Category: Investing

 

The following post was written by Deeb Eid, PharmD. Deeb is a 2016 graduate of The University of Toledo College of Pharmacy and Pharmaceutical Sciences. He recently completed an Executive Residency at the Pharmacy Technician Certification Board (PTCB) in Washington, D.C. and is transitioning to Ferris State College of Pharmacy as Assistant Professor/Experiential Coordinator in July 2017. Dr. Eid’s vision of social and interactive education for all audiences about the profession of pharmacy has led to an ongoing startup development of Facebook, Twitter, and YouTube pages branded as Pharmacy Universe (Feel free to Follow/Like, but still under construction). For any questions, please contact him at [email protected].

 

Tim Ulbrich (Your Financial Pharmacist) and Deeb Eid have no financial tie to either one of the applications mentioned in this article.

 

From Your Financial Pharmacist (YFP): There are lots of apps out there that can help you automate your savings goals and invest your money (such as the ones noted below in this article). While automation is a great idea to help you achieve your goals, don’t forget about (1) appropriately balancing investing with your other goals (e.g., debt repayment, saving for an emergency, etc.) and (2) maximizing the use of tax-advantage retirement accounts (e.g., 401k, 403b, Roth IRA).

 

When smartphones were first introduced, I recall being fascinated with many mobile applications and the usefulness in daily activities. While some were very practical and useful (eBay®, Gmail™), others were simply entertaining and handy for those long car rides (Paper Toss, Temple Run). I found myself excited to learn about applications that made everyday life tasks more efficient. It was even more refreshing to refer friends to certain apps, if it felt like the “right fit” for their scenario. Somewhere along the way came bank accounts, personal finances, budgeting, and many other financial responsibilities that we all deal with each day.

 

During pharmacy school, I observed that many of my classmates, colleagues, and personal friends loved using their smartphones, but were often unfamiliar with many of the great personal finance mobile applications available. After reflecting, two common areas I’ve identified that we as pharmacy professionals commonly ask about or struggle with include saving and investing. The following mobile applications are both easy to use and provide alternative tools to utilize. They will help to address some of these commonly asked about areas and hopefully make your financial success that much easier!

 

Acorns

Acorns is a seemingly effortless tool to help with saving as well as investing your money. On initial setup, you’ll be asked to connect to a checking account and a series of questions (since you are setting up an investment account, this is the usual). Don’t worry, Acorns encrypts and protects all of your data with bank level security. One of the main concepts within this app is to round up each purchase you make with the linked debit card/checking account. For example, say you go to get a cup of coffee and the total is $3.50. Swipe or pay with debit or the linked checking account and you will get charged $4 to your account, but $0.50 of that that will go into your Acorns account and be saved/invested. Some will find it necessary to turn this feature to “manual” which allows you to only round up those purchases if you choose to within the app.

 

My personal favorite feature is recurring investments. This allows the ability to schedule a daily, weekly, or monthly investment from your checking account into your Acorns account. You would be surprised how quickly saving and investing $10 every Friday could add up! Acorns also simplifies investing. It allows you to pick an approach (1 of 6 available) to your portfolio with how you’d like to invest (from Conservative to Aggressive) (Figure 1). In addition, you can view the projection charts for each portfolio approach to gauge the predictions of how much money you can potentially save/earn based on the amount you put in over a period of time. If you are interested in exactly where your money is invested, Acorns also breaks down the percentages, funds, and sectors in simple and colorful fashion. Overall, Acorns provides a simplistic and easy way to start investing and saving, without all of the complicated financial terminology!

 

Figure 1

Robinhood

Finally, a stock brokerage that does not charge those pesky commission fees on every trade! For those of you looking to invest your money or who already do and are looking for an alternative broker, this app is worth checking out. Contrary to most other brokers (Schwab, Scottrade, E*Trade..etc.) Robinhood does not require a minimum deposit to get started, but does need your bank account to be linked for transferring money. The interface of the app itself is clean, colorful, and easy to navigate.

