investing

YFP 397: The Art of Rebalancing: Maintaining Your Investment Portfolio

Posted on by YFP Media

Tim Baker, CFP®, RICP®, RLP® and Tim Ulbrich, PharmD discuss the importance of maintaining a balanced asset allocation, the nuances of risk tolerance and capacity, and the different accounts you should be rebalancing.

Brought to you by First Horizon.

Episode Summary

In this episode, Tim Baker, CFP®, RICP®, RLP®, and Tim Ulbrich, PharmD, explore the essentials of rebalancing your investment portfolio.

Tim and Tim discuss asset allocation, risk tolerance, and key accounts to rebalance. They also highlight common mistakes and effective rebalancing strategies for long-term investment success.

Key Points from the Episode

[00:16] Introduction to Rebalancing Your Investment Portfolio
[01:34] Defining Asset Allocation and Rebalancing
[02:43] The Importance of Rebalancing
[04:37] Accounts to Consider for Rebalancing
[09:23] Risk Tolerance vs. Risk Capacity
[17:44] Common Mistakes in Rebalancing
[22:43] Timing Your Rebalancing
[25:38] Conclusion and Financial Planning Services

Episode Highlights

“ What we’re really talking about here is like maintaining the amount of risk that you feel comfortable with.” – Tim Baker [1:04]

“ Rebalancing is the process of realigning the asset allocation of your investments to maintain whatever your desired level of risk is.” – Tim Baker [2:30]

“ But the question behind that is like, Where are we going with these investment accounts? What’s the overarching goal? What’s the target amount that we’re trying to achieve?” – Tim Ulbrich [7:06]

“ The longer time horizon that you have, the more capacity that you have to take risk because the more likely that that portfolio can recover over those 30 years.” – Tim Baker [11:06]

“ Risk tolerance is what you want to take. That’s kind of your emotional response. The risk capacity is what you should or need to take.” – Tim Baker [11:54]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich: Tim Baker, glad to have you back on the show.

Tim Baker: Good to be back with what’s new, Tim.

Tim Ulbrich: I think this is back to back, right? It’s been a while, uh, since we’ve done a back to back. So last week we talked about couples working together with their finances, certainly a relevant and important topic. And today we’re going to go pretty narrow and pretty nerdy.

Uh, as we talk about rebalancing your investment portfolio and Tim, let me start with that. We talk a lot [00:03:00] about. our savings rate and how much we’re going to save and how much we need to save for retirement. And sometimes what we lose in that conversation, certainly not with clients when our team’s doing this one on one, but maybe in a broader education sense is how we actually allocate those assets.

Where, where do those dollars go? And then what do we do when that asset allocation perhaps get it out of whack over time, which is our topic, uh, with rebalancing. So I think, I think naturally there can be a focus on the accumulation, but we might lose some of those details along the way.

Tim Baker: Yeah. I mean, it’s an important thing to consider because what we’re really talking about here is like maintaining the amount of risk that you feel comfortable with, with, and for a lot of people are like, I don’t even know what you’re talking about. So I’m just putting in a target date fund. Um, so if you’re in a target date fund, Um, you know, primarily this episode won’t apply to you, but if you’re kind of pulling the strings and want a little bit more precision, um, want to pay a little bit less, that’s one of the, the, the, the beast that I have with target a fund, this’ll [00:04:00] be an episode to kind of tune in and, and, and listen to in terms of, you know, at least how we approach it.

Tim Ulbrich: So let’s start with just defining rebalancing and maybe at the same time, define asset allocation, because those are going to go hand in hand.

Tim Baker: Yeah, so asset allocation is really just the percentages between stocks and bonds, um, at a high level. Um, so. Um, you know, if you’re, if you’re in, say, an 80 20, um, portfolio, that means 80 percent is in stock. So you think traditionally more exponential growth, um, you know, more, more stocks and an accumulation phase.

And then bonds are, I, we typically explain as more like linear growth, which is where you’re, you know, it’s fixed income, you’re, you’re being set, you know, being paid, um, you know, interest and those types of things. So typically the higher the bonds, the more risk. Um, avoidant you are. Um, and typically this is for people that are approaching retirement or in retirement.

So the percentage of stocks and bonds is really what we’re talking about with [00:05:00] that asset allocation. Rebalancing is the process of realigning the asset allocation of your investments to maintain whatever your desired level of risk is. And, you know, return. So over time, Tim, Tim. The market fluctuates, obviously it goes up and down and certain investments may grow faster than others.

So this causes your portfolio to drift from its original target allocation. So give me an example. Let’s say your target allocation is fairly conservative. It’s 6040. So 60 percent in stocks and 40 percent in bonds, a strong stock market, which we’ve been experiencing lately, um, over the last couple of years, although volatile could shift that to a 7030.

Um, ratio. So if you’re in a buy and hold strategy, which is basically you, you buy and set it and forget it, you’re going to continue to drift 20, um, which, which ultimately increases your portfolio’s risk. So what rebalancing [00:06:00] basically involves is selling some of the stocks and buy in bonds to return it back to that original 60, 40.

So basically. You know, you sign up for a certain amount of risk, you know, whether you’re working with advisor or just in your own mind and as the market does what it does the You know the percentages shift and you just want to basically reset that so In the event, you know, I always kind of think about in the event of um, you know the market taking a significant downturn Um, you’re protected as much as you can be with the the percentages that you signed up for.

Tim Ulbrich: Yeah. And for the DIYers out there, right? This is something they have to keep on, on their radar to come back to at some frequency. You know what, whatever that might be determined, or of course, we’re big advocates of, Hey, this is one of the many things that a financial planner can help you with. Like, I, I selfishly know that, hey, I’ve got Kim, uh, on our side, you know, in our corner, one of our CFPs, that like, I’m not thinking about risk.

You know, I’m not thinking about the rebalancing, you know, of course we’re constantly re [00:07:00] evaluating what are the goals, what’s the risk tolerance, what’s the risk capacity, but that aspect’s being taken care of as naturally market fluctuations will happen. So Tim, what accounts should people be thinking about here with rebalancing?

You know, perhaps the obvious people are thinking, Oh yeah, my 401k, but it’s, it’s bigger than that. Right,

Tim Baker: Yeah, it’s pretty much all of your investment accounts. So, um You know, IRAs, HSAs, if you’re invested in your HSA, 401ks, 403bs, TSPs, brokerage accounts, um, you know, and, and, and to kind of drill down a little bit more, Tim, it’s not just like. You know, stocks and bonds. You, if you look in the equity side of your portfolio, you know, it could be that small, small cap has performed, you know, outperformed.

So, you know, we have to sell some off the, some of the small part, a small cap to maybe redeploy that to a merging market or an international exposure. So, um, but it really is anything that you have. You know, investments, right? Which could be IRAs, HSAs, [00:08:00] 401ks, brokerage account. Um, these are the, these are the accounts that you want to pay the most attention to.

Now, I would say that 401ks, Are typically less, there’s a less of a need to rebalance a 401k. And the reason for that is typically 401ks are contributing to every pay cycle. So if you get paid 24 times a year, every time some of your paycheck goes in, it’s almost like a natural rebalance, right? There’s still some drift there.

And it’s still important to look at this because oftentimes this is the biggest asset that many of us have outside of maybe a home. Um, so it’s a big asset on the, on the balance sheet that needs attention, but, but oftentimes you kind of have that natural rebalance because of how regular the contributions are made into your 401k.

Tim Ulbrich: And I would add to this, you know, you mentioned kind of the, the various accounts, right? So 401ks, IRAs, [00:09:00] TSBs, 403Bs, HSAs, 529s would fall in there, right? As well. If we’re,

Tim Baker: Yeah, 457s. Yep, exactly right.

Tim Ulbrich: I think too. It’s worth mentioning this. I’m thinking of the DIY or in particular where, where I often see this overlooked him that there’s a question behind this question that we can’t overlook.

Right? So the question we’re addressing is what is rebalancing? And we’ll talk some about the strategies, what accounts need rebalancing and ultimately how does that connect and relate to your risk tolerance and capacity, all important stuff. But the question behind that is like, Where are we going with these investment accounts?

What’s the overarching goal? What’s the target amount that we’re trying to achieve? And how are we balancing that with all these different goals? Once those decisions are made in those conversations happen, then within that, we can begin to think about, okay, how do we make sure we rebalance and keep on track with the plan that we set?

Tim Baker: Yeah, if you’re, [00:10:00] if you’re looking at a checklist of reviewing your financial plan. You know, this is probably item number

Tim Ulbrich: Right.

Tim Baker: and all of the other things, you know, that are going to be important of like, Hey, where are we at? Where are we going? What’s the purpose of this are the things that we talked about, you know, last year, the year before still important.

So, I, I think this is very much the technical after all of those really value based conversations and questions are answered, but it’s important all the same. Right? So I think that. You know, um, And this changes, right? So, so what, what your, there’s so many people are like, ah, like nothing’s going on. Like I got this, but I always like do the thought experiment is like, you know, even for us, Tim, if we look back at like two years ago, how much things have changed over these last two years.

And I think as humans, we, we think. We kind of, we kind of lose sight of that and we think that the next two years are not going to be, [00:11:00] you know, kind of laissez faire type of thing. So I think, I think, yeah, the, this is, this is a, an item on a long list of things that need to be answered. And I think it’s just important to ask that question, um, kind of do that mental azimuth of like, is this still kind of serving me and what I’m trying to accomplish with my financial plan?

Tim Ulbrich: Yeah. And I want to make sure to say that out loud and we don’t miss that because, you know, the thought that was coming to mind, Tim, that stimulated that, that comment was there’s a lot of work that has to be done to determine what percentage of our income are we saving and why are we saving it? And then within that conversation, what vehicles are we going to use?

And then within that conversation, there’s the risk tolerance, risk capacity rebalancing. So making sure we just don’t get lost in the weeds, right? Especially for people that are, that are DIY in this. Um, let’s talk. I keep throwing around these terms, risk tolerance, risk capacity, but so important, right?

Because that ultimately is going to inform What is your [00:12:00] asset allocation, which will then inform, what are we going to do with the rebalance? So talk to us about risk, tolerance, risk capacity, and then even a, uh, peek behind the curtain for those that are financial planning clients, how we handle this through something like an investment policy statement.

Tim Baker: Yeah. So the way that I simply put risk tolerance versus capacity, risk capacity is risk tolerance is a risk that you want to take. The risk capacity is the risk that you should or need to take. So I’ll give you an example, you know, I could be a 35 year old pharmacist and I, I could be very risk adverse, right?

So when I take a questionnaire about how I view my investments and how I view about money, I’m like, I just want to keep, you know, I don’t want to lose anything. I just want to, you know, I’m, I’m much more comfortable putting everything into a high yield savings account and, and, and doing my thing there.

The problem is, is because we know about things with inflation and. [00:13:00] Um, uh, taxes that we have to do more than the 3 percent or whatever high yield savings accounts paying these days. Like, we have to outpace inflation. We have to outpace. Um, if you’re 35 or 40 years old or younger, or even a little bit older than that, you have more capacity.

Take risk. If we’re thinking about it in terms of retirement planning, because I might have 30 years To invest. And the idea is that the longer time horizon that you have, the more capacity that you have to take risk because the more likely that that portfolio can recover over those 30 years. So as you get closer, I could be the most, you know, so I’m, I pretty much like pretty aggressive with my investments, but once I get to, if I’m going to retire at 65, once I get to 55 or 60.

I don’t have the capacity to take the [00:14:00] risk because my time is so short. So even though I’m aggressive, you know, I need to know I, in the back of my mind, I’m, I’m fighting what’s called sequence of return risk, where if my, if I’m 58 and I’m trying to retire at 60 and I’m super aggressive. And my portfolio, you know, drops by a third.

It’s hard for me to recover in a 22 year period. So risk tolerance is what you want to take. That’s kind of your emotional response. The risk capacity is what you should or need to take. And sometimes if you’re 50 years old, 60 years old, and you’re trying to retire in the next 5 or 10 years and you haven’t done much.

Your risk, you have, you know, you have to take more risk because you have no choice or you’re going to just be working forever. So there’s, there’s this Venn diagram, Tim, of what we kind of look at your risk tolerance, which is typically a result of a questionnaire that we do. And then we overlay the demographic of how much you have saved, what your age is, what’s your time horizon.

And we come to that asset allocation [00:15:00] of, you know, the magic percentage of stocks to bonds. And then to kind of answer your question, what we typically do, um, at YFP is we just have a one page document. We call this the investment policy statement. This is kind of our North Star of how we’re going to manage your investments, both the ones that we are managing at our custodian directly, but also held away investments, which are typically 401ks or 403bs that you’re contributing directly, you know, cause you’re still employed.

Um, so that investment policy statement is kind of like our instruction manual of how we’re going to, you know, what the asset allocation is, how we’re going to rebalance. You know, the, how you, how you have visibility yet that you’ll receive statements and all that kind of stuff. So it’s really kind of a, a, um, North star of how we’re going to handle the investments that gives us kind of a, a scalable way to manage millions of dollars for our clients, but also for the client to understand, okay, this is what the [00:16:00] team at YFP, this is how they’re, they’re handling, you know, my long term investments, et cetera.

Tim Ulbrich: Yeah, and I think that helps people, especially if they’re new to that relationship, feel comfortable, like, hey, we’ve been through the evaluation of risk process. We’ve agreed upon these set of terms, but I’m also, in part, delegating. This work to the team I hired, but I’m delegating this work to the team that I hired within the sandbox we’ve agreed upon.

Um, which I think is, is really important. And I love your visual, the Venn diagram, right? Because I think it encompasses when we talk about risk capacity, risk tolerance. Yes. We’re thinking about the emotional part, how much risk can I stomach, but we’re also considering how much risk do I need to take Based on all these goals.

And that’s where a third party can really have a valuable role of like, let’s talk about both of those things and where there may be differences. Let’s have a conversation and kind of figure out what gives, right? Are we willing to push ourselves maybe a little bit in a direction that we weren’t thinking, or are we willing to adjust the goals?

Oh, [00:17:00] 2 people doing this partner spouses, thinking of others, you might have 2 different. Risk tolerances and risk capacities that you’re dealing with and to have those conversations can be really valuable.

Tim Baker: Yeah. And I think one of the things that I, you know, ultimately say, you know, when I was working with clients back in the day is at the end of the day, it’s your financial plan. So even though I might reckon, you know, you might come in at a seven 30, a 70 30, and I think that you can be more aggressive, you know, 90, 10, or even a hundred zero, you know, all equity portfolio.

I’ve had some clients will say, like, let’s start at 80 20. And then I just say, like, I’m just forewarning you every time we meet because you’re 28 or whatever it is, like, I’m just going to bring this up that. You know, we need to be more aggressive and, you know, ultimately clients might step into that over a couple of years because I think they realize it’s, it’s working smarter, not harder because again, typically the more conservative you are, the harder you have to work, i.

save. Or work longer to kind of reach that [00:18:00] portfolio amount that we can have a sustainable paycheck. So, and that goes back to, you know, in the past, I’ve talked about aggressive Jane and conservative Jane and everything being equal and the delta between their portfolio after a 30 year career is significant.

Um, and the only thing that really changes is, is the asset allocation. So it’s 1 of the most powerful things. And I think, tending to that. IE through a rebalancing strategy over time is going to be really important as well. So, um, yeah, at the end of the day, you know, you have to feel comfortable, but I think what most people realize is.

Hey, even the portfolio goes down in 2025 and I’m retiring in 2055, who cares, right? It doesn’t matter. We’re not even going to remember that. And in fact, we’re going to probably have, you know, six, seven more of those. It’s just, is this, when we get to that eye of the storm close to retirement, um, that’s when we really need to be hyper focused and conservative on the, on the asset allocation.

So we don’t, you know, again, fall to sequence of return risk.

Tim Ulbrich: Yeah. And it’s worth noting, Tim, especially for [00:19:00] newer investors, how you think you’re going to feel and how you actually feel might not always line up. Right. Until you go through a dip where you have a sizable amount of assets and kind of experience that. I do think some people go into that thinking. Hey, I’m in this for the longterm.

I can stomach it. And it market drops 30 percent and they still feel the same way. Like that’s fine. You know, I’m in it for the long run. I think other people might go into that with that mind, same mindset, see that number go down on their accounts. And all of a sudden there’s this gut feeling of, of like, whoa, I didn’t think this would impact me in the way it did.

Tim Baker: yeah. And, and sometimes that gut feeling leads to that whole idea that I talk about is like, I want to take my investment ball and go home. And then that could lead to really. Um, the word is not inappropriate, but really, um, unproductive decisions and actions with your portfolio when you’re selling into cash, then you start feeling a little bit better because the markets recover and then you buy back into the portfolio higher.

And it’s [00:20:00] probably 1 of the biggest mistakes that novice investors make. And it’s basically playing on our loss aversion that affects all of us. So.

Tim Ulbrich: Let’s go there to common mistakes investors make when rebalancing, you’re, you’re talking about one really important one right there. And specifically, I’m thinking about the DIY investor where, Hey, when the hands in the cookie jar, you know, we might, might make some mistakes or be more prone to making mistakes than we would be otherwise.

If, if we had, um, a financial planner advisor, someone in our corner kind of talking through some of these things. So what, what are some of those mistakes that folks should be. Aware of that. Hey, we can avoid these if, if at all possible related to rebalancing.

Tim Baker: Yeah, so I think it’s, it’s kind of what I just said is like that emotional reaction, um, to, to this, uh, or taking a short term view of a, of a portfolio that has a long term outlook. Um, you know, I think sometimes like, and rebalance in itself seems [00:21:00] unnatural because you’re taking your highest performing asset class, some of it selling some of it and putting it potentially in your lowest performing asset class.

So it feels weird. Um, Uh, you know, again, if you’re overwatching your portfolio, it could lead to you making irrational decisions to time the market, which we know over the course of a long investing career, you just can’t do. Um, You know, I think the other thing is not considering the shifts in risk tolerance over time.

Right? So if, if you set this and forget it early in your career, and then your mid career and late career, and you’re still in that same asset allocation, there’s a problem there. Um, and I think, I think the other thing too, that is kind of related to this, but tangentially so is. Like if you’re in, if you’re thinking like, oh, I’m going to target date fund.

I don’t have to worry about that. Like in my 401k, that is true to an degree. But the, the other thing is like, we’ve talked about like, not all HSAs or 401ks are create equal, not all target date funds are created equal. [00:22:00] So you could be in a 2060 target date fund. That’s actually too conservative to what you actually need to be in.

And even, you know, all of those as they lead up and they had to have this glide path of, you know, taking out equities and re you know, re um, reinvested in the, in the, Stocks and bond or, uh, bonds. It’s, it’s not necessarily lines up with what you’re thing, it’s all those, it’s the easy button. I would think.

I would say look at the fees and look at the, the actual asset allocation within that fund to make a good decision. Um, I also think not considering tax cons, consequences in certain accounts or chasing something because of a tax benefit. So the big, the big thing that we haven’t talked here, um, is like rebalance is, is different in a brokerage account versus a.

401k or an IRA. Um, and what I mean by that is we’ve always talked about like the, the tax benefits of a 401k or, or an IRA or a Roth IRA, the, in those accounts, [00:23:00] the money that is in those accounts is either tax going in, so that’s in the case of a Roth or tax going out, which is the case of the, the traditional, the, the added tax.

Um in a brokerage account is that when you buy and sell a Stock bond mutual fund inside of a 401k you pay no capital gains. So the growth is tax free, which is which is another benefit Um of those accounts inside of a brokerage account you’re paying capital gains on any gain or or loss Um in the side of those accounts.

So sometimes we do weird things because of tax Ramifications and I think it’s losing, not losing sight of that, you know, as well. And then, um, I think also kind of related to this, Tim is, is account location. So this is kind of related to rebalancing, but having a good amount of, you know, I just, we just signed on a client, um, recently that they’re in [00:24:00] their early forties, forties, they want to retire in their early fifties.

So they have about a decade left, but they have nothing in a brokerage account. Um, which is typically what we’re going to use for an early retirement paycheck. So this is kind of the do we have a Do we have enough in? Uh, a taxable pre tax than an after tax to basically build a sustainable paycheck. So not necessarily related directly to rebalancing, but important to know again, as you’re asking yourself those questions and we’re getting to that 80 second step of rebalancing that we, we could look at the situation and be like, our account location is off.

So we need to, we need to reallocate assets that way. And then obviously rebalance the portfolio in general.

Tim Ulbrich: That’s a great example, right? Because that’s one of those in the weeds types of things where we can be, you know, neat, neat, deep, and trying to rebalance within an account, thinking about the asset allocation, maybe even trying to think about some of the tax benefits, especially if it’s not in a retirement account all the while, you know, bigger question of, Hey, might I.

Need these funds [00:25:00] prior to traditional retirement age. And do we have the right account locations? A really good example of, of the bigger, the bigger puzzle that we need to be thinking about.

Tim Baker: Yeah,

Tim Ulbrich: Last question I have for you here is on timing, Tim. So we’ve established that, Hey, once we set an Alice asset allocation based on risk tolerance, based on risk capacity, based on goals, that risks, that asset allocation will inevitably shift as the market does its thing over time, which then.

Puts in the, the need for what we’re talking about here, which is rebalancing. Um, so then the next natural question is, well, how often should I do that? Is this a once a year? Is this a twice a year? Is this a, it depends based on market volatility and you know, some seasons of the market may be more volatile than others.

What are your thoughts here on timing?

Tim Baker: yeah. So typically, the three common approaches to rebalancing is time based rebalancing, which is kind of what you’re talking about. So rebalance at regular interviews, you know, I quarterly, annually, maybe in semi annually, it could be [00:26:00] threshold based rebalancing, which is rebalancing when an asset class deviates from the target by a certain percentage.

So if it drifts 5 percent or 10 percent Transcribed by https: otter. ai Then we rebalance and then there’s a hybrid approach. So combining time and threshold methods for more flexibility back in the day, Tim, this was a concern because, um, and even, I think even today it’s a concern depending on how you’re invested is, um, you know, we, we would rebalance in, in my previous firm, we would rebalance like mutual funds.

We didn’t use ETFs, which is what we use now. And those would generate like. Ticket charge and commissions. Um, and some of the listeners might have heard of things called like churning where an advisor is kind of selling, not unnecessarily, but in a rebalancing to kind of earn a commission. Um, and even like even ETFs or stocks, anytime that you, you buy and sell, sometimes there’s a ticket charge.

Now, a lot of those have kind of gone to zero. So you’re able to, to do this kind of at will. [00:27:00] Um, Um, but that was a, that was a, that was a, something that you had to be aware of back in the day of either, you know, what’s the ticket charge related to the trade or like, what’s the commission that you’re going to pay an advisor?

Um, so obviously being fee only, we don’t earn commission since that’s not part of what we do. Um, today, a lot of these, a lot of these methods are going to be. Threshold based. Um, so if you’re working with a robo advisor, it’s going to, it’s going to look at a drift at a certain percentage and then basically realign you.

Obviously, you’re paying a fee for that, which you need to know what that is. Um, but we kind of do a hybrid approach of, of both. Um, you know, some people, Okay. Want to overdo this and rebalance this, you know, if you’re a tinkerer and that’s typically not the best approach. So I would say at a minimum, at a minimum, you know, at least once a year you should be looking at this and rebalancing back to a target percentage.

