19 Feb 2014
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.net
Stephanie Bonne is an assistant professor in trauma, acute and critical care surgery at Washington University in St. Louis.