Investing / Podcast

YFP 163: Investing Beyond the 401k/403b

Posted on July 30, 2020November 2, 2022 by yfpadmin

Investing Beyond the 401k/403b

Tim Ulbrich and Tim Baker talk about investing beyond the 401k or 403b and break down the traditional IRA, Roth IRA, HSA, SEP IRA and taxable/brokerage accounts by discussing their contribution limits, how to appropriately use them and the advantages and disadvantages of each.

Summary

Tim Baker joins Tim Ulbrich on this week’s episode to break down investment vehicles beyond the 401k and 403b. To start, Tim Baker explains that investing is just one part of the financial plan and should not be looked at in a silo. However, when he works with financial planning clients he helps to get their nest egg on track so that they are financially prepared for their retirement some pharmacists feel overwhelmed that they will need $4 or $5 million at retirement. The certified financial planners at YFP Planning help to provide actionable steps to help you get you on track while keeping the rest of your financial plan in mind.

Tim runs through several investment vehicle options that are outside of the 401k or 403b employer-sponsored plans. He digs into the IRA, Roth IRA, HSA, SEP IRA and taxable/brokerage accounts and discusses their contribution limits, how to appropriately use them and the advantages and disadvantages of each. Tim also talks through YFP’s view of the priority of investing, common mistakes and assessing risk tolerance and risk capacity.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim Baker, welcome back to the show. Two weeks in a row!

Tim Baker: Yeah, crazy. Good to be back.

Tim Ulbrich: Fresh off vacation, right? You’re primed and ready to go, talk about investing?

Tim Baker: Yeah. We spent a week at the Jersey shore, kind of close to my old stomping grounds. And good family vacation away from Baltimore and the city and do some good social distancing on the beach. And yeah, just feeling happy to be back but glad I got to get some quality time with the fam.

Tim Ulbrich: Awesome. So we’re back at it here today, talking about how to invest your money beyond an employer-sponsored plan like a 401k or a 403b, which we’ve talked about many times before on the podcast. And before we jump into this discussion, Tim, I think it’s important that we highlight, as I know I hear you say often, that investing, albeit a very important part of the financial plan, it is just one part of the financial plan. So talk to us about why that is so important that look at it that way. And really, what are all of the different parts that you work with in terms of the financial plan with clients?

Tim Baker: Yeah, so I think one of the issues that I have in, you know, with other financial planners, financial advisors, is a lot of financial advisors will say, “Hey, I do financial planning and investment management.” And it kind of, it grinds my gears a little bit because I think those are like one and the same. Like the investment management is nested in financial planning in the majority of cases. But the reason it’s separated out I think is because a lot of advisors will say, “I do financial planning,” but it’s really just managing your investments. They’ll say, “Hey, Tim, you have half a million dollars, we’ll manage that for a fee or we’ll get commissions or things like that. And then maybe we’ll talk about some of these other things along the way like insurance, especially if I can sell you insurance or hey, the kids are going to college. You’re probably not going to get any help with your student loans or anything like that. So to me, you kind of follow the money. So with the way that most advisors are paid, it’s based on the investments and then if they can sell you kind of a crappy insurance product. So it has like this elevated designation of, you know, with regard to the financial plan. And it is important and it is a main driver. But I think, you know, getting your student loans right, having a savings plan, a plan for the debt, a plan to pay off your house, you’re properly protected from an insurance perspective so you’re managing your risk, estate plan, your taxes, which permeate everything, you’re doing some planning for that. Like to me, it’s just one piece of the puzzle. And I think we kind of put the investment up on a pedestal. And again, it’s important. It’s typically the thing that’s most confusing or most exciting to the average consumer because it’s kind of like this, oh, OK, I can buy shares of this and I can be investing in these companies. But I often argue that those are some times where the more exciting an investment is, typically the worse it is for the investor because they’re chasing returns or they’re tweaking too much. So you know, at YFP, we do all of the things and we fit the investment and retirement piece into that puzzle. But then we also kind of go beyond where we talk about things like credit, credit score, credit report, and you know, kind of the life events of hey, Tim, I’m buying a house, I’m buying a car. I’m getting married, so now I’m combining finances, we’re having a baby, we’re retiring in a couple years, we’re getting into real estate investing, we’re negotiating our salary, we’re downsizing. Whatever that is, to me, those are the main — kind of some of the main drivers. We have the structure that is the financial plan, but then we have these life events that happen that can throw a wrench and kind of force us to zig and zag. So again, the investment is super important, but at the end of the day, it’s going to be one piece of the overall financial journey.

Tim Ulbrich: Yeah, and we’re going to keep coming back to this over and over again, that the financial plan and how you think through your financial decisions should be comprehensive, comprehensive, comprehensive. And so I think especially because we do so many episodes or blog posts or whatever that are more topical in nature. So here, we’re talking about investing. It might be student loans, it might be home buying. And I think it’s just human behavior that you hear something and you’re like, ooh, I can optimize that. Maybe after today, somebody’s like, ooh, I should go max out my Roth IRA. But you know, you take a step back and that may or may not be the best decision once you have a chance to look at all of the different components of the financial plan and understand how one decision can have a ripple effect into the others. So let’s jump in. I want to start by talking about the end, and that really is the nest egg. As we talk about long-term savings, trying to determine what we ultimately need to have saved so that we can turn that into a meaningful plan of what we should be doing today. So as you work with clients, Tim, on this long-term savings strategy, talk us through why that nest egg calculation is so important, what it is, and then how you ultimately are able to back that into a plan of something that they can take action on today.

Tim Baker: Yeah, so you know, typically when I talk to some of our clients that are in maybe 20s, 30s or even 40s, you know, I’ll ask the question, I’m like, “Well, how are you feeling about your retirement?” And you know, sometimes the question is — sometimes, especially early on in the 20s and maybe even 30s, it’s kind of similar to the question that we would ask when we would ask students and residents, probably students at like the APhA conference, we would say like, “How are you feeling about your student loans?” And a lot of the answer was like, “Ah, I just don’t even really look at it. I’m not really worried about it. I’ll figure it out later.” And that kind of perpetuates into like the next, really one of the next big things is trying to establish retirements savings. So it’s like, ah, I don’t really know. So then if I ask the follow-up question — if I say something, if I get an answer like, “Well, I guess I feel good about it, I’m getting a match and maybe I’m putting a little money into like an IRA or something,” I’m like, “Well, do you feel like you’re on track?” And you know, I think that question then kind of goes into like, well, I don’t know. I’m not really sure. I think I want to retire at 65, but there’s some people that think they have to retire or that they’re going to work forever. So what the nest egg is is it’s an exercise that we do, it’s a calculation that we do, and I kind of walk it line-by-line through with the client that says, that shows them if they’re — basically, are they on track or off track? And it’s kind of a binary thing. So what I often say to a lot of clients is like I say, “Hey, you know, you probably need $4 or $5 million to retire.

Tim Ulbrich: What?

Tim Baker: And they typically — yeah — and then they typically look at me like I have 4 or 5 million heads, right?

Tim Ulbrich: Yeah.
Tim Baker: So I say, “Alright, once” — I’m processing that look — once we get beyond that and what we typically do is then is we start to break or deconstruct that number down to a monthly number that we can digest today. So big, big number, way in the future, Tim, that doesn’t mean anything to me. That’s just this noise. That doesn’t connect. That doesn’t connect with me today. So what we do is we then break it down to a number that they can sink their teeth in today. So I can say, “OK, if you need — if we had nothing saved for retirement and you’re getting the match and maybe you’re maxing out your Roth IRA, you’re still running a deficit of $100 per month. So we need to maybe put a little bit money into the 401k or something like that.” So what it does is it provides actionable steps, you know, for them to kind of get on track. And then as they kind of pursue, we kind of check in with that calculation as the years go by, and then as we get into the 40s and 50s and 60s and 70s, we do a little bit more robust planning and kind of decisions that are stuff like, OK, if we retire early or if we downsize our house or if we relocate to this state that’s maybe more tax-free, we can kind of show the effects of that and if your money’s going to run out or not and at what age. So longer story longer, the nest egg calculation is really meant to say, alright, we need some type of money in the future so you’re 30-, 20-, 20-, 30-, 35-year-older self can retire and really not have to work anymore or have the option not to work. So you know, to bring this full circle, the investment plan and the retirement plan that’s kind of executed per what the nest egg says is really, really, really important.

Tim Ulbrich: Yeah, and you know, we’ve mentioned before on the show that saving for the future, whether it’s traditional retirement or something else, it shouldn’t be I hope, I wish, I dream, maybe. I mean, it’s a set of assumptions based on mathematical calculations. And we may or may not like the outcome of that, but we can then begin to understand the variables that go into that calculation and make adjustments or changes, whether that be investments or changes in expectations or adjustments in changes on how we’re executing our savings plan. And so Tim, we talk a lot about wow, it’s really important to invest, invest, invest and do so at an early age and you’ve got to take advantage of compound interest and let it work its magic. But I think we often brush over, you know, what does that mean? And why is that so tangible? So give us the 20,000-foot view of exactly what is compound interest, why that’s so important, and then perhaps an example of how investing can really help someone grow their nest egg. So somebody who is and is not investing.

Tim Baker: Yeah, so you know, we use this quote by Albert Einstein, and it says, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” So a lot of pharmacists, especially early on in their career, they’re feeling it from the paying it side, right? Oh man, I’ve got $200,000 in debt, I’m paying 6.5-7% in interest, you know, this is terrible. But you know, once we kind of have a plan for the loans — and I’m not saying it needs to be paid off — but once we have an intentional plan for the loans and our consumer debt is in check, we have an emergency fund in place, we can then really start dipping our toe very seriously into the investment waters. So you know, so that’s really the idea is that we want the compound interest is our money, we’re taking risks to earn it. But we’re putting it out, we’re putting it into companies and to maybe bonds and we’re saying, “Alright, here’s some money. Hopefully we can earn dividends and capital appreciation as we go. And I can get a much better return down in, basically in the future.” So to give you kind of a case study — and the reason this is really important is, you know, if we talk about Ally Bank, a big one for a high yield savings vehicle, but as many people with where interest rates are, you’re making like 1%. And one of the main things that you’re combating as you’re building wealth is tax, so Uncle Sam always needs his bite of the apple, and inflation. So — and I think, Tim, you might have created this graph, but I showed the graph of the $10 latte. So you know, if you have a latte that costs $4 in 2020, using historical rates of inflation of about 3%, in 30 years, that latte will cost $10. So this is why my dad, who’s in his 70s, would say, “Well, Tim, back in my day, the nickel would buy the whole candy store.” And now it doesn’t buy anything because prices, the prices of goods and services go up naturally over time.

Tim Ulbrich: So just a quick aside, Tim, on that. It made me laugh when you said that. I just — the other day with my boys I had a box of Cherry Heads with like a $.25 sign on the corner of the box, and I was like, “When I was a kid, we used to go out to the candy store. And those were not $.25.” So.

Tim Baker: Yeah. I mean, my wife sent me a picture of I think she filled up at like $1.25 because she had some points or whatever. And I was kind of reminiscing, like I think it was either when I started driving or when my brother started driving, gas was at like $.89 or $.99 a gallon.

Tim Ulbrich: I remember that.

Tim Baker: You know? And you see it in the movies. And those are — that’s a staple of American life. That’s pretty kind of inflation-focused because people really get upset when gas goes up because it’s right in our face, but if you think about all these other, I mean — gosh, we could talk about college tuition and drive our listeners off a cliff here. But yeah, I mean, prices just go up. So to combat the taxman and the inflation monster, we have to — we can’t just put our money into the mattress and not take risks. We can’t just put our money into a bank account and not take risks because naturally, maybe that $500,000 that you have in your bank account, maybe it’ll some interest, but in 30 years, it’s going to purchase about half of what you can purchase today.

Tim Ulbrich: Right.

Tim Baker: So if we take a case study here, so we’re going to talk about Conservative Jane. So Conservative Jane, she’s a pharmacist, she makes $120,000 in income, she gets her 3% cost of living raises, which might be generous. She gets that every year. She’s going to put 10% into her retirement plan, but she’s just going to put it into a Money Market, which is like a cash-like investment. And she’s going to work for 30 years. Over the course of that 30 years, she’s going to accumulate a nest egg of about $600,000. So you’re going to say, hey, that’s not too bad. But because hopefully a lot of our listeners are reading “Seven Figure Pharmacist,” we assert that — or at least you and Tim Church assert and I agree — that we need to be thinking like millionaires because it’s going to — that is what it will take for us to achieve that financial freedom, that financial independence that we’re looking for. So this Conservative Jane, she’s really afraid about what the market has done in the ‘08-’09 crisis, the subprime mortgage crisis if you remember that, the COVID crisis where the stock market did a nose dive here and now is recovering. And she’s saying, “You know what? I don’t want to look at my balance and see it go down. I just want to slow and steady.” So unfortunately, that amount of money is not really — if she retires at 65, it’s not going to last her until 95, 100, 105, which is typically what she’ll live to. So in an alternate reality, which again, another of maybe Einstein’s theories, we wave our wand and we say, OK, if we take a more aggressive stance with our investments and we take the exact same Conservative Jane with the same income, $120,000, the same cost of living raises, the same contribution amount, 10%, and the same timeline of career, 30-year, and the only thing that we do differently, the only variable that we change is we change the stance towards investment. So instead of being conservative, we’re being aggressive. And what the market bears consistently over 20+-year periods, it’s about a 10% return. And when we adjust that down for inflation, it’s about a 6.87% return. So this is where Aggressive Jane is now taking advantage of that compound interest, so those capital appreciation where you buy that stock at $100 and it sells for $500 in the future. Or the dividends that these companies will reward shareholders over time for being investors. So when we do that and we get that 7% return, it’s about a $1.2 million swing. So that nest egg is not going to be $600,000 now. With Aggressive Jane, it’s going to be $1.8 million. So and you’re not doing anything different except for your stance. So it’s going to be a rockier road, it’s going to be a bumpier road because you’re going to have ups and downs in the market, but if you believe that the market takes care of you over time like we do, it’s going to be OK. So to me, that is the power. And when we show that and we can demonstrate that in the nest egg calculation to say, hey, we’ll talk about risk here in a little bit. This is your risk tolerance, you’re showing this type of portfolio, but if we’re a little bit more aggressive, then they’re like, oh, well I don’t have to save as much right now or I’m actually set for where I’m at. I don’t have to work until I’m 85 years old. And I think demonstrating that, you kind of get that (sigh). And we’ve had clients that have looked at this and were like, alright, well, one spouse was maybe I don’t need to work anymore. We could have a single-income family because we want to stay home and raise the kids. That’s the power in it is to have some intentionality about what we’re doing and we’re not just like oh, I don’t really know how I’m tracking for retirement. And the sooner that you do it, you know, one of the big things that we say with working with a lot of young professionals is time is a great asset to have. We do believe that the income that pharmacists make is great. But time is a great asset to have, and it can kind of be a double-edged sword because some people are like, well, I have 20-30 years to figure that out. But the sooner that you figure it out, the better.

Tim Ulbrich: And I just love that example because as you had mentioned, one variable that was different, you know, where you put that money — so instead of a Money Market account, you’re investing that. We’ll talk about vehicles to do that here in a moment — the only variable that’s different. So you’ve already done the hard work. You’ve already said, “I’m going to save x% of my salary.” That example was 10%, perhaps those that are listening are aspiring for a higher number. But you’ve already made that hard decision. Now it’s a matter of where do I put that to be able to put myself in the best advantage and best position to achieve my long-term goals. So we’ve talked about the concept of what you need in the nest egg. We’ve talked about why investing and compound interest is so important. So the next natural question is, well, how do you get there? Where do I put my money? What are the options that I have available? And this episode is all about investing beyond the 401k and 403b. So we’re not going to talk about those two, and we’ll link to our investing series back from episodes 072-076 where we have more information on those. So let’s jump into those other investment vehicles beyond the 401k or 403b, Tim. And here we’re going to be talking about traditional IRAs, Roth IRAs, HSAs, SEP IRAs and taxable brokerage accounts. So we’re going to do this in a rapid-fire format. So Tim, we’ll tee up each one one-by-one, we’ll start with the IRA. And I’d love for you to talk about, you know, generally, characteristics and design, contribution limits and perhaps some advantages and disadvantages with each of these options. So let’s start off with the IRA.

Tim Baker: Yeah, so the traditional IRA or just sometimes called an IRA, this is an investment vehicle, I like to say investment bucket, that you can use as an investor often to supplement your 401k, 403b. So with this particular bucket, it is a bucket that you fill with pre-tax dollars. So anybody can contribute — anybody that has earned income can contribute to a traditional IRA. Now, once you start making more money than say like a resident makes, if you’re a normally salaried pharmacist, you don’t get that deduction but you can still put non-deductible contributions into your IRA, which you don’t get that tax benefit. And then any money — and this goes for any of these vehicles that we’re talking about — any money that’s inside of that bucket grows tax-free. So if you get investment income or if you get dividends paid, you’re not taxed on that. So outside of that, in the taxable account, you are taxed on that. And I’ll talk about that when we get there. So typically the contributions that you can make into these accounts are $6,000. So that’s in aggregate with the Roth IRA, which we’ll talk about here in a second, next. So if you put $4,000 into a traditional IRA, you can only put $2,000 into a Roth. So it’s in aggregate. But it’s completely separate from your 401k, 403, TSP. So these aren’t tied together in terms of contribution amount. Once you reach age 50 or older, you can put an extra $1,000. And like I said, this is subject to phase out for the deduction. So the IRS will look at your AGI and say, “Hey, Tim, you make too much money. You can put money in here, but you’re not getting that deduction.” So the appropriate use here is that you’re supplementing a 401k or you have no retirement savings, so again, we work with a lot of independent pharmacists that don’t provide a 401k to their employers. So call me if that’s the case, we can definitely help there. But in the meantime, you can use this as really your main retirement. And then in that case, you do get a full deduction, no matter what you make. You want to shelter your income from tax, so if you are trying to lower your AGI and you can, if you’re in the right tax bracket, so you’re a resident, that’s the way to do it, you’re deferring taxes on your investment portfolio. So it’s not taxed going in, but it is going to be taxed coming out when you distribute it in retirement. And then this is for long-term accumulation for retirement. So you’re not going to put money in here and then use it for a home purchase or something like that. So the biggest advantages here is, again, it’s a tax benefit, the investing selection is nice. So you can typically — I always talk about with the 401k, you kind of have to play with the toys in the sandbox, so you only get 20-30 selection. Here, you can basically invest in anything you want.

Tim Ulbrich: Right.

Tim Baker: And typically, less fees associated with it. Now the big drawback is if you do take money out, it’s a 10% penalty unless you’re 59.5. You can take loans against it, which I think is actually a benefit. And then the distributions when you’re retired are taxed as ordinary income, which is not great. So hopefully — I don’t know if that was quick enough, Tim, but those are the high level pieces.

Tim Ulbrich: No, that’s great. So there we were talking about traditional IRA. Let’s talk for a couple moments then about the Roth IRA.

Tim Baker: Yeah, so Roth IRA, a lot of the same things are true. The main difference here is that this is — you’re contributing it to a Roth IRA with after-tax monies, which means that you don’t get a deduction going in, so you pay the tax up front, it grows tax-free, and then when you distribute it in retirement, it comes out tax-free. So one of the things I’ll talk about is like I say, “OK, Tim Ulbrich, you have $1 million in your Roth IRA and $1 million in your traditional IRA. How much money do you have?” Unfortunately, your balance sheet says $2 million, but that’s not what you actually own because in the traditional IRA, Uncle Sam hasn’t taken his bite of the apple. So if you’re in a 25% tax bracket, in the traditional IRA, you own $750,000 of that and the government owns $250,000 of that as it’s distributed. So that’s kind of a high-level look at that. So you can convert a traditional IRA to a Roth IRA, and that’s kind of a separate ball of wax, but you can contribute up to $6,000, there’s a catch-up phase, again, this is typically to supplement the 401k. You’re looking for long-term retirement. You can use this money for like a first-time home purchase, you can distribute up to $10,000 without a 10% penalty. So there are some little nuances to — you don’t have loans or anything like that.

Tim Ulbrich: Yeah.

Tim Baker: And typically the investment selection is good. There’s less fees associated in most cases compared to like a 401k. And your distributions of basis, which is the money that you put in, are always tax- and penalty-free. Now the earnings that it makes could be taxed and could be penalized based on the situation, so that’s something to keep in mind. So high level between traditional pre-tax, not taxed going in, grows tax-free, tax comes out when you distribute it. For a Roth, it’s taxed going in, it grows tax-free, and then it’s not taxed coming out. So I usually take clients through some pretty cool graphics that show them that because it’s harder — oh, and the big thing I forgot to say — this is important — is that for a Roth, for a traditional IRA, anybody can contribute to a traditional IRA, maybe not get the deductions. For a Roth, once you start making a certain amount of money, the door starts to slam shut for you to actually make contributions. So as a single earner in 2020, once you start making more than $124,000, that Roth IRA door starts to shut. So then that’s typically where we do a nondeductible contribution to an IRA and then do a backdoor contribution to a Roth IRA.

Tim Ulbrich: Yeah, and since you mentioned that, Tim, and I’m glad you did, the backdoor, I would point our listeners to Episode 096. We talked about how to do a backdoor Roth IRA. And we also have a blog post on why every pharmacist should consider that as an option with their investing plan. We’ll link to both of those in the show notes. So that’s the IRA and the Roth IRA. Next up is the Health Savings Account, the HSA, also known as the Stealth IRA. Talk to us about that one.

Tim Baker: Yeah. So this is typically paired with a high deductible health plan. So a high deductible health plan is a health plan that you’re — for an individual, the minimum annual deductible is $1,400 a year or more. And the max out-of-pocket expense is $6,900 a year more. So if you have the option with your employer, you’re young, you’re healthy — I guess you can be older and healthy — but if you’re healthy, you don’t go to the doctor a lot, this might be a thing to look at. And you can couple the HSA with this. So this is — the HSA is different from an FSA. FSA is a use-or-lose fund. So every year, you’re going to say, “OK, if I put $1,000 into this and I don’t use it, then I lose it.” And it doesn’t accumulate over time, so at the end of the year, you’re buying a bunch of stuff for like contacts and things like that. I don’t like playing that game. Whereas the HSA, it does accumulate over time. So you don’t have to use it. So the money goes in cash and then for some HSAs, you can invest it dollar one or maybe you have to wait for you to have a balance of $1,000 and then you can invest above $1,000. It just depends on the HSA. But it allows you — it’s very similar to an IRA in a sense of how you invest it. Now, the main thing for this, it has a triple tax benefit. So what I mean by that is for the IRAs, we were talking about a double tax benefit. You either get a tax break going in or going out. And it grows tax-free. With the HSA, there’s a triple tax benefit, meaning that you get a deduction — and it doesn’t matter how much money you make. So you could make $10 million a year, and you’d still get this deduction. You get a deduction as it goes in, it grows tax-free, and then it comes out tax-free if it’s used for qualifying medical expenses or once you reach age 65, you can use it for really whatever you want. So for a lot of people, they use this is as almost like another IRA bucket, which is what my household uses it for to get that. So it never sees the IRS. It never sees the taxman, if you do it correctly. So you can put up to $3,550 as an individual, $7,100 as a family, and then there’s a catchup after age 55, I believe. So you know, the advantages, the advantages of this is obviously the tax treatment, it’s another bucket that if you’re a little bit higher income that you don’t get some of the tax breaks like the traditional IRA deduction, you can put money in there. So what we try to do as a family is we fund this first and then we try to cash flow our health expenses as best we can.

Tim Ulbrich: So that’s the traditional IRA, Roth IRA, HSA. Talk to us about us about the SEP IRA.

Tim Baker: Yeah, so the SEP IRA out there is typically for those self-employed pharmacists out there or maybe ones that are running a side business or could be they work for a small business owner that has a SEP IRA as their sole retirement plan. So they look and act very similar to a traditional IRA, but they’re kind of like a super IRA because the contribution limits are a lot higher. So this is an employer-sponsored IRA, so if you work for a company that has a SEP, you don’t put any money into it at all, and you can’t put any money into it at all. The employer basically has to put — and they’re not necessarily as popular once you start getting employees just because there’s flexibility on when, you know, so you don’t have to contribute to it every year. So if you have a down year because of COVID or whatever, the business owner could say, “Hey, I don’t want to contribute this year.” But next year when business starts to pick up, you have to contribute at the same rate as you contribute to yourself. So if I put 10% in for what I make, you have to do the same for your employees. So typically the rules here, eligible employees have to be at least 21, they have to work for the employer at least three out of the last five years, they have to earn at least $600. So if you’re the employee and the owner, so if you’re one and the same person, this is kind of what I used early on in my business, a SEP, to basically save for retirement above and beyond the traditional IRA. So you can typically put in like the lesser of 25% or up to $57,000 as of 2020. So the hard part about this — and one of the disadvantages — it’s really hard because you’re really looking at what the business profits are to kind of gauge what you can put in. So in my experience, I would put money aside and then like on tax day when I had all those numbers, then that’s when I would kind of check the SEP IRA. So long story short, the IRA is just typically used for those self-employed, if you’re running a side business, you might be able to shelter a little bit of the business income there to help from a tax perspective, from a Schedule C perspective. But there’s no Roth component or anything like that. So there are some disadvantages.

Tim Ulbrich: So we have lots of tax advantage savings vehicles. So obviously the 401k or the 403b, traditional IRA, Roth IRA, HSA, SEP IRA, so as we talk for a moment about taxable brokerage accounts, not only what are they but what would their role be, considering that we have all of these other options available?

Tim Baker: Yeah, so the taxable account — and we can kind of talk about this in kind of the mistakes that I see — but the taxable account is often — think of it as like a savings account but on steroids. So instead of in the savings account that money just sits in cash and maybe earns an interest rate, in a taxable account, you can actually convert that cash into shares of an investment, you know, Facebook stock or S&P 500 ETF or a mutual fund, and then that’s where you start earning the capital appreciation, the dividends, etc. So the contributions here, it’s really unlimited. So you know, you can put a couple bucks a year into it or millions of dollars a year. It’s really — the world’s your oyster. Same thing with the investments: You can basically invest in whatever you want. There’s restrictions like you see in some of the retirement plans. You typically use this when you’ve exhausted your retirement contributions to some of these other accounts that we’ve talked about or if you say, “Hey, Tim, I want to retire at age 55,” a lot of these accounts, the IRA, the 401k, they’re going to say, “Hey, you’re going to be penalized to take money out until you reach this kind of arbitrary age of 59.5 years old. So if I retire at 55, I can’t get that money out of the 401k without a penalty. So when you might use this account for like near — like kind of the beginning phases of retirement and then shift — when you get to age 60, shift over. The other use for this is my wife and I use this for a future car purchase is we see where rates are and how the saver is taking a beating now because interest rates are so low. So we say, alright, we can use this taxable account, we’ll put a car payment worth every month into a taxable account and hopefully over the next five years, the average investment return in the S&P 500 is about 6-7%. Hopefully we can get that versus the 1% that we’re getting in our high-yield savings account. So it’s more of a near- to medium-term goal, which could be a home purchase, a car purchase, maybe real estate investing, investment, with the caveat that you could lose that investment. So you know, there’s risk there that you’re taking. So big advantages in terms of flexibility, there’s no penalty to withdraw, you can recognize losses to offset gains. So this is where you’re paying capital gains, whether they’re short-term or long-term. So when you buy that share at $100 and sell it for $400 in a taxable account, you’re paying $300 in capital gains per share. And so that is one of the disadvantages to the taxable account.

Tim Ulbrich: So Tim, we started by talking about the nest egg, what you need, and then we talked about the importance of investing and taking advantage of compound interest to get there, and then we talked about the vehicles that are available to get there, lots of different ones. So then the next question is, OK, well how do I prioritize this? I’ve got some dollars that I want to save each and every month towards my long-term savings goals to get to that nest egg and take advantage of compound interest. But with all of these options available, where do I go and in what order? And so this takes me back to Episode 073, where we talked about the priority of investing and we talked about the order in which we think you should consider filling your long-term savings or retirement buckets. And it’s important to say, as with any other part of the financial plan, this has to be tailored to the individual. So of course, this is not investment advice. But walk us through again, Tim, at a high level what we think of as the priority of investing between these different vehicles that are available to someone.

Tim Baker: Yeah, so assuming that we have kind of the foundation in place, the consumer debt is kind of taken care of, emergency fund, we don’t owe any taxes, we have a plan for the student loans, we’re kind of accounting for more of the near-term goals like travel, wedding, home purchase, education planning for the kids, really as we kind of wade into the how you prioritize, it’s going to depend. Obviously that’s my statement answer, but in most cases what we would say is you want to start with the employer match. That is — we talk about that’s free money in 99% of cases. 95% of cases, you always want to get, at least get the match so you don’t forego that benefit. And then typically, the next step, the decision tree here is based on if my — how great or not so great my retirement plan is. So you know, in a lot of cases, retirement plans, 401k’s, 403b’s, they have a lot of fees associated that the investor doesn’t necessarily see. So what we typically say is that if you don’t know, it might be good to go out into the IRA/HSA world and max those out next. And then go back into the 401k, the 403b, the TSP and get the max, which is in 2020 $19,500. And then from there, from a traditional investment perspective, that’s when you would start loading up in the taxable account or if you’re more nontraditional, you might look at real estate investment, investing in businesses, or something like that. So that’s typically kind of steps 1, 2, 3 and then 4 with regard to how to kind of prioritize your approach to filling your retirement buckets.

Tim Ulbrich: And you talked about one of these already, but common mistakes that you see people make in the investment prioritization, but talk us through some others that you commonly see as well as people are trying to sort out these different options.

Tim Baker: Yeah, so you know, often when I come across — and I had a conversation with a pharmacist here recently. You know, they get into investing before the debt is paid or there’s a plan for the debt. So that could be a student loan, that could be a credit card or a personal loan. So you know, you have $10,000 in credit card debt, but you’re putting 10% in — you get a 5% and you get a 10%, and you have a 10% contribution into your — you know, that doesn’t really make any sense. Or sometimes there’s no purpose or goal with the investment. So most of these accounts that we’ve talked about are retirement accounts, so they’re for retirement. But if you have taxable accounts, I often ask clients that have like a Robinhood account or — what’s the other one? Robinhood and…

Tim Ulbrich: Acorn?

Tim Baker: Acorn. And I’m like, what’s this account for? And they’re like, I don’t know. And to me, I think that’s dangerous — not dangerous, but just to me, I’d like to say, “OK, my wife and I, we have a taxable account, which is like Robinhood in terms of the same tax treatment. But it’s for real estate, it’s for a trip to Australia.” And sometimes we do the taxable accounts before we even get the match, we have an emergency fund in place. And I know why that happens. It happens — and I think you, Tim, and I can appreciate this — is because you’re interested, you’re curious, you want to see how some of these apps or like the investment works. And it feels good to invest in Tesla or Disney or Ford or whatever. But it’s kind of putting the cart before the horse. So in a lot of cases, we kind of advise clients, like, hey, you need a $30,000 emergency fund. Right now, you have $10,000. You have $30,000 in the taxable account. Let’s do the math here and figure that out. Another mistake is just having no concept — I know we’re not talking about it today — but no concept of how good or bad their 401k and 403b is, which that’s tough because it is very opaque to the investor, unfortunately. And then probably the last thing is just kind of having that 401k inertia where they just stick it at the match and then they wake up and they’re 45 and they’re still just putting it at 3% or 5%. So some of that investment, some of the mistakes I see with kind of the prioritization is kind of outlined there.

Tim Ulbrich: And you mentioned, Tim, earlier I think an important part about risk tolerance and understanding how that fits into your investment selection, your long-term goals. So how do you work through this with clients in terms of understanding the risk tolerance and then ultimately developing a portfolio that aligns with that.

Tim Baker: I kind of look at risk tolerance as — so you really have two things going on here. You have the risk tolerance, and then you have what’s called risk capacity. So risk tolerance is the amount of risk that you want to take. So in the case study that we went through earlier in this episode, we talked about Conservative Jane. So Conservative Jane didn’t want to take any risk at all, didn’t want to. The risk capacity is the amount of risk that you need to take or the amount of risk that you can take. So for some people, you know, if they’re age 50, they want to retire at age 60-65 and they haven’t done the things that they need to do throughout the course of their career and they’re a little bit behind, you need to take a little bit more risk to kind of make up for lost time. The other example is if you’re 30 years old and you’re going to retire at 65, you have 35 years, so you can take more risk because you just have a longer time horizon. So we measure the risk tolerance but then we talk about the risk capacity. And what I kind of say is — and I would say it’s not very common, but kind of the rules of thumb out there where you say, alright, you take your age and you sub — so say I’m 30 years old and I subtract that from 100, that’s 70. So the rule of thumb is you put 70% in equities and 30% in bonds. And I think that is utterly terrible. That’s a terrible rule of thumb. And I love those rules of thumbs and making it easier. But it’s — I think it’s the wrong advice. So to me, what I argue is if you have decades worth of time, 20-30 years, you really shouldn’t have many bonds in your portfolio at all, if any. So as an example, I’m — how old am I? — I’m going to be 38 this year, Tim.

Tim Ulbrich: Old. Old.

Tim Baker: Yeah. I’m getting up there. But I’m not going to smell bonds in my portfolio for another 20 years probably because, you know, right? And it sounds weird, but like when COVID happened and the market went down, like I never looked at my balances. I don’t care. And the reason I don’t care is because I’m not going to spend that money for another 25 years, 30 years. So in 25 or 30 years, we’ll probably remember COVID, but we’re not going to remember what our balances were there. So now if you’re 60 and you’re going to retire next year or in a couple years, then you do care. And that’s where we start shifting from an equity portfolio to more of a bond portfolio where it’s more safety in principle and you’re protecting what you’ve built over the course of your career. So that’s important. And that’s, again, something that when we talk about, when we change that one variable between Conservative Jane and Aggressive Jane, if you’re willing to kind of join me on that ride — and it can be bumpy — but the market goes up, then you just have to save less hard, if that makes sense. Because your money’s just going to go a lot further, and a lot of people get that wrong.

Tim Ulbrich: Yeah, and I remember when Jess and I were working through this with you, Tim, I remember taking an assessment that we each did that helped us understand our own risk tolerance but then also stimulated a great discussion between the three of us about OK, let’s take that information and then let’s also look at that in the context of our nest egg and our goals and everything else that we want to do. And I think that’s exactly how this process should work. So I want to talk about taxes for a moment. And we talk often because we so firmly believe that tax strategy and planning is ideal when it’s paired up with the financial planning in the process. So we are fortunate to have Paul Eichenberg, our IRS-enrolled agent, on the YFP Planning team to help our clients that are also working with our Certified Financial Planners. But as we look at the tax piece here in the context of investing — and we’ve talked a little bit about it already — but paint that picture for us. Why is the tax consideration and having that input so valuable as we are looking at it through the lens of the investments?

Tim Baker: Yeah, you know, just coming from the beach, it’s like tax is like the sand. Like it gets into everything, right? So it’s everywhere.

Tim Ulbrich: That’s good.

Tim Baker: And you have to consider that. And I’ll give you — I’ll kind of give you a real-world example. I was having a meeting with a client we’ve been working with forever and we were talking about his Roth IRA and some of the other things. And we’re not doing his taxes right now. I think he has a family member that does it. And I said, “Hey, let’s at least upload your tax returns so we can kind of take a look and see how everything’s doing and see if I can give you some advice.” And we found out that his AGI, it was actually too high for him to be making Roth contributions. So we’re going to have to basically back those contributions out, you know, put them into as a nondeductible contribution in the traditional IRA and then figure out a way to convert them. So you know, it’s going to cost him. There’s going to be a penalty and things like that. And it’s just one of the — this was the year that he kind of went over that threshold. He was working a lot of overtime, etc. So you know, so those types of things happen. But what I say to clients is like, look, most financial planners, they don’t do taxes. So in my last firm, we would say, “Hey, client, we don’t do taxes. But you know, go work with a CPA,” and then there was really no cross-planning between the two of us. And I think you leave a lot on the table when you do that or you potentially can run into some of the cases like I was telling here today. So my big pitch to the client that I just mentioned was like, hey, let’s just roll it up in with us. Let’s do it. Fire your aunt or whoever that’s doing it and let us do it because it’s just — it’s that important. So I think whether it’s something like the Roth contribution or just when to convert things, it’s just for everything, every financial decision that is involved typically has some type of tax implications. And what I’ve found, at least in my experience, is that similar to like the student loans, most financial planners don’t really understand student loans, most financial planners are not going to basically file the taxes and do the associated planning that is kind of need through every walk of life with regard to the financial plan. So that’s why we’ve kind of rolled that up into our service. And I think it just makes it — it allows us to have more robust conversations and cover more bases with regard to the journey that we’re on.

Tim Ulbrich: Yeah, great stuff, Tim. And we preach and hopefully model with our clients the importance of both the filing aspects as well as the strategy and the planning. And so our clients have the opportunity to work closely not only with you and Robert and the rest of the team but also with Paul to be able to make sure that that tax piece is closely integrated with the rest of the financial plan. So as we wrap up here, Tim, with everything that we have talked through here as it relates to investing, and from my experience, there is huge value for having a financial coach. And we know that investing is a huge part of the financial plan, as we started with. It’s only one part. And like we talked about, it’s essential for helping folks, me and others, increase their nest egg and ultimately achieve their long-term financial goals. And I know firsthand from my experience for Jess and I having you on our side as our coach to guide us through our options and help us assess our risk tolerance and ultimately put together that savings plan has been so critical. So for those that are listening that say, “Hey, I want a coach in my corner. I want somebody to help me guide me through not only the investing part of the financial plan but the rest of the plan and the ins and outs of each part of the plan,” talk to us more about not only where do folks go to ultimately have a conversation with you but also the offering and the service of what we do at YFP Planning.

Tim Baker: Yeah, so the best way to — if someone’s listening to this and they’re like, hey, that sounds really something that I need in my life, they can go to YourFinancialPharmacist.com and at the top right, there’s a “Book Free Financial Planning Call.” And you’ll see an appointment calendar where you’ll see my ugly mug and then also you, Tim Ulbrich, that we can have conversations about potentially working together. Or I think if you go to YFPPlanning.com is our other website, you can book a meeting that way. And those are free of charge. It’s really hey, this is us, who are you, let’s learn more about it and see if we would be potentially a good fit. You know, I think when — the way that I look at financial planning is I don’t really even look at it as like financial planning. I really look at our service as a life plan that is supported by a financial plan. So I often say, you know, we were talking about that nest egg as like, hey, you need $4 or $5 million in your nest egg, you know, let’s suppose that we work together for the next 20 or 30 years and we have $10 million in the nest egg. $10 million is better than $4 or $5 million. However, if you’re miserable because you haven’t done the things that you wanted to do in life, you feel like you don’t get fulfillment from your career, you haven’t traveled, whatever those goals are, whatever — we talk about the why — whatever that why is, who cares? Like what’s the point? What’s the point of making a six-figure income, what’s the point of becoming a Seven Figure Pharmacist, what’s the point of paying — like what’s the point if you’re not happy, if you’re not fulfilled? So to me, the hard part — so we’ve kind of gotten into some of the technical pieces today with regard to investing outside of the 401k, but to me the hard part about this is the human element.

Tim Ulbrich: Yes.

Tim Baker: It’s the how do we thread the needle between taking care of you, the listener that’s listening out there today, but then you the listener who’s 10, 20, 30 years older that things are completely different. So it’s threading the needle between taking care of yourself today and your future self. And that is hard, especially if you’re doing it with a partner, working with you and Jess, my wife, I mean, you just have different opinions about money and there’s compromise and things like that. So to me, we go into lots of different pieces of the financial plan and we kind of rattle off a bunch of them, but at the end of the day what we want to see — our mantra really is are we helping the client grow and protect income, which is the lifeblood of the financial plan? Without the income, nothing moves. So sometimes we kind of like poo-poo the six-figure income, that’s going to solve all your problems. It is good to have, but we want to be intentional. So how can we help you grow and protect the income, and then more importantly, grow and protect the net worth, which means increasing the assets efficiently, which includes the investments, but then also decreasing the liabilities efficiently, which includes things like student loans, paying off the house, etc. So assets minus your liabilities equal your net worth. So income and net worth quantitatively are the two most important numbers. And we track the net worth over time to show progress. But then it goes back to the who cares unless we’re keeping the goals in mind. And those are the qualitative aspect that we really have to pair. So you know, it’s not uncommon for me to say, hey client, we talked about this trip to Australia. We’ve been working together for 12, 18, 2 years, whatever that 12-18 months, maybe two years — and again, keep COVID in mind — but I’ll say, “Where’s the money? We haven’t done that yet, but where’s the money for that?” Either it’s important and we want to be intentionally saving towards that goal and check that off because when I asked you the questions of like hey, what are we trying to do? You said hey, that’s something that came to mind. So it must be important. Or maybe it’s not anymore. And then we’ll adjust the plan accordingly. So how can we help you grow and protect income, the net worth, while keeping your goals in mind? That’s our jam.

