By Dr. James M. Dahle, WCI Founder
I have a lot of people interested in being a DIY investor asking me how to successfully do it. They feel like they need just a little bit more knowledge to tackle it without an advisor.
What is a DIY Investor?
A DIY Investor manages their finances themselves. They don't have a financial advisor aka a “money guy.” A major characteristic of DIY investors is that they find personal finance and investing interesting. Not necessarily thrilling, but there is a certain amount of a hobbyist mentality that seems to be required. If you have enough interest, you will develop the knowledge and discipline required to be successful. But there's very little that can be done if you can't find even a modicum of interest in this stuff.
Why Be a Do-It-Yourself Investor?
There are really three main reasons to be your own investment manager.
#1 It's Fun!
The first is that DIY investing is fun. If you detest it, you may want to rethink doing this on your own because you are unlikely to learn as much as you need to learn and unlikely to pay as much attention to it as you should (which isn't that much, but it does require some attention).
#2 Control
You get to be in control. Personally, I have zero tolerance for someone else screwing up my stuff. No advisor cares about my money as much as I do. I also get to completely eliminate the risk of my advisor ripping me off, as this once happened to a dentist in my neighborhood who no longer has a nest egg.
#3 Save Money
Perhaps the most important reason to be a DIY investor is to save money. Good financial advice is expensive stuff. It is silly to mow your own lawn, clean your own house, and work on your own car to save money and then turn around and pay tens of thousands of dollars per year to have your money managed. You would be better off learning to manage your own money and paying someone else to do those other chores.
How much does advice cost at typical prices? Well, consider a doctor who decides to save $80,000 per year for retirement starting at age 30 and pays 1% of their assets to advisors each year. By the time they retire at 60, their portfolio will be $1.5 million smaller ($9 million vs $7.5 million) if they used an advisor. If they live another 30 years, their portfolio stays about the same size over those 30 years, and they take out 4% a year to live, they will pay the advisor another $2.3 million in retirement. The way I look at it, if you can learn to be your own competent investment manager, you can make up to $3.8 million worth of mistakes and still come out ahead! Think of managing your own money as a very well-paid hobby.
Although I'm against bad financial advice and against overpriced advice, I am in favor of good advice at a fair price. The financial advising industry isn't hosing everyone and not all advisors are charging 1% AUM fees. Some advisors are better than others, and I've compiled a list of fairly-priced advisors that I trust to help you when needed. If an advisor can help you save and invest in a reasonable plan and can keep you from doing dumb things with your money (like bailing out in a bear market), paying a reasonable fee can be worth millions of dollars to you.
More information here:
What Is a Financial Advisor? How to Choose the Right Fit
Start DIY Investing Slowly
Managing your own money is easiest if you start doing it at the very beginning when you have hardly anything to invest. Your financial life tends to be pretty simple at that point. Your taxes are easy. You have few investing accounts available to you. Your portfolio might only be four figures or a low five figures. Mistakes made on a portfolio that tiny are extremely inexpensive.
But even if you're a few years into practice, you can still start slowly. You don't have to fire your advisor the day you decide to be a DIY investor. You can watch what your advisor does, ask lots of questions, and learn. You can also manage a portion of your money on your own—perhaps just your Roth IRA or just your 401(k) or just a 529 or just your taxable account, and you can see how you do and how much you like it. If you are like most, you will find it to be a relatively easy task and will soon feel comfortable managing the whole thing.
Some Learning Required to Be a DIY Investor
There are a few things a DIY investor must learn, either as education before you start or as part of your on-the-job training. Just as there is medical terminology, there is a specific language of finance. The more you deal with it and read about it, the more natural all of these words will be to you.
In particular, you should learn everything there is to know about your own personal retirement accounts. Your 401(k) is unlike that of anybody else (except your co-workers). Read the plan document. If your 401(k) is at Vanguard, read about all the investing options and fees. Read the prospectus of any mutual fund you are considering investing in. Compare one fund to another using the Morningstar database. Look up all the funds in your 401(k) there, specifically to see what they are invested in and what their fees are.
The good news is that you don't have to know everything about tax law or investing. All you have to know is the part that applies to you. Once you've learned that, very little changes from year to year, so you can automate a great deal of it down the road. Read a few books. Follow a good blog or podcast. Participate in an internet forum or two. This stuff isn't that hard to learn if you have even a little bit of interest in it.
