Tag: Finance

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What To Do With A Large Windfall During Residency

windfall

You may think it is just a pipe dream, getting an unforeseen large windfall. (and I’ve spoken about small windfalls before). Nevertheless, throughout my years of stewardship in the residency program, I have encountered a few residents who have had a significant life-changing amount of money fall into their hands. Some with cryptocurrency, others with family inheritance, and others with a stock pick that rose much more than expected. So, what is the best way to deal with a substantial windfall like this? OK. It might not happen to you. But it still occurs more often than you might think. And, if it doesn’t happen to you, it is still fun to mull over. So, let’s talk about some general advice about what to do with a windfall.

Give The Large Windfall A Little Bit Of Time To Sink In

In general, when you receive a windfall of a significant amount, your first thought is to do something immediately with the cash hoard. But your brain needs to catch up a bit with the reality of the situation. Typically, it would help if you waited a bit until the initial circumstances of the windfall had settled out. When it comes to money, emotion can interfere with the best and most rational choices that we need to make. So, give it some time. Waiting a bit won’t cause that much harm (just a little bit of a loss to inflation). But the opportunity cost of doing something rash with the money is much worse!

It’s Not All Or Nothing!

Just like you don’t want to put all your money on 00 on a roulette wheel (you will lose much more often than you will win!), don’t put all your money into one financial basket. Diversification is the name of the game. And you may want to consider not putting it all into one debt repayment or investment. Consider spreading out your newfound fortune on a host of different opportunities. It’s tough to predict the future. So, you are generally better off spreading your money into multiple options.

Consider Repayment Of Debt/Student Loans

Although many of your student loans are at low interest (or 0 interest rate currently), you should consider putting a large chunk of your fortune into your student loans. Why even at these interest rates? Well, there is always a risk that you may not be able to complete a residency, or an unforeseen event can happen that can prevent you from paying them back when the interest returns to normal. And student loans are generally not dischargeable in bankruptcy. So, taking these risks off the table is enormous. Furthermore, the peace of mind of knowing that your student loans are significantly smaller or even gone is priceless.

Savings/Investments

In addition to student loans, also consider putting some money away for a rainy day. Some good options you might want to consider as a low-paid resident will be an emergency fund for savings, a Roth IRA, or a hospital 401k if there is a match. And try not to buy individual stocks or bonds. That situation can lead you to a very undiversified state that can lose all your hard-earned money.

Other Depreciating Assets

Finally, if you still have some money left over, there is nothing wrong with a bit of enjoyment in your life. Just beware of taking too much to buy things like cars, boats, planes, or whatever else floats your boat. You may regret it later on. I recommend using no more than 10 percent for personal enjoyment related to these items. Otherwise, there is a good chance that you will regret any rash decisions you make for your future self!

Let A Large Windfall Be A Blessing!

Whatever the reason for the windfall, it is your opportunity to make it into a blessing instead of a curse. It’s an opportunity to make your life better and your future self happier. So, give it some time to sink in; don’t spend it all on one thing; consider repayment of debt/student loans, and enjoy a bit of it. Following these rules will make that obscene sum of money into something more than just a number. Grandma would be proud!

 

 

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Should You Pull The Trigger In This Housing Market?

housing market

Lately, I have been speaking to some younger radiologists about what to do in this housing market. Interest rates are climbing. With that, housing prices continue to rise, making homeownership even more expensive. Moreover, many folks want to start a family in a “big-enough” house to meet their needs. But, monthly payments are climbing higher and higher to pay off a 15 or 30-year mortgage. Is it worthwhile to wait, or should you jump right into the housing market? Let’s discuss some of the benefits and disadvantages of delaying vs. waiting so you can make the right decision for yourself.