Tim Ulbrich: I love it. And again, YFPPlanning.com, you can book a free discovery call to see if it’s a good fit for you, good fit for us. And if we’re not already yet a part of the Your Financial Pharmacist Facebook group and our community of more than 6,000 pharmacy professionals that are answering questions, encouraging one another, challenging one another, I hope you will join us in that community. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review on Apple podcasts or wherever you listen to your show each and every week. Have a great rest of your day.

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YFP 146: COVID-19: Financial Considerations

Posted on April 2, 2020November 2, 2022 by yfpadmin

COVID-19: Financial Considerations

Things are changing on a daily basis secondary to COVID-19. In these unprecedented times, there are a lot of financial concerns people are likely having. On this episode sponsored by APhA, Tim Baker, CFP® answers questions about investing, the uncertainty of work and student loans.

Summary

This podcast is from the APhA and YFP webinar recorded on March 31, 2020. In the past couple of weeks, so much has changed as a result of COVID-19. Between the stock market being down, unemployment rising, the CARES Act and rapid changes with federal student loans, it’s likely that you have a lot of questions regarding your finances.

During this discussion, Tim Baker, CFP® answers the questions everyone has at the top of their mind and focuses on the topics of investments, uncertainty of work and student loans. He also dives into the CARES Act and the levers you can pull if you’re facing financial hardship due to unemployment or a reduction in hours.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Well, good evening and welcome to this webinar. My name is Tim Ulbrich from the team over at Your Financial Pharmacist, and I’m excited to also have joining me my partner in crime and Certified Financial Planner Tim Baker as we’re going to talk about a big-time topic right now, which is financial considerations and COVID-19. So thank you so much for taking time out of your schedule to be here tonight. Thank you for those that during the registration process, you submitted questions and concerns that you have. That really helped us shape how we’ll spend our time this evening. And we’re also going to have time to take your questions throughout the evening as well. So thank you again. And first and foremost, before we jump in to individual topics, I know many listening or perhaps those that couldn’t be here tonight that will watch the replay are on the frontlines of this, putting themselves at risk and obviously stress that comes along with that and carrying that risk back home. So thank you so much for the work that you’re doing for the patients that you’re serving. And we certainly appreciate that effort.

So so many financial issues that are swirling around a time like this. And we’re going to try to hit some of the major ones, certainly not all of them knowing there’s so much changing so quickly, literally some days it seems like by the hour. At least by the day, we have some piece of news that’s coming out as it relates to COVID-19 and something related to the financial plan. If we look at just the past couple weeks as an example, we’ve seen the markets really take a significant hit. As of this morning, the Dow Jones was down roughly 25% from its February peak. And we actually saw that was inching closer to 40% last week before we saw an increase at the end of last week. Unemployment rate predictions are upwards of 30%. We certainly hope that many pharmacists aren’t going to be in that figure, but we’ve already seen a significant rise in unemployment claims in this area. We saw news of the fed cutting interest rates. And in one week, we had three pieces of big news related to student loans. First, the announcement from the Trump administration that we would be freezing interest rates on student loans for 60 days. Then, the announcement that there would be a pause of payments due for a 60-day period. And then of course, with the stimulus package that was passed last Friday, ultimately as we’ll talk about in more detail tonight, six-month window on most federal loans in terms of pausing the payments as well as interest accrual during that time. So certainly big news here in the last couple weeks as it relates to student loans.

So lots of things to talk about, and a brief introduction to the format. Then we’ll jump right in, and I’m going to put Tim Baker on the hot seat and start firing away your questions as we talk about really three big buckets of topics that we saw come through as themes when you all registered for this webinar this evening. One was around investments, you know, what do I do in terms of my investments during an uncertain time period such as this? How does my investing strategy change? So we’ll talk about that in detail. The second around the uncertainty of work and what this time period means in terms of employment and changes and we know some of you may be dealing with this more for others. And how does that impact the financial plan? And what could you be doing during this time of uncertainty? And then last of course would be student loans. And as I mentioned earlier, there’s a lot, a lot to talk about here. So in terms of the format, what we’re going to do is I have gathered some questions in advance, and I’m going to fire away at Tim Baker in each one of these three areas: investments, work uncertainty, and student loans. And then we’ll pause at the end of each of those sections to answer some of your questions. We may not get to all of them, but we’ll try to get to as many as we possibly can this evening. So if you have a question as you’re hearing some of the discussion this evening, please go ahead and submit that in the chat, and then I’m going to ask Drew from APhA, who’s on the call this evening, to help us field those questions and we’ll take a couple breaks throughout.

I do want to thank before we get started as well the American Pharmacists Association for the continued partnership that we have with Your Financial Pharmacist to provide financial education resources that are exclusive to APhA members. So this is one example, but we’ve been doing webinars often and live events. We have discounts on our products and services, including comprehensive financial planning, which you can learn more about at YFPPlanning.com. So to check out a lot of the resources that we’ve done with APhA, you can go to pharmacists.com/YFP and get more information about that partnership and even go back and watch some of the webinars that we’ve done over the past couple years.

Alright, Tim Baker, officially welcome. That was a long introduction, but welcome.

Tim Baker: Yeah.

Tim Ulbrich: And I know this is a chaotic time, so thank you for taking time out of your schedule to do this.

Tim Baker: Yeah, of course. Happy to be here.

Tim Ulbrich: So we know that many of your clients at Your Financial Pharmacist certainly are having a lot of questions. So many of these you probably already have gotten, but we’re going to go through, as I mentioned, each of these in more detail in three different buckets. So let’s start with investments. And I think probably the most common question that we’re seeing in a time period such as this, which is really similar — while the situation is different — similar market drops to what we saw in 2008 is what should I be doing as I think about my account being down? So the question here is my accounts are down 25% — so assuming your retirement accounts — from mid-February. How should my investing strategy change during this uncertain time where it appears there’s no end in sight to this pandemic and the havoc that it’s wreaking? So talk to us about investment strategy broadly during a time period like this.

Tim Baker: Yeah, so — again, if people have heard me answer these questions, I’m going to start off with the worst answer ever. It’s going to depend. So a lot of our listeners are 20-something, 30-something, 40-something year-olds. And if your portfolio goes down now and you’re planning to retire when you’re 50, 60, 70, it doesn’t matter that much. Now, I don’t want to be facetious in saying that because it’s still painful when you look at hey, I had $200,000 in my portfolio and now I have $160,000 or something to that effect. That’s never fun, and we as human, those losses that we feel, the loss aversion really takes hold of us and it’s not fun. But the fact of the matter is that in most cases, these types of corrections, which last time was a subprime mortgage crisis that was created by kind of poor lending practices, this is a pandemic. I thought we were going to have kind of a downturn in the market due to an election. But this is kind of something that’s come out of nowhere, in essence, that’s really affected the market. And typically, these types of things, they last in the long run three years, three and a half years. So again, if you’re — I’m 37. I’ll use my example. If I’m going to work until I’m 67, that’s 30 years. I’m probably not going to even remember this unless I think about all of the Netflix I watched or the Zoom conferences that I had with my family, the games that we played. So now, the equation is a little bit different if you are kind of further along and closer to retirement. So probably some of the worst years to take a recession or to take a hit in your portfolio is right as you’re about to retire. So you know, 2, 3, 4, 5 years out. And the reason for that is when you start withdrawing on your portfolio in retirement, now you’re taking principal out, and you have to make up those gains that much more. So going through the eye of the storm in retirement is kind of like the couple years out to a couple years into retirement, which is when you probably want to be the most conservative. So depending on what side of the coin you’re on, that’s going to be a big part of it. Now, I was talking with a counterpart that said, hey, a bunch of his clients are reaching out and they’re like, how am I doing? And most of his clients are OK because he’s built out basically a bond ladder to get them through recession-like downturns in the market. So they’re basically priming that and maybe a little bit too much for this particular talk, but it really depends on where you’re at. So I would say as a general principle, a general rule of thumb with investments, you typically want to do the opposite of how you feel. So you know, when the subprime mortgage crisis was going on or right before the subprime mortgage crisis, people were taking out money from everywhere to buy real estate. When the dot-com crisis happened, right at the peak of that, people were taking out second mortgages on their house to buy cats.com. So in that case, we know that the markets probably inflated, and we want to be a little bit more conservative. I’m not saying do anything vastly different, but in the downturn, you know, when we see that slight, that drawdown, we typically want to take our investment ball and go home. So that’s what I tell my clients is that you don’t want to take your investment ball and go home. You actually want to do the opposite. You want to keep playing. If you can, you want to play some more, which means that if you are in a good cash position, get money to the market. Now, I often — and I said this last time we talked about this — sometimes I think financial advisors or we as humans, we rationalize away the loss and we’ll say, oh, it’s a great time to buy. It is kind of because when Trump was elected last time, I’m like, oh, the market, it’s overpriced, we’re going to see a correction, not a great time to buy. And that’s kind of the levels we’re at now. So it’s relative, right? But to me, the rule of thumb here is typically the more that you do, the worse. The more tinkering, the more you try to like outfool, outplay the market, it’s not going to work. You know, best rule of thumb is if you’re kind of in this situation where you’re in this accumulation phase, if you can invest more, invest more. If you can be a little bit more aggressive, be a little bit more aggressive. I often say that if you’re kind of in your 20s, 30s and 40s, you probably shouldn’t have any bonds in your portfolio at all. That’s my belief just because basically they’re a drag on your investments. When you get closer to retirement and there’s more safety in principal, then you want to put bonds in there and start really building out kind of that retirement paycheck, that bond ladder. So lots of words, lot of different ways to look at that. At the end of the day, this too shall pass. Markets will go up, it’s part of the general cycle of things. We’re basically being forced into this one a little bit more because of the pandemic, but we were also on an 11-year bull market, a positive market, really since the last downturn. So yeah.

Tim Ulbrich: Yeah, great stuff. And Tim, this really has been a reminder for me in a couple areas. It’s something we preach and teach, but when it hits you directly, it’s a gut check to say, do I really believe in what I preach and teach? And you know, we talk about volatility and the irrationality of the markets and who can predict it, what a great example this has been. I mean, nobody can say they — now, some people might say I saw a bubble and it was eventually going to pop, yadda yadda yadda ya, but nobody predicted COVID-19 specifically. Maybe Bill Gates. But nobody predicted the impact that that would have at this time period and obviously the unemployment, all the impacts we’ve had. But also I think it’s just been a good reminder of some of the investing principles and strategies that I know I’m highly leveraged in stocks, you see a significant drop, I log into my accounts, I want to take action. I know I shouldn’t take action, so for me, this has also been a really good reminder of the value of having a coach in your corner, on your team, in a time period like this to really help you take a step back and look at the whole plan and to really go back and think, what’s the goal? What are we trying to do? What’s the timeline? And a period like this quickly becomes very emotional, not objective, and I think having somebody else that can really help you navigate a difficult time like this is a great reminder.

Tim Baker: Yeah, and my overall belief — I have a few of them — but my overall belief for investments is that investments should be as boring and budgeting. It should be as boring as paying off the debt. It should not be sexy, it shouldn’t be exciting. I think oftentimes when we make it that, that’s where we get into trouble because we’re typically going into investments that maybe cost too much. So when you think about like, oh, this is a smart beta fund, it’s going to cost the investor a lot of money. You know, even I am like, oh man, maybe I should buy this stock because it’s trading really low. And the example I gave the last time we talked about this is you know, when we had corrections in the ‘80s and ‘90s, my first employer out of the Army was Sears. Sears was this giant company that was never going to go away, it was retail supreme, kind of like the Amazon of today. It’s trading at like $.31 a share right now because they just were — so everyone thinks well maybe Amazon — I don’t think Amazon shares are down — but maybe that other, that Walmart or that other stock. So you start twisting your mustache to say hey, maybe I can outsmart the market, maybe this is a great time to buy. And my belief — and again, I do this for a living — is I just become overwhelmingly humbled again and again by that. So you can — I think it’s OK, my personal opinion, to take a small percent, 5-10%, and speculate on stocks. I don’t personally do it anymore because I, again, I’m tired of being humbled by the market. I like to buy the market. It treats you right over the long term and just rebalance it over time. So one of the things that I think you can do if you’re up for it is that if you’re not in something like a target date fund, you know, when I’m reviewing — I reviewed a client’s patient, actually one of the clients are about to be forgiven for PSLF. They’re two months away. Yeah, one of the things that we looked at their TSP and the spouse’s 401k, very out of balance in terms of like their equity to fixed income ratio. So one of the things we were going to go do — and we can do this for them with some of the tools that we have — is we basically rebalance that back because right now their portfolio is more conservative than what they signed up because equities are depressed and as a result, the fixed income makes up a bigger percentage. So we’re basically going to rebalance those out. Now, my counsel to them is get rid of the bonds in general. They’re about my age, a little bit older. But they’re kind of in a 90-10 stocks to bonds split. So that’s maybe one thing that you can do to tinker or change. And in reality, you should do that once or twice per year. And I think that’s good.

Tim Ulbrich: Yeah, and I think that’s a good reminder. I haven’t seen a lot of discussion on in this area of investing is making sure you’re looking at your distributions and rebalancing appropriately as a time period like this can certainly throw things off. So to your comment, you alluded to this, and I’d like to talk more about this. Question here is for several people that are listening that may be in a position to invest, you know, they might look at a time like this and say, “OK, is this a time I should be doubling down? Should I do it? Should I wait? Should I hold that money for other uses, depending on a certain time? Where do I begin to think about how to invest that money?” So talk us through more of the opportunistic side of if I have money to invest, is this a period where I want to make that move?

Tim Baker: Yeah. And again, it depends, Tim, again. I’ll say that again and again. You know, if we look at your balance sheet and you have that emergency fund that’s fully plussed up, your consumer debt is in line so you’re not really — you don’t have any credit card debt or you’re not paying that couch off that you bought a year ago when you moved into your house, you know, and you feel pretty secure, as secure as you can be, now might be a good opportunity to start increasing that 401k contribution, that 403b contribution. If you haven’t dabbled in IRAs, you can open up IRAs to basically supplement that. But you know, right now, I think because of what we’re seeing, my inclination for — in a lot of ways is to kind of sit on the cash and put it in a high-yield account, get your 1.5% interest rate now and call it a day. But you know, me personally, I have shoveled some money into the IRAs as I can, just to get that money into the market and working. But I also feel fairly confident in kind of cash position and where we’re at. So yeah, I think it depends on a lot of factors like if you’re a one-income, two-income household and just some of those other things. Now, we’ll talk about this in a second, but one of the big things is that between now — really, March 13 to end of September, for federal loans, $0 payments, 0% interest, so one of the big things — and we talk about this on the podcast all the time, if you guys are not familiar with YFP podcast, check us out. But one of the things we talk about is really acting and planning with intent. So one of the things I’m talking about with clients is hey, you have this $800 per month federal loan payment for your Pay As You Earn. Now that’s going away, and if you’re going for a forgiveness play, you know, PSLF, that still counts. The $0 payment still counts for September, all the way up until September. So what can we do with that $800? And it might be to get the emergency fund further plussed up. It could be to pay off a car, credit card debt. It could be to invest. And I think all of those things are on the table. But I think ultimately, what we don’t want to do is just say,”Oh, sweet, there’s an extra $800 into the pot.” We as humans, we see a copious resource and consume it, whether it’s time or money. So really be intentional and call out, OK, this $800 is going to go right into my Ally emergency fund — I like Ally — or some other emergency fund that you have. Or it’s going to go, I’m going to schedule that payment to go right into my IRA I can contribute for 2019 all the way up until July of this year. So lots of different kind of ways to look at it.

Tim Ulbrich: So for those that are looking to invest and have extra money that they want to then utilize this time period to implement that strategy, I would reference you back, all the way back, to November 2018, which seems forever ago, on the podcast. Episodes 072, 073, 074, 075 and 076, we did a month-long series all about investing, including the priority of investing and commonly asked questions around investing. And I think that material would be helpful to make sure you’re strategically making those decisions as you invest those funds. Tim, other question here — we’ll round out this section on investing as we transition to some of the uncertainty around work, and I’d remind people if they have questions about investing, please submit them now — is the time of rainy day fund emergency savings. You know, we normally preach and teach 3-6 months, depends on individual factors, if you have one income, two incomes, how comfortable, are you not with the amount of funds that are available, what are the priorities you’re trying to achieve? So my question here, is this a time period you look at — and you might have alluded to this a little bit already — where you say, “Maybe there is a time period where somebody who normally would be 3, maybe it should look more like 6?” Or somebody who’s normally at 6 months, this should be larger than 6 months. How do you typically advise clients on the rainy day fund during a time period like this?

Tim Baker: Yeah, I mean, a lot of those I think have been set by like the Certified Planning Board and they’ve gone through multiple iterations of downturns in the market and things like that. You know, the danger of having more than 6 months in cash is that your cash position is too much and that you should really have some of that money into the market. Now again, that gets put to the test when you’re out of work and you can’t find employment or that type of thing. So I don’t think systemically, anything really changes. But you know, I look at my own — one of the things that I, we get stuck on sometimes is, you know, I meet with a client and I say, “Hey, your emergency fund needs to be $20,000.” And then you know, they maybe move and buy a new house, maybe they have a kid and like we don’t go back and kind of refresh that.

Tim Ulbrich: Right.

Tim Baker: And that needs to be refreshed. So you know, basically what I do from the outset is I say, “Hey, this is what a good emergency fund is. This is where I would put it.” And then we build the savings around that. So I’m a big proponent of having like savings built out for things that are kind of more in line with your goals. So the emergency fund anchors that and then we have kind of secondary and tertiary savings goals. So I don’t think it really changes anything systemically, but I also like one of my bias is that for me, like if I was out of a job like this, like I would figure it out. And I don’t care what I have to do, like I would hustle. And part of that’s kind of just the entrepreneur coming out in me. Not everyone has that, you know? So if you’re more conservative with kind of going out and trying to find income streams, which sometimes pharmacists are, then maybe you do for this period of time try to shuttle away more and then when basically things come to more normalcy, then you kind of get back to that 3-6 months. So I think if you have the cash and you can plus up your account a little bit more, that makes sense. But I think as we go, a lot of the questions people are asking is like, how is this going to change society? How is this going to change how we interact with people and our spending habits and things like that? I don’t know if it really will. Maybe it does. I kind of look back at like 9/11, and you know, now we are however many years later, and it’s like ugh, I have to take my shoes off when I fly in an airplane.

Tim Ulbrich: Right.

Tim Baker: And you know, I was my freshman year at West Point when that happened. And obviously that was a big, big thing in my life just like it was in everyone’s life. But I think that over time, things erode, we forget, and I think there will be a time when we can go to the movies and not feel scared about getting sick or whatever that is. And I think the same is true with our spending, how we save, and all that kind of stuff.

Tim Ulbrich: Yeah, and I think this is a good time as we’re wrapping up this section talking about rainy day funds, you know, one of the things that I always mention, especially when you have two people that are working through a financial plan together, is I don’t think this is the place to push somebody else.

Tim Baker: No, yeah.

Tim Ulbrich: So really making sure you are having an honest conversation about during uncertainty like this, sometimes it’s not rational, what makes you comfortable? And obviously there has to be a reasonable balance of that as you’re trying to achieve other goals and do other things. You know, as you mentioned, you don’t want to have too much in the cash position. But if you’re splitting hairs between 4 and 5 months and somebody is more comfortable with 5 months or 6 months, like this is the place to defer, you know, as you look at making sure that both spouses, both individuals that are working on this together are comfortable with that. So Drew, at this point, as we wrap up this investing section and talk about COVID-19 and the financial implications as it relates to investing, I want to pause here and address any questions that have come in specific to investing as we move on to the next topic about work uncertainty.

Drew: Sure, thanks, Tim. So we’ll start with the first question here. For those at home who are kind of relying on financial planners to really manage their investments and maybe they’re looking to gain more knowledge and education around this topic, where might you guys recommend that they start to get that education and really start to learn about investing on their own?

Tim Ulbrich: Great question. Tim Baker, do you want to start and then I’ll chime in?

Tim Baker: I mean, I’m biased. I think right here, right? Like this is a good spot. What I tell clients when we go through any part of the financial plan, whether it’s the fundamentals: insurance and benefits, retirement investment, estate, tax credits, negotiation, whatever that is, just to kind of name a few parts of the plans that we cover, I want to educate clients in a way that it’s enough to make you dangerous but not enough to bore you to death. So we probably could release — I mean, you know, what Tim and Tim wrote, “Seven Figure Pharmacist,” is another great tool, resource, to — if you’re a reader, you know, I can probably name off a bunch on my kind of read list that would go onto the Mount Rushmore of investment books to read: “Index Revolution” is one. I don’t know, Tim, what am I missing here?

Tim Ulbrich: Yeah, great recommendations on books. “MONEY Master the Game” is something that I typically recommend as a book.

Tim Baker: Yeah.

Tim Ulbrich: They do a nice job some of the complexities of investing in a very easy to understand way. Obviously, I put a plug in for our comprehensive financial planning services that Your Financial Pharmacist specifically designed for pharmacy professionals. And you can learn more about that at YFPPlanning.com. And we have some exclusive benefits to APhA members. Two other things that jump out to me: One, I mentioned the investing series we did on the podcast back in November 2018. Again, Episodes 072-076. So you can download that on Apple podcasts, Spotify, or wherever you get your podcasts each and every week — sounds like a commercial. And then the last thing for APhA members, since we’re here obviously in that, is that we’ve done — you’ve done — previous webinars I believe Investing 101, Investing 102, that are available recorded. And again, you can access those at pharmacists.com/YFP. So I think a whole lot of resources, probably strategically identifying one or two to get started and not getting overwhelmed. But I think even for those that have a financial planner, you know, whether it’s us or somebody else, I think making sure — this is true of any part of the financial plan — making sure you’re educated and up-to-speed yourself I think just leads to a richer conversation and a greater understanding and you’re asking more questions, typically, when you are more knowledgeable about a topic. So you know, I think sometimes there’s a tendency to say, “Oh, I’ve got my investment guy, right? I’ve got somebody that’s doing this for me.” And I think it’s always helpful to have some of the base knowledge yourself as well. Awesome. Drew, what else?

Drew: Awesome. Thanks, Tim. Next question. Is it risky to put money into a savings account where you don’t have close access to the bank? Also, should you have some money not in the bank in case the market crashes?

Tim Ulbrich: Yeah, that’s a good question. So the first question I’m guessing they’re referring to like an online bank perhaps is the way I interpret that versus like a local branch that you can walk through the doors. I mean, I don’t know, Tim Baker, how you feel. I don’t necessarily view online banks such as Ally, CIT Bank, others that are out there that have online savings accounts, to me, I don’t like at that any different than me walking through the doors of a Huntington branch here in Columbus. You know, as long as they’re FDI-insured, obviously you’re looking for competitive product and offering. I feel like from a security standpoint and an offering standpoint, I very much view a physical location similar to an online bank. And obviously you and I have both used Ally extensively and are comfortable with that. What are your thoughts on the cash part of it? This has come up before, I think in our webinar last week about is this a time period where you actually want to have physical cash in hand. What are your thoughts on that?

Tim Baker: Yeah, so I had a client ask me this, and I’ve been asked this a couple times since this has all been going on. And I can’t see — I have like a strong — you know, I actually had a client talk about it today. You know, it’s like, we’re not Doomsdayers, but should we keep some cash in the house? And I’m like, I don’t know. I feel like the banks, one of the lessons learned from the last crisis, the banks are more robust and stronger than they’ve probably ever been. And at the end of the day, like what the government is trying to do is figure out ways to get money into the hands of the people and really businesses. So I don’t have this overwhelming personal need to have stacks of cash in a safe in my house in Baltimore, Maryland. So you know, and I remember the first time I talked about this with a client, I said, “You know, if there is a run on like ATMs, maybe that could be a thing. But then you could always go to the grocery store and like take out cash when you did.” But the second I said that the last two times, I’ve been to the grocery store. They basically turned that off.

Tim Ulbrich: Turned it off, yep.

Tim Baker: And my thought was like, OK, grocery stores are flush because everyone’s buying toilet paper and everything else. But yeah, so maybe. I think though, it’s like you can do everything electronic these days anyway. So people are like, what if you need cash? I’m like, Venmo or PayPal? They’re like, well my parents are old, they’re older and they haven’t used all that stuff. I don’t know. I just don’t — I personally don’t see it. But again, a lot of this goes back to how you feel. So if it makes you feel better to have $1,000 in the house, then do it. I don’t think there’s anything terribly wrong with it. I feel like growing up, my mom would hide money around the house. I don’t know why, it was just one of her things, you know, just like little nest eggs. So I don’t know.

Tim Ulbrich: I agree with you. And I think unfortunately, right now since we’re all pretty much quarantined for the most part is if I had $1,000 in cash, I ain’t really going anywhere where I can spend that cash right now. You know, most of it at least what we’re doing from grocery and other standpoint, you know, we’re pre-ordering and picking it up and that kind of thing. So good question, thought, but I echo your comments and feelings. I think you’ve also got to ask yourself, how does this make you feel? And how does that sway your decisions?

Tim Baker: Yeah, and another thing I talk to clients about is like, I’ll say something to the effect of like outside the Zombie Apocalypse, the market’s going to go up. And if we have the Zombie Apocalypse, we have such bigger problems than our investment portfolio. And I think the same is true, it’s like if all of a sudden the banks collapse and we can’t get cash, like the cash might be worthless, you know? So there might be more systemic things to worry about. So probably not the right kind of tone of the conversation, but I just, yeah, I think you’re OK with trusting the banks.

Tim Ulbrich: Yeah, and if that happens, you’re not making student loan payments.

Tim Baker: Right.

Tim Ulbrich: A lot of things aren’t getting paid.

Tim Baker: Right, I agree.

Tim Ulbrich: That’s a depressing thought. So Drew, how about one more before we keep the ball rolling and move onto the next section? And then we can also hold some time at the end.

Drew: Sure. Absolutely. And I just wanted to mention, guys, I know we have a lot of questions coming in, a lot of questions around student loan repayment, and so we do have a couple more topics, one of those being student loan repayment. So we will do our best to get to those questions. So I think we’ll just finish up with a comment. We had a comment from someone come in, they said they’re a member of the Pharmacist Stock Club. It’s a great local opportunity for meeting, learning, and idea sharing. So if you’re interested, try to find and join a local club. So I just wanted to follow up to the question we had earlier about kind of getting started in investing and learning about those options. So I thought that was a good comment to add.

Tim Baker: Yep.

Tim Ulbrich: Yeah.

Tim Baker: For sure.

Tim Ulbrich: Very cool. I love the passion for learning. And whoever submitted that comment, I’d love to hear more from you about what that looks like and how you do it and perhaps we can share with others that may be looking to start something in their own community or even in these times, start something virtually. So let’s transition to the next area, which I would say led the way in those that registered. When we asked the question, you know, what are you most concerned with your financial plan as it relates to COVID-19, there was this bucket around uncertainty of work. And we know certain situations — I would say they’re not very frequent right now from what we can gather — but we know there’s certain situations where folks have reduced hours because of lower senses at the hospital as they’re waiting for the surges to happen into the future. You know, we do know that many might be impacted by whether it’s not necessarily their own cut hours, it could be a spouse, a family member that is being impacted, or somebody that has a business or a side hustle, I think about things like Airbnb income, or it could be somebody that even gets sick with COVID and is unable to work for a period of time. So you know, I think this is an important topic that we spend a little bit of time in. And I want to kick off the discussion here, Tim Baker, for those that are listening and are concerned about either current situations of reduced hours or that that may come in the future or their job is impacted in one way or another, what are some things that they can be thinking about with their financial plan to prepare for that situation? Big question, I know.
Tim Baker: Yeah, so there’s so many different facets to this point. So like, you know, one of the things and really the ink is still drying, so maybe I’ll talk more about the CARES Act that President Trump signed into law last Friday. So real quick, the CARES Act stands for the Coronavirus Aid Relief and Economic Securities Act that was passed by the Senate, then the House, then signed into law by Trump last Friday. We’re still basically reading and deciphering like what is actually included in here and how it’s all going to work. But really, it’s a $2 trillion emergency fiscal stimulus package, which is aimed to ease the effects of kind of the economic damage that that this is really causing. This is the largest economic stimulus package in U.S. history, actually it’s more like $6 trillion when you factor in like loan provisions and guarantees that the U.S. government is making. A good part of this, about half a trillion, $500 billion, is for stimulus checks, could be more for — $500 billion for severely damaged industries, $400 for wages and payroll tax relief and on and on. So I think the biggest thing that I would probably do if I was concerned or if I was furloughed or something like that is actually file for unemployment. So we did see a big spike, probably the largest spike I think ever, 3.3 million people filed for unemployment between March 15 and March 21. That was the biggest I think spike in history. But a lot of people, they’re like, ah, there’s maybe a stigma side. It doesn’t matter. At the end of the day, we’ve got to pay the bills. You pay into it as a taxpayer, so this is a benefit for the purposes of that is to actually file for unemployment. And what the CARES Act does is actually has expanded that in terms of what you potentially get from an unemployment perspective. Another thing to do is actually take stock, look at your balance sheet. So obviously we’ve been talking about the power of the emergency fund and being able to look at OK, what is your burn rate? How many months can you basically get by without any income? And then if we supplement this with some of the other incomes out there, how do we do this? But one of the big things that you now have access to that you didn’t have access to before were things like your retirement plans, IRAs, 401k’s, 403b’s. You can actually take distributions up to $100,000 in 2020. You have to take the distribution in 2020 from these IRAs and employer-sponsored plans, without penalty. So as long as you’ve been affected by the coronavirus — and this is a very broad interpretation — you either have to be diagnosed, have a spouse or dependent diagnosed, you’ve experienced adverse financial consequences as a result, you’re unable to work because you can’t get daycare, you own your own business and it had to close, very, very broad. You basically are exempt from the 10% penalty. So most people know that once you put money into an IRA, a 401k, once it hits that bucket, for you to get it out, it’s a 10% penalty to get those moneys out. That goes away. A lot of times, you had to withhold if you were taking money out of or rolling over a 401k, you had to withhold 20%. And the reason that they do this is people take that money out, and it’s recognized as income. And then when the tax bill comes due, they’re like, oh, I forgot that I have a $50,000 tax bill or a $20,000 tax bill. The withholding goes away. And you can actually — you can repay this back. So you could say, “Hey, I need this $100,000 today for 2020,” and then over the next three years, you can pay it back or not without penalty. So that’s another thing that you can do. The other thing that they also did is they enhanced 401k. So most 401k’s, 403b’s, have provisions for you to take money and basically for hardships. So they’ve kind of done some broad strokes here. So typically, the maximum that you can take from a 401k was $50,000. Now they doubled that to $100,000.

Tim Ulbrich: Yes.

Tim Baker: Basically, it used to be that you could only take 50% of the vested balance. So if I had a $40,000 401k, I could only take $20,000 of that. Now it’s basically you can take 100% of what’s vested. So if I have $40,000, I could take all $40,000 up to a maximum of $100,000. And then the big thing here is when you take money from the 401k, you typically pay that back as part of your paycheck with an interest payment. All of this, all of those payments will be delayed for at least up to a year. So those assets on your balance sheet, when you’re looking at OK, how do I get through this? You do have some levers to pull. And obviously some of the things that we always talk about is the emergency fund, you could always basically put in your — or take out what you put into a Roth, that comes out without penalty. You know, I think the big thing that I always talk about is diversifying your income streams.

Tim Ulbrich: Yeah.

Tim Baker: So you know, I think we as Americans, just people, we say, “OK, this is our paycheck,” and we self-cap our income. But especially now, and I often wonder like to me, the things I’m really interested coming out of the coronavirus is what are all the things that we see as problems or we’re just sitting around and like here’s a solution.

Tim Ulbrich: Yes.

Tim Baker: So it could be where a business idea is born out — typically, that takes a lot of ramp-up, so maybe it’s not now. But you know, big things like could you deliver for Amazon? I would do it in a second. I love to drive around, listen to stuff, that would be fine by me. Some people are like nope, don’t want to do that, I want to stay quarantined. But thinking of ways to diversify income is big. And then probably just do a bottom-up approach to your budget. Really look at that. You know, obviously, growing top-line income I think can have far ramifications. But looking at your budget and say, “OK, do I really need” — like my wife and I, we do cleaners once a month. They’re not coming to our house because they don’t want to get infected. So that’s out of the budget. But things like that that you can basically say, OK, is this something that I absolutely need to have? You can wipe out your student loan payment. A lot of banks are forgoing mortgages, so you can contact your bank and say, “Hey, coronavirus, no loan payment for the foreseeable future.” So there’s lots of different things like that that I think are big to kind of get us through this tough period. Tim, did I leave anything else out?

Tim Ulbrich: No, that’s really comprehensive. And I’m glad you talked about all the different levers you can pull. And I’m glad you started with unemployment claims because I think there is a stigma. I know it’s something I would struggle with. But I think we have to remember that this was passed for this specific reason. So if we have somebody on the call tonight who is having a financial hardship, has reduced hours, has lost their job, has been furloughed, whatever be the case, I think starting there — because the way I think about this is of all the things you talked about, in what order am I going to pull the levers, right? So the way I think I would think about this is if I can file for unemployment and because of the CARES Act, we see that there’s some extra provisions there with additional benefits from the state and it’s a longer time period, things like that, but if I can then know what I’m looking at in terms of unemployment and then rework my budget, then I kind of know what else do I need to do. Do I need to pull from the emergency fund? Do I need to put the mortgage payment on pause? I don’t have to worry about the student loan payment. Do I need to pull money from a 401k or a 403b or an IRA? But I think objectively, starting with what can you get in terms of replacing income? And then working backwards and identifying what other moves you can make to help in that. So Tim, talk us through — and you might have mentioned this. I just want to make sure that those are on — those that are on are tracking with me as well. If I were to pull or need to pull let’s say $40,000 from my 401k or 403b, you mentioned that that has to be in this year, 2020. Obviously, those are pre-tax contributions. So is that then I would assume just treated as taxable income this year? Can I spread it out? And how should I also be thinking about the tax implications of that?

Tim Baker: Yeah, so one of the kind weird things or odd things about this but actually interesting is that you know, let’s take it the round number of $90,000 as an example. So if you can — say you take $90,000 out of your 401k. Now, you don’t get the 10% penalty, which is awesome. You get that cash immediately. So you don’t have to withhold anything. And then you have the eligibility repaid over three years if you want or not. But basically, you can recognize that income either all the $90,000 that you take out in 2020. So let’s pretend that I’m a service worker, and I make $30,000 this year. And I take $90,000 out. Now, I can basically recognize — so I basically am taxed on the $120,000 for 2020. Or I can basically spread out that adjustment between — or that distribution — across three years. So I could take $30,000 in 2020, $30,000 in 2021 and $30,000 in 2022. Now, this is where working with a savvy tax professional like our Paul Eichenberg might help this. But it’s either one or the other. So you can’t like — it’s either like spread it out evenly for three years, which probably more often than not, that makes the most sense if you can defer it out. Or if it’s a really bad year and you want to basically hey, maybe it’s $40,000 that you need, it makes sense to take it all in 2020 because you know, basically you’re shut down, you’re not making any income. Maybe it makes sense to do that. So it just depends on how you elected to do that. Another point about the unemployment that I will say is, you know, again, I kind of think about it kind of like social security. Like you pay into that over the course of your life. Same thing with unemployment. You pay into that. Some of the things that they did with the CARES Act is that the waiting period goes away. So before, you had to typically wait.

Tim Ulbrich: Right.

Tim Baker: Basically the federal government will cover the first week of unemployment. There’s a fund called the Pandemic Unemployment Insurance, which is typically if you don’t qualify for anything else, it’s typically for self-employed individuals or contractors. That’s available for you. They’ve actually plussed up — so like the regular state unemployment benefit is increased by $600 per week. Just to give you some context, the average, the typical unemployment check, is $385 per week.

Tim Ulbrich: Yeah, it was big news.

Tim Baker: Yeah. So it’s now like more than double the bonus on top of that. And you get this — and this was probably one of the big things that tied it up in the Congress.

Tim Ulbrich: Senate.

Tim Baker: The Senate, was because they thought that the benefit was too generous where it would disincentivize people from basically going out and looking for work. But they capped it at basically four months. But the extension of the overall benefits go 13 extra weeks. So again, you know, this is — right now, we’re in a time where like we’re cooped up, you know, maybe we’re feeling a little blue, maybe this half of unemployment, this shouldn’t — this doesn’t define you. This is not part of who you are.

Tim Ulbrich: Absolutely.

Tim Baker: And even like businesses, we’re going to see businesses that are not going to be able to survive this. And it’s a shame because it’s not something that they necessarily did wrong. It’s just a systemic thing that came along, and I think the government is trying to do whatever they can to basically keep businesses afloat and keep people on payrolls and things like that. But this is not a poor reflection of you and what you’re doing. So I just want to make that point because that’s a real thing for sure.

Tim Ulbrich: Great reminder. And I think this is also a good time to remind you, we talk about things like the CARES Act, and we’ll talk about the student loans here in a moment. Here you’re talking about unemployment and the additional $600 a week benefit and the timeline of that being up to four months. I think this is a good time to remind that you know, some of this may be extended. Time will tell. We don’t know. So what we know right now is what’s been passed. But I think we will continue to keep an eye out for discussions. There’s already discussions of a fourth stimulus type of package that is in the works that I was reading about this morning. So I think stay tuned. And if you’re not already part of the Your Financial Pharmacist Facebook group, I hope you’ll join us as we’re trying to stay as up-to-date as we can on all of this information. So before we jump into student loans, Tim, I thought it would helpful since we talked about unemployment and the CARES Act extensively, let’s talk for a moment about the stimulus checks. Who’s getting them? Who’s not? Timeline? And what can people expect here? Because I think we’re going to have some people listening, many people perhaps, that won’t get these or will get a reduced amount. So I don’t want to spend a ton of time here, and this has probably gotten the most wide press compared to some of the other items. But let’s talk for a moment here before we take some questions and then transition into student loans.

Tim Baker: Yeah, so this is Section 2201, the recovery rebates to individuals. Now, the stats out there is that 90% of taxpayers should receive something. I’m not sure what percent or pharmacists will receive this, but essentially this is a credit against 2020 income taxes. So everyone basically has a starting amount and then it gets reduced based on your AGI, you Adjusted Gross Income. So what we use — so as broad strokes, basically it’s $1,200 for each individual or $2,400 for married couples and then $500 per child essentially under 17. So if they’re 17, they don’t get it. Basically, under 17. The phase-outs for this are basically if you’re married filing jointly, it’s $150,000. And then head of household is $112,500 AGI. And then all other filers is $75,000. So basically, the way that you calculate this is if you’re a single taxpayer and you have one kid, that’s $1,200 plus $500 for the child. So that’s a $1,700 refundable credit. If you’re a married couple with one child, you basically have $2,400 plus $500 is the $2,900. Now, you take that as the starting point and then you look at your AGI. So in that first example, if you made $65,000 as a single individual, then you would get 100% of that $1,700.

Tim Ulbrich: Right.

Tim Baker: If you made $76,000, which is $1,000 above the threshold, then your benefit would be reduced by I think it’s $50 for every $1,000. So in that case, it would be not $1,700. It would be $1,650.

Tim Ulbrich: Yep.

Tim Baker: So the same thing with the married filing jointly, one kid, $2,400 for the couple, $500 for the child, that’s $2,900. If they made basically $151,000, it would basically be reduced by $50. So $2,850 instead of the $2,900. So you start with basically the family situation, then you apply the income, and then you reduce it as such. So for a lot of pharmacists, you know — and again, so the other caveat to this is they’re going to look at the last tax return on file. So if you are not a procrastinator or you filed your taxes early, good for you. They’re going to look at your 2019 return. If you haven’t filed your taxes or you’re like, hey, extension, more time to use, then they’re going to look at 2018. Now, at the end of the day, it will be basically be chewed up on the 2020 tax return. So they’re not going to claw anything back. So let’s pretend that your 2018-2019 income is lower than what it is today, you still get that rebate and they’re not going to claw that back. But let’s pretend that your 2018-2019 income is higher and you get furloughed, you might not get it today. And I would estimate checks will start coming — checks are deposited and will start coming in May. You might get it today, but you could get it when you file your 2020 taxes. Now, does that help you? No. It doesn’t necessarily help you today. But the idea is that in future tax returns, you’ll be indemnified essentially to that, to what you’re — so here’s an example. I’m not going to file my 2019 taxes anytime soon because of a lot of the changes that I had in my household, the business, that type of thing. So our son Liam was born last year. So he’s — to the IRS, he doesn’t really exist right now. So when we go to file for 2020, I expect a $500 credit for him.