Another important aspect of a DIY investor's learning has to be market history. I'm constantly surprised, particularly during a market downturn, how many people seem to have no idea what has happened in the past. They're surprised when markets go down 8% or 15% or 25%. They worry they should be doing something or that there is a problem with their investing plan. Reading and learning about market history allows you to ignore stuff like that. Not only has it happened before, but it happens all the time and is largely irrelevant to meeting your investment goals.
For example, from 1900-2013, there were 123 “corrections” (where the stock market drops 10% or more from previous highs) and 32 “bear markets” (where the stock market drops 20% or more from previous highs). What's the takeaway message? You should expect a correction every year and a bear market every three years. If you have a 60-year investing horizon (30-year career plus 30 years in retirement), you should plan to pass through 60 corrections and 20 bear markets. This is what markets do. It should not be a surprise to you.
Of course, there is no guarantee that the future will resemble the past, but market downturns should not change your investment plan because that plan should assume there will be tons of market downturns during your life as an investor. But again, this learning can all be done upfront. You don't have to redo it every year.
Invest You Must
Some people seek out an alternative to investing in risky assets. Unfortunately, for the vast majority of us, that simply doesn't work. It's not even an option. You MUST invest and you MUST invest in assets with some risk. The reason why is that riskless assets simply don't pay enough to reach any kind of reasonable goal. If you decide you're not going to invest in risky assets like stocks or real estate and instead will stick with bonds, CDs, or whole life insurance, you will need to save 50% or more of your gross income every year just for retirement. That's just not an option for most of us. You need to take significant investment risk.
There are two components to that risk:
Shallow Risk
The first, sometimes called shallow risk, is simply the volatility you will see in the value of your investment account between now and the time you need to spend the money. Although this does cause some people to have trouble sleeping, it is relatively insignificant in the long run.
Deep Risk
The second risk, deep risk, is the concept that the value of your investments goes down and never comes back up due to inflation, deflation, confiscation, or destruction. For some reason, very few people lie awake at night worrying about those much more significant risks, and almost nobody lies awake worrying about the biggest risk of all—an inadequate savings rate. That's too bad, since that one is completely under your control.
Setting Appropriate Goals
The retirement savings game is a fairly simple math equation with a handful of variables. Start with a guess about how much income you will need in retirement. Don't worry about being perfectly accurate; you can adjust as you go. But look at what you're currently spending and adjust for those expenses which will go away at retirement and any new ones that might appear.
Let's say your guess is $100,000 per year. Then, subtract out any guaranteed sources of income, such as a pension or Social Security. Perhaps you're left with $70,000 per year. Now, multiply that number by 25. That's about how much you need to save for retirement. $70,000*25=$1.75 million. If instead you've only saved $300,000, you'll burn through that rapidly in retirement spending $70,000 of it each year.
Now that you have “your number,” you need to know how much to save each year. This depends on how long you have until retirement, how much you have now, and how much your investments can earn each year. Be sure to adjust your numbers for inflation. For example, if you invest aggressively, it is probably reasonable to assume your investments will earn 5% a year after inflation. If you need $1.75 million, want to retire in 15 years, and currently have $400,000 saved toward retirement, you can use the Excel PMT function to see how much you need to save each year. It looks like this:
=PMT(5%,15,-400000,1750000)= -$42,562.09
You need to save $43,000 a year to reach that goal.
Choose a Simple Asset Allocation
The next step for a DIY investor is to choose an asset allocation, a plan for how you are going to invest your money. Since you need a 5% real (after-inflation) return, you will need to invest aggressively. That means most of your money should be invested in risky assets like stocks or real estate. The exact percentages don't matter all that much, but you want something low-cost, diversified, and with an appropriate level of risk—high enough that it will reach your goals and low enough that you can tolerate the volatility. There are hundreds of reasonable asset allocations. Pick one you like, write it down, and stick with it. Perhaps this will be your plan:
- 25% US Stocks
- 25% International Stocks
- 25% Real Estate
- 25% Bonds
Certainly, you can make your investment plan more complicated, and there may even be some benefits to doing so. Each of these major asset classes has sub-classes, and there are entire asset classes not included in the above portfolio. But once you get beyond 7-10 asset classes, you're just playing with your money a la Scrooge McDuck. As Thoreau said, “Simplify, simplify, simplify.” You don't have to invest in everything to be successful. Don't get paralysis by analysis. Remember that you can always tweak your plan later.
