Category: Resident financial

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HSA Plans: A Cheatsheet For The Radiology Resident

HSA

Over the past several years, how health insurance covers residents has drastically changed. And residents have been caught unwittingly in the crossfire. Many hospital health insurance plans have recently moved to a high deductible version from plans that cover most day-to-day expenses to save money. Since these changes have taken effect, many of you must contribute more pocket money to pay for these medical expenses. The government has created a new savings vehicle called the health savings account (HSA) to meet these healthcare expenses. (1) Many of you can participate in such a plan. But is it worth your while? How much should you contribute, if anything? These are some of the questions that I shall attempt to answer today.

The Mechanics Of The HSA

In summary, this savings plan can serve several purposes. First, you can use the HSA plan to cover those expenses that do not meet the deductible amount. So, how does this work? Typically, the institution you work for will take out a certain amount of money from each paycheck on a pretax basis, biweekly or monthly. And they will add these dollars to your HSA account. Depending on the resident’s needs, you may decide how much to add to this account for the year up to a maximum of $3850 for a single resident and $7750 for a resident family in 2023. So essentially, you can use this pretax money for your health benefits.

Most importantly, however, you can roll this money over from any given year. What you leave in your HSA account stays inside the account in perpetuity and can be added to the HSA at your next job. It’s all yours!

Best Way To Use The HSA Account

Even though you are saving tax dollars to pay for your day-to-day expenses, think twice about using these extra savings for your present healthcare needs. Why would I say something like that? Well, since you get the money pretax and then you can take the money and invest it without paying a dime on the interest earned if you use it for health care, it is the ultimate account to not pay taxes both on the front end and also on the back end when you take it out. Think of it as a way to avoid taxes altogether. So, it has become the best investment vehicle for most of us. No other accounts give such a significant tax benefit like this.

Let me give you some comparisons. We all must pay income taxes on Traditional IRAs and 401k plans when we take the money out. And we all must pay the income taxes on the funds in a Roth IRA before putting them into that account. Unlike these other accounts, the HSA account is the only one that allows you never to ever pay a dime of taxes on the money! Therefore, if you can afford to put away some of this money without using it yearly, you can invest it tax-free and get the most benefit possible.

In addition, typically, most retirees use over 300,000 dollars to pay for medical expenses. (2) That’s a lot of dough! And through the magic of compounding, since residents have a long career ahead of them, this account can potentially cover those expenses. So ultimately, this can be your medical care retirement account!

How Much Should You Contribute To The HSA?

This question is probably the toughest of them all. It depends on what you can afford. You probably shouldn’t fill the account to the maximum for those with very high debt loads. Instead, pay down at least some of the interest on your loans up to the $2,500 maximum deductible amount. But it certainly pays to put at least a little into this account since the tax benefits are so high. For those with a lighter debt load, maximize what you can put into this account. You may want to substitute some of the money for savings in other vehicles to pay for the investments in this account.

Final Thoughts About Resident HSA Plans

There is no such thing as a free lunch. However, the HSA comes as close as I have seen to one. So, make sure to consider the benefits of an HSA seriously. And think hard about contributing as much as you can. It can make the difference between a harried and a worry-free retirement!

(1) https://20somethingfinance.com/maximum-hsa-contribution/

(2) https://www.fool.com/retirement/2017/12/31/96-of-people-with-a-health-savings-account-are-mak.aspx

 

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The 2018 Trump Tax Plan: How Will It Affect The Typical Radiology Resident?

It’s final. President Trump has signed a bill approved by the Congress to overhaul the U.S. tax system. And, it will take effect starting January 1, 2018. However, I am a bit irritated by the misinformation out there. Watching network TV would make it seem that the tax plan will increase everyone’s tax liability. But as usual, I delved a bit deeper into the facts behind the plan.

To find out what is really going on, I have compared the new and old tax brackets and the different deductions based on the new and old tax bills. We will go through these numbers and calculate what you would have paid through the old tax system versus the new tax plan. More specifically, we will look at a few scenarios. These include a single radiology resident making the median radiology resident salary with no kids; a married couple each making a median radiology resident salary; and a married couple each making a radiology resident salary with 2 kids.

Today, we are going to emphasize federal taxes alone since every state is different and most state taxes have not significantly changed. In addition, we will assume that most of you do not own a home (since that is the minority of residents!). And, we will say that you will pay off the maximum amount of deductible student loan debt. Finally, we will estimate that each resident makes the median salary of 54,378  dollars. (1) I bet you’re curious. So, let’s start with the calculations!

Single Resident, No Kids

For 2017, we used the turbo tax taxcaster software and the median radiology resident salary of $54,378. And, we are assuming that you are paying down the maximum student interest. With this information, your tax liability would be $6634 with a marginal tax rate of 25%.

For 2018, using the calcxml.com software and the median radiology residents salary, your tax liability would be $4,713 dollars with a marginal tax rate of 22%.

So, the truth would be a $1,921 decrease in federal taxes. Not too shabby!

Married Resident, No Kids

For 2017, we used the turbo tax taxcaster software and the median radiology resident salary of $54,378 for both spouses ($108,756). Again, we are paying down the maximum deductible student interest. This time your tax liability would be $13,372 with a marginal tax rate of 25%.

For 2018, using the calcxml.com software and the median radiology resident salary for both spouses, your federal tax liability would be $9,975 with a marginal tax bracket of 24%.

In this case, the decrease in taxes would amount to $3397, slightly less than double the amount for a single resident with no kids.

Married Resident, Two Young Kids

In this situation, we will assume that your children are getting childcare amounting to $5000 dollars per year. For 2017, the federal tax liability based on a median salary and maximum student deductible interest payments would be $8347. The marginal rate would be 25%.

For 2018, using the same software and the median radiology resident salaries, the total tax liability for the family would be $5975 with a marginal tax bracket of 24%.

For comparison, the decrease in taxes would total $2372. Also, much different than what the pundits will have you believe.