Tim Ulbrich: Yes.

Tim Baker: So that’s an example. Now, there are some maybe thoughts about the ethics of this in terms of like, hey, should I file my 2019 because it will give me a better credit? The answer is yes. You should. Or should I wait to file? The answer is yes. That’s just good financial planning, it’s good sense. At the end of the day, this is tax money that they’re basically returning to you. So to me, you know, regardless of where you’re at, whether you are in a position where income is fine and stable, we don’t know that in the future. So to me is this is the system that’s there. It’s just like with taxes, what we say is we want to pay the least amount of taxes humanly possible. That’s legally. That’s legally possible. So we’re not going to pay more than that. So the same thing is that if you can get a better benefit, then you should go for that for sure.

Tim Ulbrich: Yeah, and we’re talking about legal tax strategies. So let’s be very clear on that.

Tim Baker: Exactly.

Tim Ulbrich: And I think that’s an important point. So Tim Baker, when you’re throwing around terms like clawback, you’re not using pharmacy lingo like PBM clawbacks and other things.

Tim Baker: Yeah, sorry.

Tim Ulbrich: There will be no clawbacks here though, just to be clear.

Tim Baker: No clawbacks.

Tim Ulbrich: For those who are used to clawbacks. So Drew, let’s stop here and take a couple questions related to work uncertainty before we move onto student loans.

Drew: Sure, Tim. First question, will this Act allow for small business owners to file for unemployment when they typically would not qualify?

Tim Baker: Yeah, so that — exactly right. So typically as a small business owner, you don’t get into that party. But the Pandemic fund that I mentioned is typically going to be for those small business owners, those contractors, that wouldn’t otherwise qualify. So that’s the fund that they’re probably going to basically dip into. It’s called the Pandemic Unemployment Insurance program. It’s a federal program. And that’s, to me, that’s where I would definitely go.

Tim Ulbrich: Yeah, I was thinking today, Tim Baker, about all of the people that — we talk about on the podcast all the time about side hustling, you know, whether it’s Airbnb, Rover, the list goes on and on. And how many of those are being impacted in a time like this? So it’s certainly something to consider. What else, Drew?

Drew: Thanks, guys. Another interesting question from an independent pharmacy owner. Do you guys have more insight into any assistance that may come in the future? For example, if their business is doing well right now, they’re showing an increase in revenue over the last few weeks. However, they could foresee a slump in the coming months, for example, if they’ve had patients who filled refills early or for 90 days. So therefore, they may need assistance in the future. What do you guys think about that?

Tim Baker: Yeah, so actually, one of the changes in the bill — so there are some healthcare-related rules, and I’ll run through those really quickly. So there’s definition of medical expenses is expanded, specifically for HSAs and FSAs. So a lot of eligible medical expenses will now include over-the-counter meds. So that’s a big one. But one of the things that they talked about too is Part D recipients can request up to a 90-day supply. And it’s just a matter of kind of limiting seniors from basically having to go out and those type of things. Telehealth is another big thing that’s been temporary covered by HSA-eligible high-deductible plans. So as part of that, though, to go back to the kind of independent side, one of the major parts of this legislation, the CARES Act is the Paycheck Protection Program, which is essentially — it looks like free money in a lot of ways. So if you are a pharmacy owner out there and you’re like, hey, things are OK now but we could be affected — and actually, Tim, I don’t know if you saw this email. But you know, our bank, our business bank, actually sent us kind of an email about this that said, “Hey, you may be eligible. Check this out.”

Tim Ulbrich: Yes.

Tim Baker: And it basically outlined a lot of the big — so it’s basically, it’s guaranteed by the Small Business Administration and issued by SBA-approved lenders. You’ve got to apply for this type of loan by June 3. And the maximum duration of the loan is 10 years. So this is typically for a business that has less than 500 employees. You do have to basically in good faith certify that the loan is necessary due to uncertainty of current economic conditions caused by the coronavirus. Now that’s again a broad definition there. And I would say like if you are in the toilet paper or the hand sanitizer business, you should not be applying for this because that would be fraud. But the interesting part of this is that the max loan is the lesser of $10 million, or 2.5 times the average monthly payroll costs of the previous year. And the proceeds can be used for payroll, group health insurance premiums, salaries, rent, utilities. And 100% of that could be forgiven if it’s used during the first 8 weeks that you get the loan.

Tim Ulbrich: Which is crazy.

Tim Baker: And you don’t lay off employees. So you have to basically kind of have the same employees, you have to pay them more or less the same amount, but it’s pretty generous. And the rates for small business rates are typically higher. The rates, the maximum that you can be charged is 4%. The discharge debt is nontaxable. And those initial payments are going to be deferred for at least 6 if not 12 months. So I have an independent pharmacy owner that I was talking to earlier this week and he’s like, “Is this for life?” And I’m like, “I think so. But let me read up more about it.” Because potentially, again, it’s one of those things that’s uncertainty about this. And there’s a lot of businesses that you could probably chalk that up to now go apply for these loans, I think it’s a pain in the neck. So it’s something to consider though.

Tim Ulbrich: Yeah, and get your pen ready I think to do the paperwork. But speaking of toilet paper companies, Tim Baker, I saw a toilet paper startup company I was reading about this morning that I thought was interesting. But I think on a serious note — and we actually were having this conversation before we jumped on this evening — I would encourage whoever asked that question or others that might be this would be impacting is to try to really, really intentionally self-assess, even if you’re not, again, at a good faith statement, even if you’re not impacted today, you know, as you look out in the future and trends and how that business will change, could you be heading in that direction where challenges may present themselves, payroll might be an issue. Or if you’re thinking ahead to the business, you know, that changes hiring or how you’re leveraging resources, I think really taking a step back to say, of course you want to be in good faith, but if there’s not impacts that are happening today that are significant, is that something that could be coming in the future if this continues? So Drew, how about one more and then we’ll transition to student loans.

Drew: Sure, guys. So if someone was unemployed before the CARES Act was passed, could they still have the increase to $600 a week?

Tim Ulbrich: I don’t know that question. My gut would assume yes, they would, but I don’t know the answer to that. Do you, Tim?

Tim Baker: Yeah, I think yes. And again, part of this is just if you think about the administration of this to say like, you know, when — I’m pretty sure that — well, maybe it depends. I’m not going to say yes or no to that. That might be something we have to look at. So if you were unemployed before this was signed into law, how does that affect your unemployment? Let me try to find some answers to that. If that person could email us at [email protected], I’ll research and get back to you. That’s a good question.

Tim Ulbrich: Yeah, I would like to think — maybe it’s half glass full — I’d like to think that they wouldn’t penalize somebody because of the timing of that.

Tim Baker: But I do know they were making a big deal about the actual date in which he signs. So it could basically be dated. That’s kind of the line, the demarkation.

Tim Ulbrich: That makes sense.

Tim Baker: Yeah.

Tim Ulbrich: OK. Alright, let’s move to student loans, probably a lot to discuss here and it sounds like from Drew’s comment earlier, we have a lot of questions. So we talked a little bit about the CARES Act and student loans, but let’s dig in in more detail, Tim. You know, as I mentioned in the introduction, we had a lot of news around student loans, starting with the 60-day interest freeze to the 60-day no payment with the interest freeze and then obviously the big news that came as part of the CARES Act of no payments for six months with no interest that will accrue during that time. And that was really I think the big news on student loans. So talk to us a little bit about that news as well as what that means for people that are pursuing loan forgiveness and then which federal loans are included and what’s not included.

Tim Baker: Yeah, so you know, the big news obviously, like you said, is that for federal student loan payments — so we’re not talking about your private refi’s. And this is really direct loans, so we’re not even really talking about FFEL loans or even Perkins loans or things like that.

Tim Ulbrich: That’s right.

Tim Baker: We’re really talking about the direct loans that are out there. Automatically, you’re going to basically pay 0% interest effective March 13 to September 20 of this year. And then also, payments will be suspended automatically over the course of the time. Now, we’re still talking to clients and people that are saying like, hey, they’re not suspended. Student loan servicers, one, I think part of the — I’ll give them a little bit of grace because I think they’re understaffed right now because of everything that’s going on but also they’re just — they are notoriously poor at answering questions, responding to borrowers and that type of thing. So it could take a little bit of time for them to kind of get everything on board. But I looked at the FedLoan page as one of the big federal loan servicers, and they said if there is any delay, everything will be retroactively counted and things like that. So you know, typically the big ones are FedLoan, Navient, NelNet, Great Lakes, those are all federal loan providers. So required payments are suspended. And you don’t really have to do anything. And probably it’s better if you don’t do anything because I guarantee you if one person calls and they get one direction and then the next, you could call five minutes later and get a completely separate, different direction. So the big takeaway here is that, you know, from a federal student loan perspective, no interest, no payments until basically September 30. So I think the big thing is depending on where you’re at is to kind of look at, OK, as an example, I have an $800 payment. In most cases, you should not be paying that. We should be directing that elsewhere, which could be looking at plussing up the emergency fund a little bit more, paying down consumer debt or other high-interest debt, it could be invested. So be very, very intentional about how you want to direct that payment. Again, typically if we’re not, we see lifestyle creep and things like that. That $800 gets lost in the fold. So we want to make sure that we’re really intentional with that. Another big thing is that involuntarily debt collections will be basically put on hold and suspended. So if we have anybody out there that’s kind of in those dire straits, you’d have a little bit of reprieve there. If you’re in school, if we have students on here, I think the big thing that’s going to be different is basically you’re going to take all of your unsubsidized loans and they’re going to subsidized. So essentially for those months, you’ll basically not accrue any interest, which is a big deal because that bill is basically tacked on daily. I’m trying to think — now for, I mentioned for federal loans or for private loans and FFEL loans, you kind of got cut out of this deal. So this is one of the things that’s very unfortunate because typically the people that are trying to refinance are really trying to take a proactive approach to paying off their loans. So in the decision tree, it’s typically hey, is forgiveness on the table, whether it’s PSLF or non-PSLF. If it’s not, you’re like, “Hey, Tim, not cool. Don’t trust the federal or the forgiveness program,” which I think is a viable program, you then go to comparing your standard payment to a refi. And typically, refi rates have been so much better than what you get coming out of school, so it makes sense to basically shift over from the federal government to the private. Now you’re basically being penalized for taking a more proactive approach to paying off your loans whereas a forgiveness option or forgiveness play is more of a reactive approach, unfortunately. So you can consolidate loans. I think that if you consolidate them down, a FFEL loan, so this is federal loans that aren’t part of this, you can consolidate a FFEL or even a Perkins loan down and potentially get some type of reprieve on that. Typically when you do that, if you are looking at a forgiveness option — actually, you probably want to not look at that unless you can pick out those loans specifically. That can be a big problem. I think those are the main talking points.

Tim Ulbrich: Yeah, just to reiterate some of the things you mentioned. I think this is huge news, especially for those that may be hearing this for the first, second or even third time I mean, for that matter. No payments on qualifying federal loans until September 30. Again, who knows? This may or may not be extended. Time will tell. No interest that accrues during the interim. And this will count towards loan forgiveness. So for the client you mentioned earlier that has two months left of PSLF, they’re getting a free ride on the last two payments, huh?

Tim Baker: Well, I told her, I was like, I think that you paid your last student loan payment. And she had the biggest smile ever.

Tim Ulbrich: That’s awesome. That’s really cool.

Tim Baker: Yeah.

Tim Ulbrich: So if somebody does make a payment — and I’m grateful for what you said about really taking a step back and being strategic — obviously would then just go toward directly to the principal, right?

Tim Baker: Yes, correct. Now, according to like FedLoan, they would basically figure out a way to like make you hold so you get that full benefit. I have no idea, and I have very little confidence that will actually happen, so I think one of the questions is, how do I know that if my payments count toward PSLF, I would be tracking them because one of the — although I’ve said it time and time again, I think PSLF is a very viable strategy and I think it does have legs despite the kind of national news about it, you can’t argue with the math. But the administration of this is awful, in my opinion. The Department of Education is supposed to be basically providing oversight for FedLoan, and you know, by and large, they bumbled that program. So there’s lots of handholding, there’s lots of uncertainty around it, but at the end of the day, you have to basically cross your t’s and dot your i’s, just make sure that you’re babysitting them, so to speak. So you know, I think running — one of the things you could potentially do is run an NSLDS report, which is just basically the text document that basically shows the birth to the death of the loan. So basically a month-by-month description. So run that kind of now and then run it afterwards and kind of just see where you’re at in terms of your overall PSLF count. I think that’s what I would do.

Tim Ulbrich: Yeah, this will as we get through this storm and we talk about PSLF in the future, I think this will be another example point just like last year when they added some funding to the program to help make up for some borrowers that ran into issues, especially those first couple years of applying for forgiveness. I think this will be another tick in the column of you know, it looks pretty good for the longevity of PSLF or the grandfathering of borrowers that are currently there. So does this — Tim, my question is, you know, for those that are or were thinking about refinance, does this effectively make refinance a moot point for this six-month period?

Tim Baker: Yeah, I mean, I guess there could be certain like instances where you can — because I think one of the things that I am kind of concerned about is some of these companies that are offering refi can’t stay solvent because eventually, effectively, you wiped away a lot of their market because of the 0%. So there’s going to be a lot less people jumping from the federal to the private. Now, I guess you could have some people that go from a private to a private refi.

Tim Ulbrich: Right.

Tim Baker: So it’s like hey, I have this 5%, I can get a 3.25%. That’s a little bit better. But I think it’s like 90% — isn’t it like 90% of loans are federal loans or something else?

Tim Ulbrich: Yeah, and we’ve seen that tick up in rates.

Tim Baker: Yeah. Yeah, so the rates — that’s the other thing. Rates have gone up. So and they’ve been yo-yoing. I wouldn’t be surprised if they went back down.

Tim Ulbrich: Agreed.

Tim Baker: So you know, if I could get in, I would probably have to be somewhat through the benefit period. But if I’m 3-4 months in and I can get a rate that’s really, really aggressive, you know, maybe like 2%, I might consider that as an option just to kind of lock that in. But yeah, I mean, I think it really doesn’t make a whole lot of sense to leave that, to leave the federal system. And I think the other thing to kind of note is the federal loans, they are more generous when it comes to like hardships and things like that because they’re backed by the full faith and credit of the U.S. taxpayer where some of these other companies are not. They don’t have that bank account standing behind them. So they can’t be as generous with them. Now, a lot of them have matched a lot of the kind of the forgiveness upon death and disability and they will work with you on a hardship. And I would say if you do have private loans and you can’t make the payments, contact the Earnest, CommonBond, Credible, whoever it is, and say, “What can we do?” And a lot of times, they will work with you. But they’re also, they’re kind of in dire straits as well. So.

Tim Ulbrich: Yeah. And you know, we talk a lot about on the podcast and the blog on the pros and cons of refinance. So I’m going to have to update my slides in the future, you know, something we could have never predicted, but a COVID-19-like situation where you have something like six months of federal loan payments being paused and 0% interest. I could not have ever predicted this happening. So — and just to add on your comment, Tim, before we take questions, I think it’s a really important reminder that we certainly want to extend them some grace in this moment where they’re dealing with a lot as well, but the loan servicing companies — we even have an example today from one of our Certified Financial Planners, Robert Lopez, who was on the phone with them and I think in his words was really after being on hold, was less than helpful in their response. And I think that can happen in terms of incorrect information or they’re overwhelmed. And we’ve heard that before. This is not the first time. So making sure that what you hear is lining up with other things you’ve heard or if you think, you know, that doesn’t right, making sure you’re fact-checking that.

Tim Baker: Yeah, and the thing that he said to me when I talked to him about it was like, yeah, and she was just very, very confident in her answer but completely wrong, which is — that’s the problem because it’s not like the student loans are a black-and-white issue. There’s lots of nuance and intricacies and when you’re calling up someone on such a big thing, we’re talking potentially six figures of debt, you want to walk away like feeling confident that the advice or the counsel that that person on the other line gave you was sound. And more often than not, it’s just not. And it’s not necessarily the fault of the person, it’s just that they’re not trained very well. And that’s a shame because I think we’re seeing — you know, and that’s one of the bad publicity angles is like hey, I was told this and it was completely something different, you know?

Tim Ulbrich: Yeah.

Tim Baker: So that’s why I think sometimes working with someone to help cross t’s and dot i’s and get you to that finish line is really, really important because there’s just a lot of potential hoops to jump through. And it’s not just — you know, there’s so many different — even like the tax ramifications with student loans, that’s one of the reasons that we started doing taxes at YFP is like I was tired of basically referring people out to professionals that had no idea how to handle the taxes. So I’m like, we have to do it in-house. And that’s what we do.

Tim Ulbrich: Awesome. Great stuff, Tim Baker, as always. So Drew, you had mentioned earlier lots of questions around student loans, so let’s tackle a handful of those.

Drew: Alright. So the first question, would you consider reconsolidating federal loans for a low rate? Or wait until after September? What if this rate is only offered over the next month?

Tim Baker: So I think we’re kind of conflating two issues if I’m using that word correctly. So consolidation or reconsolidation and refinance are completely separate things. So when you consolidate, when you consolidate your loans, you’re basically taking two or more federal loans, so think Direct Plus, Direct Unsubsidized, Direct Stafford Subsidized, and you’re basically shrinking those down into really one or two loans, more than likely two. You have a Direct Consolidation Unsubsidized loan, and a Direct Consolidation Subsidized loan. The reason that you do consolidation is two reasons: One is for convenience. So you guys know as pharmacists, you have a crapton of loans that are pages long. If you look at your credit report, it’s a mess because every basically disbursement is a record in your credit report. So you do it kind of for ease of use, for convenience. The second reason that you do it is to kind of solve the square peg, round hole. So like we mentioned, some of those FFEL loans and some of those other loans that are out there that a little bit older, they don’t qualify for some of those income-driven plans that are out there that then allow you to be forgiven, to get into some of the forgiveness programs. So it’s basically consolidate those down and then get into those IBR, ICR, PAYE or in a Revised Pay As You Earn. Now, the key here is that you’re just taking a weighted balance in interest rate. So you’re not getting any better terms or deals or anything like that. So if you had, you know, 6% and 5% and 4%, they’d just weight those together and now your new rate is 5.4% as an example. So when you — so that’s consolidation. When you refinance, you’re basically saying, deuces, federal government. Thanks for lending me the money, but I’m going to take my income, my credit score, my payment history, and I’m going to go out to the Credibles of the world, some of these other companies, and I’m going to try to find a better deal, a better terms for myself. So you know, I use kind of 6% as the line of demarkation. So anything higher than 6% on your federal loans is typically high. Anything low is typically — lower than that is typically pretty good. But if you have an average weighted interest rate of 5.8%, at a 10-year, that’s your default, a 10-year standard repayment, you can even today with the rates that are out there, you can beat 5.8%, so that’s where you would do an apples-to-apples comparison to a 10-year with a Credible or a CommonBond or something like that. You might get 4.9%. I’m just making up rates right now. So you would say, OK, better terms, lower payment, that type of thing. So to answer your question, do I think — so those are really the big differences. Now, the big thing to remember is that once you go from the federal to the private, there’s no going back. So that’s why a lot — I was kind of bemoaning the fact that people that have made that decision to say, “Thanks, federal government, it’s been real. Thanks for loaning me the money, I’m going to take it from here and go to a private company,” they’re kind of left in the dark a little bit because there’s no relief for them. So and they can’t go back. So they can’t say, “Psych. Just kidding. Takebacksies, let me go back to the federal government and get my relief.” So with regard to the rates, you know, rates are a little bit higher than they were a couple weeks ago. I would imagine that they’re going to come down. I think they’re going to have to just to be somewhat competitive with the government. But what the loan companies now are struggling with is not the fact that the fed has lower rates. It’s more about if I, Tim Ulbrich, if I let you refinance and now you’re making payments to me, the Baker Private Refi company, can I trust that you’re actually going to be employed to pay this back? And by the way, like I don’t have a huge cash reserve like the federal government that I can just rely on. So that’s why there was such a big flood of refis and these companies were like, whoa, like this is a problem and rates started to creep back up. And I think they’ll have to go back down just to incentivize, especially towards the end of that period, that September grace period, relief period, but yeah. So those are big, big differences we’re talking about. And sometimes those are used interchangeably, and they shouldn’t be. But a very common issue.

Drew: Awesome, guys. Should the student loan payments continue and just go 100% toward principal on the student loans during this time? Are federal Grad PLUS loans included?

Tim Baker: So the answer to the second question is yes. Grad PLUS loans are included. The answer to the first question is, typically no. So most of the time, if you are basically going through this strategy — if you selected your strategy appropriately, we’ll say, if you are in the federal system today, it’s really — the main reason is because you’re trying to seek some type of forgiveness option. So in that case, in that case, you should not pay a dollar more than you need to. The flag that you need to fly is you want to pay the least amount as humanly to maximize your forgiveness. So you’re going to take full advantage of that payment that would otherwise go there and basically direct that elsewhere.

Tim Ulbrich: And you get your forgiveness credit.

Tim Baker: Correct. Yeah, and get that month counted. Anytime that you can have basically a $0 payment, like a $0 interest payment, the math says basically money is a finite resource, use that money elsewhere. Now, this is kind of an emotional thing. Now, so the reason that I say most people that are in a federal payment is typically because they’re seeking forgiveness. You could be looking at me and saying, “Well, I’m in the federal program and I’m not seeking forgiveness.” So the reason I say that is because it makes sense from a math perspective to go outside — because of where rates have been for the last however many years — it makes sense to go out to a private company and get a better rate. Now, 10 years ago, a lot of these companies — like the student loan refi game was newer and when I was taught about student loans, you would never leave the federal system because the federal system, there’s a lot of these protections, forgive upon death and disability. But because of students loans are a $1.5 trillion issue, a lot of these companies have kind of risen to the same benefits that the federal government has. So now they can incentivize you to say, “Come over here and pay us the interest over the federal government.” So the question is should I pay the money back? I would say no unless your goal is to basically pay them off as quickly as possible. And if that’s true, then you probably should have refinanced years ago anyway. If that’s still true and you’re still in the federal system, I would say, yeah, you can pay it off. I would probably still direct that money elsewhere and then probably refinance because more than often, more often than not, you can get a better rate. Now, there are sometimes I come across loans that are like 2% and 3%. You know, if you are one of those people, don’t listen to me because I think you’re in the right spot. So if you are in a 2% or 3%, oftentimes, again, you’re like, alright, well I’d rather pay off my car loan that’s 5% or that credit card that I have that’s whatever percent. So those are some of the things you just have to weigh.

Tim Ulbrich: And if I could add to that, Tim, I think the only exception I think of here is if somebody knows themselves well enough that that money is going to be diverted elsewhere through kind of the typical lifestyle creep thing. If you know yourself well enough and you have that self-awareness, I think that might be the exception where you say, I’m going to keep making payments because momentum is really important. But the way I think about this is let’s say I’m making $1,500 a month payment let’s say on the standard default federal system. I think about that. If I didn’t have to make that payment, how would I best leverage $1,500 a month across my financial plan? And this is where we go back and we talk about this all the time on the podcast. So not just looking at one segment of your financial plan. So what does your emergency fund look like? What does the consumer debt look like? What investment opportunities exist? Are you not taking advantage of employer match in retirement, that type of situation? So you know, if you look at all those, more often than not I think what you’re really referring to is more often than not, if not almost always, you’re probably going to find an opportunity where that money could be leveraged elsewhere, at least for the short term when you have this 0% interest for six months.

Tim Baker: Yeah, and I’ll give you an example. I was talking to a pharmacist in Washington. He’s married. He’s going for PSLF. I forget how much he’s paying per month. But he has a little ways to go with the emergency fund. He has a car — one of his car loans is 5-6%. So his question is, should I put money into the emergency fund? I’m like, yes, and probably focus on the car loan. And you know, if you think about it, these loan payments can be 8 — and especially if you’re married — it can be thousands and thousands of dollars. I mean, one, two, three months of that can go huge right into an emergency fund. Like I think about how much money my wife and I basically save into our Ally accounts for different purposes. You know, it’s about $1,500 a month after we’re putting money into 401ks and IRAs and things like that, 529 accounts for our kids. But you know, it’s going into our Mexico fund or it’s going into our home maintenance fund or whatever that looks like. But if I could basically double that for this amount of months, like that would be awesome. And then the other side of that is once you have your savings plan in place, that’s when you can really get dangerous with your investments. And sometimes we put the cart before the horse. So I work with a lot of pharmacists that are like credit card debt, student loan payments are kind of all over the place, and then they have like a Robinhood account. And I get — I know why we do that. It’s because we’re interested and we want to learn about investments, but those are — we’re three or four steps ahead where we probably shouldn’t be directing money into a taxable account. We should be focused on some of these steps 1-8 type of thing. So.

Tim Ulbrich: Awesome. So Drew, I think we have time for probably one more question before we wrap up for the evening.

Drew: Awesome. So guys, for future borrowers of federal loans, do you think the interest rate will be higher after COVID-19 to make up for money lost?

Tim Ulbrich: Ooh, that’s a good question. You know, how will this get paid back and what impact will that have on future interest rates on federal loans? What do you think, Tim?

Tim Baker: I don’t think so. You know, I think rates for student loans have been pretty high with regard to like the federal side of things. That’s not uncommon for me to see. I mean, back — you know, if I’m working with people in their 40s and 50s, sometimes they have loans that are like 2% and I’m like, this is awesome. Because most of the time, I see 20-somethings, 30-somethings, that could be north of 7% for federal loans. And for pharmacists, those Grad PLUS loans, those add up. So and I think there is a little bit of a cry of like the government profiting on the backs of students, that type of thing. It is an unsecured debt, but it doesn’t ever go away. So like you can’t discharge student debt in bankruptcy, so it’s pretty secure in terms of like if you have student loans and you’re collecting social security, they’ll garnish that stuff. So that’s one of the problems with student loans is you can’t get away from them. So I don’t know if we see a big spike in rates after the fact. I mean, I could see the opposite, that they keep them low. But you know, who knows? You know, who knows what’s going to happen? We could see kind of a action-reaction type of thing with regard to that.

Tim Ulbrich: Yeah, and I think it’s a really good question. You know, this reminds me to a talking point when we talk about PSLF. We need to remember that this is a — student loans are $1.5 trillion problem that are gaining a lot of momentum politically. And if you’ve watched any of the debates this season, this is an indicator as well as what we saw as the support in the CARES Act, I think we’re going to see more of that going through the election year. So you know, in theory, of course they could. But I don’t think it’s a very popular decision right now for a lot of the flack that they take in in terms of the rising student loan debt and the impact interest rates have had. So too soon to say, but I certainly don’t think it would be a popular decision.

Tim Baker: Yeah, but I mean, but to play devil’s advocate on the other side of the aisle is you know, with Trump, he’s basically proposing to get rid of it, which again, I saw some questions get in, come in like hey, is this really a viable thing? And I think the answer is still yes despite that.

Tim Ulbrich: Yeah.

Tim Baker: Because I still bet on the status quo versus a big change. And that’s either for like mass forgiveness or elimination. So it’s another issue where our country is very, very polarized over one issue. So but I think, again, to kind of reassure the PSLF-ers out there is that every — basically when this was enacted by President George W. Bush in 2007, every president and Congress since then has talked about getting rid of it or capping it. And it’s still here. And all of the documents and legislation, proposed legislation, to do this talks about future borrowers. So if you’re a student and you’re going to graduate in 2022, I don’t know. Maybe it will be there, maybe it won’t. But if you’re a year into PSLF and you’re in the program and you’re basically filled out the employment certification form, I think that you’re going to be fine. I would imagine if and when they ever do get rid of this, let’s pretend it’s January 1, 2025, then those people that are going to be into it — so if you’re in it December 31, 2024, your loans are going to be forgiven basically 10 years from then, essentially is what the thought is. So I think at least it’ll be grandfathered in. But the press on it is terrible. But I think it will get better.

Tim Ulbrich: Yeah, I agree. And for those that want to learn more about this topic, we’ve covered it on the podcast a few different times. Episode 018, we talked about the benefits of PSLF. 078, we talked about is it a waste? And that was when the news had come out about 99% of borrowers or applicants of PSLF being denied. And then 114, most recently, we talked about the presidential candidates at the time predominantly was Elizabeth Warren and Bernie Sanders’ take on debt cancellation and forgiveness. So for those that had a question this evening that we did not get to, couple options I would throw out to you. One, if you aren’t already with us in the Your Financial Pharmacist Facebook group, I hope you’ll join there. We’ve got a community that’s very active and responsive. You can throw your question out there. As well as we have a weekly segment we do on the Your Financial Pharmacist podcast called Ask a YFP CFP where we do just like we’re doing here, question from a member of our community teed up for Tim Baker, our financial planner, to answer that question. You can submit your question by going to YourFinancialPharmacist.com/askYFP. So thank you so much to everybody who attended. Really, really appreciate your engagement throughout the evening. I appreciate you all taking the time to come onto the webinar tonight. I want to thank Tim Baker again for his time as well, as well as APhA for making this session possible. Have a great rest of your evening.

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

Posted on February 20, 2020November 2, 2022 by yfpadmin

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

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

About Today’s Guest

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

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

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

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

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

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

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

Summary

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

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

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

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

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

Mentioned on the Show

YFP Fellowship – Apply Today!
Seven Figure Pharmacist by Tim Ulbrich, PharmD and Tim Church, PharmD
BiggerPockets
BiggerPockets Real Estate Investing Podcast
How to Invest in Real Estate: The Ultimate Beginner’s Guide to Getting Started by Brandon Turner
The Millionaire Real Estate Investor by Gary Keller
Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not by Robert Kiyosaki
Think and Grow Rich by Napoleon Hill
Miracle Morning: The Not-So-Obvious Secret Guaranteed to Transform Your Life (Before 8 AM) by Hal Elrod
Newbie Real Estate Investing
Join Ryan Chaw’s Facebook Group

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Wow.

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

Tim Ulbrich: OK.

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

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

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

Tim Ulbrich: Yeah.

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

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

Ryan Chaw: Yeah, $262,000.

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

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

Tim Ulbrich: OK.

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

Tim Ulbrich: Wow, OK.

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

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

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

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

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

Tim Ulbrich: Oh, gees.

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

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

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

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

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

Tim Ulbrich: Yep.

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Wow.

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

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

Ryan Chaw: Right.

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

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

Tim Ulbrich: Awesome. Awesome.

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

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

Ryan Chaw: Yes.

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

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

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

Ryan Chaw: Yes.

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

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

Tim Ulbrich: Great book.

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

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

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

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

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

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

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

Posted on February 6, 2020November 2, 2022 by yfpadmin

What You Need to Know About Retirement Accounts in 2020

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

Summary

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

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

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

Mentioned on the Show

Episode Transcript

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

Tim Baker: Hey, Tim. What’s going on?

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

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

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

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

Tim Ulbrich: Yeah, I remember that.

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

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

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

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

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

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

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

Tim Ulbrich: Yep.

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

Tim Ulbrich: Yep.

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

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

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

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

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

Tim Ulbrich: OK.

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

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

Tim Baker: Yeah.

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

Tim Baker: Correct. Yep.

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

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

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

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

Tim Ulbrich: Oh, right.

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

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

Tim Baker: Yeah, yeah.

Tim Ulbrich: And talk about that.

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

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

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

Tim Ulbrich: Right, because of the delay.

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

Tim Ulbrich: Yeah.

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

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

Tim Baker: Yep.

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

Tim Baker: Yep.

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

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

Tim Ulbrich: K-12, yep.

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

Tim Ulbrich: Come on now!

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

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

Tim Baker: Yeah.

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

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YFP 130: House Hacking Your Way to Financial Freedom

Posted on December 12, 2019November 2, 2022 by yfpadmin

House Hacking Your Way to Financial Freedom

Craig Curelop is the author of The House Hacking Strategy and is a real estate agent, investor, and employee of BiggerPockets. Craig talks all things house hacking including what it is, how he got started with house hacking and why he claims it is the single most powerful way to build wealth.

About Today’s Guest

Craig is a real estate investor and agent living in Denver, CO where he moved in April 2017 and shortly after closed on his first property. His move to Denver also afforded him the opportunity to work for BiggerPockets where he is the finance guy talking and writing about all things real estate, personal finance and early retirement. Outside of real estate and personal finance, he is a self-proclaimed health nut where he strives to be able to perform the highest possible level for the most amount of time. For fun he loves to exercise, hike, travel, ready write, snowboard, golf and play and watch sports. Craig is the author of The House Hacking Strategy and has been a guest on The Bigger Pockets Real Estate & Bigger Pockets Money Podcast. He’s also been featured in The Denver Post, the BBC and numerous real estate/personal finance podcasts including Choose FI, Side Hustle Nation, and The Best Ever Real Estate Podcast.

Summary

Craig breaks down what house hacking is, how he got started with house hacking and why he claims it is the single most powerful way to build wealth. Tim and Craig also talk through several key components of Craig’s book, The House Hacking Strategy.

In 2017, Craig closed on his first property in Denver, Colorado. He had $90,000 in student loan debt and a negative $30,000 net worth. He quickly reached financial independence in a short period of time through house hacking, side hustles, and spending less money.

Craig defines house hacking as buying a property with a low percentage down (generally 1, 3 or 5%), living there for a year (required), and renting out the other units or rooms. If you purchase a single family home, then you would rent out the other bedrooms. With a 2-4 unit home, the other units would be rented out. The rent from those units covers your mortgage and you live for free and sometimes even have cash flow coming in. Craig explains that at this point, you’ve eliminated your largest expense while building equity, paying down your loan, and saving money. You can use the money you saved to do it again and again to create more streams of passive income. Aside from these two methods, you could also buy the home of your dreams and live in the mother-in-law suite or a basement room.

Craig’s first house hacking property was a newly renovated duplex in Denver that had a one bedroom unit upstairs and a one bedroom unit downstairs. He purchased the property for $385,000. Craig lived in the lower unit and rented out the top for $1,750. The total mortgage payment for was $2,000 and Craig wanted to live for free, so he put his bedroom up on Airbnb and created a quasi bedroom in his living room. By renting out his bedroom for a year and the top unit, he made $2,800, lived for free and also brought in additional money.

Craig also discusses what he learned from his first house hack, his concept of net worth return on investment (NWROI), the four main benefits to house hacking, and how to get started with a house hack

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. And this week, we have a special guest for you, Craig Curelop, author of “The House Hacking Strategy” and employee of Bigger Pockets. A little bit more background on Craig before we get started with the interview: Craig’s a real estate investing agent living in Denver, Colorado, where he moved in April 2017 and shortly after, closed on his first property that we will talk about in more detail during this episode. His move to Denver also afforded him the opportunity to work for Bigger Pockets, where he is the finance guy, talking and writing about all things real estate, personal finance, and early retirement. Outside of real estate and personal finance, he’s a self-proclaimed health nut where he strives to be able to perform at the highest possible level for the most amount of time. For fun, he loves to exercise, hike, travel, read and write, snowboard, golf, and play and watch sports, and as a Buffalo Bills fanatic myself, I’m reluctantly supportive of his love of the New England Patriots. In addition to his book and being a guest on the Bigger Pockets Real Estate and Bigger Pockets Money podcast, he’s been featured in the Denver Post, the BBC, and numerous real estate and personal finance podcasts, including Choose FI, Side Hustle Nation, and the Best Ever Real Estate Podcast. Craig, welcome to the Your Financial Pharmacist podcast.

Craig Curelop: Hey, Tim. Thanks for having me so much. Grateful for the opportunity to be here.

Tim Ulbrich: And I’m hopeful my Bills might be getting closer to catching your Patriots. We’ll see what happens this year.

Craig Curelop: Eh, we’re giving you a flicker of hope, but I think we’ll smother that flicker.

Tim Ulbrich: That’s right. We’ll take a flicker. So I have to say, I’m a huge fan of both Bigger Pockets as well as the house hacking strategy, which you did a great job in the book talking about. And I think it’s a strategy that is such a good fit for so many pharmacy professionals. And we’ll talk about many reasons why. So it’s an honor to have you on the show and to share your experience and expertise. And before we jump into the weeds on house hacking, let’s start with your personal journey. So 2017, you find yourself, as you mention in the book, in $90,000 of student loan debt — many of our audience can relate to that — and a net worth of -$30,000. So take us from there to when you ultimately become financially independent just two and half years later in 2019. How did you make that transformation?

Craig Curelop: Yeah, so honestly, it all started with house hacking, right? But there are three things that I really did to allow me to get to that financial independence mark. The first and the most important and largest was house hacking. The second was kind of side hustles and all that kind of stuff, just figuring out how to make more money. And the third was how to spend less money. So between those three things is what has allowed me to pay off all of my student debt and achieve financial independence in such a short amount of time.

Tim Ulbrich: That’s awesome. What an awesome accomplishment. In the very beginning of the book, you talk about — which really resonated with me and I think will resonate with our community — you talk about the typical strategy for home buying, which is “go to the bank, see what you can afford, and purchase the largest possible house and live there for 30 or more years.” What is the problem with this strategy and why does it increase the likelihood of someone being trapped in the rat race?

Craig Curelop: Well, it’s because when you buy the most expensive house you can afford, you are going to live a very luxurious life. And you are going to get used to living that luxurious life, and you are going to be very difficult for you to scale back and to start saving in times when you need. When times are good, you spend your money because you can. But then when something happens, you may have to scale back, and that’s going to be really tough for you. So why not just never scale up, save as much as you can, do these strategies that we’re going to talk about in this episode, so you can have the financial freedom to then go do whatever you want so you’re not stuck in your pharmacy jobs or your doctor jobs or whatever your audience does. Like it’s great, even if they love their jobs, it’s great to have that option and say, you know what? I don’t need this anymore. If I want to go travel, I can. If I’m having a kid and I want to spend time with my family, I can take a few years off no problem. So that’s kind of what I really believe in. And that’s why this strategy is so powerful.

Tim Ulbrich: Yeah, and I love what you just said about having options there. We recently interviewed a pharmacist, Aaron Howell, who got started in real estate investing really by accident but has built up a portfolio of 29 units. And he talks about this concept of getting to the point where you ultimately has choice. He loves what he does as a pharmacist, but he now is in a position of choosing how he spends his time. And I think ultimately, when we talk about the concept of money leading to happiness, I think that’s a great example of how that can become possible. So in the book, Craig, you say something that really resonated with me. And I’m just going to read the quote. It’s, “The concept of financial independence can be lost on some people. Growing up in a middle class family, it was lost on me. That was until I read ‘Rich Dad, Poor Dad’ by Robert Kiyosaki. In that book, I learned the secret that separates the rich from the middle class.” So Craig, tell us about what is that secret? And why did that book have such a profound impact on you?

Craig Curelop: Yeah, well that book taught me that you don’t necessarily need to trade time for money. Right? You can make money by trading your time. You can spend less than you make and invest that difference wisely into assets that provide you passive income. So that money makes you more money but in your sleep. And once that passive income of more money exceeds your expenses, you now have the freedom and the flexibility to do whatever the hell you want whenever the hell you want, which was just mind-blowing to me because I just was never — it’s such a simple thing, right?

Tim Ulbrich: Yes.

Craig Curelop: But like it just — no one brings it up, no one talks about it. And because money is such a taboo subject in so many families and the American way is to go to school, get a job, work for 40 years, live in the house. But to challenge that conventional wisdom is mind-blowing.

Tim Ulbrich: Yeah, and I was so glad to see you reference Kiyosaki’s book in your book because that’s one I often recommend, I’ve mentioned it on the show here, I recommend it when we’re speaking at events, is that for me and even my wife as we read it together a second time, that fundamentally changed the way I just think about money and think about personal finance. So if you haven’t yet read it, I highly recommend you do so. Again, “Rich Dad, Poor Dad” by Robert Kiyosaki. Alright, let’s get to the basics of house hacking. Definition. How do you define house hacking?