Be sure to write down your plan and the reasons why you built it as you did. Then, if you have doubts in a bear market, you can refer back to your written plan.
More information here:
Best Investment Portfolios – 150 Portfolios Better Than Yours
Implement Your Investing Plan
Once you have reasonable goals and a target asset allocation likely to reach them, it becomes relatively easy to implement and maintain the plan. You obviously want to take advantage of any tax-advantaged accounts available to you. Let's say you put $20,500 into a 401(k) each year, your employer matches $3,000 of it, and you put another $6,000 for you and $6,000 for your spouse into Backdoor Roth IRAs. That is a total of $35,500. Since you need to save $43,000 per year, you will need to save another $7,500 per year toward retirement in a “non-qualified” or taxable account. Let's assume you currently have $20,000 in each of your IRAs now, $150,000 in your 401(k), and $210,000 in a taxable account, $60,000 of which is the equity in an investment property. Your investment accounts look like this:
- 401(k): $150,000 + $23,500 per year
- Your Roth IRA: $20,000 + $6,000 per year
- Spousal Roth IRA: $20,000 + $6,000 per year
- Taxable account: $210,000 + $7,500 per year
- Total $400,000
Since your desired asset allocation looks like this:
- US Stocks 25%
- International Stocks: 25%
- Real Estate: 25%
- Bonds: 25%
You can implement your plan like this:
401(k): $150,000
- 500 Index Fund: $100,000
- Bond Index Fund: $50,000
Your Roth IRA: $20,000
- REIT Index Fund: $20,000
Spousal Roth IRA: $20,000
- REIT Index Fund: $20,000
Taxable: $210,000
- Investment Property: $55,000
- International Stock Index Fund: $100,000
- Municipal Bond Fund: $55,000
This setup has a number of benefits. Most 401(k)s have at least one index fund, usually an S&P 500 index fund, and some kind of a reasonable bond fund. REITs have relatively high expected returns but are very tax-inefficient, so they belong in some type of a tax-protected account. They may not be available in your 401(k), so the Roth IRAs are a good choice. All of the investments in the taxable account are relatively tax-efficient. There are other ways to implement this asset allocation into this particular investment account setup, but this is certainly a reasonable way to do it. Your own personal investment setup will have to be individualized to you, but once you write everything down in this format, it isn't that hard.
If you need help, you can meet with an investment advisor who charges by the hour or post it on the forum or the WCI Facebook Group for some feedback and assistance. Like setting goals, coming up with an asset allocation, and educating yourself, most of this work is done up front and then can be mostly automated.
More information here:
How to Build an Investment Portfolio for Long-Term Success
Stay the Course!
Maintaining the plan simply means making the required contributions each year, purchasing additional shares (or investment properties) as needed, and rebalancing the account from time to time, usually with new purchases.
Once you have a reasonable investment plan, the most important thing, perhaps just as important as your savings rate and far more important than your asset allocation, is sticking with the plan through thick and thin over decades. No plan will work if you cannot stick with it. If you can't do so on your own but you can do it with an investment advisor, it will be worth the money you will pay the advisor to help you.
Other Resources for DIY Investors
- The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
- The White Coat Investor's Financial Boot Camp: A 12-Step High-Yield Guide to Bring Your Finances Up to Speed
- The White Coat Investor's Guide to Asset Protection: How to Protect Your Life Savings from Frivolous Lawsuits and Runaway Judgments
- Fire Your Financial Advisor! A Step-By-Step Guide to Creating Your Own Financial Plan
- Physician Wellness and Financial Literacy Conference
- Continuing Education 2022 Course: The Latest in Physician Wellness and Financial Literacy
- WCI Forum
- WCI Facebook Group
- WCI Reddit
- List of Good Financial Books
What do you think? Do you think it is reasonable to be a DIY investor without an advisor? How did you come up with your investing plan? If you used to use an advisor and now do it yourself, what was the hardest thing about changing? What percentage of your colleagues do you think can handle their own investments competently? Comment below!
