step back and really look at the vision and the goals for the financial plan and how those have changed over time.

Tim Baker  04:05

Yeah, I would package these, I would actually package this together with like, what is the balance sheet look like? And then what is the vision going forward? So you know, we kind of look at this, you know, when we work with clients as a get organized and kind of a goal setting, you know, as a one two punch, and this is typically where, Tim, when a pharmacist asked me a question of Hey, should I do X or Y? I say it depends.  A lot of it depends on what is what is the financial picture look like for you? And then what does a wealthy life look like for you both today and in the future. And for everyone that’s going to be different. So, that to me is where that answer comes from. So yeah, like I think in prepping for this episode, Tim, I kind of learned you know, two things or realized two things that I think is really important to say out loud. One is just like a lot of stuff when I was looking at my you know, I was looking at my insurance stuff in my in my nest egg calculation, some of the things that we’ll talk about in this episode. It’s just a lot of moving pieces. And it’s a, and it’s changed a lot over the years. So that’s, that’s the first thing. And I think the other thing is, like, you know, this thing, things change, I think having, you know, checking up on this is really, really important. So, when we look at, like, the, when we look at the balance sheet, again, if you haven’t looked at your balance sheet in a long time, I think it’s really important, it’s not necessarily necessarily something that we feel in our day to day, yeah. But if you, you know, if you if you put your head down, and you’re working, and you’re raising a family or doing whatever you’re doing, and, you know, two or three years later go by, you can actually see the progress that, you know, has been made, right, so you can see, you know, how your assets, you know, been built up, how have you How have your liabilities been paid down? Or not, you know, do you have a different set of, you know, versus if it’s was it student loans in the past the past and now its a HELOC, or something like that. So I think it’s really important to kind of recast the vision recast the, you know, the organization of your financial plan and go from going from there. From the vision perspective, it’s, it’s laughable when you think about, you know, like, when I, you know, had these conversations with myself and my wife, you know, even three or four years ago, and then what that looks like today, like, like, and you don’t sense that, but like, when you when you actually look back, and you kind of memorialize, hey, in 2019 pre-pandemic, this is kind of our viewpoint, this is what we wanted to do. And then we look at that today, it’s vastly different. So I think, like, you know, one of the things that, that I would, you know, challenge people that are mid career, you know, from a goal setting perspective is, are you doing the things that, like, make you whole, or that you’re passionate about? You know, like, I was joking around with my team over the weekend that I kind of felt like an Uber driver, because I was driving to soccer practice and swim practice, soccer practice again, and swim practice again. Which is great, like, I love that I love you know, you know, you know, seeing my kids, you know, do well on their sports and their activities. But, you know, though conversation that I had with my wife over the weekend was like, are like, Are we are we good? Are we on like the track that we want to be on and kind of checking in with and sometimes that’s a check in with yourself, some that’s a check in with a spouse, sometimes it’s a check in with like, a close advisor, like a financial planner. And I think it’s really important to do that, because again, you can put your head down, and you know, live, you know, be living your life, but then, you know, you’re doing that vicariously through your kids or, or whatever, and not actually take the time to do the things that you’re passionate about. And sometimes, you know, again, your own goals. And ambitions are kind of taking a backseat to your kids, which is a it’s a natural thing. But at the end of the day, like there typically is enough to go around, like we can carve out time, we can carve out resources to do the things that you want to do whatever that is. So I think it’s really important, you know, as you are mid-career, and I think this is where, you know, people like to talk about, like a midlife crisis, because they kind of get caught in the rat race, and they’re like, this is not really the life that I want to live. So, you know, I think it’s that, you know, that self, you know, being being critical and actually like slowing down and saying, is this what I want to do. And then using the resources, you know, the time that you have, the dollars that you have, to kind of right that ship, and because, again, we’re here for a very finite amount of time. And it goes by quick, and it sounds very cliche, but it’s, it’s true. And I think you can I always talk about this, like, you know, that whole that sense of being on autopilot. I’ve worked at jobs where, you know, like, my commute to the office in the morning was in darkness, I would you know, I would drive there 30 minutes, I wouldn’t remember that drive, and then you back was in darkness, I would get in my car, and 30 minutes would go by and I’m home. And I don’t remember any of that. And that’s, that’s like an analogy for life is that if you’re not actually slowing down and think about is this what I want to do that’s important. So that’s just my life planning hat. You know, are we are we putting the first things first are we doing, you know, the things that we want to do and making sure that we’re, we have a plan and we’re being intentional for that. 

Tim Ulbrich  09:16

I love the example you gave of you know how for you and Shay, your family, right short period of time, the goals can look very different, and why it’s so important to be looking at these regularly and talking about them together to have a third party, you know, kind of help, whether that’d be a plan or someone else. I was even thinking as you shared that, you know, for Jess and I, when you did the planning with the two of us how helpful it was when we would get together to flash up the goals to say, hey, yeah, a year, a year ago, you guys said this is important. Like, is it still important? If so, like, what what are we doing? What are we doing to kind of move this forward? And ultimately, like, where are the funds, right? If it requires funds to do that, and that’s so important. You know, you and I had a very similar season of life where, you know, to the point you gave of the weekend and being the Uber driver We’re like, the days and the months are flying by to really have that mechanism to stop, pause, slow down and remind ourselves of like, are we running the path? Are we running the race that we want to be running? And we’re not gonna get it right all the time, right balance in every season of life, but to have some built in mechanism to not just set those goals, but also to refresh and to look at those periodically. 

Tim Baker  10:23

Yeah, absolutely. 

Tim Ulbrich  10:24

All right, number two on our list is savings. And we’re gonna talk about a few different areas. Here. We’ll talk briefly about the emergency fund, and an opportunity to recheck where we’re at with that, we’ll briefly talk about retirement. Again, we’ve talked about all these at length, we’ll reference other episodes, and then we’ll touch on some kids college stuff as well. Tim, let’s start with the emergency fund and a recheck. I just talked on Episode 357, last week about five questions that we need to be asking ourselves related to the emergency fund. So make sure you go back and check out that episode. But I think this is one of those areas that where we set the emergency fund maybe early on in our career, and then we don’t think about, wow, a lot has changed, we really got to relook at is the amount that we have there sufficient? And how does this fit in with the rest of the plan? 

Tim Baker  11:09

It’s one of those things where yeah, it’s kind of a forgotten, forgotten thing. And, you know, you know, what we really want to do is check in and make sure that you know, what’s in there is appropriate, and, you know, are there things that we can do to, you know, to, to improve it. So, you know, for for a emergency fund, what we’re looking for is three to six months of non discretionary monthly expenses. So these are expenses that are gonna go out the door, regardless of if we work or not. So things like, you know, a mortgage and insurance premiums and utilities and a food bill. So, unfortunately, we tend to get to that number, we have to actually look at spending data and understand like, what that looks like, and then, you know, we kind of look at, you know, what is what is discretionary? What are things that are non discretionary, and we add up all the non discretionary if we have, you know, two incomes, we multiply that by three, if we have one income, we multiply that by six for six months, and then and then that’s our number. For a lot of our clients. You know, it typically can be I think, in a, I would say, anywhere between 15 and $50,000 is what is what the number is, um, so I think like, you know, and this is something that that Shay, I looked at recently, and I think, for us, because of three kids and you know, daycare and all that kind of stuff, it’s, it’s crept up, and I’ve kind of tried to, you know, the interest that I that I accumulate in my high yield, or  I do, I do a combination of a high yield savings account. And then like, a laddered CD that I do every quarter, like a year CD for every quarter. So I have a q1, q2, q3, q4 that I just renew, and I kind of let those ride and I’m actually adding more money, both to the high yield, and the, and the CDs as we go here. But I, the only reason I knew to do that was to actually look at the spending, and it’s kind of crept up, you know, just because of family of, you know, probably the last time I did it, we were a family of three, now we’re a family of five. So I think that’s important to do. And again, like, there are so many people that I talked to that they’re like, Okay, this brokerage account, this, this taxable investment account, that is my emergency fund, that is not an emergency fund, it’s, it’s, you know, if you’re investing in it, and you can see volatility, that’s not what we’re trying to do. So I think having you know, the right amount, and then the location is going to be really important. And to get the right amounts, typically, looking at the budget where you’re at today, and again, like I don’t look at the kids swim or, or soccer or other activities as a discretionary as a, that’s, that’s a discretionary thing. So if times get tough, we, you know, try to try to cut that. So I think even, you know, examining what is, you know, what should be in there and what shouldn’t, is important, but, you know, to me, it’s, it’s a little bit of nails on chalkboard, right Tim, because I don’t want to keep cash, I want to get that into the market and get work. And so I need enough to get us through a tough spot. But then also know that, you know, for me, I want to get money into mortgage and a lot of people typically, you know, later in mid career and beyond, they’ll they’ll start because they have an asset like the house, they’ll even use something like a HELOC as like an even deeper reserve. Yeah. So to have access to a HELOC, or something like that is going to be important that I’ve seen people use as a mechanism to, you know, to safely and I wouldn’t say cheaply because of where rates are, but somewhat cheaply access cash if needed, and not necessarily tie up a ton of money in a checking error, high yield savings account, I should say. 

Tim Ulbrich  14:33

I like the hack that you mentioned. And yes, I do the same thing where you know, any any earnings on a high yield savings, we just kind of dumped back in the emergency letter, I let it ride right. And the idea being that’s going to help kind of keep pace at some level with inflation, maybe not fully, but to your point, it doesn’t cover those big jumps, right. So like now we’re a family of five instead of a family of three or, you know, we bought an investment property and we’ve got to be thinking about that or we moved homes and you know, mortgage payments went up and so those kind of big moves, where all of a sudden, you know, that emergency fund might go from that 15 to that 30, 35. Are we looking at that periodically.

Tim Baker  15:09

And for you, Tim is probably like your food bill, right? Oh, pre preteens? Like, like, that’s gonna that’s that’s like No, that’s no joke, you know like when you, even Olivia. Olivia is going to be 10 this year and she’s a swimmer. I mean, she eats I feel like as much as I do. And you know, when you when you think about that, that’s, that’s gonna move down quite a bit. So you know, it’s it definitely adds up. And at the end of the day, the emergency fund is there for that rainy day when, when when you need it and just making sure that’s properly funded is going to be important to kind of give you that peace of mind.

Tim Ulbrich  15:42

The second part of savings Tim, I want to touch on as we work through these six different moves for mid-career pharmacists is, you know, I think this is a natural time where we ask ourselves, Am I on track with retirement? Right? And, and this is a season where when we talk with pharmacists mid-career, you know, the visual I have is you’re getting hit in every direction, right? You maybe kids expenses, kids college has grown, we’ll talk about that a little bit. You’ve got this pressure facing you on retirement, you might be caring for elderly parents, you know, perhaps there’s debt still hanging around, we’re working through student loans or other things. There’s, there’s all these different pressures and headwinds, and naturally, that retirement piece made maybe wasn’t a top priority for a while. And all of a sudden, we get to this point where previously we couldn’t visualize retirement now we can start to and it’s like, Am I on track? And I know, we covered this in Episode 272. How much is enough? We’ll link to that in the show notes. So people can dig deeper, but just at a high level, you know, some some tips or some thoughts for folks that are asking this question of, Hey, am I on track? How much is enough? When it comes to retirement? 