Reasons Why Buying A Home May Not Make Sense In This Housing Market

You Are Not A Partner Or Tenured Attending Yet

This rule works. You never know for sure what will happen before you can claim the status of a shareholder or partner. I know countless stories of folks buying their houses only to discover that they did not receive their vaunted position. Some, then, feel the need to leave. And, with that, you will probably have to sell your house. Rarely, when this happens, do you make money on the transaction because of all the fees and taxes that you will pay with little or no equity. Even worse, if the market turns bad for sellers, you may not be able to sell your house. So, regardless of the interest or economy, it is usually not in your best interest before you know you will stay in the area.

Higher Payments And Not Enough Down Payment For This Housing Market

Getting a mortgage below three percent in the current mortgage market will no longer happen. So, you can expect your payments to be a lot higher than they would have been just a few months ago. This situation is especially true when you have not built up enough downpayment. So, if you don’t have the cash to make the new payments based on higher mortgage interest, don’t purchase the property. You will become “house poor.” And you will not be able to build wealth so quickly outside of your house.

You May Need To Move Again

Maybe you are thinking about changing jobs. Or, you are thinking about buying a house for your current family, but you are about to give birth to a set of twins. If you have a good chance that you will have to move soon after purchasing your house, it is better to delay the purchase until you know what you will need. Transaction costs and taxes for buying and selling real estate are prohibitively expensive. Moreover, these costs don’t even include the hassle of moving and purchasing a place twice. So, if you need to move soon, you are better off waiting until you know what you want!

Renting Can Be Cheaper Than Owning In This Housing Market

In some situations, renting can be a better and less expensive option than owning a place. In high cost of living areas, especially, buying a home can be unaffordable. Mortgage payments can dwarf what you would pay for a monthly rental. But, you need to do the math to see if it works out this way.

Reasons Why Buying A House Now May Not Be So Bad In This Housing Market

Just Because Interest Rates Are Rising Doesn’t Mean Housing Prices Will Fall

Sure, rising interest rates can affect the demand for housing. However, historically speaking, many periods of rising interest rates have not included a time of declining prices. And that is because housing prices are subject to many other factors such as availability, demand, employment in the neighborhood, and more. So, if you buy a house now, it does not necessarily mean you will lose your shirt even though you are paying more for the house and the mortgage interest.

Yes, Interest Rates May Go Down After Going Up- You Can Refinance!

Just because interest rates are high now does not mean that they will remain the same forever. Remember, buying a house is a long-term purchase, and you will likely own it through higher and lower interest rate environments. So, you may have the opportunity to decrease the interest you pay later. The longer you hold on to your house, the more likely that this situation will happen to you.

You Need A Place To Live- So Why Not Build Equity?

Perhaps, you have a family and need a decent-sized place to live now. Sure, you could find a rental now. However, if you have a stable situation, it may pay to build equity in a house. Of course, that assumes that you have saved up for an emergency fund, home down payment, and paid off a significant chunk of your loans. But why not build roots and own something if it makes sense?

You Are In A Stable Situation

Maybe you have become a partner or have loads of family around, and you know that you will be around for a very long time. The longer you stay in one place, the more likely you will ride out any downturns in the housing market. And the more likely that you will come out ahead when you finally decide to move.

Should You Pull The Trigger In This Housing Market?

Waiting to buy a house or purchasing a home is a personal decision based on many factors, some of which I have listed above. So, consider the amount you have saved, your job situation, your family, and the deal you will get when making this decision. Currently, buying a house is not a simple decision as interest rates and prices are relatively higher, but it can make sense!

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New Tax Laws Cancelling The Backdoor Roth IRA- A Major Loss For Radiology Residents!

backdoor roth IRA

Debt, burnout, declining reimbursements are some of the issues new radiologists need to face. But, yes, the hits keep on coming. Now, new radiologists also have to contend with a potential loss of the Backdoor Roth IRA. Again your future has just become murkier.

