By Dr. James M. Dahle, WCI Founder
If you've just recently become excited and motivated to take control of your finances or investments, or are just coming out of training, enjoy! Those of us who have been managing our own portfolios for years sometimes forget just how overwhelming and complicated it can seem in the beginning.
5 Steps to Start Saving for Retirement
If you are an investor who has recently been inspired to start saving for retirement, here are five steps you should follow to get started off on the right foot.
#1 Decide Whether or Not to Be Your Own Investment Manager
There are good arguments to be made both for and against hiring a professional investment manager. The best argument for doing it yourself comes down to the effect of saving the advisory fees on the growth of your portfolio over the long-term. For example, a physician who invests a set amount per year into a portfolio that earns 8% a year before fees for 30 years while paying an advisor 1.5% of the portfolio each year as a management fee will end up with 25% less money than if he had managed the portfolio himself. That effect continues throughout the retirement years allowing the do-it-yourselfer to spend 113% more (over twice as much) per year in retirement than the investor using the 1.5% per year advisor.
The best argument for hiring a competent, low-cost advisor is that most individual investors do not have the knowledge or temperament to be a competent investment manager. Selling out in the depths of a bear market just once late in your career may cost you more money than you ever would have paid an advisor for a lifetime of advice.
This is also not necessarily an either/or proposition. You can hire an advisor to help you and teach you for the first few years until you feel you can do it on your own. You can even periodically check in with an advisor charging an hourly rate to make sure you are still doing okay on your own.
Both options are reasonable, but if you choose to be your own investment manager, realize that you will need to spend a fair amount of time, especially in the beginning, reading some high-quality books to learn how to invest properly.
#2 Carve Out a Significant Portion of Your Income to Invest
You cannot invest money you have not yet saved. Not only do you have to live within your means, but you must live well below your means. I recommend most physicians save 20% of their gross income for retirement. If you can’t do that, do the best you can and increase it each year until you get into that neighborhood. Fifteen percent might be enough if you start early, invest wisely, and work long enough, but 5% certainly is not.
#3 Figure Out Which Retirement Accounts You Will Use
Retirement accounts will help you to save taxes, grow your money faster, protect your assets from creditors, and plan your estate. Chances are if you will simply maximize your contributions to available accounts throughout your career that you will have sufficient money to live off of in retirement. However, you will need to learn which accounts are available to you, how they work, and any special rules that apply to funds placed into each account.
The first place to look is to evaluate the options offered by your employer. Many physician employees have access to accounts such as 401(k)s, 403(b)s, 457(b)s, 401(a)s, and cash balance/defined benefit plans. Each account has different rules and investment options. Your employer is required by law to provide you a document describing each plan. Ask for it. Then read it. Pay particular attention to the fees and how you can best minimize them and maximize any “match” your employer may provide. Not earning the match is the equivalent of leaving part of your salary on the table.
Self-employed physicians get to choose their own retirement plans. The typical best choice for a physician without employees is an individual 401(k), but some doctors use SEP-IRAs, SIMPLE IRAs, and even personal defined benefit plans for various reasons.
Most physicians, whether employed or self-employed, should also be using a personal and spousal backdoor Roth IRA and if insured under a high-deductible health plan, a health savings account, which can be used as an extra retirement account. If you wish to save more money for retirement than you are allowed to place into retirement accounts, you can always make up the difference by purchasing investments in a taxable account.
#4 Choose a Reasonable Asset Allocation in Your Retirement Accounts
Once you have determined the types of accounts you will use, you will need to select the investments to use inside the accounts.
In an employer-provided account, study the plan document looking for mutual funds with low expense ratios (< 0.30% per year). Most 401(k)s will provide a lower-cost S&P 500 Index fund or perhaps even a lifecycle fund. Lifecycle funds are a diversified fund of funds that becomes less aggressive as you approach your selected retirement date. In IRAs and other types of accounts where the investments are essentially unlimited, choose either a reasonable mix of broadly diversified index funds on your own or through a balanced fund of funds. One of my favorite “default portfolios” is the Vanguard Lifestrategy Moderate Growth Fund. This fund essentially buys all the stocks and bonds in the world in a ratio of 60% stocks to 40% bonds, all at a cost of 0.16% per year.
As you do more reading and self-educating, you may wish to move into a more complex portfolio. However, the types of simple, low-cost portfolios discussed above are perfectly adequate for your needs early on or even throughout your career. Besides, early in your investment career what really matters is your savings rate, not your investment return.
#5 Develop a Written Investing Policy Statement and Stay the Course
Once you have developed a reasonable investment plan, the most important determinant of your success is your ability to follow your plan through thick and thin. The best way to do this is to actually write down your plan and refer to it from time to time.
