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Financial strategies for next 3 years for medical students/residents

Discussion in 'Finance and Investment' started by Twitch, Apr 25, 2007.

  1. Twitch

    Twitch 7+ Year Member

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    Financial strategies for next 3 years for medical students/residents

    Just wanted to get together some thoughts for how best to manage our finances in the near future esp as it pertains to medical students/residents. Feel free to contribute and I'll add/update/correct (if needed) this post.

    1) Strategy: Buy ETF's

    Suggested porfolio for busy students/residents who won't actively manage it:
    30% FTSE All-World ex-US ETF
    60% Total Stock Market ETF
    10% Total Bond Market ETF

    Another portfolio mix suggested by our own etf:
    30% FTSE All-World ex-US ETF
    40% Total Stock Market ETF
    15% REIT ETF
    15% (upto 30%) Emerging Markets ETF

    Rationale:
    The above are ones I found with low expense ratios and ofcourse there is the lack of (long term?) capital gains tax:

    "In 2008, 2009, and 2010, the tax rate on eligible dividends and capital gains is 0% for those in the 10% and 15% income tax brackets."

    Source

    If you're a broke student (like most of us) and have already maxed out your loans to pay for school then the above strategy may not apply. However, if you have some savings, or with some creative financing this could be pulled off with almost $0 in transaction fees (though you may have to pay a tiny premium on NAV).

    2) Strategy: Convert any IRA's you have to Roth

    Rationale:
    You're in 15% or lower tax bracket (0% if you're a student with no income) and you'll pay your taxes at a lower rate then you would later when you're in a higher tax bracket. If you're that lucky student with no income, make sure to stagger out your conversion to keep in that 0% tax heaven.


    3) Strategy: Save in a Roth IRA if you or your spouse works

    Rationale: If you're medical student whose spouse works or are a resident with an income you can put aside money in a Roth IRA. At this time we'll be in our lowest tax bracket and putting money in a Roth when @ a 15% bracket is a good thing (assuming you'll take it out at a higher bracket). Once we're done with our training our incomes will be too high to invest in this financial product. Isn't it ironical once we'll actually have money to invest we won't be able to utilize it in a Roth? So we're stretched out right now as it is, but think of it this way, it's just $166 per paycheck. Where do you invest the money in your Roth? See strategy #1.

    Will add more strategies - please post if you'd like to contribute
     
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  3. Anastasis

    Anastasis caffeinated for safety Moderator Emeritus 10+ Year Member

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    I actually was wondering about this. Do you think it's wise to try and save some money from your student loans (assuming you are living entirely off of loans)?

    I'd like to have some kind of money saved up before I leave med school (for the expenses associated with relocating for residency). I was going to shoot for $100/month into Vanguard STAR (Fund of Funds). $1000 minimum initial investment - which is within reach for many students. I have family stock that I've inherited which I would like to avoid selling at all costs but I will reinvest the dividends in STAR, I think.

    I'd try to keep a few thousand in a MM/Savings too (I'm applying for the Wamu checking/savings w/ 5% - not the best interest rate but I'm sacrificing for convience here).
     
  4. etf

    etf Moderator Emeritus 10+ Year Member

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    in my view, no one under 35 should have a bond allocation. unless it's in the high yield category. replace that 10% bond etf with 15% in a REIT etf, such as VNQ. take out 15-30% of the total stock and put into emerging markets (i.e. EEM). it's significantly more risk, but i think at this point in (most) of our young lives, we can afford to take it.
     
  5. Twitch

    Twitch 7+ Year Member

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    Portfolio mix added. Thanks!

    Ana - On MM/checking/savings, I like Fidelity's core account. It let's you earn interest until the very last minute till a check gets cleared. The yield used to be 5.21% APY but is now down to 5.17% APY for FSLXX. The core can be a muni which gives about 3% and you can keep some low balance here and the majority of your liquid funds in FSLXX. When a bill comes it'll automaticallyl sell your FSLXX MM to cover the trade. You get free checking, checkwriting, billpay, checkcard, ACH in/out and you can also tap into the 1.5% cashback credit card.

    On the residency relo costs, I wouldn't worry too much. Talk to your financial aid office about a TMA loan which is usu like 4.xx% and is usu used just for this purpose.

    On the family stock, if it's concentrated in 1 stock, I'd be a little worried about the associated risk and consider diversifying. Think of it this way, with no capital gains in those years, you'd access the money tax free and then diversify it.
     
  6. Anastasis

    Anastasis caffeinated for safety Moderator Emeritus 10+ Year Member

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    Hmm... thanks for the tip about the MM from Fidelity - I'll look into it when I go to deposit my stock (On a side note: I have lots of little bonds laying around, none for more than $50, that were given to me as gifts when I was little. Can I deposit those too? It would be nice not to need to worry about losing them in the move :) ) I'm not too worried about the risk involved with holding 1 stock now that I've done some research. It's a utility which pays decent dividends (usually about a 4% return in dividends each year) and the price has grown slowly with no leaps or bounds over the past year (gained about $2 a share since it's been in my name).