Right now, in Congress, Senators and representatives are duking it out over taxes and how to raise money for a multi-trillion-dollar spending bill. One of the line items on the agenda is the cancellation of the Backdoor Roth IRA, as the public perceives it as a tool for the rich to save on taxes. So, what exactly is a Backdoor Roth IRA, and how will this affect you? And, most importantly, what you can do to help to stop it.

What Is A Backdoor Roth IRA?

Let’s first start with what a Roth IRA is. A Roth IRA, which many of you know, is a post-tax account that accumulates tax-free for the rest of your life. Most residents should put as much into this account right now while they have a low salary and are underneath the income limits. The Roth account allows any future earning on this money to grow tax-free in perpetuity, even when your income climbs as an attending.

A Backdoor Roth IRA is also a Roth IRA. But most radiologists cannot put money into a Roth IRA directly because there are income limitations (you need to make below 140,000 as a single filer and 208,000 as a married filer in 2021). 

However, there has been a loophole. Any high-income earner can first put money into a Traditional nondeductible IRA and immediately convert it to a Roth IRA. Now, you essentially have the same Roth IRA as any earner below the limits has. 

Why Is/Was It Such A Great Option For Radiologists?

I have been using this savings vehicle since we were allowed to start in 2010. It has allowed for outsized tax-free earnings on money that I have put in the account. Not having this account would have significantly negatively impacted my savings. It is truly one of the last tax breaks for high-earning professionals like radiologists.

Because of the power of compounding, the younger you are, the more beneficial the account is. So, any resident should be concerned about Congress eliminating this Backdoor Roth IRA because it impacts you more than someone like me who has already been depositing into this account for years.

Moreover, you never had to pay another dime of taxes on the money you put inside the account. Granted, at present, it is only 6000 dollars per individual or 12,000 dollars for a couple. But, that number rapidly increases over time with the tax-free earnings and rising yearly contributions pegged to inflation. Over the long run, it was an excellent tool for avoiding tax drag on your accounts.

Finally, some radiologists may be in a high tax bracket when they retire because they may have most of their savings in 401k type accounts. It allowed for some money not to be taxed and hedged your bet about future taxes and earnings on your withdrawals.

What Can You Do Prevent Congress From Cancelling The Backdoor Roth IRA?

Every radiology resident should be writing to their congressman and asking them to refrain from canceling the bill. You have so much debt. You don’t start earning real money until late in life. And, you have been taking on the burden of Covid. I see this as a stab in the back for all future high-earning physicians. Of course, radiology residents are not a large bloc of citizens. But, every person counts. So, consider writing to your congressman to add to the lobbying in your congressional districts!

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Will I Be Able To Save Five Million Dollars As A Radiologist With Large Student Loans?

five million

There is something mythical about the number five million dollars. Medscape’s annual net worth survey for physicians uses that barrier as one of the leading wealth accumulation goalposts for their survey and has been doing so for years. The media has created a monicker that they love to use as well called pentamillionaire. And, it is a number that makes sense for those of you that eventually want to retire in today’s dollars.

Imagine. You can reasonably safely withdraw 4 percent of five million dollars per year and have an income of about two hundred thousand dollars while still allowing for capital appreciation. It may not be a king’s ransom in some parts of the country. (California, New York) But, it is undoubtedly a decent nest egg that can allow most folks the ability to live out their years comfortably. This five million dollar number most likely seems very large to those of you in residency that live frugally off of much smaller dollar amounts. But, believe it or not, it will all seem like a lot less when you live like an attending. 

Additionally, inflation will most likely eat into the principal of this dollar amount so that we will account for inflation on that five million dollars in today’s dollars. We will assume an inflation rate of 3 percent to be conservative.

Is It Even Possible To Achieve Five Million Dollars With High Debt Loads On One Radiologist Income?

So, I ask: Is it even possible to save this much with all the student debt you have accumulated and salaries that may not keep up with inflation? Let’s do the calculations for two sorts of residents: Those of you who decide to live in high cost of living areas with significant student debt; those who choose to live in low cost of living areas with considerable student debt. You can skip to the bottom if you want to see the final results. Or, you can peruse all the nitty-gritty details if you are so inclined.