Craig Curelop: Yeah. So house hacking is when you buy a property for a low percentage down, typically it’s 1, 3, or 5% down. You’re required to live there for one year, so you live there for one year while renting out the other parts. If you’re buying a single-family home, you’ll rent out the other rooms. If you’re buying a two-, three-, or four-unit, you rent out the other units. And such that the rent from those units covers your mortgage, and you live for free and perhaps even get paid to live there. So you’ve now eliminated your largest expense, you’re building equity in a property, you’re paying down a loan, and you’re just saving so much money that you can do it again in a year and just have that compounding effect and build that passive income extremely quickly.

Tim Ulbrich: Yeah. And the reason why I mentioned at the beginning of the show I think this will resonate so well with so many pharmacists is we know that for most individuals and obviously pharmacists as well, their mortgage payment becomes such a big percentage of their overall monthly expenses and ultimately can become a significant limiting factor in what they’re able to do in terms of cash flow, so this concept, essentially the idea here is one or two or three more people may be paying your mortgage and obviously allowing you to build up equity and other things, we’ll talk about tax advantages, but hopefully freeing up some cash flow as well. Now, Craig, before I read your book, when I thought about house hacking, I thought about it in the very traditional sense, which in the book as you outline, is a traditional house hack, which is buying a duplex, a triplex or a quad and ultimately renting out the other units. But you also talk about other options that are considered a house hack besides just that multi-unit situation where you’re renting out other units. So talk to us about the variety of what can be considered a house hack.

Craig Curelop: Yeah, so you can go as aggressive or as not aggressive as you want. And you know, we kind of talk about it on a continuum, right? We call it the comfort continuum where basically, you can sacrifice — you can be more comfortable, but you’re going to sacrifice profit for that. So it kind of depends on where you and your family and the people living in that house are going to lie. So my favorite strategy is the rent by the room strategy because you can buy a single-family house, you live in one bedroom, and you rent the other bedrooms out. Single-family houses are more liquid, they’re easier to sell, they tend to appreciate a little bit faster. And they’re just also kind of a little bit more cozy and nice to live in. So I like the single-family house strategy. But if you don’t want to live with roommates, the other strategy is a luxurious house hack where you still buy that single-family house, but instead of renting out the rooms, you have the house of your dreams that you love but maybe you have a mother-in-law suite in the basement or out back or you have like a casita or something out back, and you rent that out on Airbnb or maybe even long-term rental. And that may not fully cover your mortgage, but it may give you $1,000-1,500 a month. And that’s still $1,000-1,500 a month, which is still considered house hacking.

Tim Ulbrich: Yeah, and I love the way you reference that in the book, you mention the continuum. You call it the least profitable, smallest lifestyle change all the way to the most profitable, biggest lifestyle change. And that really resonated with me because I was thinking about this for my situation with four young kids, obviously that may look very different from somebody else who’s listening that is single and open to roommates and other types of things. So ranging from renting out additional units all the way to live-and-flip, which our listeners can check out the book to get some more information on that as well. Why is the four-unit number so important? So as we talk about a duplex, triplex, or quad, talk to us from a loan standpoint of why that four, that number of four units is so important.

Craig Curelop: Yeah, so anything above four units, so five and higher, will be considered a commercial property. And banks will not lend to that as a — you wouldn’t be able to get that low percentage down that I talked about, the 1, 3, or 5% or 3.5% if you do the FHA. But if you keep it at four or under, you can then. They consider it a residential residence.

Tim Ulbrich: So if I were to buy a quad and it’s not an investment property, it’s my first property. It’s essentially treated like it would be if I purchased a single-family home, but in a percent down, interest rate on the property but also in a future sale beyond the year. Again, from a tax standpoint, it’s treated — obviously there’s rules around the amount of value and things of which there’s profit, but it has all the benefits of a single-family home as long as it’s four units or less, correct?

Craig Curelop: Yep, it’s basically treated like a single-family home. Yep.

Tim Ulbrich: Awesome. So let’s talk about your first house hacking property, a newly renovated duplex in Denver. So talk to us through that property, the numbers, and what you learned from that first experience.

Craig Curelop: Yeah, so that first property, it was, like you said, a newly renovated duplex, it was a one-bed on top, one-bed down below duplex just a few blocks north of City Park, which is Denver’s largest park and just a mile and a half away from the office that I worked. So it was a perfect location for me. And it was listed at $400,000. I purchased it for $385,000. And I lived in the bottom, I rented out the top.

Tim Ulbrich: OK.

Craig Curelop: So total mortgage payment on that property was just about $2,000. I rented out the top for $1,750. And I lived in the bottom not for free, right? I was still paying $250.

Tim Ulbrich: $250.

Craig Curelop: But I really, really, really wanted to live for free. That was my goal. So what I did was I rented out my bedroom on Airbnb. And I made this quasi-bedroom out of my living room where I put up a curtain and a room divider, like a cardboard box room divider. I threw a futon behind there with like a little tote for my clothes and lived behind there for one year while I had a revolving guest of roommates, a revolving door of roommates coming in and out on Airbnb. And you know, with that, I was making $2,800 a month on the $2,000 mortgage total.

Tim Ulbrich: OK, awesome.

Craig Curelop: So I was living for free, I was cash flowing, I was saving tons of money, and I was really set my foundation for what has to come in the years since.

Tim Ulbrich: So you started that in essence of living on one floor, renting out to the other, saw that you were getting close to getting the home mortgage covered but not the whole thing. You wanted to see that, so then you added in the Airbnb and set up shop in the living room, made that your bedroom and rented out the other. So on the continuum spectrum, obviously we’d put that on the little more of the extreme side but love the passion and energy to make that happen. So what did you learn from that? I mean, was that an Aha! Moment or did you take away from that to say, hey, I never want to live with roommates again? Or did you see that as a strategy that you’d want to replicate further?

Craig Curelop: That was a foundation for me. I knew that it was only going to be for one year, so that helped. It wasn’t bad after the first two weeks. I’ve said this in previous podcasts I’ve been on, but it’s basically what’s called hedonic adaptation. And that whole idea if your listeners don’t know is that basically, they did a study of people who lost a limb and people who won the lottery. And after two weeks, they’ve regressed back to their happiness before that event happened. So whatever happens, you’re basically going to get used to it within two weeks. And I’d applied that some type of wisdom to OK, I’m going to live behind this curtain. It’s going to suck for two weeks. If I can just get past those two weeks, it’ll be just super normal. And that’s exactly what happened. It just became normal. It became my bed. Even when my Airbnb was vacant and I had my bed available, I would still sleep on my futon because it was just, you know, it wasn’t even worth it to clean the sheets again for me. So yeah.

Tim Ulbrich: Love that. And I think that’s a great reminder, Craig, you know, you gave the example there where two weeks you got used to it in terms of living in the living room and behind the curtain, but that’s true with so many things. As people are evaluating might I purchase a $500,000 home or maybe look at smaller and $200,000, they may have this built-up image of how painful it’s going to be or how awful it’s going to be. But ultimately, to your example in the research, you get used to it. But also, it’s all the other peripheral benefits. So when you in your case are living in your living room and you have roommates and obviously it’s cash flow positive versus if you’re living by yourself, fully funding the mortgage in a nice neighborhood, there’s other expenses that come along with that when we think about keeping up with the Joneses, taking care of your yard, all those other things that you can mitigate through some of these strategies. In the book, one of the concepts I found really interesting, Craig, is a concept that you call “net worth return on investment” or NWROI. What is this? Can you explain that? And why is this relevant to house hacking?

Craig Curelop: Yeah. So if there’s any finance people out there, it’s basically like a glorified internal rate of return or IRR calculation. But what it does is it takes all of the wealth builders of house hacking, so it takes into account cash flow, rent savings, loan paydown and appreciation, and it adds — it sums up all of that over the course of one year. And it divides it by your initial investment. So that would likely be your down payment and any rehab costs. And it gives you a percentage. Right? And that percentage is oftentimes well into the 100% or more, which just means that people are actually — like you’re making all of your money back on a house hack within that first year, which obviously allows you to then go ahead and save up for the next one and the next one and the next one. And it’s just such a powerful strategy, and there’s just no other investment out there that’s far from putting your money in a startup that has a 95% chance of failing. There’s just no other like risk-reward that’s better than house hacking. I just have never found it.

Tim Ulbrich: Yeah, and that’s why I love in the book, mention that house hacking for you — and I would agree — is the most logical first step to real estate investing. And I think in terms of building wealth and building net worth is something that many of our listeners can consider. So you outlined four main areas in the book in terms of benefits of house hacking. And I’m going to list these off, and then we’re going to go through each one of them briefly: cash flow and loan paydown, equity through appreciation — and that could be either natural or forced appreciation — learning to landlord, and then some of the tax benefits. So let’s walk through each of those. What are the benefits when it comes to cash flow and loan paydown, probably the most obvious here in this group of four?

Craig Curelop: Yeah. Well, you know, you obviously are living for free. So you’re saving whatever you paid for rent, that’s $0. You’re likely going to be cash flowing even more than that, so if you’re cash flowing $400 and you were just paying $1,000 for rent before this, that’s a $1,400 difference. Like that’s $1,400 a month difference. Like that is significant numbers, you’re talking tens of thousands of dollars a year just in cash flow, right? And a part of that payment you’re going to make is going to be your loan paydown. And so each time your make a payment on your loan, there’s a portion of it that goes to interest, and a portion of it that goes to principal. And the principal is what you actually owe to the lender. The interest is what you’re paying to the lender to borrow the money that you borrowed. And over time, the principal that you’re paying down goes up and the interest goes down. So you’re just — so you’re creating wealth that way by paying down your loan. But you’re not actually paying it down because your tenants are paying it down.

Tim Ulbrich: And your example, I think it was your first property, your example where if you would have moved into that home without renting it out, you would have been paying $2,000 a month. But instead of you writing a check for $2,000 a month, you had $2,800 that was coming in. So you’ve got to really think about what that net difference is and what that means to your financial plan. So No. 1, cash flow and loan paydown, which then obviously also impacts as that property increases in value. So here we’re talking No. 2, equity through appreciation. So talk to us about that point as well as the difference between natural and forced appreciation.

Craig Curelop: Yeah. So appreciation is exactly what it sounds like. It’s just your value appreciating or gaining value over time. And so forced appreciation is when you actually do something to the house, right? Maybe you remodel the kitchen. Maybe you add a bedroom or a bathroom or you add square footage to the house. You’re adding value to the house, and that’s forced appreciation. And that’s why real estate is so amazing too because you can actually just take an asset and you can change it yourself. Go ahead and try to buy Apple and then go try to change something that Apple does to force appreciation. That’s just not going to happen, right? So that’s forced appreciation, which is why a lot of people love real estate. Now, natural appreciation is just over time, real estate appreciates, right? It always goes up. Look at any 20-year period, and real estate has gone up over time, even in the pit of 2009, go back to 1989, and it’s still up from there. So over time, if you can just hold it, it’s going to go up. And that is what natural appreciation. And with my duplex, I got super lucky with this one. I bought it at $385,000, like I said. And I just got it appraised a couple months ago. And it came back at $550,000.

Tim Ulbrich: Wow.

Craig Curelop: I’ve done nothing to that property except just hold onto it. And it appreciated that much in that short amount of time.

Tim Ulbrich: That’s awesome.

Craig Curelop: So you know, did I get lucky? Yes. But I also — you can’t get lucky if you don’t put yourself in a position to get lucky. So I went ahead and bought that property, put myself in a position where I could get lucky, and lo and behold, I did.

Tim Ulbrich: I love that. And speaking of putting yourself in a position to be lucky, going back to the beginning when you had $90,000 of student loan debt and net worth of -$30,000, digging yourself out of that obviously is a part, as it is for our community as well, to put yourself in a position to be opportunistic. So No. 3 is learning to landlord. And I think a lot of people look at that and say, “Benefit? Landlord? I don’t see the connection.” Talk to us about that as a benefit of house hacking.

Craig Curelop: Well, so when you’re house hacking and if you do want to get into real estate investing, you will be a landlord at some point. Now, you can always outsource that to property management. But even still, you’re going to want to manage your property manager, so you’re going to want to know the basics of landlording. And it’s just a nice transition because you’re basically just living there, you’re going to go home anyway, you’re going to be with your tenants, you’re going to see what your tenants are doing. They’re not going to be that day. You’re going to make sure to screen them well. And you’re just going to go through that process of being a landlord. And you know, it sounds like a daunting term of whatever it is, but honestly, it is very — it’s not as hard as it sounds.

Tim Ulbrich: Yeah, and I like — and I think you talk about this in the book — when you’re house hacking obviously a property, let’s say a duplex, you’re on one side, you’re renting out the other, I think that’s about as convenient as it can get in terms of landlording, you know, versus if you’re trying to manage another property at a distance or even in the other part of town. So learning that process and reaping the benefits as you look to expand your portfolio I think makes a whole lot of sense of getting that skill while you’re going through a house hack. And then No. 4, which to me is an area that I’m really interested in and I think often gets overlooked, is the tax benefit. So we talked about already not only do you have cash flow, somebody else is paying down your loan, the property’s appreciating either naturally or through force, you’re learning some skills, and then also we have this bucket of tax benefit. So talk to us — and obviously disclaimer, I’m not a CPA, you’re not a CPA — but generally speaking, what are the tax benefits that come along with real estate investing but more specifically here in house hacking.

Craig Curelop: Yeah. So there’s a whole bunch of tax benefits that come with owning real estate. The biggest one by and large, especially for buy-and-hold investors is what is called depreciation. So what depreciation is is that the IRS says that you own a house for $300,000 or whatever it is. You are allowed to take a portion of that house and deduct it from your taxable income every single year. And so you basically take that $300,000 and divide it by 27.5, and you get roughly $10,000 or whatever that is dollars a year. And you’re able to take that as a loss against your business of collecting rent. So now your taxable income is much lower. Frankly, it may even be negative. And this may not apply to your audience, if you’re under a certain threshold, then you take that loss from your real estate business and apply it to your W2 income so your tax basis is lower, you’re not getting taxed on any of the rental income that you have, and so you’re like double saving on taxes. And that’s hard to actually quantify because it’s such a case-by-case basis. And it depends on if you’re below that threshold or not. But either way, there’s tremendous other benefits as well in terms of like doing 1031 exchanges or if you live in the property for two years, you can sell it with no capital gains tax to $250,000 if you’re single or $500,000 if you’re married. So there’s just tons and tons of tax benefits when it comes to real estate.

Tim Ulbrich: Yeah, and I hope our listeners will check out the book. You do a great job of teaching this in a very easy-to-understand way. You talk about the tax write-offs, obviously the depreciation, you give good examples in there, and the 1031 exchange are two of the last five here. And this reminds me, Craig, I read — awhile back after reading “Rich Dad, Poor Dad,” “Tax-Free Wealth” by Tom Wheelwright I believe is the author, which is connected to Robert Kiyosaki. And I remember hearing this for the first time, and I thought, wait a minute. So properties are appreciating in value, and you’re going to reap the benefits of that. But you’re capitalizing from a tax standpoint on the depreciation that you can write off. And the answer is yes. And it’s an amazing thing. And you highlight that in the book. So drawbacks of house hacking. Obviously, I imagine many of our listeners are thinking of objections. And you outline several in the book and you talk about ways to overcome these potential objections. But two that I want to specifically ask you about that may be most common objections that our community has: No. 1, living with or next to others, which you addressed a little bit already, and No. 2, which you call “living in a crappy investment property.” So talk a little bit more about those and how listeners may get comfortable overcoming those to be able to reap the benefits of the house hack situation.

Craig Curelop: Yeah, so it’s all — really, what it comes down to is delayed gratification if I had to sum it up in two words. It’s like, yeah, you could afford the nice house. And you know, your friends aren’t going to be impressed with you living in a dingy place with a bunch of roommates. And it may not even be dingy. You can still have a nice place and live in it with roommates. But — and it’s going to be slightly more work and all those things — but you’re making a couple sacrifices. You’re like, people might think a little less of you for a couple years, but what are those people going to think of you when you’re able to retire in 3-5 years and they have another 35 years ahead of them? Right? So think about like those — think about like 3-5 years out rather than just like in the now because this is going to be the huge, huge difference.

Tim Ulbrich: And I would encourage — as a follow-up, I would encourage our listeners pick up a copy of the book, I think you did one of the best jobs I’ve seen of talking about the importance of a why and giving a very specific activity of how you can identify and articulate your why and why that is so important before you jump into I would say real estate investing in general, whether that’s house hacking or otherwise is really spending time to figure out why is this idea of generating passive income important? Because I think ultimately, that will help uncover some interesting things but also keep you motivated along the way to achieve that goal. So the activity you have in the book is great for that. So Craig, I’m someone listening, I’m ready to pull the trigger and questions that I think of right away are, gosh, where do I even get started with finding deals? And what type of financing might I pursue? And where do I go there? But what advice do you have for people that say, yes, I buy into it, I love the philosophy, I love the idea, I’m ready to get going. Where do they go to get started in terms of finding deals?

Craig Curelop: Yeah. So I always say the first thing you should actually do is get in touch with a lender. Well, you can get in touch with a lender and an agent at the same time. So to find a deal, you need to be in touch with a real estate agent, tell them exactly what you’re looking for, tell them exactly what you want. It’s super helpful to find an agent that actually knows about house hacking and that knows about at least investment property. And you can find those on Bigger Pockets or you can find those — actually, I have like a website that I created. It’s just like www.CraigCurelop.com, and I have a thing where I can introduce you to a house hacking-friendly agent pretty much anywhere in the country.

Tim Ulbrich: Oh, cool.

Craig Curelop: And yeah. Basically the idea there is you want someone that either has done what you’re doing or at least knows a hell of a lot about it. So they can tell you what you’re going to get for rents, what your mortgage payment’s going to be, how you can extract the most dollar out of each investment. And so picking a good agent is really important. So I’d recommend finding a good agent that knows what they’re doing, they’ll send you MLS deals — and MLS is the Multiple Listing Service, which is just like a database of deals all around your area, and honestly, you don’t need to like — you know, if you’re into real estate investing and all, you’ll hear terms like driving for dollars or calling on foreclosures. You don’t need to get the best deal on a house hack because the difference between — like a $20,000 difference is going to be like $50-75 on your mortgage, which is peanuts compared to the thousands of dollars you’re saving a month in rent. So it makes way more sense to offer on a property whatever they’re asking and just like get the deal done so you can start saving on rent, start cash flowing, and most importantly, start that one-year timer until you can get your next one. So then you’ve got two working for you exactly one year from now instead of one working six months from now, then another 18 months from now. Those really start to add up as you get more and more farther down in the process. So tens of thousands of dollars, maybe hundreds of thousands of dollars if you just continue to wait.

Tim Ulbrich: Yeah, and I think the Bigger Pockets team does such a good job of emphasizing the importance of get started. Jump in and not get paralyzed in some of the weeds and details. Obviously you want to be educated, you want to be informed, you want to make sure you’re ready, it fits in with the rest of your financial plan, but ultimately, so much is to be had in terms of the learning, especially as you get started. And I think that’s great advice that you shared. So congratulations, Craig, on the work that you’ve done with the book, “The House Hacking Strategy.” It’s an excellent, comprehensive resource for anyone that is hearing this for the first time and wants to learn more as well as those who are ready to execute and certainly I think everybody in between. I hope our community will check it out. Available on Amazon as well as BiggerPockets.com. And really, we’ve just scratched the surface of house hacking during our interviewing time together today. We didn’t even get into all the information you have in the book about after you purchase the property such as marketing for rent, screening tenants, managing the house hack, etc. Again, all of which you cover in detail in the book. So Craig, where can our listeners go to learn more about you? Obviously, we’ll link to CraigCurelop.com, BiggerPockets.com, we’ll link to the book in the show notes. Anywhere else that our listeners can go to connect with you or learn more?

Craig Curelop: The best way is Instagram. My Instagram handle is @theFIguy. So @theFIguy. And yeah, follow me on there, hit me up, shoot me a message. I’m pretty good at responding within 24-48 hours. So by all means, yeah, I would love to hear from you guys.

Tim Ulbrich: Awesome. Craig, thank you so much for your time again. We appreciate it.

Craig Curelop: Thank you so much for having me on, Tim. Thanks.

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YFP 129: How One Pharmacist Built a 29 Unit Real Estate Portfolio

Posted on December 5, 2019November 2, 2022 by yfpadmin

How This Pharmacist Started in Real Estate Investing and Renting Properties

Aaron Howell, a real estate investor, real estate agent and ambulatory pharmacist at University of Virginia Health Systems joins Tim Ulbrich on this week’s episode. Aaron talks about his journey from accidentally falling into his first investment property when trying to sell his condo to how he built his current portfolio that includes 29 units in 3 different cities across the country. Aaron’s real estate investing and the cash flow it provides has put him in a position to choose how he spends his time.

About Today’s Guest

Aaron Howell graduated from West Virginia University with his BS Pharmacy in 2000. Aaron is a part-time pharmacist at the University of Virginia Health Systems and the Pharmacist in Charge at the Charlottesville Free Clinic. He is also a private pilot and recently became a real estate agent. Before he met his wife, he accidentally fell into real estate investing. They currently have 29 rental units in their portfolio in 3 different cities across the country.

Summary

Aaron Howell is a pharmacist and real estate agent. He accidentally fell into real estate investing when he couldn’t sell his condo in Charlottesville, Virginia in 2009. After having it on the market for a year, his realtor suggested that he rent it out to at least bring in some income. That’s when the lightbulb went off for Aaron and his passion for real estate investing began.

After renting out that property, his mother suggested that he look at properties in Las Vegas to purchase. In 2011, the market was very hot and properties were selling for a half or a third of their original listing. During a visit to Las Vegas, he got one property under contact for $90,000 (original asking price was $270,000) which would bring in about $1,100 a month while being rented. Six months later, Aaron purchased another property without even seeing it. In 2014, his local realtor showed him a listing for a duplex in Charlottesville which he ended up purchasing. In 2015 Aaron married his wife, a nurse, found BiggerPockets, and ended up purchasing property in Cleveland to rent.

Aaron was still working as a full-time pharmacist for Walmart, however, in 2016 the company started talking about cutting hours. At this point, Aaron knew he needed to get his portfolio in order and redid his home equity line of credit.

To buy properties, Aaron uses his home equity line of credit. He worked hard to pay the principal on his first house down and eventually built up equity in it. He then opened a HELOC and uses it as a bank to fund purchases. He’ll take a large chunk out for the principal and down payment and then will use money that’s cash flowing from other properties to pay the HELOC back down.

When choosing a property to purchase, Aaron focuses on three main areas: location, price and the condition of systems (roof, water heater, etc). When asked about his financial why, Aaron shares that his goal is to generate more time and to have more flexibility in their schedules. He currently works 3 days a week, however his wife is still a full-time nurse and he’d like to be able to provide her the option to reduce her hours if she wants.

They currently have 29 rental units in Cleveland, Pittsburgh and Charlottesville.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. We mentioned before that we would be bringing more real estate investing content to the YFP community, and I’m excited to do exactly that this week through my interview with Aaron Howell, who is a real estate investor, real estate agent, and ambulatory pharmacist at University of Virginia Health System. Aaron, welcome to the Your Financial Pharmacist podcast.

Aaron Howell: Thank you so much for having me.

Tim Ulbrich: I’m excited to do this. We had a conversation a few weeks ago, and you got me fired up about your path in real estate. As I mentioned, we’re wanting to do more with this topic in the community. I think your story is really going to inspire many, so I appreciate you taking the time. And before we jump into your specific journey in real estate investing, including your current holding, talk us through your pharmacy career thus far since graduating from West Virginia University in 2000.

Aaron Howell: OK. I started out — kind of rewind that a little bit back to 1994. I graduated high school and my aunt — I kind of started college that August. My aunt was at the local pharmacy talking to the pharmacist there. She’d mentioned, hey, my nephew, he’s looking for a job. And the pharmacist there had mentioned like, hey, we’re actually looking for a technician. So I just kind of luckily got the job, started there, loved it, enjoyed it, kind of soaked everything up. You know, I knew I’d be kind of aiming for that as a career. So I was just like a dry sponge at that point just soaking every little bit of info, working extra shifts when somebody needed to trade or couldn’t work a shift. Got into pharmacy school, graduated, and moved to Charlottesville, Virginia, took a job here in town. And I didn’t know a soul. I remember talking to my mom and grandmother and they were like, “Why are you moving to Charlottesville?” And I just kind of just wanted to go somewhere and get kind of a fresh start — not that anything was bad back home, but I moved here, I didn’t have any relatives, didn’t have any friends that were living here, and kind of just started from scratch and started working. I worked for about probably a year and a half as a staff pharmacist. And then I took an overnight position at the pharmacy there. At the time, they were open 24 hours. Did that for about a year and then I started floating from various pharmacies kind of in central Virginia. And did that for about three years. At one point, you know, I was kind of approached by my district manager to take a PIC job at a local pharmacy, the one that was closest to my house. So I started there, did that for about three years, then I changed companies and then took a job with them. Worked for about 10 years, and so I worked up until about 2008 for Kroger. And then back in middle of 2008, I kind of had the idea of maybe changing companies. There had been some transition kind of with the leadership at Kroger. And so I made the move to WalMart chain. Literally, a good friend of mine was working as the PIC there and he’s like, “Hey, we’ve got a spot open.” It was like maybe half a mile, maybe a mile down the street, so I made the move then. And at that point, I had bought my first townhome at 2006 or so. This was 2008. And I worked up until June of 2018 at WalMart. And at that point, made the move down to a part-time position at the University of Virginia Health Systems.

Tim Ulbrich: Awesome. And that’s your work as an ambulatory pharmacist. And we’ll talk a little bit as we go through, I’m sure, how real estate investing allowed you to go down into a part-time position as you were able to supplement some of your income. But let’s start back at why real estate investing. Obviously, many pharmacists listening I’m guessing have much of their investments tied up in 401ks and 403bs and other areas, which certainly makes sense. But you obviously said, hey, I want to also get involved in real estate investing. Why was that the case? And where did that desire come from?

Aaron Howell: I mentioned that the house, or townhome I had purchased in 2006, you know, it really started kind of there. By 2009, I’d kind of outgrown the place just space-wise. I was like, I need a bigger place. I think I wanted a yard and a garage and things like that. So I decided to move a little bit outside Charlottesville to a small community called Crozet. It’s kind of to the west of Charlottesville, kind of toward the mountains. And bought a home, and this is kind of like in the height of the Great Recession. We had listed the house for sale, the prices were decreasing and decreasing and decreasing. So we had it on the market for about a year. My realtor at the time was like, “Hey, why don’t we go ahead and just rent this thing?” So I was like, OK, sounds good. So about a month later, he had brought a tenant to look at the place. She decided to move in, and you know, the lightbulb kind of went off at that point. She stayed a few months and then she lost her job and she had to move away, but I found the second tenant myself. And she did great. She eventually purchased the place in 2016. She was a great tenant for a beginner landlord like me. I’d go to fix something or go to go by to pick something up, and she had the place looking better than when I lived there. So she was a great start. But somewhere along the line there, I think the lightbulb just kind of went off. And I kind of thought to myself, OK, I can outsource my debt and take advantage of the tax benefits and maybe put a little bit of money, aka cash flow, in my pocket at the same time.

Tim Ulbrich: So I find it interesting you kind of accidentally fell into that first one. You mentioned the recession, not being able to sell the condo, and that person recommending that you get into a rent situation, which turned into a purchase. Obviously the numbers made sense. Can you talk a little bit about the cash flow with that property in terms of what was that doing in terms of month-to-month, which obviously I’m sure gave you the momentum to say, hey, I want to do more of this, you know, with other properties.

Aaron Howell: Grand scheme of things, I pretty much broke even. I might have maybe had $50 or $100 a month cash flow.

Tim Ulbrich: OK.

Aaron Howell: At that point, I wasn’t the one making both mortgage payments. I did that for a year. It was kind of painful. But you know, with her kind of making the mortgage payment and then long story short, when I sold the property in 2016, she had paid the property — or I had paid the property down to where I actually got a check at closing. Even though it was a monumental real estate fail, it was kind of like a high tuition real estate university for me over those seven, eight, nine years.

Tim Ulbrich: Yeah. Yeah, and I think it’s a good strategy even though you accidentally fell into it, I think it’s often something that people might think about, especially if they’re in a good rental situation with their first home and they’re looking to buy a second home or a condo situation like yours. You know, do they have the financial margin, the capacity to keep that property if the numbers make sense, of course, and purchase their second property but ultimately be able to rent out their first? And I guess my question for you on that point, Aaron, is you obviously had put yourself in a financial position that although painful, you could short-term take on two mortgages as well as come up with a down payment on a home without having to sell that condo. So I think for some of our listeners, they might be thinking about, there’s no way I would move in unless I pull the equity out of this to put down a down payment. So can you talk a little bit about how you were able to put yourself in the position, you know, whether it was you had paid off debt at that point, you had solid savings that allowed you to be able to front the two mortgages as well as come up with the down payment on the new home without needing the equity from the condo?

Aaron Howell: Yeah. You know, at the time, I had done some good saving. I had some money kind of set aside in the bank. You know, all through those years, there was a great shortage pharmacy market-wise. So from when I graduated in 2000 to when 2008 I had left Kroger, there was a huge opportunity for overtime. I mean, I’ve got a picture of me holding up like five paychecks, and just kind of like — it was kind of crazy at the time.

Tim Ulbrich: The good old days.

Aaron Howell: The good old days, yes. You know, like Kroger would pay us monthly. But they would pay you weekly for overtime. So I had gotten I think maybe a paycheck or two and like two or three overtime checks. And it was just a good time. I saved that money, though, and kind of was able to get into the second home.

Tim Ulbrich: Yeah, I’m guessing we have recent graduates that are like, what is this guy talking about? This doesn’t even exist. But what I heard there is you were intentional about saving it. Obviously, I think that could easily have been sucked up with other expenses. And I think being intentional to have liquid savings, whether it be for an emergency fund or beyond that, to put yourself in a position to be on the offense when it comes to something like a real estate purchase. I think that’s such an important, important detail in that story. So you accidentally kind of go into this first property, a condo you couldn’t sell, you turn it into a rental, you mention it’s break even, maybe a little bit better. Where did you go from there that ultimately obviously has led to your current portfolio? Talk to us about the second, the third, the fourth property and how you made those decisions.

Aaron Howell: Somewhere along the line, sometime after moving or right before moving out to Crozet, I become — got interested in hiking and mountain climbing. And I’d went to a mountaineering school in Alaska for a week on Denali, or in Denali National Park in 2008. I’d been to Mexico and climbed some of their highest peaks in 2009. So 2011 rolls around, and I fly into Las Vegas to go climb Mount Whitney, which is the highest mountain in the Lower 48 states. And my mom had mentioned before I went, she’s like, “Hey, get some of those real estate booklets that they give away for free like at gas stations and McDonalds.” And I was kind of like, “Huh?” And she’s like, “Yeah, the market out there is really depressed. You know, grab one of those while you’re out there or a couple of them and bring them back to take a look at them.” And you know, I completely blew her off. I’m Point A to Point B lots of times and I landed in Vegas and immediately made a beeline to Bishop, California, driving for brief stops in Death Valley and looking around a little bit. But real estate was not on my mind at that point. But a month or two later, she had sent me some listings via email and she’s like, “Hey, I’ve been in contact with an agent there in California” — not California but Las Vegas and you know, “Do you want to fly out there maybe and take a look at some of those properties?” And I’m just kind of like OK? Maybe? So we made the trip out there. And the market at that point, this was probably August or so, maybe late August, September of 2011.

Tim Ulbrich: OK.

Aaron Howell: The market at that point was just crazy. People were buying stuff left and right because it was half of the original price, a third of the original price, so we got one place under contract. It was pretty much Class A, you know, nice, gated community. The house was about five or six years old. We picked it up for like $90,000. I think it recently had sold for $270,000. It was getting probably $1,100-1,200 rent per month.

Tim Ulbrich: OK.

Aaron Howell: So it was kind of very easy. We had been recommended to a property management company there by the realtor. We used them from the get-go. They did great. So about six months later, I go back and I buy the second property on my own at this point kind of getting a taste for that first property. Again, the market was just crazy hot. Stuff would come on the market, it looked good, and it would go under contract by noon, 1, 2, 3 o’clock. So at this point, I didn’t fly out there at all. I just trusted the realtor’s input. She was able to get me into another property. We got it for $100,000. Again, $1,100-1,200 rent per month, pretty much Class A in a nice, gated community. And you know, the funny story is — and I highly do not recommend this — I never saw the property. I didn’t go out there to see it, I had the home inspector do the home inspection, I got the report, I had pictures, but grand scheme of things from purchasing it to selling it in 2017, I never physically laid eyes on the property, which was strange. Again, I don’t recommend that for the most part. But so things go well there, 2012, late 2012, get that property, and at the same time, I started getting my pilot’s license, so that kind of put property buying on hold for awhile. I’m still managing at WalMart, doing things there. The company was great to work for up until that point. 2013 rolls around, I have some mutual friends who introduced me to my wife. So I met her. 2014, we get engaged. Late May or so, maybe early May of 2014, I walked into my realtor’s office just kind of saying hey, shooting the breeze, and he hands me a listing for a duplex here in Charlottesville, which is near the college, aka prime rental market there. So long story short, after probably about four months of working on closing and whatnot, we purchased the duplex. And Day 1, it was pretty much a cash cow. It’s also been the problem child of the portfolio too.

Tim Ulbrich: There’s always one if not more.

Aaron Howell: Yes, exactly. You know, there’s been many days I’m like, sell it. Sell it all. But for the most part, like the last couple years, it’s had 0% vacancy. The property management company here just keeps it — if the tenant doesn’t renew, they have them move out four or five days ahead of time and then July 1, they’ll have a new tenant in there and ready to go. So 2014 rolls around, 2015, early in January, I got married. We at that point — I had kind of found Bigger Pockets online and was looking in the marketplace there and then discovered Cleveland. So we at that point, probably June, July, contact a realtor up there and we fly up there, take a look at some properties, we go to an Indians game, we went to the Rock and Roll Hall of Fame, had a great time.

Tim Ulbrich: Awesome.

Aaron Howell: But we get a house under contract, single-family home at that point and close on it probably November or so. And in the meantime, my realtor here again knowing kind of what I’m looking for, he shows me a townhouse that was a foreclosure just here in the neighborhood. There was no sign up in front of it. Lots of times, he and his partner don’t put signs up in front of properties. They just list on the MLS because they don’t want people just tire kicking. But I can see the townhouse from right here, from my back porch. And I had no clue that it was for sale, but we go in there, and there was an awful smell, the carpet was messed up, not one of the appliances in the kitchen worked properly. Like the refrigerator was dead, the microwave was missing the handle, the oven’s bake cycle didn’t work. But we end up purchasing that about the same time we did our first purchase in Cleveland. You know, again, that one here local, the townhouse I can see from here has been a great rental property. We’ve had pretty much 0 vacancy the last couple years. So 2016 rolls around, and we purchase another duplex in Cleveland, kind of later in the year. And then things at work kind of changed late 2016. You know, it was kind of happy-go-lucky. I had built a kind of great staff there at work, and then kind of late 2016, you could hear kind of like winds of change on the conference calls. Everything went from like, “You guys are doing great. This pharmacy is leading in this, this pharmacy is leading in this. You’re doing great,” to late 2016, it went from that to kind of like, “Hey, we need to cut hours.” And you know, at this point, it was kind of like, OK. So another couple months go by, maybe another two or three months, and I’m like, I need to get my butt rolling with my portfolio. So I redid some things. I changed our home equity line around a little bit. The things in our neighborhood were selling for a lot more than I had ever purchased for back in 2009. So we redid the home equity line and kind of got things rolling there in Cleveland. I went back I think maybe in April or so for a home inspection. We had got a quad under contract there. And it went from the home inspection, everything looked pretty well. And I remember kind of flying out that day to go to Cleveland for the inspection and this little voice kind of in the back of my mind was like, how dare you think you could leave pharmacy and be a real estate investor? How dare you? But I knew that other people had done it, so I was like, if other people can do it, then I can do it.

Tim Ulbrich: Yeah. Now, so that’s really — it’s really awesome. And first of all, congratulations. I mean, what you’ve done here — and we’re going to dissect it a little bit more, I’ve got a lot of questions that I’m hoping our listeners are thinking as well — but first of all, congratulations. I mean, what you’ve done and I think obviously you’ve taken some risk, calculated risk along the way, you’ve taught yourself. And I think for many of us, especially when we’ve been in school for so long, maybe residency training, other things, there’s kind of that one-track mindset of maybe I can only do this. But I think what you saw as changes were happening in the market and obviously latching onto an area that was of interest to you that would diversify your income and give you options, also allow you to build your portfolio and long-term wealth, I think it’s really incredible. And so many things that I want to dissect. The first one — and you alluded to this maybe a little bit with the HELOC when you talked about the Home Equity Line of Credit, you know, if I’m somebody listening to this and I have no real estate investment properties, I’m thinking to myself, man, he’s just talking about buying properties, buying properties, buying a home in Vegas, buying a duplex in Cleveland, buying a quad in Cleveland. So what is your strategy? How are you coming up with the cash to buy these? Are you putting these on conventional loans with 25% down? Even that, where is the cash coming from? Has it been savings? Has it been a HELOC? Has it been a combination of? And what might be some strategies our listeners can find in that area?

Aaron Howell: Yeah, that’s a good question. So basically, the home equity line, I had purchased my house in 2009. And for a long time, I had worked really hard to pay it down, to pay the principal down. And I paid extra whenever I could. I would get a bonus at work and I would use that to just pay the mortgage down. So eventually, I’d build up equity. The market here, the values were improving, and you know, I was paying the principal down. So eventually, I opened up a home equity line and over the years, I’ve kind of used that as a bank to fund purchases. So I’ll take like a big chunk of principal for the down payment and then with the cash flow from Property A, Property B, Property C, I’ll take and pay the home equity line back down or use the home equity line to pay more principal down on the original property.

Tim Ulbrich: OK.

Aaron Howell: I just basically use that kind of as a bank. It could be problematic. You actually have to make payments on the home equity line.

Tim Ulbrich: Sure.

Aaron Howell: And it’s almost like the bank’s giving you enough rope to hang yourself with.

Tim Ulbrich: Yep.

Aaron Howell: But you had to be kind of somewhat responsible in a controlled kind of fashion.

Tim Ulbrich: Yeah, and I’m glad you mentioned obviously there’s risk there as well. But I think many investors — and I know several, and my wife Jess and I have explored a similar path — once you put yourself in a good equity position on your home, if done well with calculated risk and you understand the risk and you have a good emergency fund and you’re buying properties that you’ve done your homework and you know that the numbers and all those things, obviously you can mitigate that risk. But nonetheless, the risk is still there. And you have to be aware of it, but I think your point is well taken is that we don’t want our listeners to hear this and say, “Oh, well, I’ve got a decent amount of equity in my home and I’m just going to run out and purchase properties and use it as a bank and hope for the best.” So I think that obviously, there’s payments that come with the HELOC, obviously the longer you have that money out, you’re going to be paying interest on that depending on the rate, a whole host of variables to think about. But I think that strategy is one that our listeners should think about that especially when they either have their student loans gone or maybe have a really good debt payment plan, got a really solid emergency fund and have a good equity position on their primary residence, OK, how can they then begin to move into that next level, offensive position if they’re interested in real estate. And I think this speaks so well to some of the challenges with $0-down mortgages and other things that you know, if you enter into your primary residence with a good equity position to begin with and then you can ensure that home is at a price point that you can ideally make aggressive payments, even potentially extra payments to build more equity, it’s going to give you options in the future. And here, we’re talking about one option being that you can then potentially invest in real estate. What, Aaron, do you look for — and we’re going to talk in a little bit about, you know, maybe preference of property because I know you have a variety of things from duplex to quad to single-family homes, you started with a condo, but before we do that, what are you looking for in terms of general rules of thumb when you’re screening properties to say OK, I think this one looks good enough in terms of something I might want to invest in? Are there a couple rule of thumbs? And I know this is obviously a complex question, but a couple things that you tend to focus in on?

Aaron Howell: Yeah. You know, initially, I think I kind of looked for location. I wanted the property to be in an area where there are going to be tenants who want to rent the property. I mean, you could buy something in a population of a town that’s like 2,000, but it’s going to be hard to rent it. So that’s one thing. Probably No. 2 is the price, obviously. You want to be able to cash flow some. 3 is the condition kind of some of the systems in the house, you know, like how is the roof, the hot water heater, what are the condition of the units? Because at some point, you’re going to be putting that money back into or into the property, and you’d like to put it in later than sooner. Those are some of kind of the key things. But location, primarily is the big thing.