Tim Baker  16:45

This is such a, this is such a hard one. Because like, I’ll ask like prospective clients, like, Hey, do you feel like you’re on track to meet like your goal for retirement? And if you’re talking to someone in their 30s 40s 50s? I would say even in your 50s, it can be somewhat nebulous anytime it’s like a decade or more out. And typically, that the answer I get is like, you know, Tim, I really have no idea. Which is, I think, problematic, especially if we’re trying to, like, you know, build out a plan. So that’s obviously something that we can fix. But also, it’s kind of that default of like, well, like the 401k, you know, company or the 401k that I have, they have a calculator that says I’m on track. And I’m like, I just don’t know how they calculate that. And I almost feel like, all the compliance things that, Tim, that we have. So it’s almost like irresponsible, yeah, to, again, they’re looking at it very much from it, but people don’t necessarily know that, you know, it’s very much a vacuum. I think that like, the problem with like, Am I on track for retirement is that there’s so many variables that go into it, there’s so much time that goes into it, you know, and I always talked about this, like, when we, when I first started working as a financial planner, I remember working with my previous firm, and it’s like, you know, we would do financial planning by hand, and we would do a time value money calculation. And we would say, Hey, Tim, hey client, you know, your, your, your, what you need for retirement is $3.1 million. And we’d be like this exact number. And then we’ll kind of go on to like, the next thing, I’ll make sure you’re doing this. And it’s like, it just never connected. It was almost like this disassociated moving, because you’d like to look at like what the client had, which might be three or $400,000. And you’re like, I need to, like 10x this in 20 years, or 15 years. And there’s so many people that come back to me that when they start and then they’re like four or five years, they’re like, like, damn, Tim, like, actually, my assets I’ve actually grown like, I almost didn’t believe you. And it’s still hard to even to see that, you know, the progress to get to that, that millionaire level. But I think it’s really important. And so like, I took that, as a financial planner, I would look at the clients, like their eyes would kind of like gloss over because they’re like, that doesn’t mean anything to me. And I can’t we build up this nest egg calculator that basically goes through. And I did it recently for Shay and I, you know, what’s your current age? What’s your target? You know, so how many more years do you have left in the workforce? How long do you expect to live? Which is again, that’s one of the hardest, you know, that’s one of the risks in retirement is like longevity risk, like, are you gonna live really long or not? So again, that’s a little bit of a crapshoot. So we kind of make make some assumptions there. Social Security kind of has an idea of when they think that you’re gonna pass away, what your current retirement savings is with kind of think of it as your present value and your time value money. And then what your current calculate your current income is and then what that kind of projects into what you need for retirement. So we make some assumptions on how is your current assets actually invested? So for a lot of people that I see at least it’s in my opinion, too conservative, especially mid you know, if you follow the rules of thumb of, hey, if you’re, you know, if you’re 40 years old, you take 110 minus 40, your equity, equity amount should be 70%. And then the other 30 should be in bonds, I think that is wrong. But then we do some, you know, asset assumptions when you’re actually in retirement, so might be more conservative. And that kind of gets down to the total need. And then you have to factor in things like social security. So I pulled my Social Security, I think we’ll talk about that in a second. And then like, what does that mean, in terms of what do I need to actually save today? So it’s, it’s the idea here is to take this big number, whether it’s 3.1, 3.6, 2 million, 4 million, and actually break it down to a number that I can digest. So like, if you say, if I’m, if I’m the client, and I say, hey, you know, if I’m talking to a client, I’m like, Hey, you’re putting in 10%, for you to actually get on track to retire by 65. To live to 95, whatever that is, you need to go from 10% to 15%. Like, I can track to that. And also, you know, so that actually is a tangible thing, that’s a, that’s a digestible thing that I can do versus just saying, we need $3.1 and we kind of just are like, it’s a hope and a prayer, right. So it’s not, it’s not a perfect system. Because like, when I look at my own nest egg calculation, you know, I’m maxing out my 401. K. And let’s assume that I’m going to be doing that for the next 29 years, if I retire at 70, which, that’s a, I don’t know, I don’t know if that’s going to be the case. I’m hoping that’s the case. But so there’s, there’s, there’s some assumptions that we have to make to make, to make it kind of come to life. And I think the next level of this, Tim, was kind of going through some simulations. So if I were to, you know, if I were to, you know, take part of my portfolio and purchase x, or if I were to, you know, go and go down to part time, or, you know, do something else, you could actually run scenarios, if I, if I buy my Mountain House 10 years earlier, there’s some Monte Carlo analysis that will actually affect, you know, show you how it affects your success rate with your with your retirement. And I think that’s kind of the next level stuff. But for a lot of people, it’s where am I at? What are the things that I’m that I’m doing today? How can I tweak those things to get a better outcome, and that could be contribution rate, that could be my allocation, that can be a variety of things. So I think that’s important to kind of break down and really see, you know, because the more the longer that we wait to kind of effect change here, especially if it’s negative, the steeper that gets, right. So when you’re, when you’re early in your career, you know, a tweak here there can really have monumental changes, the closer you get to that retirement, just the the steeper that climb is and the harder it is to kind of meet goals. And that’s where you have to start, then potentially taking a haircut on lifestyle and retirement, or you know, the amount of time that you have to work etc. 

Tim Ulbrich  22:43

What I love about the nest egg exercise is, you know, going through it for Jess and I, again, just a reminder, with all these things, we’re told it’s not a one and done, right. So if you do a nest egg when you’re, you know, 45, there’s assumptions, we’re building into all of these types of calculations, both in terms of the mathematical assumptions, but also what you want. And you know, you mentioned the different scenarios, and that can change and probably will change over time. So revisiting this periodically is so important, but it really moves I often hear people talking about retirement as like a hope, wish or dream, meaning like, I hope I can retire by 58, or 67, or whatever, or, you know, I would love if I could potentially work part time at some point in the future. And it’s like, hey, yes, those assumptions can change, many of them will change over time. But we can put a number to these into your point, let’s get it down to what do we need to be doing on a monthly basis, because these numbers do seem scary. And you can see, kind of the peace of mind that comes when you walk through these calculations with people when you start with those big numbers, three, four or 5 million. And then you get down to that monthly even if we don’t love the monthly number, when we factor in employer matches, other things, savings we already have. We’ll talk about social security here in a moment. It’s like, oh, okay, like, we can work with that, because we can put our arms around it and start to figure out, can we build that into the rest of the planet, a monthly basis. So, so important, especially for those who are mid-career listening. If you’ve done this before, you know, revisit this, you know, we’d love to have opportunity to work with you on the financial planning side, if you haven’t done it before need to revisit this as well. But something we definitely need to be updating. And looking at periodically. Let’s move to number three, which is really looking at our Social Security benefits and the projected benefits, which I think fits so well into the how much is enough calculation. And, you know, this is an opportunity to really look at our [email protected] to look at our statement, our projected benefits. I think a lot of people probably aren’t necessarily familiar with these tools that are out there. And to begin to figure out and build some assumptions of, hey, if I have social security benefits, what might those be? And then certainly we can project down if people are worried about the future of the benefit. I’m sure you’ll talk about that as well. But thoughts here on on kind of revisiting or looking at the social security piece? 

 

Tim Baker  24:57

So if you go to ssa.gov Like if you have haven’t done this, I would encourage you, especially if you’re mid-career just to kind of see what your social security statement looks like. So to me, that’s really important to kind of get a sense of, and again, like, I think a lot of people, when they, when they think about security, it’s kind of an eyeroll of like, uh, that won’t be there, when I’m when I’m ready to retire, or it’s going to be greatly diminished. You know, I would, what I believe is that, you know, Social Security is one of those things where so many people rely on it to actually survive in, you know, it’s kind of a hand, um, you know, unfortunately, we’re kind of like a hand to mouth in terms of like, a lot of people don’t do a great job of saving themselves, especially, you know, no offense to Baby Boomers, where there was pensions and things like that pensions, and Social Security could go a long way, in terms of retirement, that day is done, you know, so when we moved away from pensions, and more to 401k, the onus has really shifted from the employer to the employee, to make sure that we’re doing what we need to do. And again, social security still there. But there’s lots of, you know, press about, you know, will be viable, and, you know, will it go bankrupt? My sense is that, you know, it will be there, Tim, when we retire it at 70. But it’s kind of one of those things where it’s, it’s unknown what that benefit would be, and again, maybe when we retire, you know, it’s not 70, it’s 75, or something like that, because of a variety of reasons. But the I think the big thing here is to pull your statement. And then when I look at mine, it actually shows me, you know, what my personalized monthly retirement benefits would be, if I started from age 62. So right now, my my benefits $2,076 or if I wait until age 70 and actually get the, you know, credits $3,777. The big thing with Social Security that doesn’t get enough play is that it’s inflation protected. So when we had that big jump into inflation the year before last, yeah, everyone’s payment went up, I think 8.9% or whatever it was your over a year, that’s huge. Because if you’re thinking about, you know, building a retirement paycheck, most of the things that you have, most of the income streams are not inflation protected. So every time, you know, we go through bouts of inflation, you’re you know, you know, the checks, the checks that you have running it coming in, are not going to account for the fact that, you know, your your grocery bill went from 100 bucks per month to $140, just because of where that’s at. So Social Security, you know, plays a part in that. So I think the big thing here is to try to check, you know, when you pull your statement, you can actually see your work year, and what your earnings tax for security were from, you know, I’m looking back from, like, 1991 to present day. So I think to make sure that that’s accurate, that’s, that’s going to be a big thing. And again, like, I think the sooner that you can kind of look at this and kind of get a sense of where you’re at. And then and then look at the you know, look at the the the retirement calculator that’s there, you know, if you if you retire early, versus if your full retirement age, you know, for us, it’s going to be 67. Or if you delay it out to age 70, which to me, I think a lot of people should really look at doing and if you have a plan, you know, before the kind of the knee jerk was like, get the money when you can get it, but that’s a that’s a mistake. And a lot of people are understanding now that it is a mistake. So doing a proper analysis. Again, it’s kind of a microcosm of your of your financial plan is, you know, inventory. So get organized in terms of what does the statement look like? What are the goals in retirement, and then how to properly deploy this, this inflation protected income stream, I think is going to be a big part. Now, for pharmacists, you know, your it might be 25%, 20% of your retirement paycheck, whereas, you know, the typical American it’s, it’s north of 50%. So but I think making sure that we’re positioning ourselves from, you know, to ensure that the income is correct. And then the basically the way that we collect the benefit is going to be in line with your overall retirement picture and financial plan.

Tim Ulbrich  29:13

And I think once we have that number, and again, we can adjust up or down, as you mentioned before as we’re running assumptions, but we can then build that into the nest egg calculation as well and see how that impacts where we’re at on a on a need for a monthly savings. Number four, Tim, on our list of six mid-career pharmacist moves to be considering would be the estate plan. We’ve talked about the estate plan in detail on the on the podcast episode 310. dusting off the estate plan. We’ll link to that in the show notes. But this time well, you and I were just talking about this last week. You know with your new baby in the house right there’s an opportunity to update documents we haven’t yet done our updates with with our youngest who soon to be five, so we’ve got to make sure his name is present, although he’s covered in language, but his actual name isn’t present in the documents. So I think again, and talk to us through why there’s an opportunity mid-career to really be updating these documents or perhaps for some even even establishing these for the first time. 

Tim Baker  30:10

It’s probably, you know, I can say this being a ginger, but it’s probably the redheaded stepchild of like the financial plan. It’s, it’s ignored. And unless you’re military, a lot of the clients that are coming through the door really don’t have an estate plan in place. And one of the things that we implemented to kind of really combat this and really supercharge our ability to support clients is we have a an estate planning solution now that we, when we work with clients, if you don’t have a will, a living will, and well trust, if that’s needed, we can actually get those documents in place for whatever state that you live in country, which I think is awesome. So you know, it’s one thing to kind of, you know, say, Hey, Tim, this is what you need something to actually like, walk side by side with you and get the documents in place to make sure you’re covered. So I look at this really from a from from to, you know, to? Well, I would say it’s one big perspective, just change, right. So like, you know, if you think about, you know, maybe when you were, you know, early career to where you’re at now, for some people like could be different relationships, like there’s horror stories about people that are leaving money to like an ex. So I think it’s really important to kind of do a beneficiary check to make sure that the money is going to the right people, you know, Shay is going to be my primary beneficiary for like, a lot of the things that I have. But then right now, it’s like, Liam, my, my, my, or Olivia, my daughter, and Liam my son who are the contingent beneficiary, so if something were to happen to both, it likely would go to the kids, so like Zoe, or our newest baby has to kind of be in on that. Or it could be to like a trust, you know, a trust that is for the benefit of the kids, which is probably the better way to go with minor children. So to me, it’s more of again, looking at the the relationships, whether they’re, you know, out with the old in with the new, or, you know, brand new in terms of kids to make sure that the documents that you had in place clearly reflect your wishes today could even be things about, you know, bequesting, or, yeah, hey, I want to leave, you know, money to my alma mater, or to my cousin Fred, or things like that, that that’s a really reflects the things that you want to do. But also, you know, to, to ensure that from a protection perspective, you know, if you have dependents, they’re there, they’re taken care of, in a sense that, you know, if you were gone, or you can speak for yourself, the documents are that are in place, do that justice. So, for a lot of people mid career, it is adjusting what they have, or it could be it says that, that thing that’s been neglected that you’re like, I’m gonna get to it, I’m gonna get to, I’m gonna get to it, and you have it. You know, what, when I’m talking when I’m talking to prospective clients, and I bring up the fact that we can do this, that like, perks them up, because I know, it’s important. They know, it’s like, uh, I gotta find an attorney, or I gotta find some sort of solution. We got that covered. And to me that alone, I think, especially if you’re, you’re, if you’re a family, or if you you know, I typically say that the estate plan is really important, really, for anybody, particularly, particularly for people that have a spouse, a house, or mouths to feed, right. So if you have those things, and you don’t have documents in place, I think that that’s probably the biggest thing that we need to look at. You know, it’s important to get, you know, a plan for debt, it’s important to get your your nest egg and a plan for your assets and retirement planning. But this is really going to be important to shore up and make sure you’re good to go in the event that something were to happen to you. And again, it’s one of those things like, oh, that won’t happen to me, it will happen to somebody else. And then eventually, you’re going to be that that’s someone else. So not to be morbid, but you know, I think it’s important to cross those t’s and dot the i’s with regard to the state plan. 

