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YFP 075: DIY, Robo or Hire a Planner?

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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

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.

refinance student loans

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

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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.

refinance student loans

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.

refinance student loans

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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YFP 073: How to Determine the Priority of Investing

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How to Determine the Priority of Investing

On Episode 73 of the Your Financial Pharmacist podcast, Tim Ulbrich, founder of Your Financial Pharmacist, and Tim Church, YFP Team Member, continue a month-long series on investing by talking through the various retirement/investing options available, key principles for retirement savings, and how to prioritize investing. The figure below summarizes the episode and lists the 2019 annual contribution limits for the most common retirement accounts.

Summary

On this episode, Tim and Tim discuss the priority of investing in retirement and other accounts. Tim Church mentions savings accounts aren’t able to pay the amount that inflation rises each year (2-3%), so it’s important to think about other options on how to beat inflation while paying a minimal amount of taxes. This episode focuses on using disposable income to save for retirement.

Most listeners will be presented with the options of 401(k), 403(b), or TSP (Thrift Savings Plan) and will be offered matches that vary employer to employer. There are a number of different retirement options available. Traditional varieties, Roth, IRA, backdoor Roth IRA, HSA, and SEP-IRA are all potential options for investment. Details are given for each of these options, including how much you are able to contribute as an employer each year and the age in which you can withdraw funds.

When it comes to the priority of investing, YFP suggests that you first use the employer match as it’s free money and should be the priority in your financial plan. Then, use the HSA if it’s offered to you as it carries a triple tax benefit and is a powerful tool for investing. Roth IRA and Roth 401(k) can then be contributed to as they offer tax free savings over time. You’ll pay the taxes today, allowing your money to grow tax free. After that, max out your traditional 401(k) and then a SEP- IRA. If you’ve maxed out the contributions to everything previously mentioned, you can then consider investing in brokerage accounts.

It’s important to note that this is not a financial plan, everyone’s situation is different and therefore different options may work better for you than what is mentioned, and not everyone will agree with what we have suggested.

Episode Transcript

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

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

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

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

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

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

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

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

Tim Ulbrich: Absolutely.

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

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

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

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

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

Tim Ulbrich: Yeah, yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Like a 401k and 403b.

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

Tim Ulbrich: Yep.

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

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: For how much disagreement there is.

Tim Church: Right.

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

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

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

Tim Church: Oh, OK.

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

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

Tim Ulbrich: Absolutely.

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

Tim Ulbrich: I love it.

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

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

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

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

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

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

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

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

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

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

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

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

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

Tim Church: It’s been great, Tim.

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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YFP 072: Investing Mind Tricks: How Behavioral Bias Affects Our Decisions

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How Behavioral Bias Affects Our Decisions

On Episode 72 of the Your Financial Pharmacist Podcast, Tim Church, YFP Team Member, and Tim Baker, YFP Team Member and Founder of Script Financial, discuss how behavioral bias can impact investing decisions and why they are so important to have on your radar.

Summary

Tim and Tim talk through 6 major behavioral and financial biases that have an impact on making investment decisions.

  1. Overconfidence bias refers to our subjective belief in our skills. Our ability to invest is typically greater than the actual objective reasoning behind it leading us to think that we have control in the stock market. An example of this can be seen in the 2006 study by James Montier, Behaving Badly, in which 74% of fund managers believed they delivered an above average job performance and the remaining 26% believed they delivered an average job performance. This shows an irrational high level of confidence. It’s also important to note that timing the market is impossible as you don’t know where the market is going to go.
  2. Confirmation or Hindsight bias shows that people pay more attention to information that supports preconceived ideas about a subject and they ignore or rationalize a way to the rest. The hindsight bias shows that passed events were predictable and completely obvious.
  3. Loss aversion is where people value the gains and losses differently. Losses have more of an emotional impact on us and we act irrationally to avoid loss and it’s one of the biggest reasons people don’t invest.
  4. Herd mentality means an individual conforms to the behavior of a larger group and is typically based on emotion. An example of this can be seen with Bitcoin or the .com crisis. It also happens inside mutual funds due to the actions of share owners.
  5. Hyperbolic discounting, or present bias, shows that we have a tendency to prefer rewards today that may be smaller or similar and give up on something greater in the future. This bias is the main reason why people don’t contribute enough to their retirement funds and discount the future reward.
  6. Overreaction bias is when new information is reflected instantly and investors overreact and create larger than appropriate affect on the stock market.

Mentioned on the Show

Episode Transcript

Tim Church: What’s up, everybody? And welcome to Episode 072. I’m here with Tim Baker and excited to dive into today’s topic. Tim, this is something you and I have talked about many times and really appreciate the impact it has on our financial decisions. Behavioral bias related to investing has been studied a lot under the umbrella of behavioral finance. And Tim, why is this something that people really should know about?

Tim Baker: Yeah, Tim, I think it really can be summed up in three words. People are irrational. So we often think that a lot of our economic theory is based on the premise that we act as participants, as humans, as rational beings when it comes to the money and really economic theory. But oftentimes, the opposite is true. And really, some of the biases we’re going to talk about today illustrate that point, and hopefully we can get some examples out there to kind of paint the picture. But yeah, I think this is one of the things, one of the topics that really fascinates me because obviously I can see myself in a lot of these things, and I can see my clients in a lot of these biases. And you kind of shake your head, well, why do we do that? Why do we behave this way when the probabilities really aren’t different? Or whatever the case is. And I think it’s really — we have to shine a light on it to make ourselves better when it comes to not just investing, but just behavioral finance in general.

Tim Church: Yeah, I think what’s interesting is that you and I have talked about that even though we’re aware of these biases going on and how they influence our decisions, that still, we’re able to make the same mistakes based on how they play out. And so that’s what’s really tough is that even though you know about them, they still can happen. But I do think it plays so much into our day-to-day decision-making and really can have a huge impact not only today but just on your long-term outlook of your financial plan, your financial health in general. So we’re going to go through a couple of these biases and kind of talk about what they are and really kind of to focus on how they impact investment decisions. Now, they can impact other parts of the financial plan, but really, we want to focus on in terms of investments, how that happens. So let’s start out with the first one, overconfidence. So as pharmacists, we’re pretty confident because of the training and things that we have and how we make our clinical decisions. And most pharmacists that I’ve met in my career, they’re very confident in how they practice and what they do. And a lot of times that we see this actually tip into investment and personal finance — and it kind of goes back that just because you’re confident and you’re knowledgeable in one area doesn’t always mean that that’s going to be the case for finances. But Tim, talk a little bit about how overconfidence impacts investment decisions.

Tim Baker: Yeah, so overconfidence I think fits under the miscalibration bias. So you know, basically, the overconfidence bias states that subjective belief in our skills and our ability to, say, invest is typically greater than the actual objective reason behind that. So sometimes, we view that we have this illusion of control when it comes to investment. And I see this sometimes with clients today where with the markets really doing well — and I actually had a client recently reach out to me, saying, ‘Hey, I’ve been licking my wounds from the recent downturn in the market.’ And I think he’s probably suffering from a little overconfidence that you can have this illusion of control that you can control, really, the uncontrollable. And the uncontrollable really is the stock market. There are so many things that go into where the price of the market or of individual security goes that you as the investor play little role in that. But it’s interesting to kind of outline this study that was done in 2006. It’s called — a landmark study called “Behaving Badly.” And the researcher, James Montier — I believe is how he pronounces his name — basically surveyed a bunch of professional fund managers. These are the individuals that sit on top of the mutual funds and basically buy and sell investments out of that fund. And when he surveyed 300 of these professionals, he found that 74% of them believe that they had delivered above average job performance. And really, the remain 26% believed that they were at least average. So essentially, that means that 100% of those 300 surveyed believes that they are either average or above average when it comes to basically managing their mutual fund. And of course, we all know that in statistics, that can’t be the case. We have a bell curve that basically has distribution of where everyone falls. But the discrepancies really stress that many of these fund managers displayed an irrationally high level of confidence. And I would, when I saw this, when I was at West Point and even some employers since that, we had a grade essentially on a forced distribution that you’re always going to have people that are exceptional, average and then below average. So it’s the same that holds true is that for many investors, especially in this type of market, Tim, that we say, hey, I’m really killing it here. I’m doing a great job with my portfolio, I have this idea of the hot-hand falacy where I can’t lose. And you know, over time, it can be very humbling if you are in this space of being overconfident with your investments. And really, it’s an illusion of that you can actually control where the market goes because, really, you can’t.

Tim Church: So a lot of this with this bias, Tim, would — basically timing the market would fall under this bias. Is that correct?

