By Stephanie Bonne, MD
When I finished my
training, my husband and I were overwhelmed by decisions - student loans,
college planning, life insurance, oh my! So, we decided to seek the help of a
financial advisor. It's definitely been one of the better decisions we have
made. To address financial planning this month, I decided to interview my
financial advisor, Robert Balice of Bridgewater Asset Management, and the
answers to my questions are below.
Q: Many people say, “I'm finishing training, so I’ll just quickly
pay down my student loans and max out my 401k.
What do I need a financial advisor for?”
A: Some people don't need one, but I cannot
think of a case when an advisor would not provide significant benefit to
someone, particularly someone just starting out. When you are starting out, you
need to have some perspective of where you are going. Set goals, then focus
on what you do well (surgery), while having an advisor guide you through the
rest can help you take advantage of the opportunities available to you, and
help you miss some of the pitfalls on the way.
Even simply establishing an investment strategy for your 401(k) is
fraught with pitfalls.
Q: Okay, so I think I need an
advisor. How do financial advisors get paid?
A: Good advice is not
free, but it is important to understand how an advisor is compensated to make a
choice that fits your situation. There are 2 predominant ways:
1. Commissions – The advisor
makes a commission on the products they sell you (insurance policies or
investments). This can work if you don’t
need long term advice, like managing a one-time inheritance. However,
beware of implication that you don't pay anything for the investments they
place you in simply because you don’t “see” the charge. There may be up
front, ongoing or back end sales charges. It may appear that you are not paying
anything, but the advisor is definitely making something by recommending a
certain investment or insurance product.
2. Advisory fees - for the
vast majority of people, you want your advisor to be compensated in a way that
he/she is motivated to keep your interests first, and stay engaged over the
long term. A fee-based advisor is not getting transactional compensation
up front by selling products, they make money on your business over time, so it
is in the interest of the advisor to keep you as a long term client and make
sure you continue to get advice on your investments.
Either one can be right
for any individual. A fee-based advisor is a true consultant and not a
salesperson.
Q: What’s the best way to address my student loans?
A: There are a few strategies that apply to
everyone. Consolidate your loans to get
lower interest rates, and try to get fixed rate loans in case interest rates
rise. Next, consider what you can make in your investments versus the
interest on your loans to decide what to pay off. If you are paying 2.5% on
your loans, don't rush to pay those off and forego savings where you can earn
5% and build an investment account.
Remember you can always liquidate your savings to pay the loan off in
the future for some other reason. To contrast, if your student loan rates are
8% annually, you should pay those down, because it's hard to expect that your
investments will make 8% annually after tax.
Q: I have little kids at home. How much is college going to
cost for them?
A: Most children of
educated parents, certainly doctors, would expect that their children are going
to attend college. You can pay for college by either saving for it with
discounted dollars, or pay for it afterwards with loans that have additional
interest costs. I suggest that you not plan for financial aid. The
best way to plan is to start early, and save for a good 4 year university,
either private or public. A child born today will need about $200,000 for
a 4-year degree at a public school, or up to 3 times that for private school.
To achieve this, you need to save $400-$1000 per child per month from
your child's birth. It's hard to imagine that private schools will cost over
half a million dollars, but that's just the reality. However, college inflation was previously 6-7%
annually, but has recently slowed. Still, I'd plan for the worst and hope
for the best.
Q: Taxes are always a concern for those in higher income brackets.
How do I avoid taxes?
A: Start by taking full
advantage of employer matching contributions through your qualified plan (401k,
403b). Today, many companies offer traditional pre-tax savings or
after-tax investment savings as in a Roth 401(k). If you are still in
residency, you tend to be in a lower tax bracket, and at that point, you are
better off using Roth 401k or Roth IRAs, because the taxes today are not as
large as the taxes you will pay when you take that money out. If you are
out of residency and in a higher tax bracket, then you definitely want to use
the pre-tax options so you get the tax benefit today. You can control
your taxes better in retirement by choosing how much income you are going to
take, whereas you have less control now, as your income is decided by your
employer. If you have outside income due to speaking engagements or consulting,
you should consider opening a personal qualified plan for that income.