Tim Ulbrich  33:39

I mean, the reality is just like we’ll talk about in the final item number six on the insurance side, like it’s not fun to think about, right? So it’s easy, but been there myself, it’s easy to kind of drag your feet and let this be the call to action to either update, take a fresh look at those or get those documents created. Number five on our list of six mid-career pharmacists moves to make tip is probably one that a lot of people maybe aren’t thinking about, again, not necessary, the most comfortable thing to be doing would be some of the financial conversations with aging parents, you know, I think it’s common that we see mid-career pharmacists that are entering into a new stage of caring for elderly parents sometimes that, you know, could be a time investment that they need to factor in, that could be a financial investment. And for some, you know, that might be Hey, this is an expense that we need to be thinking about caring for our elderly parents or others. It might be, Hey, do they have the documents, the right documents in place that we just talked about? And do we have an awareness, understanding and transparency into that information? Which admittedly, is a very hard and awkward conversation to have no matter which way we’re looking at it. So thoughts here on some of the financial conversations with aging parents? 

Tim Baker  34:44

So I think this can be both from an estate planning perspective, but also like a retirement perspective. So it’s very common for you know, our clients, you know, maybe who are you know, first generation immigrant that you know, they basically Say, Tim I am the retirement plan for my my parents. Right. So I think like building that into their into the our clients plan is gonna be really important because that’s, that’s part of their culture. That’s part of the goal. That’s I think that’s important. I think beyond that, you know, is more of the estate planning stuff. So I look at this as we have to, we have to secure our own estate plan. So our clients estate plan, but then what are the what are some of the things that can negatively affect, you know, and I’m talking negatively in terms of like financial, and maybe some of the legal and logistics, it could be the your parent, like elderly parents that don’t necessarily have a sound estate plan. So whether that’s, you know, we’ve talked about this, what’s the book “Mom and Dad, We Need to Talk” about some of those some of those conversations or some of those instances where, because of a lack of estate planning and foresight foresight, it’s negatively affecting the child’s plan or finances or time because they’re, they’re suing for conservativeship or you know, there, there’s just things that you’re don’t expect. So this is a tricky thing, because again, like I grew up in a household where we really talk about money that much, so it’s kind of a touchy subject. So how do you how do you go about having those conversations, and have, you know, have access to the detail that you need, but not being respectful, and not necessarily prying where you know, that it were, your parents made me feel uncomfortable, but they’re adult conversations that need to be had, because if you wait too long, then again, you’re you’re putting yourself in a position where you either can’t care or provide, you know, the support that you need to a parent, and it can ultimately, you know, negatively affect your own plan in terms of your, you know, financial resources, but also time. So, I think this is one of these things where, again, whether this is a family conversation around the holidays, or it’s a, an email or a letter, or it’s, Hey, this is a shared document, even give me passwords, and you know, I’m not going to access it until the time is needed to be able to do the things. But, you know, if something were to happen to your parents today, like, Do you know how to log into their different accounts? And what is the what’s the plan, and that can be a very uncomfortable conversation for some people, and for some people it’s not, like this, what it is, so I think, just to have that conversation, and understand where to go, what are the proper documents? What are the accounts? I think if you can do that before, you know, there’s capacity issues, or whatever, I think that’s gonna be really important. So that’s, that’s the big thing here. 

Tim Ulbrich  37:47

And that’s one of things I appreciate so much, Tim, about Cameron Huddleston book, you mentioned, “Mom and Dad, We Need to Talk” is, it does provide a nice kind of third party and she’s got some great suggestions in that book of specific questions to ask, how to ask them how to ignite the conversations. And, you know, I think having that third party resource, even if you’re referencing that of, hey, I read this book, and you know, got me thinking that we should have a conversation and, you know, likely it’s not gonna be everything addressed in one conversation, but it opens up the door. Sure, it’s gonna be uncomfortable, but for, as you mentioned, for some people, maybe not depending on how they grew up around money, but so important that we understand, you know, what, what is the potential financial impact, as you mentioned earlier, for some if that means caring financially for the parents. And even if that’s not the case, there’s just a lot to consider in the estate planning process that we want to make sure that we’re honoring the wishes and aware of what’s going on as well. So number six, our final item on the six moves to consider for financial moves for mid-career pharmacists, Tim, is an insurance checkup. Again, not the most exciting part of the plan to be thinking about here, I’m talking about term life insurance, long term disability, perhaps beginning to think about long term care insurance as well. I know we’ve talked about term life, long term disability, even long term care extensively on the show before. Is this an opportunity to reevaluate those policies, you know, I’m thinking of this situation just as one, where let’s say somebody in their early 30s, bought a 20 year term. Now they’re at the end of their late 40s. And they’re looking at that saying, hey, the terms coming up here in the next, you know, five, six years. So talk to us about how we might look at the insurance part of the plan here as a mid-career pharmacist. 

Tim Baker  39:25

I think like, in the absence of like, a, like an actual insurance calculation, you know, a lot of people will use a rule of thumb for term insurance of like, 10 to 15 times income, which again, that could have changed over the years. If, you know, if you have a 20 year policy, and you bought it in early 20s or 30s and now you’re you know, 40s 50s, like, what does that look like, you know, going forward? So I think like, I think, you know, and I think the other thing, too, is are there other wrinkles in your financial plan, i.e., hey, if I were to pass away, one of the questions I would ask myself is like, do I want to be able to send like, do I want to do I want Shay to have to worry about the mortgage or paying for the kids education? Right. So maybe that’s something that, like, I built into my, my plan going forward, and I didn’t have that, you know, 10 years ago. But now I do. So like, the other thing, too, is like, you know, again, mid-career, if you’re, if you maybe bought a house and moved out of the house, and now rented it, like, what, what happens from an insurance perspective? Like, do you want that property to be paid off? So I think like, I think, yeah, there’s there’s this renewal period, potentially, like, what do you need? And again, maybe it’s not, you know, maybe maybe you buy a 10 year term policy to kind of bridge it maybe don’t need another 20? Year? Maybe you do. But I think there’s also things that you can, in a proper calculation, say, Okay, this is important to me, this is not important to me, and then reflect that in insurance. So, obviously, I think the the life insurance is going to be really important. For some people, even getting it in place, which people just like the estate plan will drag their feet on that long term disability again, that’s one of the things I’m not really worried about short term disability, I think without it, I would just plus up the emergency fund, but from a long term disability, you know, again, how is your income changed over the over the course of the years, you know, if you’re, if you get it through a group policy, that’s going to typically be a function of what you earn. But, you know, if you have your own policy, should you  supplement that policy? Because your earnings have continued to climb? You know, does that make sense long term care, we typically, you know, the our thought here is that we want to, we want to support the client as much to age in place. So so much of the science or so much of the studies show that the longer that you can be in your own surroundings and age in your own home, whatever that looks like. So that typically means bringing in some help as you age, you know, that’s going to be important. So what can we do to buy a long term care policy to meet that minimum, and then again, different parts of the country, that’s going to be a different, different amount per month. But we typically want to look at this, believe it or not, in our late 40s, early 50s, because there’s a sweet spot of, you know, if you’re too early, it doesn’t make sense. If you’re too late, it doesn’t make sense in terms of the availability of the of the policies. So what does that look like? So, typically, late 40s, early 50s, is when we want to have that conversation. And again, a lot of people, they kind of just like security, they kind of blow this off, like this is not for me, but you know, I think more and more of of, you know, the the industry is trying to support clients as best they can, to, you know, age in their home residence, and you know, and do it versus going into a facility or something like that. So long term care is going to be really important. And then the last one, I would mention, Tim is property and casualty. So doing an assessment here, holistic plan, which is our tax tool, has this deliverable that we’re testing out now that looks at homeowner’s auto and an umbrella policy. And what it does is try to find gaps in coverage. And if you think about homeowners, if you haven’t dusted that off in a while, like what your home was, you know, if you bought a home at 35, and now you’re 40, over the last five years, your home has appreciated a lot. So are you underinsured in that regard? You know, do you have enough assets? Or is there is there a risk there that you should have an overarching umbrella insurance to cover risk if something were to happen, or if you were to get sued? So these are kind of, again, next level things to kind of consider and just doing a checkup from an insurance perspective, do you have the proper life, long term disability? Is Long Term Care something on the horizon? And then from a property and casualty perspective, are there risks there that we don’t know about that we should have kind of, you know, a circling back to make sure that the coverages that we that are currently in place are, you know, suitable for what you’re currently at in terms of, of risk?

Tim Ulbrich  43:53

Yeah, that’s a good call on on the property casualty just for the appreciation you know, is a good good reminder for me as you mentioned, I was thinking about we had a fire of a house in our neighborhood it’s probably been sitting now for over a year and a half note no movement on the home and all I can think of is it’s probably some type of insurance issue going on trying to work through the process but you know that that’s exactly the question that came to mind right of hey, you know, what, what is the replacement coverage that you have? What’s the timeline of that replacement and given the appreciation and the cost to rebuild a fresh look at those policies, you know, is certainly warranted.

Tim Baker  44:27

I mean, I just I just got a picture here from Shay- fire in the next neighborhood. Fire started in the garage with a lithium battery charger catching on fire. So this is like as as we’re recording here, this is the picture from Shay so like, this stuff is important. Again, if we haven’t dusted that off in a while you’re leaving yourself open, you know, to risk that we don’t and I think it’s a somewhat of an easy fix to mitigate that.

Tim Ulbrich  44:53

Well I hope all was good there. Thanks again for great, great stuff, Tim, as we look through these six mid-career for pharmacist moves. For more information and details on each of these as a reminder, go to yourfinancialpharmacist.com/midcareer. Again, midcareer is one word. And for those that are looking to work with one of our certified financial planners at YFP on your individual financial plan, which would certainly touch these six areas as well as many more, make sure to head on over to YFPplanning.com. Again, that’s yfpplanning.com. You can book a discovery call. We’d love to have the opportunity to talk with you to see whether or not our services are the right fit. Tim, thanks so much and we’ll catch up again here in the future. 

Tim Baker  45:32

Thanks, Tim. 

Tim Ulbrich  45:34

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

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YFP 357: Emergency Fund Check-Up: Five Questions You Must Answer

Posted on by Tim U

Tim Ulbrich, PharmD (YFP Co-Founder & CEO) covers five questions that you should ask related to your emergency fund to determine whether or not it is adequately funded and optimized.

This episode is brought to you by First Horizon.

Episode Summary

This week we’re diving deep into a financial fundamental that often flies under the radar: the emergency fund, also known as the rainy day fund.

Saving for unexpected expenses isn’t easy. It requires discipline, patience, and a leap of faith to stash away money for something you can’t predict. Especially when other financial goals, like paying off debt or investing, are competing for your attention.

In this week’s episode, we explore why having an emergency fund is crucial. From unexpected medical bills to home repairs or sudden job loss, life throws curveballs when we least expect it. But having a well-stocked emergency fund isn’t just about having the dollars to cover these surprises; it’s about gaining peace of mind and confidence.

Join host, Tim Ulbrich, PharmD, as he covers 5 questions you should ask related to emergency fund to determine whether or not it is adequately funded and optimized.  Remember, when life throws you a curveball, your emergency fund will be there to catch you.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

Episode Highlights

 

Links Mentioned in Today’s Episode

Episode Transcript

 

Current Student Loan Refinance Offers

Advertising Disclosure

Note: Referral fees from affiliate links in this table are sent to the non-profit YFP Gives. 

Read the full advertising disclosure here.

Bonus

Starting Rates

About

YFP Gives accepts advertising compensation from companies that appear on this site, which impacts the location and order in which brands (and/or their products) are presented, and also impacts the score that is assigned to it. Company lists on this page DO NOT imply endorsement. We do not feature all providers on the market.