Write down which types of investment accounts you will use, and the mix of investments you will place into them. Write down how much you plan to save each year. It is even better if you write down specific, achievable investment goals. Write down what you plan to do in bear markets and in bull markets. (Hint: You should continue to follow your plan.) Realize that you will, by necessity, pass through a handful of bear markets during your investment career. You know they are coming, you just don’t know when. Having a written plan will make it much easier for you to stay the course with your plan, a necessary step if you hope to reach your goals.
Your plan may change slightly from time to time, which is fine, especially in the first year or two while you are still doing the lion’s share of your self-education. But within a few years, plan changes should be minor and infrequent.
Starting your investing career as early as possible will pay huge dividends. Following these five steps will help any rookie retirement investor get started down the path to retirement security.
Very easy
Become your own advisor by self education, a few bibles on the subject is sufficient
Start early and save 15-20 percent yearly
Use modern portfolio theory to construct a diversified portfolio of low cost mutual funds, mostly indexed
Rebalance yearly
KISS. Keep it simple. It’s 5th grade material
Having an investment policy plan is a great idea. It’s imperative to not make emotional decisions when gambling or investing. I found a great illustration of this emotional rollercoaster and posted several months ago at the top of this blog
http://blog.fireyourbankertoday.com/how-a-financial-planner-prepares-your-retirement-plan-pt-2/2.
[Editor’s Note: It’s Russ’s blog, not some random blog. Just want readers to be aware. He is an advocate of the Bank on Yourself/Infinite Banking buy whole life insurance philosophy.]
Your point on being your own investment manager has merit too. Education on financial matters is the divider between the have’s and the have not’s. It’s the reason we emphasisize to everyone of our clients to read an 85 page book prior to implementing the Infinite Banking Concept. There are a couple of your points I will offer criticism. Lifecycle or Target Date funds are simple and straightforward however they typically have some of the highest fees which defeats your point on fees matter. I know Vanguard offers some that are cheaper than most b/c of its index trailing strategy, however if you bought the index mix yourself you could save points.
Lastly, I don’t think advising our healthcare professionals to dive deeper in bed with our GOV by directing their first investment dollars into more government created plans like 401k’s, 403b’s, SEP IRA’s is great advice. Read the lasted on their plans for 529 plans
http://www.washingtonpost.com/business/economy/critics-pounce-on-obamas-plan-to-cut-the-tax-benefits-of-529-college-savings-plans/2015/01/23/43ea75bc-a2a8-11e4-903f-9f2faf7cd9fe_story.html. It doesn’t have to take a lot of foresight to know they will change the arrangement on these plans too.
What they create they can and will change. The tax code’s first 7 pages represent what is taxable. The remaining 1000+ pages represent changes to the rule.
Do you really want TBD (To Be Determined) attached the largest part of your retirement nest egg? I don’t know anyone who would sign a loan agreement with those terms but people who invest in government created plans do it everyday. Do you know what tax bracket you will be in when you withdrawal the money? Who creates the tax brackets? What’s the chances they will lower them for you?
Sorry for the grammatical errors typing quickly.
emphasize=emphasis
withdraw=withdrawal
latest=lasted
Guess what Russ? Congress can change the laws on life insurance just as easily as the ones on retirement plans. Please confine your comments advocating for your chosen investing method to the posts on that subject such as this one:
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
Please stop using scare tactics to try to get more people to come to your site, read your book, and buy life insurance from you.
Even worse is he doesn’t even recognize the huge fees associated with his “chosen product”. Even besides the typical ones, if you are paying in monthly like a retirement plan then they charge you approximately 17% interest instead of paying yearly and trying to access that money really just means getting a loan which again they charge you interest on. This is on top of the poor performance of the product to begin with. No wonder so few people actually keep permanent insurance until death and then guess what happens the majority of the time when you do surrender, any gains (which there frequently aren’t any) are taxed at income rates so its the same exact problem with unknown tax rates in the future.
Pasting an article on a proposal that is never going to get through the Republican House and Senate is a scare tactic. And of course rules can also be changed on life insurance and I’m hardly confident that the insurance lobby is that powerful it can resist any government changes. And it is pretty common knowledge that Whole Life insurance is a terrible investment for retirement, even Suzy Orman drills it into everyone’s heads.
For those afraid of government regulatory change: Here’s a good article on it.
http://www.bloombergview.com/articles/2015-01-23/obama-s-tax-on-529-college-savings-targets-middle-class
“I’ve thought a lotabout this question , and the tentative conclusion I have come to is that you have to save the money somewhere, so you might as well put it in a tax-advantaged account. Yes, I understand the temptation to implement Plan Grasshopper in the face of future tax hikes, but before you pull the trigger, I suggest you try to draw up a household budget living only on what you’re likely to qualify for in the way of Social Security benefits. I’d rather live comfortably with a higher tax rate than scrape along on what the government will give me.