Tim Baker: Yeah, absolutely. So there will be some people that — and I’ll give you an example, Tim. Like I had a lot of people after the last election say, hey, where do you think the market’s going to go? And I’m like, to me, my gut was that the market was going to go down for whatever reason. And I would have been wrong. So if I was trying to time it then, I would have been severely off. So again, I think what I know, I think the truism that I know about investment is that I don’t know where the market’s going to go. And I think any advisor, really investor, that tells you otherwise is lying to himself or herself. So you know, it’s the timing — you might get it right once or twice, you might read that story in the Wall Street Journal and make that investment, and it turns out right for you, but I think over time, what studies have shown is that you can’t time the market. And I think getting it right on an occasion or two leads to that overconfidence. And it’s the same thing with the fundamental analysis. You might analyze a stock and say, hey, I think this is a great buy opportunity and you buy it, and you’re right. And I think it kind of balloons your confidence a little bit. But I think more often than not, the house wins, in a sense — that the market is going to do what the market does. And really, your ability to assess and market time are going to be a distant second.

Tim Church: So basically, to heed the advice of Matthew McConaughey in “The Wolf of Wall Street,” right?

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Tim Baker: Yeah, we don’t know if you’re Warren Buffett or Jimmy Buffett, if the stock is going to go up, down, left, right or in circles. So yeah, it’s true. I think it’s one of the things that I think people sometimes come to advisors on this and say, hey, beat the market. But more often than not, that’s not what an advisor should be doing or can do. So yeah, I think maybe one of the secrets of the financial planning industry is that that really shouldn’t be the reason why you are hiring someone.

Tim Church: So the second bias that we want to talk about is confirmation bias and also hindsight bias also kind of plays into that. So talk a little bit about what that one is.

Tim Baker: Yeah, so as humans, what we do is we often introduce bias when we process information, when we process events. So you know, if we break down confirmation bias, it’s typically that people pay more attention to information that supports preconceived ideas about a subject, and they basically ignore or rationalize away the rest. So one of the confirmation biases, Tim, that we probably have as a community is that we believe that passive indexing is the proper way to build an asset allocation that is low-cost and typically that’s best for the investor. Now, if I’m reading studies or I’m reading information that confirms my thesis, my belief, then I highlight those, and those carry a lot more weight as I’m reading. And then when I’m reading maybe in the same session, I’m reading something that says, “Active investment is the way to go, and you get what you pay for in terms of the investment, so you pay a little bit higher in terms of the expense ratios.” So when I read that, my bias is to kind of like, I don’t think so, I basically rationalize that away. Or I’m ignoring it and say, thanks but no thanks. So I’m not buying that. So what confirmation bias is it kind of closes my mind in the sense that I’m discounting away the counterpoint to the information. And then sometimes, that can be dangerous. So the other bias that we look at hindsight bias, and this typically occurs when people believe after the fact that past events were predictable or completely obvious. And in fact, the event couldn’t be predicted reasonably. So many events seem obvious in hindsight. So I kind of look at this as like the Monday morning quarterback where something happens and you’re like, of course that happened. These are all the things that basically led to that event. But in the moment, really, we couldn’t have predicted that. So one thing when it comes to the investing and the stock market, it’s really the subprime mortgage prices and how all of the lending standards and kind of loose actions of the bank really led to the collapse of that part of the investment world and then obviously led to the Great Recession.
Tim Church: Yeah, and that sounds very similar to overconfidence because it kind of goes back to thinking that we were really able to predict that. Even though we didn’t say it at the time, but we really felt like yeah, we knew that. So one of my favorite behavioral biases is loss aversion. And that kind of falls under this umbrella of something called prospect theory, but it’s basically where people value gains and losses differently. And really, losses have more of an emotional impact, and so we’re less likely — we do whatever we can to avoid losses. And even though we could lose some amount or gain the same amount, we would rather gain than lose, basically.

Tim Baker: Yeah, and basically, Tim, what we’re saying here is that we act irrationally just to avoid loss. So that’s essentially — and I love the quote from — if you guys have ever seen “Rounders” out there, Matthew Damon’s character, who’s a poker player, he basically says that few players recall big pots that they have won, strange as it seems. But every player can remember with remarkable accuracy the outstanding tough beats of his career. So what this means is that we, the bad beats or the losses that we take with our investments, we feel that much more than, hey, the market has been en fuego that past seven or eight years. So the example is, would you rather receive $50? So I have $50 in my pocket, and I’m good to go. Or would you rather receive $100 and then lose $50 for some reason or the other? In both instances, the net gain is $50, so I’m still walking away in both of those situations with $50, but I’m like, ah, well I had $50 more, and now I don’t have it, and that kind of stinks. And that’s kind of what we’re talking about in a very granual way. I think the status quo bias, Tim, that you talk about sometimes is really not leaving your perch, kind of where you are, because of the fact that there is choice overload or there’s the fear of maybe the unknown or fear of if I make a move, I could lose. And this is typically where you are leaving retirement savings and that default asset allocation or default contribution — we talk about the 401k inertia that I know I need to get the match, which is at 5%. But I really don’t want to do any more than that because I’m comfortable with the status quo, and I don’t really want anything to change. So the loss aversion theory, which is kind of sometimes called prospect theory, is fundamental to us as humans. And it’s not just with just investment or money. It’s just how we will shell ourselves and protect ourselves from losses, even if it’s irrational or if the probabilities tell us otherwise.

Tim Church: Yeah, and I think that this is one of the biggest reasons why people will say, I’m not investing in the stock market. I’m not going to go in and lose all of my money because of things that have occurred previously. But mainly, it’s that I don’t want to lose money, so a lot of people will justify and say, I’m going to keep it in a savings account or something that is barely probably not even beating inflation. And so that right there can play a huge impact just in that decision itself.

Tim Baker: Yeah, exactly right. And often to the detriment of just your overall financial picture.

Tim Church: So the next one we want to talk about is herd mentality. And this is an interesting one because it basically goes with the old adage that if everybody’s going to jump off a bridge, you know, would you do it? You probably heard that as a kid, right?

Tim Baker: Yeah, exactly. Yeah, well, it’s like everyone else is doing it. And that’s the question you get back. Yeah, yeah. I don’t want to hear that, though. Yeah, really, what we’re talking about here Tim is again, for the individual to kind of conform to the behavior of a larger group. And it’s typically based on emotional — it’s largely emotional rather than on a rational basis. So this could be where you hear — and I always bring it up — you hear people always talking about, bitcoin or cannabis or whatever it is. And you do that because that’s what the greater, that’s what your friends are doing, that’s what your colleagues are doing it. And as an individual, you probably would not make that same choice. But it’s a little bit of the FOMO, Fear of Missing Out, that sometimes drives this. So we saw this in the subprime mortgage crisis where people were just buying real estate, they were mortgaging their house, putting second mortgages on their house, they were putting as much into the mortgage because their neighbor did this. Or same thing with the .com crisis where everyone, if it had a .com after it, people were following each other and saying, we’ll put $100,000 into cats.com or whatever it was. So actually people taking money out of their retirement to buy stocks in this. So typically, this is where you kind of want to hit the pause button and say, does this really make sense? Am I conforming to the social pressures? Is this where it’s strength in numbers? And sometimes the contrarian view, in a lot of ways, is a better view. And this often happens with inside mutual funds. So like when you have a mutual fund manager that is managing billions of dollars of stocks and bonds inside that mutual fund, sometimes he or she is subject to that herd mentality, not because of him or her, like of their behavioral bias, but because of the herd mentality of the shareowners that he’s basically trying to manage their money for. So if people are exiting from that mutual fund and they’re basically redeeming their shares, he has to essentially cash out of his investments or her investments to make sure he gets the cash for that mutual fund person that’s exiting. So the herd mentality can be rampant up and down the investment world. And it’s just important to know if you’re caught up in that. And then again, it’s kind of why we believe that index funds that basically diversify the market where you have exposure across the market is the best way to go because you get less caught up in this herd mentality.

Tim Church: Right. And if you’re going for that buy-and-hold strategy for the most part, then you’re just basically going to ignore a lot of this news when people, masses, are changing their positions or holdings on something like that.

Tim Baker: Right, exactly right. And again, sometimes with — oftentimes with investing, less is more. So a lot of times, inaction is much better than overaction and constantly — and this is something that Ulbrich and I talk about is sometimes he talks about he just wants to meddle more, meddle in the investments. And typically, that’s not the best way. And often, that’s because you’re reacting to some of what other people are doing or the news or something like that.