My Conclusions About Most Residents And The Tax Plan

For most residents out there, you will take home a small windfall, anywhere from $1921 to $3397, based on a typical radiology residency situation and assuming you maximize the student interest deduction. (To get the best tax deal you should take advantage of it!) Of course, a few radiology residents may not fare as well. For instance, if you own an expensive home or have a spouse that makes a lot of money, you may be in a special situation. But for the most part, you can ignore the pundits. You will do much better with Trump’s tax bill. Just another example showing that we all need to tune out biased media. It pays to check the facts and do the calculations on your own!

 

 

 

(1) https://www.glassdoor.com/Salaries/diagnostic-radiology-resident-salary-SRCH_KO0,29.htm

 

 

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Paid Surveys For Radiologists Revisited

Completing paid surveys is probably one of the easiest methods of earning some extra cash on the side. And as we know, when you have hundreds of thousands of dollars in debt, every little bit helps. In addition to the extra cash, surveys have enabled me to learn more about some of the newest radiology technology and products that I may not have learned about otherwise.

In the past, I have briefly addressed opportunities for completing paid surveys in my prior post called Alternative Careers And Supplemental Income For The Radiologist. But today, I thought I would go into some more detail about surveys since I regularly participate. So, let’s start by talking about the general rules for deciding when it makes sense to complete a survey, go through the different types of surveys, and then finally delve into some of the opportunities that are available out there based on my own experiences.

My General Rules For Deciding If A Survey Is Worth The Effort

You will find that surveys vary widely in the amount of time and effort for a given amount of cash. Unless you really enjoying completing surveys for free, survey companies should compensate you well for your knowledge and time. Remember, even medical students usually have more education than the folks giving out the surveys. And, education comes at a price. So, I would recommend to not allow the survey companies to take advantage of your goodwill.

In fact, let me give you my rule of thumb. A survey company should compensate you at a rate similar to or greater than what you would earn by moonlighting. What do I mean by that? If you are a resident and you can make 100 dollars per hours by working an extra shift, then you should work at a rate no less than 100 dollars per hour. That means if you work on a survey for 15 minutes, you should get paid no less than 0.25×100 dollars or 25 dollars for your time.

Also, make sure not fall for the sweepstakes entry reward for completing a survey. Usually, there is no guarantee you will win. And, you are essentially providing a free consultation.  You are worth much more than that!

Finally, if you need to travel to complete the survey, make sure you calculate the amount it costs to get to the survey. Deduct that amount from the survey fees to come up with a final total to decide if the survey is worth your time. Or even better, have the survey company reimburse you for the travel expenses.

The One Exception To My Rules

But, of course, I have one exception to the rules. (Just like there always is!) If you have nothing else to do at the time, then I permit you to consider completing a survey for less. Why do I think that is a reasonable exception? Well, getting paid for doing something is always better than doing nothing, even if you are not getting paid what you are worth. Hell, you have lots of bills to pay for your medical school training!

What Are The Different Types Of Surveys?

Surveys opportunities vary widely. These include the standard online questionnaire, participation in a phone interview, a direct interview with a survey manager, and sitting on an expert panel. Out of the different varieties, I find the online questionnaire to be the least thought-provoking and energy draining. Other forms of surveys require more active participation. You need to be awake to answer the questions!

In addition, survey companies attend national conferences and offer opportunities for radiologists. Take advantage of these opportunities when they avail themselves. Often times, these opportunities can be the most lucrative.

Overall Best Survey Companies For Radiologists

Over the years, I have found that at any given time, the best survey companies change. Depending upon your specialty, the best radiology survey company may vary. Presently, the following companies still give me the most opportunity to complete paid radiology related surveys at the highest rates: GLG Group and M3 Research. In fact, I remain an affiliate of both of these companies since I complete these companies’ surveys regularly. Of course, other survey companies every once in a while ask for my opinions. On the whole, GLG Group and M3 Research still give me the most opportunities.

Final Thoughts

Although no magic bullet exists for getting rid of student debt, survey opportunities can give a significant boost to your bottom line. Try to avail yourselves of the opportunities when they arise. Who knows? You may even learn or thing or two!

 

 

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Should A Resident Physician Apply For A Credit Card When Already In Significant Debt?

credit card

Credit is a very touchy subject with resident physicians in all specialties. And it makes sense. Student debt seems to be increasing exponentially over the years. When I graduated, I thought I had a lot of debt from student loans. But that number pales compared to the debt that most current medical residents hold. Confirming this suspicion, I did a miniature survey of almost 100 medical students at my hospital. Student debt sums were as high as 600,000 dollars. These medical students had not yet completed their four years of training. So, the amounts were going to be higher than that. These sums of money are not insignificant. Instead, the debt will be life-altering for many of these future physicians for years. On top of that, add a high-balance credit card, and you may head toward financial ruin!

This enormous debt burden brings me to the next question. Does it make sense for a resident to apply for a credit card after accruing so much debt? This question came up in the past year with a resident who had not started to get credit in his name. It caused all sorts of issues for him at the time they needed it. And it will probably continue to cause problems for years to come until he establishes a good credit record. So, the simple answer is yes. But in this post, I will explain why setting up a few credit card accounts makes sense even with significant debt. And I will briefly discuss how residents should establish credit.

Why Do Resident Physicians Need A Credit Card?

Laying out Money

A radiology resident often must lay out a significant amount of funds for travel or a large purchase such as a car. What do you do if you do not have a credit card or do not have a credit card with enough credit? Nowadays, most travel is booked online with credit cards. For many websites, the only form of payment is a credit card. You are now stuck with either relying on others to book your flight or not going on the flight. Once you reach a resident’s level, these issues arise often.

Establishing a Track Record For Large Future Expenses (Mortgages, Car Loans, Etc.)

To purchase large items such as a house or a car without cash (and most residents don’t have lots of money on hand!!!), you need to obtain a mortgage or a loan. How will some company provide you with a loan if you do not have a long track record of making payments? Sure, you have your student loan as some background. But that is not enough. You must also have at least one revolving credit account (a credit card) to increase your credit score to obtain these large loans. A credit card is an excellent way of establishing this background.

Cash Back Credit Card

Finally, many credit cards offer incentives in the form of airplane miles, gifts, and cash. Cash has the most value out of any of these rewards. When you make a purchase, you can get a certain amount refunded on every purchase. Some cards give you 5% on specific items or 2% on all items you purchase. So, it really can add up over time. If you use credit wisely, it can pay back dividends!