And there are real benefits to a Roth IRA. For one thing, because you put in post-tax dollars, you have to save more and consume less now, which is good fiscal discipline. For another, there’s a good chance that any future attempt to tap this money will — because of the political optics — come in the form of taxing only future contributions, rather than contributions that have already been made. This seems worth the risk to me, though I certainly see the arguments against.
What it does argue for is diversifying where you put your money: some in traditional IRAs and 401(k)s, some in Roth, and hopefully, some in regular taxable accounts, because you’ve already maxed out your tax-advantaged contributions. That way a change in a single program doesn’t radically alter your retirement and college plans.
What it also argues for is saving even more than you are. The government is going to come for its money one way or another, and the best way to deal with that is to have more than you need.”
I agree that post tax, tax free withdrawals is the way to go. I prefer to do it without a government plan. My goal isn’t to create fear, just awareness. I thought that was the purpose of blogs. Fear is what keeps the market yo-yoing.
I prefer post-tax, tax-free, interest-free, no associated insurance cost withdrawals. If I have to use a “government plan” to do that, so be it. Since the government gets to dictate what taxes are, that doesn’t seem so bad. They can start taxing insurance just as easily as they can start taxing Roth money.
Obama to drop proposal to end 529 plans. So there’s no need for the fear mongering.
http://www.nytimes.com/2015/01/28/us/politics/obama-will-drop-proposal-to-end-529-college-savings-plans.html?_r=0
Great 5 step summary! I advocate using an advisor but totally agree they should be extremely low cost 0.5% of assets under management or less (but fixed fee structure rat her than AUM structure).
I would add one more basic step and that is to ask yourself the hard questions of what type of retirement lifestyle are you saving for, when will it start, how long might it last, and what will you do with with any leftovers.
Nice post. The only thing I would mention is to share your plan with spouse/accountant/brother someone that can hold you accountable. Also, just know that your plan will change over time and that’s okay.
WCI, thank you for allowing posts such as Russ above so we can see this perspective. Thank you even more for them pointing out the errors in this way of thinking!
You are right. Congress can change the laws on the build-up in insurance policies and it’s the reason I’m a member of NAIFA to help protect this from happening. Yet we know that governments take the path of least resistance and taking money from their own programs is much easier than taking it from programs that they didn’t create. I also appreciate you having a forum for all viewpoints and allowing for discussion to grow organically.
I comment on these blogs to offer professional/personal insight from a licensed practitioner’s point of view. As a CERTIFIED FINANCIAL PLANNER Professional I choose to use and recommend the use of properly structured whole life polices. However, I believe there is a place for investments such as mutual funds or real estate. I actually hold the licenses to sell the mutual funds that you recommend and I hold the license to charge a fee for that advice and have done so for the last 10 years.
Rex, change insurance companies. Out of the 12 whole life policies I own from 3 different companies the charge for paying monthly ranges from 1.5%-3.5% Annually. Insurance companies charge these fees b/c they are contractually obligated to pay the interest and death benefit listed in the contract. What is Vanguard obligated to pay? No guarantee = no fee.
A common misconception is believing that retirement is about returns. It’s about having more money. You have more money b/c you have a process or plan that you follow. I commented on this blog because I agreed with the approach of creating a plan and sticking to it. Most don’t have a plan.
I don’t recommend mutual funds that are sold.
A common misconception is that retirement is not about returns. You just can’t build much of a retirement with 2% returns, the guaranteed long-term return on a whole life policy. Unless you’re willing to save a ridiculously high percentage of your income, you need your portfolio to do its share of the lifting in order to have enough money to retire on. Whole life returns don’t cut it for me to reach my goals, and most people are saving far less than I am.
The actual typical charges (written by an insurance agent)
http://www.glenndaily.com/glenndailyblog3.htm
The definition of a properly structured whole life is one that you over fund it to MEC limits. Why? B/c this way you reduce the garbage which is wait for it….. the regular whole life policy.
The guaranteed returns are below inflation rates with whole life. Which way have dividends been going for the last few decades….. Down.
Investing with high fees into an insurance company’s bond fund isn’t going to work as a good investment.
Rex thanks for sharing the link on how loans work using insurance policies. We often show our clients how to pay things annually by borrowing against their insurance policy to earn higher equivalent rates vs their monthly payments. We have done this several times with doctors and business owners who lease their space. It’s a great way to accumulate more money which has nothing to do with rate of returns.
The key to finance is having a plan and that plan better include having a pool of cash that you can access. I buy & sell “over funded” whole life policies b/c it gives me access to cash. Rex, I’m sorry you feel that whole life insurance is garbage. You have the right to that opinion but the market disagrees with you. Otherwise it wouldn’t still exist. That’s the way free markets work in spite of the opinions of Karl Marx and Upton Sinclair.