Tim Church: So one of the things that always comes up in personal finance, and really, you coudl sum a lot of this up, is how you determine how much you spend today versus how much you spend tomorrow for savings, for retirement, and in your investment. And when we talk about this bias of hyperbolic discounting, also referred to sometimes as present bias, that you have this tendency to prefer rewards today that may be smaller or similar and giving up something that could be much greater down the road. And really, this is sort of the main reason why people don’t contribute enough to their retirement or possibly even anything because they want to spend and get that pleasure today because the perception is that the pleasure and emotional satisfaction of that today is going to be greater than what they could have later on. So how do you see sort of this play out, Tim, with some of your clients but just in general with investing?

Tim Baker: Yeah. I think hyperbolic discounting is typically, when I say, hey, Tim, if you’re my client, we have to make sure that we’re taking care of the Tim Church today but also the Tim Church of 30-40 years in the future. So and I feel like if you’re not feeling that push and pull between those two ideas, then you’re probably doing it wrong. So typically, with hyperbolic discount is given two similar rewards, people prefer the one that comes sooner rather than later, right? It makes sense. Time value of money teaches us that as well. And we typically discount that future reward by factoring in the delay in getting it. So it would be that, hey, Tim, if I offered you $100 today versus $300 next year or $600 in four years, those are all things your mind automatically calculates that and says, well, I really could use the $100 today and I don’t really want to wait for that $300. So that’s kind of what’s going on. I see often that when we combine this with loss aversion that we talked about previously, this can easily lead to that 401k inertia that we talked about. So there was a study that employers who were automatically enrolled in a default retirement contribution at 3%, after two years, 61% of those employees didn’t change from that 3% contribution, despite the fact that their employer matched those contributions up to 6%. And a little of this probably plays into the status quo bias as well that we talked about. So I think that it’s hard for us to — I often talk about this with prospective clients and even clients. It’s like, I hear you, Tim. I know I have to save for my retirement. I know I have to do these things, but I’m really under the gun with this credit card debt or with this student loan debt. And these are the pains — that’s a future Tim problem. Like I’m really trying to focus on what’s in my face. So the hyperbolic discounting, this bias is really what is in play when we’re having that struggle against, OK, how do I make sure what I need to do today and really for the future?

Tim Church: Yeah. I think you just have to figure out what that percentage to what you’re going to spend today, but also make sure you’re on track. And so I think having goals and milestones that you’re trying to hit, especially for investing, your net worth, those are really good to have so you can always keep that at the forefront of your mind. But also being able to enjoy some of the money that you can spend today and have available.

Tim Baker: Yeah, and I will say, like, if we’re doing that more consistently — and I think some of this, we saw this with Tim Ulbrich and Jess Ulbrich where TIm is definitely looking into the future, and Jess is really more like, well, let’s enjoy our family, enjoy our life. I think there’s a good push and pull between that because I think if you’re always looking into the future and you don’t do the things that you want to do, then that’s not a wealthy life either. So I think those are important things to keep in mind.

Tim Church: So what else do we have, Tim? What’s next on the behavioral bias?

Tim Baker: Tim, I think the big one that I’d like to kind of go through is the overreaction and availability bias. I think these are fascinating. And with the overreaction, in particular, because I think this will be eye-opening to some people when they’re looking at picking investments. So the overreaction bias basically means that new information is typically reflected instantly in the price of the return. But what typically happens, investors overreact, creating a larger than appropriate effect on the stock price. So as an example here Tim, would be Walgreens or Amazon or whoever releases their earnings for the quarter, and people automatically overreact, like this is either the apocalypse or we should buy. And the stock market will change accordingly. And sometimes it’s too much, and the market can be very fickle. One of the studies I thought was really interesting, it’s called the winners and losers study that was basically released in 1985 by Debaunt and Richard Thaler, who’s a well known behavioral finance guy. He’s really interesting. The study was published in the Journal of Finance, called, “Does the market overreact?” What they essentially did is they looked at the New York Stock Exchange over a three-year period, and they separate the 35 top performing stocks into a winners portfolio and the 35 lowest performing stocks into a losers portfolio, essentially tracking each portfolios of performance as compared with the appropriate index. And as it turns out, over the three-year period, the losers performed actually better. They actually beat the market index consistently. And then secondarily, the winner portfolio consistently underperformed the market. So the cumulative difference over that three years between the two portfolios was actually 25%. So what essentially happened is that the original winners portfolio became the losers, and the losers portfolio became the winners. And this typically happens because investors tend to overreact. So for the losing stocks, investors overreacted to the negative news, driving the price of the shares down. And over time, we saw that the pessimism was outsized. And then the losing stocks actually began to rebound. And the same is true in reverse with the winners and that the enthusiasm over the winners was overblown. And you kind of see this as a reversion to the mean and oftentimes, so when we talk about using things like MorningStar ratings. You’re typically, if you’re a four or five MorningStar rating, you’re more likely to be a one or two MorningStar rating. So these are just how MorningStar funds — they basically look at mutual funds and ETFs to see if they’re good or not. You’re generally looking at past performance, which is not a good indication of future performance. So that’s really what the overreaction bias. And then quickly with the availability bias is we’re really looking at where individuals tend to heavily weight decisions that are most recent. So in the real world, if I’m driving, and I get a speeding ticket, I’m more likely to drive the speed limit soon after that ticket because I’m still feeling the burns of that. And this is not necessarily rational because I’m still just as likely to get another speeding ticket or not. So that would be really availability. And we can apply this to the way that the stock goes up and down in more recent times. So those are two biases I think that are really interesting to kind of take a look at and see how they play into our own investor profile and how we look at our portfolios and that part of our financial plan.

Tim Church: So Tim, I think we talked about a lot of the core biases around investments and personal finance in general. And I think that they’re something that is so important to be aware of just because of the irrational behavior that we have. So I guess, what practical advice would you give people just to kind of sum up everything that we talked about in terms of, you know, why should you care about these? And how can it help you be better with your finances and make better decisions kind of ongoing?

Tim Baker: Yeah, I think practically speaking, I think a lot of these things can be solved with having a portfolio that is well diversified and low cost and where you don’t have to do a whole lot of meddling outside of the rebalancing of basically locking your percentages back into focus. I think practically speaking, that is typically the best way to go. I think also, if you do feel overconfident, I think that will naturally happen where you’ll probably be humbled. I think it’s happened to all of us that have dabbled in kind of individual stocks and thinking that I’m really the smartest guy here and I can be the next Warren Buffett. I think also, being aware of if you do have confirmation or hindsight bias and to be more open to outside opinion and see if it’s actually based in fact and things like that. From a loss aversion, understanding that I think in the investment world, you have to take intelligent risk to get in front of the things like tax and inflation and that the probability or our thoughts that losses feel more painful is really an irrational — it’s just how we’re built. So I think it all points back to having a passive portfolio that you don’t have to do a lot of work with. And I think also — we’re talking about investment a lot in this month — is have a second opinion. Whether that is a friend, a partner, a parent, a financial advisor that’s going to look at your particular case or your particular investments and give you objective advice. And I think that, obviously, I think that is something that I think is very valuable because sometimes, we can get in our own heads, and we don’t really see the benefit of an outside opinion. But I think that’s often the best way to make sure that you’re sound as part of your financial plan.

Tim Church: Yeah, absolutely. I think you’ve got to take the blinders off. And especially when you’re going to make some really important or key decisions is get someone else’s opinion. You know, that could be a financial planner, it could be a spouse, significant other, or friend that you trust in. But just to get away from that. And I think just to highlight what you had mentioned about your strategy around your investing. If you’re somebody that’s buying and holding, and you’re really trading or changing your funds, you’re just either increasing your contributions or trying to do some rebalancing, is that if you’re somebody that is very emotionally responsive to the news or changes in the market or things that you hear, I mean, one of the best strategies, maybe don’t put your account balance readily available. As it can ebb and flow day to day, I think sometimes, like it’s so accessible with technology, with Mint apps, that you can see what happened to my account and what happened tomorrow? And if you’re somebody that’s really, that can’t take that emotional roller coaster, that maybe you make it very difficult to even get access to that.