Assumptions For Accumulating Five Million Dollars

We will assume in all cases that you have higher than average debt (400,000 dollars) when you finish residency, that you have a family of four, with a spouse that is taking care of the kids and is not working. We will assume that you want to buy a decent size four-bedroom house in a nice area. Let’s also start with the assumption that you will male the mean income for a radiologist based on the 2021 Medscape compensation survey (413,000). Of course, you can make more or less depending on the practice. But, for simplicity’s sake, we will use this number.

Then we will assume that on average inflation rate is around 3 percent, with a worst-case scenario of radiology salaries that are relatively stagnant due to declining reimbursements. And, we will assume an interest rate on student loans of 4 percent. Finally, we will take that you will put aside a nice chunk of change for each of your kids to go to college (250,000 dollars). Of course, I want to make these circumstances as if you live like an attending instead of a resident. And, then we will go through how long it may take you to accumulate this amount of wealth given your circumstances as a radiologist.

High cost of living areas with significant student debt

Additional numbers for this assumption:

  1. House will cost 1,000,000 dollars with a down payment of 200,000 dollars, saved over your first 5 years of working. (40,000 dollars saved per year)
  2. Student debt will be paid off over 10 years (4049 dollars per month*12 months)= 48,588 per year
  3. Practice puts away 30,000 dollars including match into your 401k starting 1st year
  4. Investment rate of return 8%
  5. Federal Income Taxes after deduction will be 76182 dollars per year based on a calculator
  6. State Income Taxes will be around 6 percent or (413,000*0.06)=24,780 dollars
  7. You have twins beginning at the of your attending work and are putting away 556 dollars per month per kid to get to 250,000 dollars at age 18. (13,344 dollars per year)
  8. Rental of a 3 bedroom house for 5 years at 4000 dollars per month

First 5 years

Total Salary 413000

Expenses

401k: 30,000 (383000 left)

Taxes : 76182 (Federal) + 20290 (State) (286528 left)

Loan payments and house savings and children 529 plan: 48,588 (student loans) + 40,000 (house down payment) + 13,344 (529 plan) (184596 left)

Rental/heating/electricity  48,000  (136596 left)

Subtracting food for family 10000 (126596 left)

Transportation expenses 2 cars/insurance 10000 (116596 left)

Vacations 10,000 dollars (106596 left)

Computers/Cellphones/Electronics/Cable Bill 3600  (102996 left)

Preschool/Day Care Expenses for two kids 24,000 (78996 left)

Clothes 5ooo dollars (73996 left)

Life and Disability Insurance  9600 (64396 left)

Dues and License and CME 5000 (59396 left)

Miscellaneous Entertainment  10,000 (49396 or around 50000)

Saved

Remaining available to save around 50000 per year (not including 401k)

30,000 dollars in 401k

Assuming 8% rate of return on 80,000 over 5 years- 469000 dollars in savings

Next 5 years (Own house)

Expenses

401k: 30,000 (383000 left)

Taxes : 76182 (Federal) + 20290 (State) (286528 left)

Loan payments and house savings and children 529 plan: 48,588 (student loans) + 40,000 (house down payment) + 13,344 (529 plan) (184596 left)

Salary after mortgage payments and taxes (800,000 mortgage -30 year fixed at 3.5 percent 3592*12 (141492 left)

Salary after property taxes and insurance 14,400 (127092 left)

Home maintenance= 10000 (117092 left)

Subtracting food for family 10000 (107092 left)

Transportation expenses 2 cars/insurance 10000 (97092 left)

Vacations 10,000 dollars (87092 left)

Computers/Cellphones/Electronics/Cable Bill 3600 (83492 left)

Education and Expenses for two kids 12,000 x2 (59492 left)

Clothes 5000 dollars  (54492 left)