Here’s a quote to think about
“Give me control of a nation’s money and I care not who makes it’s laws” — Mayer Amschel Bauer Rothschild
Golden Rule-Those who have the gold, make the rules
Actually that was on fractional premiums like paying monthly but I am not surprised that you don’t understand it.
Actually almost nobody keeps whole life in force until death. Its been around a long time but nobody keeps it. Just check the actual data from LIMRA, society of actuaries or even sites like the one I linked. Always less than 20% and his site even shows 6% at times thus the market has spoken about how good an investment this is to keep until death. Lots of good stats from real organizations prove it. Its not my opinion at all. Its the facts.
It sounds like I have my work cut out for me. Based on that information I should just tell the 99.7% who still hold policies from insurance companies I sold them that less than 20% will still own those policies when they die. That way 100% won’t own policies when they die.
Considering that in my short 10 years working in the financial services industry I have delivered 2 death claims and I have firsthand experience in the difference that made for those families I’ll forge ahead. Thanks for the encouragement, it’s days like this that help remind me why I do what I do.
You do have your work cut out for you compared to the past. Information is now available that wasn’t in the past. Its going to be a harder sell for insurance now that the truth is available.
I doubt you will tell them the honest truth about their chances “for success”.
If those clients had died prematurely then they would have had 10 times as much death benefit (likely more) for the same premium. Even worse than people pushing WL as an investment are those who allow the client to be under insured with term in order to push the product/commission.
I appreciate your skepticism and encourage you to dig a little deeper. As a licensed investment advisor and a student of cash flow I can tell you that the fatal error is assuming this is a function of interest rates. Page 35 in Becoming Your Own Banker says it this way “This concept is based on recognizing where money is flowing to and the failure of charging interest to yourself for the things that you buy using your own banking system”.
This concept probably isn’t for you but it’s a little arrogant to speak about a subject that you have a “loose” understanding of. I have studied investment theory and financial management. I took 6 courses 12 weeks each on investment planning, estate planning, retirement planning, income tax planning, etc for the right to take a 2 day test to become a CERTIFIED FINANCIAL PLANNER. In addition I have studied and passed courses on investing and financial regulations to attain a Series 6, 63, & 65 security licenses. I believe I’m qualified to speak on investments. If you would like I can lay out for you the 1000+ hours I have spent speaking at or training with experts on the Infinite Banking Concept over the past 5 years. I believe I’m qualified to speak on the subject.
None of these things make me a financial expert. I continue to learn and make mistakes. I welcome any information you have that might help me continue my lifelong passion for learning.
God holds the future and I submit to his plan for what he has in store for me and my work. So if doom is ahead as you previously stated I pray that I will find joy in it.
It doesn’t matter what subject I write about, somehow it always comes back to whole life insurance, doesn’t it. It’s like the LEAP system- AKA “All roads lead to whole life.” It’s like cancer, it starts with a little nodule in the lungs and before you know it, there’s whole life all over the comments section of dozens of pages on the blog.
I get a kick out of the language of these guys…”student of cash flow” and “charging interest to myself for the things I buy” and “teacher of financial awareness.” Please DO NOT lay out the 1000+ hours you have spent training with “experts.” If it really requires 1000 hours to learn how to do, that’s either far more complicated than it needs to be or you’re an exceedingly slow learner.
How many hours have you spent studying and training in your field of medicine?
Are you suggesting the training of a financial advisor is related in any way to that of a physician? Financial advisors aren’t doctors.
https://www.whitecoatinvestor.com/financial-advisors-arent-doctors/
I went to Wharton and have a series 7 and 63, and I can tell you investing in whole life insurance is a crock of bull.
“investing in whole life is a crock of bull”
Compared to what?
I agree it isn’t a “crock of bull” (although the way it is sold often is.) Nor that it is a scam. But the truth is that once most people understand how it works they realize it doesn’t meet their needs.
“Are you suggesting the training of a financial advisor is related in any way to that of a physician? Financial advisors aren’t doctors”
No I actually wasn’t comparing the two. You said in a previous response that if it took 1000+ hours to learn you would have to be a slow learner. Which by the way I probably am a slow learner. I just wondered if you were a slow learner too.
Funny post on comparing financial advisors to lawn mowers though, it’s good to see that you have a sense of humor.
I’m really glad you do what you do and my wife who’s a dentist does what she does b/c I would not be good at your professions at all.
However if I wanted to compare our professions I could. We all depend on people needing help. We are all salespeople, like it or not. You must sell someone on the surgery you must perform on them in order to safe their life or leg. My wife must sell someone on taking better care of their mouth will lead to a healthier body. Teachers must sell people on their philosophy to learn. I could go on. The difference between us is that you believe you are higher ranking. We must all be servants and humble ourselves before the Lord.