Additionally, Robinhood has two upgrade options (Instant and Gold) that have some friendly features for more experienced investors, including the recent addition of margin accounts. The app itself does not feature many of the extras you will find with other brokers (such as in-depth data or news) but serves more as a platform to trade instead.

When you click on a specific stock or EFT, you will find some basic statistical information, a trend chart, and a short informational piece on the company (Figure 2). You are not able to transfer funds from another brokerage account into Robinhood, but can transfer them out for a $75 transfer charge. In addition, with the regular account, funds from transfers and trades take around three days to process, which can be limiting. Robinhood Instant has included a feature to eliminate this waiting period, but you might have to be placed on a waiting list to be upgraded.

Figure 2

Overall, Robinhood is a simple way to get started with investing or an option for more experienced investors, looking to for an alternative platform with no commission or account minimum. I’d recommend giving it a shot!

 

 

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Take a minute to answer the following questions:

Assuming you will retire at 65 and die at 82 (morbid, right?), how much money do you think you will need to have saved for retirement? Furthermore, what factors led you to come up with that figure?

In order to estimate a dollar amount needed to retire, we need to make some assumptions including the following:

• Life expectancy
• Age of retirement
• Salary increases
• Rate of inflation
• Percentage of working income needed to live each year in retirement
• Rate of return on our investments before and after retirement

Once we make these assumptions we can come to a dollar amount needed to reach financial independence or better known as the point when one can retire and replace his/her income without having to work. What a sweet moment, right?

While this won’t be a perfect assumption considering variables that can come into play that have a significant impact on the end goal such as uneven growth in investments through the working years, unpredictable changes in income, and investments fees, it is a good place to start. Therefore, let’s walk through an example together that has three different scenarios to highlight how changing one or two variables can have a significant impact on the result. You can then change the assumptions and run through it yourself.

As of today, if a male were born in 1984, he is expected to live to be 82 years old (check out your own life expectancy at https://www.ssa.gov/OACT/population/longevity.html). Therefore, if this individual were planning to retire at the age of 65, he would have to have funds available to live for 17 years beyond the date of retirement. For this example, let’s assume this pharmacist is making $120,950; the median pay cited by the 2014 Bureau of Labor Statistics.

When we make assumptions on the factors noted above, we need to keep a few things in mind.

First, what is your desired retirement age? Yes, lots can change along the way for lots of reasons but if you could choose your desired retirement age right now, what would that be? This will have a significant impact on the calculations as you will see in a minute.

Second, what percentage of your income during the working years do you want to have available in retirement. 80%? 100%? 120%? You can choose any number depending on your desired lifestyle in retirement. Often you will hear that a lower percentage of your income (such as 80%) is reasonable to have during retirement with the assumption that expenses during one’s working career will be higher than that during retirement. For example, during retirement, the goal would be to have a paid off home without any monthly mortgage payment like was being made during working years. The counter to this argument could be for someone that desires to have significant expenses in retirement (e.g., travel, buying a second home, etc.) or would like to be in a position to give away money at a rate he/she wasn’t able to do during the working years. In this case, an assumption of 100% of today’s salary (in future dollars) is reasonable or maybe even 120% depending on your desired lifestyle during retirement.

Third, what rate of return do you anticipate you will get on your investments before and after retirement? While much of this is out of our control based on the volatility that comes along with investing, a projection can be made based on how conservative (assumed lower %) or how aggressive (assumed higher %) you may be in your investment approach. In future articles, I will spend lots of time covering types of investments, advantages/disadvantages to those investments and factors to consider when putting together a portfolio that matches your goals and risk tolerance. For now, let’s make it simple by choosing a lower assumption (such as 6%) if you tend to be more conservative and a higher assumption (such as 8%) if you tend to be a bit more aggressive. Some could argue the 6% isn’t very conservative and 8% isn’t very aggressive, but for the ease of making these assumptions, let’s go with it. If you want to be more conservative or aggressive, you can make those changes when running the numbers yourself.