Life and Disability Insurance 9600 dollars 44892

Dues and License and CME (5000 dollars per year)= 39892

Miscellaneous Entertainment (10000 dollars per year)=29892 dollars

Saved

Remaining available to save around 29892 per year (not including 401k)

30,000 dollars in 401k

Assuming 8% rate of return on 59892  over 5 years +469000 in savings= 1040000 dollars

Next 8 years (Student Loans Paid Off)

Savings After Expenses

Savings now 29892+48588 +30000 (401k)=108480 per year

Assuming 8% rate of return on 108480 over 8 years +1040000 in savings= 3080000 dollars

Next 5 Years (No More 529 plans)

Savings now 113480+13344= 121824 per year

Assuming 8% rate of return on 121824 over 5 years +3080000 in savings= 5240000 dollars or 2655000 in today’s dollars with 3 percent inflation

Next 10 years (No More Kid Expenses)

Saving now: 121824+24000= 145824 dollars per year

Assuming 8% rate of return on 145824 over 10 years +5428000 in savings= 13240000 dollars or approximately 5 million in today’s dollars with 3 percent inflation

 

Low cost of living areas with significant student debt

Additional numbers for this assumption:

  1. House will cost 500,000 dollars with a down payment of 100,000 dollars, saved over your first 5 years of working. (20,000 dollars saved per year)
  2. Student debt will be paid off over 10 years (4049 dollars per month*12 months)= 48,588 per year
  3. Practice puts away 30,000 dollars including match into your 401k starting 1st year
  4. Investment rate of return 8%
  5. Federal Income Taxes after deduction will be 76182 dollars per year based on a calculator
  6. State Income Taxes are 0 dollars
  7. You have twins beginning at the of your attending work and are putting away 556 dollars per month per kid to get to 250,000 dollars at age 18. (13,344 dollars per year)
  8. Rental of a 3 bedroom house for 5 years at 2500 dollars per month

First 5 years

Total Salary 413000

Expenses

401k: 30,000 (383000 left)

Taxes : 76182 (Federal) + 0 (State) (306818 left)

Loan payments and house savings and children 529 plan: 48,588 (student loans) + 20,000 (house down payment) + 13,344 (529 plan) (224886 left)

Rental/heating/electricity  30000  (194886 left)

Subtracting food for family 10000 (184886 left)

Transportation expenses 2 cars/insurance 10000 (174886 left)

Vacations 10,000 dollars (164886 left)

Computers/Cellphones/Electronics/Cable Bill 3600  (161286 left)

Preschool/Day Care Expenses for two kids 24,000 (137286 left)

Clothes 5ooo dollars (132286 left)

Life and Disability Insurance  9600 (122686 left)

Dues and License and CME 5000 (117686 left)

Miscellaneous Entertainment  10,000 (107686 left)

Saved

Remaining available to save around 107686 per year (not including 401k)

30,000 dollars in 401k

Assuming 8% rate of return on 137686 over 5 years- 807690 dollars in savings

Next 5 years (Own house)

Expenses

401k: 30,000 (383000 left)

Taxes : 76182 (Federal) + 0 (State) (306818 left)

Loan payments and house savings and children 529 plan: 48,588 (student loans)  + 13,344 (529 plan) (244886 left)

Salary after mortgage payments and taxes (400,000 mortgage -30 year fixed at 3.5 percent 1796*12 (223334 left)

Salary after property taxes and insurance 12000 (211334 left)

Home maintenance= 5000 (206334 left)

Subtracting food for family 10000 (196334 left)

Transportation expenses 2 cars/insurance 10000 (186334 left)

Vacations 10,000 dollars (176334 left)

Computers/Cellphones/Electronics/Cable Bill 3600 (172734 left)

Education and Expenses for two kids 12,000 x2 (148734 left)

Clothes 5000 dollars  (143734 left)

Life and Disability Insurance 9600 dollars (134134 left)