Readers, I too am a CFP professional. Please don’t make the assumption that all CFP professionals think the way Russ does. In fact, I would argue that the vast majority of CFP professionals (especially the one’s that actually do financial planning) don’t agree with Russ’s concepts on whole life insurance. My take is that most, over 90%, of doctors won’t find the value in a permanent contract that they were sold at the beginning. Whole life can be a great tool for the super rich. For most doctors this just isn’t the case, my wife is a doc and we aren’t “banking” on ourselves with whole life policies.
SERIOUSLY. NO MORE WHOLE LIFE COMMENTS ON THIS POST. PUT THEM ON A WHOLE LIFE POST. THERE’S AT LEAST A DOZEN OF THEM ON THE SITE.
That sounds familiar. I wish I’d been sold the right policy the first time.
You know, every agent who talks about their surrender rate claims it’s basically 0%. Yet the pooled data shows it’s 80% (1/3 in just the first 5 years) and I get emails every week from docs who feel they were suckered into buying their policy and want to know how to get rid of it. Pretty significant disconnect, no? Sure makes me skeptical about the 0% surrender rate people claim.
Lots of things still exist that are garbage. Terrible argument.
Planning for one’s (on average, according to the Social Security Commission http://www.ssa.gov/planners/lifeexpectancy.htm ) 19 year retirement phase of life is important. At this phase, after-all, you are finished “earning” money.
However, what if at age 65 you were to look back at every dollar you spent (from groceries to cars and business venture’s to homes) when you were still earning money. That would be more than 40 years of spending. Can you imagine if even half of those dollars that you spent through those 40 years we able to EARN a modest 4% (guaranteed) throughout the life of them?
This is what the idea of Infinite Banking is. Infinite Banking focuses on the dollars you spend leading UP-TO retirement. By truly practicing Infinite Banking, you are taught to use cash in your whole life policy and replenish those dollars back into the policy. By doing so, when structured properly, you are contributing to a tax-advantaged retirement fund.
Having access to cash is “King”. In 2007 many business owners lost their businesses due to our tumbling economy. By having a piece of their retirement plan in a Cash-Value whole life insurance policy with a mutual, dividend paying insurance company business owners were able to stay afloat during the recession by having easy access to a pool of cash. Could you do the same with the mutual funds, 401k or stock pieces of your retirement portfolio without negatively impacting your retirement?
Fact is, in 2008 this insurance company paid a 9.7% INCREASE in dividend from 2007 ( https://www.ohionational.com/portal/site/client/older_news_releases/?guid=ac5c7b180ff6f110VgnVCM100000620011acRCRD ). Not all, but MANY people cannot say they saw a nearly 10% increase in any investment from 2007-2008. Even in one of the toughest times of our economy, this insurance company reported an increase in dividend. These companies are some of the strongest financial security rated companies.
I’m about ready to just delete all the whole life comments that aren’t on whole life posts. You guys are so anxious to sell this crap you write these 500 word diatribes all over my website and the poor reader sorting through comments on a completely unrelated topic might mistakenly assume you had some idea of what you were talking about if I don’t address them.
Cash isn’t “King.” It’s generally a drag on a portfolio. Liquidity is also not usually an issue for most docs who have their financial ducks in a row. Without selling a single share of stock or a property I have enough cash between checking, savings, emergency fund, business account, and portfolio for my family to live comfortably for YEARS. I have enough that I can buy an expensive boat, car, or investment CASH. Why? Because I didn’t buy stupid stuff like whole life insurance.
You are also demonstrating your financial illiteracy. Your link notes a 9.7% increase in dividend (so that’s like increasing a dividend from 5% to 5.5%). That’s hardly the same as a 10% increase in an investment. The fact that you confuse that makes it hard to accept your opinion on bigger issues, such as whether or not to buy a whole life policy.
But if you’re happy with your policy, and you can reach your financial goals despite buying it, then great.
I consider myself a novice investor. I have zero financial background/ formal education on the subject and everything is self taught. I read as much as I can about the subject; at least as much as my residency commitments and time constraints allow.
By far, I have found the most challenging thing about the do-it-yourself, advisor-less path is actually acting on one’s new knowledge. It is easy and enjoyable to read the books, blogs, charts, graphs and interpret the data that show the value in making your own investment decisions (and avoiding an assets under management fee).
The hard part is taking the plunge when you have no prior experience. If I rebalance my portfolio and start exchanging funds in my hard-earned Roth from residency, how do I know I’m not making an error which will cost me a fee or a call from the IRS? Practically speaking, how do I even make those transactions? If I backdoor Roth, was it done in a correct, legitimate way? Can I contribute to a Roth? What if you realize after the fact you actually can’t contribute to a Roth because you are married and filing separately in an effort to minimize loan repayments via PSLF. How do I know I am really acting in the most tax efficient, loan-payment-minimizing manner? Etc. When you are a beginner, there is a fear of making a mistake, even with the best, most legitimate intentions, and costing yourself time (!) and money.