$750*

Loans

≥150K = $750* 

≥50K-150k = $300


Fixed: 4.89%+ APR (with autopay)

A marketplace that compares multiple lenders that are credit unions and local banks

Check Rate


$500*

Loans

≥50K = $500

Variable: 4.99%+ (with autopay)*

Fixed: 4.96%+ (with autopay)**

 Read rates and terms at SplashFinancial.com

Splash is a marketplace with loans available from an exclusive network of credit unions and banks as well as U-Fi, Laurenl Road, and PenFed

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YFP 356: Love and Money: How to Successfully Navigate your Finances with a Partner

Posted on by YFP Media

Tim Ulbrich, PharmD (YFP Co-Founder & CEO) digs into how to successfully navigate finances with your partner and shares 25 questions you can use to frame conversations around money.

This episode is brought to you by First Horizon.

Episode Summary

On this episode, we’re talking about love and money! Discussing finances with your spouse, partner or significant other can be tricky sometimes. Tim Ulbrich shares 25 financial discussion questions to help you navigate these important conversations along with a free resource you can download to help get you started. From reflecting on your “money classroom” and the way you were raised to understand money to how you feel about debt, savings, and other important goals, Tim guides you through these important conversations. There is no one-size-fits all to managing finances in a relationship – but sharing the same vision and goals with your partner can set you up for success. This episode is brought to you by First Horizon.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

  • Navigating finances with a partner, identifying money personalities, and setting goals. [0:00]
  • Financial planning for pharmacists, merging money personalities in relationships. [1:49]
  • Money personalities and setting financial goals. [5:50]
  • Financial goals, budgeting, and spending plan for couples. [10:39]
  • Financial goals, debt management, housing, transportation, and children’s education. [14:57]
  • Financial planning with a partner, including goals, investing, and retirement planning. [20:04]
  • Financial planning and management strategies for couples. [24:32]

Episode Highlights

“I think it’s really important that we spend time to reflect on and identify our money personality and how this does or does not match with our partner. For some of you that have been at this topic for a while, you know how emotional and how behavioral this whole topic of managing money can be. And so it’s important we spend time to reflect on and to get curious about what our money approach is.” – Tim Ulbrich [4:13]

“It’s really helpful that we reflect upon what is the approach that we have surrounding money? How might that have been influenced by the money classroom that we grew up in? The more we can understand that about ourselves, as well as our partner, and how we bring those characteristics into the relationship can be really helpful as we set a plan going forward.” – Tim Ulbrich [8:03]

“Is everything merged when it comes to the finances? Might we have some things separate? Some things merged? Of course, that’s an individual decision for everyone. But ultimately, on some level, we want to have a shared vision, even if some of those items might be separate.” – Tim Ulbrich [8:38]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey everybody Tim Ulbrich and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week we’re talking love and money how to successfully navigate your finances with a significant other spouse or partner. Easier said than done right? During the show, I discuss how to identify with your money personality and how this does or does not match with your partner strategies for setting and achieving goals together 25 financial questions and discussions that every couple should have? Hang with me. I’ll give you a resource and a link to download those questions and advice from the YFP community on what has and has not worked for them in their own journey, navigating this important topic with their partner. 

Tim Ulbrich  00:45

Now before we jump into this week’s episode, I have a hard truth for you to hear. Making a six figure income is not a financial plan. Yes, you’ve worked hard to get where you are today. Yes, you’re earning a good income. But have you ever wondered, Am I on track to retire? How do I prioritize and fund all these competing financial goals that I have? How do I plan financially for big upcoming life events and changes such as moving, having a baby, changing jobs, getting married or retiring? And perhaps why am I not as far along financially at this point in my career as I thought I would be? Well, maybe the answer is that your six figure income is not a financial plan. As a pharmacist, you have an incredible tool in your toolbox: that’s your salary. But without a vision and a plan that it good income will only go so far. That’s why we started Your Financial Pharmacist where YFP we support pharmacists at every stage of their careers to take control their finances, reach their financial goals, and build wealth through comprehensive fee only financial planning and tax planning. Our team of certified financial planners works with pharmacists all across the United States and helps our clients set their future selves up for success while living a rich life today. If you’re ready to see how YFP can support you on your financial journey, you can learn more by visiting your financial pharmacist.com/learn again, that’s your financial pharmacist.com/learn. Alright, let’s hear from today’s sponsor First Horizon and then we’ll jump into the show. 

Tim Ulbrich  02:16

Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. For several years now we’ve been partnering First Horizon who offers a professional home loan option AKA a doctor or pharmacist loan that requires a 3% downpayment for a single family home or townhome for first time homebuyers, has no PMI and offers a 30-year fixed rate mortgage on home loans up to $766,550 in most areas. The pharmacists home loan is available in all states except Alaska and Hawaii, and can be used to purchase condos as well. However, rates may be higher and a condo review has to be completed. To check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com /home-loan. Again, that’s yourfinancialpharmacist.com/home-loan. 

Tim Ulbrich  03:20

Hi there, Tim Ulbrich here flying solo this week as we talk about love and money: how to successfully navigate your finances with a partner. Now first things first, this is a heavy topic right? And I do not have all the answers. When it comes to our financial plan for Jess and I we have found the system- keyword system -that works best for us. But we are far from perfect. We’ve made our fair share of mistakes. We haven’t always been on the same page. And it certainly has required compromise and grace on both sides. So this is not a preach and teach episode. That would be very helpful. Rather, the intent is to give you some things to think about and conversation starters, to find the system that works best for you. Because at the end of the day, that’s going to be what matters most.

Now, before we jump into some of the tactical strategies, and some of the questions and conversation starters, I think it’s really important that we spend time to reflect on and identify our money personality and how this does or perhaps does not match with our partner. Right for some of you that have been at this topic for a while, you know how emotional and how behavioral this whole topic of managing money can be. And so it’s important we spend time to reflect on and to get curious about what is our money approach? What is our money, personality? What is our money classroom that we grew up in the household that we grow up in financially? And how does that perhaps shape how we manage our money today and ultimately how we merge two of those money personalities together as we try to work and get on the same page. So some questions to think about here as it relates to the money personality. Do you approach money in the same manner that you were raised? Have you reflected upon the money classroom that you grew up in? And maybe what worked and didn’t work? Was money in your household an open conversation? Was it a closed conversation? Was it stressful? Was it calm? What was the emotional tone surrounding money? Was there transparency around money? Or was it a taboo topic? What were the spending habits, what was said? And what were some of the unsaid lessons that you learned along the way? And how did all of this potentially contribute to the money personality and the habits that you employ today that you ultimately bring into your relationship? Right, good and bad. Probably true for all of us.

If you want some guidance on this, there’s a great resource, we’ll link to it in the show notes. The Money Couple has five different money personalities, they have a book and an assessment if you want to really dig in and go further on this topic. And they in that resource they referenced five money personalities, those five personalities are number one, the Security Seeker. Number two, is the Saver; number three is the Spender; number four is the Risk Taker; and number five is the Flyer. Now, anytime we do these assessments, right, we’re running a risk a little bit in terms of bucketing ourselves into one of these approaches, when often we may have a little bit of more than one of these. And that’s one of the things I like about this tool is they combine two of these, what they call a primary and a secondary to come up with your money profile. So for example, let’s say that you identify as a saver/security seeker. Okay, so just some quick definitions here a saver, pretty much their outlook is that as they share in their own resources, A penny saved is a penny earned. You make things happen by getting the best deal, right, you can often be someone that’s very thrifty. Characteristics of a saver would be someone who’s trustworthy organized with money, they also would have some real challenges potentially, including maybe obsessing over money, having a hard time letting go. And they would rarely spend compulsively, they really liked the plan. And they really liked that good deal. Now a Security Seeker, which here was the secondary personality, they have an outlook that better safe than sorry, right protection and security is the definition here. So these individuals make things happen by planning for the future. And they’re often very well prepared. So some defining characteristics here would be they can investigate things thoroughly do a lot of research challenges, of course, could be, you know, some of the potential and again, letting, letting go. And maybe finding that balance that we often talk about in the show of living the rich life along the way. Certainly also trustworthy with their finances, they want to make decisions by confirming that there’s a plan, right? So they’re not, they’re not gonna be very spontaneous, and they’re spending money like to have multiple options. This is just one example, one assessment. But it’s really helpful, again, that we get curious that we reflect upon what is the approach that we have surrounding money, how might that have been influenced by the money classroom that we grew up in, and the more we can understand that about ourselves, as well as our partner, and how we bring those characteristics into the relationship can be really helpful, as we then set a plan going forward.

Tim Ulbrich  08:27

So once we really think about some of those money, personalities, you know, I think it’s then that we want to really figure out how can we set and achieve goals together? Now we’re gonna get into a little bit about, you know, perhaps is it everything is merged when it comes to the finances? Might we have something separate? Some things merged, completely separate. Of course, that’s an individual decision for everyone. But ultimately, on some level, we want to have a shared vision, even if some of those items might be separate. And I think it’s so important, I’ve talked about this on the show before, that we start with the vision, and not necessarily start with the budget or the spending plan, right? Not start in the weeds, but really start on what is the dream that we have financially? What does success look like for us collectively as a unit? And can we agree upon that vision, that direction, that dream that we have for us financially, right? That’s a much, I say, easy but easier conversation than getting into the individual decisions. This is also the place where we really want to get all of those goals, all of those ideas out of our heads onto paper, we want to see what overlaps what doesn’t overlap. Obviously, there’s gonna be some compromise here along the way, but once we get them to be shifting from unsaid to said, right, so Jess can share her goals, I can share my goals, we can see what what is similar, what’s different, and then we can begin to start to compromise and prioritize those. That’s really where we can start to then begin to implement and execute on that vision. So for us, I’ve shared this before on the show, typically what we do is want once a year we’re looking at, hey, what does success look like for us over the next 12 months? Right? Keeping the bigger vision in mind? What does success look like for the next 12 months? And what are those things that we want to focus on spending? You know, so we’re looking at, hey, are we on track with savings goals for the future? And retirement planning? If not, what are some things that we want to surplus in the following year? What do some of the experiences look like for us in terms of vacations, home projects, things like that? What are the giving goals for the year right? These are the things that we need to begin to, again, get out of our heads onto paper so we can start to set a plan. Now, I think it’s really helpful here, especially if you have two individuals that are on completely different pages that this is really really where a third party can be very helpful. I know for Jess and I, our financial planner at YFP has been really helpful in getting us to have conversations not only together when we’re in the room with a financial planner, but also in between those meetings to make sure that this is an open conversation as we can possibly have. Now, I have some questions here that I think are good conversation starters. Right? I started the episode by saying this is not about telling you what you should do. This is really about helping to start conversations, stimulate some discussion so that you can figure out what the system is that works best for you. So I’ve organized these questions into different areas. And I have 25 of them, I’m just going to mention them briefly. And we have a one page resource that you can download for free that will have a list of these questions. You can go to yourfinancialpharmacist.com/25 – two five again, yourfinancialpharmacist.com/25.

Tim Ulbrich  11:43

 Okay, so in the spirit of starting conversations, here are 25 financial discussions that I think are worth having. And let’s start with the first bucket, which is setting goals, budgeting and just the overall approach to managing the finances. So the first question is, have we discussed and agreed upon our short term, midterm and long term financial goals? Now you can define these differently, I think of short term goals is within the next 12 months, next year, mid-term, one to three years in long-term greater than three years. Obviously, you can determine the timeline that makes the most sense of you. And then furthermore, how can we best set, review and update these on a regular basis? So there’s that initial exercise, and then how often are we going to be reviewing these so that we can make sure we are able to implement those in the plan? Sounds simple, right. But everything starts with the vision and getting to some level of an agreement on the shared goals.

Second question here is have we developed and agreed upon monthly spending plan, budget, whatever you want to call it, that accounts for all of the income and all the expenses? And does this spending plan, budget, again, whatever you want to call it, does it represent and include the goals that we just worked through in the first question? Now, again, for some individuals, and I’ll share some data here in a little bit from our community, for some individuals, everything is merged. Some they have some separate, some is completely separate. So obviously, you have to work through this as it relates to how you treat the merging or lack thereof of the accounts. But do we have representation within our spending plan, approach, whatever that looks like lots of different ways to do that. So that the goals, there’s an actual plan to implement and achieve those goals.

Question number three, does one of us take more of the lead than the other when it comes to managing the finances? And if so, are both of us aware of our overall situation? How do we ultimately make sure that both parties are aware of the progress if one person is taking the lead. I have seen that that often, not always, often is the case where one person may take the lead. So if that’s the case, what’s the plan? What’s the strategy? What’s the structure so that both parties are aware of what’s going on? And the overall progress? Right, the overall situation?

