[Editor's Note: Today's guest post was submitted by Dr. Rikki Racela. I applaud Dr. Racela's energy and determination to figure out and correct his financial errors. It should give a lot of hope to those of you who are still digging yourself out from those stupid doctor mistakes. Enjoy!]
It was an hour before midnight and I was pumped! I was about to go to Montreal to celebrate a bachelor party. The flight was the next morning and, even if I wasn’t going to the Mecca of bachelor celebrations, just the anticipation of getting away was bliss.
I was choosing the credit cards to use internationally when I realized that the minimum payment was due in one hour on one of my Chase cards. My anticipation turned to panic as I frantically called Chase and paid over the phone in order to avoid the late payment penalty. A few minutes before midnight the payment went through! Whew . . . a wave of relief went through my body.
I could not stop, however, from reflecting later on the plane, at the Montreal dining clubs, and during other bachelor related debauchery activities, some profoundly deep financial musings: How’d I get this credit card debt in the first place? My wife and I are both doctors, after all. How did it come to this? I had a financial advisor for Pete’s sake! Wasn’t I supposed to be insulated from situations like this?
The answer was I was stupid. Well, not totally stupid, more financially stupid — FinStupid!
How an Ivy League Doc Made the Most Mistakes Imaginable and Dug Himself Out – And You Can, Too!
Despite graduating from Princeton, I had a Forrest Gump financial IQ. Yes, I had walked the same campus as economic pioneers Jack Bogle, Daniel Kahneman, and Burton Malkiel. Yet I had balance-transferred $31K of consumer debt to a Chase credit card, and could only afford the minimum payment. I went to Princeton, the number one college in the US (sorry, Harvard grads), and still fell prey to Wall Street. What happened is that I chose to dedicate my time, energy, and intelligence to just medicine, never thinking that this 100% dedication to learning our craft would have devastating consequences. I actually chose to be FinStupid, wrongly thinking that this complete medical immersion would make me the best doctor I could be. That fateful choice led me to depend on a financial advisor salesman. Forrest Gump was right; stupid is as stupid does, financially speaking.
Before finding WCI, I had a buddy of mine from high school be my financial advisor. He worked with the all too popular Northwestern Mutual. During residency, as mentioned above, I was too busy learning medicine to address my finances. And who better to trust than a childhood friend? With him, I didn’t see a salesman. I saw the guy who pitched against me in Little League, who ran laps with me during football practice, who shared jokes with all the other dudes in high school. I did not see, until later, the amount of money I was paying in fees and commissions.
I had great hopes that he and Northwestern Mutual would lead me to financial success and I could focus on neurology. For the first 7 years starting at the end of my residency and going through my early attendinghood this financial advisor led me into the dark side of Northwestern Mutual's underbelly of financial products and was basically taking advantage of my financial illiteracy. While my back was turned focusing on being an empathetic neurologist, my advisor had sold me expensive products that were detrimental to my wealth.
That, combined with lifestyle creep and not living like a resident, I found myself in credit card debt, having money fights with my wife, and not being able to afford my tax bill (side note: I live in NJ; if you ever have the chance to live here, don’t!). I even rushed through patients in order to generate more income. I am ashamed to have compromised the thing I value most — integrity in patient care — to pay off $28,000 a year of whole life insurance premiums.
I remember a scathing e-mail I received from the sister of a patient with a posterior fossa neoplasm whose visit I had sped through. On the off chance they might be reading this, I am sorry. My total dedication to being a superior neurologist and ignoring personal finance led me to be a worse doctor. It was at this desperate moment that I found the White Coat Investor and made a total 180-degree turn. Now instead of being a FinStupid, I like to think I’m FinSmart. I am no longer distracted paying off Northwestern Mutual whole life insurance premiums. Instead, I am now laser-focused on my patients.
I've made a ridiculous amount of mistakes. I have read and listened to numerous WCI podcasts and blogs and the number of mistakes you guys in the community have made pales in comparison to mine. Not so much in absolute dollar amounts (there was an orthopedist that bought whole life insurance and was more than $100K underwater, then got disabled and could no longer practice!), but rather in the number of products that my advisor had placed my money that were subject to increased prices, exorbitant fees, and illiquidity rules that prevented me from building wealth.
For anyone else that has fallen prey to these products and gotten out, congrats, we did it! For those of you feeling that sense of crushing burden of financial regret and shame, the point of this post is don't despair! WCI will lead you out, just like it led me out, and just like it led others of us out — many without the need of having to put trust in another financial advisor. If I can get out of all the inappropriate products that were sold to me, then any doc can right their financial ship. Also at the end, I will also mention a separate issue of recovering from credit card identity theft committed by . . . wait for it . . . mom!
The following is the expensive, fee laden products my wife and I had with Northwestern Mutual (I had to unwind these things twice!):
- whole life insurance policies paid up at 65
- convertible, non-level term to 80 life insurance
- advisor led traditional IRA’s rolled over from old attending job 401k’s
- variable annuities within IRAs
- an advisor led Virginia 529 plan
How I Dug Out Of My Whole Life Insurance Policy
First, I did not formally fire my financial advisor. Not only do I hate conflict, but also I knew I needed his help untangling this massive mess. I tackled the whole life insurance first.