And again, having those conversations with yourself about, is this what I still want and need? And how is this best supported my financial plan?

Tim Ulbrich: [00:28:00] Awesome, Tim. Great, great stuff. Uh, appreciate your perspective as always. And for those that are listening and saying, Hey, I could use help with rebalancing asset allocation, making sure I’m thinking about my risk tolerance, risk capacity, and other investing goals, as well as other parts of the financial plan.

That’s what our team of fee only certified financial planners do at YFP. Again, we’re talking about a very narrow aspect of the financial plan and there’s so much more opportunity Beyond just this topic. As we look at all of the different parts of the financial plan, whether that’s investing in retirement planning, whether that be debt management, credit, estate planning, insurance, and so on.

So to learn more about what it means and what it would look like to work one on one with a YFP fee only certified financial planner, head on over to our website, yourfinancialpharmacist. com. You’ll see an option there to book a discovery call. We’d love to have an opportunity to talk with you, learn more about your financial situation.

You can learn more about our services and ultimately we can determine together. Whether or not there’s a good fit there again, your financial pharmacist. com and click on the link to book a [00:29:00] discovery call. Thanks so much for listening. Have a great rest of your week.[00:30:00]

[END]

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YFP 392: Keeping Your Investment Portfolio FIT

Posted on by YFP Media

Tim Baker, CFP®, and Tim Ulbrich, PharmD, share strategies to address fees, inflation, and taxes, helping you keep your investment portfolio fit and achieve your financial goals.

Episode Summary

In this episode, Tim Baker, CFP® and Tim Ulbrich, PharmD discuss a crucial topic related to personal finance: keeping your investment portfolio fit.

Tim and Tim explore three silent threats to your investments—fees, inflation, and taxes. Learn practical strategies to manage fund fees, mitigate inflation’s impact, and use tax-efficient approaches to safeguard your portfolio. Whether you’re starting to save or nearing retirement, this episode delivers valuable tips to protect and grow your wealth.

Key Points from the Episode

[00:00] Introduction and New Year Greetings
[00:12] The Importance of Keeping Your Investment Portfolio Fit
[01:32] Understanding Investment Fees
[02:08] Expense Ratios Explained
[09:12] Other Types of Investment Fees
[12:35] Advisor Fees and Their Impact
[20:36] Inflation and Its Effects on Investments
[26:19] Strategies for Pre-Retirees and Retirees
[31:06] Taxes and Investment Income
[36:37] Building a Retirement Paycheck
[39:39] Conclusion and Final Thoughts

Episode Highlights

“ Step one is we got to save money. That that’s hard enough. But when we do that important step, we want to make sure that we can hold onto as much of the pie as we possibly can.” – Tim Baker [9:01]

“ And not all financial planning services are created equal. And so it’s not just a black and white discussion of what are the advisor fees, but what’s the construct and the makeup of the advising. And then those fees can look very different and whether they’re transparent and whether or not it has a return on investment with it.” – Tim Ulbrich [13:00]

“ I always tell the story of when I got into the industry and my parents were working with an advisor and I asked the question, “ Hey, what are you paying for that? The answer I got was like, oh, it’s free kind of through your dad’s work. And I’m like, uh, you know, there’s no free lunch.” -Tim Baker [13:55]

“ If you’re in a relationship and you’re not sure how the advisor is making their fee. That’s a big red flag.” -Tim Ulbrich [17:39]

“ The best number in terms of progress with the financial plan is your net worth, right? The assets, the things that you own minus the liabilities, things that you owe.” -Tim Baker [18:33]

“ The timing of when you retire is going to be one of the most important things. It’s related to your success in terms of having your assets not run out on you.”-Tim Baker [29:02]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich: Tim Baker, happy new year. Welcome back to the show.

Tim Baker: Yeah. Happy new year. Uh, can’t believe, uh, we’re on the other side of the new, uh, the new year already. The holidays, it’s, it’s pretty crazy.

Tim Ulbrich: We are, and we’ve got a topic that is connected to the theme of new year, but of course we’re going to bring it into first personal finance and that’s keeping your investment portfolio fit, fit, standing for fees, inflation, and taxes, really three things that are silent forces that can be working behind the scenes.

On the investment portfolio. You might not always see them directly, but their impact can really be big, especially over time. And Tim, that’s where you come in. That’s where our team of the only certified financial planners come in that have worked with pharmacists, clients all across the country to navigate this topic.

This is an area, right? That doesn’t really get [00:01:00] enough attention since I think it’s hard enough to focus on prioritizing saving. Let alone worrying about maintaining the integrity of those savings. Right.

Tim Baker: Yeah. And, and this, and this, if, if not paid attention to can be the, the drag right on your portfolio and your ability to build wealth over time. And, um, it’s important to, you know, especially, you know, when you’re evaluating your, your finances, which, you know, maybe a lot of us are doing at the start of the new year, um, to, to take a look at it and see, you know, Where we’re at with things.

So, um, yeah, it can be kind of one of those things that are behind the scenes, especially if you’re, if you’re struggling just to kind of get the portfolio and kind of the wealth building aspect of your, of your finances off the ground.

Tim Ulbrich: So Tim, let’s start with fees. We’ve all heard the saying, you get what you pay for, but sometimes in investing it might be the opposite, especially regarding fund fees. The may more you pay in fees, the less you actually keep in returns, potentially. We’ll, we’ll talk about that in more detail. And whether it’s from fund management fees to trading [00:02:00] commissions, there really can be many hidden costs that can add up, especially in the long term.

And it’s important that we understand what these fees are and whether or not they’re, they’re transparent, or we’re even aware of what they are. So walk us through the different types of fees that investors might encounter on their portfolios.

Tim Baker: Yeah, probably, probably the one of the most important ones, um, that, that we talk about is the expense ratio. So the expense ratio is essentially what a fund takes. Um, to manage said fund, right? So the way I explain this, Tim is, you know, let’s say I’m a, a fund manager and I’m managing billions of dollars of a large cap fund, right?

So my job is to, you know, gather information and, and really buy and sell stocks, large cap stocks inside of my funds that my investor has shares in. So for me to do that, I need. You know, a place of business. I need an [00:03:00] office space, which might be on, on wall street or thereabouts. I need analysts. I need to pay for information.

I need to, um, pay myself, pay salaries. So all of that work that’s done, you know, needs, you know, you know, revenue would essentially support that. So what the expense ratio is, is a percentage of the, the money that, that the fund manager is managing that they take out. Um, to basically pay themselves and all those things that I mentioned.

So the, the big, the hard part about this is that it’s not necessarily a line item on your, on your like, account statement. So, if you look at sometimes they’re listening to the account statement as, hey, you’re paying, you know, a half a percent, 0. 5 percent or 1 percent or, or, um, You know, 5 basis points, which is 0.

05%. So it might be listed as this is what the expense ratio is, but you can’t really draw a line from that [00:04:00] to, like, what’s actually being taken out of your account, which, which is hard. Right? So, and what we often see is that. You know, there’s a lot of people that just don’t pay attention to this at all.

Um, and if we take the example of a large cap, you know, one of the, one of the big things, which like a, which with a large cap is that, you know, you can buy a large cap where you’re paying. 0. 03, three basis points, or you’re paying way north of that 1%. And really the only thing that’s different is the fee itself.

When you actually like, you know, unwrap that fund and you look at the individual stocks that they’re in, it’s all the ones that we know, Microsoft and Amazon and things like that. So you’re kind of paying a premium for. I don’t know what a name potentially. So it’s really important when you’re looking at, when you’re selecting your investments, or if you’re working with an advisor and they’re helping you select investments that, you know, you are getting.

Bang for your buck. Right. So it, my, my thing is like, if I’m going to pay, you know, a hundred [00:05:00] basis points, you know, 1 percent versus five basis points. So that’s a 20 X difference in fee. For me, the way that I look at that, this is like, I should be getting 20 times more performance or 20 times safer. For the same amount of performance, but it’s typically not the case, right?

It’s typically not that. So, you know, I can say that, you know, where we, what we typically like to do is drive those fees, that expense ratio down as, as much as possible. And some of the other fees that we’ll talk about, um, and really let the portfolio do what, what it, what it does, what the market do, what it does.

So the expense ratio is a, is a huge, huge part of that.

Tim Ulbrich: Tim, when, when we hear, you know, five basis points or 0. 05 or three basis points, 0. 03 versus something like 1%, You know, I think we look at that with a little bit of shock and awe, but, you know, the average investor, if you’re not thinking about this, looking at these, if you don’t feel them right in your portfolio, necessarily, you know, it’s not impacting monthly cashflow per se.

You might look at those and say, [00:06:00] how, how much does that really matter? Right. So why, why does a type of difference when you look at something like five basis points or 0. 05 versus 1%, you know, over a long period of time, the question really is impact. What, what is the potential of that impact?

Tim Baker: Yeah. So, I mean, if you, if you take a, you know, for just simple math, if you take a, , 100, 000 portfolio, and you’re in a fund that is charging you 5 basis points,. That’s 50 per year for that. Um, if we stack that up, so let’s say I’m invested in the same type of large cap fund, but it’s charging me 1%.

That’s 1, 000. Per year. So like, you know, if we add zeros to this, we can kind of see where this is going. Right? So, so to me again, like, I don’t, you know, one of the, one of the positions that we, that we pay a little bit more and they’re newer, um, and more specialized is, is like the spot Bitcoin ETFs. Like, I think the, the fund that we’re in, it’s, it’s 20 basis point, but typically our, our portfolios are four or five basis points, [00:07:00] 0.

04, 0. 05. So what I tell the client, as I tell myself is like, if I’m paying more and I’m not getting that return, or it’s not safer.

It doesn’t make sense. So to me, it’s driving those down, you know, um, as much as possible. And you can see the numbers like, again, like if I look at 1%, I’m like, oh, it’s not really that much. But over time and over many years, it’s just, those are the, those are the things that erode, erode your gain and they don’t really need to be.

So, um, you know, and to back up, like if you buy an all stock portfolio, like you don’t buy a fund, you don’t have Expense ratio, because they’re not inside of a fund. You’re buying the individual stocks. The danger there is you’re potentially, you know, um, paying commission. So anytime you buy and sell you can, you, you are charged a fee and then just the, the risk that you take, you know, in terms of like, are you broadly diversified?

Are you putting too many eggs in, in one basket? So, you know, what, what I view as, you know, good investment practice is I can, I can build a well diversified Portfolio, um, for minimal cost and again, I would put minimal cost of anything less than, you know, in the 20 to, you know, 10 basis points, like, in that range, um, and feel good about, you know, the, the construction of the portfolio and the risk that I’m taking.

Um, so I, I do think that I, I’m willing to pay the toll, the expense ratio for that and not necessarily buy individual stocks and bonds and things like that.

Tim Ulbrich: So Tim, you mentioned expense ratios. Um, obviously that, that kind of becomes the top one that we think about, especially if they’re inside of a fund, you mentioned commissions, what, what other types of fees are out there that, that folks might, may not be as aware about?

Tim Baker: Yeah. So if you’re thinking about trading and transaction fees, um, you know, there, there are brokerage commission. So these are fees charged by a broker for executing trades on your behalf. So it could be something like a, a stock trade commission. Um, these are typically flat fee, so it could be anywhere from 5 to 10.

Um, a lot of these have kind of gone, there’s a lot of commission free brokers, um, that have kind of, you know, um, squashed a lot of these, but they’re still there. If you’re, if you’re option trade in, there’s option trade, uh, commission fees, there’s mutual fund, uh, transaction fees. So these can range anywhere.

You know, when I was in the broker deal world, I think it was almost like 30 per trade, right? Typically the range is, you know, 10 to 15. You know, 50 per trade. So, um, they’ll, they’ll, uh, they’ll, you know, brokerage will charge us, you know, to buy and sell, you know, mutual funds. There could be like spread costs.

So the difference, this is the difference between like the bid and the ask price of a particular trade. So they might, um, have a little bit of a spread. So they’re, so, so the, you know, the brokerage is making money. Um, one of the big things that I remember, especially being in the broker dealer world is account maintenance fees.

So these are, these are fees charged, uh, for maintaining an account. Um, such as an IRA. Um, and these, you see these more [00:10:00] Tim in like low interest rate environments. So they’re not making a whole lot of money on the float of the money that, you know, cash that they’re sitting on. So they try to find ways to make money.

Um, and these, these could be. I think when I saw them, it was like 50 an account. I see them anywhere from like 25 to a hundred dollars annually. Um, sometimes there’s foreign transaction fees. So these are applied to trades on international exchanges. There could be redemption fees. So these are fees for selling certain types of mutual funds or ETF within a specified, like holding period.

Um, so as an example, like if you, if you look at your account statement and you see, Like, uh, a mutual fund that you had that has an a, like next to it, that’s an a share mutual fund that you were probably, uh, sold that had like an upfront commission. Right. And, um, a lot of people don’t know that up going in, um, and they pay that and they’re like, what, what the heck happened?

There’s also C shares. [00:11:00] That you pay a little bit on the front end and then you pay an ongoing fee, um, which is not great. Those are typically the worst ones. And then you have a B1, which is kind of an in between that. There’s like a holding period that you can sometimes get redemption. So being, um, where we, we don’t, you know, we don’t operate in them, but I do come across a lot of clients that are like, oh, I’m not paying commissions.

And I look at their statement and there’s A’s and C’s. That’s what you typically see, excuse me, all over the place and they just don’t realize it. So. And probably the last one that I hear is kind of like robo advisor fees, right? I’m in a particular program and I’m paying, you know, a certain, certain amount.

So those are the ones that, you know, um, expense ratio, expense ratio, and then trading, trading fees, transaction fees, and kind of a slew of those that you’ll, you’ll often see.

Tim Ulbrich: Is that, is that it, that’s all you got on the list of, uh, potential fees that

Tim Baker: Yeah. And then we haven’t even gotten into the advisor fees, which we can talk about, but yeah. Yep.

Tim Ulbrich: let’s talk about that. Right. Because obviously, you know, that’s the work that we do and it [00:12:00] has to be factored in and, and full disclaimer, we’re, we’re biased in the value of the work that we bring clients. And we, we believe when you talk about advisor fees, Tim, when it’s done well, which is why we believe in the fee only model.

That’s why we have the model that we do that. Yeah, it’s a fee. Yeah. And it’s a fee that we have to factor in, but there’s a return on investment of that fee that we also have to account for. And not all financial planning services are created equal. And so it’s not just a black and white discussion of what are the advisor fees, but what’s the construct and the makeup of the advising.

And then those fees can look very different and whether they’re transparent so how do you think about the advisor fee piece?

Tim Baker: Yeah. And I, and I think, I think a big part of this is just like transparency, right? Like oftentimes, you know, when I would, I’d ask people that I’ve worked with an advisor, like, what are you paying them? They’re like, uh, I don’t know. Like, and I always tell the story, you know, of, you know, when, when, when I got into the industry and my parents were working with an advisor, you know, I asked the question, I’m like, Hey, what are you, what are you paying for that?

And it’s, you know, the answer I got was like, oh, it’s, it’s, it’s free kind of through your dad’s work. And I’m, I’m, And I’m like, uh, you know, there’s no free lunch. Right. So, and then years later, when I actually looked at it, you know, the fees were significant, like North of eight grand a year, right. Um, in the product.

So, you know, in the, in the broker dealer world, again, no shade to that, you know, where it’s more like fee based, so you can charge commissions, you can charge flat fee percentages. I think the problem is, is like. You know, what the advisor is trying to do is one help the client, but also make a living. So, so they’re, they’ll say, Hey, I can, I can get you in this investment and then I earn a commission.

Um, or I get you in this investment. I earn kind of an ongoing fee. And then maybe I sell you, you know, a life insurance product that I earn a commission or an annuity in our commission, or I charge you hourly. So it’s really just confusing. Right. So I think like. Transparency of fee and like, what you’re paying is really important.

And I think marrying that up to like the value that you’re receiving, right? So there’s some people that they view comprehensive financial planning as. Selling you an insurance product and managing your money. And that’s it. And then maybe talking to you once every couple of years, we don’t view that as comprehensive financial planning.

Like we, we view that as very light financial planning, if, if financial planning at all, maybe some investment management. So when you look at the different ways that advisors can charge, you know, fees, it could be a flat fee. It could be an AUM assets under management, which is a percentage of what they’re managing.

And it can be an. Assets under advisement, so it’s, you know, the feet, the investments that they’re managing directly at their own custodian, but also managing indirectly, say, at like, a 4 or 1 K or a 529. it could be commissions that we talked about, which could be commissions on insurance. It could be commissions on investment, which is kind of what we’re talking about here.

An hourly fee or kind of a combination of all these things. So, you know, I think I think the, the, the, the hard part for the consumer for the client is to determine a, like, what the heck are they paying? And are they getting value for that? Um, and if they’re not, then obviously, you know, reassessing it. So, you know, and there’s.

There’s pros and cons for all of these, right? Um, and there’s, there is no such thing as, um, you know, sometimes advisors, especially in the feeling where we’ll say, you know, we have, you know, we give conflict free advice that does not exist. It doesn’t in any model, there’s always a conflict of interest. And I think, you know, the advisors that that is willing to say, like, Hey, we think this is in your best interest.

However, cards on the table, it’s also going to change our fee, increase our fee. Um, and that can go the other way too. It’s also going to decrease our fee. Um, you know, I think those are the type of advisors that are my people, you know, we want what’s best for the, for the, for the client, but understanding, you know, what model you’re in and then like what you’re actually paying is going to be half the battle.

And, and, and more often than not, when I talk to prospective clients and I ask them, Hey, what are they, what are they, what are you paying? They’re like, I literally have no idea. And I think that’s problematic.

Tim Ulbrich: Yeah. And that’s what my experience tells me, Tim, is that, you know, especially the pharmacist households that we’ve worked with, even those that decided, Hey, we’re not, we’re not a good fit. Um, and that’s okay as well is transparency is what matters, right? They want to know what’s involved.

Everyone has a different definition of what, what is return on investment. What’s value that can change in different seasons of life. So, um, I think the transparency pieces is so critical. And if you’re in a relationship and you’re not sure how the advisor is making their fee. That’s a big red flag. Right.

And I think something worth exploring further.

Tim Baker: Yeah, and I think, you know, um, you know, when we talk about fees, like, you know, you’re no model is going to fit everybody. Right? So I think like, it’s just again, being comfortable understanding what you’re paying. Um, and, and, and what I was going to say was, you know, oftentimes, especially with pharmacists, type a scientific minds, they’re like, okay, if I’m going to give you, you know, X amount of dollars in fees.

What is the ROI? And I’m like, well, define ROI because the way that we look at this, the way that we look at ROI is that you, there is a quantifiable that you can count ROI, but I don’t even think it has anything to do with investment returns. I really think the best number in terms of progress with the financial plan is your net worth, right?

The assets, the things that you own minus the liabilities, things that you owe. But I think the other unspoken thing here is the, not the quantifiable things, but the qualifying things of, of what, what have we done with your plan with, with your life plan supported by the financial plan?

That’s hard to count. Whether it’s that, that family, that. Finally, you could buy the house when they didn’t think they could or had the baby or retired early or pivoted careers or got back into a passion that they had put on the sideline for a long time because of whatever reasons. Those are the things that get me fired up.

They have nothing to do with. Ones and zeros in the bank account or net worth or things like that. And I think if you’re in that type of relationship and you have that type of trust and rapport, that’s worth a lot. Um, so that’s my soapbox, Tim.

Tim Ulbrich: I agree. And, and I, you know, would be remiss if I didn’t put a plug in here for what we do and, and for those folks listening that would like to learn more about our fee only financial planning services, what our team of certified financial planners can offer, um, you Working with households all across the country, uh, virtually, you can learn more, your financial pharmacist.com. You’ll see an option at the top, right? You book a free discovery call to learn about those services. Tim, let’s shift to inflation. Um, so in addition to fees, we have to pay attention to inflation and this one feels a little bit sneaky, right? I mean, you’re making money, but inflation is quietly chipping away at your purchasing power.

Yes. Today. At the grocery store, I think we’ve all felt that recently and and perhaps five six years ago It was hey inflation what but we all have felt that more recently But not only in our expenses today might we feel that but also in the future When we think about how far our savings will go so explain to us how inflation erodes the purchasing power Of an investor’s returns over time

Tim Baker: Yeah. So when I talk about like, cause there’s a lot of people out there. That are super risk adverse. Right. So they’re like, Tim, do I really have to invest? Can I just like stuff my mattress or put money in my bank account, my high yields. And I call it a day. And the answer is like, especially if we’re aspiring to be a seven figure pharmacist, plug the book, um, answers.

No, you can’t. And the, when I talk about this, you know, um, with, with, in, in, in, in different talks, like when I look at inflation, if we take, If we take a latte that you buy at Starbucks in 2025, and let’s say it costs 4 dollars. Um, and maybe that’s just a plain coffee these days. But if you, if you, if you get that, that coffee at 4 dollars, if we use historical rates of inflation, and most advisors will use about 3%.

Now, you know, we’ve had years and spikes that, you know, some people are like, well, let’s use 3 and a half or 4%. But if we use 3 percent and we fast forward 30 years, from 2025 to 2055. That same latte that would cost 4. 00. Costs 10 30 years from now. So what that means is that your dollar just goes less far.

And this is why my dad’s in the 70s. You’d always talk about, you know, his grandparents would give him a nickel and you go to the candy store and buy half the store. It seemed right. You can’t buy anything for a nickel today, right? So the, the idea of investing and having a solid investment plan is to keep pace with the inflation monster, but then also get ahead of the tax man, which is what we’re going to talk about next.

So unfortunately we can’t bury our hands, head in the sand or, you know, and I, and I say that, Facetiously and just put money into a check into our savings account and call it a day because over time that, you know, 400, 000, you know, if we, if we look at it from an investment is going to be equivalent to 1, 000, 000 or the purchasing power of 1, 000, 000 in the future.

So. That’s why we need to invest and take appropriate risk and equities and bonds. And I would argue equities, you know, mostly through, you know, the working years of most people, or especially early on. And then as we get closer, you know, start to to add more bonds and fixed income. But that’s really what it is because, you know, every year, you know, the price of goods and services.

Goes up. Um, and it’s a systemic thing that we can’t escape. Um, you know, that we really have to adapt our financial plans to.

Tim Ulbrich: Yeah. And I think Tim, it can be easy to lose sight of historical trends when we’re in

Tim Baker: Yeah, for sure.

Tim Ulbrich: time periods. Right. So, you know, I’m thinking of this moment while we’re recording, although rates have come down, high yield savings accounts are. 4 percent ish, right. Give or take, um, we’ve had historically high inflation, you know, the last couple, a couple of years for obvious reasons we’ve talked about on the show.

And so I think sometimes people look at that and they say, oh, well, you know, 4%, that’s really good historical rate of inflation, but we can’t confuse those. Right. Because just a few years ago, what was our high yield savings account earning less than 2%? Well, I mean, for a while right down there, I mean, even lower than that.