Number four, I’ve alluded to this a couple times is the desire to merge all of our finances; to keep some separate, some merged; or to have everything completely separate. Now for Jess and I, we’ve made the decision that everything’s merged, I’m not here to tell you that you should do that, or that’s the only way. But really having that conversation of what’s best for us, is it all merge is a little bit of both, or is it everything that would be completely separate. Number five, do we need to check with one another before spending any money? If so, is it a certain amount? What’s the criteria for this? How do we determine this. Some, you know, couples might have a large purchase or something that would trigger hey, we need to have a discussion about this. So what are those criteria, if any exist when it comes to making some of those bigger purchases? So that’s the first group of questions around setting goals. budgeting and your overall approach. 

Tim Ulbrich  15:01

The second group of questions is around debt management. Debt Management. So question number six here on our list of 25. is how much debt have we acquired thus far? Right? Do we know? Do we know the numbers? Is everyone aware of the debt that’s that’s accrued? And what will be our plan to pay off the debt? Do we both understand each other’s debt position and the feelings perhaps just as important, the feelings towards the debt? Right, for some people, I’ve talked about this on the show before for some people, there can be a significant aversion to debt? Others maybe that’s not the case. So if you have two individuals where you have opposite feelings on debt, that’s an important conversation to have. Are we treating this as our debt? Or is this separate debt? Right? When you think about things like credit card debt, student loans, car payments, or other things that especially may have been existing coming into the relationship. Number seven, again, on debt management, how comfortable are we with having debt? And I would encourage you to break this down further to different types of debt, right, including student loans, credit card, mortgages, car loans, etc. So not just a blanket debt good or bad, but how do we feel about different types of debt? And then final question on debt? Number eight on our list is do we view each other’s debt as our debt? Or is this your debt? Right? And how does that potentially approach how we pay that off? All right, third group of questions is around housing and transportation. So question nine on our list is how do we feel about renting property versus owning a home hot topic right now, given where the housing market is at, given where home prices are and where interest rates are at? And if we already own a home, are we okay with the current situation? Or is there potentially a desire to move? Right? Again, we want to get a lot of these questions and maybe things that we’re thinking about making sure we have an opportunity to discuss with one another. So if we don’t own a home already, how do we feel about renting versus owning a home? What’s that timeline? Like if we already own a home? Are we thinking we’re set? Or is there a potential or desire to move? Next question around housing transportation, number 10 on our list, if currently renting, and there’s a goal to own a home, do we agree on the location, on the purchase price, and the amount of downpayment that would be needed, right? That’s gonna have a big impact on the budget. And again, if things are separate, and not merge, how are we both contributing to that downpayment? And getting ready for that purchase? Number 11, as relates to transportation? Do we view our cars as a necessity? Is it a luxury where we lease? Are we gonna buy our cars? If we buy our cars? Are we paying them outright? Are we going to finance part of it? How do we view the transportation part of the plan? And again, let me pause here and reinforce what I was saying towards the beginning. I don’t really think there’s a right or wrong answer here. The goal is to really get you thinking about, hey, how do we feel individually? How do we feel collectively as a unit? You know, as I think about this question here on transportation, it reminds me of Ramit Sethi’s book, I Will Teach You To Be Rich. I’ve referenced that many times on the show before and one of the things he talks about he starts the book is this concept called Money Dials. And what he’s referring to there is identifying those things that derive the most significance and meaning for you as a part of the financial plan and have a plan to spend money, what he’s referring to is the dial, dial that up. And alternately for the things that you maybe don’t care as much about financially, dial that down, right. For some people, you know, transportation cars may be something that’s has significant value, and for other people, not so much. 

Tim Ulbrich  18:35

Alright, next group of questions relates to kids, children. So number 12 on our list is how do we feel about one of the biggest expenses we often see in the financial plan – daycare? What’s our budget for this? And how does it fit in with other financial goals? Number 13, how do we feel about public versus private K through 12? education? You know, again, this might certainly link back to the home purchase and the location and and where you’re looking for home based on schools. And if it is private education is the goal, how will we plan for this and prioritize it with other financial goals? Number 14, again, in this area of children, how do we feel about paying for our kids college? This is a hot topic, right? You often see maybe people that are split on this. And how do we plan for this? Are we hoping to pay for it in its entirety? A partial amount? Are we banking on you know, scholarships or other funding other family to help taking on debt? What’s the plan for that? And then last question, as it relates to children, what ideas and strategies do we want to employ to teach our kids about managing money? Right? We started this episode talking about the money classroom we grew up in. And for those that have children in the home that you’re raising now, they’re obviously growing up in their own money classroom in your house. And so what strategies are we employing and how are we approaching teaching kids about money? What’s our philosophy about behind that, right.  So this this gets to things like, you know, our philosophy around alarm allowances, and giving, and how we’re going to teach some of those lessons to our kids. And at what ages are they ready for those lessons?

All right, next group relates to saving, investing, and retirement planning. So question number 16, when it comes to the emergency fund, are we comfortable with three months? Right, your general rule of thumb recommendation three to six months of essential expenses? Are we comfortable with that? Three months, six months, something in between, something different? Have we discussed that? Again, are we on the same page with that?

Number 17, what financial goals are we trying to achieve by saving or investing? What does success look like, right? So we often talk about the importance of saving and investing for the future. But for what? What are we trying to achieve? And what does success look like? Number 18? What does retirement look like for both of us? Are there similarities? Are there differences? What’s the desired age? Right? What are the activities? What what are we working on? Which is the next question: what activities are we engaged in during retirement? What are we doing together? What are we doing separately? Right, beginning to envision so that we’re approaching that retirement phase with intentionality.

Next question, how much should we be saving and investing for retirement each month? And how do we balance and prioritizes with other goals? And then final question here on saving investing in retirement planning? What is our risk tolerance for investing? And again, if we have two different risk profiles? How are we approaching that as we’re saving, investing and planning for the future?

Final set of questions as a group, I’m just calling miscellaneous questions. Got four left on the list here. Number 22. How does each of us feel about giving? How much? How often?Where? How will we plan for this? And what priority? Are there certain things that we have to have achieved before we do this or not? Number 23: Do we plan to do the financial plan ourselves? Or are we looking to hire a professional to assist? Are we on the same page about this? If the goal is to hire someone, what are the criteria we’re going to use that will help us find the right fit? Who’s taking the lead in this conversation? What does that look like for us as a unit? When it comes to assisting family financially, whether that be caring for elderly parents, maybe that’s supporting a family member need or some other situation, how do we feel about this? Right? How do we feel about this financially, and the impact that it can have in other parts of our financial plan? And then finally, question number 25? How will we strike that balance between saving for the future and living a rich life today? What does it mean to us to be living that rich life today? And how are we prioritizing that in the financial plan?

So again, that’s 25 conversation starters, there’s a lot there, right, the different categories we talked about, you can download that list again, yourfinancialpharmacist.com/25. I hope you’ll reference that maybe print it off, and have some of those discussions with your partner. Next, I want to give some input not just from me, but from the YFP community on what has and has not worked for them in their own journey of navigate navigating this topic with their partner.

So I recently posted a poll on LinkedIn asking the following question, that for those that are working with a significant other spouse or partner on their finances, which of the following best describes your situation: is everything merged or all the finances merged? Are some things merged something separate? Or is nothing merged? In essence, everything is separate. And what we saw from that data was just shy of 50%- 49% responded that all of the finances were merged. 42% responded that some were merged and some are separate. And 10% responded that nothing was merged, and that everything was separate in their accounts. Now, some of the comments and advice that I thought were helpful to pass on and again, some some different perspectives here. Kelly had this to say lots of systems can work. But it all starts with transparency. It’s not uncommon for one person in the household to do the bill pay, and thus see more of the transactions. Periodic money dates can help facilitate conversation. A favorite topic in our house is identifying mutual goals and where we want to prioritize funding for the year, sometimes their goals are not aligned. And that is important conversation, as well. So Kelly, comes transparency. Having that open conversation having those periodic money does it dates and sometimes those goals aren’t aligned, and important conversation to get on the same page. Tracy said that we have a joint household account, where we contribute an equal amount each month to cover our household expenses, and some minor rainy day savings. We tossed around percentage based on income but landed on equal flat dollar amount. We also have separate personal spending accounts for ourselves, so we don’t feel like we have to justify personal spending to one another. We’ve divvied up who contributes and covers what to each savings bucket and who does the insurance via their paycheck all this to say after typing this that our marriage is basically a business. I thought that was some humor to add in there as well. Cassidy said my husband, I follow the 50-30-20 budgeting process right now. We have a joint account where 50% of our income goes towards household expenses and joint purchases, a joint high yield savings where we both contribute 20% of our paycheck for larger goals. And then 30% goes in our fun money personal checking accounts. So far it’s working great ensures that we’re both contributing an equitable portion of our income.

Final one that came in is someone shared just got married in summer of 2023. My husband wanted to keep our finances separate, except for one joint checking to pay utilities out of. This came from seeing his parents get divorced about six years ago and had always fought about money. He did not want that to be us. So going into the marriage, we plan to keep our own savings. I that’s a great example before I go further with this one of how that upbringing, right, how that money classroom can impact how we approach our money today. She goes on to say that we’re now nine months married, and we’re getting ready to buy a house with the need to pay the mortgage, we’re rethinking finances and will likely be combining more of our money. He prefers a separate checking account for each item, such as utilities and mortgage, we still plan to keep the money we had pre-marriage as our own stock savings, mutual funds, etc. We have a joint credit card for joint expenses and groceries that’s worked well. We still have separate credit cards. Being upfront about money has been so important to us. We’ve had several long conversations about money, pre-marriage, and within the last few months to get us set up for success. So it sounds like here, there’s even some transition, as they’re getting ready to purchase a home. They’ve been married now just shy of a year, maybe perhaps more that’s moving into the joint accounts, but a system that they’re still working through.

So I appreciate all of those that contributed providing different ideas. So again, the spirit of this right is to identify that system that works best for you. Right works best for you and your partner, really accounting where we started with reflecting on and getting curious about what is the money mindset? What’s the money personality approach that I have? And do I have a good understanding of that for me, as well as my partner? Really coming up then with those shared goals? That vision we talked about? What does success look like in the short, mid and long term, and then beginning to work through those individual areas of the financial plan.

Tim Ulbrich  27:19

Well, certainly last but not least, as many of you know, we have a team of Certified Financial Planners at Your Financial Pharmacist that we offer fee-only financial planning and tax planning, we work with pharmacists all across the country. And certainly we’d love to have the opportunity to work with you. And we’d love to have an opportunity to talk more to see whether or not the services are a good fit. You can learn more about our fee-only financial planning services again at yourfinancialpharmacist.com/learn. Again, that’s your financial pharmacist.com/learn. I think, as I mentioned a couple times that third party, right, that third party can be so helpful to facilitate some of these conversations and to begin to execute on the different aspects of the financial plan. Well, thanks so much for listening, and have a great rest of your week. 

Tim Ulbrich  28:05

Before we wrap up today’s show, I want to again, thank this week’s sponsor of the Your Financial Pharmacist Podcast,  First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists and the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single family home or townhome for first time homebuyers and has no PMI on a 30 year fixed rate mortgage. To learn more about the requirements for First Horizon’s pharmacist home loan, and to get started with the pre approval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan. 

Tim Ulbrich  28:51

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

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YFP 355: 5 Financial Moves to Make After Graduation

Posted on by YFP Media

Sponsored by YFP+, YFP Co-Founder Tim Ulbrich shares five key elements for building a strong financial foundation after graduation.

Episode Summary

On this episode sponsored by YFP+, host Tim Ulbrich outlines five key elements for building a strong financial foundation. Whether you are a pharmacy student looking ahead, a soon to be 2024 graduate, or a resident, fellow, or new practitioner trying to find solid financial footing, Tim shares what it means to build a strong financial foundation, no matter where you are in your career.  