    About reloc costs: I also will probably need a new car by the time I'm done with med school (currently I drive a very old and busted Jeep, but I love her and will drive her into the ground. By Residency I'm sure I'll need a new one) so I'll keep a small amount aside from student loans to pay for that.
     
  7. etf

    etf Moderator Emeritus 10+ Year Member

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    the only "bonds" i can think of issued in amounts as low as $50 are U.S. Savings bonds, which aren't marketable securities. So you can't deposit them into a brokerage account or anything - just hold on to them, or if your really paranoid, stash them into a safety deposit box at your local bank.
     
  8. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Physician Partner Organization 10+ Year Member

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    I disagree, as do several investing authorities such as John Bogle, who recommended one never hold less than 20% bonds and Ben Graham, who recommended one never hold less than 25% bonds.

    Every investor needs to determine his need, ability, and willingness to take risk and set his asset allocation accordingly. While I agree that most young physician investors have great ability to take risk, few of us actually have a need to take 100% equity risk. For example, with my current savings rate, I figure I only need a 5% real return to retire after a 15 year career. I think I can get that with a 75/25 portfolio, and I can't imagine working less than 15 years. It is difficult to determine your willingness to take risk without having lived through a multi-year bear market. I intend to keep my relatively conservative asset allocation fixed until I have invested through a real bear market and seen how I (and my spouse) feel about losing thousands of dollars a day.

    To the OP: Don't recommend ETFs unless you explain the situations in which one would prefer ETFs to regular old index funds. The lower expense ratio on ETFs doesn't justify the brokerage expenses and bid/ask expenses unless one is investing large lump sums. Most of the people on SDN would probably be better served by opening a Roth IRA at Vanguard and buying mutual fund shares. If they truly are busy, hands-off, students/residents, they would be well served by 1) Buying disability insurance and 2) Maxing out a Roth IRA and putting it into a Target Retirement fund and forgetting about it. The TR 2050 fund virtually replicates your first ETF portfolio, while only requiring a person to keep track of a single investment.

    A example to explain the difference between ETFs and index funds:

    A medical student has $10,000 to invest in a lump sum and then wants to invest another $100/ month. He wants to have an asset allocation of 20% international, 10% bonds, and 70% US stock market.

    Option 1: Vanguard TR 2050 Fund. Expense ratio 0.21. Total cost for initial investment, $0. First year of expenses, $21. Each additional investment is free. Total costs after 1 year, $21.

    Option 2: Buy the individual ETFs (VTI, VEU, BND) through an inexpensive deep discount brokerage at $10/trade. Expense ratio 0.11. Total cost for initial investment, $30 in brokerage fees plus $4-9 in bid/ask spreads. First year of expenses, $11. Each additional monthly purchase, $10-30 brokerage fees+ $0.50 bid-ask spread. Total costs after 1 year, $171-416.

    It's a no-brainer for the buy-and-hold small investor to use mutual funds over ETFs.
     
  9. etf

    etf Moderator Emeritus 10+ Year Member

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    i see your john bogle and raise you a peter lynch, who said among other things "gentlemen who prefer bonds don't know what they're missing" and "when yields on long term government bonds exceed the dividend yield of the s&p 500 by 6% or more, sell stocks and buy bonds."

    of course, it's all relative. it all depends on your personal risk/reward profile. etfs are great for those who want to make a lump sum purchase, or have access to wellstrade/bofa accounts with $0 commissions.
     
  10. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Physician Partner Organization 10+ Year Member

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    6%! Surely he said that in the 80s!
     
  11. Twitch

    Twitch 7+ Year Member

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    RE: transaction costs on ETF trades - this used to be the classical argument used for ETF vs Mutual Funds, though is no longer true with. There are several shops that offer $0 trades though some have eligibility requirements such as minimum balance and such which are now getting much easier to qualify for than in the past. As it relates to the spread, as long as volume exists, the spreads should be tight, by design. Marginal benefit will exceed marginal cost to sell the underlying securities at a profit and purchase the ETF at a discount. This will bring the market price closer to NAV. There will however, be a difference (either +/-) since a NAV is static intraday where as the market conditions vary so will the market price.

    On dollar cost averaging, I don't recommend for the typical medical student living on students loans with no income to leverage student loans (@6.8%) to buy into stocks/mf/etfs. However, if you have a scholarship, and have a stipend coming in (is this reported as regular income?) or if your spouse brings in plenty home that you have a little left over and can invest - sure, then invest first in your retirement a/c. The same is true for residents since they'll be earning somewhere north of $38k. Though in the latter, it'd make sense to invest in retirement savings since after they're done with their training they won't have access to the typical retirement financial instruments (ira/roth, etc.) Let me know what you guys think of all this and I'll update the original post.
     
  12. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Physician Partner Organization 10+ Year Member

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    Sure, as long as the volume exists, the spread will be tight (but not non-existent.) Many of these newer ETFs (in fairness, not the ones mentioned above) do NOT have tight spreads.
     