So when we zoom out. Yeah, we get, get those emails, right? Your, your savings account has gone down, but you know, if we zoom out, we look at the historical rate of inflation. If we’re not investing and it taking some level of calculated risk and what that risk tolerance and capacity is, is different for, for everyone.

And that has to be customized, but if we’re not doing that, right. Our, our long term investments really come to be at risk and in terms of us achieving our long term goals.

Tim Baker: Yeah. And I’ll give you an example. So if we talk about the long term effects of inflation, so, um, over time, inflation compounds, meaning it’s cumulative effect on person power grows significantly. So, like, if we take 100, 000 portfolio and we invested at, um, we get a 6 percent annual return over 20 years.

Without inflation, that portfolio grows to from 100, 000 we’ll call it if we, if we then interject reality, which is about a 3 percent inflation, the real value of that investment, if we adjust for inflation would be 180, 000. So that’s, that’s the, that’s the rub here. And again, that’s, that’s why, you know, when people are like, Oh, I’m like really conservative.

I don’t want to take risk. I’m like, you kind of have to get in front of this, you know, especially in, you know, younger in your younger years, um, you know, to get in front of again, inflation and then, and then the tax man.

Tim Ulbrich: Yeah. And this is also why, when we’re doing things like retirement projections, nest egg calculations, especially for people that are maybe in that, you know, front half of their career, let’s say they look at these numbers and they’re like, is this wonky math, right? These seem like they’re huge. They’re out of reach.

Well, we’re, we’re thinking about it in today’s dollars. And obviously we have to be thinking about it. In the future as well, Tim, you alluded to retirement age a little bit. When you’re talking about asset allocation, let’s just touch on that a little bit more. So for maybe some of the pre retirees listening or people that are in the second half of their career that are thinking about retirement, it’s on, on the horizon and are concerned about the long term effects of inflation on their portfolios, ability to generate income and to sustain itself.

What are some general strategies that we’re, we’re thinking about employing? I know you’ve talked before on the show about, Hey, social security, right? It’s, it’s one of those rare vehicles that we have some inflation protection. What, what, what [00:25:00] other thoughts here?

Tim Baker: Yeah. I think as you look at your, your investment strategy, like there are things that, yeah, you mentioned. So that’s why we’re a big, you know, a big believer and really having a very purpose based strategy when it comes to a, uh, social security claim. And because once you made that decision, it’s kind of forever.

And that can really affect the amount of. Inflation protected income that you have coming in the door. Um, so the other things you can think about is there are inflate, there are inflation protected security. So there’s tips treasury inflation, protective securities that are linked, um, to they’re kind of marked to inflation.

So as you know, as, um, Inflation goes up. So does the interest payments for which you, you know, which you receive, um, they don’t necessarily, they’re not necessarily, you know, growth oriented, but it helps you kind of, you know, at least keep pace with that. What we’ve been talking about, you know, at length here is, is really having a portfolio that’s invested in growth oriented assets.

So stocks. Real estate could be commodity commodities that outpace inflation over time that kind of provides a hedge against inflation reinvest in your return. So compound and helps offset offset the negative effects of inflation over time. Another thing that, again, we believe in, um, that not everyone does, but even diversify internationally.

So invested in global markets may reduce inflation. Um, Risk retired, you know, tied to kind of the U. S. Dollar or the economy. And then probably the big thing I hear, or I see, and I actually just had a conversation with perspective client, you know, they were sitting on over 200, 000 of cash and I’m like, why?

And part of its monitor cash holdings. So cash lose unless it’s in a high yield. It’s kind of getting close to that. You know, and today 4 percent cash loses purchase and power quickly in inflationary environments. So you want to really limit the cash that you have idle. So we kind of talk about, you know, you want your emergency fund and any short and medium term goals that you need cash for.

So that might be a trip might be a project on your house, et cetera, et cetera. And that foundation is set to then get money into the market for more, you know, longer, longer term type plan. And so those would be things, you know, like, like I mentioned, you know, it could be, you know, what you invest in, whether it’s tips, you know, growth, equity type of, of stocks could be commodities, but then also some of the things that you’re doing, you know, with cash and, and how you reinvest returns and things like that can help Kind of tackle, tackle the, the, the problem, you know, the, that won’t ever go away, which is the inflation, um, associated with your, with your assets.

Tim Ulbrich: Yeah. One last thing I would add in here, Tim, and this is where I think the flexibility piece is so important. And we’ve, we’ve talked at length on previous shows about this, but if someone has some flexibility. With their retirement situation, whether that be part time work, whether that be the [00:28:00] timeline of when they retire, and we’re in a high inflationary period or a downturn in the market, right?

Things that we may not anticipate happening. Those types of levers that we can pull go a long way in terms of how we maintain the integrity of our, our investment pie as we go throughout retirement, so it’s not a set it and forget it so important when we think, you know, I think back to my early years of saving.

You know, coming out of pharmacy school and it’s like, all right, we’re going to pay it away, whatever, 20, 25 percent of our income. And we’ll kind of think about this tomorrow and that that’s good early on. But then you get to this point in time where we start to ask this question. I’ll be like, Hey, are we on track?

And you know, what is the horizon timeline? And then more nuanced questions, like some of the tax strategies, when we think about withdrawals or, Hey. You know, the markets had an unexpected downturn or we’re, we’re in a down market for a longer period of time. And maybe it’s not the best time to retire, or maybe I could retire early.

Right. There’s all these wrinkles that we have to consider as we get closer to that timeline.

Tim Baker: [00:29:00] yeah. And, and, you know, probably the timing of when you retire is going to be one of the most important things that, you know, um, You know, it’s related to your success in terms of having your assets not run out on you.

Tim Ulbrich: All right. The last piece of our, uh, keeping your investment portfolio fit fees, inflation, taxes, taxes is number three, certainly last, but not least. This is a big one, right? They could take a huge chunk out of your investment Income, particularly if you’re not strategic about it. We’ve harped on that on the show many times before about being proactive with your tax planning and how important that is to the financial plan and whether it’s not maximizing tax advantage accounts, whether it’s realizing, you know, capital gains, taxes, when you’re selling investments or taxes on interest income, if you’re not paying attention to taxes, Tim, it can really hurt your returns.

And, and I think tax is just one of those dry topics that, Hey, we’d rather not really think about.

Tim Baker: Yeah. And it’s, it’s another one, it’s another one that has major [00:30:00] implications on, you know, again, your, your ability to, um, grow your wealth and, and, and keep pace with, with lifestyle, especially in retirement and, and, and really throughout your, your, your whole life. So, you know, I, I think, I think one of the big things that I think about, so when I, when I talk about taxes and investment, I kind of lead with a little bit of a depressing, like example.

So like, if we look at a million dollars and a traditional 401k, a million dollars in a Roth IRA, a million dollars in an HSA, et cetera, then one of the questions I always ask is like, how much money do we actually have? And. Unfortunately, we don’t have 3 million or 4 million dollars, how many bucks it is because anything that is gone into a pre tax bucket, like a traditional IRA, a rollover IRA, a traditional 401k uncle Sam has yet to take his bite of the apple.

Right? [00:31:00] So the mechanics of this is like, if I put money into my 401k, let’s say I put 20 grand in, um, I make 100, 000 a year. The IRS looks at me is if I made 80, 000. So I get a deduction for that. So that 20, 000 goes into my, my 401k. It grows tax free, which is great, which means I’m escaping capital gains. I don’t have to pay capital gains.

And then when I pour that money out in retirement, that’s when it gets taxed. Right. So if I have, you know, over time, I have a million dollars there and I’m in a 25 percent tax bracket, actually 750, 000 of that is mine. And 250, 000 of that is the government. So I think what’s really important about taxes and investment is actually something called, um, asset location.

So these are different types of investment accounts that have different, uh, tax treatments. And the, and the three main buckets here, Tim, are the. Uh, The tax deferred accounts, which I just talked about. So this is kind of a traditional 401k traditional IRA. [00:32:00] So these contributions are pre tax and the investment gross tax referred and then the withdrawals are typically taxed at ordinary income levels.

We have the tax free accounts, which is a little bit misleading because you actually pay the taxes, you know, as it goes in. Um, so these are things like Roth IRA, um, Roth 401k. So the contributions are after tax. So I’ve got my paycheck. I’ve already been taxed and I put those money into a Roth. That investment grows tax free and the withdrawals are then tax free.

So when I pour out that money, so if I have a million dollars in a Roth IRA, I pour out all million dollars of that. I actually get all million, all 1 million of that. And then the last one is the. Taxable accounts. These are the brokerage accounts. So these are taxes, taxes are paid annually on interest, dividends, capital gains, typically the contributions are with after tax dollars.

So I was, I was taxed on it, um, through my paycheck. I contribute that to a taxable account. It grows, but then any capital gains, um, interest dividends, [00:33:00] I’m, I’m taxed again. Um, and that’s where we get into things like tax loss harvest. So, you know, depending on where you’re at. geographically where you’re at in life, you want to have a little bit in column a, a little bit in column B, a little bit in column C, right?

So it’s really important to be able to when we’re building, if we fast forward to retirement and we’re building a paycheck, if I’m the maestro and I’m building a retirement paycheck, I know that Maybe we’re getting in some in from consulting part time work team. Maybe we’re getting some in from, um, social security, which is also taxed, but then the gap that I’m trying to make up between those things and what we need to, you know, live in and thrive.

I’m pulling from these 3 buckets and, you know, if I have a balance of those 3 buckets, it benefits me because what I’m trying to do as a planner is fill up your tax bracket in the most efficient way [00:34:00] possible. So I might take some from the pre tax bucket to get you to, you know, to max out that 12% Um, tax bracket.

And then maybe I go to the, um, the, the Roth to then, you know, get the rest. Maybe we’re, we’re retiring at 58. So then I’m, I’m using primarily, um, a brokerage account because anything between before 59 and a half, you know, I get a penalty and pay taxes. So, excuse me, that’s the, the asset location is really important to determine how we then pull it in retirement and what makes the most Efficiency wise, um, from a tax perspective.

Tim Ulbrich: Yeah. And what you’re talking about, Tim is building a retirement paycheck, right? We talked about this on episode 275. We’ll, we’ll link to that in the show notes, but I love that visual. Cause we all, we all can relate to that, right? Throughout our career, whether we work for someone else, we’re self employed, you know, we have some semblance of a, of a paycheck, maybe it’s fixed, maybe it’s variable, you know, for time, but eventually we’re going to get to [00:35:00] this future state where maybe we’re working part time or eventually we’re not working at all, Or we have to produce our own paycheck.

And there’s going to be multiple sources that are feeding into that. You mentioned it could be social security. It could be, uh, an annuity. It could be, uh, coming from an IRA. It could be coming from real estate. It could be coming from a 401k, right? All these different pathways. And it highlights so well, the point that not all buckets and dollars are created equal as you articulated.

So, well, you could have two people that both have 4 million. And where that 4 million is going to go and how it’s going to be deployed could be very different depending on what buckets from a tax standpoint. And it’s important on the front end. So we’re talking withdrawal side with the building and the retirement paycheck, but it’s also important on the front end is we’re saving, not that we can predict everything that will happen in the future.

But if someone says, Hey, Tim, I want to retire early. And they’re serious about that. Well, we got to think about where those buckets of dollars are going to be and how do we build a plan and a way to support that? So, you know, this is where [00:36:00] online nested calculators fall short, right? Just, just punching in numbers and saying, Hey, Tim, you need 3.

4 million saved, like where, how, what’s that going to look like? What are the tax treatments? All those questions have to be answered.

Tim Baker: Yeah. And it’s, it’s so nuanced, right? Even like, we talk about our own situations. Like, we’re two Tim’s in Ohio. Our financial situation is similar, but different. But even, even with slight variation, we just, there’s, there’s certain things that we, that, that I’m doing in my plan that you’re not doing and vice versa.

Right? Like, one of the, one of the cool things about being self employed in Ohio is, you know, your first 250, 000 per year, there is no state income tax. Um, So, you know, when I moved from Maryland, I’m like, Oh, like I need to really take advantage of that. And hit my Roth harder than what I was, because I’d rather pay the tax.

Now, I just pay federal, um, and, you know, use another example. Like, if I decide [00:37:00] to retire in Florida, you know, maybe I don’t I don’t need to do that, you know, but I’m not retired. I’m not planning on doing that. But, you know, if you’re, if you’re working in a state with income tax and retirement with a state that doesn’t, again, there’s legislative risk there because, you know, things could change, but all of those things kind of play a part in this.

Journey, which is what it is. Um, and it, it’s hard to get that from a calculator and, you know, it is nuanced. And I think, um, you know, provide, you know, it requires a level of care and attention, um, especially when we’re talking about the, the nest eggs and, and the assets that were, you know, that we’re working with over time that, you know, just requires some level of love and attention, really.

Tim Ulbrich: Tim, great stuff. We covered a lot in a short period of time, fees, inflation, taxes, three really important parts as we think about our investment portfolio. And we really are just scratching the surface on all of those areas. We’ll link to some of the episodes. We’ve got more information in the show notes.

Thank you so much everyone for listening to this episode of the podcast. If you’d like [00:38:00] what you heard, do us a favor, leave us a rating and review on Apple podcasts. Or if you’re watching on YouTube, would you help other pharmacists find our show as well? And finally, an important reminder that the content in the show is provided for informational purposes only is not intended to provide and should not be relied on for investment or any other advice, information on the podcast and corresponding materials should not be construed as a solicitation or offered by ourselves, any investment or related financial products for more information on this, you can visit yourfinancialpharmacist.com forward slash disclaimer. Thanks so much for listening. Have a great rest of your week.

[END]

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YFP 387: Cryptocurrency & Digital Assets: Investment Considerations and Tax Implications

Posted on by YFP Media

In part two of their cryptocurrency series, YFP Co-Founders Tim Baker and Tim Ulbrich discuss spot Bitcoin ETFs, the IRS’s stance on cryptocurrency, and strategies for incorporating digital assets into long-term portfolios.

This episode is brought to you by First Horizon.

Episode Summary

This week in part two of the series on cryptocurrency and digital assets, YFP Co-Founders Tim Baker, CFP and Tim Ulbrich, PharmD explore the recent introduction of spot Bitcoin ETFs and how they differ from investing directly in Bitcoin. Tim and Tim also discuss the IRS’s perspective on cryptocurrency and key considerations for including digital assets in your portfolio as part of a long-term investment strategy.

Key Points from the Episode

Introduction to Cryptocurrency and Digital Assets Series [0:00]
Role of Digital Assets in Portfolio Diversification [3:12]
Investing in Bitcoin vs. Bitcoin Spot ETFs [8:52]
Tax Considerations for Digital Assets [13:43]
Use Cases and Future of Digital Assets [23:13]
Fee Considerations for Digital Assets [24:50]
Conclusion and Next Steps [30:41]

Episode Highlights

“There’s a lot of things that digital assets can solve. If you’re in countries where you have hyperinflation, where the price of bread is double or triple in the morning than what it is in the afternoon, something like a stable currency is really attractive to you.” – Tim Baker [12:18]

“Digital assets are taxed as property, so the IRS looks at it as property. So, and that’s kind of one of the rubs here when Bitcoin was kind of introduced. It was supposed to replace the dollar, or that was the idea. And again, I do think that a digital asset will replace the dollar. It’s just not going to – it won’t be Bitcoin.” – Tim Baker [13:45]

Links Mentioned in Today’s Episode

Episode Transcript

The transcript will be included following the release the episode.

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YFP 386: Cryptocurrency & Digital Assets: Definitions, Origins, and Risks

Posted on by Tim U

Tim Ulbrich and Tim Baker discuss cryptocurrency, examining its advantages like decentralization and transparency and risks such as volatility and regulatory uncertainty.

Episode Summary

In this first episode of a two-part series on cryptocurrency and digital assets, YFP Co-Founders Tim Ulbrich and Tim Baker explore the world of digital finance and its relevance in today’s financial landscape. Tim and Tim unpack essential terms and explore how the 2008 financial crisis served as a catalyst for the rise of cryptocurrency, with Bitcoin leading the charge.

The discussion highlights the unique advantages of digital assets, such as decentralization, transparency, and their fixed supply, contrasting these features with traditional currencies. Tim and Tim also address critical risks, including market volatility, security concerns, and regulatory uncertainties.

Key Points from the Episode

Overview of Digital Assets and Cryptocurrency [2:26]
Defining Digital Assets and Their Characteristics [4:25]
The Financial Crisis of 2008 and Its Impact on Digital Assets [8:29]
Bitcoin and Blockchain Technology [14:13]
Advantages and Risks of Digital Assets [18:43]
Regulatory Concerns and Security Risks [18:55]
Volatility and Comparison to Traditional Investments [19:12]
Conclusion and Preview of Future Episodes [34:33]

Episode Highlights

“There’s a lot of people that invest in more mutual funds in their 401k that don’t fully understand how mutual funds work. So I think that’s where an advisor or somebody that you trust can be a guide in this. But I do think that something like this, with it being new, doing some research and understanding what that looks like is important.” -Tim Baker [7:59]

“If you look at the US dollar, it used to be backed by the gold standard, but once it moved to a fiat currency, it derives value from the trust and the issue in government. Whereas Bitcoin derives value from the trust in the decentralized system.” – Tim Baker [24:05]

“The US dollar gets value from the widespread acceptance as legal tender in the United States, but even across the world, like dollars are valuable anywhere or in most places. Whereas, you know, Bitcoin, its acceptance is by its users and people that believe that this is the future.” -Tim Baker [24:46]

“I think the biggest risk is the volatility. So, you know, digital assets are highly volatile and can experience dramatic price swings in short periods.” – Tim Baker [30:18]

Links Mentioned in Today’s Episode

Whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”
Too Big to Fail by Andrew Ross Sorkin
YFP Book a Discovery Call
YFP Disclaimer
Ask a financial question to YFP
Subscribe to the YFP Newsletter
Tim Ulbrich on LinkedIn
Tim Baker on LinkedIn
YFP on Instagram
YFP Facebook Group

Episode Transcript

The transcript will be included following the release the episode.

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YFP 314: RMDs: What They Are & Why They Matter

Posted on by Tim U

Tim Baker, CFP®, RICP®, RLP® discusses RMDs: What they are, why they matter, and factors to consider when building a retirement paycheck.

Episode Summary

No matter where you are in your career journey, it’s never too early to start optimizing your retirement plan. One important factor to consider when building your retirement paycheck is Required Minimum Distributions (RMDs). RMDs refer to the minimum amount that you must withdraw from certain retirement accounts each year after reaching a certain age.

On this week’s episode, YFP’s Co-founder and Director of Financial Planning, Tim Baker, CFP®, RICP®, RLP® unpacks the many intricacies of RMDs, like which accounts demand RMDs, which ones don’t, and what to consider when planning how to build your retirement paycheck. You’ll learn about how RMDs are calculated, the penalties you can expect when you don’t fulfill RMD requirements, how to optimize and reduce the impact of RMDs, and why optimizing your retirement strategy starts in the accumulation phase.

Key Points From the Episode

Introducing Tim Baker and today’s topic: Required Minimum Distributions (RMDs).
Planning for retirement and the taxes you typically need to pay.
The importance of understanding RMDs, even if you aren’t near retirement age.
How the IRS defines RMDs and a run-through of the accounts that typically include RMDs.
An overview of a Roth IRA and how it is contributed with after-tax dollars.
How contributing after-tax dollars allows your retirement to grow tax-free.
A rundown of what happens if you inherit a Roth account.
The primary benefit of Roth accounts: control.
Why traditional accounts are still beneficial despite RMDs.
A breakdown of how RMDs are calculated in various scenarios.
The rules and penalties if you don’t fulfill your RMDs.
What to consider when planning how to build your retirement paycheck.
Why optimizing your retirement strategy starts in the accumulation phase.
How to optimize and reduce the impact of RMDs.

Episode Highlights

“The government doesn’t really care because they’ve already taken their bite of the apple. With Roth IRAs, and then Roth 401Ks, 403Bs (especially heading into 2024), you’re not required to take RMDs.” — @TimBakerCFP [0:10:53]

“With Roths, it’s about control. It’s the control of when you’re paying your taxes or a known quantity of what your tax bill is going to be but then it’s also [that] I don’t have the burden of being forced to distribute the account when I don’t want to.” — @TimBakerCFP [0:13:03]

“So much of building a retirement paycheck (and all this strategy we’re talking about) really starts with ‘in what buckets are you saving?’” — Tim Ulbrich [0:27:16]

“I would still advocate for the use of these accounts because the long-term benefits of having tax-deferred growth is a huge benefit. – I don’t want people to think ‘I don’t want to use these accounts because I don’t want to have to pay RMDs’.” — @TimBakerCFP [0:30:01]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey everybody, Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome YFP co-founder and Director of Financial Planning, Tim Baker, to talk about required minimum distributions. Also known as RMDs. We discuss what they are, how they’re calculated, strategies to optimize, and why this topic matters to building a retirement paycheck.

As a supplement to today’s episode, make sure to download our free checklist; What Issues Should I Consider When Reviewing My Investments? You get a copy of that resource by visiting yourfinancialpharmacist.com/investmentreview. Again, that’s yourfinancialpharmacist.com/investmentreview.

Okay. Let’s hear from Justin from the YFP team and then we’ll jump into my interview with Tim Baker.

[00:00:55] JW: This is Justin Woods from the YFP team with a quick message before the show. If you listen to the YFP podcast, you may learn something every now and then, either from Tim Ulbrich, Tim Baker or one of our guests. A lot of people listen to the show but they may not execute or implement the things they learn.

As pharmacists, we know the impact of non-adherence on patient outcomes and their overall well-being. As a pharmacist myself and part of the YFP team, I talk with pharmacists every day who are confused about how to implement financial knowledge. Pharmacists share with me that they’re treading water financially. Maybe took a DIY approach, reached the plateau and are confused about what to do next. Or those who work for decades can see the light at the end of the tunnel and feel uncertain about how the next chapter will unfold. If that sounds like you, one, it is not uncommon to feel that way. And two, does it make sense for us to have a conversation to see if YFP planning can help you? Visit yfpplanning.com or follow the link in the show notes to find a time that works for your schedule.

[INTERVIEW]

[00:02:01] TU: Tim Baker, welcome back to the show.

[00:02:03] TB: Good to be here, Tim. How’s it going?

[00:02:05] TU: It is going well. Last week we talked about four reasons that we believe you should have your financial planner manage your investments. Great episode. If you haven’t yet, check that out. I hope you will do so. We’ll link to that in the show notes.

This week we’re going to be talking about a topic that we have not really covered before at length or in depth. And that is around required minimum distributions or RMD.

Tim, maybe not the most exciting topic to talk about. But considering some of the questions that we’re getting considering some of the rule changes have come around this with the Secure Act and, obviously, an important part of the retirement planning, a topic that we need to address.

[00:02:43] TB: Yeah. It’s one of those overlooked things until you’re kind of right up against it, unfortunately. And we kind of talk about it at a high level more with regard to your investment assets and what has yet to be taken by Uncle Sam.

I always kind of talk through, if you have a million dollars in a traditional IRA, a million dollars in a Roth IRA and a million dollars in a brokerage account, like how much money do you have? And unfortunately, it’s not $3 million. Because at least in the traditional IRA, when that money goes in pre-tax, it’s tax coming out. So if you’re in a 25% tax bracket to keep the math simple, you have 750,000 of that and Uncle Sam has 250,000. So you’re in a partnership with Uncle Sam in that account.