So, let’s get back to our example of a male born in 1984 and look at three different scenarios. For all three scenarios, we will assume he has no retirement savings to date. Hopefully, that is not the case but certainly not an unheard of scenario considering many new graduates are strapped with significant debt coming out of school. Take note of the numbers in bold that are the factors that are changing between the three scenarios.

 

Assumption	Scenario 1	Scenario 2	Scenario 3
Current age	32	32	32
Salary	$120,9501	$120,9501	$120,9501
Current retirement savings	$0	$0	$0
Projected age of retirement	65	67	70
Years of retirement income needed (based on life expectancy of 82)	17	15	12
Expected income increase (per year)	3%	3%	3%
Projected rate of inflation (per year)	3%	3%	3%
Percentage of current income (in future dollars) needed in retirement	100%	90%	80%
Pre-retirement investment returns	6%	7%	8%
Post-retirement investment returns	3%	3%	3%
Assume Social Security Benefits?	No	No	No
Amount saved at date of retirement	$5.4 million	$4.6 million	$3.6 million
Amount needed to save each month to reach retirement goal	$4,990	$3,001	$1,496

¹ Average pharmacist salary according to Bureau of Labor Statistics, 2014

 

Wow, what a difference! In Scenario 1, he would have to save $4,990 per month all the way up until retirement to reach his goal. That would be well over 50% of his salary to start and likely not a realistic scenario. Compare that to Scenario 3 where he would have to save $1,496 per month to reach the retirement goal. Still a lot per month but much better and more realistic at about 20% of his salary. While we may not like the assumptions used in Scenario 3 such as having to work until 70, having to live off a lower percentage of income during retirement or assuming more aggressive returns on investments during the working years, the key is we have a goal in place with reasonable assumptions that will inform a plan to achieve that goal. Without that goal, we are hoping to have enough saved for retirement but may fall significantly short and/or be unpleasantly surprised as we near that age.

One last thing worth discussion is the power of starting early. In scenario 3, if this individual would have started at 26 instead of 32, he would be able to reduce the amount he needs to save per month towards retirement by $395 to meet the same goal of having $3.6 million saved. I don’t know about you but an extra $395 per month is a big deal!

So how does this example compare to the number you wrote down just a few minutes ago? Maybe it shocks you or maybe it validates your thinking. Regardless, once we get to this point we can now determine a plan for what needs to happen each year, or even each month to achieve this goal.

So here is your Financial Homework this week. Play around with the retirement calculator at https://www.dinkytown.net/java/RetirementNestegg.html You can make your own assumptions to determine your retirement number and then work backward to figure out how much needs to be saved per month to achieve that goal.

One final thought. Remember that saving for retirement is one of many financial goals and should be considered in the context of those other goals such as giving, saving for kids college, paying off the house, etc. Do not jump into changing one factor of your financial plan without considering the others.

P.S. If you didn’t figure it out, the example used in this post is based on my birthday! Therefore, I have 50 more years to live according to the life expectancy calculator. Jess and I are currently saving 22% of our income towards retirement so we are close to being on track to achieve the goal but have some work to do!

 

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The following post was written by Ben Michaels, Pharm.D. Ben is an assistant pharmacy manager for Kroger Columbus KMA. He received his Doctor of Pharmacy degree from University of Cincinnati’s James L Winkle College of Pharmacy and completed a community residency program with Fred Meyer/Oregon State. In addition to practicing as a pharmacist, Ben works with students at The Ohio State University to help orientate resettled refugees to using community pharmacies in the United States. He aspires to enable pharmacists and pharmacy students understand finances and achieve their financial goals. If you have any questions for Ben, please contact him at [email protected]

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Does the thought of saving $3 million by the age of 65 make you uneasy? More importantly, how can you do it? Using the average pharmacist salary of approximately $117,000, let’s assume that a pharmacist graduates at age 25 and starts saving 10% of his/her average salary until 65. This pharmacist decides to put all the money under his/her mattress. Over the next 40 years this pharmacist would be sleeping on $466,680. While the pharmacist did a great job at saving, this leaves him/her over $2.5 million short of achieving our goal and sleeping on a very uncomfortable mattress!