How To Establish Credit Without Breaking The Bank

If you have a poor or no credit history, finding a good credit card company willing to give you a credit card can be challenging. Even with these issues, there are several ways to establish credit. You can apply for cards backed by your savings or find cards with very low maximum balances. Either of these sorts of cards will allow you to occasionally use the card to make small purchases such that you can begin to establish a credit history. And remember to use personal credit hygiene: Pay your balances off monthly and try to use a small percentage of the credit allotted. These small steps will allow you to establish a good history without spending too much.

Summary

Even though resident physicians already have vast amounts of debt, establishing a credit card account becomes very important from both a practicality and utility standpoint. You can do it in a way that does not cause additional debt burdens or hardship. Bottom line: Establish credit now rather than later when you need the credit!

 

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Buying vs Leasing A Car During Residency

leasing

Mass transportation is unavailable in all parts of the United States, unlike other countries, due to infrastructure issues and spread-out spaces. For this reason, many medical residents may consider buying or leasing a car during residency. It may not be such a simple question. Several times my residents have asked that I write a post on this subject matter. So, I will define what it means to lease a car and then explain how I would decide to buy versus lease a car with multiple thought experiments and comparisons.

What Is A Car Lease?

A car lease is a hybrid between buying and renting a car. It allows the lessor to spend a portion of the entire vehicle cost over a fixed period, usually with the option to buy the car at the end of the lease period at a depreciated amount. Monthly payments are typically less than a car purchase since it does not include the entire vehicle cost. The lease cost usually consists of the depreciating price of the car and monthly interest. The lease can contain additional fees in the monthly bill, including a charge for going over a fixed limit of miles and sometimes additional insurance costs not factored into a bought car.

The lessor will often put down a nominal fee at the beginning of the lease period. Bottom line- leasing a vehicle lets the lessee enjoy a more expensive car than they could typically afford with lower monthly payments. But the big question is- do they come at a significant cost?

Examples of Buying Vs. Leasing Cars

Whenever I make a financial decision, I like to take a mental picture of the different financial possibilities using thought experiments. Otherwise, it can be hard to understand the subtleties of the other arrangements. So, I am going to do just that with a typical car. I will assume the vehicle costs about 30000 dollars and that we will buy or lease the car over three years. Cars can be less costly if bought used, but for the point I am trying to make in this article, buying or leasing a new versus used car should not change the conclusions. In my first example, I will assume that we will hold the vehicle we purchased for over ten years and compare that to the costs of leasing for three years and buying out the lease after the three years are over. So, let’s do just that.

Scenario 1- Buying and Holding for 10 Years Vs. Leasing And Buying Out A Lease

Buying A Car

Let’s say the interest rates are 3% on the three-year loan for a new car and the lease. And, we will put down a nominal amount on the vehicle on both the car purchase and lease- say 2000 dollars on both. So, what are the monthly and total costs of buying a car over the entire period? To determine that, I will use one of my favorite financial programs in the world- a simple amortization calculator on the web from Bret Whissel called Amortization Calculator. So, the monthly payments on a bought car over three years after the nominal down payment is approximately 814 dollars for a total cost over the three-year loan of around 29313 dollars. The total cost of purchasing the vehicle will be 2000+29313 dollars or 31313 dollars.

Leasing A Car

How does this compare to the monthly payments on a three-year car lease? Let’s do the calculations. One of my favorite rules for determining the depreciation of a car that approximates reality is the rule of 10+9+8+7+6+5+4+3+2+1. For each year that you have owned the vehicle for up to 10 years, you can match the price of the car by taking the number of years that you have owned the vehicle, adding the numbers from highest to lowest for that period, and then dividing by the rule’s total (55). So, in this case, the amount of depreciation over three years would be 10+9+8/55 or 49%.

Alternatively, you can use a slightly more accurate calculator such as this one from Money-zine and develop a depreciation percentage of approximately 39%. For the sake of “accuracy,” we will use the more accurate calculator. The initial lump sum of 3-year monthly payments will be (0.39) (30000-2000) or 10920 without interest. Calculating interest at a 3% rate and using the amortization calculator, the monthly payments will be 317.57 dollars, and the total sum of payments over the three years will be 11433 dollars.

The Verdict

According to the calculations, the car’s residual value will now be 30000*(1-0.39) or 18300 dollars. Remember, the 2000 dollars you put down on the car does not contribute to the principal/cost basis of the vehicle. So, let’s finance the residual value payments over three years again at 3%. The monthly payments this second time around for buying the car out of the lease will be about 532 dollars, and the sum of the charges will be 19159 dollars. So, the total cost of the vehicle after leasing and then buying out the lease will be 2000+11433+19159 dollars for a total of 32592 dollars, not including additional leasing fees. The extra cost for leasing and buying out the car to get the lower payments vs. buying over three years is a mild difference of 32592-31313 or 1279 dollars total.

Scenario 2- Buying and Holding Vs. Continually Leasing for 10 Years

In the second example, I will compare leasing costs when you do not buy out the lease, continually leasing cars every three years over ten years, and compare that to buying and holding a car for ten years. So as in our first example, the initial cost of leasing the vehicle over three years will be 11433+2000 dollars. Let’s assume you will do that three and a third times over ten years. So, our total costs for leasing a car continually over the ten years would be 3.33*(11433+2000) or 44732 dollars.

For comparison, when we buy and hold a car for ten years, there will likely be increased repair costs for keeping a relatively older car. Let us then go ahead and add 500 dollars per year in repair costs after the initial three years of the loan for buying the vehicle. We will add that to the former loan price in the previous example or 31313+(7*500) or 34813 dollars. So, the additional cost for leasing a car continually over ten years compared to buying a car and holding for ten years would be 44732-34813 dollars or 9919 dollars, almost a third of the price of a car!!!

Scenario 3- Buying and Holding vs. Continually Leasing for 10 Years With Tax Deductions

In the third example, I will assume that the resident will moonlight and can deduct the car’s depreciated value from their total income annually at 25%. We will again compare the costs of releasing a vehicle every three years over ten years and compare that with buying and holding a car for ten years. Assuming you can deduct the depreciation from your salary, the new costs of leasing a vehicle would be [11433 (1-0.25) +2000]*3.33 or 35214 dollars over ten years. In this situation, the additional cost for continually leasing a car over ten years would be 35214- 34813 dollars or 401 dollars, which is more reasonable.