Tim Baker: Yeah, so much with investment is less is more. And you can apply that to a lot of different parts of your investment strategy, but just like looking at it and messing with it is probably better. The inaction is probably better than overly concentrating on that. And like I said, when there are downturns in the market, although I preach to clients that the market will take care of you over long periods of time, it’s very predictable over long periods of time, it’s not fun to be in that down market because although the losses aren’t realized, meaning that we’re not cashing out in that moment because a lot of us have many years left until retirement, you still feel that loss. You still feel that loss, and it still can be a cloud that hovers over you. So even though I preach that, I feel that. I still feel the weight of the client assets that I’m managing. But I have to just remind myself that over time, the market will take care of us. And a lot of it is less is more when it comes to your investment strategy.
Tim Church: Definitely, totally agree, Tim. And I think it was a great topic to get out there are really is a great way to kick off this series we’re doing for the whole month on investing. So please check out the future episodes we’re going to do this month. We’re going to talk about how to get your 401k on track and how to analyze that, and then also some of the priority around investing, and then also some of the ways that you can do the investing either yourself or through some of the roboadvisors or hiring a financial planner. So be sure to check those out.

Sponsor: As we wrap up another episode of the podcast, I want to again take a moment to thank our sponsor of today’s show, CommonBond. CommonBond is a on a mission to provide a more transparent simple and affordable way to manage higher education expenses. There approach is no big secret…lower rates, simpler options and a world class experience…all built to support you throughout your student loan journey. Since its founding, CommonBond has funded over $2 billion in student loans and is the only student loan company to offer a true one-for-one social promise. So for every loan CommonBond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise.Right now, as a member of the YFP community you can get $500 cash when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. And one last thing if you could do us a favor, if you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Have a great rest of your week!

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YFP 053: One Pharmacist’s Journey from Financial Ignorance to Financial Independence

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On Episode 053 of the Your Financial Pharmacist Podcast, YFP team member Tim Ulbrich interviews Dr. Tony Guerra, an author, podcaster, entrepreneur, real-estate investor, educator and father to triplet girls that has an incredible story to share going from financial ignorance to financial independence. Tony talks about his financial journey, his various business ventures, and how and when his mindset shifted that allowed him to be on the path to financial independence.

About Our Guest

Tony Guerra graduated with a Doctorate of Pharmacy from the University of Maryland in 1997 and has followed a non-traditional career path to best suit his needs and interests. Tony has taken on the roles of pharmacist, homeowner, professor, real estate agent, author, mentor, podcast host, husband, and father of triplet girls while continually striving for financial independence. Through motivation and creative entrepreneurial thinking, Tony has created a lifestyle that allows him to focus on his family and his passions.

You can learn more about Tony and his work at http://MemorizingPharmacology.com

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 053 of the Your Financial Pharmacist podcast. We have an awesome episode in store for you today with a special guest, Dr. Tony Guerra that has taken a nontraditional path with his pharmacy career, which has allowed him to be on the path to financial independence. And I’m excited to have him on the show to share that story and journey today. And ever since I heard about Tony’s work more than a year ago and having the chance to learn about his background, I’ve been excited to get him on this show and to share his story with you, the YFP community. So Tony, thank you so much for taking the time to come on the YFP podcast.
Tony Guerra: Hey Tim, thanks for having me on.

Tim Ulbrich: So to be honest, Tony, there’s lots to talk about today. The more I dug into your background and story, the more I thought, where do we even start with this? We’ve got your fascinating pharmacy career, the real estate that you’ve been involved with, successful business ventures, and so I think maybe the best place to start is let’s go all the way back to when you graduated from the University of Maryland in 1997 with your pharmacy degree. So tell us a little bit about your first job out of school and what was your financial situation right away after you graduated?
Tony Guerra: Well, first, thanks for having me on the show. I actually listen to every single one of your podcast episodes, so I’m honored to be No. 53.

Tim Ulbrich: Thank you.

Tony Guerra: And my journey was a little bit different in that, you know, so many students right now are graduating, want to do residency, do 40-60 hours a week. When I sat down for the interview to work for Walgreen’s when I graduated to go to the Phoenix area, I actually asked to work only 24 hours a week or three days a week. And he talked me into four days a week, or 32 hours a week. So I had no interest in maxing out the number of hours I had, and my situation’s a little bit different because they had doubled our tuition from BS to PharmD, but my tuition was $4,000 a year.

Tim Ulbrich: Wow.

Tony Guerra: So I had $16,000 total in tuition. So my situation there is a little bit different, and before people hang up like, this guy doesn’t have any problems, let me talk about the mistakes that I made. So the issue with Maryland is that New Jersey and Atlantic City is not that far of a drive away. So a lot of times my buddies and I would go up to Atlantic City, and the most important thing that we had to do was because in New Jersey you can’t pump your own gas, we just had to have enough money left over to have a tank of gas or at least half a tank of gas to get us back to Maryland. So when I talk about finances, it was truly monopoly money that I was playing with back then. I had $20,000 in credit card debt, I had the student loans, and then I bought a $20,000 car, brand-new car, just out of college. So I had absolutely no concept of what it meant to owe money at the end. So in terms of graduating, the only budget I did was to make sure that I could work 24 hours or 32 hours, so I worked four days a week. And I didn’t want the pharmacy life to take over my life. So I was going to the Phoenix area. I wanted to go to a destination area. After seven years of college, I didn’t want to work 40 hours a week. I only worked 32. But I’d made some mistakes with finances, and eventually, it did catch up with me.

Tim Ulbrich: Couple things there that really stick out to me is, you know, even the student loan numbers, which obviously are very small relative to our indebtedness we’re dealing with today, right? $160,000, $200,000, depending on public-private, whatnot. But also, you’ve got to remember context of, you know, 20 years ago. But that I think does highlight how much that has increased in that period of time, which is obviously shows you —

Tony Guerra: 1,000%, right?

Tim Ulbrich: Yeah, and I think to your point about Monopoly money, I know we just talked about this on your show as well is that we’ve got to change that conversation that it’s got to hit us, have a little bit more of an emotional reaction to that debt. And when we see a number like $160,000, we should be like, ‘Holy cow! What is that?’ One of the things I wanted to ask you, though, which is intriguing to me is your intentional choice to not work full-time. And the reason I want to ask this question is that as you know, right now, there’s a trend going on nationally where some pharmacists are getting cut back to 32 hours, and they’re not getting full-time work because of various reasons, saturations of markets and whatnot. And here you are, and I think a lot of people out there are obviously unhappy with that. They maybe financially feel pressed that they need their full salary, but here you are intentionally not choosing to go full-time. And I heard in your conversation, I heard a little bit of a strategic decision that you didn’t really want maybe to get burned out, you wanted to give yourself other options. Talk more about why you made that choice to not go full-time right away.

Tony Guerra: Well, I can connect the dots looking backwards. I think Steve Jobs said in that famous graduation speech at Stanford, but I call the other eight hours, the Entrepreneurial Eight. And so what I wanted to leave was that other day just for kind of entrepreneurial ventures, and I was taking classes in journalism and writing. I never had a plan to become a journalist, but I knew I wanted something besides pharmacy. I didn’t like my job after about three months, and I kind of knew that that was coming. I’d been in retail for 3-4 years, so it wasn’t a surprise that I’m like, ‘Gosh, this kind of got repetitive.’ And I did try to make changes. I would change my days, I would go to overnights, I worked as a pharmacy manager in a grocery store, I worked in mail order. But it just — I just wanted to minimize that. What I found was that it was OK — I enjoyed the people I was with, and so I focused a lot more on the people I was with and the people I was serving. But if I had that one day a week that was completely dedicated to creative work and making money a different way — and now we call them side hustles — I just wanted a creative outlet. So I think making room for that intentionally before you graduate was something that I really wanted. The residency burnout is much lower in pharmacy than it is in medicine, but to have to dedicate 50, 60 hours at that salary — and it works out to I think maybe $16 an hour as a resident if you work 60 hours a week, that’s deflating. And I didn’t want that to happen. So if I’m going to go to a destination, I wanted to have time to enjoy it. So I knew early that I wanted to be a writer, but that success didn’t come until much later. But the entrepreneurial space — I always made room for entrepreneurial space.

Tim Ulbrich: Yeah, I remember, Tony, my whopping $31,000 salary during 2009.

Tony Guerra: Ouch.

Tim Ulbrich: And I think it’s an interesting point you bring up there, and I’m so glad — and I hope our listeners can stop and listen and absorb the wisdom that you just shared. The Entrepreneurial Eight, I love that term because I wouldn’t say I have many regrets. But if I look back and now with a family of three young boys, every year that goes on since graduation, my tolerance for risk is looking more — looks different with each passing year, right? Because you have more things that you’re accountable for, you have more things that you’re responsible for, and I think as I envision where the profession of pharmacy is going, and as I think about some of the new grads being frustrated with either the options that are available to them or maybe the work environment that they’re in, I love that concept of why not carve eight hours a week? Why not work part-time? Why not put yourself in a financial position that you can do that? Because I think while it not only positions you for potentially long-term other options, business ventures, things where you can control your own destiny, that one day of creative outlet I’m guessing made some of the other time more palatable, whatever you want to call it, that you knew you had that day of the week that you could ultimately turn to that creative outlet. So I hope the new graduates, some of those in their mid-20s where maybe they don’t have a lot of things that are going to hold them back risk-wise, obviously besides student loan debt — is this the time potentially to think about some of those entrepreneurial risks that somebody could take? So what — as you look back and kind of think about the graduates, I know you take a lot of APPE students on rotations, what advice do you have for them? Maybe mistakes that you’ve made? Things you wish you would have done differently? Obviously, you mentioned credit card debt, new cars, and I’m guessing there’s just a certain set of advice or points that you give to your APPE students to say, hey, if I were in your shoes right now, these are the things I wish I would have done differently. What are those things?