What are you thoughts on the challenges of actually getting started and diving in? On making the actual transactions, not just learning about it? I guess, as with anything in life, you learn from experience and one must seek that zone of “optimal discomfort”, when you are outside your comfort zone and pushing yourself to learn by doing, but not so far outside your comfort zone that you are a danger to yourself and the people you care for. Not unlike residency!
Thoughts?
The best way to make sure you are doing things correctly is to do alot of research before making the move, and when in doubt, consult your accountant. When I first started investing in backdoor Roth IRAs I made alot of mistakes. First I rolled over a substantial 401K to an IRA and then converted it into a IRA Roth. Had to pay 10K in taxes. Looking back, I should have left it in the old 401K and rolled it over to a new 401K, would not have had to pay anything at all.
My husband was contributing to a backdoor IRA without realizing he was incurring significant penalties as he had not count his Simple IRA as an IRA that could penalize him. We had to re characterize his Roth IRA back to an IRA. Luckily we caught it in time.
I would say if you have a great accountant, consult him or her! Otherwise, do tons of research. I’ve been learning how to do tax loss harvesting myself and educating myself about the tax implications of dividends etc.
I would agree with what’s been said. Like residency you need to educate yourself and realize you will make mistakes. It’s inevitable unfortunately. But like residency, just keep learning. Read as many books as possible on the topic. It sounds like you’ve read investment books before. You can start with very basic ones and move on to more complex ones. William Bernestein is a great start, obviously White Coat Investor book as well. Just keep learning and reading.
It’s a lot easier to make all your mistakes when your portfolio is still just 4 figures than when it is 7. Most financial transactions are reversible too. That helps.
Should it cost any more to manage 5 mil versus 1 mil
Trust me any doc can manage their own investments
Of course they need advice on setting up ret plans and need a CPA for taxes but creating a portfolio is quite simple and straightforward
You can choose from many authors like swedroe who has ones designed for different risk takers
Read his book the winning investment strategy
The crucial time is nit the accumulation phase but the the near retirement phase when you need to preserve the nest egg you created
The best advice is to self educate and take advice from seasoned investors, like myself, who over 40 yrs has seen the ups and downs
The basics still remain the same and you gotta start savings as soon as you can and more than you think
Russ-many financial experts, all of whom advise against whole life insurance recommend asking what commission the seller of the policy will be making off of them. Are you willing to share this? If not I am even more skeptical of folks selling whole life (especially to physicians who are known to take poor financial advice and be taken advantage of by the many sharks out there).
PBell,
I addressed this is exact subject in the following blog:
http://blog.fireyourbankertoday.com/5-reasons-i-chose-cash-value-life-insurance-over-the-529-plan
Also read my background and story on why as a CFP I drastically changed my financial practice from an investment management practice to a practice devoted to teaching financial awareness. I too listened to the same “financial experts” and advised physicians and dentists against the purchase of whole life insurance. I believe this is what gives me the creditability to speak to this issue.
http://blog.fireyourbankertoday.com/the-turning-point-my-personal-experience-with-infinite-banking
50-110% of the first year’s premium. It’s not a secret. Why else do you think people are so willing to work so hard to get you to buy something that at best is optional for your financial success.
The sad thing is how much of the commission is early on. Notice the commission drops after a few years and is like zero by year 10. Why? Because the insurance company also wants you to drop the policy by that time. They don’t want to pay a death benefit and most agents leave the business as well. Other agents have no incentive to help you keep the policy in force. This is also why so often they have gotten into trouble for trying to churn you into a different policy where they can get a new commission.
What’s even funnier about the bank crowd is they don’t even realize how this concept has been used with all of the other permanent products and will continue to change in flavor depending on what they think they can sell. If IUL gains more favor, just wait they will try to claim it.
There is nothing special about a tax free loan. All loans are tax free. There is nothing special about leverage. You can always leverage. It has risks. I don’t need a loan. I don’t need to pay myself back extra interest besides what goes into the insurance companies profits. The entire concept is just a way to dress up whole life to pretend it is something different than it is. Its a permanent death benefit and its expensive for what you get.
Even funnier how the other agent doesn’t realize that dividends continue to go down. Just bc they paid more money out doesn’t mean the policy did well. The denominator is a very important number and ALL whole life companies have had dividends dropping for a long time.
You are right this is not a secret. I don’t think it matters but if you are so interested here you go.
50-110% of the first year BASE premium is paid out. 3-5% on any Paid Up-Riders (additional cash). Someone practicing IBC will usually have their policies designed where 50-70% is going toward the Paid-up Rider. Hence why I said in the blog I referenced that the commission paid out is about 60% less than traditionally sold whole life policies.