With the average pharmacist facing staggering student loan debt and often lacking financial knowledge, Tim shares practical strategies to help pharmacists to begin to navigate debt management, investing, insurance coverage and retirement planning.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

  • Financial moves after graduation, including debt management and investing. [0:00]
  • Financial planning for pharmacists, including student loan debt and income management. [3:52]
  • Financial planning for pharmacists, including assessing current financial state and setting long-term goals. [8:28]
  • Proactive budgeting to prioritize financial goals. [13:50]
  • Investing early and often for financial success. [18:24]
  • Investing for pharmacists, including retirement accounts and tax-advantaged savings. [23:39]

Episode Highlights

“Without a plan, pharmacists certainly may be income rich, but net-worth poor.” – Tim Ulbrich [6:48]

“I saw firsthand how good decisions early in the career could certainly accelerate the financial plan, as I now look back nearly 18 years as well as how some of those bad decisions had a lingering effect in our financial plan. That’s part of the reason why I’m so passionate about teaching this topic to pharmacists at all stages of their career.” – Tim Ulbrich [8:08]

“At the end of the day, money is a tool. And we’ve really got to strike this balance between making sure that we’re taking care of our future selves, making sure that we’re putting this foundation in place today, and also living a rich life along the way.” – Tim Ulbrich [12:21]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast for each week we strive to inspire and encourage you on your path towards achieving financial freedom. On today’s episode, I’ll be covering five financial moves to make after graduation. Whether you’re a student looking ahead, a soon to be 2024, grad, or resident fellow or new practitioner trying to find solid financial footing, this episode is for you. We’ll be talking all about what it means to build a strong financial foundation, including practical strategies that you can implement in your own plan. 

Before we jump into today’s show, I have two exciting announcements. First up, make sure to sign up for our next YFP webinar on Thursday, April 25 at 8:30pm Eastern, where pharmacist and real estate agent, Nate Hedrick, The Real Estate RPh, co-host of the YFP Real Estate Investing Podcast, will be presenting on your checklist for buying a home in 2024. During this free webinar, Nate will walk you through how to know if you’re ready to buy a home. We’ll discuss the current state of the housing market and give valuable insights into the home buying process. You learn more and register at yourfinancialpharmacist.com/webinar again, yourfinancialpharmacist.com/webinar. 

Second announcement last year we launched a nonprofit YFP Gives that aims to empower a community pharmacist to give to alleviate the indebtedness of the PharmD students and graduates, to help enhance the financial literacy within our profession, and to support other pharmacist-led philanthropic organizations and efforts. We’re thrilled to announce that our first round of the YFP Gives scholarships is now live! We’ll be giving out three $1,000 scholarships and applications are due on April, 30 2024. For those eligible for the scholarship include PharmD students and new practitioners within five years of graduation. You can learn more and apply at yfpgives.org/cholarship. Again, yfpgives.org/scholarship. 

Alright, let’s hear more about our new online community YFP Plus, and then we’ll jump into today’s episode.

Do you ever feel like you’re trying to figure out this money stuff all on your own and aren’t sure where to turn? Maybe you’re overwhelmed with determining how to tackle your student loan repayment. Or perhaps you’re living paycheck to paycheck despite making a six figure income. Maybe you have a negative net worth and aren’t sure how to climb out of debt or make progress on your financial goals. Trust me, I’ve been there. When I finished my residency, I was starting at $200,000 of student loan debt and confused about how to best navigate the transition to new practitioner. I had a great income, but was living paycheck to paycheck and felt trapped. The good news is that you don’t have to continue feeling that way. At Your Financial Pharmacist, we want pharmacists to have the education, resources, and support they need to get a plan in place so they can stop feeling overwhelmed and they can use their six-figure income in the best way possible. That’s why we created YFP Plus an online membership community that empowers pharmacists to gain the knowledge and skills necessary to take control of their financial well being. Inside YFP Plus you have access to exclusive on demand courses. Like the prescription for student loan success, you have access to the right capital financial planning tool so you can track your debt assets and net worth to view your financial progress. You’ll have access to exclusive live events, monthly themes and challenges, a space to ask questions to YFP financial planning and tax professionals, and a community of like minded pharmacists on a similar financial journey as you. If you’re ready to get started inside YFP Plus to take control of your finances, visit yourfinancialpharmacists.com/membership. And if you sign up today, you’ll get a 30 day free trial. Again, that’s yourfinancialpharmacist.com/membership. 

Hi there, Tim Ulbrich here welcome to this week’s episode of the YFP podcast. Excited to be talking about this very important financial transition, whether it’s going from student to new practitioner or resident or fellow to new practitioner, critical five year window, where we need to really be thinking about how we can best optimize the financial plan and get on some solid financial footing. So in the next several weeks, we’re about 12,000 pharmacy students that are going to be awarded the doctor of pharmacy degree joining them of course in the workforce will be those completing postgraduate training, whether that be residents, fellows, graduate students, and these graduates on average are gonna make about $120-$130,000 a year of course, depending on where they live in the area of employment they choose. And if we assume that they work a 40-year period with an average raise cost of living about one to 3% they’re going to earn approximately six to $9 million throughout their careers. Let me say that again: about six to $9 million of gross income throughout their careers. 

Now if we assumed that about 30% of that income would be eaten up by federal income tax, FICA tax, which is Medicare and Social Security, state income tax, health insurance premiums, and a small contribution to an employer sponsored retirement plan, that leaves about four to $6 million of take home pay. So again, we start with about six to $9 million of gross income, we’re left with about four to $6 million of take home pay. Now I know that’s imperfect math, right? There’s a lot of assumptions that are in there, but just Just stay with me for a moment. We can debate how far a six figure income does or doesn’t go. But let’s agree that a pharmacist income on average, is about $50,000 above the average household income in the United States.

So if we look at the average household income in the United States, it’s about $75,000 per year, it was the average pharmacist’s income according to the Bureau of Labor Statistics, that’s about $130,000 per year, right. So by all intensive purposes, pharmacists make a good income. And if it’s managed wisely, it should be more than enough. So what’s the problem? Well, I’ve talked with hundreds of pharmacists who make a great income but feel like they aren’t progressing financially. They feel stuck. And yes, student loan debt is a big contributor, but it’s certainly not the sole culprit. And I know that because we recently had three-plus years worth of a pause on federal loan payments starting back at the beginning of the pandemic, and those feelings of making a high income, but not progressing financially didn’t go away during that time period. The main reason I see pharmacists experiencing financial stress is the omission of having an intentional plan in place that includes clear goals, and a system that prioritize and funds those goals on a monthly basis. It’s proactive, intentional planning. Without a plan, pharmacists certainly may be income rich, but net-worth poor.

That’s really what today’s episode is all about. It’s about having an intentional plan, and building a strong financial foundation early in one’s career. Now, I know the importance of this because I lived it. 

So as many of you know, I graduated from pharmacy school in 2008. I did a year residency, in 2009. Came out of residency entered an academic position. And I remember vividly having that feeling of, wait a minute, I make a good income, but I don’t feel like I’m progressing financially. And the main reason for my journey for our journey as a family is that early on, we were navigating through a sizable amount of student loan debt, a little over $200,000 of student loan debt. And we would eventually get that paid off in the fall of 2015. That was a big milestone for our journey, certainly one that I’m excited about and excited and teaching others about as well.

However, we made that journey more difficult than it needed to be. I didn’t understand terms like Public Service Loan Forgiveness, there wasn’t great information out there. We paid more interest than we had to in the journey. We perhaps, weren’t looking at how other parts of the financial plan fit together while we are also pursuing that debt repayment. And because of that, I saw firsthand how good decisions early in the career could certainly accelerate the financial plan, as I now look back nearly 18 years as well as how some of those bad decisions had a lingering effect in our financial plan. That’s part of the reason why I’m so passionate about teaching this topic to pharmacists at all stages of their career. Here, we’re of course talking about those that are making that transition. Now let’s talk about what I mean by having a strong financial foundation. 

So through my own experience, and in teaching 1000s of other pharmacists on this topic, I’ve come to appreciate really five key elements that are critical to building a strong financial foundation. Now let’s be clear, this is not five things that once we check the list, this is the finish line, right? Think of this as literally the first couple blocks that we’re putting in place on the foundation of our financial plan so that we can grow and thrive in the long term and do so with confidence. So let’s talk through what these five areas are. 

Number one is completing a financial vitals check. So I believe the starting point is to complete an honest self assessment of where you are today with your personal finances as a pharmacist, right. no need for judgment, no need for shame. Where are we today? Because before we can implement a plan, right, we have to have a good idea of our progress made thus far and what are some of those opportunities that we could potentially improve upon.

So here are just a handful of questions to really help you consider areas of the financial plan that might require your attention. Number one, do I have an emergency fund in place, approximately three to six months worth of essential expenses? Number two, do I have any revolving high interest rate credit card debt, right? I’m not talking about the credit card charges that you pay off each month but that revolving debt that’s accruing. Perhaps 20-25% interest. Number three, do I have an optimize student loan repayment strategy? Critical as we look at many new practitioners and the average debt load that folks are carrying, this is often a key piece of the financial puzzle that we have to put in place, and then build around it. Do I have sufficient own occupation, long-term disability insurance that covers about 60% of my income in the event that I’m unable to work as a pharmacist? A few more questions. Do I have sufficient term life insurance to care for loved ones who depend on my income? If that’s applicable. Do I have adequate professional liability insurance? And do I know my retirement number? Have I thought about, certainly far away, but what is that number that we’re shooting for in the future? Am I on track? If not, how much should I be saving each month to ultimately achieve that goal? We have a lot of information, and resources in each one of these areas available at yourfinancialpharmacist.com.

We certainly have talked through many of these topics at length on the podcasts and the blog, so make sure to check out those resources. Furthermore, if you if you want to go through some of this in more detail yourself, we have a really neat tool available called the YFP Financial Fitness Test. We’ll link to that in the show notes. It’s a really fun interactive quiz that will take you through essentially conducting a vital check in and help identify some areas that you perhaps can improve upon, and that you might want to implement as you look at setting goals for the future. So that’s step number one, completing a vitals check

Number two. Step number two is setting the vision setting the vision. So after we reflect on the current state, right, the current situation, the Financial Vitals Check. It’s time to really establish a vision for the future. Now, this is the area where I think it’s really helpful that we let ourselves dream a little bit right, we just perhaps bogged ourselves down and kind of looking at the current state and the reality, maybe that didn’t bring the greatest feelings of joy. And so this is our opportunity to really let ourselves dream a little bit. Spending time reflecting on questions like what does it mean to be living your rich life? What brings you the most joy? As it relates to the financial plan? Are there experiences such as traveling, giving spending time with family and friends or something else? Right, at the end of the day, money is a tool. And we’ve really got to strike this balance between making sure that we’re taking care of our future selves, making sure that we’re putting this foundation in place today, and also living a rich life along the way.

One more final question to reflect upon, if you were to find yourself in a position where you were financially independent, the find that you are no longer required to work. How would you be spending your time perhaps for some of you? The answer is, hey, exactly like I am is great. Right? This is meant to help us identify what are those things that derive and give us the greatest significance, and meaning in our lives. And for every person, this certainly can look different. So that’s number two. Step number two, letting ourselves dream setting the vision, before we start to chart the path forward. Alright, step number three, is to develop the spending plan to develop the budget to develop the system that’s going to help us bring this vision to reality. Right. So in step number one, we identified what are some of the opportunities, what are some of areas that we might want to focus on. Step number two is really about the vision of where we want to go. 

Step number three, is now about making that come to life. Now, while one spending plan method, budgeting method, whatever you want to call, it will never be right for everyone, I really believe that the zero-based budget is a great place to start, especially for those early in their career, those that are looking to get back on track. Reason being is that with a zero-based budget, you give every dollar you earn a job before the month begins. This is a proactive planning process. Now, I’m not suggesting this as a method that you stay with forever. This certainly can feel onerous at times. But as we’re looking at defining how we’re spending our income, making sure that we’re allocating income towards our goals, and that we have a good track on what that income is and how it’s being spent. This system is really going to help us shine a light on that. So the goal is again, we’re doing this proactively is to spend your paycheck essentially down on paper to zero, and to ensure that your financial goals can be funded rather than hoping you have money leftover at the end of the month.

Okay, so for example, let’s say that after step one, which again, step number one was completing the vitals check, and step number two is really setting that vision. Let’s say you identify three goals that you want to focus on over the next year, just as one example. Let’s say goal number one is to save $500 per month for an emergency fund, and up until it’s fully funded at $25,000. Let’s say that you want to save $300 per month in a Roth IRA to supplement your retirement savings. And finally, is the third goal. Let’s say that you want to save $300 a month and a travel account to fund one trip per year. Okay, so in that vision setting, you determine that travel was a was an item that was really important. So in this case, with these three goals, right, we have some money set aside in earmark for the emergency fund some for retirement savings in a Roth IRA, some in a travel account, when you go to work the budget through the budgeting process, you want to have those three areas represented just like any other expense, so that you prioritize these before the month begins.