The big difference or when where RMDs come into play is that, just like when we retire, or how we retire, or things like that, we’re not always in control of how that money is to be poured into retirement. And, essentially, what the government says is, “Hey, remember all of those years that you were able to defer? Now we’re kind of requiring you to distribute those assets over time based on a table in terms of how much you actually have to do or actually have to distribute.” So we’ll kind of talk about that in this episode.

[00:04:16] TU: Yeah. And I really do believe, while this is a topic that I think tends to focus more on those that are nearing retirement planning, to build that retirement paycheck. Really, for folks at all stages of their career, even if I’m early on in my journey, really understanding how RMDs can be helpful in understanding, as you mentioned, the different bucket than how you’re saving and even some of the early investing strategies. So stay tuned regardless of where you are throughout your career.

Tim, let’s start with the definition. What exactly is an RMD? Requirement minimum distribution?

[00:04:49] TB: So this is the minimum amount that you must withdraw from your retirement account each year. I think that’s how the IRS defines it. And essentially, what it means is that if you have that million dollars in your traditional IRA that we talked about, you don’t have to pour all million dollars out in one year and Uncle Sam gets 250,000 and you get 750,000. That’s just used for kind of illustrative purposes.

But depending on your age, you have to pour out a portion of that million dollars. And essentially, what it’s doing is it’s forcing you to pay the tax on those pre-tax retirement accounts. And this has moved over time.

I think, Tim, when I first started learning about studying for the CFP and things like that, the age four required minimum distributions was 17 and a half years old. Now it’s 72. And this is part of the changes of the Secure Act. It’s going to move to 73. And then I think starting in 2033, the age will be 75. That’s a benefit for us. Our required minimum distribution at present will be 75 years old.

What that means is that we can hold on to these investments in the tax-preferred account longer. Now what the government is saying is that, yeah, you could hold on it longer. We also know that you’re living longer. So that’s one of the things that you’re trying to do.

The accounts that are in question, Tim, that often require – not often but do require minimum distributions are the 401K, the 403B, the 457, the TSP, the traditional IRA, SEP IRA, SARSEP IRA and then the simple IRA. These are the ones. Again, most people don’t have SARSEPs these days.

And then what’s weird is most Roth accounts do not require RMDs, which is one of the main advantages of a Roth. However, today, in 2023, and this will change in 2024, if you have – with YFP, we have a 401K with YFP. Part of the dollars that I invest into our YFP 401K goes to a pre-tax, a traditional 401K. But a good chunk of my dollars go into a Roth 401K.

If I were 73 and I had a balance in that Roth 401K, technically, I would still have to take an RMD from that account. In 2024 and Beyond, RMDs will no longer be required from those designated Roth 401K, 403B. So another little quirk in the –

[00:07:34] TU: Tim, just to highlight that for a moment because I think that’s point of confusion that’s going on right now. Roth IRAs have been like that. If you have a million dollars in a Roth IRA, as you highlighted, the buckets, a little bit earlier, you’re not required to draw from that in terms of what would come out of it with taxes. And we’ll talk about how that could impact beneficiaries if that money was transferred here in a moment.

And so, really, the change you’re referring to is for what has been a more popular employer-sponsored account. We see more and more people that are in these Roth 401Ks or in Roth 403Bs. Where the Roth is a part of an employer-sponsored account. And up until – coming up in 2024, those would have required an RMD even though they had the Roth term. But that’s going to change. Correct?

[00:08:22] TB: Correct.

[00:08:22] TU: Okay.

[00:08:23] TB: Yep.

[00:08:24] TU: So will that be a part of it will, part of it won’t? I’m thinking about my situation, right? I’ve got all this Roth 401K money that’s sitting in that bucket that’s pre-2024 and then after 2024. So some of it will be subject to RMD. Some of it will not?

[00:08:43] TB: No. When you’re in retirement, the only thing that’s going to be subject to an RMD for you would be what’s in your traditional 401K and any – if you still have a 403B, if you have a 457, a traditional. So it won’t be – that rule, you’re not going to have to take a little bit out of the Roth in 401K in the future. No.

I guess, in 2024, no one will be taking any money out of a Roth 401K or 403B for the purpose of an RMD. It was just one of those weird rules that kind of just needed to be satisfied. And I think that was put into the Secure Act 2.0.

[00:09:21] TU: Got it. Okay. So talk to us about Roths. And one of the main advantages I often – I guess debates I often hear around Roth is the whole tax rate today, tax rate in the future. But I think what we don’t talk enough about is the benefit of Roth’s not being required to withdraw that money until after death. So not only not having an RMD, right? Which is a positive. But also, that there’s not a requirement of those monies being withdrawn. So tell us more about that.

[00:09:49] TB: Yeah. So as part of the Roth – and again, you think about it from the government’s perspective. So the government, although we joke inefficient and like why the heck are we doing this? Or why is it written this way? From the government’s perspective, they’re looking to access tax dollars where they can. And for a Roth, they’ve already taxed those monies.

A Roth IRA is contributed with after-tax dollars. Again, the example I use is if I make $100,000 and I put I put $5,000 into a Roth IRA, the government taxes me in that year as if I made $100,000. So I don’t get a deduction for that. So it goes in after-tax and then it grows tax-free.

As those investments – as that $5,000 grows to 10,000, 15,000, I’m not paying capital gains tax on those dollars. When I pour that out in retirement, that doesn’t hit my 1040. I don’t get a 10 – like I’m not reporting that as taxable income. So the government doesn’t really care because they’ve already taken their bite of the apple. With Roth IRAs and then Roth 401Ks, 403Bs, especially heading into 2024, you’re not required to take RMDs.

Now if you inherit a Roth. Say you inherit a Roth from a deceased spouse, essentially, what you’re going to want to do is roll that over into your name and then no RMD will be required. If you inherit a Roth, say, from like a parent or something like that or any type of non-spouse, typically, there is an RMD required and it’s typically over a 10-year timeline. And that’s just the kind of exhaust the legacy account and close that out.

That’s one of the major bene – so I think one of the major benefits of the Roth and probably not talked about it directly is control, right? Because in a Roth, you are controlling when you’re paying the taxes, today. Whereas in a traditional, it’s kind of you put your finger in the sky. You don’t really know what your tax – your marginal tax rate is going to be in the future. We have no idea.

The government, the Congress could say, “Hey, these are the new –” the IRS could say, “Hey, these are the new tax brackets.” They’re a lot more than what they are today. Or they could go down. I think most people think that taxes are going to go up. That’s one of the benefits of like, “Hey, pay the tax now and go from there.

But the other thing that often doesn’t get talked about is, if I’m going to retire in Florida, Tim, we know that Ohio – one of the reasons I put a lot of money into Roth now is because – because we’re business owners, one of the weird nuances is that we don’t get hit with taxes for the first set amount of dollars that we make as business owners.

Right now, I’m like, “Okay, that’s a good opportunity for me to kind of circumvent.” It’s almost like I live in Florida or Texas from a – but if I didn’t have that and I was going to retire to Florida or Texas, where I don’t have state income tax, and I’m going to pour that out then, then that’s another thing that we have to kind of consider.

With Roth, it’s about control. It’s the control of when you’re paying your taxes or a known quantity of what your tax bill is going to be. But then it’s also I don’t have the burden of being forced to distribute the account when I don’t want to.

That is a huge benefit to a lot of people, is being able to have control over the tax rate and the time. And again, that’s not to say that these traditional accounts are bad. They’re not. They’re good, in fact. But when we kind of get the question of like where should I have my money? It’s a little bit in pre-tax. It’s a little bit in after tax. And it’s a little bit in tax-free. And I think all of those are going to play an important part as you approach retirement.

[00:13:53] TU: Yeah. And Tim, I wasn’t aware of the difference between the spouse versus non-spouse with a Roth being passed on to a beneficiary.

[00:14:03] TB: They’ve changed those rules like recently too. Yeah. Because it used to have stretch. And the stretch IRAs and inherited IRAs. And there’s lots of different nuances with that. And even the rules around inherited IRAs are pretty complex. Like they’re not straightforward if you’re an entity, versus a non-spouse, versus a spouse, versus keeping it in the decedent’s name or your name. There’s lots of different things that are going on there.

[00:14:31] TU: This too is another example we just talked about in the last episode of how we don’t want to look at any in a silo, right? For our younger practitioners who are listening that may be working through something like a student loan, forgiveness strategy, right? Implications here of traditional versus Roth contributions on the student loan equation.

We’ve talked about that before. We don’t need to go down that rabbit hole now. But when we talk about like Roth or traditional, another example yet where it’s not just a blanket, this one is better than the other, right? It really does depend in someone’s whole situation.

[00:15:03] TB: Yep.

[00:15:04] TU: Tim, how are the RMDs calculated?

[00:15:07] TB: The required minimum distribution for any year is – essentially, the way I learn this is that you look back for the balance. So this is the balance of your 401K, your IRA, your SEP IRA. So you look back at 12-31 of 2022 as an example. And then you look ahead, essentially, the year of – so if I’m turning 76 this year, that I look at that year as the year that I need for the IRS’s uniform lifetime table.

What do I mean by that? Let’s do an example to kind of flush this out. Let’s pretend it’s June 2023, which it is. And I’ve just turned 76. Or I’m about to turn 76. Essentially, when I look at age 76, the IRS uniform lifetime table returns a column. It’s distribution period in years of 23.7.

As a 76-year-old, essentially, I have 23.7 years to distribute the account out. So that’s the factor that I use. I go and I pull my statement from the end of last year and I see that, in my traditional IRA, I had $250,000. I take that $250,000 and then I divide it by that factor from the IRS table as a 76-year-old. $250 000 divided by 23.7. And it says that my required minimum distribution for that year is $10,548.52.

That is what I’m required to distribute to kind of – to not be penalized by not taking the proper RMD. Essentially, I would work with my advisor and I would say, “Okay, at a minimum, I need to, either in a lump sum or in payments over the course of – we would probably just build this into the retirement paycheck. That, hey, we need to essentially allocate this amount of cash from the IRA and make sure that that satisfies the RMD requirement. That’s the first example, Tim. Did you have a question?

[00:17:18] TU: Yeah. And so, in that example, 10,548, right? You mentioned $50,000 balance in your traditional IRA. [inaudible 00:17:25] 10,500, that would be the required minimum distribution. That 10,500 is then taxed as ordinary income, correct?

[00:17:34] TB: Correct. If the custodian is what we use that TD Ameritrade, which is TD Schwab. Essentially, TD Schwab would send me a 1099R and it would show that distribution. And essentially, I would be working with Sean, my CPA, when I go to file my taxes. And that would show up as income. I might still have some W2 income or I might have some other 1099 contract income of doing some consultant and when I’m 76. Maybe I’m doing that for YFP in the future.

I might have some W2 income. I might have some 1099 income. And then this 1099R our income would be recorded on my taxes. And then depending on what tax bracket I’m in, that’s when I would be taxed.

Right now, if I’m in a 25% tax bracket versus maybe when I’m 76 – I know I’m conflating years and everything. But maybe when I’m 76, maybe I’m in a 12% tax bracket. So that would be benefit to essentially – let’s say I’m earning less than $90,000, which is the 12% bracket for married filing jointly. That’s kind of what’s at play here. You basically get the 1099R and record it in your taxes in that year.

[00:18:50] TU: Okay. Got it.

[00:18:52] TB: Another example of this is let’s pretend, Tim, that I have a traditional IRA, a SEP IRA and a 401K. Same fact pattern. It’s June 2023. I’ve just turned 76. And that distribution period in years is still 23.7. When I look at my statement, I see that, okay, I still have the $250,000 IRA. But I also have $100,000 in my SEP IRA and I have $500,000 in my 401K.

My RMD this year, if I take 250,000 and divide it by 23.7, it’s still at 10,548. The SEP IRA, $100,000 divided by the same factor, 23.7. The RMD for that is now $4,219.41. That’s still in addition to the 10,500 from the traditional.

And then the 401K of half a million dollars I have to distribute. So, $500,000 divided by 23.7. I have to distribute 21,000. We’ll call it 21,1000. $21,000. My total RMD across all three of those accounts is $35,865.

Now just to make this even more complex, Tim, with the traditional and the SEP, I could take all of that out of my traditional. That’s the bigger account. Or I could take that all out of the SEP if I wanted to. With the 401K, I have to take it out of the 401K.

Or let’s say I had a 403B. I would have to take it out of the 403B. So those that are administered by the employer, or in my case, a previous employer, I have to take it out of those plans if I have those IRAs that I’m managing. Or an advisor is managing for my benefit, I can aggregate those and have that come out of one. That’s one of kind of the nuances there.

[00:20:53] TU: That makes sense. So the I in IRA is an individual account, right? It stands for individual. In that example, we had a traditional and a SEP. You could take the RMD out of one of those accounts. Either the tradition or the SEP. But since the 401K was an employer-sponsored account, that RMD has to come directly out of that account.

[00:21:11] TB: Yep. Correct.

[00:21:12] TU: Okay. Got it. So we’re going to talk in a little bit about why this topic really matters and some of the strategies to reduce CRMDs. But let’s talk about the penalty side of this. What happens if, Tim, I don’t take an RMD? So maybe I’m not familiar with the rules. I’m DIYing this and just not paying attention to logistics or something gets overlooked. What happens in that case?

[00:21:33] TB: In the old rules, before the Secure ACT 2.0, it would be basically 50% of what you fail to take that would be taxed. In the case that I was saying, it’s like if I had to take 10,500, 5,200 of that would be basically the penalty. And then you’d have to file form 5329 in your federal tax return for the year that the RMD was not taken.

With the new rules, it’s basically they tried to make this less – they try to soften this a little bit. So now it’s 25%, which is still substantial. And then if you correct it within two years, it’s 70 – it’s 10%. Excuse me. One of the things – again, one of the weird nuances is let’s say I’m turning 72 this year. Technically, I don’t have to take the R in the first year. Don’t ask me why is this, Tim. In the first year, I don’t have to take the RMD until April of next year.

But then every subsequent year I have to take it before the end of the year. Let’s pretend I say, “Oh, I didn’t take it. I’m taking it April 15th right before I file my taxes.” But then in that same – if I have to take that 10,500. In that same year, I have to take another RMD for 73. That’s another one of the weird nuances. Yeah, it’s 25%. But 10% if it’s corrected within the first two years.

[00:22:54] TU: I mean, even 10% is no joke though, right?

[00:22:58] TB: Yeah. I mean, some of these rules is like if you over contribute, it’s like a 6% excise. When you go from 50% even down to 25% or 10%, it’s – and the dollars get bigger. I mean, your balances are supposed to get smaller. But every year – so when you go from like 76, where the factor is 23.7, the next year at 77, it’s 22.9.

And one of the things that the IRS has done is they extended it out. I think it goes all the way up to like age 120 and older. But at 110, as an example, the factor is 3.5. If you have a million dollars at 110, about $300,000 and $400,000 is what you have to distribute in that year. The factors get smaller, which means that the RMD gets bigger as you age. Again, if you’re not doing it properly, the penalties can be quite robust.

[00:23:54] TU: Whether we like the rules or not, Tim, they are what they are, right? We’ve got to factor them in. We’ve got to plan for this. And my mind is spinning around, “Okay, I’ve got all these different buckets of funds that I’ve been building throughout my accumulation phase.” Right? We’ve talked about some of the alphabet soup here in this episode. And now there’s this strategy of how I withdraw not only from those buckets. But also, how do I factor in the RMDs? And in which order? Which priority?

At the end of the day, the topic matters, I think, as you try to build a retirement paycheck and think about the order of withdrawal and how you’re going to put together that paycheck in retirement.

[00:24:33] TB: Yeah. I mean, if you look at what are the sources of income that you’re going to have in your retirement paycheck, one of the big ones is going to be Social Security, which, as we continue to go on, more and more people, their Social Security will be taxed. Because a lot of the phase-outs for that have not been adjusted for inflation.

But if you think about it, the average today, Social Security check, per month, per recipient, it’s like $1,780. Just about 21,000 and change per year. That might be your baseline. And then for most people, if I need $80,000, then 60,000 is going to come from your traditional investments.

And what we’ve seen here is, in this example, 35,000 of that has – in this example, has to come from the traditional, right? So then you’re playing the game of like, “Okay, if I’m trying to get to 60,000, that still puts me in a 12% tax bracket.” Again, if I’m just looking at myself and not necessarily Shay.

What is she getting from Social Security? What does her RMD look like? Are we going to try to fill up the 12% tax bracket? Are we looking at the 225 tax bracket? Are we pulling anything from Roth at all?

I think, again, having the ability to pull from pre-tax, you have to, especially with the RMDs. But then to then move to something like a brokerage account, which is after tax to a tax-free, which is a Roth. All of those things are going to be in play to make the most efficient play at building a retirement paycheck.

And depending on where – again, if you have certain assets in certain accounts, they are not going to be optimized with kind of the strategy. You have to be wary of that too. What are the things that are going to be most volatile or higher risk, higher return? Most capital gains, things associated with that. Those are all going to be important when you’re kind of building this out.

Is there an annuity? A lot of annuities if you buy a qualified annuity. If you take some money out of your traditional IRA, so to speak, to buy an annuity, those have RMDs. And a lot of that can satisfy the RMD or delay it. There’s some strategies there. There’s lots of tax implications. But also, how does this relate to your investment allocation? The location of certain assets? It’s all very nuanced.

[00:27:10] TU: Yeah. And Tim, the place that I’m thinking about right now, I’m 15 years into my career. I put myself in that mid-career bucket. But so much of building a retirement paycheck and all this strategy we’re talking about really starts with ‘in what buckets are you saving’, right?

I think sometimes there’s a tendency that, “Hey, we need to save whatever big number.” Right? Two, three, four million dollars. And we just start saving, saving saving.

And saving is good, especially if we’re doing it over a long period of time. But saving intentionally so that we’re thinking about this from a distribution sense, I think we often disconnect that accumulation and decumulation phase. And, really, prioritizing that. Really, the accumulation, optimization, and the strategy around that, especially in a tax-efficient way, really starts back in the accumulation phase.

[00:27:58] TB: Correct. Yeah. It’s kind of building – we talked about building a foundation of an emergency fund and getting the debt – the consumer debt in line and having a plan for this student loan. But this is right there in terms of, again, bucket selection. But then inside of those buckets, what assets are we actually put in? And are they the best for the long run? Yeah, those are definitely in play.

And again, I think it’s often an overlooked thing. And this is where – and again, it’s not necessarily like if you’re required to distribute your account, that doesn’t necessarily – it doesn’t mean that you have to consume it. You can always direct those dollars elsewhere. Whether it’s a brokerage account or it could be real estate. It could be paying for a grandkid’s education or something like that. There are things that you don’t necessarily have to like move those dollars off your balance sheet.

But, essentially, what’s in play here is the efficiency related to tax. And, again, in the context of like, “Okay, what is it that I need to sustain a retirement paycheck for from now until age 95, 100, 105, 110?” And that’s difficult to do.

[00:29:13] TU: Yeah. And I’m thinking about this from a household perspective, right? Tim, you mentioned you’ve got, often, two people, multiple accounts. So now you’re talking about additional layers of complexity. Maybe different timelines of retirement and when they need those funds and goals that they have. This is where I really want for Jess and I. I want the two of us with our CFP and the CPA in the same room whiteboarding and kind of masterminding this to make sure that we’re really thinking about it from every angle.

[00:29:43] TB: Yep.

[00:29:45] TU: Finally, I know many of our listeners are thinking what I’m thinking, which is, “Hey, what can we do to optimize this? What can we do to potentially reduce the impact of the RMDs?”

[00:29:55] TB: Yeah. So there are a few things. RMDs are inevitable, right? If you use any of these accounts – and again, I would still advocate for the use of these accounts because the long-term benefits of having tax-deferred growth is a huge benefit. I don’t want to say it’s not. I don’t want people to think I don’t want to use these accounts because I don’t want to have to pay RMDs.

There’s a few strategies that you can employ. If you are still employed and you’re kind of within that RMD age. Let’s use 72, 73. You can delay your 401K RMDs. Not necessarily your IRA RMDs. But your 401K RMDs from your employer until you retire. You just can’t be a 5% owner, Tim, for you and I. Like that wouldn’t imply. We would still have to take RMDs.

Probably one of the biggest things that you can do is just get money out of those buckets. So this would be things like Roth conversions. Essentially, over your career, you can identify times that it makes sense because of lower earning years. You’re still paying the taxes on it. But you’re doing it in more of a controlled way versus here’s the balance, here’s the factor, and then that’s your RMD.

One way that you can do it is just manage the distribution. So most people take RMDs either in a series of payments or through like a lump sum at the end of the year. One strategy that you can, which, again, we bring up annuity, which is sometimes a bad word for people. But you can invest in a QLAC.

A QLAC is a qualified longevity annuity contract. This is the deferred fixed annuity that you purchase with funds from your retirement account. Like a traditional 401K or a traditional IRA. And typically, because there is a promise in the future to pay out those funds, one of the special things about this is that there’s no required distributions until 85. Until age 85. You can push that out for a decade or so.

The big selling point for this is, if you’re looking at – in the example I gave, “Hey, I had $500,000 in my 401K.” And that means that the RMD for this year is 21,000. I really don’t want to do that. I can peel off 100,000 or 200,000 and put that into a QLAC. And that lessens the burden from what’s coming out from the 401K. That is a strategy that you can use.

Charitable donations. So you can either – you can do this one of two ways. And I think it just depends on the tax situation. You can make a QCD, a qualified charitable distribution, which is a direct transfer from your retirement account right to a qualified charity. And this will be basically excluded taxable income, which will lower your tax bill. Or you can use your RMD to make charitable donations and kind of get a – that’s typically where, again, you’re going to use the itemized deduction and maybe want to do a bunch in strategy or things like that to get the most benefit. So those are ways to kind of reduce or delay or get around the RMD, which at the end of the day is inevitable.

[00:33:17] TU: Tim, great stuff. I feel like we’ve covered a lot of length in a short period of time a topic, again, that we haven’t talked about in great detail. We’ll certainly be coming back to this more as we talk about some of the retirement planning strategies. But again, a great episode regardless of what stage of career that you’re in.

For those that are listening and say, “Hey, I’d love to have someone in my corner really thinking about this from an investment, retirement planning strategy,” we’d love an opportunity to talk with you further about the financial planning services that we offer at YFP planning. You can learn more and book a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com.

Tim, great stuff. We’ll be back here in the future.

[00:33:57] TB: Thanks, Tim.

[OUTRO]

[00:33:58] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists unless otherwise noted, and constitute judgments as of the date publish. Such information may contain forward-looking statements are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacists.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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YFP 313: 4 Reasons Your Financial Planner Should Manage Your Investments

Posted on by Tim U

Tim Baker CFP®, RICP®, RLP® discusses the 4 reasons why your financial planner should manager you investments on this podcast episode sponsored by First Horizon.