[This updated article was originally published in 2016.]
oh its because I did not want to complicate my IRA accounts. Fee was 0.05% for VFIAX and the dividend yield was good. It was also vetted by Warren Buffet so I just went with it. I doubt it would make a big difference over 30+years :).
For my betterment account, betterment has it invested in various index funds and funds with lower tax impact – This is what its invested in in my “save money for retirement part of portfolio”. Again, as I am 32, I went all stocks. I copy pasted it for you to see.
HOLDINGS CURRENT WEIGHT CURRENT VALUE FUND FEES PER YEAR % $
US Total Stock Market: VTI, SCHB 17.8% $****0.04%
US Large-Cap Value: VTV, IVE 17.8% $**** 0.10%
US Mid-Cap Value: VOE, IWS 5.7% $**** 0.15%
US Small-Cap Value: VBR, IWN 4.9% $**** 0.15%
Developed Markets: VEA, SCHF 40.9% $**** 0.09%
Emerging Markets: VWO, IEMG 12.9% $**** 0.14%
Total100%
That AA seems a lot smarter to me than just S&P 500 stocks, thus my comment.
I’m sorry – I didn’t understand your comment. what’s AA? Are you referring to the rating?
Sorry, AA is Asset Allocation, or how your investments are divided up.
Gotchya – yes, ok, so I did some research total market fund does outperform VFIAX by 0.5% with a similar yield – maybe I will switch it over. Dividend yield is similar.
Betterment is a great for post-tax accounts. One may learn to do TLH, but it does it automatically. Thats what I am paying for essentially – the headache, the paperwork and keeping track of things. I think 0.15% AUM for that service is reasonable…What do you think? Thats 1500 dollars/ 1 M. I am not there yet, but once my portfolio gets that big, maybe I will manage it myself.
I am trying to keep things simple and basically want a vanguard account for IRA and betterment for post tax. If I delve into real estate, then that will be the other asset category, but the more I learn about real estate [with the exception of owning your own practice and home], the more I am turned off by it. The idea seems nice, but I think for busy professionals like doctors, its not the most ideal investment. I am full time and I already have 2 part time jobs…I cannot imagine managing RE also myself. It wont pay me enough $/time.
I think long term stock investing will outperform real estate any day simply because of compounding and dividend aspect of money being invested in one place. And real estate costs time, I value my time, and I would rather work an extra shift or saturday to earn that difference.
Anyways, thanks to the education material on this site, purchasing your book and reading things over the past two years, I have finally come up with a reasonable strategy to feel financially secure. I am continuing to live like a resident much to my wife’s annoyance – but she is young and does not know the real value of money….haha. I am aiming for 30M by the time I retire in post tax account and > 10 M in my IRA account – and I am on track.
I plan to start nursing homes for people of my community and the elderly who require cultural and ethnic caretakers. Of course I will be able to live comfortably also and take care of my family, and that is also the plan.
Anyways, I am on track thus far [I save about 150K/ yr post tax money and 36K pre tax – 403b and 457b, plus 5500 IRA at this time, and will be 52k per year once I am independent]. I did not opt for Backdoor Roth IRA because I found the conversions, etc too tedious and also the limit is so little and locked away till retirement – my post tax accounts allow me more control. Similarly, instead of 529 accounts etc, I am just channelling all funds into Betterment because the dividend yield is dependent on the total sum – the higher the amount, the higher the return.
Sorry for the long and perhaps tangential response, but I wanted to write this and again thank you for the service you provide in educating doctors on their financial health. i hope that they learn this sooner rather than later. I have certainly made some tough lifestyle and financial choices after reading your material, but I know it will pay off in the future.
I agree. 0.15% is a reasonable price to pay for that service.
There are ways to invest in real estate that minimize the hassle dramatically compared to direct property ownership and management.
By the way, you need to run the numbers on your $40M projected retirement number again. $200K a year doesn’t get you there. Maybe I missed an inheritance somewhere in this conversation. If you are truly going to have $40M in 20 or 30 years, you’re probably okay letting your wife spend a little more!
$11K in a never taxed again account seems worth the 30 seconds it takes me to do a backdoor Roth IRA each year. And money in retirement accounts isn’t locked away until retirement. Lots of ways to get it out penalty free.
https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/
I hope its that – thats what betterment’s projections show at 2.5%, 10%, median, 90% and 97.5% – invested 13, 000/ month x 12 months x 35 years = median avg market performance = 33 M. 2.5 % chance 79M, 10% chance 59 M.