FYI-Not all of that goes to the agent. Typically an agent is housed within a agency/firm and they receive 25-50% of that total to cover overhead expenses.
I think #5 is so important. Too many people abondon their plans and set themselves up for even more losses!
Where are sample investing policy statements? I recall reading several at bogleheads. Do you have yours here?
You’ve probably read the part of mine posted there.
You can also share yours if you like.
Very few investors will ever need whole life, but the super wealthy and a few others might need a death benefit
Sure, there are some estate planning uses for life insurance. But you don’t need whole life for those and most docs won’t need it anyway.
OKAY EVERYBODY. THIS IS THE LAST COMMENT ON WHOLE LIFE I’M ALLOWING ON THIS POST (WHICH ISN’T EVEN ABOUT WHOLE LIFE.) ANY FURTHER COMMENTS ON WHOLE LIFE MADE ON THIS POST WILL BE REDIRECTED HERE (OR IF YOU PERSIST, DELETED.)
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
In the words of that sage Mrs. WCI, “Get a life!”
This is worse than a hijacking…I just wanted an Investment Policy to read.
Hi, question on #2. Is it “cheating” to include employer contributions or match in the 20% savings goal? I know some of your previous posts have stated that this should be considered part of your salary. I make less than the average for my specialty in academics, so not including that would make reaching the 20% goal more difficult.
First, the 20% is a rule of thumb. There’s no regulation you have to hit. Just be aware if you save less or start late you’ll take longer to become financially independent. I view employer contributions/match as part of your salary, so I would certainly count it toward my savings goal, whatever that might be.
Just to clarify – in your response to Liz (and assuming 20% is the goal), are you basically saying that it doesn’t matter where the 20% comes from, as long as the total contribution equals 20%? (Example: 10% on your own, 10% employer match.). Or…are you saying that if your employer contributes 10%, you should make sure that your contribution is 20% of your base salary with the money from the 10% match factored in as part of that base salary? (Example: your base is $100k. Employer match is $10K. Therefore, your yearly contribution should be $22K on top of the $10K your employer put in?)
Absolutely. An employer match is part of your salary. If you don’t get it, you’re leaving your salary on the table. So of course I think it’s fair to claim when calculating your savings rate. In your example, I’d say you need to save $12K of your own plus $10K of your employer’s.
Okay – thank you for clarifying. I was struggling a bit to understand. While my husband does not earn a “match” (so to speak) he does receive a profit sharing contribution. That is currently set at 15% of his base. So (assuming a 100K base); Our savings goal (at 20%) would be $23K, with $15K coming from his employer and $8K coming from us. Correct?
He also receives a bonus, so we should factor that in as part of his base – correct?
Make sure you put these two terms into your financial dictionary
l. marginal utility of wealth
2. Sequence of returns risk
BOTH critical pre retirement
Agreed.
Congrats on the overwhelming success of the course registration. I can only imagine how much anxiety there is for being on the hook for 6 figures regardless of how it turned out. I think it is suffice to say that there is a huge demand for information like this and will continue to be So hopefully the anxiety goes down for subsequent offerings.
As for this topic, I think the staying the course and investment policy statement as well as your savings rate are the two big ones in my book. Although people stress over asset allocation, it is likely to make little difference in the end (unless you truly are out there and take high risks). The savings rate will cause your net worth to grow the fastest (and has a great side effect in that since you are living on less you will have to have a much smaller nest egg to support the lifestyle you get accustomed to).
Less anxiety than last time (despite the larger contracts) but it never really goes away!
If I had to pick one of these 5, it would be #2. Just keep harping on it and sooner or later people will listen. 😉
When you recommend saving 20% of gross income, does that include employer contributions or just our contributions?
Count employer contributions in both the denominator and numerator.
Long time reader of the site and I have treated it like my financial life bible. I started in medical school when I had no money to worry about. During residency my wife and I (who is also a physician) were living in a high cost of living city and did what we could to max out a Vanguard Roth account and put a few dollars into the 403b offered (with no match for residents). This all seemed easy enough to manage the totem pole of what to do with any money we could save. However, now we both just started our fist jobs and plan to save 20% purely for retirement (additional money is being saved to increase our emergency fund, LTD, term life, aggressive loan repayment, and additional investment goals). I feel like the totem pole is more confusing now and I was hoping for some clarification/advice.
I am private hospital employed. Married filing jointly. Spouse is also a high earner. Combined income approx $900k. Personally, I have about $120,000 budgeted for retirement savings in 2022 from my income. Retirement vehicles I have available are: employer 401k (traditional/Roth/voluntary after tax contributions WITHOUT current option to do mega back door Roth), modest 401k employer match of $2500, non qualified deferred compensation plan. I have a Vanguard account with my Roth IRA from training that I can no longer contribute to as well as a rollover IRA from my residency 403b. My wife funds our HSA.