Tim Ulbrich: OK. And you mentioned, I know for our listeners, we could get into this in the future as well, but on Bigger Pockets, they often talk about a 1% rule, which is obviously a very general rule of thumb. But in short, the idea is if you buy a property for $100,000 and you’re able to rent it out for $1,000 a month, then obviously you’d meet that 1% rule. And the examples you’ve given so far were above and beyond that. Again, very general rule of thumb. But I’m guessing something along those lines is numbers you’re looking at but other variables that are included in there as well, correct?

Aaron Howell: Yeah. Yeah, absolutely.

Tim Ulbrich: OK. So one of the other questions I had for you is I find it fascinating that you have invested in multiple areas, so obviously you started with the condo, you mentioned the Vegas property, you talked about some others you picked up in Virginia where you’re located, you mentioned identifying the Cleveland market as a unique opportunity where you saw and have continued to invest. And then one we haven’t talked about is you’re also doing some investing in the Pittsburgh area. But I’m guessing as our listeners hear that, they might be thinking, man, how are you comfortable with investing outside of the area? You know, you can’t necessarily just drive down the street and see how everything’s going. And I could see that being both a blessing and a curse. And so talk a little bit about the out-of-area investing or long distance investing and how you became comfortable with that. And what are some things our listeners might want to consider if that’s an area they’re going to dabble into?

Aaron Howell: Yeah, originally the out of the area investing was in Vegas. We were just essentially at that point looking at the barrier to entry, which is price on the property, what would our down payment be? So that was a big thing. Some reservations generally you would have kind of at a distance would be like how are you going to manage the property? You know? And a lot of people ask me like, do you manage those yourselves? And I always answer like, no way, man. No way. So a good property manager is going to make your life a lot simpler or make your life a lot tougher. And that’s kind of my key is just honing in on that property management company. You know, the one we had in Las Vegas is amazing. The one we have here locally, they’re great. Our Pittsburgh property managers are great. I’ve recently just changed property managers in Cleveland, just kind of wasn’t comfortable or wasn’t necessarily real happy with the management there. So we’ve made that change. But investing at a distance, it’s a little less comfortable than you would normally like it. I mean, I would love for all my properties to be here in the Charlottesville, Albemarle, Virginia area. But the barrier to entry because of price is pretty prohibitive. So I’ve kind of got to go where the market is available, where I can purchase things that cash flow well. I mean, I could buy a house here in our neighborhood and buy it for $300,000, $400,000, $500,000 and charge $2,500 rent, but I’m not going to make the cash that I do say like if I purchase a duplex in Cleveland for $100,000 and I’m getting $1,500-1,800 rent.

Tim Ulbrich: Yeah, and I think what that does is, you know, to your point, it allows you to look more strategically at markets where the numbers make more sense than the area in which somebody is. So for example, my wife and I are here in Columbus, Ohio, and I don’t claim to know the Columbus, Ohio, market as well as many other investors do, and I’m sure there’s plenty of deals to be had regardless of market. But we’ve gone outside and identified some opportunities with another pharmacist up in the Muskeegen, Michigan, area because of just more opportunity there where the numbers make sense. And one of the books I read — and I’m sure you’ve read as well — and we’ll link to in the show notes for our listeners is Bigger Pockets has a really good book on long distance real estate investing. And one of the takeaways I had from that in addition to being able to then shop by market and where the numbers make sense is it really forces you I think to develop systems and processes and checklists that I think allow you to scale and grow if that’s a goal that somebody has. And I’ve seen that firsthand where, you know, when I can’t drive down the street and see something or run by the property before work and have to work with contractors at a distance, you start to put some of those other checks and balances in place and develop some of those other systems because you can’t control, you can’t do all of those things. And I think that in hindsight, now that we have this first one behind us out of area, I feel more comfortable doing more knowing that I think we’ll be able to grow a little bit quicker because it’s not all on our back, you know? And again, property management being another one that I often hear people that want to do that themselves. And I, like you, tend to think about it as hey, look at the deal and calculate in property management, of course assuming it’s good, as a cost to ensure that the deal still makes sense with that cost included because I think that’s going to allow you to get to the point of growth that I’m assuming many people want to get to with their portfolio in the future. Do you have, Aaron, you’ve mentioned single-family homes, duplexes, quads — do you have a certain type of property that you would say, I really like these better for this reason? Or are you just looking at a variety of opportunities that come your way and looking at where the numbers make sense?

Aaron Howell: You know, I think a lot of people like to start with single-family. You know, I’ve graduated more to multi-family at this point. You know, I kind of think maybe the bigger, the better at this point. You know, I have the same issues on a duplex that I have on a six-unit apartment building that we purchased. Same issues, but scaling it is just a lot more manageable for the property manager and the six-unit absorbs the hit. Say if we had to change a hot water heater on a duplex, that’s $800-1,000 there that basically eats up cash flow for a month or two. Where if we have a six-unit building and we have to replace a hot water heater, that’s maybe a half a month’s cash flow.

Tim Ulbrich: Makes sense.

Aaron Howell: So over time, I’ve kind of graduated into the bigger, the better. But also too if there’s a deal in front of me on a duplex, I think I probably would take advantage of that also.

Tim Ulbrich: Awesome. Yeah, that’s cool. I think just the reinforcement there of looking at the numbers and being open to the opportunities, whether it be something you hadn’t originally thought, whether that’s a duplex instead of a single-family home, or a quad instead of a duplex, or another variance of an area. So I mentioned in the introduction, Aaron, that you’re a real estate agent in addition to being a real estate investor. So give us that backstory. Why did you decide it was worth your time and effort to get an agent’s license?

Aaron Howell: You know, over time, as the portfolio grew bigger, I knew at some point in the last year or two that I needed to change my CPA services. And so I did change that last — I guess officially this year for the first time. But in the last year or so, I’ve kind of sat down with them on several calls, and they kind of planned out some strategies. And one of those strategies was becoming a real estate professional in the IRS’ eyes, that I was spending probably, you know, an hour or two hours a day just dealing with real estate stuff in general. And they said, you know, “Hey, you need to take care of keeping a log with your time you spend on doing things. And then you need some active hours.” And where I wasn’t managing the properties myself, they recommended me getting my realtor license because I needed to have some of those hours for the year to be where I’m materially participating in real estate. So where I didn’t have the management, where I’ve outsourced the management, that realtor status or license was the way to go about that.

Tim Ulbrich: OK. Got you. One of the questions — and you and I talked a little bit about this when we talked a few weeks ago, but I think it’s important, as I’ve said on the show before, that people have a purpose and vision behind their investment decisions, whether that’s investing a 401k where they’re saving a significant amount of money, whether it’s starting a business or here, whether it’s buying real estate. And we often talk about this as the financial why. Why do you want to do what you’re doing? So as you reflect on building this mini-real estate empire, what’s the goal? I mean, obviously you’re going to hopefully build wealth over the long term and you have positive cash flow, all of those things, but what is the bigger goal, the why behind what you’re trying to do with your real estate investment portfolio.

Aaron Howell: The bigger goal, I think it will change over time, but the bigger goal now is to be able to generate some just time. I’m down to three days a week as a pharmacist. If I need to go in more or if I want to go in more, like example, I think last week on Wednesday, I went in for like three hours. I had to be in Charlottesville for a meeting at the bank. And my wife, she had just went out of town for a nurse’s conference, so I was like, you know what, I’m going to go in. I’ve got to be in at 11:30 or so, so I’m going to go in and work from like 8:15 to 11:15. You know, I was scheduled for two days, and I’d taken off the Wednesday, Thursday, Friday. So I actually did go in Wednesday for the three hours, but I just, meh, I’ve got to go, see you guys later, bye.

Tim Ulbrich: Right.

Aaron Howell: And they were just kind of funny, they were short staffed that morning so I walk in there, they’re like, “What are you doing here?” And I just came to work a little extra. They were like, “OK. Great.” But you know, having the real estate portfolio, ultimately, I’d love to be able to generate some more flexibility with my schedule, if not just mine, my wife’s also. She’s working like nine days in a 10-day pay period now. So she works five days one week, and then she’s off one day the next week, so she works four that week. Maybe giving her the option of maybe working 2-3 days a week, just like kind of what I’ve done. You know, she’s had kind of a stressful two or three days at work, and she’s telling me about it last night and so I think down the line, maybe giving her that option too. Yeah.

Tim Ulbrich: Love it. Yeah, love it.

Aaron Howell: And we don’t have kids yet, but at some point, we’ll have kids. And we have a little park down from our house and they have soccer leagues. I’d like to be able to coach the kid’s soccer team at some point down the road.

Tim Ulbrich: Yeah. Options, option, options. I mean, I think that we try to talk about that a lot in terms of when you’re putting together a financial plan — and here, we’re talking about real estate investing, but it could be a whole host of things that putting yourself in the position to make decisions rather than those decisions being made for you. Speaking of your wife, one of the things I was thinking about as you told your story is that you were already investing in several properties, I think out in the Vegas area, and then you mentioned you met your wife and you ultimately, of course, got married. Talk to me about that in terms of you were doing this investing, then you got married. I’m guessing we have many people listening that maybe one partner’s really interested and the other either maybe is not interested or is kind of like, yeah, I’m on board, I’m not on board, I want to learn more. How has that worked for the two of you? Was she instantly on board or was that a journey that you two have kind of come along together along the way?

Aaron Howell: To be honest with you, she’s not terribly involved in real estate investing. I think she kind of gives me a blank slate and just says, “Hey, don’t screw up.”

Tim Ulbrich: No pressure.

Aaron Howell: No pressure there, no pressure. But you know, I think at this point, she trusts me. I’m cautiously ambitious with the whole portfolio. But I think at this point, she trusts me. She’s really on board, though, with the realtor. She’ll ask me like, “Hey, what’s this couple? Do you think they’re going to find what they’re looking for?” Like, “Well, you know, I think they really liked the house today.” And she asks me questions about that. I mean, she’s aware of what’s going on for the most part, but she kind of after about 30-45 seconds, she’ll glaze over. But at this point, she trusts me and things are going well for the most part. So she kind of lets me take charge.

Tim Ulbrich: Sure.

Aaron Howell: And just don’t screw up.

Tim Ulbrich: Don’t screw it up. And I would encourage our listeners, if anybody finds themselves in a situation where one person’s been eagerly learning this topic by listening to Bigger Pockets, reading books, and the other maybe is not as interested or just hasn’t been as eager in their learning, I think dragging somebody along is certainly never the right approach, especially when you’re potentially taking on some risk. And I would encourage people to dive into education together. I think when two people can learn together, just like we talk about with the budget, setting a vision, setting the goals together, and then working on the budget, I think the same thing is here true. If you can learn together, you know, watching webinars, listening to a podcast, reading books, I think it’s much more likely to be successful when you can both be on that journey. Before I ask you as a wrap-up question, ask you about your current portfolio because we talked a little bit about the beginning and some things you did along the way but haven’t talked about exactly where you are today, where would you recommend — I mean, Bigger Pockets is one resource you mentioned, which I would second, great resource. Anything else you’d recommend to pharmacists that are listening that say, “Wow, he’s really got me intrigued. I want to learn more. I want to think about getting started in 2020.” Are there certain books, other websites, other podcasts that you really have found helpful for you in your own learning and your own journey?

Aaron Howell: Yeah, I found at some point along the way, I think I had heard him as guest, the Michael Blank podcast on multi-family investing. It’s Blank. He’s German, so the k is pronounced a little differently than you would normally say it. But it’s spelled Blank. I’ve found that podcast, I found that ultimately to be very kind of informative as far as what I wanted to do with my portfolio and my career. That’s been a great find. Another thing too if you’re interested in investing, generally, there’s some local meetups for real estate investing. I’m sure, you know, any major city, you could probably go to meetup.com or find a meeting, maybe a once-a-month or twice-a-month meeting there. And just kind of immerse yourself with people who are doing the same thing or doing things that you’re wanting to do.

Tim Ulbrich: And we’ll link to the podcast you mentioned, we’ll link to Bigger Pockets as well in the show notes. And we’re excited, we’ve got some more content as I mentioned at the beginning of the show and hopefully some opportunities coming your way as well for those that want to learn more about this, for those that want to invest in properties. And we’re excited to build upon a lot of the existing content and education that’s already out there and bring a lot of that to the pharmacist community. So let’s wrap up, Aaron. Where are you at today? Tell us about your current portfolio and what you see coming ahead here in the next year or so.

Aaron Howell: So at this point, we spent a lot of this year kind of consolidating the stuff we’ve purchased in 2017-2018. And when I say consolidating, I mean kind of developing systems more so. We’ve had the property manager transition. But we’ve renovated a bunch of units. And at this point, I’m kind of with the portfolio, I’m looking to syndicate. We did our first deal in January as a syndication.

Tim Ulbrich: Oh, cool.

Aaron Howell: So I’m looking to do a little bit more of that, kind of gathering some passive investors for that. But you know, just have been kind of enjoying things a little bit, kind of got the realtor status off the ground here in the last couple months and just kind of been enjoying things.

Tim Ulbrich: So how many doors do you have? And what cities are you at today here in 2019?

Aaron Howell: We are currently at 29 doors. We’ve got 13 in Cleveland, 12 in Pittsburgh, and then four here locally.

Tim Ulbrich: Awesome, awesome. Very cool. Well, thank you so much, Aaron. I appreciate you taking time to share your experience with our community. I think it’s going to be inspirational. Again, as I mentioned, I think many people in the community have a desire to learn more if nothing else or maybe need that nudge to say, hey, I’ve been learning for a couple years, now I’m ready to get started. And I think hearing from others that have done it and done it well is really helpful. So thank you so much for taking the time to come on the show and congratulations on the success you’ve had and wish you the best of luck in the future.

Aaron Howell: Alright, thank you very much.

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YFP 119: Ask a YFP CFP®

Posted on September 26, 2019November 2, 2022 by yfpadmin

Ask a YFP CFP®

Christina Slavonik, CFP® at Your Financial Pharmacist, joins Tim Ulbrich for a new installment of the YFP podcast, Ask a YFP CFP®. Christina answers financial questions from the Your Financial Pharmacist community covering topics such as student loans, investing and the inverted yield curve.

Summary

Christina Slavonik, CFP®, is a team member of Your Financial Pharmacist and offers fee-only comprehensive financial planning. In this podcast episode, Christina answers questions from the YFP community in a rapid fire format.

To start, Christina explains that fee-only financial planning means that we’re not getting extra commissions as many traditional firms are. Christina explains that YFP believes the best way to measure non-conflict of interest is to provide fee-only services where clients are only paying for the advice they receive. YFP also upholds to the fiduciary standard where the clients’ best interests are really the focus.

Christina answers several questions from diverse topics such as student loans, investing and the inverted yield curve. Two of the asked questions are below:

Andre asks if he’s sacrificing a lot of immediate short term investment opportunities like having a house or saving for retirement in order to pay off student loans more quickly through refinancing. Christina explains that it really depends on your goals and life plan. While there may be some comprises that have to be made, YFP believes there should be a balance of today and tomorrow so that you’re enjoying your life along the way to meeting your financial goals.

Amanda asks, “I’ve heard that given the inverted yield curve as well as many other factors that we may be entering a recession. How can I best prepare? Should I be picking up lots of extra shifts at my 2nd job to boost my emergency savings (currently 3 months) or should I continue focusing on student loan debt?” Christina responds by saying that there will always be recessions. There have been 47 recessions in the U.S. and the average recession lasts about 1 ½ years. She explains that the markets are cyclical and recessions are part of the process. The best way to cover yourself in any situation, whether we’re in a recession or not, is to be diversified in your investments and also your income. Having a second job or side hustle and having an emergency fund with 3 to 6 months of income for emergency expenses are all good practices.

If you have a question you’d like answered, email [email protected] or send us a message on Facebook or Instagram.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast, excited to be here live on Facebook for the first installment of a new segment that we’re doing, Ask a YFP CFP, standing for Certified Financial Planner, where we’re going to be taking your questions on a regular basis going forward, and we’re going to ask those questions to one of our Certified Financial Planners, Tim Baker or joining me this evening, Christina Slavonik. So Christina, thank you so much for joining.

Christina Slavonik: Yes, thanks so much for having me, Tim. I’m excited.

Tim Ulbrich: Excited to do this. We’ve got some great questions that we’re going to answer this evening. And before we jump into those, I know some of our audience and community members with your background you’ve had — you’ve been on the show before — but some may not be, so give us a quick introduction and talk about some of the work that you’re doing over at YFP.

Christina Slavonik: Sure. Well, I’ve been in the industry doing various roles for the past 13 years and really just hit the planning piece the last several years, became a Certified Financial Planner in 2017 and was working with the more traditional side of investment management, which you hear about fee-based and fee-only, this was a little bit of both mixed. And so when I had the opportunity to come on board with Your Financial Pharmacist, it’s a niche. I love working with younger professionals, and it just seems like a great segway into the next stage.

Tim Ulbrich: Well, we’re certainly excited to have you as a part of the team. And you mentioned fee-based, fee-only, we talk a lot on the show about the importance of the credential of Certified Financial Planner but also the importance of being fee-only. Break that down for us real quick. Why is fee-only so important? And what does the credential CFP even mean?

Christina Slavonik: Sure. So fee-only, when that comes to mind is you’re paying us just for the advice. We’re not getting any extra commissions, no extra fees being paid on Assets Under Management, which is how a lot of traditional firms are paid and a lot of advisors. Nothing wrong with that, but we just believe that the best way to measure a non-conflict of interest is to provide that fee-only service, which is you’re just paying us for our advice and being a Certified Financial Planner, we are held to that higher standard, the fiduciary standard, so to speak. And we’re supposed to be holding our clients’ best interests at heart.

Tim Ulbrich: Yeah, and I think one of the examples I use often that is in the pharmacy world, you know, we tend to think that OK, everyone is licensed as a pharmacist, everyone has their doctorate of pharmacy, and therefore, we’re all obligated to act in the best interests of our patients. That’s what we do. And so it was a shocker to me when I first entered into this just over about four years ago to really learn that the industry in the financial planning world is very much not the case, even that really the opposite. And for those of you that want to learn more about this topic of fiduciary, fee-only, we’ve got lots of information on the website. But I think also John Oliver has a great segment on fiduciary and fee-only that I think is worth watching. And he really breaks this down in a way that’s easy to understand. So if you’re not already familiar, we offer fee-only comprehensive financial planning over at Your Financial Pharmacist. As I mentioned, we have two Certified Financial Planners, Christina and Tim Baker. And you can learn more over at YFPPlanning.com. And so we’re going to be taking your questions on a regular basis. Some of the questions that came in this evening came via email, our Facebook group, Instagram, so you can reach us at [email protected] or you can shoot us a question in one of those social media outlets as well. In terms of format, I’m going to rapid-fire these questions to Christina, so I’m going to put her on the hot seat. We have lots of questions, student loans, investing, inverted yield curves, which is the cool term these days, so we’re going to talk about lots of different things. And certainly, if you’re on live now and you have a question, throw it out there and we’d love to answer that as well. You ready?

Christina Slavonik: I’m ready. Let’s get going.

Tim Ulbrich: Awesome. Let’s do this. We’ve got some good questions, so this is exciting.

Christina Slavonik: I’m very impressed with the lineup.

Tim Ulbrich: So Andre — first question comes from Andre, and he has two questions. He’s a new member of our Facebook group, so Andre, welcome to the community. We’re excited to have you. His first question is traditionally, most people pursue PSLF, standing for Public Service Loan Forgiveness, or refinance their student loans. But his question is are there other, non-traditional methods to consider beyond PSLF or refinance?

Christina Slavonik: Yeah, this is a really great question, Andre. So one of the things that we’re seeing more and more is non-traditional method. Some employers are actually offering reimbursement to help you pay off your loans faster in various forms and fashions. So that’s actually something to look into with your current employer. And there’s always the non-PSLF forgiveness. I know some people kind of forget about that one. Of course, you would have to pay the tax hit once that forgiveness is sent your way. It is counted as income on your tax return. But still, it is a forgiveness. And I think some people forget about that kind of forgiveness. Side hustles, you know, other nontraditional ways, I know some people have talked about giving away plasma. I wouldn’t go as far as selling an organ, but hey, you know, the sky’s the limit if you’re that committed to paying off those loans. Cutting certain expenses, just fairly small changes can move the needle in a big way over a sustained period of time.

Tim Ulbrich: Yeah, and one of the things we preach, Christina, you know this in working with clients is that unfortunately, when it comes to choosing a student loan repayment strategy, it’s probably way more complicated than it needs to be. Multiple options in the federal system, income-based repayment, standard monthly payments, extended, graduated, forgiveness, non-forgiveness, PSLF, non-PSLF, and then you’ve also got the whole host of options you see in the private market with refinance.

Christina Slavonik: Right.

Tim Ulbrich: And I think because of that confusion, I know what happened for me in my personal journey, I see with lots of pharmacists, is there’s often that paralysis by analysis where people default into the standard 10-year or maybe go into income-based repayment but wander into that and don’t really think about why or what they’re trying to do. And if you’re talking about six-figure+ student loan debt, we now know the average graduating student is facing about $173,000 on average, which is mind-blowing. But this is not a decision that you want to wander into. And we’ve seen with clients, with individuals, intentionality in this choice can be the difference of tens of thousands of dollars, especially when you consider in the context of the rest of your financial plan. So I would point our listeners, if you haven’t already checked out — shoutout to Tim Church, he did an awesome job on this piece — if you go to YourFinancialPharmacist.com/ultimate, he’s got the ultimate guide to repaying back your student loans. It talks through a lot of those options and gives you additional information. Second question from Andre, Christina, he asks, “Am I sacrificing a lot of immediate, short-term investment opportunities such a house, retirement, kids, etc. in order to pay off student loans more quickly through refinancing?” What are your thoughts on that?

Christina Slavonik: Yeah, that’s always a tough one to navigate, especially when it’s staring at you right in the face. Hard to put a price tag on that clarity and peace of mind, totally get that. But being able to be with an accountability partner that can help you put all these things on the table, it all goes back to your life plan, what goals you have for yourself. And your financial plan should be built around that life plan. Once we kind of get that clarification, it’s much easier to see where the other things will fall into place. And it can be quite a transformative experience, and your priorities become more defined. Some of the questions I ask myself is trying to find that balance, what keeps you awake the most at night? And kind of prioritizing it that way and then working with this through a Certified Financial Planner or a life coach that can help you navigate which path you should take. There’s some compromises that may be worth sacrificing up front. Just some ideas, especially little kids. I don’t know how old your children are or if you’re just planning to have kids, but there’s so many ways you can have fun when they’re young, and you don’t have to spend a whole lot of money. So there’s just different ways to think out of the box when it comes to those opportunities.

Tim Ulbrich: Yeah, and I love the approach that you and Tim take on this that there has to be a balance of today and tomorrow. Right? I mean, we have to take care of our financial house today, but if we do a great job with that for 30 or 40 years and we never enjoy it along the way, then I think we’re losing, right? We have to find this balance between living a rich life today and living a rich life in the future. And I think that happens through asking some of those probing questions that really get at the things, you know, what do you care about most? What are you passionate about? What really gets you excited each and every day? And ultimately, why does this whole topic of money even matter? And I think that’s a great question to ask before you even get into the x’s and o’s of your financial plan. And I’ll never forget, I think it was Episode 032 and 033, maybe 031 and 032, where Tim Baker interview Jess and I, talking about this concept of find your why. When you really start to challenge and say, OK, we’re paying down debt, we’re saving, we’re doing all of these things, but why are we doing these things? What are the things that really matter? And I think that’s what Andre is getting to in this question here. Alright, next one’s a big one. So to Christina from Christina, and it’s a really multi-part question that’s got some investing pieces, student loan pieces, FSA dependent savings account, so I’m going to break this down and collectively, we’ll tackle this one. So Christina asks, “I just started working at a not-for-profit hospital. As soon as that happened, I switched to PAYE, Pay As You Earn, loan and have already submitted my PSLF loan forgiveness employment verification form to the DOE, Department of Education.” Lots of acronyms here in this question. “I maxed out by 403b so that I can hit the $19,000 limit.” The question from Christina is, “Can I also contribute to my traditional IRA? Or is it one or the other?”

Christina Slavonik: Well, my answer is yes, Christina, from Christina, you can contribute to max out your 401k or 403b up to that $19,000 as well as max out an IRA. So the way I like to think about it is one is provided by your employer, the other is provided personally to yourself. So both have maximum limits. The IRA, of course, you can choose between a Roth and a traditional. You can only max one of those out or just a combination of those two. But yes, to answer that question, you can.

Tim Ulbrich: Yeah, so great point. I mean, 401k, 403b, those are employer-sponsored, one for-profit, one not-for-profit. IRA, the I standing for Individual, right? So that’s your individual retirement account. So second part of this, then, is, “I am also a working PRN” — nerdy pharmacy lingo here — so “as needed at my retail job. And I left that at a 6% contribution for my 401k since that is what they match. What happens if I get extra shifts and end up contributing more? Is there a penalty? I tried to calculate and plan on watching it very closely, but I would like to know in the event it happens.”

Christina Slavonik: Well, yeah, it’s good that you’re being proactive and not waiting. You really have until your tax filing deadline of April 15 to make any corrections if you need to. And yes, there is a penalty involved. There’s typically a 6% excise tax as well as some other double taxation issues if you cannot get that amount out in time before you file your taxes. So yes, just keep tracking on both pay stubs, maybe even getting your HR person involved if possible. But yeah, you may just have to totally not contribute to one of those altogether for the rest of the year since the year is almost over and approaching that tax deadline.

Tim Ulbrich: And I think relatively a good problem to be thinking about, right? If you’re worried about exceeding the maximum contribution.

Christina Slavonik: Yes.

Tim Ulbrich: So let’s not lose that fact, Christina, great job on making these contributions. Next part of this is, “There was also a dependent FSA, Flexible Savings Account, offered that I opted into for child care expenses. I’m trying to max as much as possible so that I can decrease my AGI, Adjusted Gross Income, for my PAYE, Pay As You Earn, loan. How do you determine when to file married separate or married jointly?” This is a great question. We get this all the time.

Christina Slavonik: Yeah, it is a fabulous question and one that’s best suited for someone, an enrolled agent or CPA that deals with taxes on a regular basis. There are so many pieces that wag the tax dog. And it’s just hard to give a specific recommendation without seeing the whole situation. Sometimes, it does make sense to file separately when doing the Pay As You Earn as the other spouse’s income does not count. But again, there are other factors to consider as well.

Tim Ulbrich: And I think for me, that’s the take-home point when I get a question like this is that making sure that those that are in an income-based repayment plan, especially those that are pursuing Public Service Loan Forgiveness, that you understand there can be a difference. And from there, you really dig deeper with an enrolled agent, with a tax professional, because they can look at the rest of your financial plan to understand the rest of your financial situation, understand what might be best. And we’re also grateful that we have Paul on our team, who is an enrolled agent, that can supplement the financial planning services that you and Tim are doing as well. OK, last part here from Christina is, “And for dependents’ savings account that are offered through your employer, is there a max that each person can use? Is it $5,000 per family and only $2,500 per person? Or can one do the full $5,000?”

Christina Slavonik: Sure, this is a really good question and one that we’ve actually seen before. Yes, the maximum is $5,000 to contribute. But really, any person in that family can utilize that. I know Tim Baker has mentioned that there are state-specific rules when it comes to FSAs, but in general, you can use it on qualified expenses for the physical care, the day care, child care, yeah. Just keep the receipts, keep good records of what you actually used it for. And one other side note with that: I know you’re wanting to lower your AGI by doing this. And sometimes, employers will also offer the Health Savings Account component for a high-deductible health plan. Sometimes having a limited purpose FSA will allow you to have an HSA as well, which can increase the deduction you can put towards lowering your AGI, so that’s another way to check into some more tax savings.

Tim Ulbrich: And good news we got back from Christina as a follow-up to this question. She says, “We max out our deductions for a total of $55,000 going into the 403b, TSA, IRAs, DSA, which should bring us to just under $100,000 of Adjusted Gross Income for the year. Thank you for reaching out and for all the help with the group.” I love that because I think that what I see through Christina’s questions is intentionality. And I see her digging in, I see her trying to understand the tax situations, understand what’s going on with the rest of the financial plan as it relates to student loans. And let me encourage those that are listening that they hear 401k, 403b, Roth IRA, FSA, HSA, DSA, and you’re following, great. But for those that are hearing some of those terms for the first time, we have a lot that we’ve covered in the investing realm on the podcast. Episode 072-076 back in fall 2018, we did an entire series on investing for this reason, so I would encourage you to check that out and certainly get more information that will help you with the rest of this decision as you’re looking at loan forgiveness and some of these situations. OK, from Stephanie, this question comes from Instagram: “Recommendations for personal loan lenders for the intention of consolidating credit card debt?” What are your thoughts on that one, Christina?

Christina Slavonik: Sure, well, congratulations, Stephanie, being one of the 2019 graduates. Like many graduates, I’m sure you’ve had your share of transitional expenses, such as the job moving, job search, budget changes. While we can’t generally recommend any specific lender, we do recommend starting with a current banking relationship as the best way to tackle that, including a credit union. They can normally give you pretty good rates. Try being careful. Some things to look out for when consolidating credit card debt is make sure that there may be a minimum that you have to consolidate. And sometimes you may not meet that minimum. So having to make sure you know that. Try not to take more than five years to pay off that loan just because the shorter we can keep that, the better. And know if there are going to be any origination fees or what those flat fees or any flat fees that are involved. Sometimes it’s a percentage of what you consolidate, sometimes there isn’t. And don’t — try not to use the credit cards once you consolidate. I know that’s one of the hardest things, but I’ve seen that happen time and time again. And I know the snowball method — now we’re venturing into Dave Ramsey territory, that’s one of the things he says — once you’re paying off those credit cards, try not to use them. You’re trying to get rid of that debt. So other items to consider, maybe a home equity line of credit is another way to approach that. And revisiting the budget. If you can avoid taking on a consolidation loan altogether, the extra steps are worth it and just finding ways that you can walk through your budget and maybe cut some extra expenses. I do want to give out a shout to Tom Eraz (?), he’s our accounting budgeting nerd at YFP Planning. And he’s helped many, many of our clients with questions just like this, what should I do in this situation? And he’s been very helpful with giving some suggestions.

Tim Ulbrich: To say Tom is a budgeting nerd is an understatement. I mean, he gets jacked up about budgeting.

Christina Slavonik: Yeah, I’ve never seen someone so excited about spreadsheets.

Tim Ulbrich: Yeah, I think he loves helping people in that area. Alright, time to get nerdy, and we’re going to talk about inverted yield curves. And I swear about a month ago, this was like the cool thing to talk about on NPR and the Wall Street Journal. Everybody was talking about inverted yield curves. So Amanda asks, “I’ve heard that given the inverted yield curve as well as many other factors that we may be entering a recession.” So the question is, “How can I best prepare? Should I be picking up lots of extra shifts at my second job to boost my emergency savings currently at three months? Or should I continue focusing on student loan debt? Thank you for your help.”

Christina Slavonik: Sure, Amanda. Yeah. And I know sometimes it’s hard not to listen to the talking heads and the people when they comment on inverted yield curves and what those indicators may mean. Typically, it may or may not say that a recession’s on the way. That’s just one of the indicators that we kind of look at. But again, it’s not something to hang your laurels on. There always will be recessions. I know we’ve had about 47 recessions in the U.S. history. Average one lasts about one and a half years, so just a little bit of feedback on that. The markets are cyclical, so what goes up will go down. That’s just part of the process. But just know that I believe you are already covering yourself the best way you can. Recession or not, it’s always great to be diversified, not just in your investments but also how you have your cash flow coming in to you. So even though you’re picking up those side hustles, working those second jobs, you’re not getting stuck in the 9-5, which is fantastic. Having a second side hustle or flow of income coming through and having that emergency fund already saved up at 3-6 months of emergency expenses for those non-discretionary items. These are great behaviors just to keep consistent during good and bad markets. So never really a bad idea to keep paying towards debt as it overall increases your net worth over time. And just be careful to keep reevaluating your lifestyle creep is a good exercise as well. So very good. Very good.

Tim Ulbrich: Yeah, I agree. When I saw this question, I mean, I think boosting emergency savings and paying down debt is good practice regardless of a pending recession or not. So I think it’s important to think about those foundational items. So Jeff asks, again, kind of along this idea of low interest rates, potentially a pending recession, “How should a prolonged period of extremely low or even negative interest rates be considered in your financial plan?”

Christina Slavonik: Sure, and one thing I like to think about first is where are you at in your life cycle? Are you approaching retirement? Are you a retiree who would have to look at those cash alternatives such as a bond ladder, which is where you can match cash flow with the demand for cash via multi-maturing layerings, and that’s a whole other topic. But yeah, mostly when dealing with young professionals, you’re generally saving for those long-term goals and objectives, so saving for retirement. And the period of a downside should really have little consequence with the long-term strategy, so I try not to get too wrapped up if you see prolonged periods of market drops. Generally, if you’re trying to borrow money, now would be a great time to do that, an extreme or low, negative interest rate environments. And capitalize on the securities and the equities, especially during the down times because you’re buying at a bargain. And so by the time the market does go back up again, you know you’re going to be well ahead if you had decided not to do that, instead take your investment ball and go home. So again, just really determining your objectives and having an investment allocation that matches that objective. Short-term goals, you may need to dial back a little bit, CDs, Money Market funds or whatnot. But yeah, just in general, I wouldn’t worry too much if you have a long-term strategy.

Tim Ulbrich: Yeah, I think that’s an important point: long-term strategy. And building off of the previous question with the inverted curve and looking at interest rates and other things, I think it is hard to take the noise out of it. I mean, I meant to keep them and I forgot to do so, but I’m still that guy who gets a newspaper delivered at home every day. And literally, you know, I was thinking back in December, January, it was like every day, it was the front page of one day the market was going up, the next it was going down.

Christina Slavonik: It’s always going on.

Tim Ulbrich: And the projections of why this was going on, and even though I’ve got a plan and I’m sticking to it, like it’s still hard to ignore the noise, and it starts to have that subconscious effect over time. But I think your point’s a good one here when we talk about negative low interest rates, really think about — the two areas that come to mind, especially for a lot of our community members, would be mortgage interest rates and whether it’s a new home or refinancing on a home, I think now is the time is probably to be looking at that if you haven’t done so in awhile. You know, when you look at a 30-year mortgage, a point on that loan can be really significant on a $300,000-400,000 house and looking at what would be your break-even on a refinance, and then also refinance on the student loans. We preach over and over again that refinancing student loans is not for everyone. So if you’re pursuing Public Service Loan Forgiveness, absolutely not. There’s certain provisions you want to consider and be looking for when you’re doing a refinance. But for those that the math makes sense and they’re really doing all of those things they need to be thinking about, you know, a point or two on your student loans obviously can be really significant. And as we see student loans still at 6, 7, 8% for many graduates, and we’re seeing refi rates continue to come down. I think it’s a good opportunity to look at those. OK, Kelsey asks, back into the student loan category, “Question about re-certifying my IBR income-based replacement income — income-based repayment income. I’m seeing that PAYE and RePAYE may be a better option for those that qualify. I’m due to re-certify for IBR this month. But would changing to PAYE or RePAYE affect anything in regards to qualifying for PSLF in the future? I’m five years in, and I don’t want to mess anything up. I’ve read the horror stories from those who’ve submitted for forgiveness, and they say not to change anything. But I’m hoping to make my payment a little lower this year if I can. Any thoughts, suggestions, or advice?”

Christina Slavonik: Yes. Three words: student loan analysis. This is one of those bigger picture things. So yeah, looking at the bigger picture, definitely changing from an IBR to a Pay As You Earn or RePAYE would not affect qualifying for the student loan forgiveness itself, but you would need to figure out which loans in particular would qualify and how to navigate that process. So that’s probably where people say if it’s not broke, don’t fix it. Stay where you’re at. So I wouldn’t want you to consolidate as that could restart the forgiveness clock all over again since you are five years in. I typically wouldn’t touch it unless you’re willing to do a little more digging and get that analysis done. As a side note, we did have a client that did go through the analysis, and she was in the IBR, went through the analysis program, and we did discover that she would be a good candidate to switch to the PAYE or RePAYE. And we were able to walk her through the steps. So in general, yes, the PAYE, RePAYE, can be more beneficial, meaning it can lower your payments, but it’s hard to say a firm yes or no without looking under the hood of the car, so to speak.

Tim Ulbrich: Yeah, and I think most of the horror stories that I’ve seen and heard and read about have been because of the consolidation piece that for many people, restarted the PSLF clock. Certainly, there’s been some qualified employer issues that have been out there. But I think if you really dig deep on this — and we talked about this in Episode 078 where we broke down is pursuing Public Service Loan Forgiveness a waste? And this really came out of the NPR story that was famous that we still have questions about. Every time we’re speaking, we’re quoting 99% of applicants that were denied. And really, when you dug into that a lot deeper, we talked about that on that episode, you know, many of those were incomplete applications, many people that weren’t in a qualifying repayment plan, and many people that ran into issues around consolidation or other things. And I think it’s important to reiterate here that this program, in terms of those that are actually qualified and eligible for forgiveness, is still relatively new. So 2007, this program was started, meaning 2017 was the first group that was up for forgiveness to take place. And I think the information that people have today and a lot of things we talk about in terms of what you need to be doing to cross your t’s, dot your i’s, is very different than the information that was available before. So I think our take is as we talk about many times when it comes to student loans, look at all your options, do the math, see how you feel about it, and make sure certainly if it’s PSLF that you’re doing all the details that you need to do to make sure you qualify. Alright, last question we have here, of course, somebody, we had to talk about the Dave Ramsey baby steps and the Dave Ramsey program. So Andrea asks — and it’s a good one — “Here’s my question. I’m starting the Dave Ramsey program at my church tonight. What are good points in his program” — so I’m pretty sure she’s referring to Financial Peace University — “that I should really focus on. Are there parts of the program that you disagree with or have a different opinion? I love his baby steps but not knowing exactly where to start.” So what are your thoughts on the Ramsey baby steps and the Ramsey plan?

Christina Slavonik: Yeah, and Andrea, I’m so excited. I love Dave Ramsey and what he has done in society in general just making people more aware on the forefront that you can get in control of your finances. And this is, I mean, a tremendous, huge first step, especially for those that have had no prior experience getting back to the baby steps, getting into the habit of saving and paying down debt, starting with that $1,000 emergency fund is a really key component to jumpstarting that. And I love the snowball method. That is one thing that we do preach on here is the debt rolldown and how to tackle that debt. We do focus more on the emergency fund part, you know, if you’re comfortable having a $1,000, that’s great. But we try to have at least three months, maybe $10,000 as a buffer, depending on what kind of income you have coming in just to forebode any huge, unexpected things coming your way. And then getting the match in your retirement plan, we think that’s a great thing. I know he preaches that. Getting basic term life insurance, we do recommend just getting basic. There’s no way you can beat that. And then working on what’s the next steps? I know he is a big component of paying down the mortgage. I guess that’s probably one of the places we may deviate a little bit from. And of course, you know, again, what keeps you up at night? It all comes back to that emotional factor. If you feel like paying down your mortgage as soon as possible is the best way to go, but most times, you can be earning a whole lot more putting that extra payments into the market or to another savings goal. You can, however, shave off 10-15 years off of a 30-year loan by just making an extra payment or two each year. So just trying to balance that out. He can be a little extreme in some of the methods he tackles, but again, it’s great. I have nothing bad to say about Dave Ramsey. And he’s really done a great service to many, many people.

Tim Ulbrich: Yeah, I’m not sure, as you know, I went through Financial Peace, Jess and I did, and it was a great experience for us and listened to his podcast for awhile. And I, like you, I think that it provides a great framework. But certainly, there’s nothing that evokes a greater emotional reaction than talking about Dave Ramsey’s baby steps, right? And I think what’s important to remember — and I actually had a chance to go visit Ramsey’s office when I was at the American Pharmacists Association in Nashville a couple years ago and quietly was able to talk to one of their team members who certainly was willing to open up and say, ‘Hey, the reality is Dave’s talking to 5+ million people every day, right? And so when you’re teaching that many people every day, there has to be a simple framework and model.’ And so he’s talking with people that have maybe an income of $20,000-30,000 but of course people that have incomes of $300,000 or more per year. And of course, their situations are going to be very different. But at the end of the day, it’s a stepwise approach, and I think you have to remember that it’s meant for that general audience. I think you also have to remember that it’s predicated on the fact that behavioral aspects related to your financial plan are really what’s going to get many people hung up. It’s not necessarily always the math, but it could be the behavioral piece. And for even the people here listening tonight, I think some people, that model and framework as is may be great to have the discipline, even if it means leaving some of the dollars, some of the math on the table. For other people, maybe that’s not an issue, and they’re going to really adjust, move things around, and create a plan of their own. So I think it very much depends on how much do you need that stepwise approach? How much does that model really resonate with you? And where are you at in the financial planning? Do you really feel like you need that motivation and reminder along the way? I, too, like you — and we talked about this Episode 068, we went back and forth a little bit on the pros and cons of the Dave Ramsey steps, and we hope to have him on the show someday, maybe doing that episode if he were to come on the show, I don’t know.