Scenario 4- Buying and Selling Over 10 Years vs. Continually Leasing Over 10 Years

In this example, I will compare what it would cost to buy and sell a new car every three years, assuming a 30000 dollar price tag for ten years without leasing vs. the cost of leasing cars over ten years. Most residents don’t like the hassle of constantly buying and selling cars, but it would be interesting to compare with leasing over the same time. So, let’s do the calculations.

Based on our initial scenario, buying the car every three years would cost 31313 dollars. So let’s assume we can sell the car every three years for 31313 dollars*(1-0.39) or the depreciated value of 19101 dollars. So, the cost over ten years would be 3.33*(31313-19100) for 40669 dollars. The additional cost for leasing cars over ten years vs. buying and selling cars over ten years would be 44732-40669 dollars or 4063 dollars, a moderate difference.

Scenario 5- Buying and Selling Over 10 Years vs. Continually Leasing Over 10 Years With Deductions

Finally, let’s compare the cost of leasing over ten years with the ability to deduct the depreciated lease value from your taxes compared to buying and selling cars every three years for ten years. The calculations were performed in several scenarios above, making these calculations easy. So, the total in this situation would be 35214 dollars for leasing and 40669 dollars for buying and selling over ten years. This scenario is one where it would be less costly to lease for a total savings of 40669-35214 dollars or 5455 dollars total.

What Can We Conclude Based on These Scenarios?

We have crunched all the numbers, and what can we conclude? The most stark difference under all these scenarios is between continually leasing a car for over ten years and buying and holding it for ten years. You would theoretically save 9919 dollars over ten years if you buy and own a vehicle, approximately 1/3 the car’s value. That’s a lot of money!!!

If you can deduct the car’s depreciated value from your income, then leasing a car every three years for ten years will be a slightly higher cost than holding on to a vehicle for ten years. If you like new cars, this proposition can make some sense.

Finally, the finances are almost always in favor of buying a car except for the one situation where you have to decide between leasing a car every three years for ten years and buying and selling a car every three years for ten years with the condition that you can deduct the depreciated lease value from your taxes because you are an independent practitioner/moonlighter/consultant. This situation would be highly unusual.

Final Thoughts

Always crunch the numbers based on your inputs (these may vary slightly from mine). But, for most residents, if you need a ride to work and must have a car- buy a car and avoid the lease. A lease will put you behind the eight ball over your initial working years, especially when getting rid of your student debt and beginning your savings/investments is crucial. On the other hand, if you can deduct the car’s depreciated value from other self-employment income, you can argue to lease instead of buy. And finally, if you are in the fortunate situation of being able to walk to work every day, perhaps you can do without a car altogether and save some money!!!

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My First Real Radiology Job- Do I Want Partnership?

partnership

Every once in a while, a resident or fellow will ask me, “Should I take a partnership track versus an employed position?” Or, “What questions should I ask about partnership when I interview for a job?”. These can be somewhat tricky questions to answer since there are so many variables involved. I will tackle some of these issues here. I will also answer some common questions and clarify some misconceptions.

To make this post somewhat structured, I will first talk about the features of employed positions and ownership/partnership track positions. Then, I will determine whether it makes sense to be a permanent employee or on a partnership track. Finally, I will elaborate on the questions you should ask if you are fortunate (or unfortunate) to be placed on a partnership track. So, let’s begin…

To Be Or Not To Be– A Partner!!!

What are the initial differences between jobs that are permanent employee versus partnership tack positions? First of all, no hard and fast rules exist. Some employed roles have features of partnerships, and others have characteristics of employed positions. For the sake of simplicity, I will ignore these nuances and instead talk about the general features of each type of employment situation. You can further determine how the different components of your particular job offer apply to you.

Employed Positions

Basic Issues

Most practices pay employees a fixed salary that makes up the majority of their income. Some employees also may receive a production bonus of some sort, but it tends to be a small percentage of the salary. Starting salaries of employed positions tend to be higher than partnership track positions at the beginning. But, they remain more stable or gradually drift higher for many years to come. If the partnership or practice has a “banner” year, you will likely still get the same negotiated salary regardless of its profitability.

They also tend to be at the mercy of the employing body, whether a hospital system, partnership, or corporate entity. In general, employees have less control over their situation. Employers make the business decisions. If you don’t like the technologist, nurse, or administrator in your practice, you will still have to live with that person. You may not be able to change your PACS system or to set your protocols. Bottom line. You are at the whim of your employers.

Defined Written Responsibilities

Also, in general, employed positions usually have particular sets of responsibilities written in the contract. If you perform a duty that lies outside the realm of your negotiated deal, the practice does not require you to accomplish that task unless your employer pays for it. Being an employee allows you to concentrate on radiology without dealing with the day to day issues of running a practice.

For instance, you don’t have to worry about hiring, firing, buying magnets, billing, capitalizing on radiology trends, attending hospital events, and more. A lot goes into the management of a practice that is not related to day to day radiology. And as an employee, you will likely be a lot less responsible for these activities. But everything comes with a price. You are selling your ability to control the entity for which you are working.

Risks of A Private Equity Buyout

And most importantly, for some, practices treat employees very differently when there are significant changes. In today’s rapidly changing practice environment, groups are merging; hospitals are buying out imaging centers; large corporations are taking over smaller entities. When a significant event such as this occurs, the employee usually does not benefit as the practice’s employer will. Typically, when a radiology practice is “bought out,” the partners or employers will get a large sum of money to pay for the accounts receivable, equipment, real estate, goodwill, and so on/so forth. On the other hand, the employee will typically get nothing. Or even worse, the employee will be the first to be fired if there is a business restructuring.

Partnership Track Positions

Partnership track positions usually pay a lower amount at the beginning than an employed position until you make a “partner.” A partnership track employee can make a substantially different income than a permanent employee. Many starting radiologists do not understand this concept, but it makes a lot of sense. You are paying for the equity/ownership of the partnership in two ways.