Through the immense resources here on WCI I learned the best choice for us was to 1035 exchange the whole life policies into low-cost variable annuities in order to preserve the cost basis. I asked for in-force illustrations from my advisor for both whole life policies. I then asked to have the premium payments immediately be put on hold (btw each policy cost $14K per year — that decision immediately freed up $28K per year of cash flow!). I also asked when the dividend on the cash value would actually be paid. Northwestern Mutual pays a dividend, and I did not want to formally exchange the policies until that dividend was paid. Because the cash values were $67,000 and $54,000 and the cost bases were $92,000 and $79,000 respectively, it made sense to do the exchange to make up the cost basis tax-free in a low-cost variable annuity.
The most cost-friendly options mentioned on WCI forums were Jefferson National (now Nationwide), Vanguard, and Fidelity. Given my cash values, Fidelity had the lowest cost at 25 basis points, so I went with them. At the time I was doing this in 2019, Nationwide would have been cheaper if my cash value exceeded $96,000. I contacted Fidelity that I wanted to do a 1035 exchange, and they guided me through the process. It was helpful to have the in-force illustrations while doing this. A helpful step by step guide was written by TJ on June 4, 2015, at 1:15 pm MST on the WCI post How to Dump Your Whole Life Policy. TJ, if you are out there, man, thank you!
Term Life Insurance
I next tackled the term life insurance. As recommended by WCI, I went to term4sale.com and picked the insurance company that gave me the cheapest rate, which happened to be Lincoln. I knew also that we needed new disability insurance because Northwestern Mutual's definition is not true own occupation. I used the links here on WCI and found the best price with an independent agent, who also provided me with the term life insurance policies. Turns out for the same amount of disability benefit with a better definition of disability the new policies were actually cheaper, even being 7 years older!
Only then, with new term and disability insurance in place, did we cancel the Northwestern Mutual policies.
The next thing to tackle was the IRAs that kept us from contributing via the backdoor Roth IRA. I had a traditional IRA that was rolled over from a previous attending job, which was easy to transfer to a solo 401k I had set up at Fidelity. I didn't need to talk to my advisor about making this change. However, I did need my advisor to help unwind the variable annuity within the IRA that was set up after residency. Now you might be asking, “why would you have a tax-advantaged product within a tax-advantaged account?” Fees, my friend, fees. I found out later that annuities are layer, upon layer, upon layer of fees. My advisor didn’t tell us that part. He sold them to us as “a pension during retirement.” In order to get rid of the IRA, I first had to ask my advisor to liquidate the variable annuity. After this was done, I did a rollover to my solo 401k and my wife had her retirement plan at work pull the money into her 401k. I never bothered looking into surrender charges, etc . . . I am angry enough as it is.
Finally, for the 529 plan, I contacted Virginia where the plan was held. I explained that I wanted to convert from the advisor-led plan, which had 130 basis points of fees, into the self-directed one, which used Vanguard funds at an average cost of 13 basis points – 10x cheaper!
Extra Bonus — Ripped Off by Mom
This final financial disaster was actually not Northwestern Mutual-related but rather being ripped off by my own mother! My wife and I were mortgage shopping and went to Chase Bank as our first stop. You would not believe my surprise when the loan officer said that I would not be approved given there were multiple credit cards with maxed out balances on my credit report. I looked over a copy of my credit report and saw 5 credit cards with multiple balances on them that I had no idea existed, totaling up to $31,000. One of those credit cards was listed as me being a joint account holder with my mother, which pointed the finger to the culprit.
Needless to say, I was very angry at my mother and tried to work my way out of this mess. You wouldn’t believe it, but I went to my local police station to at least formally document the crime. Don’t worry, I didn’t throw my mom in jail — and, FYI, the local police actually have no jurisdiction in regards to arresting non-local cybercrimes. Anyway, I filed disputes with the 3 credit bureaus with the formal police documentation and was successful in getting these cards off my Transunion and Equifax reports. Unfortunately, Experian would not remove these cards. I ended up having to pay the unpaid balances in order to clean my credit report with Experian.
After all this, I would have to disagree with Warren Buffet’s “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” A doctor can do a bunch of things wrong and still come out financially ahead. My wife and I are now maxing out our retirement plans at work, doing Backdoor Roth IRAs every year, saving 20% of our income, have true own-occupation disability insurance, laddered level term life insurance policies, an appropriate emergency fund, and credit card debt that has a 0% APR while the money used to fully pay it off sits in a high yield savings account. It was only through the resources of WCI as well as the tenacity and perseverance that defines us as doctors that we could defy the wisdom of Warren Buffett. If I can crawl out of the above plethora of financial traps, then you can too!
What financial mistakes have you made? Were you sold whole life insurance inappropriately? How did you correct your mistakes? Comment below!