Again, we’re working proactively really important, rather than hoping we’ve got something leftover at the end of the month. So just like we account for a mortgage, or rent payment, or utility payment, or a car payment, right, we want to think about our goals in the same sense, and making sure that we’re building our plan accordingly to prioritize and fund those goals. In my experience, and in talking with others, so much of the stress, so much of the feelings of overwhelmed and confused around the financial plan comes from having all of these competing priorities swirling in our minds, without necessarily a plan for how we’re actually going to achieve them. Right. And so what we need to do, and what we’re trying to do here in step number three is get those ideas out of our head onto paper. So we can list them down, we can prioritize them, and we can start to put a plan in place to actually achieve those goals and to see the progress.

Now, sometimes we realize that, hey, in this season, or in this moment, we’re not necessarily going to get to all of those goals. That’s certainly normal. But at least we have an expectation of what’s happening. And we’ve been intentional with proactively planning how we’re going to work through those different goals. Now, if you’re ready to try this out yourself, we’ve got a free budgeting template you can download, we’ll take you through this process that I’m referring to here. You can download that at yourfinancialpharmacist.com/budget, we’ll link to that in the show notes as well. Again, your financialpharmacist.com/budget. Alright, that’s step number three, developing the spending plan. 

Step number four, is automating your plan. Now I’ve talked about this several times on the podcast, and I’ve referenced that this has really been one of the most transformational things that Jess and I, over the last 15-16 years since I graduated, have really evolved into that has had a significant impact on our own plan. So once we do the work in steps one through three, right. Once we’re able to complete that vitals check to identify what are some of those gaps, what their progress once we’re able to set the vision once we implement the spending plan. Now it’s time that we make sure we execute, right we actually achieve these goals. And that’s really what automation is all about. I

n his book I Will Teach You To Be Rich , Ramit Sethi says that automating your money will be the single most profitable system that you ever built. And I agree automation is so apparent, so effective, so easy to implement, yet vastly under utilized. It involves essentially scheduling the transfer of funds to the predefined goals, right? We just talked about that in the previous steps and doing so confidently knowing that we’ve already accounted for these in the budget, right, because we were proactively planning during that process. Sure, it takes a bit of time to set up. But once it’s set up, it provides a long term return on your time benefit. And perhaps equally, if not more important peace of mind knowing that you’ve thought about prioritize and have a plan working for you to fund your goals. Right. I just mentioned a couple moments ago that so much of the feelings of stress and confusion, overwhelmed come from that uncertainty come from the unknown. So this step is all about bringing it into the known and executing on the plan that we set.

Tim Ulbrich  18:54

So in terms of operationalizing this, one example certainly not the only way, my wife Jess and I, we have a high yield savings account. We use Ally Online Bank for all of our accounts. And inside of that high yield savings account, we essentially have several different buckets. And those buckets are named according to the goals that we’re working on. Right. So one bucket, for example, is an emergency fund. Another bucket might be for a vacation that we have earmarked, you know this summer or next year, one bucket is for the next car purchase one bucket might be for something related to the boys’ education or to the activities that they’re involved in. So all of that rolls up into one high yield savings account. So it’s liquid, it’s accessible, we can get it we can move it to our checking account if we need it. However, the key there is it’s earmarked and defined for the goals that we’re trying to achieve. Now. Just like I said, a little bit of a go, you know, this may not be a forever system that you have to develop. We have found it to be something that’s beneficial ongoing because it’s a visual reminder. It’s the visual aspect of hey, we set those goals, here are the actual buckets, right named for the goal that we worked on. And it allows Jess and I, I’d have some really good conversations. And of course, transparency into the system that we’re working on. This system it took us about 15 minutes to get set up. And again, you could just as easily achieve it through perhaps your own bank that you already have, or through tracking these in a simple spreadsheet. So, as I mentioned, the buckets are simply a visual representation, it really is just sitting in one high yield savings accounts. And it’s then earmarked to these different buckets. So that’s step number four is automating the plan. 

Step number five, again, as we’re on this journey, towards building a strong financial foundation, is investing early and often. Investing early and often. Now, Albert Einstein is credited with saying whether he said it or not, compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t, pays it. Right, regardless of whether he actually said it’s really good advice, the time value of money is real. And the earlier you save, the less aggressive you’re going to have to be. Now easier said than done, right? Considering many competing priorities that new practitioners are facing. And I remember well, in my journey after graduating 2008, not only was it the student loans that were staring us in the face, right, it was a potential home purchase, it was the emergency fund, it was building up some additional reserves, and of course wanting to enjoy some things as well during that transition. So there’s a lot of things that are coming at you in this season of life. And shortly thereafter, we would start our family and certainly new expenses that would be there as well. 

Now let’s take a look at an example of how powerful early investing can be. Okay, early investing. So if we assume and you can run your own numbers using a number of calculators, we have several on the YFP site as well. But if we assume a pharmacist is making, let’s say, $126,000 per year, if we assume that their incomes gonna go up on average, about 2% per year could be a cost of living adjustment could be a performance adjustment, a combination of both, we’re gonna assume that they’re going to put away 15% of their income. And we’ll assume that there’s an average annual rate of return on that investment of 6%. Now, we know the markets don’t work like that in terms of a clean 6% every year. But for the sake of the calculation, we’ll go with that we’ll assume no match from the employer, and that they have a planned retirement age of 60. Okay, so pretty normal situation. So I’m gonna make an average pharmacists salary that’s putting away about 15% of the year and they want to retire at the age of 60. Now, what we see is that if they start at the age of 25, saving 15% of their income with these assumptions, when they get to the age of 60, the math tells us they’re gonna have about $2.6 million. Now, is that enough is a whole another question, right, we’ve talked about that. On the show before we’ve done an episode on how much is enough, we’ll link to that in the show notes as well. So 25, if they start, we’ve got $2.6 million at the age of 60, a coordinator these assumptions now if we wait to the age of 30, right, because of student loans, because life’s expensive, there’s a lot of things going on that 2.6 turns in $1.8 million. An $800,000 difference already. If we wait to 35, we’re down to $1.2 million. If we wait to 40, we’re down to $800,000. Right. So that’s the power of time value of money. That’s what Albert Einstein was talking about with compound interest in  really the value of investing as early as we can, knowing that the earlier we invest, perhaps the less aggressive we’ll have to be the later we invest, the more that we’re going to have to do to catch up. 

So naturally, then the question is, well, where do I save? Right? And that depends, of course, there’s lots of different options. Everyone’s investing journey is going to look a little bit different. We have to really assess what’s the risk tolerance, what’s the risk capacity, what are the goals, but many pharmacists are going to be focused early on, especially in their career on tax advantage, retirement accounts, tax advantaged savings accounts. So these would be employer sponsored accounts like a 401k or a 403B offered through your employer. Of course, as the name suggests, there’s both Roth and traditional versions of those anytime you hear traditional thing pre tax, anytime you hear Roth and post taxt. There would also be opportunities to save and something like an IRA stands for individual. So these are not through your employer. Again, there’s a Traditional and Roth version of those. Lower contribution limit in 2024 $7,000 versus in the employer sponsored accounts $23,000. And then the other one I typically think of in this bucket would be an HSA or health savings accounts, which again, we’ve talked about on the show at length before we’ll link to those episodes in the show notes as well. So those are the five foundation and steps and I would encourage you with each one of those to learn a little bit more. Right and as I think about and zoom out here for a moment we think about being on this financial journey throughout your career. Right. So important. Remember, here we’re talking about laying the early bricks of the foundation. Again, this is not the finish line where we start to check these boxes off, but rather, it’s that strong foundation upon which we can then build and hopefully build wealth throughout our career and live confidently knowing that we’ve done some of the hard work early on. So just a quick recap, step number one, we talked about completing that vitals, check the self assessment. Step number two, we talked about setting that vision step number three, developing the spending plan. Step number four, automating that plan, right, that was all about the execution. And then step number five is investing early and often. 

So let me wrap up by sharing some advice that I got from the YFP community. I recently reached out to the YFP community to say hey, what are some of the things what are some of the things that you think would be helpful as you reflect back on your journey, going from student to new practitioner student to resident to fellow to a new practitioner that you wish you would have either learned or you wish you would have followed that advice and let me just share you a handful of those response.

One person in the life he can be said it’s worth it to learn how to budget early even on a resident salary you can save. 

Another person said there’s one financial hack I wish someone had whispered in my ear my own graduation, house hacking with a high value short term, or midterm rental model. We’ve talked about house hacking on the show before referring there to essentially living in a unit can be a single unit duplex, triplex quad and then renting out a portion of a single family house or if you have multiple units renting out other units.

Another person in the YFP community said I wish I would have learned about the different student loan payment options and how to lower my taxes as a W2 employee. 

Another person share this advice don’t put off paying your loans if you’re not going down to forgiveness pathway, tackle them head on, and get them done with. Financial life only gets crazier down the road with the addition of a spouse and kids. Looking back, I wish I would have lived as a student resident lifestyle for two years or more and paid extra to knock out those loans early. And then finally, someone else said if you do income based repayment for your student loans, don’t do forbearance during residency, your payments will be low, and you’ll be finished a year earlier.

So just a few pieces of advice from those in the YFP community that I’ve made that transition. I hope you enjoyed this episode. Thank you so much for listening on a regular basis. Again, we have several of these topics we talked about before we’ll link those into the show notes. And I hope you have a great rest of your week. Take care.

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

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YFP 351: Legacy Planning 101: How to Build Your Legacy Folder

Posted on by YFP Media

Tim Ulbrich discusses the importance of creating a legacy folder to organize essential financial documents for access during emergencies and peace of mind.

Episode Summary

In this episode, YFP Founder and CEO, Tim Ulbrich, delves into the critical aspect of establishing a “legacy folder” to efficiently organize essential financial documents and accounts. This folder serves as a vital resource in emergencies, streamlining access for loved ones and averting confusion or delays. Drawing from personal experience, Ulbrich shares how he and his wife maintain their financial plan and essential documents in a shared electronic folder and a secure physical safe at home, ensuring accessibility and peace of mind during unforeseen circumstances.

Tim explores the contents of the legacy folder, which encompass a comprehensive checklist, electronic copies, and hard copies of vital papers such as birth certificates and social security cards and other critical documents like insurance policies and estate planning materials.

Learn how to proactively organize your financial affairs to safeguard against unforeseen events, ultimately fostering financial peace of mind and security.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

  • Building a legacy folder for financial peace of mind. [0:00]
  • Creating a “legacy folder” for financial documents. [2:36]
  • Important documents, insurance policies, estate planning, and car titles. [6:50]
  • Organizing financial documents for emergency situations. [14:59]

Episode Highlights

“So when it comes to why having a legacy folder is important. Getting organized with your financial records plays a significant role not necessary in terms of moving the needle on your net worth but in making sure you and others have access to all the information that you need to make informed decisions.” – Tim Ulbrich [2:24]

“Now, what is the legacy folder? So essentially the idea of a legacy folder, whether it’s a physical copy and electronic copy, or combination of both. It’s a place where you have all of your financial related documents. So in the event of an emergency, others will be able to quickly assess your financial situation and get access to all of the documents and accounts that pertain to your finances.” – Tim Ulbrich [4:07]

“Don’t underestimate the peace of mind and the clarity that can come from having this information collected.” -Tim Ulbrich [5:25]

“Once you get organized with your information, you’re going to be walking from that point of confidence, you’re going to feel prepared in taking action on other parts of your financial plan.” – Tim Ulbrich [16:49]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRO]

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week I’m talking through Legacy Planning 101: How to Build your Legacy Folder and why it’s important. To assist with implementing this important step and your own financial plan, make sure to download the YFP Legacy Folder Checklist at yourfinancialpharmacist.com/legacy. This checklist includes a list of 15+ financial related documents that you can have a record of in your legacy folder. It helps you identify key parts of your financial plan that you may or may not have in place but need to get started. And it helps give you peace of mind knowing that in the event of an emergency, all of your financial documents are organized in in one location. Again, you can access that free checklist at yourfinancialpharmacist.com/legacy. 

Tim Ulbrich  00:51

Now before we jump into today’s episode, I have a hard truth for you to hear making a six figure income is not a financial plan. Yes, you’ve worked hard to get where you are today. Yes, you’re earning a good salary. But have you ever wondered, am I on track to retire? How do I prioritize and fund all these competing financial goals that I have? How do I plan financially for big upcoming life events? Whether that be moving, having a child, changing jobs, getting married or retiring? And why am I not as far along financially at this point in my career, as perhaps I thought I should be? The answer your six figure income is not a financial plan. As a pharmacist, you have an incredible tool in your toolbox your salary, but without a vision and a plan that good income will only go so far. That’s in part why we started Your Financial Pharmacists back in 2015. At YFP we support pharmacists at every stage of their career to take control of their finances reach their financial goals and build wealth through comprehensive fee only financial planning and tax planning. Our team of professionals including certified financial planners and a CPA, work with pharmacists all across the US and help our clients set their future selves up for success while living their rich life today. Ready to see how Your Financial Pharmacist can support you on your financial journey? The next step is to book a free discovery call with our team by visiting YFPplanning.com Again, that’s YFPplanning.com Alright, let’s jump in today’s episode.