Sweat equity

First, there is a concept called “sweat equity.” “Sweat equity’ is essentially a time commitment. This process can last almost any time interval. Most practices have a partnership track period that can last anywhere from almost immediately (in the early 2000s, I knew one fellow offered immediate partnership before finishing fellowship!) to 10 years.

Time to partnership varies depending on multiple factors. First and foremost, these include location. The more desirable the area, the more competitive the partnership spots. And, the more years to partner the practice will charge the partnership track radiologist. Additionally, the time to partnership can be longer if you own equipment, real estate, and other assets. That makes sense because to pay for that share in the partnership, you need to put in more “sweat equity.” Finally, market conditions also affect time until a partnership. Suppose numerous radiologists are looking for partnership positions. In that case, the practice will charge a more extended period of “sweat equity” because of the high demand for a job and willingness of the partnership track position “to pay” for it.

Buy-ins

Second, many practices expect the partnership track employees to buy-in monetarily to the radiology business at the end of the partnership track term. This buy-in may be related to the accounts receivable and the owned assets of the practice. Furthermore, buy-ins can range from a nominal amount to over a million dollars, depending on the assets owned. It can be paid for directly, by a loan, or by increased “sweat equity.” The amount of buy-in can be a critical factor in selecting a partnership track position.

Practice building

Practices also expect partnership track employees to be involved in practice building. You will not just perform your daily duties as a radiologist, but you will be assisting and learning to accomplish other tasks outside of the normal radiologist purview. You may involve yourself with hospital committees, giving grand rounds, attending events outside regular business hours, and other important “non-radiologist” functions. These events are essential training for the partnership track radiologist to learn the business roles of the partner.

Partnership- Not An Obligation

The applicant needs to remember: Practice partners usually do not want to create a partnership position!!! Why? It’s pretty simple. It dilutes the preexisting partners’ equity (meaning that each partner will get a smaller share of the profits). There has to be a significant need to create a partner. These issues include lack of coverage in a particular subspecialty, need for more practice managers, etc. There is no such thing as an entitlement to a new partnership track position. Also, be prepared to work hard to gain a share of the partnership for that period.

What about the Partners?

Usually, practices pay partners a fixed salary. However, they earn a substantial portion of their income from the practice’s excess profits, usually a bonus. Usually, you expect the compensation of the partner to be higher than that of the employee. Why? Partners assume the risk of the practice and also manage practice issues. If reimbursement decreases, partners are affected first. If there is a loss of an employee, the partner needs to cover that position. Or, if there is a lawsuit against the practice, partners need to manage the subsequent issues.

However, the difference in salary between a partner and a non-partner can vary widely depending on the profitability of the practice. Therefore, it behooves the applicant radiologist to determine what the partners are making before joining the practice. You need to “check the books” or talk to the business manager. You certainly do not want to go through the process of “sweat equity” only to find out that your final income is not much different from your partnership track salary.

Does It Make Sense To Be On A Partnership Track?

Believe it or not, there is no quick answer to this question. It all depends on the individual situation and the job. There are also inherent risks to taking a partnership track position versus a permanently employed position. So, let’s evaluate each piece of this equation individually with different questions.

Are you the sort of person that likes running the show, or do you just want to do your work and go home?

A partnership track individual needs to be interested in business and practice building. There is no room for a partner who does not have any interest in building the practice outside regular business hours or is unwilling to perform different roles during the workday outside the normal radiology purview.

Is the job something temporary for you, or do you want this job to be permanent?

It would be best if you did not put “sweat equity” into a job where you think you will be leaving in several years to be closer to family or other needs. Generally, imaging centers will pay less for a partnership position. So, it’s just not worth it. Or maybe, you just need a position, but the practice job description is not exactly optimal, but it is the only thing available in your desired location. In this case, you may also decide a partnership track is not the correct decision. For example, you don’t want to be practicing women’s radiology when your only desire is to be an interventionist!

What is the current business environment in your location?

In some practice locations, hospitals are converting private practice jobs to employed positions due to mergers and acquisitions. You do not want to be stuck in a partnership track, only to find out that there is no partnership position at the end of the road. You may never make the “partnership” salary, or even worse, you may be out of a job. Remember, in a situation like this: employees are the first to go.

Have multiple recent retirees received buyouts?

First of all, what is a buyout? It is essentially the opposite of the buy-in. A partner that steps down expects to get the equity back that he put into the practice. Every once in a while, a practice may have many former partners retiring with enormous buyouts. Large buyouts can affect the partners’ salaries dramatically depending on the circumstances. It would help if you looked into all the specifics for yourself.

Is there a tiered partnership?

Some partnerships have separate buy-ins for the professional portion of the practice and the practice’s technical ownership. Others may give you only a small percentage of ownership compared to a “full partner.” You may become a partner one day. But, the partnership may not be what you thought it would be. Some practices are more equal than others!!! It is imperative to get all the facts correct before starting that partnership track.

Should Student Loans Affect The Decision To Be On A Partnership Track? 

I will try to tackle this question separately from all the others because it is becoming an important issue for residents/fellows before the partnership decision, given their enormous loan burdens. The difference between an employed position and a partnership track position can also seem substantial at the beginning. It may or may not be more financially savvy to take the initially lower-paying partnership track job. Here’s where it is vital to try to glean the specifics of your future career. And, this decision can be complicated. You have to plug in the numbers for yourself and make the calculations. To show you, we will take a specific circumstance under consideration. I will give you the example below.

Here are the inputs:
  1. You owe 500000 dollars on student loans.
  2. Student loan interest and long-term investment returns are both 6%
  3. The partnership track lasts three years.
  4. The difference between the salary of a partner and an employee is 150000 dollars.
  5. A permanent employee makes 100000 dollars more per year on average than the partnership track position during the partnership track term.
The calculation:

Theoretically, the salary difference can go to student loan payments if you are in a permanently employed position at the beginning. So, after taxes, you will have 66,000 dollars (100,000 dollars *0.66) per year or about 200,000 dollars (66,000 dollars x 3 years) more principal paid toward the student loans at the end of three years. Given that the loan’s interest rate and that the money you will make after you pay the loan is 6 percent, for a 30-year career, that same amount is equivalent to saving 200000 *1.06^30 or approximately 1.15 million dollars.