So where are we going to get the extra millions from? A 401(k) (or 403(b) or 457(b) if you work for certain organizations) is one of your best tools for making up this difference. Throughout the rest of the article, I will use the terminology 401(k) to represent these employer-sponsored retirement plans. For many pharmacists, these terms may be something that you have heard of, but may not fully understand. After all, you graduated with a pharmacy degree, not a degree in finance! To summarize these types of accounts, they are a retirement savings account sponsored by your employer normally managed by an outside financial institution. Here is a link from Investopedia that provides more information.

There are three major advantages to using a 401(k) as a savings vehicle for retirement:

1. Your contribution to a traditional 401(k) is tax deductible. What this means is that if you earn the average pharmacist salary of $116,670 and contribute 10% of your salary ($11,667 per year) to a 401(k), your taxable income for the year is now $105,003.
2. The contributions (employee and employer match) to a traditional 401(k) grow tax-free. However, it is important to note this money will be taxed upon withdrawal. While we won’t spend time in this article discussing the Roth 401(k), it is important to note this option may be available to you in your employer offered retirement plan. In a Roth 401(k), you will pay income taxes on your contributions but your account will grow tax-free and you won’t have to pay any taxes on your withdrawals during retirement.
3. Many employers will match a percentage of your 401(k) contributions. Let’s look at a potential scenario again using the assumptions from above.

If the mattress money stocking pharmacist from above put the same amount of money into a 401(k) account that didn’t make any interest at all in 40 years, but his/her employer matched 3% of the contribution, instead of amassing $466,680 over 40 years, he/she would have $606,684. That’s an extra $140,004 just from the employer that would be lost if he/she did not take advantage of the 401(k) plan!

Hopefully the above information will have convinced you to start contributing to your 401(k) plan if you aren’t already. So now that you are ready to contribute, where can you get more information on managing your account? Fortunately, there are some great websites that can provide you with tools to help you plan your retirement.

The website Investopedia, which I already reference above, is a page that provides definitions and general information related to investing. There are articles on managing a 401(k) and also some useful budgeting tools. This site is a good starting point to learn many of the basic terms and theories used in the financial world.

Once you get your retirement account up and running, you may see that you have some options with regards to how you wish to allocate the money that you are saving in the account. Futureadvisor is a free service that allows you to link your 401(k) through their website and then gives you investing advice based on an analysis of your account. The alternative to this would be meeting face to face with a financial planner, which is also a great option if you are unsure about how to invest your savings.

If you want to work out the numbers and see what adding a bit more money each month will do long term, you will want to use some financial calculators. Just like calculating vancomycin peaks and troughs, you can do this all by hand, but using a calculator makes it much easier. Bankrate and Smartasset both have calculators for almost every financial situation you can think of. Besides retirement calculators, these sites offer calculators for real estate, loans, relocation, and many other categories.

You probably already use the internet to read reviews of products or services that you are looking to purchase and financial services are no different. A helpful site that reviews investment accounts along with credit cards, bank savings and checking accounts, insurance, mortgages, etc. is Nerdwallet. If you are looking to open any type of financial account, this site is a great place to do some research first.

The last sites I want to mention are robo-advisor sites. The two major sites are Betterment and Wealthfront and you can find reviews of each on the previously mentioned Nerdwallet. If you find yourself in a position where you want to start a retirement account but your employer doesn’t offer a 401(k), these sites both provide a way to invest funds and then use computer algorithms to do the investing and trading for you.

Returning to the previous example of the mattress money-stocking pharmacist, let’s compare what his/her savings might have been if he/she invested for 40 years in an employer-sponsored traditional 401(k) where the employer matched 3% and the average annual rate of return was the 8% using this calculator from Bankrate. Under the same assumptions previously mentioned this pharmacist would have $4,097,413 saved in their retirement account at age 65. Even with a conservative average annual return of 4%, this pharmacist would still have 1,472,308 saved at age 65 or $865,624 more than his mattress-stuffing peer. I invite you to use the calculator and plug in your own financial numbers and see the difference that 401(k) contributions can have on your retirement savings.

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