Tony Guerra: I find that money and budgeting is kind of deflating. And so what motivates me is doubling my money. So I find places where I can double it. And I want to be very careful not to say, I can double a pharmacist’s salary. I don’t know how to do that. But I can certainly double $400, $5,000, even $40,000. And maybe I can go through some of those stories where I’ve done it or where I understand where I’ve doubled my money. But I find that what you have to do first is what you’ve taught — I think when you’ve talked about your student loan course — is you have to have everything in place before you start playing with this double-your-money game.

Tim Ulbrich: Yes.

Tony Guerra: To put the money somewhere because you can get it, you can always lifestyle creep up to whatever you spend. But I’m actually taking on debt right now so I have a place to put the money so that’s something you also talked about in a recent episode is that people that are high earners that have no debt really struggle to know where to put their money.

Tim Ulbrich: Yeah.

Tony Guerra: So I’m taking on debt in the form of a third home, I just bought it yesterday. And that’s where it is. But maybe we can talk a little bit about some ways to kind of double your money. And we’re not giving investing advice. And I’m going to take this on instead of you guys taking it on because you guys have a very good, methodical way. But maybe we can just talk about how to double $500 to start with.

Tim Ulbrich: Yeah, let’s do it. And I know you’ve been involved in different things. As I mentioned in the intro, you’re an author, so you’ve written a couple different books, and we’ll link to them in the show notes, so “Memorizing Pharmacology,” “How to Pronounce Drug Names,” what am I missing, Tony? What else have you done on the book front?

Tony Guerra: The new one’s “Memorizing Pharmacology Mnemonics.” It’s meant for APPE students. And it should be free on Audible if they’ve never had an audiobook before, but something they can listen to back and forth on their way. You know, I think that really, as you get into the APPEs and you get into the internal medicine one and then the grueling critical care ones, you’ve got to have the basics down. And by having the basics down, I wrote that book and made it into an audiobook with another pharmacist out in New York, so “Memorizing Pharmacology Mnemonics” is where I would start if I was an APPE student.

Tim Ulbrich: So we’ll link to those in the show notes, and I’m guessing — and we’ll talk real estate here in a little bit — but I’m guessing your authorship, and I know you’ve put these online, so you’ve done audiobooks, which if I’m right, one of these has landed its way onto the Audible.com best seller list. And so you’ve obviously had success here. So talk to us about even just that journey of, wow, I want to write a book and how I did that, what impact that’s had for you financially but also maybe just the scratch that entrepreneurial itch that you’ve had all the way back to graduation.

Tony Guerra: I found that I couldn’t write a book until I got mad. So I had to do something to get mad about the book, and so what I did was I was taking classes up at Iowa State, and I went into a class that I knew I was going to get kicked out of. And so there’s an MFA program, a Master of Fine Arts program there, and there was a class on nonfiction creative writing, and this is a class I wanted to take. And I knew I was going to get kicked out. I knew the teacher, and I knew the people there. I said, ‘Hey, you know, I signed up for your class.’ And she said, ‘No, no. You’re not in the MFA program.’ ‘Yeah, but I’m allowed in. I’m in an English program, and part of the department.’ ‘Yeah, we’re just going to stick with what we have here.’ And I knew that would — I didn’t know for sure she’d kick me out — but she did kick me out, wouldn’t let me in the class, so I was excluded. And the one thing that makes me mad is being excluded, and I knew that would happen. So it made me mad enough to write the book, and now the book actually makes double the salary of the professor herself, so I won’t name the person, but it just makes me mad. So I think 98% of people, they say, want to write a book but only 1% do. So some kind of emotional reaction — and I think in your writing your book, “The Seven Figure Pharmacist” with Tim Church, I think that it was an emotional response to what had happened with your stories as well. So to write a book or to get there, you really have to. And what I think I’ll point to is actually another author, Dr. Richard Waithe, who was the host of Rx Radio podcast, I think he probably put about $500 into his book, and I can’t remember the name, but it’s like “The New Pharmacist” or “First Time Pharmacist,” that’s what it’s called. Yeah, “First Time Pharmacist.” And I just by seeing his numbers and knowing how much he makes from each book, he’ll probably double his money I would say in four or five months. But the way that I would — and I don’t mean to be self-serving to your course — but the easiest way to get make $400 on $400 is to invest in your course because the return could be close to $100,000. And that’s one of those returns that’s so big that you don’t even do the math on it. You’re just like, I put $400 into the course, and I saved $100,000. Or in your case, if you had had — if we could go back in time and you wrote the course for yourself, you would have saved $300,000.

Tim Ulbrich: Oh my gosh. I try not to think about it.

Tony Guerra: And I would have saved tons of money. So that’s an easy way to double $400 or $500 — either write a book that you’re passionate about, put maybe $400 or $500 into it or take the student loan course. That’s where I would start with $500. And then maybe we can talk about $5,000 is the next way. But I would recommend being a little slower with this one. But I can tell you how I doubled $5,000 as well.

Tim Ulbrich: Yeah, so before we go there, just talk me through — obviously, you got mad, which I think obviously there’s an emotion there which inspires action. I’m with you, I need something to fire me up, especially if you’re going to sit down and start writing and typing. I remember lots of early mornings, lots of late nights, and it’s a grind, right? As you’re kind of working through the process. So you’re mad, but you obviously were very strategic about, you know, I’m not going to write this just to write this, I want to write something that’s going to provide value and is needed in the market and is something that I have expertise in. And so I think a lot of listeners might be hearing that, hey, I do this every day, and there seems to be a need for something, whether it’s a book, a course, a Webinar, whatever. Talk to us, though, about how you put those pieces together that it’s not just writing a book to write a book, it’s that you want to put something that had value, that was needed and lined up with your expertise. And does that connect with your day job and what you do as a professor right at Des Moines Area Community College? Were you able to sync those experiences up to maximize your time?

Tony Guerra: I actually think you have to sync it. So my recommendation to anyone who’s always wanted to write a book is instead of worrying about writing a book, just write the curriculum for the course that you’re going to teach or that you would want to teach and just put it in book form. And then when it comes to audiobook, it took — when I first talked to my narrator, I never had hired a narrator. He was $400 per finished hours, so that means for a 7-hour book, it’s $2,800, a ton of money on something I had no experience with. And he said, boy — because it was a two-month lag between when I could have him do it — he’s like, ‘Boy, you’re going to really have a heck of a time making this for the ear.’ And what he was saying is is that if you can make nonfiction into something that is listenable, people will buy it. And so that’s really where it came from is the two steps are 1, what course would you teach if you could? And then write the course for something that you actually are maybe doing. It’s a lot easier for professors and things like that that have it. But if you’ve got technicians or you’ve got other people that work for you, what would be the course that you would write for them? Or if you, you know, with you guys and teaching about money, how would you write that course? And the second part is is make it for the ear. So you take that course, and then you just read it. And then you just continue to revise it but make it as if you are talking to someone. So those two components, writing for a need — and the pharmacology books, the need was that many nursing students have to take pharmacology but don’t get chemistry before it. So imagine hearing beta lactam or N-acetyl para enol phenol and all of these things, and you’ve never had chemistry. So that was kind of the need that I filled. But the way to get a book done — align it with what you do anyway, and then No. 2, then read it and re-write it as if you’re reading it to someone rather than ‘Here, I’ve wrote this book.’ And if you read Dr. Richard Waithe’s book, it’s really conversational.
Tim Ulbrich: Yeah, I love that. And I think for those that are listening that maybe are not fully satisfied with your job, and you’re looking for a creative outlet, you’re looking to create something, obviously the money that we’re talking about here and how you can generate revenue to help accelerate your financial plan is an important piece, but you can’t underestimate the positive energy and the feeling and momentum that you get from being in the creative process. And so you know, I would ask, outside of your time, of course, what is there to lose to potentially consider a path like this, thinking of the work that you already do? I want to take a brief moment before we jump into the second part of the show to highlight today’s sponsor of the Your Financial Pharmacist podcast, which is Script Financial.