On the other hand, if you decide to take the partnership track, you lost out on the 1.15 million dollars you would have made if you were an employee. But, how much more, in the end, will you make to compensate for those years of “sweat equity”? So, let’s subtract the salary difference between a partner and a non-partner and take the taxes out every year. That number would be (150,000 dollars* 66 percent) or 100,000 dollars. Let’s take that 100000 dollars and multiply it by the number of years worked. That number would be 100,000 dollars *27 years (30 years of working minus three years of making less than an employee) or 2.7 million dollars. This number does not even include interest!! In this case, it would certainly make financial sense for the applicant to take a partnership track position.

The bottom line: you need to perform the calculations for yourself. It may make financial sense to take the partnership track position even though the initial salary is less than the permanent employee.

Bottom Line

The decision to become a partner vs. a permanent employee may not be simple due to the applicant’s personality, job-related factors, and monetary considerations. If you are thinking about the partnership route, make sure to know your role and get as much information/specifics as possible so you can leap. A partnership is a long-term decision, just like a marriage. Know what you are getting into!!!!

Please leave in comments below. I would love to hear from you!!!

 

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Investments vs. Savings- A Resident’s Guide- Part 2

As a reminder, last week we went through the difference between savings and investments and talked about why the difference is so important with examples of using savings as an investment and investments as savings as a resident. We also discussed many different ways to put money away for savings. This is all encompassed in the first part of the this series called Investments vs. Savings- A Resident’s Guide- Part 1. Please refer back to this article if you want to review these important concepts. Today, we are going to discuss what many residents are more excited about- what are the common options available for investing money as a resident? In particular, we will emphasize the usual individual types of investments available (stocks, bonds, mutual funds, and ETFs). This post is not going to include other sorts of alternative investments such as peer-peer lending, real estate, MLPs, etc.  Also, I am not going to discuss the  different overarching account types (IRAs, brokerage accounts, 401k, etc.). Both of these latter topics are grounds for another discussion as a full blown article at a later point!!!

To make it easier to follow, I will divide the investment types into the following categories: stocks and bonds. I will give examples of each and examine which places are good places to park your money as a radiology resident. Let’s start with the best place to put your money for most residents: stocks.

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Investments vs. Savings- A Resident Guide- Part 1

The distinction between investing and savings is not trivial. It can lead to the loss of thousands of dollars if the two ideas are misused or confused. Since most residents do not have business backgrounds, I’m pretty sure there is a high percentage of radiology residents that do not understand the difference between investments and savings. So, I am going to simply define each, show why it is so important to understand the distinction, and then go into more detail about what constitutes savings. Due to time constraints, I will leave a full investigation of types of investments and how to invest in another blog. (Let’s make it part 2!!!)

 

Savings vs. Investment Definition

First off, the definitions. Savings are short-term instruments for keeping/holding onto money, usually for less than 5  years. Investments are long-term instruments for creating wealth.

Why is this the distinction so important? If you are putting investment money into savings, you are losing out on the opportunity cost of making high interest/capital appreciation on your money. Likewise, if you are putting savings money into investments, you are substantially increasing your risk on money that you need, or risking the need for capital preservation.

What can happen if you treat an investment as savings?

Let’s start with a thought experiment: putting investment money into savings. Imagine you have 1,000 dollars that you can afford to put away for a long period of time. Logically, what is the safest way to utilize this money? Many would say put it in an FDIC insured bank account, possibly a certificate of deposit. Wrong, wrong, wrong!!! In fact, the risks to this money become substantial.

What can you get on a 5 year CD? Maybe 2 percent, if lucky.  Now, what is the current inflation rate? It is about 1.86%. (There is handy calculator called the CPI calculator that you can use to calculate the yearly inflation rate). So, you decide to put the 1000 dollars into a 5 year CD. At the end of 5 years, you collect the interest which is 1000 * (1.02^5-1) or about 104 dollars. But wait. The government has to take its fair share of the interest with taxes. Taxes on interest are pretty much the same as your regular income taxes. So, let’s say you are in the 25% tax bracket and you have a 3% state tax on interest, you are now left with 104*(1-(0.25+0.03) or around 75 dollars. So, you have 1000+75 or 1075 dollars after taxes and interest. However, what is 1075 really worth 5 years later? Here, we need to take the prevailing cpi number (for simplicity sake we will assume it is 1.86% each year, the current cpi rate). So we take the 1075 dollars and divide that by the following number- 1.0186^5,  or 1.097, the total effect of inflation over 5 years. So how much is the 1075 dollars in 5 years be worth in present dollars- that would 1075/1.097 or 980 dollars. Think about it. The 1000 dollars that you put into the 5-year cd is really worth only 980 dollars when you take it out. That’s a really raw deal. Your money will be guaranteed to be eaten up by taxes and inflation in this low-interest environment over a long period of time. Don’t put your investment money into savings!

What can happen if you treat savings as an investment?

Alright, let’s take the opposite situation. You have a 12-year-old car that is on it’s last 10-20 thousand miles. You decide to take that 1000 dollars and put it into an S & P index fund. And, you intend to save for a car over the next three years when you think you will need one. It happens to be the year 2006. What happened to the S & P index fund between Jan 1, 2006 and Jan 1, 2009? It fell by 35%. And, you need that money to afford to buy a car in 2009. So, now you only have 1000*(1 -0.35) or 650 dollars in 2009. You may now not be able to afford to buy the car you wanted. Even worse, you may have to take that 650 dollars and use it to buy your car. Think about it. Subsequently, in the period of time afterward from 2009-2016, the stock market went up about 158 percent. That same original 1000 dollars you would have put into the index fund would have been worth over 68% more in 2016 or (1.68*1000) 1680 dollars if you kept it invested. Or that 650 dollars that you used in 2009 would have been worth 1680 dollars in 2016. Hmmm… 650 dollars vs. 1680 dollars only 7 years later, a striking difference.

The problem is you need to use your savings when you need to use your savings. You have little control over timing. Often times, you will wind up selling your investment at a low point, meaning that you will lose the potential capital appreciation of your initial investment. Any money that you need over the short term should not be placed in an instrument with significant risk. Never put your short-term savings into an investment!