I do anticipate putting more money in that account time to time (bonuses etc). I can email you their projections image – its actually very interesting…
No inheritance.
Haha, my wife is fine. living a simple life is good anyway. we just got back from dubai – so we are living a comfortable life.
Those sorts of calculators are garbage in garbage out. I would recommend you run your own. For instance, if you put in $200K a year for 30 years and earn 5% real on it, it comes to $13 Million. Not that that isn’t plenty of money, but it’s a long way from $40M. To get to $40M with those numbers you’ll need a real return of 11%. You’re not going to get that.
I moved all my funds out of betterment beacuse they hiked their prices to flat 0.25%
Discussed more here: https://www.whitecoatinvestor.com/direct-indexing-with-wealthfront/
are you talking about REITs and partnerships?
I agree with those who say that you can become a good investor if you learn by yourself. We can learn anything if we work hard.
I am curious… Does the real estate total include rental properties only, or does it include your own home?
I don’t include the value of my home in my portfolio, but I do in my net worth. The reason is that if I sold the home, I’d have to buy another or rent somewhere using the proceeds.
WC-
Thanks for all you do. I am currently 30, married with one kid. Hopefully more on the way soon. I currently max out my 401k, do a roth conversion for my wife and I and put money into 529 plan. We have zero debt besides mortgage. Interested to hear your thoughts on paying down mortgage versus putting extra cash into taxable accounts? We owe around 400, on a 600k house on a 15 year.
Both are excellent things to do and both build wealth. There is no right or wrong answer there. If you have a relatively small portfolio, perhaps lean toward investing in taxable more. If you are nearly financially independent, maybe lean toward paying down debt more. Just realize what you’re doing–you’re borrowing money to invest. Or you can just split the difference.
You might want to consider the asset protection angle too. In some states home equity gets a lot of protection from creditors whereas a taxable account isn’t protected in any state.
What are your thoughts about the level of asset protection in taxable investment accounts titled as Tenants in the Entirety?
I paid down my mortgage to about 68% LTV so far and my plan was to pay it down at pace to pay it off over 8 more years (13 total), while simultaneously putting a significantly larger allocation into the TIE investment account. No other debt and I have a generous emergency fund with all retirement accounts maxed out.
Just wanted to make sure the TIE investment account wouldn’t still be vulnerable to creditors though.
It’s pretty good in states that offer it. Mine doesn’t. Basically, if the creditor is not a creditor of you and your spouse, it is protected in bankruptcy.
Not sure whether your state protects much home equity or not, but in some states you would get more asset protection by paying down the house and in other states you would get more asset protection by investing in a taxable account titled as Tenants by the Entirety.
https://www.whitecoatinvestor.com/asset-protection/
Speaking of investing, how do you feel about having a franchise as a sort of investment?
Every deal is an individual one and must be analyzed on its own merits. I can’t say all franchises are good or all franchises are bad. Do recognize that they will require more time and effort than buying an index fund, but also provide opportunities for you to add (or subtract) value that an index fund would not.
Thanks for the advise!
I am in the very beginning of stages of planning to save for retirement/invest/etc as I will finally be starting as an attending in August. What should I do to start investing for retirement etc. if I do not qualify for a 401(k) account through my employer for the first 12 months?
Most new attendings have more stuff to do with their money than money. You can pay off debt, save up an emergency fund, save up a down payment, do Roth conversions, do Backdoor Roth IRA contributions, start 529s, or just invest for retirement in a taxable account.
A 401(k) is nice, but not mandatory to save for retirement.
Great question.
I’m in my early 40s, but I’ve been learning to manage my finances ever since I was a teen. I’ve been doing part-time jobs to pay for my car and health insurance. What I learned through my experiences is that I must narrow down my choices and develop my own budgeting strategy. Setting a goal for each of my investment will certainly help determine the amount you need to set aside
Your opinion please:
Started learning/managing my financials since retired 2+ years ago. Liking this and becoming more comfortable with it.