  13. Miami_med

    Miami_med Moving Far Away Moderator Emeritus 7+ Year Member

    If you are a med student, borrow as little as possible. The old days of 2% money are over. You won't always make more than your loan costs, and you are in no position for loan tolerance.

    If you are a resident, do your best to pay off any loans that you have at over 6% that are unsubsidized.

    Think about investing when the above criteria do not apply to you.
     
  14. etf

    etf Moderator Emeritus 10+ Year Member

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    i bought some DIA today; the commission was $0, and the bid price was the exact same as the ask price.
     
  15. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Physician Partner Organization 10+ Year Member

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    If bid=ask, why would the market-maker "make the market?"
     
  16. etf

    etf Moderator Emeritus 10+ Year Member

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    beats me - i might have just stumbled upon an anomalous situation - maybe it's another benefit of wellstrade. of course, it is one of the more liquid etfs, so the spread is usually tight as it is.
     
  17. southerndoc

    southerndoc life is good Physician Moderator Emeritus Lifetime Donor Classifieds Approved 10+ Year Member

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    I plan to move all of my 403(b) contributions and my hospital's 401(a) match (the part I get to keep) to a Rollover IRA, and then transition it to a Roth IRA. I can only do this if I complete a fellowship, which I'm about 95% sure I will do.
     
  18. Sol Rosenberg

    Sol Rosenberg Long Live the New Flesh! 10+ Year Member

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    How can you move the $$$ from the rollover IRA to the Roth? Don't you have to pay taxes on that money? Is it subject to some limit? Please explain....
     
  19. etf

    etf Moderator Emeritus 10+ Year Member

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    you can convert a normal IRA to a roth if you make under a certain amount of money (i think it's like the same amount the qualifies you for the roth anyway). you pay taxes on all the money during the conversion, but after that, you never pay taxes again. from what i understand, in 2010, they are going to remove the income limit for that year only, so everybody can convert regular IRAs to roths.
     
  20. southerndoc

    southerndoc life is good Physician Moderator Emeritus Lifetime Donor Classifieds Approved 10+ Year Member

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    I can only do this as a fellow. Even with the income limits removed, it wouldn't make sense for me to pay taxes on the money on an attending's salary. It would simply be way too expensive.
     
  21. Sol Rosenberg

    Sol Rosenberg Long Live the New Flesh! 10+ Year Member

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    Thanks for the clarification. Seems like the upcoming years that I will be in Medical School, earning essentially 0, would be a perfect time for me to do something like this. I just didn't know that you could do it. I will obviously do my homework about this, but it's always good to pick up a new tip :) Thanks!
     
  22. southerndoc

    southerndoc life is good Physician Moderator Emeritus Lifetime Donor Classifieds Approved 10+ Year Member

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    I'm not sure you can do it without earning at least some income. For instance, if you make zero dollars, you can't contribute to an IRA. You can only contribute $5,000 or your AGI, whichever is less.
     
  23. Sol Rosenberg

    Sol Rosenberg Long Live the New Flesh! 10+ Year Member

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    That's not actually a problem in my case (and I'm not completely convinced that you even need any income to do the rollover, based upon what I've read,) but the real catch is that you need to have cash sitting around to pay the tax. Otherwise, if you need to use money from the IRA to pay the taxes on the conversion, you might have to pay early distribution penalties, etc. Still sounds like something that I will take advantage of, but, like anything else relating to retirement accounts, it's going to require some careful planning.

    It's also worth mentioning that starting in 2008, it looks like you can roll directly from an "employer plan" (401k, 403b, etc) to a Roth IRA (i.e. saves the trouble of rolling from the employer plan to the trad. IRA)
     
  24. southerndoc

    southerndoc life is good Physician Moderator Emeritus Lifetime Donor Classifieds Approved 10+ Year Member

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    Interesting. I'll have to look into this since I finish residency in 2008. Do you have a link?
     
  25. Sol Rosenberg

    Sol Rosenberg Long Live the New Flesh! 10+ Year Member

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    http://www.fairmark.com/rothira/expand.htm

    Scroll down to the "Conversion from Employer Plans" section.
     
  26. etf

    etf Moderator Emeritus 10+ Year Member

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    actually, from what i understand, they will let you spread out the tax payments over the years 2011 and 2012. so it won't be as big a tax hit.
     
  27. Sol Rosenberg

    Sol Rosenberg Long Live the New Flesh! 10+ Year Member

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    That would be most excellent. I have lots to look into. Thanks!
     
  28. Twitch

    Twitch 7+ Year Member

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    There are ways to avoid paying the extra 10% penalty for an early withdrawal from an IRA. Technically, as a full time student you can withdraw money for higher education expenses. Look at pub 570 IIRC at irs.gov for more details. You're still paying taxes on it though at your tax bracket, but it's a way to get around the early withdrawal penalty.
     

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