Christina Slavonik: That would be great.

Tim Ulbrich: But one of the things we talked about, of course, was employer retirement match, which is something that I disagree with him on that. For most people with few exceptions, I think we’re talking about free money. And I think the other thing that you mentioned, the mortgage. I think for some people, paying off the home really makes a whole lot of sense. I think for other people, depending on your interest rate, depending on what’s going on else in your plan, maybe not so much. I think some people are taking that home out 30 years at a low interest rate so they can free up money to do other types of investing, and they’re calculating risk appropriately. Other people maybe not so much. So again, it depends. And I think of course, the big variable and difference is that Dave’s audience is not on average facing $173,000 of student loan debt, right?

Christina Slavonik: Very good point.

Tim Ulbrich: So that’s a very unique factor. And when you think about his framework and model, baby steps, really paying off all debt before you build up a full emergency fund, I think we would agree that some of that needs to be happening in tandem because somebody may be in debt for 10+ years paying off student loans. So great stuff there, Christina. We actually had another question come in that I’m going to read. And just a reminder to those that are on live as well, if you have a question before we jump off, we’d love to answer it. Question relates to PSLF and picking up extra hours at a non-qualifying employer. So question is, “Can you work on the side at a retail pharmacy, which would be a for-profit, non-qualifying employer while enrolled and working with the Public Service Loan Forgiveness employer?” So imagine a situation here where somebody’s working full-time for a not-for-profit hospital, and then they’re picking up extra shifts at a for-profit. Is there extra penalty for making more money from the side retail job? Of course besides it having an impact on your Adjusted Gross Income and therefore, impacting your payments.

Christina Slavonik: Yeah, that’s a good question. And the answer is no. As long as you’re working at a 501c3, the forgiveness should still be OK. I mean, you have many people out there pursuing different side hustles and whatnot just to help make ends meet. And so yeah, the short answer would be no, it shouldn’t affect the PSLF. Is that what was the question?

Tim Ulbrich: That is. I think the other obvious component here if I’m understanding this correctly would be making more money of course would increase the AGI.

Christina Slavonik: It would.

Tim Ulbrich: Which would change the monthly payment, right?

Christina Slavonik: It could, definitely. Yeah. So that is one aspect of that.

Tim Ulbrich: Awesome. Well, Christina, thank you so much. We’re going to be doing this hopefully a lot more often in the future. And just a reminder to the community, shoot us your question that you have, we’d love to have it answered by Christina or Tim Baker, again, our Certified Financial Planners. You can shoot us an email at [email protected]. You can hit us up in the YFP Facebook group or on Instagram as well. And again, as I mentioned at the very beginning of the call, if you’re not already familiar, we offer fee-only comprehensive financial planning over at Your Financial Pharmacist. So you can learn more about that and working with Christina or Tim over at YFPPlanning.com. So Christina, thank you so much. And to everyone else, have a great rest of your night.

Christina Slavonik: Thank you so much, Tim.

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YFP 076: Investing Q&A Episode

Posted on November 29, 2018November 2, 2022 by yfpadmin

Investing Q&A

On episode 76 of the Your Financial Pharmacist podcast, Tim Ulbrich, founder of Your Financial Pharmacist, and Tim Baker, YFP Team Member and owner of Script Financial, wrap up a month-long series focused on investing by fielding questions posed by, YOU, the YFP Community in this rapid fire investing Q&A edition.

Summary

Tim Ulbrich and Tim Baker tackle several questions during this investing Q&A episode.

Q: Is it better to hold company matched retirement contributions to pay off 20-25% interest credit cards that I had to live off of between residency and my job? A: This may be a situation where you should hold off contributing to retirement and pay off your credit card debt quickly. Tim Baker would suggest to a client to look at strategies for debt reduction while growing income. The additional income can be applied to the debt. This is also dependent on how fast you can get out of credit card debt.
Q: 401k Roth or before tax 401(k) which is the preferred option? The before tax 401k lowers taxable yearly income but we’ll pay taxes on the growth or the Roth 401k is tax free growth over time but higher taxable income at the end of the year. I can’t decide which is the best route. A: There is no one bad way as you’ll either pay tax now or in the future. If you think taxes today will be lower than taxes in the future, go with Roth. If you think taxes will be lower in the future, maybe wait to pay taxes. Tim Baker leans toward the Roth component.
Q: What are your thoughts for proper investing strategies for current pharmacy students? A: Don’t invest anything as a student. Put that money into an emergency fund, toward your credit card situation, or put that additional money toward the accruing interest on your student loans. If you fall in the 10% that graduate without student loans, look at things like an HSA or IRA. Tim Baker offers a student/resident package with a reduced fee to help you establish a foundation and not miss out on wasted opportunities.
Q: Can you go over how to rebalance a portfolio? A: When you set an allocation for your portfolio, over time it is going to drift. When it does, you need to rebalance it. To do so, you sell and reinvest. This usually happens once or twice a year. You can set alerts if an allocation drifts over 5%. Talk to your advisor, company or Tim Baker to do this.
Q: Can you review pros and cons of active and passive funds? A: Active funds believe that the market is not perfectly efficient and that you can achieve above market returns through security selection, market timing or both. Passive investing means that you believe the price of the stock market is efficient and that you are unlikely to outperform the market on a consistent basis. 9/10 actively managed funds underperform passive funds.
Q: Have you guys talked about HSA accounts and risks/benefits and how they fit into a long term financial strategy? A: Yes, in episodes 19 and 73. Follow-up question: Do HSA accounts need to be deposited throughout the year or are these ok to max out contribution limits anytime during the year? A: Like with an IRA or 401(k), it doesn’t matter when you max the contribution out.
Q: How do you feel about investing apps, like Robinhood and Acorns? A: Tim Baker needs to do a review of them as this question comes up a lot. A lot of these solutions believe in low cost investing. Tim Baker likes the concept of building wealth over time and these apps may provide a way to save money without the emotional ties.
Q: Can we do 401(k), IRA and Roth IRA all three? What are the limits in each? Which other options to turn to for tax saving purpose? A: Yes, it depends on the income limits. Tax saving purpose options are HSA or 529 accounts.
Q: What is your thought on robo investors (Betterment etc)? I am a Federal employee, and so my retirement investments go into my TSP. However, I am looking at options for taxable investments beyond what I currently have with an advisor (the fees are making me consider other options). I know that index fund investing with Vanguard or Fidelity offer attractive low fees, but leave me open to issues with taxes on dividends unless I manually do my own tax loss harvesting (which I am reading and learning about, but don’t feel comfortable taking on my own just yet). Betterment does this for me at a higher fee than index investing on my own, but significantly less than an advisor. So, is something like Betterment “good enough” for taxable investments for those that want lower fees but still a more hands off approach? Thank you! I have loved catching up on your podcasts and am, 7 years post graduation, finally getting a better grasp on finances than I ever have. A: Tax harvesting is looking at the gains you make in a year off of your investments. You can sell loser stocks in your portfolio to offset your taxable gains with the goal of breaking even. Betterment or robo advisors can do this automatically and financial advisors also have tools for this. If you do this on your own, you have to do it manually which could take a lot of time.
Q: If I’m a 1099, and have been contributing to a SEP IRA, and decided I want to take advantage of a backdoor Roth, what steps do I need to take to move my money to make it work? A: In a backdoor Roth IRA, you move money from a traditional to Roth IRA. This is a legal way to fund a Roth IRA.

Mentioned on the Show

Policygenius
YFP Facebook Group
YFP Episode 075: DIY, Robo or Hire A Planner?
YFP Episode 074: Evaluating Your 401(k) Plan
YFP Episode 073: How to Determine the Priority of Investing
YFP Episode 072: Investing Mind Tricks: How Behavioral Bias Affects Our Decisions
YFP Email
YFP Episode 026: Baby Stepping Your Financial Plan – The 2 Things to Focus on First
YFP Episode 068: Pros/Cons of the Dave Ramsey 7 Baby Steps
YFP Episode 070: Pre-Planning for Tax Season
Seven Figure Pharmacist by Tim Church and Tim Ulbrich
Tim Baker’s Student/Resident Package
Simple Wealth, Inevitable Wealth: How You and Your Financial Advisor Can Grow Your Fortune in Stock Mutual Funds by Nick Murray
The Laws of Wealth: Psychology and the Secret to Investing Success by Daniel Crosby
The Index Revolution: Why Investors Should Join It Now by Charles Ellis
YFP Episode 019: How Do Health Savings Accounts (HSA) Fit Into a Financial Plan?

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 076 of the Your Financial Pharmacist podcast. Excited to be here alongside our financial investing expert, Tim Baker, as we’re going to take questions from you, the YFP community in a rapid fire format. So Tim, we’ve got lots of questions on investing. And I think you’re on the hot seat today.

Tim Baker: Yeah, I think I’m ready. I’m ready to go. We have lots of questions, lots of engagement in the Facebook group, so hopefully we can get some of these questions answered.

Tim Ulbrich: Yeah, it’s been a fun month. I think this is a topic that we identified — as we were planning out the month of November, we identified we haven’t done enough on investing. We got that feedback from the community, we heard you, we listened, and hopefully we haven’t overwhelmed on the topic of investing. But knowing it’s such a critical part of the financial plan, we want to give it the attention it deserves. So if you haven’t been with us for the month, make sure to go back and check out the topics we’ve already covered in terms of priority investing, some of the behavioral biases, how to evaluate your investing accounts, DIY versus robo versus an advisor. And here, we’re wrapping everything up with a rapid fire Q&A format. And so for those that submitted questions via the YFP Facebook group, via LinkedIn, via email, thank you. And for those that have a question, make sure to join the YFP Facebook group if you’re not already part of that community. Or shoot us an email at [email protected]. Alright, here we go. Ready?

Tim Baker: Let’s do it.

Tim Ulbrich: Alright, Peter from the YFP Facebook group asks, “Is it better to hold company-matched retirement contributions to pay of 20-25% interest rate credit card that I had to live off between residency and my job?”

Tim Baker: Yeah, this is a great question. And I typically will say an addendum to the certainties in life are death and taxes. I typically will say the part three really should be if you have a match in your retirement plan, the third part is you probably should put that money in and get the max. Free money, you’ve heard us talk about that time and time again. So this might be one of the situations, however, that you might want to pump the brakes. And I think a lot, Tim, it deals with the timeline of things. So if this is something that we can put the retirement contributions on hold and do a gazelle-like sprint, as Dave Ramsey would say, and get through the credit cards, that might be where it would make sense. If we’re talking about a longer term horizon, we’re talking about a debt load of 20-25%, what I would actually do with a client here is possibly look at strategies for debt restructuring so you can get some breathing room. And then my thing is, OK, like how can we grow the top line? How can we grow the income? Not necessarily put the retirement contributions on hold but to apply all that extra income towards kind of the predatory debt levels. So it might be in your case, Peter, that it does make sense and it does make sense to put it on hold for a year or a short time frame and get through it as quickly as possible. But if I’m your advisor, I would say, hey, is there anything that we can do to make additional income so we can kind of keep the match going but also keep aggressive on the loans.

Tim Ulbrich: Yeah, and Peter, I’d point you back too to Episode 026. Tim Baker talked about baby stepping into a financial plan, specifically with a focus on consumer credit card debt and emergency funds. And I think that that would help even answer this question further. We obviously talked about in Episode 068 when we went through the pros and cons of the Ramsey Baby Steps. And via YFP team member Tim Church in the Facebook group saying, “Great question. Thanks for sharing. If you put your match on hold, how fast could you get out of credit card debt?” And so I think that’s the question of at what intensity, as you referenced, would you be able to get this paid off? And then obviously, how do you feel about having that 20-25% debt?

Tim Baker: It’s a great question by Tim Church.

Tim Ulbrich: Alright, Rachel from the YFP Facebook group asked, “401k Roth or before tax 401k?” So referring to a traditional 401k versus a Roth 401k. “The before-tax 401k lowers taxable yearly income but will pay taxes on the growth, where the Roth 401k is tax-free growth over time but higher taxable income at the end of the year. I can’t decide which is the best value.” Now, in Episode 073, Tim Church and I talked about the priority investing. We broke down the differences between traditional 401k, Roth 401k, we talked about IRAs. So I think what we didn’t get into as much in that episode was this whole idea of if I’m weighing between traditional contributions where I’m going to defer the payment of taxes to the future but lower my taxable income versus a Roth contribution where I’m paying taxes now, and I’m going to reap the benefits later. How do you weigh the balance of where to be prioritizing there?

Tim Baker: Yeah, and I think without being too simplistic, again, I think this is one of the things that I think sometimes we look at and we’re like, I don’t know what to do. And it’s almost like paralysis by analysis. And to me, I think it’s the same thing — and I kind of equate it to the avalanche versus snowball. There’s really no one bad way. I mean, you’re going to pay the tax either now or in the future. So you know, again, to back up just so everyone is crystal clear because we had a few questions around this. When you have a 401k, this is typically administered through your employer. Your employer will say, hey, Fidelity, Vanguard, whoever, we want this benefit for our employees as means to recruit and retain, we’re going to set up this 401k and we’re actually going to match. And we’ll say 3%. So it’s basically quarterbacked, in a sense, by the employer. So in this particular investment account, you basically put in a set amount, and everybody — these are 2018 numbers — can put in $18,500. So every year, that’s what you can put in. That’s what you can put in as a maxing out your 401k. Now, concurrently, your employer will incentivize you to put money in by matching a certain percentage. So they might say, hey, if you put in 3%, we’ll put in 3% and match that dollar-for-dollar. And there’s different things. They might say, we’ll match the first 3% and then 50% on the next 2%. So you have to put in 5% to get the full match and essentially, they’re putting in 4%. So I know there are a lot of numbers out there. In the 401k system, you basically have a traditional 401k, so that’s all pre-tax dollars. So it goes in pre-tax, it grows tax-free, and then when you distribute that in retirement, it comes out taxed. So in retirement, you’re going to be taxed on that amount you distribute. What’s becoming more and more popular these days is the Roth component of that. So anytime you see Roth, think after tax. So you’ll actually have what is basically almost like two subaccounts. You’ll have a traditional 401k, which you could put money into. And any match that you get from your employer goes in there. And then you’ll have what looks like a secondary account, which is your Roth 401k. So it’s going to look like two subaccounts, which is all after-tax money. And those monies cannot be co-mingled because you have a pre-tax bucket and an after-tax bucket. So the mechanics of that is it goes in after-tax, meaning you don’t get any tax deduction. So that money actually flows through onto your tax return. It grows tax-free, but in retirement, when you’re looking at a Roth 401k, and there’s $1 million in there, you actually have $1 million that you can distribute. Versus a traditional 401k, if you have $1 million in there, you don’t necessarily have $1 million because Uncle Sam still needs to take his bite of the apple. So those are really the same components. Now, in terms of your ability to contribute to that, it’s an aggregate. So between if you put $10,000 into your traditional 401k, you can only put $8,500 into your Roth 401k. So that’s the 401k. So to kind of go back to the question of which is better, if you think that taxes today will be lower than taxes in the future, probably best to go with the Roth option. If you think that taxes will be lower in the future, it might be worth to defer and wait to pay the taxes in the future. So and again, we’re really trying to look at the crystal ball here. I kind of lean more towards — and I think some of the studies that show, well, if you put money in pre-tax and it grows, that you’re going to pay a higher amount of tax on more money, essentially. And there’s studies that kind of support I think both sides. I think what I’m trying to say here is don’t get caught up in the minutia. I think if anything, I would go more towards the Roth component. But again, like when we talked about in the tax episode with Paul Eikenberg, which was Episode 070.

Tim Ulbrich: Yes.

Tim Baker: 070. There are different strategies out there. So it could be a tax strategy where you are looking to defer or you’re look to avoid. So it just depends, I think. If you have a handle on your tax situation, you’re going to know what makes the most sense for you and kind of your household. So lots of stuff there. I would be remiss to not mention IRAs here, which are similar in a sense that instead of the employer basically quarterbacking it, this is your own Individual Retirement Account that you are — there’s typically no match there. There is no match. But you’re basically putting money into an account and investing it on your own. And we can talk about that a little bit more.

Tim Ulbrich: Tim Baker, preaching and teaching. I love it.

Tim Baker: I’m trying. It’s a lot of stuff. I don’t want to confuse anybody.

Tim Ulbrich: No, it comes up so much. And I think your point’s a good one that we’ve talked with so many new practitioners that are getting that paralysis by analysis. So I think like anything else, take some action, get started, continue to learn, get some help along the way. But don’t do nothing because it seems so confusing.

Tim Baker: Right. And you can always — I mean, it’s the thing like year to year, you can always look at when you’re truly doing financial planning and kind of tax planning strategy, it can change year-to-year. So you might look at your pre-tax money and say, it doesn’t make sense to pay the tax on it today and actually get into some of the nitty gritty. I think for a lot of our listeners, just like how do I get started and what should be the bucket I focus on?

Tim Ulbrich: Yeah, and if you’re somebody who’s not resonating with the audio version of this, and you want to read this and be able to break it down, we spend a lot of time in Chapters 12 and 13 and 14 of “Seven Figure Pharmacist” breaking down investment terms and strategies and retirement accounts and taxable accounts. And so if you need some more time to digest it, look at it, you check that out, sevenfigurepharmacist.com. Alright, we’ve got a question — actually, we got several questions via LinkedIn this time, which was cool. Scott asked, “What are your thoughts for proper investing strategies for current pharmacy students.” So we’ve talked at length about student indebtedness, coming out, and I think when we talk about students, we tend to only focus on debt. So here Scott’s asking, well, what about investing? “I know that if I have time and I can invest and get compound growth, should I get started as a student? If so, what’s the strategy?”

Tim Baker: Yeah, so I typically give the least sexy answer to this question as I can because I get this like when we talk to pharmacy schools. And if it were me, I think the conservative approach to me would say I wouldn’t really invest anything as a student. If I’m a student, any additional income that I have, I’m either kind of going back to Episode 026 where we’re talking about baby stepping into a financial plan where we’re focused on do you have a solid emergency fund? Do you have — what’s your credit card situation looking like? And then from there, I think if I have a solid foundation, any additional money that I had that I want to — I’ve had students ask me about, hey, what do you think about the cannabis industry? What do you think about bitcoin? And I’m like, no, don’t do that. You guys have $160,000 in debt on average. So the least sexy answer is I would apply all of that money back to the interest on your loans that’s accruing. Because what happens is once you get through your P4 year, you pass your boards, you go through your grace period. And around this time of year, you’re going to hit repayment. Any of the interest that you’ve had that you’ve accumulated since the loans originated when you took the loans out — and that’s going to capitalized, which means that it basically moves from the interest side of the ledger to the principal side of the ledger. And now, that interest is accumulating interest on top of interest. So it doesn’t sound sexy, and I get it. Now, if you are one of the 10% of pharmacists out there that doesn’t have student loans, then I would definitely look at things like the HSA, the IRA, and obviously maxing out. And maybe it might be worth spending some time about how I typically advise clients to fill their investment buckets, which would be essentially get your match and your max in your 401k. And the example that I gave, if you have a 3% match, you typically want to put 3% in. And then typically, there you want to go into the IRA world, which is you setting up an IRA at Vanguard or wherever. And you’re putting $5,500 in per year, which is $458.33. So get into that monthly rhythm of putting that money in. And then you typically want to go back into the 401k and max it out, so that’s where you’re getting the $18,500. And then if you exhaust that, then that’s typically where you want to go into the taxable accounts that we’ll talk about here in a little bit. And what I didn’t say is probably along with the max of the IRA, in that second step, if you have a high deductible plan, maxing out the HSA, which is for a single person, $3,450. And for a family, it’s $6,900. So again, if you’re a student, I would focus on all the boring stuff. If you have the debt, if you don’t have debt, then that’s how to start filling your buckets. Now, if you don’t have an employer, obviously, you would want to go right to the IRA and start doing that. But it also depends — to kind of make this answer longer than it should be — is what is your goal? So if the goal of the investment is just to build wealth and put money towards retirement, that’s great. But if you’re investing for purposes like a wedding or something like that that you have a little bit more runway, then maybe you go straight to the taxable account. So lots of stuff, kind of lots of little pieces.

Tim Ulbrich: And I’m glad you brought up the 10% because we don’t talk about the 10%. I mean, if you look at the AACP data in any given year, when they publish the graduating student survey, 10-12% of students report they have no student loan debt.

Tim Baker: Which is a lot.

Tim Ulbrich: Yeah, it’s great. And I think we’re so often preaching to the 88% probably, but I think what just to highlight what you said there is keep your eye on the prize of graduating with as little student loan debt as possible. And I think it can be exciting to jump into investing or it can be exciting to do these other things that are opportunities there, but if you’re contributing some to investments while you’re in school, all while you’re taking on credit card debt or you’re taking on more cost of living, tuition and that’s compounding in interest, obviously, we’re kind of fighting against the effort that we’re doing. So I think this is a good time to talk about what you’re doing with the student resident financial planning services. We haven’t really talked much about that, but if we have students and residents who are listening, saying, I’ve got all these competing things, I’d love to work with Tim Baker talking about financial planning, what are you doing with the student resident package?

Tim Baker: Yeah, so I basically, what I do with students and residents — and I think it to me I think a lot of people are like, oh I don’t have the money or I’m too early in this process. But I think one of the things that I see is especially when it comes to like the foundational stuff, which includes cash flowing, budgeting, student loans, emergency funds, is it could potentially be — and not to speak in hyperbole — it can be hundreds of thousands of dollars swing in terms of your student loans and how we attack them. So what I’m really trying to do is present an offering that focuses on the student and focuses on the resident. So in those years, we can still work at a much reduced speed because I realize that there’s not a whole lot of income. But we’re setting the foundation to the financial plan. So the idea is to work with you guys, that population earlier, and then hopefully feed you into comprehensive financial planning like you and Jess are doing. But I think the swing — I know a lot of planners out there that say, hey, come talk to me after you’re through your residency. And I’m kind of thinking of a counterpart that I have that works with physicians. And my thought is that there’s a lot of wasted opportunity when you don’t have a sound financial plan in place almost immediately. And I think back, Tim, when we went back to USC and we were talking to basically the school, the pharmacy school out there, and we were talking to the P4s. And I was kind of like, I don’t know, probably begging is not the word, but like imploring their P4s, they’re in no better of a situation in that moment to be intentional about their finances.

Tim Ulbrich: Absolutely.

Tim Baker: And really be conscious of and having a plan for their student loans and especially if it’s like a PSLF option if they go into residency. There’s a lot of moving pieces there that I think if you can nail those first few years, that will set you up. So you know, I get fired up about it, and I like working with really all of my clients, but I think the students and residents, there’s so much opportunity there to get in front of.

Tim Ulbrich: Absolutely. So YourFinancialPharmacist.com/financial-planner will give you all the information for those that are interested in learning more. Michael and Audra via the YFP Facebook group are asking about rebalancing. So this idea of rebalancing a portfolio, can you go over how to rebalance, maybe what it means and a step-by-step process. And as you’re working with clients, how often do you do that?

Tim Baker: Yeah, so I think ultimately, when you set an allocation for your portfolio, over time, the investment portfolio’s going to drift. So the example that we can give in very broad terms is Tim, if you come into the office and kind of look at —

Tim Ulbrich: Your new office.

Tim Baker: New office, yeah, in Baltimore. Pretty excited about that. So if you come into the new office in Baltimore and you sit down and say, hey, I really want to save for retirement. I kind of put you through what’s called an investment policy statement. We’re going to build out like what that looks like. A big part of it is going to be the risk assessment. And the risk assessment, it’s going to basically return like an allocation. So it might say, when you answer these questions, you should be 80% in equities, which are stocks, and 20% in fixed income or bonds. So you know, there’s like a general rule of thumb out there — I typically don’t use this — but you could say as a general rule of thumb, just take 100 and then subtract your age, and that’s what you should be in equities. So if you were at 100, and you were 20 years old, you would be in 80%. And I don’t necessarily subscribe to that, but it’s kind of just rough math there. So say, Tim, you need to be 80% in equities and 20% in fixed income. Then you could essentially — and I think we’ve talked about this on the podcast, which a lot of financial planners would maybe argue with me. But I think that you can build a very diverse portfolio just essentially using two funds.

Tim Ulbrich: With low fees.
Tim Baker: With low fees. Basically, a total market fund and an aggregate bond fund. So you would buy, if you had $100,000, you would buy $80,000 in a total market fund and $20,000 in an aggregate bond fund. Now, I slice it a little bit thinner. You know, I’ll do more large cap and small cap and international. But I think if we use the example of one fund that’s 80% and one fund that’s 20%, over time, that’s going to drift. So over time, it’s going to be 85%, maybe 90% in that one fund and 10% in the other. So in that moment, your portfolio is more risky than essentially you sign up for. So what you would do is you would say, OK, now the portfolio has grown from $100,000 to $120,000, but I’m exposed too much because I’m in a 90% allocation, so you would essentially say $120,000 by .8, and that’s the target that you would want your total market, that equity to be in. So you would essentially sell off some and basically reinvest it into the bond to rebalance. Now, you typically want to do this once or twice per year because really, it just saves on costs. So typically, I have alerts on my investment accounts that basically alert me to trade. In most of the retirement plans, you can actually set these up. So if it drifts over 5%, then it will rebalance for you.

Tim Ulbrich: Yeah.

Tim Baker: So if you don’t know how to do that, obviously I would say to talk to someone at that, whether it’s Fidelity or whatever, talk to this, they can help you or reach out to me or another advisor that can help you with that.

Tim Ulbrich: So this might go into the behavioral biases, but I’ve found that I like having somebody else rebalance. Not because I think it’s difficult to do, per say, but what I found myself doing is I would go into my accounts, and I’d start sticking my fingers in it. And then I’d start saying, ooh, international, 10%. I keep reading the news, what’s happening with international stocks, and you start inserting all these biases. And I start adjusting and shifting things. Where if you and I agreed on an investment policy and strategy and we’re not reacting to the world of today but we’re looking at the long-term play, I’m less likely to do that, right? Or I’m going to at least engage with you before I make those decisions or whomever. So I think it just speaks to — and this gets to the next question about active versus passive funds, which I’m going to pose to you. But it speaks to that strategy of not necessarily leave it and forget it, but once you develop a strategy and a mindset, we’re in this for the long-term play. We’re not in it for the news of what’s happened in the DOW this week, right?

Tim Baker: Right.

Tim Ulbrich: So let’s talk about active and passive. So another question via the Facebook group, “Can you review the pros and cons of active funds versus passive funds?” I think we have some biases here probably. We’ve talked about those before. But what are the main differences and what should people be looking for?

Tim Baker: So an active investor basically believes, they believe that the market is not perfectly efficient. So if I’m an active investor, I basically think that I can achieve above-market returns through essentially security selection, market timing or both. So I’m smarter than the average bear that if I’m looking at large cap stocks, I’m going to be able to pick that better than what the market can essentially do. And then in terms of market timing, I can essentially see the future in a lot of ways. So the condition is I must determine when and under what conditions to both buy and sell. So the two methods that really people use to do active investing is technical analysis, which is really an attempt to determine kind of the demand side of the supply-demand equation of a particular security. So this typically relies on timing; it’s a lot of charts. You study past pricing, sales volumes, future trends. And you’re not necessarily concerned about hey, what’s Ford’s next line of cars? Or what’s the leadership at this company? It’s really about patterns. So that’s one way to look at it. The other way is the fundamental analysis where you’re looking at both kind of that macro and micro data. So you’re looking at interest rate increases, monetary policy, but then also specific to that industry or that company, productivity and profitability and earning potential. So that’s the active investor. The passive investor says, thanks but no thanks. I believe that the price of the stock market is essentially efficient, and then when I read that story in the New York Times about the cannabis industry or whatever or bitcoin, it’s been priced into the market long, long ago. So I’m not getting a stock tip or anything like that, I’m basically — I know that that is perfectly efficient. So the passive investor basically says, you’re unlikely to outperform the market on a consistent basis. And generally, that well-diversified portfolio that I just explained that has low cost is the better way to go, that you’re not going to — in the long-term — outperform the market. And the stats show that about nine in 10 actively managed funds underperform the passive funds. So inverse is true is typically, actively managed funds are more expensive. And that’s one thing that a lot of investors aren’t really aware of is what is it, how much money is actually going to be evaporating from their accounts because of expense ratio? And typically, the more you pay for the investment, the worse it is for the investor. So you would think if I’m buying a luxury car and paying more, I get better quality. So I would expect that. It’s not true with investments. Typically, the cheaper ones are the better way to go.

Tim Ulbrich: So for those interested in learning more on this topic, a few that come to mind, resources and books. We talk about obviously in “Seven Figure” as well, but “Simple Wealth, Inevitable Wealth” by Nick Murray is a great read. “Laws of Wealth” by Daniel Crosby is fantastic. And then “Index Revolution.”

Tim Baker: “Index Revolution” is such a simple —

Tim Ulbrich: Charles Ellis, is that who wrote that?

Tim Baker: Charles Ellis.

Tim Ulbrich: Yeah.

Tim Baker: Yeah.

Tim Ulbrich: OK. So we’ll link to those in the show notes. But I think a great topic, and obviously when this topic comes up, probably the most famous quote on this is Warren Buffet, who is the active investor of all active investors, you know, really quoting that as he thinks about the future for his family, his spouse, in terms of advice, obviously what he had to say was probably most people are best off putting it in an index fund and letting it ride.

Tim Baker: Yeah, and he’s one of the people that on Planet Earth — and there’s probably, you know, a very small, like maybe half dozen that can kind of see what’s going on with the markets — part of it, and I think these guys admit it because they have access to investments. Like they just buy companies.

Tim Ulbrich: A little more purchasing power than we have.

Tim Baker: Right. So by and large — and I think that’s one, if you’re talking to people and really advisors who say, hey, I can beat the market, go the other way because nine times out of 10, even moreso than that, we have no idea where the market’s going to go. It’s better set an allocation, keep expenses low and kind of the singles and doubles approach.

Tim Ulbrich: Awesome. So Ryan asks via LinkedIn, “Have you guys thought about HSA accounts? Risks and benefits and how they fit into a long-term strategy?” We did in Episode 019, we broke down, you and I, HSA accounts and then also again in Episode 073, Tim Church and I talked at great length about the prioritization of the HSA, what are the contribution amounts, what’s a high deductible health plan. So for those that are itching, especially around — well, we’re post-enrollment now — but around that time, it’s a good time to be talking HSAs. But we had a follow-up question from Brynn on HSAs. “Do HSA accounts need to be deposited to throughout the year? Or are those OK to max out the contribution limits anytime during the year?”

Tim Baker: Yeah, I don’t think it really matters. I think it’s the same thing with like an IRA. Like some people will say, hey, I want to max out $5,500 immediately. Same thing with the 401k. I guess technically, you could front-load $18,500 in the first quarter of the year. With the HSA, if you $6,900 to put into it and you know that you’re going to have family medical expenses, I would have it really act as a pass-through if that’s the purpose of the account is to fund that and then use it if you are using it for medical expenses. Now I think what we’re trying to do in my household is more of using that as a self-IRA and really cash-flowing the health expenses and let the HSA go. So again, I think that’s a little bit of next-level in terms of having that bucket of money for that purpose. But yeah, HSA is a powerful — and I think one of the really good things about the HSA is that you could make $1 million and still get a deduction for that, which with the deductible IRA, most pharmacists, unless you’re a resident, you’re going to make too much to be able to enjoy the deduction.

Tim Ulbrich: Joseph via LinkedIn asked, “How do you feel about investing apps like Robinhood and Acorn?”

Tim Baker: Yeah, you know, we get this question so much that I really — I probably need to sit down and actually review all of these different solutions and come up with kind of an opinion on them. So I know a lot of advisors — and you kind of see this in the pharmacy world too, it’s like as technology creeps in, there’s almost like a defensive pushback like oh, I’ll never be replaced by a robot. I’m more of the mindset to embrace the technology and utilize it for good. So I think some of these ideas with rounding off purchases and slowly building wealth over time, I actually like that concept. Because from a behavioral perspective, we’re more likely to save that way than if Tim, if I was a financial planner and I said, “Alright, Tim, can we put $100 more per month into your IRA?” If you’re less of a feel, less of an emotional pull, I’m all in. So I think to Joseph, I think I owe you and a lot of the other people that asked me that question to kind of do a deep dive and look at these and see. I do know that a lot of these solutions believe in kind of low-cost investing. They’re not necessarily putting you in expensive funds. But I think an extensive look is probably something that we should have on the docket for 2019.

Tim Ulbrich: Alright. Via the Facebook group, Krishna asks, “Can we do 401k, IRA and Roth IRA all three? What are the limits in each? Which other options to turn to for tax savings purpose?” So again, in Episode 073, Tim Church talked a lot about the total contribution limits, you broke that down, preaching a little bit earlier, so we covered that. But the question of all three, the answer is yes with an asterisk, right? Depending on some of the taxable, the income limits and what not that we’ve talked about. What other options besides those do you turn to for tax-saving purposes? So if somebody’s listening that’s saying, “OK. I’ve got me covered in a 401k, got me covered in a Roth IRA. I’m looking to do more.” HSA…

Tim Baker: HSA would be the big one. Yeah, absolutely. And I think if the HSA is not on the table — and that typically is where you look at the taxable account, which you don’t necessarily get a tax benefit unless you’re doing some tax (inaudible), which we’ll maybe talk about here and that type of thing. But yeah, those are the major books that you want to focus on and really exhaust before you get into some of the other vehicles. And I think that’s one of maybe the drawbacks for like Robinhood and Acorns is I’m not sure if they’re necessarily IRAs or they’re taxable accounts. And typically, I feel more comfortable, unless it’s more of a near-term goal like a wedding or a trip or something like that, I would want clients to focus more on the retirement buckets before they would go into the taxable buckets.

Tim Ulbrich: Yeah, and obviously if kids are in the picture, taking advantage of 529s and the tax advantages over there as well. So Cory via email asks, “What’s your thought on robo-investors, specifically Betterment?” Now obviously in 075, we talked about DIY v. Robo and Hire a Planner, so if you haven’t yet heard that, go check it out so you get some more background on robos. He says, “I’m a federal employee, and so my retirement investments go into a TSP,” which we talked about in Episode 073. “However, I’m looking at options for taxable investments beyond what I currently have with an advisor. The fees are making me consider other options. I know that index fund investing with Vanguard or Fidelity offer attractive low fees but leave me open to issues with taxes on dividends unless I manually do my own tax loss harvesting, which I am reading and learning about but don’t feel comfortable taking on my own. Betterment does this for me at a higher fee that index investing on my own but significantly less than advisors. So is something like Betterment good enough for taxable investments for those that want lower fees but still a more hands-off approach? Thank you, I love catching up on your podcast. I’m seven years post-graduation, finally getting a better grasp on finances than I’ve ever had.”

Tim Baker: That makes me feel good.

Tim Ulbrich: Yeah. So Cory, thanks for the thoughtful question, appreciate the feedback. And I think these are the ones that get us fired up.

Tim Baker: Oh yeah.

Tim Ulbrich: So before going into the question maybe about pros and cons of a robo and building off what we talked about in 075, break this down on tax loss harvesting quick. I think this is kind of a next-level question from what we’ve talked about before.

Tim Baker: Yeah, essentially so when we depart from all of the retirement accounts, 401k’s, IRAs, in those accounts, your investments essentially grow tax-free. So the government basically leaves you alone from a tax perspective and any gains you might get inside of those accounts. On the taxable account, which is basically a brokerage or just an investment account that you have that is funded with after-tax dollars, it doesn’t grow tax free. And when you realize gains, you actually pay taxes on it. So what tax loss harvesting is is essentially you’re looking at any gains that you make throughout the year. So if I buy Tesla stock at x and then I sell it at x plus a 20% profit, I’m going to pay capital gains on that amount of money. What tax loss harvesting done is basically it looks at some of the less profitable, even loser stocks and positions in your portfolio, and you can actually sell those to offset your taxable gains. So you’re essentially trying to break even, in a sense, from a tax perspective. So this is a strategy that robo investors like Betterment can do automatically, and sometimes they do. And even a lot of financial advisors have tools that can do these things similarly. If you’re on your own, though, with a lot of these tools, you essentially have to do it manually. So at the end of the year, you might say, hey, I have a gain, so I don’t want to pay this amount of tax on it. So where can I sell an investment at a loss to offset those gains. And typically, you can basically offset whatever your gains are, and you can actually lower your income by about $3,000 per year, your ordinary income, if you have enough of a loss. So it’s kind of next-level. Betterment, I think boasts that you could potentially save .7-2.5%. Like that’s the range that you can ultimately do. I think those are a little bit exaggerated. To go back to the question, I think it’s really a matter of you get what you pay for, in a sense. Obviously if you’re doing low-cost investing on your own, obviously you have to do a lot of the legwork.

Tim Ulbrich: Yeah.

Tim Baker: Tim, you kind of talked about with your DIY approach when you were buying and selling houses, or selling house. It’s a time-suck. The Betterment approach is maybe that where they can do it automatically, but you’re going to pay 50 basis points on that. So you pay for that. And then an advisor could be where they’re charging you a fee and maybe an AUM fee. But you get a little bit more of the human element. So it kind of depends on, I mean, if I’m Cory, if this is something that you want to DIY, and your taxable account is not huge at this point — I’m not sure where you’re at — maybe you try to figure out the tax loss harvesting for yourself and take a crack at it. But you might get to a point where you have a million other things to do with life and you just would rather just slot it into a Betterment. But yeah, it’s definitely a strategy that I think if you can do consistently over time, you can essentially protect some of your gains because we talk about taxes and inflation are the big headwinds that are blowing in your face as you’re trying to build wealth over time.

Tim Ulbrich: Yeah, and I think this builds nicely off of what we talked about in 075 and really, have been talking about since Day 1 is emphasizing the point, which is important here when we’re doing a whole month on investing, that investing is one part of a very comprehensive financial plan, right? So if you’re doing the DIY robo route, making sure that you’ve got those other pieces accounted for and you’re not looking in one avenue, in a silo, only one bucket, and you’re really looking at the entire financial plan and picture as you’re moving forward. Alright, last question comes from Mo in L.A. via email. She asks, “If I’m a 1099 employee, and I’ve been contributing to a SEP IRA and decided I want to take advantage of a back-door Roth, what steps would I need to take to move my money to make it work?” I think that while Mo is asking this question of being a 1099 and a SEP IRA, which we talked about in 073, maybe to broaden this out to the community at large is the mechanics of a back-door Roth IRA. Now, we’ve defined what it is. But for those that say, OK, I don’t meet the income limits for a Roth IRA, so I know I need to do a back-door Roth, what is the next step they take?

Tim Baker: So typically, the breakdown is like anybody can contribute to a traditional IRA, but not everyone necessarily gets the deduction. For a Roth IRA, not everyone can actually contribute to a Roth IRA. So once you make a certain amount of money, those doors close to the Roth IRA. So typically, what the mechanics of is you can actually contribute to a traditional IRA and then essentially recategorize or do a back-door Roth IRA. So you basically move the money from the traditional to the Roth in an instant. And it’s a legal way to basically fund the Roth IRA. So that’s really the mechanics of it. Now, a SEP IRA, which we’ve outlined in previous episodes, is really the IRA for that Self-Employed Person. So for someone like me who I don’t have a TSP, I don’t have a 401k, I basically am — and really the traditional and the Roth IRA are not enough for me to be saving for retirement. So you can only put $5,500 per year in that. The SEP IRA is basically an investment account for the self-employed where you can put a lot more money in. It’s like $55,000 per year into that versus the $5,500 that you can put into the Roth and the traditional IRA.

Tim Ulbrich: So good question. We took a lot this week, and here we are, finally, end of November. We’ve hashed out investing. I think this is a series we’re going to really look back at and say, for those that want to dig in deeper into investing, go back to November 2018 where we covered a lot on this topic. So we’re pumped as a team to be wrapping up 2018. We’ve got lots of exciting content, new content, new ideas, things are coming to 2019. So we hope that you’ll continue on the journey with us. We hope that you’ll join us in the YFP Facebook group. And before we wrap up today’s episode, I want to again take a moment to thank our sponsor, PolicyGenius.