Episode Summary

Financial planners often get a bad reputation because people either don’t trust them or they feel like planners are a waste of time — they could be doing the job themselves. So on today’s episode, sponsored by First Horizon, YFP’s Co-founder & Director of Financial Planning, Tim Baker is here to discuss the four reasons why having a financial planner is crucial for managing your investments. From our conversation, you’ll gain a better understanding of the type of accounts that a financial planner could manage on your behalf, what an Investment Policy Statement (IPS) is, and why it’s vital for your financial plan. Then, we dive into the 4 reasons why, if it is the right fit, having a financial planner manage your investments is a good idea. Spoiler alert…hiring a financial planner to beat the market didn’t make the list!

Key Points From the Episode

Introducing Tim Baker and today’s topic: Financial planners managing your investments
Taking a closer look at the investment accounts that a financial planner could manage for you.
What an investment policy statement (IPS) is and why it’s important.
How having a financial planner will save you time and bring you peace.
The importance of an integrated financial plan, and how a financial planner can help.
How a financial planner will ensure that don’t fall victim to behavioral mistakes and biases.
Using a planner to avoid technical mistakes, and the common technical errors that Tim sees.
Why the role of a financial planner is not necessarily to help you beat the markets.
What you can look forward to in the next episode.

Episode Highlights

“On my time off, on the weekends or whatever, I would rather pay a professional that knows what the hell they’re doing — they’ve done it, it’s not their first rodeo — than me waste a weekend.” — @TimBakerCFP [14:33]

“The more that you continue on and accumulate wealth; working with a coach [or] a planner is in line with that. The management of the investments and the stress of it should be delegated to someone else.” — @TimBakerCFP [15:31]

“If we don’t have the assets and the investment management integrated with the plan, it’s almost like we’re trying to fight with one hand tied behind our back.” — @TimBakerCFP [19:13]

“I often say that with investment, you often want to do the exact opposite of what you feel. But the statement that you have to make, even before you make that, is that investment is an emotional activity. It is. [And] a lot of that has to do with our aversion to loss.” — @TimBakerCFP [25:12]

“[Go] by the market, don’t try to beat the market, and the market will take care of you — if you invest in it consistently without bad behavior over long periods of time.” — @TimBakerCFP [36:46]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome YFP co-founder and Director of Financial Planning Tim Baker to talk about four reasons you should have your financial planner manage your investments. Spoiler alert, beating the market did not make the list. As a supplement to today’s episode, download our free checklist, “What Issues Should I Consider When Reviewing My Investments.” You can get a copy of that resource by visiting yourfinancialpharmacist.com/investmentreview. Again, that’s yourfinancialpharmacist.com/investmentreview.

Now, at YFP Planning, our team of fee-only certified financial planners pride themselves in helping clients manage their investments in a tax-efficient, low-fee manner. While that in and of itself is a win, that’s just one part of the financial plan. Our planning team that services more than 280 households in 40 plus states guides clients through the entirety of the financial plan, including retirement planning, debt management, wealth protection, and more. All centered around our philosophy of helping you live a rich life today and tomorrow. You can learn more about our one-on-one planning services while visiting yfpplanning.com. Again, that’s yfpplanning.com. Okay, let’s hear from today’s sponsor, First Horizon and then we’ll jump into my interview with Tim Baker.

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[INTERVIEW]

[0:02:40] TU: Tim Baker, good to have you back on the show.

[0:02:42] TB: Good to be back, Tim. How’s it going?

[0:02:44] TU: It is going well. We’re going to be doing back-to-back episodes focused on managing investments. Next week, we’re going to talk about RMDs or required minimum distributions. We’re going to get in the weeds a little bit over the next two weeks, which I’m excited to do as we talk about some of the investing side of the financial plan. Tim, today we’re going to talk about four reasons you should have your financial planner manage your investments. Now, before we get into those four reasons, I want to make sure we’re all on the same page with what we mean by this. So, having your financial planner manage your investments. Talk about this at a high level, so we can have the right context throughout the show.

[0:03:23] TB: Yes. My attitudes have changed about this over time. Really, this is because of just working with pharmacists on their financial plans and just some of the things that we’ve come up against with regard to being effective and efficient with the financial plan. When we say we feel that your advisor, your planner should manage the investments, what we’re talking about are the investments that you’re managing, that you don’t necessarily need to. This means – these are things like your traditional IRA, your Roth IRA, your brokerage account, old 401(k)s, old 403(b), TSPS, 457 Plans. These are things that you’re not actively contributing to as part of like an entire employer-sponsored retirement plan.

What we found over the years, because I used to be more location agnostic, meaning, my viewpoint was, it didn’t really matter where it was. We either manage it or help your management. I think, in theory, that sounds nice. But in application, it’s not, it’s messy, there’s lots of hands in the cookie jar. There’s lots of moving pieces in regards to the financial plan that the investments are absolutely part of that. Our belief is that if there are held away assets, so held away are defined, you know, when advisors talking about this or assets that are not at their custodian. We use that YFP Planning, we use TD Ameritrade, which is recently merged with Charles Schwab. Schwab will be the predominant brand there. We feel that those client assets that can be managed by us, the advisor should be managed by us. We’ll get into a few reasons of why that is. That’s held away piece.

[0:05:25] TU: Let me give a for instance to define these just a little bit further, and hopefully put something that people can hook on to. Tim, if I, let’s say, I’m working with Kroger pharmacy right now, and I’ve been with them for five years, contributing to their 401(k). Then prior to that, I worked for, let’s say, CVS for five years. Once I left CVS, that money, I moved into a traditional IRA, let’s just say for that example. I’ve got $100,000 in an IRA, and then I’ve got this, let’s say, another $100,000 in my current employer, Kroger, with the 401(k).

When you say held away, that Kroger, my current employer count $100,000, would be a held away asset through my current employer and the contributions I’m making. When we talk about today, managing why you should have your financial planner manage your investments. We’re talking about that previous $100,000 that’s sitting in an IRA that maybe I’m self-managing right now, or it could be someone’s listening to another advisor that’s managing for it. But that’s a differentiation we’re making, correct?

[0:06:33] TB: Yes. You’re going to have held away accounts that some are going to be eligible to potentially be moved over for us to manage. That would be like the old employer, and then you’re going to have some that aren’t because you’re actively contributing to said account. Yes, that would be the distinction I would make.

[0:06:50] TU: Okay. An assumption I want to put out there before we get into the weeds here is that when we say why we believe your financial planner should manage your investments. The assumption we’re making is that that planner, from our perspective, best practice is, there’s a fee-only with a fiduciary responsibility. They have a really thoughtful approach to how they’re managing their investments, which would include an investment policy statement, an IPS, where you’re really spending time with the client to understand their goals, understand their risk tolerance. All of that is informing the direction that we’re taking with the investment. Let’s spend a moment just to break that down a little bit more in terms of what is an IPS, and why is that important? Obviously, the context here of fee-only as well.

[0:07:37] TB: Yes, IPS is not something that every advisor has or even employees. I think regulators like this because it’s kind of a set of instructions for them to see how they are managing client accounts. When I was in my first job in financial services, we didn’t have an investment policy statement. We knew, based on a risk tolerance assessment that we give them, that, “Hey, they’re conservative, or they’re a moderate, or they’re an aggressive investor,” but that was essentially it. We had it in their file that that was what they were, and then we try to match up their portfolios at such.

The way that we do it is, before we invest any dollars on behalf of our client, so let’s pretend that we moved that $100,000 over to a rollover IRA at TD Schwab for us to manage for the benefit of the client. Before we do anything with those dollars, we essentially go through a risk tolerance and questioning goals about the investments. And we issue an investment policy statement, so this is something that we send to a client via DocuSign. In the investment policy statement, it’s essentially an executive summary. What the purpose of the document is, and it’s really to outline investment goals, expectations, strategies, and responsibilities related to the portfolio? It’s to create reasonable objectives and guidelines in the investment of your assets.

We outline things like, what was your risk tolerance, what portfolio do we agree to, what is the asset allocation. Is it a moderate 60-40, or is it more aggressive 90-10, or an all-equity portfolio? What is that investment objective? Is it aggressive growth or growth with income? Are there any type of liquidity needs, any type of tax considerations that we should be aware of? What is the time horizon?

If Tim, you’re the client, and you have 25 years left to retire, then the time horizon is 20, 25 years. What type of accounts most of – a lot of our clients will have an IPS, an investment policy statement for retirement accounts, but they might have something that is related to a tax bomb or a more near-term goal. So we have a different asset allocation. We outline what are the duties and responsibilities of reporting. I think one of the fears that people have, if they’re having their advisor manage their asset is, I think they fear that the money’s not theirs. One of the things that I’ll say is that we don’t have necessarily access to the money. We trade the account, but I can’t go in there and say, “Hey, Tim, you move from this part of Ohio to this part of Ohio.” You have to do that yourself. Because they want to make sure that the chain of custody from where they’re sending account statements is not broken. We used to be able to do that recently.

It’s very, very much like we have very deliberate and specific responsibilities related to the portfolio, but we’re not – it’s not our piggy bank, which I think sometimes people get afraid about that. So, we do know the custodian does all the reporting with statements. We talk about what our responsibility is with rebalancing, how often we’re going to review the count if we take discretion or not. Then, part of our IPS is we outline the different positions that we’re in. So we go through what’s our large cap, or mid-cap, and all the different positions that we’re in related to the portfolio, what the allocation is, some nerdy stock analysis.

What parts of the world that we’re invested in, so whether that’s North America or Asia developing, Asia emerging, Latin America, what the bonds look like, so if they’re double A or single A, we show performance. We look back one, three, five years and show the annualized return, the risk, some charts. We’ll show what the income is on this portfolio. It’s a look back in terms of what the yield is, the stress test, which is a big thing. In the subprime mortgage crisis, this is how the portfolio would react, or when coronavirus happened, or the tech bubble? So, we show some of the stress testing on that. Then, the expense, which often is a huge driver in the overall ability for the portfolio to grow, what does the expense of the overall portfolio look like? That’s our north star, Tim. That’s the document that we use to trade and manage the portfolio as we go here.

[0:12:44] TU: I think that’s time really well spent, right? Because I think for folks, as you mentioned, especially I would say for people who have maybe not worked with an advisor before, who have gone through this type of process or experience where you have someone that is helping to manage your investments. This can feel scary, it can feel big, it can feel — at least as you hear, for the first time, a little bit like a black hole. I think when done well, and that’s the backdrop. We’re assuming as we go through these four points here today. When done well, as you just described in great detail, there’s a lot of time spent, a lot of thought, a lot of attention to make sure that there’s alignment and the decisions that are being made.

Obviously, that’s an important part of the trust process as you’re working with a financial planner, and that should be something that you feel good about, number one. And that you understand and make sure you understand as you’re reviewing those documents and having the conversations with the planner.

[0:13:34] TB: Yes, absolutely.

[0:13:34] TU: With that in mind, let’s talk through four reasons that we believe you should have your financial planner manage your investments. Tim, number one, perhaps most obvious on the list is saving time. I’m busy; I don’t have to worry about this, maybe less stress involved as well. Tell us more about this.

[0:13:50] TB: Yes, I definitely think it’s a time thing. Obviously, this is something that we often talk about, less is more. But I think having your hand on the wheel with regard to this is important. I probably even more so than time; it’s just the brain capacity, Tim. I think sometimes we often really undersell or overlooked fee, the things that drag on our mind that don’t necessarily need to. I always – we’ve kind of talked about how the two of us were not necessarily the most handy people in the world. Could I go out and learn basic plumbing and things like that? Yeah.

But I look at that as, like, on my time off, on the weekends or whatever, I would rather pay a professional that knows what the hell they’re doing; they’ve done it; it’s not their first rodeo. Than me waste a weekend, and either complete it at an hourly rate that is well below that than what I would make during my day job, or that it’s half done or not done. That’s the thing, is like –

[0:14:58] TU: With some curse words.

[0:14:59] TB: With a lot of curse words, and stress, and things like that. That’s just my mentality. I think that becomes more of a thing. The more you look at yourself as a professional as pharmacists should, right? To me, this is an area. We talked about this with small – it’s kind of a no-brainer with small business owners. The first thing that probably needs to go is bookkeeping. It’s one of those things, and I would say that the more that you continue on and accumulate wealth, this thing, working with a coach, a planner is in line with that. And the management of the investments and the stress of it should be delegated to someone else. Obviously, again, it assumes you trust the person, the team that you’re with, which is not something that I take lightly, or anyone takes take lightly. One on our team takes lightly.

One of the things that I really like about being a financial planner is that you’re in that position of trust, and I think pharmacists can relate to that. Again, not taking that lightly, I think is important. But just think about the convenience, and ease of management, paperwork that’s involved. I would love to be more paperless than we are now. We’re getting there. But it’s a slow go. But the ongoing account maintenance, rebalance, and other strategies that you’re going. If you can delegate that to others, I think that’s a huge time savings, but just a brain capacity savings. Then, I think you see this with people in the accumulation stage. But I think, even more so, retirees. I’ve joked about this with my dad, like when he retired, he was no longer doing his day job. He knew that I was, obviously, building out my business and I’m a financial planner.

It was almost like every time that we talked, we talked about the market. He almost preoccupied this, and it was almost a substitute for his job. His livelihood is very much connected to what the market is doing. But I think if you’re doing it correctly, you want to inoculate yourself as best you can. Those near-term ups and downs should not really affect your overall well-being. So to me, a lot of people miss the mark on that. I think that’s where a professional can help you as well.

[0:17:22] TU: Tim, that’s a really good example in terms of the retirement and the preoccupied nature of investments. It’s funny, my father, father-in-law, every time we visit, this comes up within 10 minutes prior. We’re talking about the markets and trends. I think it’s just human behavior that now you get more time available than you did, obviously, than when you’re working. But you’re thinking about things like distributions and strategies, especially if you’re DIY’ing this and not working with a planner.

The ups and downs of volatility, especially the period we’ve been in here the last couple of years that can weigh on you. I think having someone in your corner to help talk you through that, coach you through it, making sure that we’re sticking to the plan, and that we have accountability to stay to that plan, it’s important all the way throughout, but probably even more important than that time period, where you just have the time and it’s front and center top of mind.

[0:18:14] TB: Yes, and I probably should give my dad less of a hard time. He’s probably just trying to find ways to engage me and talk about my business and things like that. But I know for a lot of retirees, definitely one of the things that they talk about quite a bit.

[0:18:29] TU: Number two on our list is ensuring an integrated approach, that we’re not considering this in a silo. Something we talked about often on the show, Tim, that it’s really important we look across the entire financial plan. When we’re looking at investments, retirement planning, debt pay down, insurance, any part of the financial plan that we’re really looking in its entirety, and we’re not just focused on one part of the plan, perhaps at the expense of other parts. Tell us more here.

[0:18:58] TB: Yes. I think, just like we talked about systems of the body, everything’s interconnected. I think one of the things that we’ve learned over from my time at script financial and now, YFP Planning is that if we don’t have the assets and the investment management integrated with the plan, it’s almost like we’re trying to fight with one hand tied behind our back. What we’re really trying to do here see the full picture. We want to make sure that the investment philosophy and management of such assets is aligned with your goals and your life plan. I’m a big, big believer in purpose-based investments. Another buzzword. But what I often find with people that are coming in the door, even do-it-yourself investors is, I’ll say, obviously, Roth 401(k), a Roth IRA, a traditional IRA, we know that those are for retirement by and large.

But I’ll often will see brokerage accounts and accounts like that. I’m like, “What is this money for?” It’s like, “Well, I don’t know.” Why do we even have it? So really aligning and drawing clear lines of distinction between what this bucket of money is for and executing to that. But probably – so you have that, which is more broad to the overall financial plan, but then making sure there’s alignment with other technical areas of the plan. Whether that be debt, the tax situation, retirement. It could be estate and charitable given. All of those things are interconnected. I think if you don’t have eyes on our hands on that, again, it makes our job a lot easier. From the depth perspective, Tim, we know this with regard to PSLF, and non-PSLF, that these things are interconnected. Oftentimes, they are disconnected if they’re not managed, I think, by a QB, one person that is overseeing the plan.

We know that tax is another thing. Is there synergy with the financial plan and the tax plan? By and large, most advisors will say, “Hey, that’s a tax question, go talk to your accountant.” Which is like nails on a chalkboard for me. That’s one of the things that we do differently. We have YFP tax that works in concert with YFP planning. We have a CFP, that is your financial planner, that is working in tandem with a CPA, which is your tax accountant. Looking at things like, are we going to have a big refund? Are we going to owe a lot of taxes at the end of this year? What are the tax loss harvesting strategies as we get more advanced multi-year tax planning? It might be bunching for charitable giving.

We know that retirement and the investment strategy is intertwined. In the accumulation phase, which a lot of our clients are in, that simply bucket creation, so having the different buckets. But then, where are we putting different assets? A lot of people don’t think that probably in your Roth, you need your most appreciable assets, which might be small cap or emerging market. Should probably go there. Where do we put tax advantage accounts that are in the brokerage, or is that somewhere else?

Just knowing where to actually put the investments that you’re putting in that bucket is important in the accumulation stage, where a lot of people overlook that. Then in the deaccumulation, or the withdrawal strategy, whether you’re using a foreign strategy, a bucket strategy, a systemic withdrawal strategy. All of these have rules, Tim, that are clearly linked to the traditional portfolio, and how we either refill bucket one with bucket two or refill bucket two with bucket three. Or how we’re going to with inflation and the gains on the portfolio. How are we going to essentially send that paycheck to you in concert with social security in 2024? How do we create the floor? What are the tools that we’re going to use, and then how are we going to supplement from the investment strategy, and give those dollars to you in retirement?

Then, just overall, how do we manage the liquidity needs. There’s lots of things that happen in real-time. Over the course of many years, that if we’re managing through the client by proxy, is a is a challenge. We’ve had instances where clients will be upset because they’re trading their own accounts, and this is related to tax, and they’re generating lots of short-term capital gains. Then they’re upset with us because our projections are off. It’s like, “But we don’t have any visibility or vantage point of what you’re doing in these accounts that we’re not controlling or we’re not overseeing for you.”

It’s one of those things that, this is what we do. We do this for our clients across the board, and we think we do it well. So working in that way, I think, is important for us, and I think for the effectiveness of the overall financial plan.

[0:24:22] TU: Tim, I think for folks that are hearing some of these terms for the first time, when you talk about things like flooring, bucket tragedy, systemic withdrawal. We talked about this on episode 275 of the podcast, where we had a month-long series on retirement planning, and that episode specifically. We talk about how to build a retirement paycheck. I hope folks will check that episode out in more detail. That’s number two. Ensuring that we have an integrated approach. I think you explained that well, Tim. Number three, which is one that maybe our DIYers are going to get a hate, that we’re challenging this. But this is avoiding behavioral mistakes and biases. Tim, I tend to fall under this – I’ve come to appreciate where I need help. But perhaps, I’m over overconfidence, and really understanding the behavioral mistakes and the biases that we may fall victim to.

[0:25:11] TB: Yes, I often say that with investment, you often want to do the exact opposite of what you feel. But the statement that you have to make, even before you make that is that, investment is an emotional activity. It is. A lot of that has to do with our aversion to loss. Sometimes, it can be also chasing a big payoff if we’re doing things like chasing hot stocks. The market volatility, I think, really plays on our emotion. I always joke, like when the market took a downturn during the Corona Virus or during the subprime mortgage crisis. As you’re seeing your portfolio go from X to X minus 30%, 35%, you want to then take your investment ball and go home, Tim. It doesn’t feel good to see your balance get sawed off like that. But it often leads to bad behavior, and that’s typically where we’re doing things like selling low and buying high.

When we sell to avoid that pain, then we wait on the sideline and buy when the market seems like it’s returned to normal. All of that upside. Again, l think people don’t see this in themselves. I would say that, Tim, that this is true for advisors as well. It absolutely is. But I would say that, if you’re, again – I’ve talked about this, related to the any type of salary negotiation. The big disadvantage that you have as an employee of a company when you’re – or a prospective employee of a company is that you might have a dozen times during your life where you’re negotiating on your behalf with an employer. Whereas your counterpart, whether it’s a hiring manager, an HR manager, they might do it a dozen times in that week. You’re at a disadvantage just because of reps. I’m not saying that we as humans or as advisors, we don’t have these. It’s just that I think we’re more aware of it, and we try to mitigate that with the way that we build out our portfolios.

The behavior thing is huge, and that can be again, it can be chasing hot stocks, it can be trading too much, trying to time the market, which we talked about the buying high, and selling low. Ignoring diversification that’s another issue. Sometimes we see portfolios that are overloaded in tech stocks or one particular security or even act on unreasonable expectations. I still frequently we’ll talk to people who are super confident in their prowess as an investor. But they will say things that just are not in line with reality. Like, “Hey, within the next year, I really want to start making passive income off of my portfolio.” I’m like, “That’s not a real thing in any time in the near future.”

We have to be aware of our common biases, and I think a lot of the ones that you mentioned are things like overconfidence. I probably see that the most. Typically, that is more male than female. It’s just the reality of situation. But even things like hindsight bias, like, of course, the market went down, and this is why. Or herd mentality, or overreaction, these are all biases that I think that we don’t see in ourselves that really can affect our ability to grow our portfolios consistently over time.

We always cite Vanguard. Vanguard has done an advisor alpha study. Vanguard doesn’t have advisors. They’re kind of – they don’t necessarily have a horse in the race, but they basically said that an advisor can add 3% per year in return to your assets. Half of that Tim, 1.5%. I think it’s 2.9 or it might be three. But essentially half of that, Tim, is related to behavior. Paul Eichenberg, he talks about – he does manage some cash, or some investments himself. But he basically said, the core of his investments, what he talks about is, there’s a wall between him and his investments. It’s just so he doesn’t do anything foolish or crazy. That’s part of this as well, is sometimes, something – it’s the overreaction, something happens in the market and it’s like, part of our job is to say, “Hey, we’re okay here. Let’s continue to execute to the plan that we have in place.” The behavior and the emotion drives so much of this, and it can either be bad behavior or you can, again, delegate that out to help you with that.

[0:30:19] TU: Yes. I think, Tim, the time we’re in right now with the volatility, we talked about this a little while going in Episode 213 of investing considerations in a volatile market. But we are living at firsthand the ups and downs, the announcements from the Fed, the anticipation, the reaction to that, the inflation numbers. I mean, it’s just June, June, June. More than ever, I think there’s that risk of access to information volatility on top of that. Obviously, there can be some fear that’s layered on top of that, as well. All of a sudden, we’re feeling that edge to make a move, make some decisions, move our investments. Obviously, there’s tax considerations. There’s timing of the market; you talked about those considerations that can have a negative impact as well.

Great explanation there. Number three on the avoiding behavioral mistakes and biases. Number four probably the favorite of our team. Right, Tim? As it relates to clean these up, is avoiding some of the technical mistakes. You’ve talked about this at length on the show as it relates to backdoor Roth and some of the mistakes. I think one of the challenges here, and we even talk about this behind the scenes that we love putting out content and education. We do a lot of it. But as I often say, in presentations, one of my fears is that I’m oversimplifying information to try to explain and to do in a short period of time. And that someone may run, make some decisions, and maybe not have the full understanding. We just saw that, as we talked about some of the changes that are coming to tax laws and different things. We may not understand the whole picture. Talk to us about avoiding technical mistakes and some of the common ones that we see here.