My question is, what is the appropriate pecking order to allocate the funds after maxing out the obvious pre-tax 401k contribution of $20,500? I haven’t been able to find much discussion on here about voluntary after tax contributions without the option to perform the megabackdoor roth, or non qualified deferred compensation plans. As I see it, the remaining $100k would be allocated as follows. $38k to voluntary after tax contributions to max out the allowed $61k of total employer and employee contribution. $50k into a deferred compensation plan. Remaining $12k into a taxable account for some increased liquidity.
Is there a better option or a more ideal allocation? That got a bit long, so thanks to anyone who made it through. I appreciate any help/advice and think an article with a clear pecking order that includes some of these options would be awesome.
Why do you need a pecking order? Can’t you do it all? Max out the 401K, get the match, max out the deferred comp, do a Backdoor Roth IRA, convert the rollover IRA to a Roth IRA, and max out the HSA. The rest of your $120K can go into taxable or be used to pay off debt. You guys make $900K. You should be able to do it all at once!
But if you can’t, then I think you need to look very carefully at the details of after-tax contributions to the 401(k) and the deferred compensation plan. You may end up skipping one or the other or even both and just investing more in taxable. The rest should be a higher priority than those two, but I just don’t have enough info to say anything about either one.
Thank you for the prompt reply. You mentioned converting the rollover IRA to a Roth IRA. First, can I do this directly into my Roth IRA on vanguard since the rollover IRA is also on vanguard? Second, won’t this be a taxable event? I will need to pay taxes on all of the rollover money at my current tax bracket? It’s about $25k last I looked. I have been wondering what the best thing to do with the Rollover IRA is because it has been inhibiting me from performing the backdoor Roth because of pro rata. I was planning to roll it into my current employers 401k at principle to avoid getting taxed on it. However, is it a better move to bite the bullet now and make it Roth? I wish I would have just left it in the residency 401k. I thought I was making my life easier moving it over to Vanguard :/
This brings up another thing I have been reading about in some of your articles regarding contributing to the traditional or Roth section of the 401k. Would you consider my situation one where the roth makes more sense?
More details on the non qualified deferred compensation plan (NQDCP). It seems like these are highly customizable by the company that offers it. For mine, I can put up to 75% of my income into it. So it is essentially limitless. After reading the policy documents and various articles (which there aren’t many), I’ve determined that it is essentially like an IOU from the company. You pay FICA at the time of earning it, but all other tax is deferred until you take it out. It has the same investment options as the 401k which are decent and grows tax free. It is taxed like normal income whenever you take it out (minus the FICA that was already paid). The catch is that it is not guaranteed, meaning that if the company goes bankrupt you are basically like another creditor to them. This is an IRS requirement to offer the plan. However, the company is a large national organization and has set up a large trust fund to fulfill their obligation to it. If I leave the company before retirement age, it is paid out as a lump sum. If I stay all the way to 55 then I can set up annual payouts. Otherwise payouts can be set for any time with a 5 year advanced notice.
I am leery of going all in on it because I don’t know anyone else that has ever contributed to one and the literature that I can find on them is scant. Also the idea that isn’t guaranteed is scary.
My understanding of the voluntary after tax contributions to the 401k is that it will grow tax free and it’s possible they may add the mega backdoor roth option at some point (if the gov’t doesn’t oust it). I suppose what I’m unsure about is if without the conversion to Roth option, is this a better option than more into the taxable account versus more into the NQDCP.
Thanks again for taking the time to look it over. I just don’t feel like there is a lot of clear information on using NQCPs and voluntary after tax contributions.
1. Yes
2. Yes
3. Yes
4. Probably. It’s only $25K. You can afford that conversion. Do it before the end of the year since Congress may change the rules for 2022.
5. Hard to say whether regular Roth contributions are better or not. You could easily fall into the supersaver category I suppose. You have quite an income.
https://www.whitecoatinvestor.com/supersavers-and-the-roth-vs-tax-deferred-401k-dilemma/
6. I don’t like that lump sum distribution. That alone is enough for me to limit how much I’d put into it. Yuck. Too much golden handcuffs for my taste. Feel free to put some into it, but I wouldn’t put a huge amount in. The fact that it is subject to the employer’s creditors (Unless it is truly held in trust) is another strike of course.
7. Depends primarily on how long the money is left in there and how tax inefficient the investments are. For short time periods and very tax efficient investments, you’re better off in taxable. But if you put bonds or REITs or whatever in there and use it for decades and enjoy some asset protection, it can still make sense even without the MBDR move. Obviously it would be better if you could convert it at some point. Remember you CAN convert it after you separate from the company and roll it into an IRA.