Types of Savings

So now you understand why it is important not to take too many risks with your money for short-term needs. But, there are many options. For the uninitiated, this can seem daunting. I think of it as a multilayered approach. Let’s put the type of savings into two different types of buckets: money you may need for something immediately (100 percent liquid savings) and money you don’t need immediately but you will need in the short term future (up to 5 years later).

Liquid Savings Accounts

Which savings instruments are 100 percent liquid? Checking accounts, money market accounts, FDIC insured savings accounts, and money market funds,

I will begin with checking accounts, probably the most familiar. You can establish a checking account at almost any bank or credit union, online or in person. And, you probably have one already. It usually issues almost no interest but allows instant access anytime. I personally have a checking account with a local branch, but an online checking account is likely ok for most people.

Money market funds are safe heavily diversified accounts that invest in large numbers of short-term notes that usually return a nominal amount of interest. They are common at brokerage houses. Some allow you to write checks on the account. They are a good place to park cash temporarily, often as an instrument to buy investments at some point. But, it is safe enough to be considered 100 percent liquid and a savings instrument.

Money market accounts are available at banks and usually also allow instant access to your money, but for a limited number of times per month. You can typically write checks on the account. The advantage of this account: they usually provide a higher interest rate than a checking account and it is also FDIC insured. I would tend to put money in this account for less frequent and larger expenses. Also, if someone steals your checking account information, it provides an additional level of security. Not all of your money will be at the most readily accessible checking account.

And, there are FDIC insured savings accounts. They are very similar to money market accounts but usually don’t allow direct checks against them. You can move money instantaneously in and out of them electronically. Similar to money market accounts, they provide a higher level of interest. I personally recommend looking into online savings accounts because they tend to issue a higher interest rate because these online banks don’t have the fixed costs of local branches. This sort of account can be used to save for short-term larger purchases.

Less Liquid Savings Options

Let’s say you don’t need instant access to your money, but you do need it sometime in the near future. These options provide a slightly higher interest rate with the main intention of capital preservation and not capital appreciation. Remember, these savings instruments should not be seen as means to make tons of money, but rather a means to be able to pay for important/necessary expenses. Many residents have not had much experience with these options. Nonetheless, they are really important to understand. What are some of these options? The main ones are bank CDs, brokerage CDs, short-term Treasuries, “investment grade” short-term municipal bonds, and “investment grade” short-term corporate bonds.

So let’s talk about bank CDs first. The type of bank CDs I am talking about are FDIC insured bank CDs only. These CDs guarantee a fixed interest yearly interest rate for the duration of the time of the CD. You can use the principal and interest without penalty when the bank CD comes due. If you decide to cash in the CD prior to the due date, there is an often an interest penalty that can vary with the bank offering the CD. Bank CDs often range from 3 months to 10 years and beyond. I would recommend using bank CDs in the range of 1 to 5 years. Why? Simply because very short-term bank CDs less than 1 year tend to offer lower interest rates than savings accounts and money market accounts with less liquidity. Bank CDs greater than 5 years break the golden rule of using a savings account as an investment account. Why? Because a CD tends to provide a much lower interest rate than what you can make in an investment.

Bank CDs are very useful for saving for items or events that you will definitely not need until a specified date since they offer a slightly higher interest rate than the standard savings account. You can also use them as a back up to an emergency account. It can be a place where you can save additional money with minimal penalty, if needed, with a higher interest rate.

I would also like to mention brokerage CDs as a similar sort of savings instrument. These CDs operate in a very similar fashion to a bank CD. The big difference is that you can buy these CDs at a brokerage and collect many different CDs from many different banks in one place. These CDs are very good for people that need a large amount of liquid money and don’t want to have to worry about FDIC insurance limits for their money (250000 dollars- Not something for a typical resident to worry about!!!) You can also buy and sell the CDs prior to the due date at a loss or gain depending upon the changes in prevailing interest rates, something that you can’t do easily with a bank CD.

Short term treasury notes are also another option as a safe short-term savings mechanism. The going interest rate at the present time is 1.31 percent for a five-year treasury as of the date that the article is written. This interest rate tends to be somewhat lower than what you can get in an FDIC insured CD. So, I tend not to recommend them. But, it is also backed by the full faith of United States government and is unlikely to default. It is surely a safe means of capital preservation.

The final two less liquid savings options are closer to a hybrid between savings and investments since there is a slightly higher risk of default (meaning there is a theoretical risk that you won’t get all your money back). These include investment grade short-term municipal bonds and corporate bonds.

For the typical radiology resident, municipal bonds are not the greatest deal because they tend to issue a lower interest rate than the other savings interest rates. Moreover,  you do not get the big benefit of the municipal bond, the ability of the instrument to be free from federal taxes. Most residents are in either the 15 or 25 percent federal tax bracket, so the advantage of buying these instruments is typically not there. You really need to be in higher tax brackets (above 35 percent) to take advantage of this instrument. At the current time, the median yield on a 5-year municipal bond ranges from 1.1-1.4 percent depending on the investment quality. If you figure, that the true interest rate including the tax benefit is somewhere around (1.1/0.85 to 1.4/0.75) or 1.29 to 1.86 percent, depending on the bond and your tax rate, there is not much benefit to this sort of bond and it has a very low but real risk of default.

Investment grade corporate bonds can be another interesting way to save money for a fixed period of time. The interest rates at the current time may be a touch higher than the typical high-interest bank CD. However, again there is a real but remote risk of a short-term high-quality company default. I would not recommend it at the current time.

Finally, I would briefly like to mention that there is also the option of short-term bond funds. The reason I don’t like this option for savings is that there is a real risk of loss of principal (albeit not by that much typically), breaking the rule of using savings as an investment.

The Bottom Line

The biggest take-home point is to remember savings are not investments and investments are not savings. Severe damage to your financial life can occur if you break this cardinal rule, even as a resident.

Also, there are multiple ways that you can put money into savings. For most residents, a checking account, money market account, and/or saving account make a lot of sense for the most liquid needs. In addition, I would recommend bank or brokerage CDs to those residents that don’t need their savings for a slightly longer period of time (between 1-5 years) and want to accumulate a slightly higher interest rate.