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

Tim Ulbrich: And one last thing if you could do us a favor. If you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you’ll find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Have a great rest of your week.

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YFP 075: DIY, Robo or Hire a Planner?

Posted on November 22, 2018November 2, 2022 by yfpadmin

DIY, Robo or Hire a Planner?

On episode 75 of the Your Financial Pharmacist podcast, Tim Ulbrich, found of YFP, and Tim Baker, YFP team member and owner of Script Financial, continue YFP’s month-long series on investing by talking about the pros and cons of a DIY approach to investing compared to utilizing a robo advisor or hiring a financial planner.

Summary

On this episode, Tim Ulbrich and Tim Baker dive into a discussion of three strategies of investing: DIY, robo and hiring a financial planner. The DIY (do it yourself) route of investing means that you, instead of your employer or planner, will be in charge of all aspects of your retirement or investment. You’ll determine how much to defer into retirement accounts, what to invest in, make adjustments, and figure out to how to distribute funds at retirement, among other tasks. This route is becoming more popular most likely due to the fact that there are resources available and many advisors require their clients to have a lot of money to work with them. Pros of the DIY strategy are that there is a potential savings (if you are doing it well, etc.) and a feeling of empowerment. Cons are that there is a lack of accountability, that someone isn’t there checking or bringing awareness to potential financial behavioral biases you may have, and if you aren’t well-versed in the information, you could end up paying more.

Using an advisor is a strategy that lies between the DIY and financial planner routes. With this strategy, technology is used which allows you to simply click a link, answer a few questions, and fund taxable accounts. The pros of this strategy are that you don’t have to go through thousands of funds, the funds are automatically rebalanced over time, and the cost lands between .25-.5% on what’s invested. Cons are that there is no human interaction and that this only focuses on one part of your financial plan.

Hiring a planner means working with someone to act as the middle point between you and your investments. Pros to this strategy are the human aspect, the potential of having a comprehensive financial plan, the ability to create a diversified portfolio, and having someone act as a safeguard between you and your investments. Cons of hiring a financial planner are that the industry is structured so many planners are incentivized to grow your assets, may have a conflict of interest due to making more money off of your investments, and that a planner may not help you with credit card or student loan debt.

Mentioned on the Show

Script Financial
YFP Episode 015: Financial Planning Series Interview with Tim Baker (Part 1)
YFP Episode 016: Financial Planning Series Benefits of a Financial Planner (Part 2)
YFP Episode 017: Financial Planning Series Questions to Ask – Hiring a Planner (Part 3)
YFP Episode 054: Why Fee-Only Financial Planning Matters
YFP Episode 055: Why You Should Care How a Financial Planner Charges
YFP Facebook Group
Seven Figure Pharmacist by Tim Church and Tim Ulbrich
NerdWallet
Investopedia
Simple Wealth, Inevitable Wealth: How You and Your Financial Advisor Can Grow Your Fortune in Stock Mutual Funds by Nick Murray
YFP Blog: Are You Making This $1 Million Mistake
NerdWallet: Best Robo-Advisors: 2018 Top Picks
YFP Episode 032: Find Your Why (Part 1) – 3 Life Planning Questions
YFP Episode 033: Find Your Why (Part 2) – The Path To Success
Hire A Planner
XY Planning Network
Unshakeable: Your Guide to Financial Freedom by Tony Robbins

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 075, excited to be here alongside Tim Baker as we continue our month-long series on investing. We’re nearing the end. We’ve got next week coming up, we’re going to do an investing Q&A. But first and foremost, happy Thanksgiving, Tim Baker, to you and to the YFP community. So excited to be here.

Tim Baker: Yeah, happy Thanksgiving, Tim, to you and yours. And excited to get this episode going.

Tim Ulbrich: Yeah, we hope everyone’s having a great day, enjoying with family. We hope that you’re not nerding out on personal finance podcasts while you should be spending quality time with family. But if you are listening, please know that we appreciate it and that we’re certainly grateful for the community that has developed here over the past year. So we’ve been going along this month on investing. We’ve covered a lot of different topics and information, everything from behavioral aspects to investing, prioritization of investing, what to look for in your different investment accounts, the fees and so forth. And next week, we’re going to wrap it up with an investing Q&A. But here, we’re talking about the strategy of investing. Is this something you do yourself? Is this something you look at engaging with a robo advisor? We’ll talk about what that means. Or is this something you look at hiring a financial planner? Maybe for many people listening, there may be a different answer depending on the status of what you’re working on and what your preference is. So we’re going to reference some previous episodes throughout this episode, so let me throw them out here in advance. Episodes 015, 016 and 017, we talked at length, Tim Baker and I did, about what to look for in a financial planner, the benefits, different types of planners that are out there. In 054, we talked about why fee-only financial planning matters. And in 055, we talked about why you should care about how a financial planner charges. All of that feeds into the conversation here about DIY, robo or hiring a financial planner. So in terms of the structure and format of what we’re going to do, with each of these three buckets, we’re going to talk about what we’re referring to in a DIY approach, in a robo approach, in a financial planner approach. We’ll talk about the pros and potential pitfalls of each of those approaches. So Tim Baker, DIY. When we say DIY as it relates to investing, what exactly are we talking about? Whether listeners are thinking about maybe their 401k or maybe their 403b at their work environment, in the TSP, or they’re thinking about an IRA that’s outside of their work?

Tim Baker: Yeah, so the DIY, the Do It Yourself approach when it comes to investing, when we’re discussing things like the 401k, the 403b, the TSP, this is a little bit set up on a T-ball stand for you because the employer is essentially putting it in front of you and saying, hey, now that you work for us, we have contracted through an organization like a Vanguard or a Fidelity to basically have this investment account for you. So we’re going to cut you a deal, as long as you put money into it, we’ll match it. And we’re going to help you grow your retirement. So you can DIY that. And essentially, it’s a sandbox approach because you’re going to put in front of you a series of 10, 15, 20 — depending on the plan — investments that say, hey, for large cap, for U.S. large cap, you’re going to have four or five funds to pick from. From international, you might have two or three funds to pick from. From a bond, you might have some, it could be target funds. And if you’re hearing me talk about this and you’re saying, ‘What the heck is this guy talking about?’ then maybe having some help and not DIY-ing that — won’t be for you. Because the plan is defined, you’ll have basically a sandbox to work in. And essentially, what you’ll do is you’ll determine how much to defer into your retirement accounts. We’re talking your 401k, your Roth 401k, your 403b, what to actually invest it in — so a lot of people sometimes, they miss that step. So they think that once they put the money in there, it’s automatically invested. And some plans will be like that. But some plans won’t.

Tim Ulbrich: And they find out it’s just sitting there in a market fund.

Tim Baker: Right. I’ve seen that happen quite a bit. So you basically figure out how much you want to defer, what you’re going to invest it in, and over time, you have to kind of make those adjustments and do the rebalancing and things like that. And then when you go to retire, then you basically say, ‘Self, how do I distribute this in the most tax-efficient manner as possible?’ Whereas Tim, I don’t know about your dad, but my dad — well, my parents, really, they worked for the same company for 40 years, and the companies did that for them. And the pension manager would do that for them, basically would manage all those steps. So now, it’s kind of on us to figure that out. So that’s kind of the retirement side. If we’re talking outside the retirement, and we’re looking at IRAs, Individual Retirement Accounts, could be 529s, could be taxable accounts, that’s really where we’re going out into the market, essentially, and we’re looking at TD America, Vanguard, Fidelity, we’re going onto their website because we’ve heard of these companies, and we’re saying, ‘I want to open up an account on my own and basically do some investing on my own.’ So this is where you would open up a taxable account, open up a Roth IRA, and then the process is very similar except it’s just outside of the realm of what your employer is. So you’re opening up that account, you’re funding money from your paycheck. In then in that world, you’re essentially looking at a vast ocean, thousands and thousands of stocks and bonds and mutual funds and exchange traded funds, all the different things that could fit in these accounts. And you’re doing it in a way that hopefully is consistent with your beliefs about investing, if you have any, your risk tolerance, how you want to maximize or minimize, really, expenses and that type of thing. So I can tell from personal experience just the first time I ever opened up a Roth, I was at West Point. And I wanted to just dip my toe in the market. And I wanted to feel the feeling of basically buying a stock in a company.

Tim Ulbrich: Been there.

Tim Baker: And I think I bought like one share of Johnson & Johnson, and like after the transaction grew — and it’s kind of not very exciting — it was kind of exciting to see it, but I bought one share, which is the most inefficient way to do it because one share at that time was probably like $45. But then I paid like $10 —

Tim Ulbrich: The fee, yeah.

Tim Baker: Just to do the trade-in. But it was cool because at that time, I was like, well, technically, I’m part owner of this company, a .0 — add so many zeroes — 1% of Johnson & Johnson, so I would get documents that say, ‘Hey, these are when the board meetings are,’ but I really didn’t know what I was doing. And quite frankly — I know, Tim, we talked about this before — I probably had no business doing that, opening up an account like that because I didn’t really have a proper emergency fund. In the Army, a student is a little bit different, but there were so many other things that foundationally, I should have done before I even got to that point, but that’s kind of in a nutshell what the DIY approach is.

Tim Ulbrich: Yeah, and I think it’s — for many of our listeners, they’re probably thinking about, OK, most of my investing — maybe not all — but most of my investing’s happening with my employer-sponsored plan, so 401k, 403b. Of course that’s not everyone listening, many people have Roth IRAs or have taxable accounts that are out there, but what I’ve seen, Tim, is depending on the employer, how complex that is or is not can be all over the place. So for example, I work for the state. And they intentionally simplify options, you know, you’ve got two options in large cap, two options in international, they’re all index funds. Fees are pretty low. And I think they’re really trying to minimize some of the behavioral components that are there. But it’s still up to me, if I were doing a DIY approach and saying, OK, this is my asset allocation, this much stock, this much bonds, this much cash or cash equivalent or REETs or whatever. And then within there, what types of stocks I want to be investing in and then am I going to rebalance or not. Now, for other people — like a target fund I’m thinking of specifically — if somebody were to choose a target fund to say, OK, I’m going to retired in the year 2075, and that’s going to then set my asset allocation. The rebalancing is kind of happening along the way.

Tim Baker: It’s automatic.

Tim Ulbrich: Yeah.

Tim Baker: I would say from a target fund perspective, if you literally listen to what I just said about different types of funds like bond and international, emerging markets, small cap, large cap, and you’re like, ‘I have no idea,’ then go target fund. You probably will pay some type of premium for that service of it being rebalanced and becoming basically more aggressive to more conservative over time. But more often than not, I would rather you just pay the premium than have it sit in cash or be way too aggressive than you need be, depending on where you’re at in your life. But oftentimes, when I work with clients — and this is the opposite end of the spectrum, which is not DIY, it’s working with an advisor — I crack that nut, and I say, “Hey, client, you have 15-20 different options out there. And you’re in a target fund right now by default. I think we can do a little bit better given your situation and save on expense and things and break it out that way.” I think one of the things that you talk about (inaudible) and I’ve read a few books about the more choice that we are given, the more it causes that paralysis by analysis. And they say even like things like auto-enrolls. So we’ve talked about auto-enroll. There’s a lot of people that before auto-enroll really became a thing would work for a company for five, six, seven years, a decade, and never opt into their benefit of a 401k and the match there. Now, and this could be something the Obama administration put in, is that they’re incentivizing companies to basically auto-enroll employees. And then you essentially opt out of it if you want. And they’ve done a lot of studies in this with like Sweden and Finland, you have to opt out to not be an organ donor. And two countries that are very similar in a lot of ways, the opt-in, the percentage of people that were actually donating their organs was very low versus the opt-out. So a lot of this plays in. And we could do a whole topic, a whole episode, on behavioral finance and all the different biases that are out there. And I think that’s one of the things that maybe working with an advisor does. But it can be really confusing when you do it on DIY. It’s not impossible, obviously. But I think ultimately, my opinion — again, I’m biased because I do this for a living — is that I think it’s always good to have an objective look at your finances and say, hey, does this make sense? Is what I’m doing OK because I heard Uncle Tommy say this or my neighbor down the street said that, and I really want to know like sanity check this.

Tim Ulbrich: So obviously, as we think about the DIY approach, I think it’s fair to say that it’s becoming more popular — maybe not more popular but why is it popular in some regards. Accessing information is more readily available than it’s ever been before.

Tim Baker: Right.

Tim Ulbrich: Resources are out there. Just today, we had somebody ask in the YFP Facebook group, you know, I’ve heard of back door Roth IRAs, but what do I actually do mechanically. And we were able to quickly reference an article, get her a stepwise approach. So that information is there, readily available. I think that’s one of the reasons that it’s quite popular. What else do you think in terms of why people are going kind of that route of more of a DIY?

Tim Baker: I think it’s a little bit of an indictment of kind of my professional brethren. You know, there’s a lot of advisors out there that will say, “Hey, love to help you. But you have to have a half a million dollars before I can actually do work with you.” And the reason they do that is because they’ll charge based on assets, investable assets, which basically mean the assets they control directly, not what’s in your retirement account. So they say, “Hey, love to help you, but I can’t because I won’t essentially be paid enough.” So you have those minimum assets under management, AUM, requirements that basically for a lot of young population, just excludes them in general. I think one of the things that — and I was a little naive, no, I was a lot of naive to that is when I was looking at the profession of personal finance, kind of the whole 1% Occupy Wall Street was going on. So I think there is a distrust of large banking institutions and really financial advisors in general. And I think in a lot of ways, it’s well deserved. What a lot of people don’t know is that the majority, the overwhelming majority of financial advisors can legally put their own interests ahead of their clients, which when I kind of figured that out — and I was in that model when I discovered that the fee-based where you can earn commission fees, that blew me away. And it shouldn’t be that way. And I’m not saying that means 95% of the professionals out there are corrupted. But to me, is it should always be about the client, always be about what is in the best interests of the client, not necessarily mine. So I think that that perception is prevailing in a lot of ways. And that’s why I’m kind of fortunate when you talk about the work that we’re doing with you and Jess, it legitimizes, I think, what I’m trying to do. And I think what the fee-only world is trying to do is really say, there are services for young people that you’re not excluded. And by the way, I want to be on your team. And I want to get you to those goals that we talked about that whether it’s orca whales (?) or being able to retire at a certain time or whatever that is, that stuff jacks me up. And really, it’s the mechanisms of what the investments are and are properly insured that are just that supporting detail that I more or less have a playbook in my mind, and we just kind of plug and play depending on your situation.

Tim Ulbrich: Yeah, and I think I can say as somebody who went the DIY route for 10 years, you know, after graduation and obviously in working with you and Jess and I, I think too it’s fair to say for many listening, there’s just that overwhelming transition that happens where you’ve got new career, you’ve got tons of student loan debt, you feel like you’re trying to develop budgets and take care of all these other things. And part of it I think is just that feeling of being overwhelmed and my budget’s tight, I’m trying to figure out these things, and I may see additional fees or things and not necessarily be able to articulate the benefits associated with those.

Tim Baker: Right.

Tim Ulbrich: And I think it’s important that we just claim right off the bat what you just articulated nicely. Anytime we’re talking here about working with a planner versus not, you have to look at that under the assumption that it’s somebody who is good, who is acting ethically, who is acting, in our opinion, within a fiduciary standard because at the end of the day — we’ll get to some of the pros and cons of working with a planner — if you’re paying to work with a planner and you’re getting crappy advice, and you’re paying more in fees and things, now we’ve just put ourself up a creek and you might as well have gone the DIY route.

Tim Baker: Yeah, and I would say this — and I usually say this when I speak is I think one of the differences between financial planning, financial advisors and the profession of pharmacy is that the profession of pharmacy is actually a profession. You can take a test and be a financial advisor and give advice. You can do exactly what I do. The barrier to entry is very, very low, which means that you have — and you can see this maybe in other professions, not to call any out, but maybe like real estate and things like that where you take a test and you can sell houses.

Tim Ulbrich: Yeah.

Tim Baker: Sorry to all the real estate agents out there. But when you have such low barriers of entry, that basically muddies the water for a lot of hopefully professionals. And what I point to is someone that has the CFP mark, the Certified Financial Planning marks, and that are kind of following standards of ethics and all that kind of stuff. So I think that’s another reason why there’s lots of advisors out there that don’t necessarily know either what they’re doing or the other thing could be ignorance. So again, like when I was in the broker dealer world, I just didn’t know what I didn’t know. I thought I was awesome because I wasn’t selling proprietary products for maybe some of the bigger banks. So I’m like, oh, we can pick whatever products that we want from anywhere, whatever best suits you. But then I found out that there are other advisors out there that they’re not compensated based on product sales. It’s basically — the product and the advice is separated. And you know this in pharmacy, like anytime you mix the sale of product with advice, there’s conflict of interest. And you might see it with doctors and how they prescribe medications, those types of things. So to me, the model is broken from Jump Street that really, the consumer or client needs to be put first and everything else will fall into place. But I think that would, again, lead to why DIY is a popular — you know, just the savings cost and really, there are people that are thirsty. We’ve seen that from YFP. There’s people that are thirsty to learn. And it’s just something that is a huge void in our education system. We teach how to bake cakes and make ash trays in school, but we don’t teach them how to balance a checkbook or what credit card debt looks like or what student debt looks like.

Tim Ulbrich: Absolutely.

Tim Baker: So there’s a big void there, and I think people are — sometimes, we learn through pain and what we’ve gone through. And I think we can fill up a whole book of what we’ve personally done. And sometimes, it’s wisdom where we’re actually sitting down, writing through, reading “Seven Figure Pharmacist,” looking at all of the stuff that we have. You could learn a wealth of stuff on NerdWallet and Investopedia. So really, I think that’s a play as well.

Tim Ulrich: You know, one of the things I think is interesting as you were talking is — without getting too political here — when all the movement was going toward the fiduciary standard, I think it brought the public awareness and attention up a little bit that there’s not — most advisors are not acting in a fiduciary standard. And now that that really hasn’t moved forward, that may even, in some regards, lead people to think, well, now I know more about what fiduciary means, and I see that a majority of people aren’t that. That standard’s not progressing, so maybe a DIY route is where I’m going to go.

Tim Baker: Yeah, and really what Tim’s talking about here is in the last administration, basically the Department of Labor was essentially trying to push forward this standard, this fiduciary standard that said that basically the only accounts that they could touch under the Department of Labor were those basically issued by the employers. So they were saying any retirement account, 401k’s, 403b’s, and even I think IRAs, in this sense, have to be basically managed by fiduciaries that have the client’s best interests in mind. When the new administration came in, that legislation that was kind of being pushed through was squashed. So it did bring up I think some awareness that what is a fiduciary? And why aren’t all advisors fiduciaries? And there was a big push from the broker dealer world that says, hey, if we put this standard in place, then it’s going to shut out a lot of advice to kind of middle market and smaller — it’s going to shut out advice from that, which is categorically false. But it’s really around the protection of the income streams that insurance and other commissionable products generate. So I think we’ll eventually get there. It’s funny because we — I’m at different conferences, and Australia, you know, I’ve talked to advisors there that are like way ahead of us. They can’t believe that we don’t have a fiduciary standard across the board. Even their insurance products are similar. So I think we’ll eventually get there, but it could be a generation away just because of the lobbying.

Tim Ulbrich: So I think the pros of the DIY approach are obvious: potential cost savings with an asterisk — we’ll come back to that. Of course, it’s assuming that you’re doing it well and you’re controlling fees and you’re making the right decisions and so forth, you’re not being overtaken by some of the behavioral problems that can come up. Obviously, I think there’s a pro of empowerment and learning and being involved when you’ve got to figure it out, what does rebalancing mean? What does asset allocation mean? What do these funds and accounts means? So there’s a forced hand in learning. In terms of potential pitfalls, let me read you a quote from one of my favorite books, “Simple Wealth, Inevitable Wealth” by Nick Murray and get your reaction on this. He says that, “The twin premises of all do-it-yourself appeals are that most investors are smart enough, rational enough and disciplined enough always to select and maintain portfolios that are best suited to their long-term goals and that most advisors are venal and are stupid or at the very least, cost much more than they’re worth. The former premise is a fundamental misreading of basic human nature. The latter is just a self-serving mean-spirited lie.” Strong language, right? I mean, what are your thoughts?

Tim Baker: Strong language in a lot of ways. First, I had to actually look at what venal meant. So which, for you advisors out there, because I use the word fungible and gotten called on that. So venal means “showing or motivated by susceptibility to bribery.” So I think basically to summarize the quote, it’s we are perfect investors all the time. We know exactly what we need to do. We’re not emotional when it comes to this. And that advisors are stupid and basically fickle to wherever the money flows. I think that there’s probably truth and lies in both parts of that. What behavioral finance tells us and what’s becoming more and more is that a lot of our thoughts about finance is that people will — and it’s based on conventional economics — is that people will behave rationally, predictably and that emotions don’t influence people when they’re making economic choices, which is completely false.

Tim Ulbrich: We all know that. We’ve been thinking about it, right?

Tim Baker: We can outline a variety of biases, whether it’s anchoring or mental accounting or overconfidence, gambler’s fallacy, and we could maybe do a whole episode just on that. But frankly, as humans — and I do this for a living — and even sometimes for me, and especially when I’m looking at my own, we suck at it. Right now, we’re kind of in a market downturn. And I preach the long-term, I preach that over the course of the long haul, the market will take care of you. And that is a certainty. And I always joke outside of the zombie apocalypse or the Poles switching, the market will return 7-10%. It’s done it for 100 years. There’s bumps and bruises along the way, but when you’re in that moment, what I say in investing is that you should do the opposite of how you feel. So when 2008-2009 came around and we kind of are feeling a little bit of that now, you want to take your proverbial investment ball and go home. You want to get out of the market, you want to sit on the sidelines and stay in cash.

Tim Ulbrich: It should be game on, right?

Tim Baker: Right. And really, it should be opposite. If you are sitting on cash and the market is down, you should be chucking cash into your investments because essentially, it’s the one area of our financial life where we’re like, ah, I can’t believe that things are on sale and I want to get out of it. And then we kind of talked a little bit about the second part about advisors being venal and stupid. And again, I think part of that is earned in a lot of ways. But I would say by and large, I definitely operate that I think people are inherently good. But that doesn’t necessarily mean they’re good at their jobs or that they’re going to guide you the right way with regard to investing. And that’s why I think questions about that when you are potentially talking to a financial advisor is important, you know? And I think if people — one of the questions I ask prospective clients is if you had to make a list of all the things that you want your financial planner to have, what would that be? And the first one’s like, I want them to be trustworthy and I want them to communicate and I have access. But part of it is it could be an investment philosophy. If they tell me, I want someone to pick me the hot stocks, disqualified. I’m not your guy. I never will be your guy because I think the smartest thing I’ve ever said about investing in the stock market is that I don’t know where the stock market’s going to go. Nobody does. So again, I think that you shouldn’t be hiring a financial advisor to try to beat the market. By and large, they can’t do it. It should really be about managing the expectation, the behaviors, and specifically around this topic of investing.

Tim Ulbrich: I think one of the biggest pitfalls I see here — potential pitfalls — of the DIY approach is that lack of accountability, that risk of operating on an island. I know as I look back now on doing it myself, you may not feel it in the moment, but when there’s not somebody there to keep you in check and to call out the behavioral biases that we all are prone to, one I know for me and I’ve referred to before on the podcast is I knew that I shouldn’t be rebalancing more than I need to. I knew that once I set up my asset allocation based on risk tolerance, I should hold true. But you know, you log into your account, you see what’s going on, you start looking at things, and you say, well, maybe not so much of this or that, and you start messing around. And that’s why you hear the different studies saying the average return of the market is this, but the average person gets x, which is much less, because of our tendency to make those tweaks along the way. So I think accountability. I think the other thing too is that if you don’t have the right knowledge and so forth that you may end up paying more than the fees that are associated with a robo-planner, right? So we’ll link in the show notes, we wrote an article on the impact of fees and how fees can be a $1 million+ mistake alone if you’re not accounting for fees. And I know you helped me with a 403b account. I mean, we discovered fees north of — what? 1.5% I think?

Tim Baker: Yeah. And to kind of break this down, like one of the main suspects here is what’s called the expense ratio. So the funds that you are invested in, you know, mutual funds, exchange traded funds — not necessarily stocks — but the funds, there’s a manager that sits on top of that account and basically is buying and trading. And they pay themselves and they pay for office space and analysts and information. So basically, expense ratio is siphoning off money to keep the business profitable, in a sense. And if you have $100,000 in an investment and you have a 1% expense ratio, essentially you have $1,000 that is just evaporating every year from — and it’s not a line item anywhere, it’s just basically accounted for in the performance. And it doesn’t have to be that way because you can build a very investment portfolio for a tenth or even a twentieth of that. And my mantra’s always been, if I’m not getting the performance or it’s not safer for the same amount of performance, why am I paying 10 times, 20 times more? And that’s why we’re big proponents of some of the funds out there like Vanguard and Fidelity, they just rolled out a 0% expense ratio, and State Street and some of these ones that are very efficient for clients because again, you know, I think we’ve talked about this in a past episode is that the best indicator of performance is not star system ratings for Morningstar, it’s how you can drive expense down and keep as many hands in your investment — as many hands out of your investment pockets as — there’s platform fees and trading costs and expense ratios. Those are all things that — I mean, we have enough problems with the taxes and inflation that we need to be really protecting our gains, and a lot of that’s really keeping our expenses low when it comes to the investing part of the financial plan.

Tim Ulbrich: Yeah, if we’re going to hustle to put away money each and every month, like we’ve got to most out of it, right? And I think I love that’s what your mantra is keep those fees low. Obviously looking for performance as well, but I think of the statements I receive, and it has the tendency to say, well, I’m going to look at the one-year, three-year, five-year, 10-year performance. But I’m not really going to calculate what’s this 1% in total fees cost me? Or this 2%.

Tim Baker: Yeah. Well even that, like even advisors fall into this. They’ll say, hey, like I want to put my clients in 4- or 5-rated, and I only look at that. But that’s not the way to do it because typically, it’s a reversion to the mean. So what were high performing in 5-star systems, usually the script is flipped — pun intended — and those high performing, we’re buying them high and then they basically go low in terms of performance. So again, it’s just one that’s kind of the availability bias or what’s recently happened is we play on that. And it typically is the wrong move.

Tim Ulbrich: So that’s the DIY bucket. Let’s jump into the robo bucket. And you know, obvious pros and potential pitfalls. But here, we’re talking about somebody that maybe just heard this whole conversation about asset allocation and rebalancing and choosing investments and so forth and says, it would be nice to have a little bit of help around this investing piece there. And that’s really where robos come in. And obviously, there’s been I think — not a resurgence, a surgence of robo-advising, obviously, as they become more popular. I think they’ve been marketed a lot more than they were worth three or five years ago. So just briefly, what is a robo-advisor? Before we talk about the pros and cons.

Tim Baker: Yeah, so I would categorize a robo-advisor would basically sit in between DIY approach and working with a financial advisor. So typically, when you go the DIY route — and maybe we’ll put this link in the show notes, but NerdWallet has an article that says, “Best Robo-Advisors 2018 topics.” And the typical players in this are WealthFront, Betterment and those types. And essentially, what they do is they’re market disruptors in a sense that — and I remember working at my last firm, it took 38 pages to open up a Roth IRA. And essentially, what they do is you go to their website and you say, hey, if you want to open up — these are typically the kind of self-directed accounts. They’d be IRAs, Roth IRAs, taxable accounts. If you want to open up one of these, click this link, answer a few questions, and they automatically slot — and then fund it, so connect to your bank account or fund it from a different source. And you’re in a model.

Tim Ulbrich: Automatic selection there.

Tim Baker: Yeah, everything. So it’s really a method to bring technology and efficiency in a profession that needs it. So if you’re thinking, hey, I don’t want to wade through thousands and thousands of stocks and bonds and mutual funds and ETFs, and I want something that if I ask a few questions, they’ll automatically slot and rebalance over time — some of these rebalance. They’re robo, so they look at algorithms and they could rebalance daily, weekly, and you really just want to leave it alone. Then this would be typically something that you would do. Now, again, it’s going to cost you a fee to do that. So the typical ones, you’re looking anywhere from 25-50 basis points, so .25% on what you have invested to .5%. If we measure that against most advisors are probably 1%, north of 1%, just to kind of give you some perspective. But typically, you don’t have any type of human interaction. It’s go through this questionnaire, fund it, and then those dollars are invested on your behalf per an algorithm that is rebalancing over time. So again, like I’ve said this before is — and you kind of see this sometimes in pharmacy too where you’ll say, hey, I’ll never be replaced. The technology will never replace me. But robots are actually more efficient basically rebalancing than I would ever be because I’m not sitting by my computer every day. Just like you could make a case that robots are probably going to be more efficient filling scripts because of just the advances in technology. I think what robots will never be better at than me is that kind of one-on-one personal looking at the breadth of the financial picture. And I think the same is true when we’re talking about adherence and working with patients and all that kind of stuff. So they’re very synonymous in a lot of ways. But yeah, so I think the robo, I think it’s a good thing in terms of moving the needle in the market.

Tim Ulbrich: So you obviously mentioned the pro of convenience and access disrupted what was a very cumbersome, comprehensive process. I mean now, if you log onto one of those platforms you mentioned, it’s quick, it’s easy, asks you some question, you fund the account that you’re working on, and it sets up the asset allocation for you. And boom, you’re ready to go. So lower fees than a planner. So you mentioned, obviously, we’re assuming 0 or 1%ish. So here, we’re maybe .25-.5% so you can get a feel for that. I think the con you mentioned is a really good one. The lack of human element, engagement. And I think along that line, the thing I think about as the central pitfall here is that it’s focused on one part of the financial plan. You’ve been preaching since Day 1, and many of the financial planners that are out there are focused on one part of a financial plan. But what we’ve been preaching, especially for most of our audience, is that a financial plan runs all the way from debt to death. So we’re thinking about student loans, we’re thinking about budgeting and goal-setting and the right insurance. We’re thinking about end-of-life planning and home buying and kids’ college, all of these things. And when you’re looking at your month-to-month budget and your goals and what you’re trying to do, investing is one part, albeit a very important part, but it’s one part of your financial plan. And Betterment isn’t going to jump out and say, “Hey, by the way, are you thinking about your student loans and this or that?”

Tim Baker: Right.

Tim Ulbrich: And I was thinking back to just our relationship over the last year of you working with Jess and I, we’re a year in. And we’ve done very little discussion yet — we’re going to get there more — but very little discussions on investing because we’ve been spending all this time on for us figuring out what’s our why and what’s our purpose, which we published in episodes 031 and 032, maybe 032 and 033. We’ll get that right in the show notes. We’ve been talking about goal-setting, we’ve set up sinking funds and budgets and making sure we have a good foundation and insurance. And now, we’re working on end-of-life estate planning. And so I think the biggest risk I see here is that — are you filling in all the holes? And are you prioritizing goals the right way if you’re only focused on that one part of the plan?

Tim Baker: Yeah, and this is something — full disclosure — that we have been offering, Script Financial, that we’re testing out. And essentially what I want to do is be able to for someone that doesn’t want to work with me directly, they can tap into a lot of the models and portfolios that I use for clients and it’s just a little bit of less service but less cost as well. And I think if you’re not in that, then you’re going to become extinct. So I think — and we’ll put a link to that in the show notes as well. If you are wanting to do more in the investment world, open an IRA or a taxable account, make sure you’re doing all the other things we’re preaching about and have those in place in terms of foundational. But then, you know, if you’re looking at just the wealth of funds out there and you have no idea where to start, we can definitely do that as well.

Tim Ulbrich: So two out of three buckets we’ve covered. We talked DIY, we talked robo, and now let’s move into hiring a financial planner. And as I mentioned in the beginning of the show, we have previous content on this that we’re going to talk about and build on a little bit. But make sure you check out episodes 015-017 that we talk through, episode 054 about what it means to be fee-only and episode 055 about why you should care how a planner charges. And before we get into the details here, I want to reference our site, YourFinancialPharmacist.com/financial-planner. Again, YourFinancialPharmacist.com/financial-planner. We’ve got lots of content in there, we’ve got a free guide about what we think you should look for in a financial planner, who may benefit most from one. And then we’ve got an extensive list of questions that we think you should be asking to make sure you’ve got somebody who’s really acting in your best interest as you’re going along the way. So whether that’s with us or somebody else, we want you to make sure that you have the right person that’s in your corner. So Tim Baker, as I was looking at some data on this, there’s a 2016 Northwestern Mutual study that only 21% of Americans hire a financial planner to assist them, despite more than 70% — and that 70% number coming from a Harris poll — indicating that they’re interested in receiving guidance. So we have a majority that says, I want it and I want guidance, but only about a fifth that are actually engaging with a planner. I mean, maybe we’ve already hit on some of this already earlier in the show, but what’s behind that?

Tim Baker: Yeah, I mean, and it could be a lot of the things that we’re talking about is sometimes I hear a lot with prospective clients is I didn’t even really know that there were people out there that focus more on younger professionals because they look at their parents’ planner and it’s kind of where their planner is patting them on the head and saying, hey, when you have some money, sonny, I’ll help you. Or I hear like a lot of these paternalistic, where it’s like “Do as I say,” you know, it’s not necessarily collaborative, which I like. But yeah, that’s shocking is that again, I think there was people, young Americans that want it but that it’s not hitting. And I think, again, I think that’s why — you know, I’m a member of the XY Planning Network, and I think when I joined the network — so it’s a group of fee-only fiduciaries, CFPs, that really want to bring financial planning to Gen X, Gen Y demographic that’s been by and large ignored. And I joined at the end of 2015, there was 200 members maybe. And there’s 700 with us now. I mean, that’s unbelievable growth. So I think it’s just there’s a void that I think is starting to be filled. And I’m encouraged by I think what I’m seeing in the industry. But I’m also discouraged by the fact that there are a lot of people out there that need help and have no idea where to go, whether it’s account minimums or — and sometimes, it’s like well my parents never had an advisor. Sometimes with money, we kind of repeat — you know, I have a lot of pharmacists say, “I’m the first person to go to college. Further, I’m the first person to get an advanced degree. The amount of money I’m making now is more than both of my parents combined.” And what often happens is that a lot of what they’ve learned about money comes from parents, and I’ve said that time and time again is what my parents taught me about money, essentially don’t have credit card debt, buy a house. And beyond that, it was wing it. Figure it out. And I think in that regard, we just don’t have good mechanisms in place. And I think I’ll call out some of the pharmacy schools and associations, I want more education around that because when you’re walking out with a potential mortgage-worth of debt, we better be damn sure that we kind of know how to approach that. And right now, I think we miss that. So when I asked a question, $160,000 of debt at a 6.5% interest rate, what’s that monthly payment? And then there’s crickets. And then they found out the payment is $1,800+, it’s like gees, that’s a lot of money.

Tim Ulbrich: I couldn’t agree more. And I think as Tim Baker gets fired up about needing more in the PharmD, I think we’re going to have to put the explicit rating on this episode. The little “E” next to the I.

Tim Baker: Yeah, oh man, I think we’re going to lose our family-friendly status.

Tim Ulbrich: So the obvious pros — we’re not going to rehash these because we’ve talked through these in the DIY and the robo is that of course, you’ve got the human aspect. You’ve got the scope of if done well, it’s comprehensive, right? So I used the example of the debt to death. You’re looking at all aspects. It’s not limited on one aspect like investing. You’re looking at your whole plan. One of the things I think is interesting, though, Tim, is there’s this continued myth that if I hire a financial planner, my outcome is going to be better because they’re going to help me choose the right stocks. And therefore, I’m going to outperform the market. And we, I think from our perspective, debunk that myth. And when we were working on the book, we were looking at research published that shows between about 1.8% and 3% better returns on average per year for those that are hiring a planner versus those that don’t. Now, I think people look at those numbers and think, oh, that’s because of them helping me choose the right investment. I think what we’re trying to make a case of, though, is if you’re saying no, it’s not because of that, then where is that positive return coming from?
Tim Baker: I think it’s really a matter of — and this could even be by accident in some ways, even in my past life in the broker dealer world is — you sit in between, from an investment perspective, you sit in between your client and their money. Most investment accounts, when the advisor is managing that for their client, there’s not two sets of hands in that. The client basically says, hey, I want you, the advisor to do that. So when the sky is falling, and the client calls — and I’ve had this here recently where the client says, hey, I really think that we should sell, typically, I do a timeout and let’s talk about it. Let’s revisit what we talked about in the investment. And although like I have the butterflies in my stomach too because my portfolio is affected, and I’m invested the same exact way that my clients are. I have to remind myself just like I have to remind the client that again, over the course of time, we adhere to, stick to our guns and adhere to the investment policy statement, the allocation that we put forth that is very diversified and low cost. It will take care of us. So I think because we don’t have the ability to get in and trade and that we’re kind of standing in between, it’s almost like a safeguard on hasty behavior. It’s kind of like what I tell clients that are just having a really bad time, just spending money on impulse or not being able to save money is anything that’s over $100, you have to have a 24-48 hour cooling off period. And if you are thinking about it in 24 or 48 hours, then maybe buy it. If you’re not, then that’s a good choice. So in the same way is this too shall pass when it comes to investments, there are brighter days ahead. And we’ve enjoyed a great, bold market, a great, hot market, and we’re going to have corrections. But by and large, sometimes it’s just the investor standing in between them and their accounts.

Tim Ulbrich: And I think you use the example of the advisor there sitting in between the investor and their accounts, I think it also goes beyond just the investment component. So as you’re working with clients and you’re asking them things about what are your hopes, dreams and goals, obviously one of those, you’re going to increase your net worth, you’re going to retire successfully, all of those things. But also if someone were to say, I really want to take some time off, 10 years into my career and do this. Or I want to make sure I’m spending more time with my family or at some point, I want to go part-time, I want to start my own business, or I want to get into real estate. Somebody who is really walking that path with you can turn back to you and say, hey, remember when we talked about this? Are we working towards doing that?

Tim Baker: Right.

Tim Ulbrich: And I think that gets to some of the cons because when you look at the industry, as you mentioned earlier, a lot of the industry is still structured in a way that incentivizes only the growth of the assets because if you’re being paid in an Assets Under Management model, you’re not incentivized to look at me in the face and say, hey, Tim, remember when you and Jess talked about Sam going to see the orca whales. Like you’d be better off saying, Tim, go open up the IRA so I can get my 1%.

Tim Baker: Right, or even more quantifiable than just saying orca whales, which is very important, is credit card debt.

Tim Ulbrich: Yeah.

Tim Baker: Or even student loan debt. I remember that question, and we answered that — I don’t know what episode it was, in one of the Ask Tim & Tim’s, and the advisor was basically saying to prolong the debt payments for the house and invest the difference. And to me, I look at that as like that is the advisor putting their interests ahead of their own. But like again, I’m seeing this more and more with new graduates, and this is something that I’m trying to crack the nut on with the offering that we have with students and residents in terms of financial planning is I’m seeing a lot of credit card debt. So if I walk into a financial advisor, typically because there’s an assumption of wealth and typically because they charge based on Assets Under Management, they don’t care to even know how to advise you on cash flowing, budgeting, debt management.

Tim Ulbrich: Do you have a will?

Tim Baker: Yeah, do you have a will? Those types of things.

Tim Ulbrich: Yeah.

Tim Baker: And I think maybe even the will is a little bit more because they want to protect the assets from the estate.

Tim Ulbrich: Yeah, that’s true.

Tim Baker: So we’re talking about the next generation of wealth transfer and the next few years is going to be incredible, but if I’m an advisor, then I’m paid more money if you put money into an IRA versus paying down credit card debt. And again, I think again, the planners, they want to be able to help their clients I think by and large. But they’re just not incentivized to do so. And I think that’s a problem.

Tim Ulbrich: And so as we talk about the cons here, I think they’re obvious. And we’ve highlighted some of them so far is that we’ve made a point of emphasis saying if you’re going to be working with a financial planner, there’s a lot of work that needs to be done to make sure that you’re working with the right planner that has your interests in mind, you’re asking the right questions about how they’re charging, fiduciary standards, do they have the right credentials? And it’s not any one of the answers to those questions is going to give you the obvious yes, this person is the person I want to be looking to work with. And one of the resources I would point our listeners to is one of my favorite books I read, “Unshakeable,” by Tony Robbins or maybe Tony Robbins’ ghostwriting team, you know, I’m not sure. But either way, he does a great job of outlining what we’ve been talking about here of the — I think he quoted maybe somewhere around 2-3% actually remain in that fiduciary category. But when you look at the wide variety of planners that are out there, the credentials that it takes to become a planner, the scope of services, how they charge, all the things that we talk about on our financial planner page at YFP, I think it can become very overwhelming to think, why am I paying for what I’m paying with these services, right? And what’s the value that I’m going to be getting from these services.