Sponsor: Now, you’ve heard us talk about Script Financial before on the show. YFP team member Tim Baker, who’s also a fee-only certified financial planner, is owner of Script Financial. Now, Script Financial comes with my highest recommendation. Jess and I use Tim Baker and his services through Script Financial, and I can advocate for the planning services that he provides and the value of fee-only financial planning advice, meaning that when I’m paying Tim for his services, I am paying him directly for his advice and to help Jess and I with our financial plan. I am not paying him for commissions, I am not paying him for products or services that may ultimately cloud or bias the advice that he’s giving me. So Script Financial specifically works with pharmacy client’s. So if you’re somebody who’s overwhelmed with students loans or maybe you’re confused about how to invest and adequately save for retirement, or maybe you’re frustrated with just the overall progress of your financial plan, I would highly recommend Tim Baker and the services that he’s offering over at Script Financial. You can learn more today by going over to scriptfinancial.com. Again, that’s scriptfinancial.com.

Tim Ulbrich: Alright, so we’re back with today’s show. We’re walking through with Tony Guerra to hear about all of his work. We’re talking about some of the books that he’s written, and he’s shared with us kind of that first step he took to earn income. And now we want to talk, Tony, about the next step that you took. So we talked about getting to that $500 point, and now we’re talking about that next level of $5,000. So talk us through for you kind of that next level of the business venture.

Tony Guerra: So the mantra is invest in yourself. And right now, you guys have an only $400 course, but I expect that if you guys continue on your path, there’s going to be a $5,000 course that you guys are going to have in your future where maybe we go to a destination, we get everything done with the finances and things like that, but then we start talking about investing, then we kind of create our own group. So somebody that has done that in the real estate space is Brian Buffini. He came here from Ireland and was one of the best realtors in the country but then created a coaching company. And the $5,000 I spent — I remember these exact words to my coach, and we’re very similar in that we want return on investment mathematically, where my wife is completely different. She would want certain feelings that come out of it. But when I talked to my coach, I said, she said, ‘What do you want to get out of this?’ I said, ‘$10,000. I want my $5,000 back, and I want $5,000 more.’ And that was it. And I ended up making $22,000 as a real estate agent. But what I invested in was $400 a month to get one-on-one coaching, 30 minutes, every two weeks, and what I was basically doing was following the path of somebody that had done these steps and was able to articulate how to do it. And then years later, I want to say five or six years later, just before the crash, my income — and I didn’t take all of this home, I had a little bit of group of people, of real estate agents, but my income — I had to leave pharmacy because it had just gotten away, and it didn’t make enough money. But I made $253,000 in that coaching program.

Tim Ulbrich: Wow.

Tony Guerra: So that $5,000 at first got me to $22,000 in the first year but then I was making $253,000 that last year. And I would have stayed with real estate even with the crash because that’s when people really needed me, but my wife made it clear that we’re moving to Iowa. And so I moved to Iowa, and I completely gave up the real estate business. But to spend $5,000 and make $5,000, I would invest in yourself in some kind of program. I think Blair Theilemier has something that’s a couple thousand dollars or something like that. But those kinds of things, that’s where I would put up to $5,000 in terms of investing in myself. And where I wouldn’t go is into some kind of postgraduate Master’s degree or something like that because you have to wait until you graduate to maybe get a return on that. I’m talking about things that you can — like a real estate license, it’s like $500 — that you can get returns immediately, that you can start making your money right away. But that’s how I’d put $5,000 in and get $5,000 back.

Tim Ulbrich: Yeah, and we think about — we’re always harping on our students, professional development, professional development, professional development. It’s the same thing when it comes to your finances, real estate, a business coach, whatever, you have to look at those opportunities and say — and I’ve done the same thing with business coaching, I’ve done the same thing with hiring Tim Baker to help me with my finances — and I’ve realized all of those and said, ‘That’s an investment. I’ve got to write a check.’ But I realize the return on it is going to be much greater than what I’m investing. And I think that’s true for so many different areas of your life is you have to look at those things and say, OK. I’m going to try to go at this all myself or what are the opportunities I can really hire somebody who’s taken this path that can really keep me accountable and has the expertise to get me to the goal that I want to achieve. So let’s segway, then, into the real estate investing. So you alluded to the fact of being a real estate agent, you got your license, you’re selling real estate. But you’re also now getting into real estate investing. So as I know, you now have three properties, is that correct?

Tony Guerra: Yeah, we’ll close on the other one the first week of July. But I’ll have three again. And we kind of talked through the very first things that I did and then — so I have a 20-state, 20-year real estate career. And this will be my 10th property that I’ve moved in some way or another.

Tim Ulbrich: OK.

Tony Guerra: But I only own three. I only own three right now.

Tim Ulbrich: So why don’t we — obviously, you have the primary residence, and we’ll come back and talk about that because I think there’s some due diligence that people need to do in buying their primary home. But specifically from the real estate investing side, why did you look at this area and say, ‘As a pharmacist, this is something that I want to get into in the long run?’ You mentioned currently owning three. You’ve been involved in 10 properties. So talk to us a little bit about your mindset around real estate investing as a category or as an area. And maybe for you, where did that fit in while you’re also looking at more traditional streams such as a 401k, 403b, and the timing of those.

Tony Guerra: OK. So let’s kind of go all the way back to graduation and you know, should I rent? Or should I buy a home? And the first thing that I did, and when I did look at my student loans, I heard, I was like, why is this not tax-deductible? And your student loan interest is not tax-deductible, but it is deductible on a home loan. So my parents owned a vacation home, and the first home I bought was for $1. I bought it from them for $1; they were able to transfer it to me.

Tim Ulbrich: Sounds pretty awesome.

Tony Guerra: Yeah. Well, they took back the loan. So then I had to pay them monthly payments, but then I immediately put a mortgage on the property and then paid off the student loans so that now, the interest that I would have had on the student loans was now tax-deductible.

Tim Ulbrich: Got it.

Tony Guerra: So that was kind of the first deal I made. This is a deal that’s very common now with the new graduates in all fields in that they’re deciding to rent where they’re going to live, but they’re getting in the real estate market in a different area. So for example, if somebody wants to move to San Francisco, it’s a lot easier to find a rental with maybe rent control or something that’s a little bit more manageable and then buy something maybe in Nevada that’s maybe a vacation home or something like that. So the first thing I did was recognize that a home is a commitment as much as it is a marriage. And you don’t go into a marriage just saying, ‘Oh, look, I qualify for this marriage. Time to get married.’ You know? And I think a lot of people do that. They’re like, ‘Well, I think I should buy a home because it’s supposed to be tax-deductible interest.’ And that may or may not be true with the new tax code. So the first thing I would say is, find a place you want to live and get to know it. And so I lived there a year before I ever bought a home in Tempe. So I didn’t — my first piece of advice is to not buy a home in an area that you haven’t known for at least a year.

Tim Ulbrich: Amen. Yes. Yeah, that’s a mistake actually my wife and I — we had been in the relative area for a year but didn’t know well enough. And we were kind of itching from a renting standpoint, and as I look back, a little bit more patience would have done us a lot of good in terms of the rest of our financial plan. We’ll link in the show notes, there’s actually a good calculator the New York Times has to do a rent-to-buy comparison because I think a lot of times I hear people say things like, ‘Well, my rent costs $1,000, and the mortgage costs $1,000.’ But as you know, that’s not an apples-to-apples comparison. So really trying to look at your financial situation and look at all the pieces to say, where does this fit in in terms of the buy of knowing the area? But also where does it fit in with rest of a financial plan? So where did you then see real estate investing beyond your primary home come into play? And how did you determine it was a right time to get involved in that? Was there a certain point where you said, I’ve got enough equity in my primary home, I’m on the path with my other retirement savings, so now’s the time? When did you make that jump into investing?

Tony Guerra: Well, I first thought I didn’t agree with you on this, but now I do agree with you on this — when I had 20 percent to put down.

Tim Ulbrich: OK.

Tony Guerra: And because I had bought this vacation home, which was in Ocean City, Maryland, so I actually never lived in it more than the 14 days you’re allowed by the tax code as a rental, that I decided to just buy something in Tempe. And the first thing I would say is don’t ever try to time it. The market is crazy. You know, right now, you would say, ‘OK, well now prices are going up. So now maybe I shouldn’t buy because they’re going up, and I shouldn’t do it.’ But then you’ve got this investing coming from China, and I just saw in the news that a house in San Francisco went $1.6 million over asking.