Currently have a Balanced portfolio 56/44 (roll over IRA) and a Growth semi aggressive portfolio 80/20 (backdoor Roth). Financial consultant at Fidelity says I can take more risk with Balaced Portfolio, and consider earlier draw-down to minimize future high taxes on RMD. I’m 62.5 yo. Will never need drawing from back door roth earmarked for my grandchild’s education etc.
I’m leaning/planning to tilt Balanced to Growth. Good/bad idea? What would be a good guideline 65/35? 70/30? Thank you
It’s a very individual decision, but doesn’t matter too much given that a 65/35 and a 70/30 don’t perform all the differently.
A typical rule of thumb is to hold your age in bonds which would argue for a 38/62 portfolio, which suggests you’re already plenty aggressive at 56/44.
You might consider doing some Roth conversions.
Thank you!
Incredibly helpful post. The Excel PMT tool is great (seeing that the 20% you recommend puts me well within where I need to be to retire comfortably). How should I adjust that (expected spending) x 25 number for # of years anticipated in retirement? ie is the x25 assumption based on retiring at a specific age?
Thanks!
The 25 number comes from the 4% rule. So it isn’t guaranteed, and some worrywarts/conservative folks advocate for higher numbers, such as 33-40X. But it’s an indefinite number. So whether your retirement lasts 20 years or 50 years, the 25X should get you there. That said, the longer your period of retirement, the more you may wish to hedge toward the 33-40X number.
https://www.whitecoatinvestor.com/the-4-rule-safe-withdrawal-rates/
Thank you!
Well, I used this site and articles like this to shed my financial advisor ($1000 a year) and his AUM company (Ameriprise Financial) who charged me a 1% wrap fee to invest and rebalance my retirement portfolio.
I calculated the return on my moderately aggressive (2012 to 2016) and later moderately conservative (2017) portfolio. It was hard to calculate total return due the stepwise way in which I gave them my money (some in 2012 and the rest in 2014), but it seems the return from 2014 to 2017 (but I changed my allocation in 2017 due to being older, the age of the bull market and political climate which turned out to be at least a 4-5% mistake in 2017), it was about 7.75% a year for 2014 to 2017 after fees during “the Bull.”
Anyway, its all now at Fidelity, mostly in index funds and being tracked by PersonalCapital.com for free. The Fidelity account has no fees, and all the trades for funds were free.
I am now the proud manager of my own account and have an asset allocation that is in accord with my risk profile and age according to FutureAdvisor.com and PersonalCapital.com. Thanks WCI!
You’re welcome. Congratulations on your progress! I have yet to meet someone who left Ameriprise and regretted it.
Congrats! My brother used Ameriprise and they were always trying to sell him something. But, it was alright since he did his own investing in individual stocks himself like I do. It takes more effort but it is worth the extra returns. I do my trades with Vanguard because the fee is about $7.00 and they don’t try to sell me on anything.
What a great article. I have done well financially but not because of investments. I have just been good at creating several successful businesses. However, I really want to get better at taking what I have and investing it wisely. Your section on “Choose A Simple Asset Allocation” was something I needed to hear. What do you think about investing in Bitcoin? I am thinking of getting into Bitcoin but wanted to get your input.
Whatever you believe about blockchain technology, the 300+ cryptocurrencies, or Bitcoin in particular, buying something AFTER it went up 1800% the year before probably isn’t a great move.
Great point. That’s something that I had thought of but you definitely reinforced my thinking.
Why have they never challenged the site? It’s a good question right?
What are you talking about?
How do you arrive at the expected return (%) of your investments when you calculate how much you need to save each year for retirement?
There are three basic approaches- guess, use someone else’s estimates, or actually calculate what you’ve had over the years and use that. It’s probably a good idea to run your projections with a few different returns to see how they change. I use 5% real and feel comfortable with that because my long term returns are 6% real.