[0:31:54] TB: Yes. I mean, it’s most base. Sometimes it’s just understanding what accounts that you have. I still hear investors that will say, “I have this mutual fund account.” I’m like, “Well, mutual fund isn’t an account, it’s a type of investment.” That’s very extreme. But then, understanding what are inside of those accounts, those investment accounts, which could be a mutual fund, an ETF, a stock. Again, this is not to – this is not to belittle anyone or make anyone feel bad. Again, I always joke that when I first got out of the Army, I was picking the investments for my 401(k). I looked at all 50 investment choices, or whatever, I’m like – Investing for Dummies, and I bought that book, and I read a few pages, and I’m like, “No, thanks,” and I just picked whatever.

This isn’t something that necessarily is – we know this, Tim. It’s not taught in school or anything. It’s not to make anybody feel bad. It’s just that – this is what we do. It could be the types of accounts that you have, what are in those accounts, transfer accounts wrong. Sometimes this happens where accounts are moved between custodians, and they’re not performed accurately, and that can cause a lot of problems. You have the hyper investor, so it can be someone that’s trading in and out of positions that’s triggered in short-term capital gains tax.

Then, we have issues with the tax bill at the end of the year or other things that are going on. I’ve seen portfolios that have 20, 30, 40 positions, and I’m like, “What the heck is going on? What are we doing? What is the goal of this?” Sometimes it’s just overheard a stock, or I heard this, and I just bought it. Yes, overconcentration. That’s a technical mistake. Is there too much cash in the accumulation, too little cash when you’re in the withdrawal stage?

But yes, one of the things that you’re talking about that, I think, is, again, we gloss over is just things related to backdoor Roth. Most of the people that we are working with are in that Roth IRA eligibility phase-out. So even us managing this as a team, it’s a project. It’s something that we have to be on top of. It’s difficult to do when you have to factor in phase-outs, pro rata rules, you have to look at other accounts that you have, the step transaction rule. There’s lots of things that go into that.

On the technical, I always joke like – kind of related, but unrelated, Tim. When I lived in Ohio the first time, there’s no way that I filed my own Ohio taxes correctly. This is impossible. There’s no way that I did it correctly because of the nuance there. Even some of this stuff is kind of in the same breath; it’s like there’s no way that if I had a similar savviness with regard to investments that I did back in the day, that I would be able to do this correctly without mistake.

There could be a mistake with RMDs for retirements, obviously fees and things like that that are less technical but more an awareness thing. So the list is long with regard to this. Again, what often happens is we read a blog or a podcast. Some say, “Hey, that’s really easy,” and then we do it. Then, the reality is that it’s much more nuanced than – it depends on your particular situation in terms of how to execute some of these strategies.

[0:35:31] TU: Tim, we just talked about four reasons that you should have your financial planner manage your investments. What’s not on the list perhaps is something that everyone is thinking about of, “Hey, I’m going to have my planner manage my investment so that I can beat the market. Isn’t that why I’m hiring you after all? Where’s that on the list?”

[0:35:49] TB: Yes. I mean, I think it’s not on there. I think the reason, Tim is that, in order to beat the market, in order to beat the S&P 500 consistently, and there’s still no guarantee of that, is that you have to spend so much time, effort, energy, and money to do that. They say, we look at the most active mutual fund managers out there. By and large, the research and the studies show that, though, that type of active management in an effort to beat the market does not pay off on a consistent basis.

The strategy that we employ that I feel like a lot of fee-only financial planners employ is more of a passive by the market, don’t try to beat the market, and the market will take care of you if you invest in it consistently without bad behavior over long periods of time. It’s more of a singles and doubles approach versus, “I’m going to hit a home run in 2023, and then strike out for the next three or four years, and then maybe the home run in 2026, 27.” It’s kind of the singles and doubles approach to invest in. And over time, I think that’s a good equation for success.

[0:37:13] TU: We’re going to talk more about that. We have an episode plan for the near future on passive versus active investing, so we’re going to dig into that a little bit more detail in the future. Tim Baker, great stuff. For those that are listening to this episode, and would like to talk with us about the financial planning services at YFP planning and what we offer. Obviously, we’ve talked about managing investment, just one part, an important part, but just one part of financial plan. We would love to have that conversation. You can book a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com.

Whether you’re in the early stages of your career, in the middle of your career, nearing retirement, whether you have an advisor, you don’t have an advisor; we’d love to have a conversation to learn more about your situation so you can learn more about us and determine whether or not what we offer is a good fit. Again, book a free discovery call at yfpplanning.com. Tim Baker, great stuff, and looking forward to talking about R&Ds next week.

[0:38:06] TB: Thanks, Tim.

[END OF INTERVIEW]

[0:38:07] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single-family home or townhome for first time homebuyers and has no PMI on a 30-year fixed-rate mortgage.

To learn more about the requirements for First Horizon’s pharmacist home loan, and to get started with the pre-approval process, you can visit yourfinancialpharmacists.com/home-loan. Again, that’s yourfinancialpharmacists.com/home-loan. As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide, and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacist unless otherwise noted, and constitute judgments as of the dates publish. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

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YFP 306: Investing in Yourself

Posted on by Tim U

Erin Albert, PharmD, JD, MBA joins the YFP podcast to discuss why you should approach your career development like you do your financial investments.

About Today’s Guest

Erin L. Albert, PharmD, JD, MBA is Vice President of Pharmacy Relations and Chief Privacy Officer at Mark Cuban Cost Plus Drug Company, PBC. She is both a pharmacist and an attorney. Prior to joining Mark Cuban, she worked in a variety of pharmacy roles, including pharmacy benefits, taught pharmacy students at Butler University College of Pharmacy and Health Sciences for over a decade, served as a director of content for two different ACPE accredited Continuing Pharmacy Education programs, consulted in both fee for service and managed care Medicaid, worked in the pharmaceutical industry in a variety of roles—(including pharmacovigilance, clinical trials, medical affairs, and medical marketing), and in community practice pharmacy as a staff pharmacist and pharmacist-in-charge. She is also a freelance writer and author of over a dozen books, and podcaster (at The Edutainer Podcast.)

Episode Summary

Investing your money is one thing, but people often overlook the fact that they should also be investing in themselves. An article in the Wall Street Journal in late 2022 suggested that “The Best Investment to Make in 2023 Is in Yourself” and that people should treat their own career development like they do their investment portfolios. To discuss, we are joined by Erin Albert, PharmD, JD, MBA. Erin is the vice president of pharmacy relations and the chief privacy officer at Mark Cuban Cost Plus Drug Company. In addition to being a pharmacist, she’s an attorney, author, and podcaster. She explains the concept of investing in oneself by building a portfolio of how we spend our time and money and how she applies this to her own life. She talks about the five categories that make up her professional development portfolio, how often she revisits this framework, and what it looks like to pay herself dividends along the way. She also talks about what she looks for in education and training programs and how her personal brand and network have accelerated the achievement of her goals.

Key Points From the Episode

An introduction to today’s guest Erin Albert, PharmD, JD, MBA and a brief summary of her career journey.
How she came to work at the Mark Cuban Cost Plus Drug Company.
The concept of investing in oneself by building a portfolio of how we spend our time and money.
How Erin applies the strategy of developing a long-term vision to her own life.
Why she revisits this framework or portfolio annually.
How she became comfortable with the uncomfortable and was able to jump at the opportunity to work for Cost Plus Drugs.
What a “jar of awesome” is and how Erin celebrates the small wins.
The value of traditional and non-traditional education and training programs in the pharmacy profession.
Why you should create the course you’re looking for if you cannot find it.
How Erin’s personal brand and network have accelerated her personal and professional goals.

Episode Highlights

“My portfolio looks like a five-way intersection. It’s really your strengths, your values, what you love to do, what the world needs, and what someone will actually pay you to do.” — Erin Albert [0:10:11]

“You have to keep investing in your own personal learning and development so that when you do get that blank piece of paper, you can run with it.” — Erin Albert [0:18:07]

“When I’m looking at different educational opportunities for myself, it’s not so much about formal learning anymore. It’s much more important to me to look at the content and who is teaching it than anything else.” — Erin Albert [0:24:57]

“Whatever your niche is, you should be sharing it because part of the journey in becoming a leader or a thought leader is that you’re sharing what you’re learning along the way.” — Erin Albert [0:30:47]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here. Thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome Erin Albert on to the show to talk about investing in yourself. Erin is the vice president of pharmacy relations and chief privacy officer at Mark Cuban Cost Plus Drugs Company. In addition to being a pharmacist, she’s an attorney, author, and podcaster. Prior to joining Mark Cuban, she worked in a variety of roles, including pharmacy benefits, taught pharmacy students at Butler University College of Pharmacy for over a decade, served as a director of content for two different ACPE-accredited CPE programs, consulted in both fee-for-service and managed care Medicaid, worked in the pharmaceutical industry in a variety of roles, and in community practice as a staff pharmacist and pharmacist in charge.

Before we jump into my interview with Erin, I recognize that many of you may not be aware of the work that the team at YFP Planning does in working one-on-one with more than 280 households in 40-plus days. YFP planning offers fee-only high-touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com.

Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

[INTERVIEW]

[0:01:33] TU: Erin, welcome to the show.

[0:01:34] EA: Thanks, Tim. It’s great to be here.

[0:01:35] TU: Well, it’s been a long time in the making. I feel like I’ve been following you on social media, LinkedIn in particular for some time. I feel like, I know you at this point in time, which is weird. I guess social media can have that effect, right?

[0:01:46] EA: Yeah. I think it’s a good effect, though, right? Like, I love podcasting and listening to you as well. A lot of our fellow pharmacist podcasters are doing their thing now, which I think is great. I think we need to have more voices on pharmacy and in pharmacy and in healthcare, because let’s be honest, there’s a lot of work to be done.

[0:02:06] TU: That’s right. Well, speaking of work to be done, today we’re going to be talking about investing in yourself. A different take than the normal Xs and Os of the financial plan. Erin, before we dig into that topic, give us a brief summary of your career journey, including the current role that you have as the vice president of pharmacy relations, chief pharmacy officer at Mark Cuban Cost Plus Drugs.

[0:02:29] EA: Yeah. Thanks again, Tim, for having me on the show. My career started right here in Indiana, where I’ve gone full circle and ended back up at. I went to Butler University College of Pharmacy and Health Sciences. I won’t say when because now I’m too old to own up to that. I really always loved chemistry and science and was one of those nerdy little kids that geeked out going to the library. I played some musical instruments in high school, I always had my paws on a lot of different things in a good way.

When I chose pharmacy, I knew that I was staying in-state. It was between that other pharmacy school, Purdue and Butler. Now we have Manchester here in Indiana. I chose Butler. I loved pharmacy but ran screaming from the building after five years. I had had enough education thinking, “Oh, I’m going to go launch my career and I’m never going to go back to school again.” Well, that was not what happened in a good way, in a good way, right?

My life took me out to the Philadelphia area back in the late 90s when pharmaceutical manufacturers were having their heyday out there. Had a lot of great experiences on the pharma manufacturer side, working in a lot of roles, but came home here to Indiana, continued to do that in industry. Then somehow, I wound up in academia, taught at Butler University again, right back where I started in the school, the College of Pharmacy and Health Sciences. I did that for 10 years. I had the hair-brained idea to go to law school at night, also went to business school at night.

All my graduate programs were always when I was a working professional, doing it part-time, either in the evenings or on the side. Lo and behold, I was working for a broker advisor here in Indiana called Apex Benefits, and shout out to them. I love them. They’re still all my peeps. At the time, one of the drug manufacturers was pulling their copay coupon at the beginning of a new plan year. I reached out to, lo and behold, Mark Cuban Cost Plus Drugs, because they had an incredible price on Imatnib. Imatinib as you know is chemo. It is not low cost.

I was trying to figure out a way to get our patients access to that drug at that low cost. Suddenly, they reached out, the CEO and I had a chat, and all of a sudden, I had a job offer. I do believe that somehow Kismet played a role in all this because each and every day I get the opportunity and the honor to use my pharmacist brain, my lawyer brain, and my MBA marketing brain in a variety of different things that I’m doing here at Mark Cuban Cost Plus. I’ve been here almost a year now, although it feels time is a relative thing post-pandemic.

Now I serve as our vice president of pharmacy relations and chief privacy officer here at Mark Cuban. My colleagues are fantastic and phenomenal to work with. I work now for the smartest individual, Alex Oshmyansky that I think I’ve ever had the honor to work for. He’s an MD Ph.D. Oxford guy. He’s got a Ph.D. in math, super brilliant. Then of course we can’t leave out Mr. Cuban. He’s been great to work with, as well. He is very entrenched in the business, by the way, in a very good way, because pharmacy benefits are not easy to understand, but he’s a lifelong learner too. I’ll just put it out there that he’s very inspirational because he’s always asking questions and he always wants to know what the ramifications of everything are in our daily operations.

[0:06:38] TU: I got that vibe. I’m an avid Shark Tank watcher, right? As I suspect many people may be familiar with Mark Cuban through that or through his ownership of a variety of companies, including professional sports teams. I’ve gotten that vibe in watching Shark Tank of that he is constantly asking questions. He’s always wanting to learn, always wanting to grow. I think that’s a sign of not only a good business owner, but that’s a sign of someone who’s looking to stretch themselves, understand more. Of course, as we can have more information, we can make better decisions along the way. It’s really neat, Erin, to see you as a pharmacist representing our profession inside of an organization like Mark Cuban Cost Plus is obviously is having, I think, a positive disruption on our healthcare system. Exciting to see that evolution.

We’ll talk about some of the behaviors around professional development the educational path you’ve taken, the networking that you’ve obviously done, which has led to an opportunity like this. We talk often on the show about where to put your investments, but we haven’t yet discussed this concept of investing in yourself. To guide this conversation, Erin, you shared an article from the Wall Street Journal back at the end of 2022 that we’ll link to in the show notes, that article is called “The Best Investment to Make is in Yourself in 2023”.

To set the stage for our conversation, let me read an excerpt from the article and then I’m going to get your input. That expert excerpt is this, “Just as we buy stocks and bonds to generate financial growth, we can build a portfolio of how we spend our time and money now that pays off in the months and years ahead.” Erin, I like to think that I’ve been pretty intentional about professional development, but I honestly can’t say I’ve been as intentional and as structured about it as I have been in building my own long-term investing plan. This feels to me like a big mindset shift and a reframe. Would you agree?

[0:08:36] EA: I do. I really love that article. We like to focus on our investment portfolios. Now I think more than any other time, maybe. Inflation has gone up or looking to think about retirement in some instances, there’s been huge dips in the stock market, but that whole approach to looking at your bank and your money and dollars in the bank versus treating your own career development like that, having a portfolio, having different educational opportunities, networking with other individuals, and treating it much like you would your own investment portfolio, I think is a really great parallel to what we all should be doing as professionals inside particularly healthcare and pharmacy.

[0:09:25] TU: Yeah. I think as I read that article, Erin, this concept of setting a long-term vision seems to be a really important piece to then be able to inform the steps that we’re going to take today, right, and in the short-term to get that long-term vision. They talk about in the article some big questions that we want to be thinking about that inform that long-term vision and lead to those shorter-term action items. Questions like, what is my purpose? What is my passion? What am I doing this for? As I’ve mentioned already, I see you as someone who’s very intentional about goal-setting and taking action. Share with us about how you apply this strategy of developing a long-term vision with short-term actionable steps. How do you implement this in your own life and your own professional development?

[0:10:11] EA: Sure. My portfolio looks like, almost a five-way intersection. It’s really your strengths, your values, what you love to do, what the world needs, and what someone will actually pay you to do. Okay. That’s the framework for my own portfolio. I call it an ikigai or the French call it a raison d’etre. It’s your reason for being, right? That to me is the long-term legacy game that we’re all trying to play, I think.

We all are incumbent upon ourselves to find out what that meaning is for each of us individually. When I coach students or other professionals, one of the first questions I ask them is, what are your values? What do you personally value and hold above all other values? I think that has to be the starting point for unearthing whatever your ikigai or your raison d’etre is. Understanding what is personally important and valuable to you.

One of my values, my personal values, is working on the frontiers of knowledge, new knowledge. I am a huge junkie of the future of whatever, XYZ, constantly looking ahead, looking at the best hits, and figuring out how to pull those best ideas into today to make the future happen today. Values are super important. I think the other piece that, frankly, a lot of pharmacy schools, I think, have done a better job in the last few years is assessing your personal strengths, knowing what those are. There are some great tools out there like strengths finder, for example, where you can figure out what your strengths are.

What you love to do like my favorite question there is thinking about what was the last day that time went by and you didn’t even notice? Like what were you doing that day? Because those are hints and clues for you to figure out what your purpose in life is. Also, things like, what the world needs. Right now we’re constantly trying to fill gaps. What are those gaps? What does the world still need? Let’s be honest, particularly in healthcare, there’s a lot of opportunity there.

Then what somebody will actually pay you to do? I think, is important too. Because otherwise, it’s a hobby. It’s something that maybe you’re personally interested in, curious about. I just read a recent book called Unicorn Space that talks about this element as well. These might not be in your day job, but by having this curiosity about different things, that actually can be another mechanism by which you invest in your lifelong learning portfolio and drag better ideas for your curiosities into your day job as well. That’s the framework that I utilize when I look at my own purpose or calling.

[0:13:13] TU: I love that, Erin. I love the visual of the intersection of those things, right? I think so often when I talk with folks, you may see people, “Hey, I’m making a great income, but I’m feeling that dissatisfaction, because of these other things are missing.” Right? That you mentioned as you think about values and some of the impacts forth or we don’t want it to be a hobby. I might be doing those other things, but it’s not paying the bills or it’s not valued in the way that it’s being compensated, so there’s that rub there.

The intersection of these things coming together is beautiful. One of the things I used to share often with students when I was doing some career development is what you alluded to is, “Hey, what are you doing when you’re spending time and you don’t realize time is passing? What are those things or that you could spend a day, a week, whatever, working on a project and you feel more energized through that work”, right? Then on the other side of the coin, what are those things that you do in a day? obviously, all jobs, all work are going to come with some element, some percentage of these things, but that time can be even limited, but it drains you, right? It pulls the energy away from you.

Being aware and observing those things, aligning those with your strengths, understanding what the market value isn’t going to pay for. I think the intersection of those is a really powerful visual. My follow-up to you with that is how often do you revisit that framework? What is the process for you to look at that portfolio? Is it something you do in an annual goal setting to track your progress to rebalance, if you will, right? If we’re off track. How do you evaluate your progress towards achieving that intersection?

[0:14:50] EA: Yeah. I think that’s twofold for me. The first point is annually. I know it’s cheesy to set goals or basé to do that this year or any year for that matter, especially post-pandemic, right? Because we never know what tomorrow is going to bring. But still, I need that order and structure in my life, so usually, the month of December preceding the new year, I really sit down, put pen to paper, and start thinking about what do I really want to bring to my portfolio, my learning portfolio, my life portfolio in the coming year?

The other point in time when I do it is when I change jobs and things derail in a good way, right? Because you weren’t expecting necessarily that great opportunity to come your way, but if you’re offered a seat on a rocket ship, you get on and then you start asking questions later. You don’t ponder things and let the great opportunity pass you by. I mean, with Cost Plus Drugs, I didn’t even have a job description when I rolled in. I basically got keys to the building and they told me to write my job description and it’s changed a couple of times since I’ve been here.

I think any time you have your life’s work or whatever is really, truly important to you at the time and there’s been radical change, I think that’s always a good time to do a little bit of janitorial, if you will, on your portfolio to make sure that you’re still headed in the right direction for you based upon your new situation.

[0:16:22] TU: Erin, the example you just gave of coming to Cost Plus, not having a job description, getting the keys, you figure it out as you go. I think for many folks listening, they may not be comfortable with that type of an opportunity, that type of an unknown. Your mindset around that is really interesting to me. Where do you attribute? How have you become comfortable with the uncomfortable that you say yes to an opportunity like that, knowing that there’s certainly going to be some bumps along the way?

[0:16:49] EA: That’s a really good question. I think where your roots came from like, I grew up, I think we were talking off camera a little bit about or before we recorded about the fact that we grew up in entrepreneurial households. I mean, I grew up in an entrepreneurial household. I watch Shark Tank. I’m a junkie when it comes to Shark Tank like I taught a Shark Tank, literally at Butler University. We had an entrepreneurship in healthcare and life sciences course and their final exam in that course was to do a Shark Tank.

I am a controlled or conservative risk taker. For me, I think it’s empowering to be able to have a blank piece of paper or a blank slate to create and craft a job description or even your portfolio in life, what you really want to accomplish, what you’re here to do, because we’re all here for a reason. I know that sounds really woo-woo, but it’s true. For me, I love to just get keys to the building and I’ll figure it out one way or the other, but I get that sometimes people can be a little more reserved or conservative and they want the checklist, right? I think post-pandemic, if nothing else, it’s taught us that sometimes there isn’t a roadmap. There isn’t a checklist. You have to keep investing in your own personal learning and development so when you do get that blank piece of paper, you can run with it.

[0:18:17] TU: Yeah. I would encourage any listeners out there that are managers, supervisors, ask yourself, what could I be doing to create that culture that allows people to figure it out and to get in the messy middle? That’s one of our core values, Erin, at YFP, is that we really want to have the team comfortable with taking some calculated risks, right? Obviously, there’s discernment there. Sometimes that means we get it right. Sometimes that means, we don’t and permission to fail and to fail quickly and to get back up on our feet and move forward.

I think anything we can do from a management leadership perspective to foster that culture and to role model that is going to allow us to hopefully make the strides that we need to make in pharmacy, but also in healthcare at large. I love that. I love the concept of getting comfortable with the uncomfortable. I want to shift gears. One of the things Erin, this article talks about is how valuable it can be to pay ourselves dividends along the way, as a way to really start to reap some of the rewards and to keep the motivation going.

Admittedly, I am terrible at this. I’m someone who will set big audacious goals and I’m all in grinding it out, waiting to celebrate until the finish line is achieved. The problem with this approach is that we know that the feelings associated with achievement, right, with getting to that “finish line” are short-lived. We can be spending a significant amount of time grinding and grinding some more only to have that feeling of accomplishment be fleeting right in that moment. One, I’d love to hear your thoughts on that and what strategies you implement for these type of micro rewards along the way, these dividends.

[0:20:02] EA: I call that the hedonic treadmill, right, like especially pharmacists. There’s something about us that we love to set big, hairy, audacious goals. Then when we get there, it’s like, what’s next? For me, especially later in my career, I started focusing on the tiny wins, because really, that’s what it’s all about at the end of the day. You get to that big picture, final countdown, whether it’s you’re graduating from pharmacy school or you’re getting that new cool job. It’s not about the big wins. It’s about the tiny wins.

I’ll try to look visually around my day, mentally around my day, every day to sit down and think about, okay, what was the tiny win of the day? What was the best part of my day? Then even keeping what I call a “jar of awesome” around. I have a little 365-day calendar, each day I pull the tag off, and then whatever that was, that particular day, I’ll write it on that calendar posting and I’ll jam it in my “jar of awesome”. Then at the end of the year, I go back and look at it and say, “Wow.” Especially on those bad days, right? When you’re really struggling to find that tiny win, you have something to go back to and say, “Okay, it’s not really that bad after all.”