Tim Ulbrich: Gees.

Tony Guerra: So you know, you might say, ‘Oh, well you know, the student loan bubble’s coming and all these things so prices are going to drop, you know, in a couple years.’ And then you have this weird investing thing coming from another country. Timing it is not the way to go in terms of like trying to time when the best time to buy is. But what I liked was that once I had 20% to put down, I don’t want to say I was a bully, but I was kind of a bully. When you make an offer, and you’re putting 20% down, all of a sudden because of the savings rate in the U.S. and all of these things, you are in the pull position. All of a sudden, that seller is like, ‘Whoa. I don’t want to upset this person. I want to get them.’ So when I offered on my Tempe home, I offered under asking in what is a white hot market. The summer, right by Arizona State, to the east side of Arizona State University, is a white hot market. And I was able to offer a little under asking because I had 20% to put down. So when I talk about timing, don’t time the market. Time yourself. Time your own situation because if you have built up 20%, that 20% is actually — I don’t want to say a symptom — but that 20% represents that you have gotten your financial house in order and that you are ready to buy a home.

Tim Ulbrich: Yes.

Tony Guerra: That you are financially ready, and a lot of the things that you put in your course and things like that. So don’t look at 20% as I have to do this thing first, it’s 20% will come if you do all the steps right. And I did a lot of things right in that year, and I took a little money out of that deal I did with my parents, and I bought a house that was $90,000. So the 20% wasn’t a ton of money.

Tim Ulbrich: The other thing — and I would love your input on this — the other thing to me, and my wife and I are hopefully going to be dabbling in this a little bit more here in the near future, but one of the things that interests me about real estate investing is that it has an opportunity, if done well, it has an opportunity for a cash flow on a monthly basis that is not waiting until a traditional withdrawal age for a retirement account of 59 and a half like a 401k, 403b or a Roth IRA. And so I think as people are out there maybe thinking, Oooo, I like pharmacy, I don’t love pharmacy, maybe I want to do something different — at the right time, and if done well, I think real estate investing or business ventures like we’ve talked about the work you’ve already done are alternative revenue streams that aren’t having to wait to a certain age to be able to draw down money over time. And so when you looked at this most recent one you mentioned is out in Tempe, right?

Tony Guerra: Mmhmm. Yep.

Tim Ulbrich: Was that connection because you know the area from being out there previously? Or how do you, I guess how do you approach real estate investing outside of your backyard and feeling comfortable — I’m assuming are you working with a property manager? What does that look like kind of day-to-day on those rentals?

Tony Guerra: OK, well let me give you the big picture. And again, this is kind of advanced investing. Let me actually talk a little bit about just buying a home, and then I’ll talk about this more advanced investing. So if you are — let me talk first about a single person. If you’re a single person coming out of college, and you’re going to buy a home, buy a home as if it were a — my thought is to buy a home as if it were a rental, and make sure that you have at least two other rooms that you’re renting out to other people or at least one other room. Don’t buy a house with just one toilet. Make sure there are two toilets because if you have one toilet, it’s an emergency if it doesn’t work. And that’s my first thing is get cash flow from the place that you’re living in. If you are married, and you’re like, I am not living with anyone anymore, that time is done, we are grownups now, I’m not doing that — and that was — but my wife and I did have somebody always in the basement while we were in residency here. Then my thought with maybe what you and Jess are thinking about is to start thinking about using a team approach. So my wife is a great lurker. She loves to look at homes, so if I say, ‘Hey, can you look at houses here?’ and so forth, that would be something she would be all over it. And then I would be the one that’s crunching the numbers, like, ‘Oh, that’s not going to cash flow at all.’ ‘But it looks so good!’ ‘No, the cash flow is terrible.’ You know? So when I looked at this Tempe home, I almost pulled the trigger on a house — and this is how hot the market is. They asked me to waive the appraisal. So I would pay in if it didn’t appraise. And I was close to doing it. It was $185,000 for a two-bedroom, and I just couldn’t do it. You know, my sensor was going off, like don’t do it, don’t do it. But you want the house! Don’t do it, don’t do it. And then I talked to my wife, and she’s like, ‘No. That’s dumb. Don’t do that.’ So always bring your wife in. She’s turned down a number of the ones that I was like, ‘Oh, I love this one!’ She’s like, ‘No. Why? I just don’t feel good about it.’ And I’ve learned over my 10 years, now almost 11 years of marriage, ‘I don’t feel good about it’ — you want to listen to that sentence. Always, always. But when I went from the two-bedroom that I didn’t buy, I bought a place that’s now a three-bedroom, two-bath in the same place. It’s a mile from a Starbucks and a Target. That seems to be — follow people that are smarter. If you’re trying to go into an up-and-coming area, if you see a Target moving in and then a Starbucks, those are really smart people. Follow those guys. But if you’re going in, if you and Jess are looking for a place, I would start in terms of looking at one, but the other caveat is that I was looking in four different areas of the country so I could see what’s going on. So at Tempe, 85281, 85284; I was looking in Baltimore, 21230, 21224, where I think Tim Baker is, I was looking in Gainesville, Florida, I don’t remember the zip code, and then I was looking in Ocean City, Maryland. So four places I knew, but I was looking at four different markets. And Tempe, in many ways, I just wanted it. My parents are going to end up moving to Arizona, there are a lot of reasons I picked it, but I was looking at different areas, so I didn’t have this kind of myopic view. And I think, not to keep talking too long, but when you’re looking at pharmacy school admissions — I help a lot of pre-pharmacy people — if you’re trying to get the best deal from one school, you might not get the best deal because you’re not looking at all the schools. Just as you know, you’re looking at one repayment plan. You want to look at all the repayment plans. But that was my kind of thought. And in terms of who I had there, Lisa Schofield (?) is my contact there in Arizona, she’s been a realtor for 17 years, I’ve done other deals with her when I was there. Having somebody that’s knowledgeable with investing. You don’t want just a real estate agent, especially not someone that’s related to you. You want someone that specializes in working with investors.

Tim Ulbrich: Great stuff. And to wrap up this section on real estate, I would reference listeners back to episodes 040 and 041, we had Nate Hedrick, the Real Estate RPH on, we talk about 10 things every pharmacist should know about home buying. And I think, Tony, I really appreciate — we haven’t talked as much on this podcast about real estate investing, but I think right time, right place, for many pharmacists, it’s a great move to think about obviously building your own financial foundation and house in order first, but when the right time is there — and I think for many listeners, that may already be there — to be pursuing real estate investing as an alternative way to diversify their investments at large. So I have a couple kind of next-level questions that are not related to any specific topic here, but as I hear this conversation to you, what sticks out to me is that you’re incredibly motivated. You obviously have a significant drive. You have an entrepreneurial mindset. You’re creative in the way that you think; you see alternative revenue streams. You’re willing to look at things that are in an outside-of-the-box way. Where does that come from? Where do you attribute to having that skill set? Is that something you feel like was taught by your parents? Have there been mentor that influenced you? Where would you say that’s come from?

Tony Guerra: This might be disappointing, but its fear. Absolute terror. And it comes from when I started, and I came back to Maryland after four years of being in Arizona, I had something go on with my leg, and I thought it was some kind of rheumatoid arthritis or something like that. It ended up being that I was standing 12 hours a day, and my IT bands were pulling so hard on my knee that I was in knee pain, but I actually, you know, I had to get it so I had a stool that I could sit on, and then I really thought I was going to lose my career. So I thought I was going to go to — I didn’t know what I was going to go to. And so that fear and then also watching the collapse of the real estate market, I was a little better prepared there, but I went from a $253,000 income to doing residency with my wife. So I went from $253,000 to $40,000. So seeing those two drops, I wish I could say I’m motivated by some great, entrepreneurial spirit, all these things, but it’s just fear of not having money. And I think people that maybe have gone through the Great Depression had this kind of mindset, maybe people that were crushed by the drop in ‘08 had this mindset. But really, it’s just that I was really fearful. But the most important caveat in terms of entrepreneurship is to give, ask and receive. So I continue to give without hope of getting anything back, and things come back to you. But that’s kind of my mindset. I’m a little bit scared about money, and that’s why I have two years’ worth of income in my savings account. That’s pathologic to have that much there. But I’m just scared of going through that again, and I never want to have to take a job or a career that takes me away from my children, makes me into a person that comes home that is just so dissatisfied with my work that I’m taking it out on my family, and I feel like that maybe happens a lot. And I just didn’t want to go back there again, ever again.