Have 2 years left in ortho residency and, thanks to this blog, opened Roth IRA’s for my wife and I during my intern year and have maxed them out the last 3 yrs. She has had a traditional 401k that she has been slowly contributing to over the years and we have always only contributed just enough to get all of the company match. We recently got serious about our saving and found out she has access to a Roth 401K and have increased her contribution rate to max out the Roth 401K this year as well as continue to max out our Roth IRA’s. Our savings rate is 28.6% of our after tax income. We are now looking into a “in plan Roth conversion” to move her full traditional 401k balance into the Roth 401K account and have started saving to pay the taxes that will apply to the conversion. We have significant student loans (400K+ at 7%) that we have been making minimum payments on using REPAYE as we aren’t sure if PSLF will work for us or not (wife is not a physician). I will have 4 years towards PSLF at the end of residency and likely 5 years towards it at the end of fellowship. Just to give a complete picture, we also became distant accidental landlords with a home purchase that has actually worked out pretty well and we have approximately 120,000 in equity in the property (Loan is 30yr fixed at 3.9% with physician mortgage. Put 8% down at purchase. Cash flow about $200/mo with “cash on cash return” of about 6.8% and we build $625/mo in equity from mortgage payment). Our tenant’s lease will be up this summer and we are trying to determine if we should continue to rent it or sell and pay off 2 car loans that total 48,000 at 2.9% (I know people say pay cash for cars and this was a bit of a splurge but we bought them used with low mileage which gives us peace of mind and enjoyment. we had our previous cars for 16+ years and plan to do the same with these) and use the remaining balance for starting a taxable investment account or putting it towards student loans. Our health insurance is dirt cheap and our zero deductible plan does not qualify for an HSA. We carry 12-15k at all times in an emergency fund. No credit card debt.
So far we have put every dollar in our retirement portfolio (Roths and 401K) in the Vanguard S and P 500 Index fund which worked very well last year but I am starting to think we are getting to the point where we should start adding other classes including small cap, international, etc while still staying relatively simple. We are at least 20 years (and more realistically 25+ years from retiring) and want to be aggressive with our position. I certainly haven’t been perfect with our financial decisions but I continue to try to learn and improve our position and your website and book have been instrumental, so thank you. Just wondering if you have any advice/insight on our do-it-yourself-investor situation.
You’re doing pretty well. The car situation is ridiculous, especially given a much higher than average student loan burden. I think that’s where I’d focus my efforts if I were you. If you really like those expensive cars and it’s worth it to you to have them, then I’d pay them off with the proceeds of the home sale. I’m not a big fan of long distance accidental landlording and since you can get out of that property, I would.
I see no reason to go 100% S&P 500 even if you want to be 100% equity (which I generally don’t recommend either to someone who has never invested in a bear market.) I mean, at a minimum go 100% TSM, but I’d consider adding international equity in addition to bonds. If you want to be aggressive, you might even tilt the portfolio to small/value kinds of stocks.
If you can keep that savings rate up, it’ll cure all your financial problems eventually.
I assume some of that $400K is private loans. You can refinance those. If you decide not to go for PSLF (i.e. don’t take a job at a 501(c)3) then you can refinance your federal loans too.
WCI
Can you please explain the difference between pretax and after-tax 401k contribution? Employer offering the option of doing pre-tax AND post-tax contribution, I’m not familiar with post-tax contribution, I’ve always thought it was only pre-tax contribution for a 401k. Thanks.
Saw you question about Pre-Tax and Post-Tax 401k. Most 401k plans are Pre-Tax contributions. A Pre-Tax means you get to put that amount in it before paying any taxes, then when you retire you pay the taxes. This is the better option and here is why. First, the Pre-Tax plan allows you to avoid paying more taxes when your salary level are the highest, and it allows more capital which then gets to compound over say 30 years. THen you must with drawn it when you are 70.5 years of age and pay the taxes. But, you are then retired and are in a much lower tax bracket compared to those 30 years. The other plan, Post-Tax, makes you pay the taxes up front, which are higher, reduces the amount inside the plan, and thus reduces the amount of capital that can then compound. I used the Pre-Tax one myself and know I invest using all that compunded tax free capital. Best of luck to you and I hope that helped somewhat.
There are 2 kinds of 401(k) contributions:
Employee and Employer. The employee contribution is $18.5K if under 50. The employer + employee contribution cannot total more than $55K if under 50.
The employee contribution is either pre-tax (traditional, tax-deferred) or Roth (tax-free). In addition, some 401(k)s allows employees to make after-tax contributions above and beyond $18.5K (but included in the $55K limit). These are neither tax-deferred NOR Roth. The principle comes out tax-free but the earnings are taxed at ordinary income tax rates. However, some 401(k)s allow that money to be withdrawn and converted to a Roth or converted to a Roth sub-account inside the 401(k). This tactic is often called a Mega Backdoor Roth IRA.