Tim Baker: Yeah, I think one thing to mention is I hear some prospective clients say, yeah, I heard you on the podcast, I’m thinking about working with you, but I’m also thinking about working with my parents’ financial planner. And one of the questions that I implore them to ask is what do they think about student loans? Because if student loans are a huge thing, again, 95% of advisors have no idea —

Tim Ulbrich: And they weren’t a big things for our parents, probably.

Tim Baker: Right, exactly. And they haven’t been trained up. So like they’ll say, oh, they just amortize our retirement. Or I heard one prospective client said that their advisor said, oh, these are no big deal. And you know, it makes my blood boil, in a sense, that we can do so much better. And the market is changing with how our economy is changing and what our financial picture is looking like. Like again, a lot of the stuff that we spend money on and that debts that our parents didn’t have, so we have to adapt accordingly, and it can be about training advisors on stock options and all that stuff that it’s still in the curriculum, but it doesn’t fit at all.

Tim Ulbrich: So just like pretty much anything else, all three of these buckets have pros and cons, right?

Tim Baker: Sure.

Tim Ulbrich: And we have people I know who have just commented in the Facebook group and reached out to us via email, we have people that are in all three of these buckets and are dominating. So I think the take-home point here is really, do a self-evaluation of where are you at and as you’re looking at investing as one part of the financial plan, which of these do you feel like really resonates most with you? Now, for those of you that are in interested in, hey, I really think I would benefit from a financial planner, I want to work with YFP and this, again, YourFinancialPharmacist.com/financial-planner. From there, you can get lots of information on what to look for, you can schedule a call with Tim Baker, learn more about him, see if that’s a good fit or not. And so I’d encourage you to check that out, YourFinancialPharmacist.com/financial-planner. Tim Baker, it’s been fun.

Tim Baker: Yeah, good stuff.

Tim Ulbrich: Look forward to wrapping this up next week. We’re going to do the Investing Q&A month of December. And again, to our community, happy Thanksgiving. We’re certainly grateful and thankful for you and the support that you’re provided. Have a great holiday and a great rest of your week.

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YFP 074: Evaluating Your 401k Plan

Posted on November 15, 2018November 2, 2022 by yfpadmin

Evaluating Your 401k Plan

On Episode 74 of the Your Financial Pharmacist podcast, Tim Church, Your Financial Pharmacist Team Member, and Tim Baker, owner of Script Financial and YFP Team Member, discuss how to evaluate your 401k plan and share information to help you understand some of the fees associated with it.

Summary

On this episode of the Your Financial Pharmacist podcast, Tim Church and Tim Baker discuss 401k employee sponsored plans. It can be overwhelming for new graduates or someone changing jobs to orient themselves with presented 401k options as most people have 20-30 investment options to choose from. All 401k plans aren’t created equal and it’s important to look at all fees that are being charged, even ones that aren’t seen, to determine which plan best suits you. If you need assistance analyzing possible plan options, Bright Scope is an excellent resource to help you find information.

Within a 401k plan, the rules of contribution and distribution are set by the IRS, however each organization has its own set of guidelines for the employee match and possible vesting requirements. For 2018, an employee can put $18,500 into their 401k and you and your employer can contribute $55,000 combined. Tim Baker discusses the difference between an employer match and vesting. A company encourages you to put money into your retirement account and also receives a tax reduction for the money they contribute. Employer matches vary from company to company, but it’s important to take advantage of them because the company is essentially giving you free money. Vesting helps mitigate turnover in a company and refers to how much ownership you have in a 401k. Companies may either offer graded or cliffed vesting.

If you are going to be leaving a job or if you have a new job that has a different 401k plan or provider, Tim Baker explains that there are four possible options to take: do nothing (let the 401k sit), liquidate the fund (cash it out), transfer to a new plan (move old retirement plan to a new one), or roll it over to an IRA. Typically, the best option is to roll it over to an IRA.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 073 of the Your Financial Pharmacist podcast. Excited to be here alongside, in-person, with Tim Church to talk about prioritizing your investing for the future. Tim Church, how we doing?

Tim Church: Doing great, Tim. Glad to have you down here. How’s the weather feel?

Tim Ulbrich: It’s unbelievable. So here we are, mid- to end of October, came from northeast Ohio, below freezing weather, and they had to de-ice the plane before I got here. Came, landed, walked out, and I was overdressed, too warm for the day, saw the palm trees, so excited to be here. And Andrea has been an incredible.

Tim Church: Well, thanks. That’s basically why I’ve been down here the past seven years if you haven’t figured that out yet.

Tim Ulbrich: Yeah, for those of you that don’t know, Tim grew up in the Snow Belt and has made the wise decision of coming down south, where it’s a little bit warmer. So I get it now. I see what you’re doing here every day. So here we are, we’re talking about investing in and prioritizing in terms of the means in which people are investing. I think this is a long overdue topic. We acknowledge we haven’t done a ton on the topic of investing on this podcast, a little bit here or there. We did Investing 101 back at the beginning of the podcast, but that’s what this month-long series is all about. And probably one of the most important questions, most frequent questions we get is, so with all these options available, where should I actually be putting my money? And in what order? Especially for those that are coming out as new practitioners. So long, long overdue. Would you agree?

Tim Church: Yeah, definitely. I think so. And I think there’s a lot of great questions and things that come up with investing. And especially as you guys talked about in the Dave Ramsey episode, what comes first — investing versus paying off student loans and other debts. But I think this topic that we’re talking about just in terms of, OK, you’ve got these retirement investment options available. How do you prioritize and how do you say, OK, this is the first one I’m going to go after. And then after I do that, I’m going to go to the next one. And there’s a lot of questions that come up with that.

Tim Ulbrich: Absolutely. And I know as a new practitioner, new grad, I struggled with that myself, not only where does this fit within the other context of other goals, but also should I be maxing out my employer account? Everyone says Roth IRAs, putting money into those. I get emails about these brokerage accounts, what should I be doing and in what order? So we’re going to talk about that and give you our opinion on that topic. But I think it’s first important to start with what are the key principles of retirement savings? And as you and I were talking about this episode, we talked a little bit about inflation, taxes, and the power of investing early and often. So give us a little bit more information around those principles of investing.

Tim Church: Alright. So if you look at inflation over the years, over several decades, it’s typically 2-3% per year, which most savings accounts are not paying that, right?

Tim Ulbrich: Absolutely.

Tim Church: And so when you look at that, you have to say, OK, what are the other options that are available to me that I can use to not only get a better return to beat inflation, but the other consideration is how do you do that with paying the minimal amount of taxes that you can so you’re keeping most of that money that’s growing?

Tim Ulbrich: Yeah, and I think just to add to that, the one advantage that young pharmacists have is that you’re coming out with a great income, typically — many graduates are coming out in their mid- to late 20s, you’ve got lots of years ahead of you in terms of investing a significant percentage and portion of your income and allowing that time for compound growth. So I like to think of inflation as kind of this gnawing thing that is just always coming after you. And I think it’s important to do that. And I read a couple books several years ago that if you really look at the impact that inflation can have on your finances, it’s something we don’t think a lot about, almost like fees on investment vehicles and other things. So inflation, taxes, and starting early and often. Now, Tim, it’s important that we talk about for everybody listening to this podcast, their personal situation is going to be different. And here, we’re going to talk specifically — almost in a silo of investing, right? And we know that those listening, some are looking at $100,000-200,000 in debt, other people are out of debt, personal life situations that are very different, all types of things. And so here, we’re really looking at if somebody has disposable income and they’re looking to invest that for retirement, in what order are they going to do that, right? So when I say if somebody has disposable income, what are we referring to there?

Tim Church: Basically, you’re talking about money that you have after you’re paying your expenses every month. So anything that you have to pay for your bills, how much it costs to live, what is that additional amount of money that you have that could be going towards investment? Many people, like you said, are flooded in debt, and so you could be listening to this episode, and saying, ‘What disposable income do I have? I’m just trying to survive. I’m trying to make it.’ But that’s really where we’re getting at is let’s just assume you’re going into this episode that you have money to invest to put in retirement accounts. Now, if that’s who you are listening to this episode and saying, I don’t have any money to put in investments because of the bills and things I have, well, it’s a pretty simple equation. That in order to increase your disposable income, you’ve got to increase your earnings, get a side hustle, work more hours, or you’ve got to decrease your expenses. And so that’s where really budgeting comes into play.

Tim Ulbrich: Absolutely, yeah. And I think that idea of it’s a simple equation — you either increase your earnings or you decrease your expenses. And just a shout out to the work you’ve been doing with the side hustle series, giving people ideas. We’ve got more content coming there. And just before we jump into the buckets of investing, I think it’s important that we are not — and we’ve had this conversation multiple times on the previous episodes — but we’re not going to have a conversation about should I be investing or should I be paying off my debt? And as I mentioned before, one of my concerns with an episode like this where we talk about investing or even the month-long series in a silo is that this is one part of a comprehensive financial plan. And you’ve got to look at the whole picture. So if you want more information on our thoughts about investing while in debt and how does that fit in with emergency funds and other life goals, head on over to episodes 068, where Tim Baker and I tackle that, where we reviewed the pros and cons of the Dave Ramsey plan. And I’m sure that’s evoked a lot of emotional reactions because it usually does.

Tim Church: Yeah, that was a great episode. And I think you guys did a great job talking through some of the controversy, but also some of the positive things that are in that plan and some of the behavioral aspects of it. And so when we’re talking about these major buckets, things that you can invest in for retirement, one of the things that came to mind, Tim Baker, he recently did an investing webinar. And he showed this image of actual buckets, and he was naming the buckets and putting one in. And I don’t know if when you were a kid, Tim — do you ever remember that show, Bozo the Clown? Do you ever remember that?

Tim Ulbrich: Yeah, yes.

Tim Church: And in that show, at the end of the episode — I think it was at the end — they actually were throwing ping pong balls into buckets. And they progressively — but there was a specific order that you had to put them in. And for some reason, he really evoked that memory when he was showing that figure. But it’s cool because it’s really, that’s what we’re talking about here. We’re talking about, OK, what’s the first bucket that you’re going to put your money toward? And then how do you go to the next level and what do you do?

Tim Ulbrich: And I think the visuals he used as well with the buckets in that presentation, it was a good reminder that these are vehicles and not the investments themselves. That’s an important point. We’ll talk more throughout this month. But when we talk about 401k’s, 403b’s, IRAs, etc., those are essentially the tax advantage shield in which you’re investing. But within that, you’re going to be choosing the individual investments, whether that’s stocks, bonds or mutual funds, etc. So let’s jump into these buckets. So probably for the vast majority of our listeners, they’re going to be presented by their employer with an option of a 401k, a 403b and what’s referred to as a TSP, which is a VA employee, right, that’s you.

Tim Church: Right, that’s the Thrift Savings Plan.

Tim Ulbrich: The Thrift Savings Plan. So we’re going to group these together because I think we throw around these words like we assume everyone understands exactly the implications of them. So let’s review quickly — a 401k, a 403b, and a Thrift Savings Plan, these are employer-sponsored retirement plans. So obviously, in order to get this benefit, you’re working for somebody. They’re going to offer this. And at what level they’re offering this benefit in terms of a match and what they can contribute is all over the place. And I think one of the things that we’ll talk in future episodes is as you’re looking at different jobs and comparing benefits and things, it’s a key thing to be looking at what is the benefit that you have? And I know the VA, that’s a pretty lucrative benefit on your TSP, is that correct?

Tim Church: Yeah, through the TSP — a couple different reasons. No. 1, they do offer a match up to 5%. But one of the other things is that they have very low fees in the funds that they have available. And I know that, Tim Baker always talks about that when you’re looking at different options within your 401k, is that you have to pay attention to those fees because even if you’re not seeing that change in your accounts, like over time, it can really eat at the earnings that you have.

Tim Ulbrich: Absolutely. And so let’s talk first — we’ve got 401k’s, 403b’s or TSPs, let’s talk about the traditional variety first because what has complicated this whole equation is that — you know, I remember when I came out of school, we were looking at primarily a traditional 401k or a Roth IRA. And now, we’ve got hybrids of these vehicles such as a Roth 401k or a Roth 403b, which I think has made this very complicated and probably make it even difficult to talk about it on the podcast in something like this. It’s good for a visual. So when we talk about a traditional 401k or 403b, essentially what we’re referring to there is that you are deferring the payment of taxes to the future. So those are a deductible in terms of income taxes today. You are not paying taxes on the contributions today. But when you go to withdraw those funds, no earlier than the age of 59.5 without penalty — and there’s a required minimum distribution at the age at which you’re beginning to have to force to take out that money — the maximum amount that you can put in as an employee into these accounts in $18,500 in the year of 2018. We’ve seen that climb each year by $500 or so. Now, there is an additional amount that you can put in after the age of 50. And that is $6,000, which essentially is a catch-up provision that allows you, if you’re behind in savings, to be able to save more beyond that $18,500. Now, what this does not include, which is a really critical, important piece here, is that $18,500 does not include the portion in which your employer would provide in the form of a match. Now, if you’re not familiar or haven’t heard of that term, match before, as Tim gave the example with the VA, it’s a 5% match. Essentially, 5% of his salary that he contributes, the VA will contribute dollar-for-dollar. And this is all over the place with employers. Some will do a 3% match, some will do a 6% match, some will do a dollar-for-dollar, some will do 50 cents on the dollar. But essentially as you’ll see when we get into the priority of investing, the match is free money. And that’s really the critical piece here. So why is this number important? Because what we’re referring to is that you obviously are growing money tax-free for a period of time. But ultimately, when it comes to being pulled out, you’re going to be paying taxes on that money. But if you make $100,000 — just out of simplicity — $100,000 per year, and you contribute $15,000 into your 401l, essentially you are going to be paying income taxes on $85,000. So it’s reducing your taxable income today. That money is growing all along, and you’re not going to pay taxes until the point you distribute it. And obviously depending on the income tax bracket you’re in and what the income tax bracket rates are at the time, you’re then going to be slapped with an income tax bill in the future.

Tim Church: Yeah, and I think that’s a good point to bring up is that when you’re looking at those account balances, somewhat really of an illusion when you’re looking at that bottom line if all of your contributions are traditional because it’s going to get taxed eventually, it’s just at what level is going to depend on where you are at the time when you’re making those withdrawals. Versus the Roth version — so many employers now offer the Roth version, and that’s even for the Thrift Savings Plan, where basically, you’re going to make contributions after-tax. So you’ve already been taxed on your income, and you’re going to allow those contributions to grow tax-free. So when I say tax-free, it basically is at the time at which you’re eligible to make the withdrawals, you’re not going to be taxed on that money. Now, that’s a whole separate animal in terms of determining what is best for you. Should you do traditional contributions? Should you do Roth contributions? And there’s a lot of different factors that can play into that, such as what your projected tax bracket’s going to be at the time of retirement or eligibility. And that could be a couple different things there. Does the government change the tax brackets? But then also, what is your projected income going to be? And things could obviously change with your job, so it’s really sort of difficult to predict everything. But there are some simulations out there online where you can kind of go through that.

Tim Ulbrich: And I think your point earlier about considering the tax implications is so critical to retirement planning because we often — and we’ve talked before on the podcast about a nest egg, how much you need at the point of retirement. Well, that number, if a majority of that’s in a traditional 401k, for somebody else that’s maybe saved a lot in a Roth IRA, which I’m going to talk about here in a minute, how that’s going to play out when you’re in retirement is very different in terms of the total amount that you have and how it’s going to be taxed. So I say that because I think the tax implications are a key planning piece as you’re thinking about exactly how much do I need at the point of retirement, and what’s going to be taxed? And what’s not going to be taxed when you get to the point of withdrawal? So again, 401k, 403b, TSP, max contributions in 2018 are $18,500 for the majority of people that will be listening to this podcast. And that number I think will be important because you often hear people say generally, to meet your retirement goals, you’re probably looking at somewhere around maybe 15-20% of your income that needs to be saved. So if you figure out the numbers, a pharmacist making $120,000, obviously you’re starting to get that point with the 401k, 403b, but there’s other vehicles that we’re going to talk through right now. And let’s go to that next one, which is an IRA. So Tim Church, IRA, Individual Retirement Arrangement, this one has different figures, different numbers, but also has a traditional form of it as well as a Roth form of it. So talk us through that one.

Tim Church: Correct. So this is something that anybody with an earned income is eligible for. They can contribute up to the max, which as of 2018 is $5,500. And there’s an extra $1,000 if you’re 50 or olders, so $6,500 if you’re 50 or older. But anyone who is earning an income can contribute to this. And what’s important is this is something outside of your employer. So this is something that you set up on your own, either through a brokerage account — but the other thing here too is besides what you’re able to contribute, if you’re a married and you have a non-working spouse, they can also contribute up to that limit. So technically, if you’re less than age 50, your household if you’re working and you have a non-working spouse, you can contribute up to $11,000 per year.

Tim Ulbrich: Yeah, and I think that’s an important provision. I know for Jess and I, so Jess is at home with the boys, she’s not working. But to your point, a non-working spouse, so for us, when we talk about a Roth IRA, we both contribute that $5,500 per year to be able to make that contribution. So this has both a traditional version as well as a Roth version. And again, I think that’s where it gets confusing when people hear Roth 401k, Roth IRA. So traditional IRA looks very much — obviously the numbers are different, the $5,500 per year — but looks very much tax-wise like a 401k or 403b in that you are — if you meet the income qualifications — you are deferring the payment of taxes to a later point in time. You know, many pharmacists don’t qualify in terms of the income limits for a traditional IRA.

Tim Church: Right. And if you look at the IRS has some different rules depending on whether you are covered by a 401k or whether you’re not covered by a 401k. But if you are, the phase-out if you’re single is $73,000. And for being married filing jointly, it’s $121,000. So if you make above those limits, you actually can’t deduct the traditional IRA contributions. And so that kind of leads into well then why would I ever do that, right?

Tim Ulbrich: Absolutely, yeah. And I think that we’ll talk in a minute about the back-door Roth IRA, and we’re going to actually in our upcoming Q&A episode even talk a little bit more about it. But when we talk about a Roth IRA, and I think why Roth IRA’s have all the rage these days, rightfully so, is that you are paying taxes today, that money is growing, but you are never paying taxes on that money again in the future. So if I were to contribute up to the max, $5,500 per year in a Roth IRA, and Jess did the same, that’s money that is being contributed that we’ve already paid our taxes on. So got my paycheck, paid taxes, then I make the contribution into the Roth IRA. I invest that money, it grows at some percentage every year, hopefully that compounds, let’s say that turns into a half million dollars, I’m at the age of 70, I start to withdraw that money, I’m no longer paying taxes on that money because I already paid taxes on the money before I put it into the account. Now, this gets into the whole debate about, well, would I be better off putting money in a Roth IRA or a 401k, and that gets back to the point that Tim Church made in terms of the tax brackets and what’s going to happen in the future, and largely, I think most people would agree we probably don’t know at this point in time. Now, this also has income limits to directly contribute. So for those that are single, the phase-out of contributions at $135,000. For those that are married filing jointly, there’s a phase-out that’s at $199,000. And so this is where you’ll hear people and you’ll hear pharmacists say, ‘Well, I really like that idea of tax-free growth, I pay taxes now, I’m not going to pay taxes in the future. But I exceed that income limit,’ and insert the back-door Roth IRA. Now, we could have a whole separate episode probably about the back-door Roth IRA. There’s some great tutorials, resources online. I know the White Coat Investor — just shout out to what he’s done — he’s got some great tools and resources about how people can go through that process. But essentially, what you’re doing in a back-door Roth IRA is you’re contributing to a traditional IRA, and then you’re converting that to a Roth component. And so we’re going to come back to that in our Investing Q&A. But all that to say if you’re somebody that exceeds the income limits of a Roth IRA, that does not mean you cannot take advantage of the benefits of a Roth IRA because of that back-door components.

Tim Church: Right. And I think the key is to keep in mind that it really is about the timeframe at which you make that conversion and whether there’s any gains on the money when you make the contributions to a traditional IRA. So if there’s any gains in between that conversion, you’re going to pay taxes on it. The other thing is too is that if you’ve already had past traditional IRAs, and you didn’t convert them, there can be some tax implications with that as well.

Tim Ulbrich: You know, the other thing I love about Roths, which I don’t think is talked about enough is that they do not have the forced required minimum distribution that come with the 401k or 403b. So if somebody’s out there thinking, you know what, maybe I’m going to be working until I’m 75 or 80 or maybe I have other sources of wealth, real estate investing, businesses, whatever, and you think you may not need that money at the required minimum distribution age in the early 70s that you’d be forced to take in a 401k or 403b, to me, that’s one of the great advantages of a Roth IRA, that you continue to let that money grow, and you don’t have to take it out. Alright, we’ve got another big bucket here, Tim, in terms of the HSA or the Health Savings Accounts, which we talked about in Episode 019 in details for those that want to go back and look at those. But give us the down-low on HSAs. I know you have this benefit through the VA, but this has the lethal triple-tax benefits, which are talked about often. So why are HSAs so powerful?

Tim Church: Well, exactly just like you said. It has the triple tax benefit. But yeah, this is one of the cool things that I started for my wife and I for this year for 2018 because I didn’t really know much about it before and what the implications were. But just going through as we talked about through YFP, I mean, it really has a lot of power. And the name itself is really a misnomer because you look at that and you say, Health Savings Account, so it’s just a regular savings account that I can use to pay health expenses, right? Well, not exactly. It can actually be an investment vehicle. It’s really an investment account in disguise. It really depends on your intentions or how you’re going to use it. And for some of these accounts, you have to have a certain amount before you can unlock those investment options. So for example, for me, is I had to have $2,000 in the account before I was allowed to contribute anything towards an actual investment.

Tim Ulbrich: Does that vary by who offers the accounts?

Tim Church: Yeah, I think it does. I don’t believe that that is an IRS stipulation. I think it does depend on the bank that is servicing the HSA.

Tim Ulbrich: I thought I saw that on the Facebook group, people were talking about, well, ‘with my employer, that number is different,’ so yeah.

Tim Church: Right. So like we were talking about is, how you’re going to manage this account really depends on that intention. So you could be using this account to strictly pay for medical expenses, and the benefit of doing that is you’d be paying for them pre-tax, which is not a bad thing. I mean, that’s a great way if you have anticipated medical expenses and you want to be able to pay for them with some tax efficiency, then that’s great. But you can also look at this from the perspective as I’m going to use my HSA as an investment vehicle. So you’re going to say, I’m going to pay for all of my medical expenses out-of-pocket, and I’m just going to invest the rest, and I’m going to treat it like an IRA or I’m going to treat it like my 401k in that my goal is to beat inflation to actually get some compound growth.

Tim Ulbrich: And is the thought here if you’re going to pay for your medical expenses out-of-pocket now and really let that grow, it sounds like it’s got the benefits of a Roth IRA plus you’re not paying taxes now. It’s got that, you know, the highs of the 401k, 403b and also the highs of the IRA. But at some point, are you forced to use those on medical expenses?

Tim Church: No, so it’s really kind of interesting about the account. So just to jump into that triple tax benefit. So the first one is that it will lower your adjusted gross income. So you can — any contributions you’re making to the account are tax-deductible.

Tim Ulbrich: Like a 401k and 403b.

Tim Church: Correct — if they’re traditional, correct.

Tim Ulbrich: Yep.

Tim Church: And then that account, any contribution that you put in are going to grow tax-free. Now, the withdrawals are tax-free as long as you can prove that they’re being used to pay for a qualified medical expense because otherwise, you’re going to pay a 20% tax if you take the money out before age 65 for a non-qualified expense. Now, if it’s after age 65, to my knowledge, there’s no additional penalty, there’s no additional tax. You basically, it’s like a regular retirement account. Now, here’s the caveat. So — and this is one thing that I didn’t know until I really got into it is that let’s say you contribute to an HSA over 20-30 years. And those accounts are growing, you’ve been investing them aggressively, and you’ve got some great growth on them. And let’s say you’re 60. Can you pull out some of that growth that you’ve had, some of that money that’s in there, but without paying taxes on it? And you can because the caveat is that if you keep track of all of your medical expenses you paid over that time that you’ve been contributing and can prove that you’re essentially reimbursing yourself, you’re not going to have to pay those taxes. But the key is really, you have to keep a good record of those receipts. What I’ve been doing is basically putting anything I have into the cloud, into Google Drive, and doing that for every year so I know exactly what I’ve paid and what I can technically claim as being a reimbursable expense.

Tim Ulbrich: Sounds like you need to develop like an HSA tracking expense app.

Tim Church: Yeah, there’s probably something out there.

Tim Ulbrich: Maybe it’s the next business project. But so unfortunately, not everybody has these available. But for those that do — and we’ll get into this prioritization — you often hear people putting these at the level of, OK, take your match, and then you think about an HSA. We’ll come back to that, but the reason that is and why they are so highly regarded in terms of priority investing is because of the tax benefits that you were just talking about. But not everybody qualifies. I know I haven’t with the employers I’ve worked with. In the state benefits, we didn’t have what was considered a high-deductible health plan. So to qualify, you have to be enrolled in a high-deductible health plan. What basically is a high-deductible health plan? Well, this year, for an individual, it’s having a plan with a deductible of at least $1,350. And for a family, that deductible is at least $2,700. Now, I think what we’ve seen with health insurance benefits pushing some of the costs back into the consumer and obviously increasing deductibles, we’ve seen more people being eligible for these. And I think it’s a great time to talk about this because of the time period around open enrollment. So if you’re somebody saying, do I have a high-deductible health plan? Do I not? Does my employer offer an HSA or not? Now is the time to look to see where this may fit in the context of your prioritization of investing.

Tim Church: And I would say that the two major reasons that my wife and I, we decided to switch from a traditional PPO health plan to a high-deductible health plan, really for the opportunity to contribute to the HSA but also the other benefit is that high-deductible health plans typically have lower premiums. So with the old plan, I was paying a lot more each month, but I wasn’t using any of the insurance that I was paying for. So if you’re relatively healthy, I think it’s a great option. So if stuff comes up, you might be paying some money out-of-pocket, but again, you wouldn’t have had that option otherwise to even contribute to an HSA. And you have to really look in the context of what your premiums are.

Tim Ulbrich: That’s a great point. And I think what you just said too speaks to the power of the emergency fund and having an emergency fund because if you can afford to take on that risk of, you know, maybe I’m healthy now, something comes up unexpectedly, I get slapped with a huge payment. Then ultimately, you’re ready to take that on, and you can afford it without feeling that risk of that. So what we didn’t talk about here with HSAs is the max contribution amount. So we talked about it with 401k’s and 403b’s or the TSPs, we’re looking at $18,500. We talked about with the IRAs, $5,500. What about the HSAs?

Tim Church: So as of 2018, if you’re single, it’s $3,450. And then if you’re self plus one or family, it’s $6,900. And an additional $1,000 if you’re 55 or older for catch-up. And this — just like the other accounts — this typically changes every year, every couple years.

Tim Ulbrich: So what I like, if you start to string these together between a 401k, a 403b, a Roth IRA or a traditional IRA, if you qualify as well as if you have access to an HSA, you can start to get to a point where you’re saving a significant percentage of your salary, probably more than many listening, especially in the contest of other goals. But nonetheless, you have the option to be saving a significant portion of your salary that has tax advantages. And I think that’s key because one of the last things that we want to talk about here is the taxable or brokerage accounts. And so with the taxable brokerage accounts, why I said that previous point I think is important is that I see a lot of new graduates getting ads and promotions for some of these apps and tools and things that are out there. But they’re investing outside of the tax-advantaged accounts. And so I think as we talk about taxable or brokerage account, where we see this fit in is once you’ve exhausted all your other tax-favored retirement plans, this probably is the final option that you’re looking at because of the loss of tax-shield capital gains taxes that you have to pay, etc. So good news here is if you get to the point where you max out everything and you’re looking for options, there’s lots of options out there in which you can invest. But don’t get too far ahead of yourself if you’re not taking advantage of the match or other tax advantages that we’ve talked about previously. So last one quickly before we talk about prioritization of these buckets would be the SEP IRA. And I think this is timely because of your side hustle series. And so maybe we have people out there that own their own business, are starting their own business, want to, and to me, when I see information about a SEP IRA, that makes me want to start some businesses because you’ve got some really good advantages with retirement options. So what is a SEP IRA? And what flexibility and freedom does it give you in terms of retirement?

Tim Church: So a SEP IRA stands for a Simplified Employee Pension. And basically, if you’re self-employed, you own your business, you have this opportunity, this benefit available to you. And this could be in addition to a 401k that you have available. So this could be something that you’re doing on the side, an additional business you own. But one of the advantages is that there’s a lot more money you could potentially contribute versus what’s available with a 401k or IRA. I mean, it’s a huge difference. But obviously, you have to be making that much money up to that certain point to be able to. So right now, what the guidelines are, is that you can contribute up to the lesser amount of either 25% of your compensation or $55,000. But when I see those kind of numbers — like you’re shaking your head here, Tim — that just gets people fired up, I think, to say, hey, what if I was able to bring in an additional amount of income that I’m no longer capped out at this 401k, this IRA max that’s there.

Tim Ulbrich: Yeah, reason No. 403 to start a side hustle, right? I mean, when you see those numbers, and it gets me fired up even for the work that we’re doing that to your point, it’s dependent on compensation, obviously, you mentioned the lesser of those numbers. But in addition to other retirement vehicles, you can obviously make some great headway if you’re in a position to do that. OK, let’s jump in now. We’ve set the stage, we’ve spent a decent amount of time talking about the buckets, which is important because before we can talk about prioritization, we have to know what we’re talking about. What is a 401k? What is a 403b? What is a Roth? Now, a couple disclaimers here that I think we have to talk about because we’re probably going to take some flack regardless, which is OK. But not everyone is going to agree with the prioritization that we’re talking about. Not necessarily that there is one right way in terms of order of investing. Now, we’re going to give a framework on that that we think many listening will follow, but to my point earlier, everybody has different personal situations in terms of income earned, in terms of other financial priorities, in terms of other goals, when you want to retire, all types of variables that may come into play in terms of how you actually execute this.

Tim Church: Yeah, and I think like there’s a lot of people out there that are really into real estate, and they look at that as even taking priority over some of these retirement accounts because either they’re all-in or they’re confident that they’re going to get good returns there. And I think that’s great. I think for some people, that is an awesome option. But I think here, like you said, we’re talking in the context of, OK, let’s focusing in on these retirement accounts and just really try to figure out, well, what is the best order?

Tim Ulbrich: Yeah, and I think the other situation I think about, Tim, is those that are on fire about the FIRE moment, the Financial Independence Retire Early, waiting until 59.5 to access your accounts may not be the goal they’re after. And so you know, obviously again, this to me really speaks to the power of sitting down with somebody like Tim Baker and financial planning and talking about what are your goals and then putting out a map to be able to achieve those. The last thing I have to say here as a disclaimer before we jump into the prioritization — if Tim Baker was here, he would make me say this — is what we are saying is not financial advice, right? So we don’t know of the thousands of you listening, we don’t know what your own personal situation is. So we’re looking, again, down the lane of investing. If you have disposable income to invest, this is the priority we think you should consider. But we’re not saying, run out and do this tonight. You’ve got to think about the context of the plan. OK, No. 1 — I think everyone agrees with this. I mean, maybe there’s a person or two out there, maybe? I don’t know.

Tim Church: I haven’t seen — so what I was looking at to see what else is on the Internet and some of the other bloggers, I think this is one thing almost everybody I think actually agrees on.

Tim Ulbrich: For how much disagreement there is.

Tim Church: Right.

Tim Ulbrich: So No. 1, as you may have guessed it, is the employer match, right? No surprises here, most people agree on this. You are getting free money from your employer. If you don’t take it, you’re leaving it on the table. And so we even believe, we talked about this in the Dave Ramsey episode, Episode 068, the match has to be a priority in your financial plan, even in the context, I think, of student loan debt — maybe a different conversation depending on personal situations, but you have to take that money. Now, for you, you mentioned that 5% match. So let’s just use a hypothetical. Somebody’s making $100,000, they put in 5%, they get 5%, that’s $10,000 of tax-deductible retirement savings that are going to grow over time. You’re putting in 5, your employer’s putting in 5. And again, as I mentioned earlier, you’ll see this in different situations in terms of the percentage of salary match. It may be 5%, 6%, 3%, no percent, dollar-for-dollar, $.50-per-dollar. And so it’s all over the place.

Tim Church: Or what you get. What have you gotten at schools? You’ve gotten like 14%?

Tim Ulbrich: Well, I’m unemployed right now.

Tim Church: Oh, OK.

Tim Ulbrich: But you know, yeah. So you know, I’m lucky to work in the state teachers’ retirement system, which we actually are forced to put in. I remember when I was in the grinding out of paying off debt, it was painful. But we are forced to put in 14%, and there’s some fees and things that shakes out to that they match around 10%. So it’s kind of a forced combined contribution of about 24% total, which is really nice. But the downside is I actually don’t get any Social Security, so I won’t receive that Social Security benefit in the future if it’s there. But we’ll see. So No. 1, employer match. Now, No. 2 is HSAs or Health Savings Accounts. Take the employer match, and I think what often, people do right after the employer match is they just go up and maybe max out their 401k. I think what you’re making a point here is maybe after that match, move into the HSA if you have it available.

Tim Church: Yeah, and I think — but even going back to is that a bad option of putting more money in your 401k? So I think like in the context, which is interesting here is that really, even if you’re switching up the order on some of these, like really, it’s still not a bad decision. The decision to actually put money into the accounts to grow is a good thing. But I do think, you know, the HSA with that triple tax benefit, it’s hard to argue against that, right?

Tim Ulbrich: Absolutely.

Tim Church: I mean, it’s such a powerful tool. I think Dr. James Daly of the White Coat Investor, he calls it the Stealth IRA, which is pretty cool.

Tim Ulbrich: I love it.

Tim Church: Because it’s basically like you’re getting the opportunity to contribute to another IRA if that’s your intention behind it. But it can really be a powerful way to get some additional retirement savings.

Tim Ulbrich: I do have HSA envy. I don’t have access to an HSA, so unfortunately, yes, great match, but I wish I had that HSA option. So No. 1, we said employer match. No 2, HSA triple tax benefit makes a whole lot of sense.

Tim Church: If available, right? Because not everybody’s going to have that.

Tim Ulbrich: Right. High-deductible health plan, you may or may not have it. Now, No. 3 here, we’re getting into the IRA. And really what we’re getting at is the Roth IRA component. And obviously, for those that don’t meet those income qualifications, they would have to do a back-door Roth IRA. But what we really want to take advantage here is the tax-free savings that are going to happen over time. You’re paying taxes today, you put the money in, it grows tax-free, you go to pull it out, you’re not paying taxes anymore. So even though this doesn’t have the same maximum as the 401k, 403b’s, you’re not going to be able to have these be equally weighted, pre- and post-tax, right? $18,500, $5,500. To me, I see this as the way that you’re balancing out getting to the point of retirement, you’ve got some free and post-tax savings. So if I’m maxing a Roth IRA at $5,500 per year or back-door Roth IRA to get there, and then I’m putting in $18,500 in a 401k or 403b, of course I’m going to have more in accounts that are going to get taxed than I am in accounts that are not going to get taxed. But I’m balancing those out a little bit.

Tim Church: It also depends too if you have a Roth 401k, then also that could be after-tax contributions, so it’s possible you could have both. You could do the Roth IRA and a Roth 401k and basically putting everything in after taxes and then letting your accounts grow tax-free. I think going back to what we talked about is that since most pharmacists are not going to get the deduction if they contribute to a traditional IRA, it sort of makes sense to always go to the back-door Roth. Well, I think one of the interesting questions — and this has come up before — is why would I not just go up higher on my 401k versus contributing to an IRA? And really, you know, the way I look at that is either one is still a great option in terms of the contributions. The difference, really, is that with the IRA, this is outside of your employer, which means a lot more options.

Tim Ulbrich: Yeah. And that’s why you hear — we won’t get into it here — but that’s why you hear when you switch employers, there’s value in rolling that over into an IRA where you can unlock those options. And one of the things I’ve seen with Tim Baker’s help is the variety of what people have available to them in an employer-sponsored 401k or 403b, both options and fees, good or bad, is all over the place. Some have very limited options, very high fees, and maybe their employer doesn’t even really recognize or acknowledge the value. Others are maybe working with a Fidelity, Vanguard, whomever, have tons of options, can get low-fee accounts. So this really is an individualized decision.

Tim Church: I totally agree because when I look at the Thrift Savings Plan, one of the benefits of a Thrift Savings Plan, like we talked about earlier, is there’s such low fees on that. And so with a situation like that, I mean, you could make the argument that either one is going to be fine. But if I’ve got really low-fee options that are getting great growth, then I may go and try to max out my 401k or increase prior to going to the IRA.

Tim Ulbrich: And I think your point is a good one. At the end of the day, we’re splitting hairs, right? If you’re having this debate, there’s lots of opinions, lots of nuances, but at the end of the day, you’re doing a good job, you’re being intentional, you’re saving for the future. I tend to favor the prioritization of really maxing out the Roth component before I go back to max out the traditional 401k because of what I mentioned earlier and having that balance of pre- and post-tax, but again, people have different answers on that based on what they think is going to happen in terms of the tax component. So just going back in order here — your employer match, HSA, IRA component, we talked specifically about the Roth component of an IRA or a Roth 401k, right? And then going back to your traditional 401k, maxing that out to the $18,500. Now, if you get to this point, and you’ve taken an employer match, you’ve maxed out an HSA if you have it, you’ve maxed out the IRA, and you’ve maxed out your 401k, you’re crushing it.

Tim Church: Yeah, I mean, that’s pretty awesome. I mean, I’m not quite there yet. But it really is encouraging to see those numbers as a goal, really, to say, hey that’s where I want to be.

Tim Ulbrich: When you put those numbers together, we’re talking about $18,500, another few thousand, another $5,000 — you’re saving a significant percentage of your salary, looking at several million dollars with compound growth over 30-40 years. Now, after we max out the 401k or the 403b or the TSP, then obviously, if people have access to a SEP IRA, they’re going to take advantage of that. Now, after Step 5 here…

Tim Church: Right, that would depend if they have some kind of additional income or potentially they don’t work as a W2 employee, and their main business or their main job is as an employer or a small business. So that actually could be somewhat reversed depending on the situation and depending on what kind of job you have.

Tim Ulbrich: What you have available, yes. I think what we’re doing here is — before we get to the last one, which we’re calling them brokerage accounts, which as I made the point earlier, these don’t have the same tax advantages that all these others do. So what we’re advocating for is really maxing out the opportunities you have to save in tax-advantaged vehicles and then ultimately if you’re still looking to save more, personally I’d probably advocate for maybe some real estate investing, some business stuff, other things before even brokerage accounts. But you’ve got lots of options available.

Tim Church: You’ve got lots of options. And the other thing too is as long as you’re not continually trading fees and different things like that, I mean, capital gains tax is actually still tax efficient versus some other things that are out there that you’re going to get taxed ordinary income.
Tim Ulbrich: Absolutely. Fun stuff. We covered a lot here, packed full of information. I think this is one we’re going to hopefully go back and say, ‘Hey, you got questions about the different investing buckets, prioritization, go back to Episode 073, we’ve got some great information.’ And this is a reminder, for those of you that haven’t yet done so, if you could leave us a review in iTunes, if you like what you heard, or whatever podcast player that you’re listening to, we would greatly appreciate it. Also, if you haven’t yet done so, make sure to head on over to YourFinancialPharmacist.com, where we’ve got lots of resources, guides, calculators, that are intended to help you as the pharmacy professional on your path towards achieving financial freedom. Tim Church, this has been fun and looking forward to coming back and finishing up the series.

Tim Church: It’s been great, Tim.

Sponsor: Before we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to again thank our sponsor, PolicyGenius. Now, you’ve heard us talk many times before on the show about the importance of having a solid life insurance plan in place. And while we know that life insurance isn’t the most exciting or enjoyable thing to think about, actually having a life insurance policy in place is a really good feeling. And PolicyGenius is an easy way to get life insurance online. In just two minutes, you can compare quotes from the top insurers to find the best policy for you. And we know that when you compare quotes, you save money. It’s really that simple. So if you’ve been avoiding getting life insurance because it’s difficult or confusing, give PolicyGenius a try. Just go to PolicyGenius.com, get your quote, and apply in minutes. You can do the whole thing on your phone right now. PolicyGenius, the easy way to compare and buy life insurance.

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