Tim Ulbrich: So obviously, there’s the fear of money there, which obviously is real. But as I also look at the work you’re doing on the Pharmacy Leaders podcast, I can tell there’s a very intentional pathway of shaping future leaders of the profession that is beyond just wanting to create revenue streams. So as you think about the work that you’re doing there and even some of your other entrepreneurial work, what are you hoping down the road to look back and say, this is what I was trying to do, this is what I was accomplishing. It’s a thought that’s been hanging with me a lot over the last year of, when I’m 70-75, you’re in retirement, what am I going to look back and say, this is what I was trying to achieve, this was the goal that I was going after. So with your work around the pharmacy leaders podcast, developing future leaders, maybe even modeling kind of entrepreneurship, what is that goal for you? What is that pathway?

Tony Guerra: I see time differently. I can’t see really past dinner. I’m very short-term; my wife is very long-term. And usually, people come together that way. So something will really bother me that might be due three weeks from now but I feel like I have to get it done now. So I guess when I look at what’s going on with pharmacy, I see, I guess I’m really scared for them in many ways as a parent who looks at it, and I know that certain students are going to be absolutely fine. These are the kind of national candidates, I look at their resumes, their CVs, what they’ve done, and what they’ve done differently is they’ve invested in other people. And I guess I just fear for them, and that’s why I keep interviewing them and giving them a space to be interviewed so that they can share what they have with the other people that may be making some mistakes. And you can never change someone’s mind, but what you can do is put out the people that are doing it right and expose them to those people. Casey Rathburn, for example, from the University of Houston, comes up, Dallas Tolburg (?) from University of Maryland, (inaudible name) are names that come to mind. These are the people that have invested so much in their pharmacy education in helping other people while they were in pharmacy school that it all came back to them — in the residencies they wanted, the career and eventually the careers they want, so I’m just seeing that if you just try to get through pharmacy school and you’re not known for anything, as Blair Thielemier says, you’re going to be in trouble. But if you continue to invest in other people as Ahmad Ahmad (?) who just started the Your Power Pursuit of Purpose podcast, those are the kinds of people that are going to have no problem. So that’s what my drive comes from. It’s just like, look, I made a bunch of mistakes when I came out. I think I can help a lot of people if I can expose other people to these leaders that are moving and shaping their own lives and other people’s lives.

Tim Ulbrich: Great wisdom there. And if our listeners have not yet checked out the Pharmacy Leaders podcast, please do. You’ve done an awesome job with that podcast, super inspirational, I think motivational for students and really helping shape the future of these leaders. I think you’re, what? 129, 130 episodes in already? Something like that?

Tony Guerra: Yeah, like I said, that’s kind of pathologic too. I mean, I do 3-4 episodes a week. Casey Rathburn (?) said, ‘Hey, can I do some episodes?’ I was like, OK, and she gave me seven episodes in three days. So you know, I wanted to make a space, but again, it’s so in line with what I do. I’m just a people-y person, so I like to talk to people. So it’s not work. And you know, if you’re doing something that you love, you’ll never work a day in your life.

Tim Ulbrich: So we’ll link to that in the show notes. Again, that’s the Pharmacy Leaders podcast. Now, one final — it’s actually kind of a split question — but I want to end here because I would be remiss if we didn’t talk about family. I know it’s important to you, you’re a father of triplets. You’ve got all of these things going on, your day job and your real estate investing, your book, your podcast. So two questions I have here for you that I know will be inspirational for me and probably even help me as well in my own journey. How do you balance all of this with the kids and obviously a marriage? And then second to that, how has some of these ventures in your financial success allowed you and created the space to enjoy the time with family that I perceive to be so important for you?

Tony Guerra: OK. You know, marry the right person.

Tim Ulbrich: Yes, Amen.

Tony Guerra: I hate to say that, it’s kind of a cliche. But man, marry the right person. But the one thing that we did was we did the Five Love Languages book. And I’m physical, which means that it’s better for her to tap me on the shoulder than to say anything to me when she comes home. And hers is service. And I can’t believe I didn’t know this until about seven or eight years in our marriage, but that means that the things that I do, making sure the house is clean when she comes home, it’s the first thing she sees is clean house, not extra work to do after a long day at the VA. So that’s my first recommendation is figure out which love language you have and which love language your spouse has because then you can know what’s important to them. So that allows the marriage to work well. And you’ve talked about “The Millionaire Next Door,” and most millionaires are married with three kids, and that’s the first thing. That’s the strength. But the other thing was — I guess I took for granted, and I didn’t do the episode, I should have, but the Father’s Day episode — I took for granted that 100,000 pharmacists each Father’s Day are probably working, you know, men and women. And I took for granted that this Sunday, I could be with my kids, coach their soccer team, and I think that was the other part is that I work so much because I’m fighting for that time to not have to ever say, ‘Dad’s got to work.’ And my one daughter just absolutely threw a dagger at us one morning. She’s like, ‘Daddy, you always get to come to the parties on Friday. Why does Mommy never get to come?’ And I was just like, oh my gosh, how do I answer this? And so I made sure to — I was like, ‘Daddy just doesn’t make enough money yet. And when Daddy makes enough money, then there’s going to be no problem with Mom coming to everything.’ She’s like, ‘Well, Daddy, you just need to work another job.’ And so I think too many pharmacists accept that that’s just how it is, I work weekends, every other weekend. And I have to tell you, if you follow the steps that you have in your loan course, I can tell you that once they get out of that debt, they could do a 32-hour week or a 24-hour week, no problem. And then they would have, they could stop having those conversations with their children, and they could have really good conversations like, you know, wasn’t that a great game that we had on Sunday?

Tim Ulbrich: Tony, great stuff. And I know your work has been an inspiration to me. I appreciate you taking time to come on this podcast, I appreciate your support of the YFP podcast. And I’m sure we’ll be finding lots of opportunities to partner in the future. So thank you again for coming on today’s episode, I appreciate it.

Tony Guerra: Yeah, I appreciate it too. Thanks so much, Tim.

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

Tim Baker: Which we were surprised by that.

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

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

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

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

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

Tim Baker: Yeah.

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

Tim Baker: Sure.

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

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

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

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

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

Tim Ulbrich: Yeah, right about there. Yep.

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

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

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

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

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

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

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

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

Tim Baker: Yes.

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

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

Tim Ulbrich: That’s it.

Tim Baker: OK. Alright.

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

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

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

 

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

Posted on by yfpadmin

 

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

Tim Baker: Yeah, definitely.

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Hopefully not Facebook.

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

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

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

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

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

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

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

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

Tim Ulbrich: Yeah.

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

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

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

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

Tim Baker: Right, exactly.

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

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

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

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

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

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

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

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YFP 021: 6 Reasons Pharmacy Graduates Will Struggle to Build Wealth (And What You Can Do About It) – Part 2

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On Episode 21 of the Your Financial Pharmacist Podcast, we wrap up our two-part series talking about six reasons pharmacy graduates will struggle to build wealth and what they can do to combat these factors working against them.

Episodes 20-21 Special Giveaway

Along with this series, we are providing a YFP step-by-step spending plan (budget) template that will put you on the path to putting purpose to your spending each month. As this series highlights the factors working against us to build wealth, the reality is that we need to be more intentional about our monthly spending in order to achieve our long-term goals.

This YFP spending plan Excel template is ready to go with formulas that will allow you to easily create a zero-based budget.

Get your FREE spending plan template at www.yourfinancialpharmacist.com/budget

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YFP 020: 6 Reasons Pharmacy Graduates Will Struggle to Build Wealth (And What You Can Do About It) – Part 1

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On Episode 20 of the Your Financial Pharmacist Podcast, we kick off a two-part series to talk about six reasons pharmacy graduates will struggle to build wealth and what they can do to combat these factors working against them.

Episode 20 Special Giveaway

Along with this episode, we are providing a YFP step-by-step spending plan (budget) template that will put you on the path to putting purpose to your spending each month. As this series highlights the factors working against us to build wealth, the reality is that we need to be more intentional about our monthly spending in order to achieve our long-term goals.

This YFP spending plan Excel template is ready to go with formulas that will allow you to easily create a zero-based budget.

Get your FREE spending plan template at www.yourfinancialpharmacist.com/budget

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YFP 019: How do Health Savings Accounts (HSA) Fit Into a Financial Plan?

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On Episode 19 of the Your Financial Pharmacist Podcast, we feature a listener question on an Ask Tim & Tim segment of the show. Keith from Ohio asks a question about the utility of a Health Savings Account (HSA) as a long-term investment strategy.

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Do you have a financial question that we can feature on an upcoming Ask Tim & Tim segment of the show? Head on over to www.yourfinancialpharmacist.com or e-mail us at [email protected] to submit your question today!

 

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