Hope that helps.
You sound like you’re just asking about the Roth 401(k), which is very common. Most 401(k)s are allowing that these days.
White Coat,
Great post!
I have a question regarding the estimation of how much you have yearly to live off of in retirement. You used the estimated value of 100k/year and then explained in the example someone would have to contribute up to 70k bc of other money from pension/ss/ect. I understand this was just an example and everyone would need to estimate their own yearly needs however my question is more general.
My question is does that account for cost of living inflation. In the PMT function you include inflation for gains in your investments (5%) however I am curious if the estimated cost of living includes inflation.
To give an example it may cost me $2 to buy a loaf of bread now, but in 30 years that cost will increase. To continue with that example, I may be able to live off 70k now but in 30 years that could be 90k. Did the estimated living account for these types of changes?
I love your blog (and book) and appreciate any feedback!
Most withdrawal calculations do build in an inflation factor. So if a $1M portfolio provides $40K this year in retirement income, next year it will be something like $40,500. That’s built in. If there wasn’t an inflation factor you could use a higher percentage like 5%.
excellent piece as well as most
staying the course is not as easy as said when nearing retirement as most need to preserve capital and income stream
there is no guarantee going forward that we will see the returns of the past as bogle explained in recent times
if your goal is 4m, try for 5, thus giving you freedom to be more into equities and other asset classes if so desired
Thank you for bringing back this classic! All the pearls of DIY investing in one place.
I think the biggest hangup for the average doctor is the “fun” aspect of investing. Most do not think it’s fun. Including reading about it. I might think The Simple Path To Wealth is a fabulous read. My husband, not so much. That leads to not reading enough about it. So it continues to feel difficult. I guess one just has to do it, like other chores one may not enjoy (for me, that’s exercise, yikes). Again, like exercise, it’s delayed gratification and one that reaps benefits many times over. I also think the younger folks are a lot more into it. And you can congratulate yourself on being a big part of the reason why.
I agree thank you for bringing back this classic. Jim your advice has helped me bounce back [after my interactions with NML] and unfortunately unlike you I had [a loss of $50K when I surrendered the whole life policy I wish I had not bought.] I am DIY simply because I’m super pissed to say the least and will never trust my finances to anybody ever again!
I think all docs are capable of being DIY especially with all the stuff Jim you have to offer, but to get motivated it takes either a love of finance like Physician Basics mentions above, or having a fire lit under your arse and [feeling] burned by Northwestern Mutual.
Comment modified to remove potentially libelous statements.
I like the do it yourself planning, that helps one to cut cost on financial advisors and save more money on your investments. I also like the fact that you stated if one badly needs a financial adviser they should be willing to seat down and ask questions that profit them and know what cost would be effective, by make good bargains on them. I would recommend this article to my clients and close relatives who spend so much on financial advisors and forget to give time to there own finances, sometime coming off debts they could have avoided if they paid close attention to their own hard earned money.
There is one point Bogle made that forever stuck in my mind. Comparing two investors with one purely indexing for next to nothing versus the ACTIVE investor who’s costs are 2%. After 30-40 yrs the ACTIVE one has lost about 70% of his portfolio compared to the INDEX investor. This is in taxable accounts. he calls it THE TYRANNY OF COMPOUNDING!!!!
I think your points made about being a DIY investor are sound and fair. But that being said, this is addressing primarily the “accumulation” phase of investing and saving for retirement. What I don’t see much written about is the “distribution” phase – you’re no longer actively contributing (outside of taxable accounts) and are primarily withdrawing all the hard earned $ you’ve saved to fund your retirement – which is ultimately the goal. Yes, you still need to manage your investments during distribution. But this gets complicated with multiple income streams that most well heeled retirees will have. My opinion is this is where a retirement planner/advisor can be critical. They may not be making you a lot of $ managing your investments, particularly if they are more passive, but can keep you from making critical errors that can cost you $1000s. The last point also applies during accumulation as well. Do you feel that retirement income planning should be handled DIY also, or do you feel advisors bring fair value there also?
Depends on the investor. I think advisors provide more value than their cost for most investors, no matter where they are. But I don’t think everyone needs one. My best guess is 20% of docs can function as their own financial planners and investment managers.