The tax code allows you to have multiple qualified plans as long as there
is no common ownership with your employer.
After your retirement
accounts, your tax deductions dwindle quickly. If you are saving for your
child's education, some 529 plans offer state income tax deductibility.
After that, try minimizing
taxes on the savings that you are making on an after-tax basis. These generate
taxable income and capital gains. Variable annuities or variable
universal life policies can accomplish this, but consider all the pros and cons
of these vehicles and the tax implications of such products. Bottom line is: you can lose up to 1/3 of
your investment earnings if you don’t pay attention to the tax treatment of
your investments. . Not all investments make sense for everyone - this is
why you need a qualified advisor.
Q: I am concerned about an injury that causes a loss of my ability
to do surgery. How do I plan for this?
A: You’re right;
statistically, you have a 40% chance of being disabled for 90 days or more
before age 65. Your first line of protection is your employer’s group long term
disability plan. However, be aware that it typically does not cover all your
compensation; specifically, it may not cover your bonuses and will not cover
any outside income. You may want a personal disability policy that overlaps the
group coverage. If you purchase options for future coverage, that
guarantees your insurability as your income continues to go up. If you
plan on having your own practice, and therefore not working for an employer,
then a personal disability policy is essential to do at a young age when you
are healthy and costs are lower.
Q: Long term care insurance (LTCI) is getting more expensive
and is of greater necessity for women than men. How should we be
prepared?
A: Because women
statistically live longer than men, insurance companies have struggled to fully
assess LTCI. As a result, some states have recently taken away unisex
rates for LTCI, resulting in up to 300% increases in rates for women, who use LTCI
more and live longer. Not all states have moved away from unisex rates,
but they probably will at some time. If you have any genetic conditions that
would result in long term care needs (Parkinson’s, Alzheimer’s); then early
coverage is essential.
Q: What if I still live in a state with unisex rates?
A: If you are in a state
that still has unisex rates, you should take advantage of some sort of coverage. The premiums are not guaranteed, and all
rates will go up as the demand for long term care increases. But, if you are in
a unisex state, you would probably get a much better premium if you get a policy
before your state changes. If your state changes later, your rate will probably
be more than the unisex rate, but less than the female rate.
Q: Does long term care insurance follow you if you move?
A: Some employers have
group long term care which are portable if you leave employment. But,
these tend to have limitations in coverage for things like in-home care. In
that case, a personal long term care usually will provide more comprehensive
coverage, and is portable if you change jobs. The timing of when you
should acquire LTCI is based on many individual factors such as age and health.
Q: Women typically have
longer life spans. What does this mean for financial planning?
A: We already addressed
long term care. The other challenge is to accumulate retirement assets.
If you live into your 90s, you may need to draw 30 years of income from
your investments. Longevity translates to a more aggressive savings
strategy now. This does not necessary mean taking on more risk, but would
require higher accumulation to meet their retirement needs. The advantage women
have due to longevity is cheaper life insurance rates because insurance
companies are less likely to have to pay your death benefit early. What
that means in terms of financial planning is that we can consider insurance-oriented
products to provide sources of retirement income with relatively low insurance
costs.
Q: I hear a lot about the debt accrual by the US Government, what
does this mean to me?
A: This isn't meant to
be political, but the fact is, the government has a lot of debt. In the
intermediate and long term, having so much debt is likely to translate to
higher inflation and higher taxes. This requires your retirement savings
to outpace inflation, in particular. In the short term, interest rates
will likely need to increase. This means you should be aware of the impact of
rising interest rates, in particular to fixed income investments.
~~~
Robert Balice is a full-service financial advisor at Bridgewater
Asset Management in Chesterfield, MO.
He completed his undergraduate education at Lawrence Technological
Institute in Michigan, and has an MBA from Washington University in St.
Louis. He has over 20 year experience in
financial planning. www.bwam.netStephanie Bonne is an assistant professor in trauma, acute and critical care surgery at Washington University in St. Louis.