We’ve had a tremendous amount of tiny wins along the way, XYZ year, so it’s really about the little things. It’s not about the big picture stuff. I know we all need to have those large goals, those lofty goals to get to, but don’t forget the tiny wins along the way as well, because I think they’re equally, if not more important.

[0:21:49] TU: Yeah. I really like that. What I’m hearing there is some type of process or system or activity behavior, whatever we want to call it, that really captures those wins, captures the things that we’re grateful for in the moment because it’s easy to lose sight of those. One I started doing recently and shout out to my partner, Tim Baker, who gave me this idea is, I’ll do a morning gratitude exercise five minutes, micro things of the day that I’m grateful for from the day before. I’ve started organizing those by day. I can see it by year. For example, on March 15th, I can see it 2023, 2022, and the goal would be over time you can look back several years. That has been really powerful.

Even things just one year ago, where it’s like, “Ah, I totally lost sight of that.” Like in that day, that was such an important win. I find it to be very grounding for exactly what you’re saying enjoying those small wins and join the day in the moments and being present in that. Resisting against that urge to be focusing on these massive goals that may or may not come in the future. That to be a fleeting reward when it does come. love what you had to share there.

I want to pick your brain on disruption and education. You and I both were former academics. I feel like we’re academics at heart always, but considering the disruption we’re seeing in education with expanded accessibility at a lower cost, some really referring to things like the massive online open courses. It feels like we’re stuck between a traditional model that values the more structured training programs defined by degrees and credentials, right, think PharmD, residency board certification.

All the while, those structured programs may not be as customizable, affordable, or relatable as other learning opportunities that are coming out there. As someone, Erin, who holds four degrees, if I follow the journey correctly, Bachelors, PharmD, MBA, JD, but also values ongoing professional development and learning, right? Books, podcasts, courses, etc. what do you see as the future of the value of traditional and non-traditional education and training programs in our profession?

[0:24:01] EA: Yeah. I think the MOOCs to your point earlier are a wonderful opportunity to dip your toe into the pool before you go to the deep end with another degree. Okay. I see it as a pool, right? You’ve got all these different lanes in the pool that you can dip into. You can start with a certificate, you could start with an online course, you could talk to your mentor and get their wise advice or sage advice. You should, by the way, have multiple mentors, not just one.

You could formalize that education and go get a graduate degree if you wanted to, or even shift and get a different bachelor’s degree. You could even go get your Ph.D. if you wanted to. I think the range of opportunity has never been better historically than it is right now. I think we have to seize that opportunity. When I’m looking at different educational opportunities for myself, I got to tell you, it’s not so much about formal learning anymore. It’s much more important to me to look at the content and who is teaching it than anything else. I will pay gobs of money myself. I will invest in myself. No questions asked, if it’s content that I cannot get from other sources and the person or the thought leader that’s teaching that content is truly a leader in their arena.

Whether that’s pharmacy benefits, that’s a certain therapeutic area like oncology or whatever the case may be, business ownership as an independent pharmacist. We now have more choices than ever. Sometimes that’s a little bit overwhelming, right? That’s why, again, you want to tap back into your mentor network, and your mentors can be peers, too, by the way, which I think is really important and talk to your network and find out, “Hey, well, that’s really the best program out there in XYZ and go from there?” I think it’s actually a beautiful thing, a great thing that we have a range of different types of ways that we can learn, both live and online or on demand.

[0:26:14] TU: Yeah. I think that’s a great point, right? The access information is greater than it’s ever been, which can be a blessing and a curse. I see it as a blessing, but it can be so overwhelming, whether it’s things we just pick up and read, whether it’s taking online courses, whether it’s more formal certifications or academic degree programs. There are so many different pathways that are out there. I think having a system, having a filter, whether that’s mentors, whether that’s going back to the things you mentioned earlier in the intersection of those five different areas and trying to figure out where do these align and fit in, do they align or do they fit in? But really asking yourself those questions before you make that investment of time and money, right?

I think that’s the thing I was encouraging people is you’re thinking about, especially a traditional degree, right? MBA, MS, whatever, post-PharmD like, what’s the return on investment of both your time and money? I think with so many options that are now out there having some type of criteria, some type of framework, some type of funnel to be able to really filter those opportunities.

[0:27:17] EA: Exactly. I use that mindset when I published and wrote all my books, Toni Morrison, who’s another famous author, said, “If I’m trying to find a book that I want to read and it’s not available, that’s the hint from the universe that I need to write it.” An example sometimes means you have to create the course. In that case, I’ll give you a recent example as immediate past president of the American Society for Pharmacy Law, one of the things that I noticed was as a mid-career professional, there is nothing out there for people like me who are passionate about the intersection of pharmacy and law and leveling up on their own leadership.

We decided to create the diplomat for the American Society for Pharmacy Law program. It is a one-year longitudinal mentor-mentee program that lets you go down a rabbit hole and study an area of pharmacy and law that you are personally passionate about. You present it at the subsequent annual meeting. You get paired with a mentor. You have a leadership seminar series. All those components have swirled together to bring the very best professionals in the realms of pharmacy and law together, to bring along the next generation of leaders in that arena that are mid-career right now.

That didn’t exist before, but darn it, I wanted it like, I wanted to be part of that. We decided to build it. Now we’re getting ready to launch our second class at our next annual meeting coming this fall. We’ve already got a lot of interest in it. Sometimes I have to say as much as I hate to say it because this extra work, if you’re looking around for something and you cannot find it, maybe that’s the sign that you need to create it. Then, in turn, that’s going to wrap right into your own learning portfolio.

[0:29:08] TU: It’s a great example, great example. Since we’re talking about professional development, I want to tap in your expertise as someone that I view as a role model in personal branding and networking. I think my observation, Erin, is that you have intentionally yet authentically built a personal brand that has obviously led to networking and other opportunities. My question for you is, how has your ability to develop the personal brand that you’ve built to develop the network that you’ve built? How has that accelerated your personal and professional goals?

[0:29:43] EA: I mean, that’s everything. I think one of the first touch points that I made with Mark Cuban Cost Plus, I didn’t talk about this earlier, but Mr. Cuban himself was being interviewed by one of the news editors at LinkedIn on a live stream, now that LinkedIn has live stream video. They took one of my posts that I compared and contrasted drug prices that are out in the internet, Cost Plus, and some other sites and integrated it into the live stream. I had no idea that they were going to do that. I was shocked.

I still don’t know how they figured that out, but I think that was definitely part of the conversation that led me to joining Mark Cuban Cost Plus, as well. I guess, the best advice there is number one, you can’t fake it. If you’re passionate about something, you should be sharing it with the rest of the world, if you can. My world is nerdy. I do pharmacy benefits, pharmacy law and career development.

Those are my three niches, but whatever your niche is, you should be sharing it, because part of the journey in becoming a leader or a thought leader in that arena is that you’re sharing what you’re learning along the way. There’s always that opportunity, I think. It’s super important to share that. I mean, that’s part of being a good learner. In academia, as you know, we always say, see one, do one, teach one, right?

[0:31:11] TU: Yup. Absolutely. What a tangible example of personal branding leading to an opportunity. That’s a really neat one. Erin, this has been awesome. I love this topic, investing in yourself. Your passion comes through the microphone, certainly. I’m excited to get this out to our community to be thinking about how does investing in yourself accelerate your personal goals? I do think there’s a return on investment financially, as well. There’s a connection there to the financial plan. As we wrap up, though, where’s the best place for our listeners to go to connect with you and to learn more about the work that you’re doing?

[0:31:46] EA: Sure. LinkedIn is a great place. Right now, at Cost Plus Drugs, we’re very focused on what we’re calling The Team Cuban Benefits Card and the Cuban Pharmacy Affiliate Network. I’m excited to partner with independent pharmacies across the US, right now to work with them into Brick-and-Mortar pharmacies and get our amazing pricing into their pharmacies, yet offered them a solution where they’re getting paid and reimbursed for their awesome services and our patients can get their prescription drugs closer to home. If you’re an independent pharmacist, I personally love to talk to you. Please connect to me on LinkedIn.

Every Saturday morning that I am home, I also do a quick 20-minute live stream on LinkedIn. That’s audio only. You do not want to see this camera face. This face is not ready for camera at 9 am, Eastern time on Saturday mornings, but I do, do a quick update there on pharmacy benefits, pharmacy law and career development for the week incoming. Then I do publish a newsletter around that after we have our little morning coffee clutch and chat. If you want to check me out over there, I do that live stream again every Saturday morning at 9 am, Eastern.

[0:33:04] TU: Awesome. Great stuff. Hopefully, you all connect and follow Erin on LinkedIn. We’ll link to that in the show notes. Erin, this has been fantastic. Thank you so much for taking the time. I appreciate it.

[0:33:12] EA: Yeah. Best of success to you, Tim. I know it’s hard to leave Academia where it’s seemingly “stable” to go do your own thing, but you’re brave doing it, and kudos to you for that.

[0:33:23] TU: Thank you, so much. Appreciate that.

[END OF INTERVIEW]

[0:33:25] TU: As we conclude this week’s podcast, an important reminder that the content on this show has provided you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 071: Ask Tim & Tim

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Ask Tim & Tim

On Episode 71 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of YFP, and Tim Baker, YFP Team Member and Founder of Script Financial, tackle 10 listener questions that were posed in the YFP Facebook Group, covering a wide array of topics like investing, refinancing student loans after pharmacy school, taxes, and more.

Have a question you would like answered on a future episode of the show? Make sure to join the YFP Facebook Group to pose your question to the YFP community or shoot us an email at [email protected].

Summary

Tim Ulbrich and Tim Baker field 10 questions from the YFP community. The first question asks about the pros and cons of a traditional 401k versus a Roth 401k. Tim Baker explains that “Roth” means after tax (Roth 401K, Roth 403B, Roth IRA) and a traditional 401k means pre-tax. He explains that there are different participant contribution amounts to 401Ks and that you are able to have a traditional IRA and Roth IRA that you can put aggregate money in each year in separate systems. Question 2 asks, what is something you wish you would’ve started in pharmacy school based on what you know now? Tim Ulbrich says first become educated, especially around student loans, work in school to help set yourself up for a career to to form connections and skills, and, lastly, look at the amount of money you are borrowing as real money that you’ll need to pay back. Question 3 asks how to start earning interest on monetary gifts a child has received. Tim Baker responds that first you need to know the goal of the money. From there, you can put it in a high yield savings account or CD or put it in an index fund. However, a 529 is probably the best vehicle for the money to be put in, as it offers tax advantages. Question 4 asks about unconventional pharmacy jobs. Tim Ulbrich says that 45% of jobs are in community pharmacy and 30-40% are in residence training, however there are still many different avenues of unconventional pharmacy jobs to explore. The best advice is to find a mentorship, either within your college or outside, to help you see other possibilities. Question 5 asks about online banking and suggested companies other than Ally. Tim Baker says that it’s important to gauge the ease of use, customer service, and fees charged. These online bank accounts are best used for separate emergency funds or storage accounts.

Question 6 asks if there is any benefit to staying with the same home and auto insurance or switching companies for a better rate. Tim Ulbrich suggests that you should assess the price with the service you receive. Nickel and diming policy coverage over a company you are happy with should be avoided as it’s important to put value over relationship. However, if there is a significant savings, then, of course, switching makes sense. Question 7 asks what should be taken for an initial appointment with a financial advisor and what questions should be asked. Tim Baker says it’s important to ask good questions, such as how would we interact and how often, are you fee only or fiduciary, how is the fee calculated and how are you compensated? If you are going to a financial advisor strictly for guidance with student loans, be aware of how much knowledge they have. Question 8 asks if anyone has repaid their student loans through the federal government with income based options, such as IBR or PAYE, and if the better option is refinancing student loans after pharmacy school. Rim Ulbrich says that you have to assess what the best repayment option is for you. Run the numbers, look at the feelings you have toward carrying student loan debt for 20-25 years, assess your financial goals, and lay our all of your options. From there, you are able to make a decision. Question 8 asks if it’s better to file taxes married filed separately when a spouse is eligible for PSLF. Tim Baker explains that there are situations that married filed separately is the right way to go, however, it depends on the repayment plan. He suggests to do a tax projection and student loan analysis to see if you’re approaching the situation in the best way possible. Lastly, question 10 asks if someone should stick with federal loans to keep a minimum payment down or refinance to lower their interest rate. Tim Ulbrich suggests that as the interest rate market rises, refinance offers may not be as attractive. If you refinance on $100,000, a 1-2% interest rate change in refinancing may largely affect how much you are repaying. Regardless of the math, refinancing is off of the table if you are pursuing PSLF.

Mentioned on the Show

CommonBond
YFP Facebook Group
Have a question about investing? Ask us!
YFP Episode 70: Pre-Planning for Tax Season with Paul Eikenburg
Nate Hedrick, Real Estate RPH
YFP Episode 69: Carissa Explains It All: How One Pharmacist is Accelerating Her Financial Goals Through Rodan & Fields
YFP Episode 63: Intro Into the Side Hustle Series
YFP Episode 38: The Happy PharmD’s Journey to Becoming Debt Free with Alex Barker
Tony Guerra’s Pharmacy Leaders Podcast
YFP Episode 53: One Pharmacist’s Journey From Financial Ignorance to Financial Independence with Tony Guerra
Nuts and Bolts to Hiring a Financial Planner Guide
YFP Episode 15: Financial Planning Series Interview with Tim Baker (Part 1)
YFP Episode 16: Financial Planning Series Benefits of a Financial Planner (Part 2)
YFP Episode 17: Financial Planning Series Questions to Ask – Hiring a Planner (Part 3)
YFP Episode 62: The ‘Other’ Forgiveness
YFP Episode 18: Maximizing the Benefits of Public Service Loan Forgiveness
YFP Student Loan Course
Schedule a Tax Review
Student Loan Refinance Calculator
Have a question and want it featured on the show?

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 071 of the podcast. Excited to be alongside Tim Baker as we dive into an Ask Tim & Tim episode where we take a wide array of questions, 10 from the YFP community that were posed in the YFP Facebook group. So Tim Baker, how you doing?

Tim Baker: Doing well, how about you, Tim?

Tim Ulbrich: Good. So you’re back from Iceland. Welcome back. How was the trip?

Tim Baker: Oh, it was awesome. Yeah, it was great. You know, I feel like the last few weeks has been crazy, but it was good to get away. I think I literally didn’t touch my phone for about a week. So now I’m trying to get back into the swing of things, but Iceland is an interesting place to visit for sure.
Tim Ulbrich: It seems like I’ve noticed a lot of friends from college and coworkers are taking that trip, it seems like on the East Coast here. I know Cleveland has direct flights over to Iceland, I’m guessing something similar by you guys. Seems like a popular destination to begin to see that part of the world.

Tim Baker: Yeah, it’s funny because like prohibition ended like for beer, I think in like the late ‘90s — don’t quote me on that — which was interesting. But I think since then, the tourism has become the biggest staple in Iceland, moreso than fishing. But you have a combination of just like incredible scenery, like almost where you’re on a different planet. And of course, beer drinking and things like that. So yeah, it was great. It’s one of those vacations where you’re out in the country, but it’s somewhat affordable. It’s expensive when you get there in terms of like food and things. But oh man, it was great. Just good to get away and reset and, you know, I’m ready for the final quarter of the year.

Tim Ulbrich: Yeah, welcome back. We’re excited to jump into this episode. And we’re actually getting together end of this week in West Palm Beach, Florida, where Tim Church lives. We have a YFP retreat, so excited to be jumping into all things YFP. And actually, as a part of that time that we’re together — to our listeners, we’re going to be recording an episode that’s taking all questions related to investing. So if you’re listening to this episode and you have a question, all questions investing, shoot us an email at [email protected] or jump on the YFP Facebook group and pose your question and we’ll make sure to feature that on the upcoming episode where we do that Q&A session. Alright, so here’s the format. We’re going to go back and forth. We have 10 questions, great questions from the community. We’re going to read the question, we’re going to answer them between the two of us, and then we’ll jump in with some feedback that the community has provided as well. So Question 1, Tim Baker, comes from Nidhee (?), and he asks, “What are the pros and cons of a traditional 401k versus Roth? Currently, I’m trying to maximize my traditional 401k. Any suggestions would be helpful.” What do you think?

Tim Baker: Yeah, such a great question. And you’re starting to see more and more 401k’s offer a Roth component. So just kind of to break this down for listeners who are kind of a little murky about this, anytime you see “Roth” before 401k, 403b, IRA, you’re going to think after-tax. So the money that gets thrown into that account is after-tax. Now, if you see a traditional 401k, traditional IRA and traditional 403b, you’re going to think pre-tax. So the money goes into that bucket pre-tax. And typically, the opposite is true when the money comes out. So it goes in pre-tax, it usually grows tax-free, and then it comes out taxed. And then the opposite is true if it goes in after-tax, it grows tax-free, and it comes out tax-free in the after-tax world. So to get back to the question, I think the Roth component is actually a great component to the 401k because a lot of pharmacists because of their salary, they make too much to actually contribute directly to a Roth IRA. So when you sign up for your 401k or when you’re adjusting your 401k, you’re going to want to see if there is a Roth component and if that makes sense for your particular situation. In our last episode, we kind of talked about all the different levers to pull when it comes to, you know, should I pay the tax now? Should I defer the tax? What does that look like? And this is actually one that you can do. So a lot of people get confused by kind of the Roth 401k because it really, you can’t commingle those accounts. So it actually looks like you have two accounts when you’re funding this. So basically, you go in and you would see a balance for your traditional 401k. And if there’s a match, that’s where all your match dollars are going to go from your employer. But for your Roth, if you’re deciding to fund that, you know, those are basically funded with after-tax dollars. So you would go in and you would set up an allocation similar to your 401k, your traditional 401k. And essentially, the difference would be just if those dollars are taxed or not. So that’s essentially the basics there.

Tim Ulbrich: Tim, one of the questions I often get here — and I think it’s good just to clarify for our listeners because the term “Roth” gets confusing when they see it as a Roth 401k versus a Roth IRA. Does the Roth contribution towards a Roth 401k go towards or impact the total of the $5,500 that you can contribute in a Roth IRA? Or are those completely separate buckets?

Tim Baker: Yeah, to kind of draw the lines around the 401k and the IRA. So you as a participant in the 401k, you can put in $18,500 — these are 2018 numbers — per year in aggregate between a traditional 401k and a Roth 401k. In the same breath, you can also have a traditional IRA and a Roth IRA that you can put an aggregate $5,500 per year. So these are, they’re essentially separate systems. So if you put money into a Roth IRA, it doesn’t necessarily affect how much money you can put into a Roth 401k.

Tim Ulrich: Got it, thank you.

Tim Baker: So the next question for you, Tim, is a great question from the Facebook group. “My name is Steven. I recently joined the group, and I really enjoy all of your posts about business and financials. I am in my third year in pharmacy school and wanted to ask you this question. Knowing what you know now, what is something you wish you would have done or started in pharmacy school?” That’s a great question.

Tim Ulbrich: Yeah, great question, Steven. And first of all, kudos to you for being proactive as you’re in pharmacy school. I think so many in this community — and I think some even commented in the feed of the question that you posed saying, “Hey, I wish I would have been thinking about this sooner,” and I know that’s something, Tim, that I often think back of, wow, what would have happened if I would have actually dove into this topic, been a little bit more proactive instead of reactive where looked up, had a ton of debt and then tried to figure it out and felt the pain. And that was the beginning of trying to figure this out. And I think that gets to the point of my answer to Steven’s question. If I had to go back and do it all over again — and this is not a sexy answer — to me, it’s all about being educated, specifically probably around student loans for many of the students that are listening. You know, I think as I look back, I was trying to dabble in the Roth IRAs and learn some other things here or there. All the while, I had student loans that are accruing above $152,000 at 6.8% interest, I didn’t have really a solid emergency fund, and I was just doing things out of order because I didn’t have a good education and understanding of what it meant to have a solid financial base. And that even, to me, trickled into new practitioner life where I was getting ahead of myself in some areas around kids’ college saving and other things at the expense of having, again, a solid emergency fund, the right life insurance protection, making sure I had end-of-life planning documents, all the things that we’ve talked about before around having a solid financial plan. So Steven, the one thing I would do, which you’re obviously doing, is getting involved in this topic, being educated. And hopefully you can inspire your peers and your friends and your coworkers to do the same. The other thing that I would do — and I know a couple people had responded, and actually, we had a response from Steve, who is another fourth-year student. And one of the things he mentioned was definitely work in school. And I would advocate for that. And I know I had a lot of faculty members who would tell me, “Hey, don’t work in school. You’ve got to focus on your academics.” Of course you have to graduate, otherwise your degree and not having one is counterproductive. But many students who can balance these things — I’m not saying you need to work 30-40 hours a week. But obviously a little work experience is going to, you know, provide a little bit of a financial component. But probably more important, it’s going to set you up for career components, going to allow you to begin to form those connections in your network, and I think as I now see new practitioners coming into the workforce, I think it gives you those skills that you just aren’t going to get in school, right? Dealing with difficult customers and time management and coworkers and understanding all of the things beyond the books and what you’re learning in school. So Steve, if you haven’t yet too, make sure to take a look at the responses from your peers and some of the group because there was some great feedback around — you know, I really like what Vbar (?) had to say about “borrow only what you need for tuition and fees because these student loans are killers.” And we say this over and over again on the podcast that if you look at the average indebtedness of a pharmacy graduate, those numbers are often double what are the numbers for tuition and fees. And that’s because of the borrowing that’s happening for cost of living expenses. So do everything that you can, especially in the interest rate market we’re in for student loans, everything you can to minimize the costs you’re borrowing while in school.

Tim Baker: And I think just to piggyback on that, Tim, one of the things that I think I hear quite a bit is it’s almost like Monopoly money, you know, like the loans you’re taking out. So I think if you can, you know, in your mind, make it real. And I think the best way to do that is to, you know — I know that with the average debt load being $160,000, I know that a standard — that equates to a standard payment of like $1,800 and change. So if you have loans that are $320,000, then you’re looking at a $3,600 payment. So obviously listeners, if you’re P3, P4, you’re going to know more or less where you’re going to fall in that, so I think — like you said, if you can work — anything you can do to kind of make it more real. And I think once it becomes more real, then you’re more likely to actually be intentional, I think, with what you’re trying to do, whether it’s working or just being more frugal as a student. I think the sooner you do that, I think the better you will be as you enter into repayment.

Tim Ulbrich: Great advice. Great advice. Our third question comes from Rachel in the Facebook group, who says, “My husband and I just had our first child and want to start earning her interest on the monetary gifts we have received for her. Any advice and suggestions?” So Tim Baker, I’m guessing maybe there’s a question behind the question here around college savings for kids or just investing money long-term for a child. What are your thoughts? And what do you do with clients typically in this arena?