Well, that’s about it for a summary of pitfalls of savings vs. investments, and the basics of savings instrument. See you back here in a little while for part 2- Investments!!!

 

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I’m Just A Resident- Should I Really Start Saving For Retirement?

retirement

You’ve just started collecting your first few paychecks or are a more seasoned 3rd or 4th-year resident. Either way, you may think, I only have 50 dollars left over at the end of the month after paying off student loan interest, putting money into an emergency account, and paying off all my expenses. It’s only 50 dollars- Does it matter if I save it or spend it on dinner, drinks, or movies? If you have that thought process month after month, you will seriously damage your future retirement net worth. Let’s run through some calculations.

The Basics of Compounding at Different Ages

Compounding at 26 years old

So let’s assume you are beginning residency and you are 26 years old. And let’s say you will also be working until you are 70. That gives you somewhere around 45 years of working life. Let’s estimate that you can average 8 percent per year in your investments (the stock market has given back close to 10 percent returns over the past century!) So based on the 8% yearly return, your 50 dollars would be worth (50*1.08^45) or 1596 dollars at retirement. Of course, some of that money would erode due to inflation.

Now let’s assume inflation is going to run at 2.5%. That means that the 1596 dollars would erode from inflation and be worth (1596/1.025^45) or the equivalent of 525 dollars in today’s dollars after inflation. So, think about it… For every 50 dollars you spend, you use 525 dollars in “future money” when you are 70 years old. Do you believe that a meal with drinks is worth 525 dollars?

Let’s think about these calculations a little bit deeper. Say you put away those 50 dollars each month for your entire first year of work. That would be 50 x 12 or 600 dollars saved for this year when you are 26. Or, approximately 6,300 “future 70-year-old you” dollars saved (525 dollars x 12) after inflation.

Compounding at 50 years old

How long would it take to save the same amount of money at 50 years old (peak earnings age) at 50 dollars per month? It would be the following calculation for seven years of savings:

600+ (600*1.08/1.025)+ (600*1.08^2/1.025^2)+(600*1.08^3/1.025^3)+ (600*1.08^4/1.025^4) + (600*1.08^5/1.025^5) +(600*1.08^6/1.025^6) +(600*1.08^7/1.025^7) or 5823 dollars after 7 years.

If you add another year of saving at 50 dollars per month, you come up with an additional (600*1.08^8/1.025^8) for a total of 6734 dollars at eight years.

In other words, you would need to save for 7-8 years at 50 dollars per month when you are 50 to come up with an approximate total of 6,300 dollars of future money. This total compares to the spry age of 26 when you only need to save 50 dollars for one year to come up with the same amount at 70.

What does this all mean for you?

So, the bottom line is that even though you will be making a lot more in the future, your future dollars are nowhere near as powerful as today’s dollars. You may be making ten times as many dollars, but each dollar earned will be 7-8 times less potent. This power of compounding is a good reason alone to start investing today.

Another Reason Why Investing is So Important Now- Moderate Prevailing Interest Rates

It turns out that interest rates have significantly improved in the year 2023. But, there is no guarantee that interest rates will return to 8,9 percent or higher for a very long time. So in retirement, you need a significantly larger nest egg than you would have required 30 or more years ago when interest rates were at that level. Today, you can get a maximum “safe” interest rate of 4.5-5% on instruments such as municipal bonds. And the 30-year treasury bond, another safe investment, yields close to 4%. So, if you want a guaranteed income when you get older, you may need to save twice or three times as many years ago when the same interest rates would have been 8,9 percent or more.

Think of it this way- today, you have a million dollars, and you only collect 40 thousand dollars annually. Thirty years ago, with that same million dollars collecting interest at 10 percent, you would have had a hundred thousand dollars yearly. That’s a significant difference in the potential quality of retirement. It behooves all of us in 2023 to become conscientious savers/investors.

The Importance of Basic Investing Habits for Retirement

I would also argue that, as human beings, we tend to do many things habitually. We brush our teeth, go to work, shower, etc. If you don’t develop those habits early, they may never become part of your routine. I would say the same idea goes for putting away monthly investment money.

Those radiology residents who don’t start investing every month early in their career are much less likely to do the same when they are further on. You are likely to want to spend without thinking about the possibility of your future if it is not a habit. Also, you need to develop a comfort level with how to invest. If you don’t start, you will not know the basics and be less likely to contribute. And most importantly, believe it or not. We can’t work forever!!! Who knows how much the Social Security trust fund will leave you when you retire?

What’s the Upshot?

So, the crucial factors of compounding and low prevailing interest rates are important reasons to start saving that extra 50 dollars or whatever you have at the end of the month in an investment account. Start making a concerted effort to plug away at your retirement account. Eventually, investing monthly for the rest of your life will become a habit, and you will feel comfortable doing so. It’s not just 50 dollars per month or 600 dollars per year. It’s a lovely gift of 6300 dollars yearly for your 70-year-old birthday, not just chump change. For your sake and for your retirement’s sake, start putting away money for investment, no matter how small, right now!!!

If you have any comments or questions, please reply below.

 

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Clinton or Trump- How Will Each One Affect My Finances As A Radiologist?

The first debates between the two candidates just passed with much fanfare. Lots of yelling and screaming. But what does it really mean in a practical sense? Since radiology residents have a long career ahead of them, I started thinking about how each candidate’s policies will affect the financial status of radiology practices over the short and long term, if enacted. In a real sense, these policies are likely going to be altered due to the congressional makeup. If Hillary Clinton gets elected, it is likely that anything she tries to pass through congress will be blocked by a republican congress. On the other hand, Donald Trump is likely going to have difficulty pushing through his agenda with all of the political interests out there. Even so, I went to their websites: Hillary Clinton and Donald Trump. I then extracted the most salient health care policies and imagined what they would do to radiology if they had full control of their health care policy without the interference of Congress. So, here is a list of some of their most important health care policies. I will evaluate which policy would be more helpful over the short and long term for each candidate and assign a point to the winner of each. Whoever has the most points wins! Let’s get started…

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