Tim Ulbrich  02:18

Hi there, Tim Ulbrich here. Welcome to this week’s episode of the YFP Podcast. I’m flying solo this week to discuss legacy planning 101: how to build your legacy folder and why it’s important. Now this episode is going to be a brief one. But I hope you can walk away with a specific action item or to relate it to your own financial plan. Whether that be to create a legacy folder if you don’t already have one or if you do to make sure that you look at it and update that information if it’s been a while. So when it comes to why having a legacy folder is important. Getting organized with your financial records plays a significant role not necessary in terms of moving the needle on your net worth, but in making sure you and others have access to all the information that you need to make informed decisions. Think for a minute about all the various financial accounts, documents, records, insurance policies, tax returns that you have right, the list quickly grows to be one that is overwhelming. And the more you operate in your own system, the easier it is to navigate for you. But unfortunately harder for others to unravel, should they have to do so in the future. Right? Think of a situation where in the event of an emergency, you have this beautiful system you’ve created, you know where all your accounts are all your files, all your passwords, but unfortunately, others aren’t able to readily access that and to make sense of that information. 

That’s where the legacy folder concept comes in. I actually first heard of this idea, it’s not my idea, I first heard of it when taking Dave Ramsey’s Financial Peace University class, this was probably 15 years ago through our local church. And I remember walking away thinking, wow, that is so obvious, yet so important. And something that Jess and I hadn’t yet done at that point in our financial plan. Now, what is the legacy folder? so essentially the idea of a legacy folder, whether it’s a physical copy and electronic copy, or combination of both, which is what we have, and I’ll share more information about that. It’s a place where you have all of your financial related documents. So in the event of an emergency, others will be able to quickly assess your financial situation and get access to all of the documents and accounts that pertain to your finances. We just went through updating this – Jess and I did in our own financial plan, shifting everything to an electronic version with the exception of a couple things that we keep in a safe at home, so that in the event of something happening to Jess or I or both of us, those caring for our boys along with our financial planning team at YFP readily have access to all the necessary information that they would need. 

So when I think of the importance of this, you know, it really is peace of mind but there’s a secondary part that we often don’t think about, which is it forces you to get organized right? When you go through this process, and I’ll talk about the different sections of our own legacy folder. When you go through this process, you quickly might realize, wow, I’ve got some areas of the plan that I need to clean up, I need to gather some information. And this like many other parts of the financial plan, sure, it takes a little bit of time to get set up. But once you have it set up, right, we’re then in that update or maintenance mode. And again, don’t underestimate the peace of mind and the clarity that can come from having this information collected. So what’s included in the legacy folder? Well, I mentioned our checklist before and if you didn’t already download that make sure to download the YFP legacy folder checklist, you can access that again, at yourfinancialpharmacist.com/legacy that will give you a good guide. 

There’s no one right answer to this. So I’m going to talk through what we have in our legacy folder. And you can see maybe some of that makes sense. Or maybe you have other documents and sections that you would want to include. So here’s how we have it organized in a combination of a Google Drive a shared drive, and a safe at home with the password the master password to our One Password, which is the the password account that we use the password management account that we use, I have the master key password in a safe at home, along with some hard copies of some documents like birth certificate, social security card, etc. Those things are in the safe, everything else is stored electronically and anything that’s in the safe as referenced as such in the electronic documents so so keep that in mind to combination of an electronic folder we used to have this all in a paper copy it was in a blue folder, we used to joke with our my parents and our in laws that hey, if anything ever happens to Jess or I – get the blue folder! For obvious reasons, having everything in a hardcopy wasn’t ideal in terms of updating that as well as making sure that the integrity of documents stay in place. 

Okay, so section one is what we call important documents. Okay, so these are birth certificates for Jess, for me, for our four boys, these are our social security cards for us and the boys, this is our marriage certificate. These are our passports. And these components, we keep in a fireproof safe at home, obviously, because the hardcopy is important to have. So that’s section one important documents. 

Section two is insurance policies, and information. So this is something that we have to update. Some of these we have to update annually, others not so much. So for example, long term disability policies or term life policies unless something changes with those policies, you know, we’re not updating those on a regular basis. But this includes things like auto insurance policies, homeowners insurance policies, or umbrella insurance policy, or health insurance policies, long term disability insurance policies, and our term life insurance policies. And we have a couple of different term life policies and long term disability policies. So all of that is included here in section number two. Now, what I have done typically in the electronic version, is I’ll list these out. And then I have the the actual policy hyperlink. So it can be easily reference to get to the actual policy, right, whether that’s a term life, disability, or another type of insurance policy. So that’s section two insurance policies and information.

Section three is estate planning documents. So we have an electronic copy on the Google Drive folder, the shared folder, and then we have a hard copy of these as well, because of the wet signature that’s needed on these and each state is different. Ours is a wet signature with a note notarized copy. So we have a hard copy in the safe at home. So these include our revocable trust agreements, this is our healthcare power of attorney, this is our living will, our last will and testament, et cetera, a lot of work to be done here. Now, if you’re hearing those terms, and thinking, Wow, maybe I need to get my estate planning documents in place. We’re gonna be talking more about that on the podcast, but I would reference you back to Episode 222. We’ll link to that in the show notes, when we brought on a couple of attorneys to talk about why estate planning is such an important part of the financial plan, as well as Episode 310, when Tim Baker and I talked about dusting off the estate plan, so this is not a you set it and you’re done. 

Again, most of the work is upfront. Sure, there’s an investment of time and money to get these documents created. Again, the value is in the process of getting these created. And then you’ll have to update these periodically. So Jess and I often joke that our youngest son, Bennett, he wasn’t named individually in our documents when we created the so I guess that’s how it goes right when you’re the fourth son in the family. So he’s represented –  it does address future children. But it’s just funny that he’s not called out individually. So we’ve got some updating to do there. So that’s section three – estate planning documents. And again, we keep a hardcopy in the safe. And then we have an electronic version of that available as well. 

Section four is car titles. Now I’m not sure how valuable these are based on the current conditions of our minivan and our other vehicle, but, you know, calling these an asset would be a stretch but nonetheless, they have some value. Okay, so we have the car titles, readily available in section four so that someone could quickly sell or transfer the title of the car if need be. That’s section four car titles. 

Section five is all documents related to our homeownership, okay, this is the deed on our home. This is the HELOC that we have open in the event, essentially, we have this as a backup emergency fund or if we need to tap into some of the equity in the home. So this is the HELOC documents. This is another copy of our homeowners insurance just to have it all in one place as well. So any important document related to the home, obviously, information about the mortgage, all of that is here in Section Five. 

Section six is probably the biggest document I think, or close to the biggest section, which is a summary of all of our financial accounts. It’s our net worth tracking sheet, which I’ve talked about before on this show. And it’s all of our social security statements. Now I was just talking with a group of pharmacists last night that I was presenting to and I was talking about, hey, how many of you have pulled your Social Security statements to see your projected benefits, and I kind of got this impression that it was very few if any, right. So if you haven’t done that, it’s a good action step you’re going to do if you go to ssa.gov, to look at your Social Security statements, it’s got good information on there on projected benefits, and you can see your work credits. It’s pretty cool.

But this is a section where I have a table of contents that explains every account we have, right. So at Ally Bank, we have our high yield savings account, we have our checking account. Here’s where we have our Roth IRAs. Here’s where we have our 401 K’s. Here’s where we have a Roth 401 K. For every single financial account that we have, what is the account name? What is the institution? Where’s the link to that account? And what are we using that account for. And then as I mentioned before, we use One Password to store all of our password information and shared between Jess and I and the master key to that Password account is inside of our lock safe at home. So essentially, in the lock safe, you get to the One Password document through that you can then access all the individual financial accounts. 

Now I know I’ve talked about this before, but I really believe in the value and the importance of not only having a good idea of the summary of all of your accounts. But this is a good place to also be tracking your overall net worth and your trajectory of your financial health. Right net worth is your assets what you own minus your liabilities, what you owe. Tom Stanley talks about the importance of tracking your net worth in the book, The Millionaire Next Door, and he talks about those that develop and build wealth over time they think differently, right? What he’s talking about there is that they realized that their income is a good tool. But their income is only a tool if they’re applying that to building their assets and paying down their liabilities, which ultimately is translating into their net worth. 

So Jess, and I track our net worth on a monthly basis. It’s a very simple spreadsheet. If you want to see what that spreadsheet looks like I have that in the toolbox, yourfinancialpharmacist.com/toolbox along with a couple of the resources that I use, you can make a copy of that make it your own, very simple- every financial account we have, it’s the value of the asset. It’s the amount of liability assets minus liabilities we track that month over month, I think about that as the 20,000 foot view of kind of where we’re progressing financially, of course, the real work to be done is on a much more granular level. So that’s Section six, summary of financial accounts, net worth tracking sheet, and social security statements. 

Section seven is our tax returns, this is our tax returns. On the personal side, this is a tax returns on the business side. So for us that would be the business, Your Financial Pharmacist as well as the business YFP Tax. And then for the property that we own, we have a separate LLC for the property as well. So for any business filings or extensions, or important communications, documentations. Obviously, it’s important to retain your tax records for everyone. But here to have those readily available, as well whether it’s needed in the event of an emergency, or if you’re working with a tax professional or someone you need to reference that information that’s good to have. So that’s section seven tax returns. 

Section Eight is all information related to business records. So this is a summary of the business entities, I have a quick summary of what are the different entities and then of course, all of the legal documents, including the incorporation documents, the operating agreements, the buy/sell agreements, really important that you not only have these in place, but you have these readily available and accessible in the event of something happening. So any important document related to the business is there. And then as I mentioned, I kick off this section with a quick summary. So that in the event that someone needs to look at this, they can quickly understand what are the entities, what’s my ownership in the entities, and then what are the important documents within each entity that’s included in the legacy folder. 

Section nine is just a miscellaneous section. So this could be utilities information or other information that is not easily fit into one of the other buckets in the first eight sections. Pretty simple. Right? So yeah, it takes time. And I think even recently, when I went through a pretty major update of this, I want to say it took me you know, three, four or five hours just to update documents, things that I had to scan to get electronically and making sure I had the right setup, creating some of the explanation in the summary documents. But not only as I mentioned, is it helpful for whoever is looking at this information? Hopefully that never needs to happen. But it’s also helpful for you as you go through this to identify like, oh, maybe there’s some gaps in here in the financial plan that we could use as an opportunity to make some adjustments or changes as you’re looking at goals for the next year. 

So in terms of who has access to this, of course, Jess and I have access. Also, my in-laws have access to this who would in our state planning documents become the caregivers of our boys in the event of an emergency so important for them to have access and awareness of it, as well as our financial planning team at YFP right. So I know that in the tragic instance, if Jess and I were to get in an accident tomorrow, and something terrible would happen, I know that instantly my in-laws, who would be in charge of the boys and I know our financial planning team who would be helping them and making decisions, they have access to all of this information. Now, it doesn’t mean it’d be easy. There probably are still questions, maybe things that I’ve missed or haven’t thought about. But it’s a really, really good start again, gives us peace of mind knowing that we thought through this in great detail. 

So in closing, right, simple yet effective, simple, yet effective. And that’s so true for so much of the financial plan. Sometimes we overthink this, we overcomplicate this, yeah, there’s work to be done. There’s professionals to be hired, certainly on the financial planning side, on the estate planning side, on the tax side, but the gathering of documents and information. This seems like a bigger mountain to climb than it actually is. And I think for obvious reasons, right? Who likes to think about, you know, some of these circumstances that might be tragic, where someone would need to access your information. It also might expose areas of the plan really like ah, I don’t really like the progress that we’ve made, we’ve got opportunities to improve. So for those reasons, it seems like a bigger mountain to climb. But I promise you that as you go through the process, it likely is easier than you think. And once you get organized with your information, you’re gonna be walking from that point of confidence, you’re gonna feel prepared in taking action on other parts of your financial plan. If you have questions on this episode, as always, feel free to reach out to us [email protected]. Again, make sure to download the YFP Legacy Folder checklist. As you follow along in this episode, you can get that at yourfinancialpharmacist.com /legacy. Thanks so much for joining this week. We’ll catch you next week. Have a good one.

Tim Ulbrich  17:17

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

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