Tim Baker: Yeah, I think the question with the question would be like, well, what’s the goal? What are we thinking we want this money for? If we want something that’s a sure thing and we want to be able to access this when the child is growing up for whatever reason, then something like a high-yield savings account or a CD might be the best bet. If it’s more of a long-term goal and we don’t really have an education goal in mind, maybe it’s just sticking the money in an index fund. But more acutely, I think the 529 would probably be the best vehicle to put money into that these monetary gifts, even some of these 529s are getting pretty creative. Like I know the Maryland 529, you know, I can send out links to grandparents and aunts and uncles and say, “Hey, contribute to Olivia’s 529.” I think the big advantage there is you typically, most states will give some type of tax deduction. And even with the new tax code we talked about a little bit last episode, you know, the 529 can now be used for kind of secondary school, high school, middle school, that type of thing. So you can actually use it as a pass-through to get a state tax deduction. But then longer term, you can invest it similarly like you would your 401k, your IRA, where you’re putting money in there and as it accumulates over 15, 16, 17 years, it provides a return on the investment that you can apply towards your child’s education. So you know, there’s a lot of I guess different sides to the answer. And same thing with 401k’s and IRAs and things like that, not all of them are created equal. So you’re going to want to really pay attention to fees and the investments that are there for you. But obviously, your state is going to play a role in that. But those would be kind of the top things that I would rattle off in terms of advice and suggestions.

Tim Ulbrich: Yeah, just a couple things to add there, you know, especially knowing where we are in the year and coming up on the month of November, if Rachel, if her and her husband are thinking 529 — and I don’t know, I’m guessing this is every state in terms of the income tax deduction, I know here in Ohio I think the limit to that is $2,000. And so depending on the amount that they’re looking at doing, there may be a play there to divide some between the 2018 and some between the 2019 year rather than going above that $2,000. And I think you and Paul did an awesome job last week talking about that in the context of tax. The other thing I think about here, Rachel and to the broader community that’s listening — and Tim Baker, you helped I think Jess and I realize this, that not only the why of what the goal is, what you’re trying to do, what you’re trying to achieve, but I think for those of us that graduated with tons of student loan debt, we tend to probably be compensated a little bit too much on the other side when it comes to kids’ college because we want to avoid that, naturally, for our own kids, right? And so I’m not suggesting here that Rachel, you and your husband take your child’s money that was received for your child, but I am just bringing up the point that as you and your husband talk through this going into the future, making sure that college savings for children is done so in the appropriate context of your own financial plan. And I’ve seen a lot of new practitioners, myself included, who, again, to my point earlier, maybe don’t have those foundational items like the right insurance and emergency fund, etc. but are running off saving for kids’ college, and that’s 18+ years away. So again, just thinking about the priority and the order of things within a financial plan.

Tim Baker: Yeah. I’ve actually had some clients like stop at a certain amount of kids because their goal was to pay 100%. And I mean, obviously, it’s a personal choice. But there’s different ways you can go about funding education, it’s important to kind of talk with your partner and maybe a planner to kind of work through that. So great question by Rachel. So Tim, next question for you is — this is from Elise. “With the ever-changing pharmacy job market, I’m starting to think more about unconventional pharmacist jobs, i.e. not in hospital or retail. I think in school, we’re kind of programmed to believe that those are our only two choices, so it’s hard to even know where to begin looking for what else is out there. I’m wondering if anyone has experienced doing something other than hospital or retail that they really enjoy and is financially stable, offers good perks and benefits. Thanks.”

Tim Ulbrich: This is a great question, Elise. Thanks for taking the time to pose it. And I got fired up when I saw this question, Tim, because in my former day job at Neomed, I did a lot of career counseling, advising with our students. And I cannot tell you how often I heard from our own students, even as a P1 or a P2, even before they’ve really been getting along that path of looking for jobs, there tends to be this mindset that Elise is describing of, I’ve got one of two options, right? I’ve got retail community pharmacy, and I’ve got hospital pharmacy, which more often than not means residents to train.

Tim Baker: Right.

Tim Ulbrich: And really, if you look at the workforce data, the reason people think that is valid. If you look at the last workforce survey that was pushed, 45% of all pharmacists’ jobs are in the community pharmacy sector. Now, that can be obviously retail chains, CVS, Walgreens, etc. It could be independent pharmacies, but that’s almost half of the workforce. So that’s why I think you see — and depending on the school that graduates, you’ll see these numbers upwards of 50, 60, 70% depending on the region and the job that they have available. And then I know at Neomed, we saw 30-40% of our grads every year would go into residency training. So you put those two together, and that’s 80% or so of a graduating class. And so I think it’s easy for students and new practitioners to think these are my only two options. And for those listening that also have this question, please make sure to go check out the Facebook group and look at the answers because there’s some great examples out there that were highlighted of people that are doing different things. Somebody’s working for a hospice, pharmacy benefit manager on the side. People that are in pharmacy informatics. Nate Hedrick, who we’ve had featured on the show, the Real Estate RPH, during our September series on home buying, talks a little bit about his job working for a pharmacy benefit manager as a sales team clinical liaison. So very unique, niche position. And he actually I know did an in-patient hospital residency. So there’s many different paths and options, and I think the advice I would have to somebody asking this question is begin to find the mentorship and the people that are going to offer you this viewpoint, if you don’t feel like you can get it as a student at the college that you’re at. So are there new practitioners, are there people with an organizations, associations that you’re connected with that have these positions that are the “nontraditional” or unconventional positions that you can begin to form those relationships and networks and get them to help you along this process because the reality is we all know pharmacy’s a small world and we know that when it comes to these niche markets, it’s all about networking and building those relationships. So if you want to find something beyond the hospital, community pharmacy world, go find those practitioners who are out there. You know, you’ve talked before on this podcast, Tim, the 1,000 cups of coffee. You meet with people, have them introduce you to three more people, and keep going and going and going. And it may take 10 or 20 or 30 conversations, or it may take two, but doors will open over time. And you’ve just got to put the work and effort into doing that. The other thing I would just highlight, Elise, in response to your question, is if you haven’t done so already, check out the side hustle series that Tim Church has been doing on this podcast, episodes 069 and 063, also in episode 038, we had Alex Barker from the Happy PharmD on talking about his journey. He’s got some great context — or excuse me, he’s got some great information on the unconventional jobs that are out there. And then Tony Guerra, pharmacy leader and podcast host, we had him on in episode 053 as well, did a great job of talking about some of these other options. So Elise, thanks for your question. Alright Tim Baker, question 5 here comes from Lane inside the Facebook group. “What other banks do people use besides Ally? A Google search showed Northfield Bank offers higher APY.” And I think maybe we’ve brainwashed our audience unintentionally about Ally because you and I are Ally users, and we get giddy when we get the rate increase emails that come. I think they usually come on Friday afternoons.

Tim Baker: Yeah, and I think I missed the last one because when I was researching a bit for this question, I saw that Ally’s now at 1.9%, so I think I missed that last bump, which I’m pretty excited about.

Tim Ulbrich: So what — and maybe, so Lane is asking here what other banks do people use? But maybe there’s a better question here — not to hijack her question — is what should people be looking for when they’re choosing a bank specifically for more of that long-term savings, you know, emergency fund and whatnot.

Tim Baker: Yeah, so I think that having a bank set aside for kind of your long-time savings like emergency fund and storage account, which might be like a travel fund, a car maintenance, a home maintenance fund, I think what you’re really trying to find is something that there’s ease of use, there’s an app, there’s a website, that doesn’t charge fees, that you can move money in and out fairly easy. And for me, like when I started kind of recommending, I found that when I started working with clients, this was kind of a topic that came up over and over again. Where should I bank? And where should I put money? And again, it’s not something that most financial planners I think even think about because it’s very much investment-centric, and we’re not really thinking about budgeting and debt and things like that. But this was kind of a key question that came up over and over again, so when I did research on this topic awhile ago, those were some of the things that I was trying to figure out. OK, where is the best bank to park money and get a little bit of return and not be charged fees and all that kind of stuff. So I actually tested out Ally, Synchrony Bank, Capital One, and I think Barclays was the fourth one I looked at. And although Synchrony at the time was kind of providing a little bit more return, I just found that from a great experience across the board, Ally was far and away better in terms of opening accounts, moving money in and out of it, just the app, all that stuff. To me, I think Ally was head and shoulders, even I think above Capital One 360, which obviously is a huge bank. So again, I’m a big proponent of kind of keeping this type of banking kind of separate from your everyday kind of monthly expenses. So if you bank with BNC or Chase or something like that, I like kind of a separate entity that is going to park kind of your emergency fund and kind of those storage accounts for those particular goals. So that was just my experience in testing these out. And obviously, you know, it’s a little bit of an arms race because these companies are putting money into their apps and things like that. But at the same time, I think Ally — and even for me, I know, Tim, you and Jess are using Ally. And again, we don’t get any type of benefit from talking about Ally. I just think that they have a great solution.

Tim Ulbrich: You know, it’s funny how far we’ve come in this online banking. Do you remember when Ally came out and it was kind of like, really? Are we going to do banking online? I remember those days. And you know, great customer service and I think you can obviously find that with other banks as well, but I think looking at some of the components you mentioned is great advice.

Tim Baker: OK, so next question comes from Kara. “Home and auto insurance question. Is there any benefit to staying with the same company? We have had the same company forever, but I called MetLife to get quotes because I can get a corporate discount through my employer. For the same exact coverage, auto policies are almost half as much. Switch and save money?”

Tim Ulbrich: Yeah, this is a great question. And actually, I just went through this in the move of getting a re-quote on home and auto. And you know, obviously as Kara mentions, the number half as much, it’s hard to not say, switch. But I think you always have to consider this in the context of price versus the service that you receive. And obviously, there’s a point where you’re going to be able to save a significant amount of money. But don’t — I guess what I’m trying to say here is don’t nickel and dime policy coverage for a company that you’re happy working with that you have a quick connection if you need it and that is responsive, obviously, in the times that you need them to be responsive. And Nate Hedrick really highlighted this for me as I asked him for his input as I was shopping around on home and auto. And that was his advice back to me is, you know, look at the total cost of the policies. And if you’re talking about saving $20 or $30 and you have somebody that’s an email or a phone call away that you have a relationship with, you have to put value to that relationship. Now, obviously if you’re talking about a policy that’s half as much, unless it’s just atrocious customer service and you’re not going to be able to get that same coverage, then obviously there’s a point where switching makes sense to save some money. The other thing I always encourage people to do is make sure you look side-by-side, whether it’s a home or auto insurance policy, look side-by-side to see the coverage that you’re getting is the same because if your deductibles are changing or coverage isn’t as good, obviously that may explain the price difference. But if you loko side-by-side and say, “OK. All coverage is equal,” now you’ve got to really weigh this against what is the level of the relationships and the customer service and how much am I going to save on this? Kelsey also makes a good point. In responding to Kara, she says, “I think it depends on the company. Some will now give you money back after x amount of years you don’t have a claim. My sister is an insurance agent, and the company she had me switch to will give us back 25% of our payment if we have no claims for three years.” So obviously, that policy is built in a way that incentivizes that relationship over time. So different factors that you have to consider as you’re looking at these different companies. Alright, Tim Baker, question No. 7, Devin asks, “Hello everyone, I’m meeting with a financial advisor tomorrow, and I was wondering if there was anything I may forget to bring them that you all think would be helpful. I’m a recent graduate.” So recent graduate, going to meet with a financial advisor, what information should they be bringing? Or what questions should they be asking? What do you think?

Tim Baker: I think typically when I meet with a kind of a prospective client, I don’t have them bring anything except for questions. I know some people’s process is different. They might start kind of getting down to some of the details of kind of the work they would do and everything. But for me, I think it’s just a matter of like do I have a connection with this particular person? Do I see myself working with them for a long period of time? And in Devin’s case, it might not be a long period of time. It might be I’m just trying to get a few questions answered and then I’m going to move on. So that would be kind of the question that I would ask first is how would we interact? And how often? I think the big thing is — and again, I’m biased here — is are you fee-only? Are you a fiduciary? You know, how is your fee calculated and compensated? Can I clearly see what I’m paying you? And nine times out of 10, these will send financial advisors squirming. And I think if you see that, then it’s probably a good indication to kind of go in the other direction. You know, just a lot of financial advisors, they have minimums. So you have to have — it’s kind of like, hey, I can help you, but only if you have a quarter million dollars or something like that.

Tim Ulbrich: Right.

Tim Baker: Or I don’t have minimums, but typically when you don’t have minimums, typically that particular client is maybe ignored more so than someone who does a quarter million dollars. So I think there’s a variety of questions. I think some of my FAQs that I would give a person to ask their financial planner — and I think a big one is around like what are the conflicts of interest? Are you a fiduciary? Are you fee-only? And from my experience, the majority of financial advisors out there — and I can say this with confidence that the majority of financial advisors out there are not going to be keen on a lot of the issues that pharmacists deal with, and the big one being student loans. A lot of — one of the reasons that I decided to kind of move on from my last firm was because there wasn’t a whole lot of understanding or process around student loans, which obviously is a major pain point for pharmacists. So if Devin, if this is one of the big things that you’re going to talk with a financial planner about, ask good questions because I would suspect that a lot of people in our Facebook group, a lot of our listeners, know more about student loans than some of my counterparts, sad to say.

Tim Ulbrich: Mhm. Yeah and Devin, make sure to check out YourFinancialPharmacist.com/financial-planner if you haven’t yet done so. Again, YourFinancialPharmacist.com/financieal-planner. We built out an entire page really getting to the gist of your question. We have a free guide that answers a lot of what to look for in a financial planner. We have a list of questions that you can ask inside of that document. What are the qualifications you should be looking for, some of the things that Tim talked about there. And then also on that page, we have referenced episodes 015, 016 and 017, where Tim Baker and I talk through a lot of this as well. And on that page, for those that are interested, you can also schedule a free call with Tim Baker if you’re interested in learning more about working with a financial planner and the value that he can provide. Alright, Tim, I think we’ve got three more, right?

Tim Baker: Yeah, let’s do it. So this question is from Sabina. So the question is, “Has anyone repaid student loans through the federal government and utilized the income-based options such as PAYE or IBR, both of which list forgiveness after 20 years as an option. Any recommendations on that approach versus refinancing with private companies?”

Tim Ulbrich: Yeah, thank you, Sabina, for your question. And what really she’s asking here about is what we called in Episode 062 “the other forgiveness.” So we’ve talked a lot on the show about Public Student Loan Forgiveness, PSLF. In Episode 018, we talked about that. I think we’ve mentioned it probably in 15 other episodes, right?

Tim Baker: I think so, yeah.

Tim Ulbrich: And I’m glad we did because I posted in the group last night, there’s a lot of negative news coming out about PSLF, and I’m not going to get on the soapbox right now. News article that 99% of borrowers that applied for forgiveness didn’t get it. And while you and I think we both agree that the federal government and the loan servicers could do 1,000,000% better job than what they’ve done in terms of the PR or the press and all of this, if you really dig into the details of why people aren’t Public Student Loan Forgiveness, most of it if not all of it really isn’t a surprise. It’s either they haven’t consolidated to the right loans, they’re not in the right repayment options or they’re not working for a qualifying employer. So as I mentioned on that episode, dotting your i’s, crossing your t’s is critical. If you have questions, let us know. But what Sabina is asking is about the other forgiveness, non-PSLF forgiveness. So if you stay inside the federal student loan repayment system, and she mentioned two of the income-driven repayment plans, PAYE and IBR, after a certain period of time, 20 or 25 years, depending on the plan, there is an option for forgiveness. And the key here is you do not have to work for a qualifying employer, which is different than PSLF. However, the amount that’s forgiven is taxable, unlike PSLF, where it’s tax-free. So there’s some planning that has to be done with tax. All that we covered inside Episode 062. And so I’d reference our listeners to Episode 062, Sabina the same. And also, she’s asking about refinance. And I think the question here behind the question is what is the best repayment option for Sabina? And I know many of our listeners and followers have that question. Should I refinance? Should I stay in the standard 10-year repayment program? Should I choose one of the income-driven repayment plans? Should I go PSLF? Should I not? If I do refinance, is it five years? Seven years? Ten years? Fifteen years? And we talk a lot about choosing the best repayment option, and we’ve got a full course around that topic, specifically that I would point our listeners to as well. So Sabina, without being able to dig into the numbers, this really comes down to lots of different factors such as running the numbers on each of these options, what’s the math? What are your feelings towards having these loans around for 20+ years? What are other financial goals you’re trying to achieve? What’s your progress in those goals? And I think at the end of the day, what I’m trying to encourage you and our listeners to do is to lay out all of the options, refinance, no refinance, forgiveness, no forgiveness, PSLF, non-PSL Forgiveness — and then from there, look at all the numbers, consider some of the non-math factors, and you can move on and make that decision to ensure that you’ve got this big decision and you’ve made the best decision for your financial plan. Tim Baker, question No. 9 is from Blake, who asked, “My wife is a PA, and I’m a pharmacist. She’s eligible for PSLF, and I am not. She’s set up on an income-based repayment plan, but this will be the first year where we both have a full year of income when we go to file our taxes. We’re wondering if there is a best way to file taxes to keep her payments low to maximize the amount that’s forgiven. I didn’t know if we filed our taxes as married filing separate, would it be more beneficial than filing together?” What do you think?

Tim Baker: Yeah, it’s a great question. And it’s kind of similar to our last question. It’s kind of difficult to dig into without all of the nitty gritty details. But you know, I would say that I think that there are situations where with student loans and spousal income that married file it separately is the right way to go. And I actually have a few clients that are doing that. It also depends on what repayment plan you’re in. So if you’re in a REPAYE — and if you’re in PSLF, those are going to be the two that you are really going to want to look at is Revised Pay as You Earn and Pay as You Earn. One of them, REPAYE, it doesn’t matter how you file. It’s going to count both spousal income. Pay as You Earn, it does matter how you file, depending on if you do file married filing separately will only account for the one spousal income. So I think you have to actually sit down and maybe do a tax projection, so we talked about that last time. If you’re interested, YourFinancialPharmacist.com/tax, we’re doing tax projections right now. And maybe actually couple that with kind of a student loan consult, student loan analysis, just to see am I approaching this the most efficient way as possible. Now, it is a pain in the neck to file with your spouse to file separately for 10 years. That’s not fun. And for nine out of 10 scenarios, just strictly from a tax perspective, married filing separately offers few benefits. But if you look at it, and your benefit or your payment is hundreds of dollars a month or even equate to thousands of dollars per year, the tax benefit might not equate to that in terms of married filing jointly. So again, I think that your question, it does, Blake, it does have legs. And there are scenarios where it does make sense to actually not file jointly with your spouse, especially if you’re looking at PSLF. And it kind of just depends on some of the income and the underlying numbers with the loans themselves. Alright, Tim, last question here is question No. 10. This is from Joshua. So Joshua says, “I’m on course to pay off student loans in a relatively short period of time. I noticed that refinancing my federal loans to a private lender would decrease my interest rate, as expected. But because I’m set to pay off the loans in a small period of time, the amount saved in interest is relatively small for a pharmacist’s salary. Would it be wise to stick with the federal loans with the option of utilizing a graduated repayment option to keep my minimum payment low in case something unexpected happens that doesn’t get paid for by insurance, like having a baby, etc.?”

Tim Ulbrich: Yeah, this is a great question, Josh. And Tim Baker, I don’t know your thoughts on this, but I have a feeling we’re going to get more of this question as we see the interest rate market rise. You know, I think a year ago, we had our student loans that were hovering around, what, 6-7% fixed rate? And some of our listeners were getting refinance rates in the 3-4% and obviously some a little bit higher depending on your credit and all those types of factors, debt-to-income ratio, etc. But I think as we see the interest rate market rise, then obviously we’re going to see refinance offers become maybe still attractive but not as attractive. Would you agree with that?

Tim Baker: Yeah. Absolutely. I mean, the interest rates on here are a huge thing that’s hanging out there. I think it will always be competitive in the five-year or the seven-year, but if you’re doing like a 10-year and you’re at 6%, I think eventually that market will dry up.

Tim Ulbrich: Yeah, I mean, obviously when you’re talking about potentially refinancing $150,000-160,000 and you look at 1-2% interest rate change, that can be huge, you know.

Tim Baker: Yes.

Tim Ulbrich: And we’ve done the math before on some fairly conservative numbers, and we estimate that somebody who has the average indebtedness can definitely save around $25,000-30,000 in refinance, depending on your individual situation. So and I like the way Josh asked this question because I can tell he already did the math. And that was the first suggestion I would have for our listeners is go to YourFinancialPharmacist.com/refinance, shoutout to Tim Church, who worked hard to build out a refi calculator, so you can look exactly to see as you get quotes from different lenders exactly what is the difference? How much are you going to save? Is it worth it? And based on those savings, you can then make the decision — or projected savings — you can make the decision to switch or not. Now, I must clarify, any time we talk about refinance, you know, regardless of what the math says, if anybody’s pursuing loan forgiveness, obviously refinance should be off the table because once you refinance, you’re taking yourself out of the federal system into the private system. You’re then making yourself ineligible for a refinance — or for forgiveness, excuse me. So for those who are not pursuing forgiveness who are then doing the math on a refinance, now the question becomes what am I giving up by getting out of the federal system? And how much am I saving? And is it worth whatever I am giving up? And you’ve talked about before several times on this show that 10 years ago or so, there was some vast difference between the benefits of the federal program and the private system. And those really have gone away because as you’ve made the point, when you have such a lucrative market, those private companies have to be competitive against whatever the federal system is offering. And so I think as we now look at some of these major lenders that we have, obviously pumped on our page as well, SoFi and LendKey and Common Bond, etc., you know, they really are becoming apples to apples with the federal system, with of course the exception of the forgiveness clauses. Now, there’s a couple lenders that are still out there that do not offer a discharge on death and disability, so of course you need to look at that as a factor. And if you’re going to get a much better rate from them, you have to weigh that against the risk that you’re taking on there. But for me, it’s starting with doing the math, seeing what the savings are, and then making the decision as to whether or not you’re going to switch. And again, YourFinancialPharmacist.com/refinance, we’ll give you the information to get started. The other thing I want to add here, which is the second part of Josh’s question, is would I just be better off with a smaller minimum payment in an extended or graduated plan in case something unexpected comes up? Now, I think this goes all the way back to budgeting and financial planning and really trying to get a feel for what are you locking yourself into month-to-month. And the thing I would say here to Josh is don’t forget that you can refinance more than once. So if you’re looking at your monthly budget, and you’re saying, “Oh, I’d be really squeezed by a five-year refinance, but I feel really comfortable about a 10-year, and then I’ll reassess in 12 months or 18 months or whatever,” you can always refinance into a 10-year, and then you could reevaluate that into the future. Or you choose a lender that allows you just to make those extra payments, right? Which are all of the ones that we have listed on our website. So don’t feel like you’re locked out of that because of a refinance. You could choose a longer term period and then you could obviously make extra payments or you could reassess and re-refinance at a later point in time. Alright, Tim Baker, good stuff. This was fun to take on these 10 questions. I think we’ll be doing more of this. So again, as a reminder to our listeners, if you have a question that you would like featured on the show, shoot us an email at [email protected] or jump onto the YFP Facebook group if you’re not already there, join the 1,700 other pharmacy professionals, great conversation, great community, and certainly you ask a question, you’re going to get a lot of good feedback in addition to Tim and I — Tim, Tim and I jumping in as well. 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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