Dues and License and CME 5000 dollars  (129134 left)

Miscellaneous Entertainment  10000 (119134 left)

Saved

Remaining available to save around 119134 per year (not including 401k)

30,000 dollars in 401k

Assuming 8% rate of return on 149134  over 5 years +807690 in savings= 2061000 dollars

Next 8 years (Student Loans Paid Off)

Savings After Expenses

Savings now 119134+48588 +30000 (401k)=197722 dollars per year

Assuming 8% rate of return on 197722 over 8 years +2061000 in savings= 5918000 dollars or 3476201 in today’s dollars

Next 5 Years (No More 529 plans)

Savings now 197722+13344= 211066 per year

Assuming 8% rate of return on 211066 over 5 years +5918000 in savings= 9934000 dollars or 5033000 in today’s dollars with 3 percent inflation

Next 10 years (No More Kid Expenses)- if you were to go past 5,000,000 dollars

Saving now: 211066 +24000= 235066 dollars per year

Assuming 8% rate of return on 235066 over 10 years +9934000 in savings= 24854000 dollars or approximately 9.4 million in today’s dollars with 3 percent inflation

 

Can You Accumulate Five Million Dollars In A High or Low-Cost Area?

The results are stark. Yes, you can accumulate 5 million dollars in a high cost of living area in today’s dollars with high student loan debt if you are willing to wait 33 years based on these numbers. On the other hand, if you decide to live in a low cost of living area, you can expect to accumulate 5 million dollars 10 years earlier. Now, money may not be everything. But, if you decide you want to change your lifestyle earlier than you expect, there will be many more doors accessible to you in your career if you choose to live in a lower-cost area. And, if you wanted to work a whole 33-year career, you would accumulate a large nest egg for your heirs. Something to think about!

 

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Hobbies For The Radiologist: Are They Just A Fling?

hobbies

Yes, I enjoy radiology. But, a whole world of other pursuits awaits me when I finish work. I may write for this website, learn two different languages (Spanish and Hebrew), play guitar, prepare for the next gig, read about finance, or cook. These are just some of the long-term projects and hobbies that I always seem to fall back on. Yet, I understand that not everyone has the time or inclination for my daily rituals. But, maintaining at least one toe outside the field of medicine is necessary nowadays. And, it is not just about making a paper trail for applications to medical school, residency slots, and radiology jobs.

So, what is it about hobbies and long-term projects that enhance my radiology career? Well, there are a whole host of benefits that come with other endeavors that I enjoy. These include looking at radiology with a fresh eye, reminding me that there is more to life than medicine, finding new friends with differing interests, keeping my brain active/enhancing my energy, and enabling me to transition to a post radiology world. And, these passions may also apply to you as well. Let’s explore some of these reasons to establish a hobby now!

Looking At Your Daily Work With A Different Perspective

Hobbies can allow you to look at the world from a different perspective. For example, instead of dreading waiting for a translator to help translate a Spanish-speaking patient, as a time sink, I look forward to interacting with patients who speak Spanish. It is a way for me to get to learn their culture and get more Spanish practice. Or, as if I am working at home, having a guitar on hand as I’m reading some film enables me to play a little bit while I take a short break. All these different hobbies allow me to look at work from a different perspective.

Hobbies Remind You There Is More To Life Than Medicine

As much as I enjoy radiology and medicine, most of us need time apart from the field so that we can go back to it with a fresh eye. Working on outside projects enables you to accomplish just that. It could be a musical ensemble or a trip to a third-world country. Whatever the case may be, you enhance your enthusiasm for your career when you return to work.

Enlarging Your Familiar Circle

Pursuing hobbies outside the field of medicine can allow the added benefit of meeting other people that think and operate differently from yourself. It is a way to expand your inner circle and make new friends. It’s effortless to stagnate and drift inward as a radiologist, especially for those radiologists that tend not to see as many patients. Hobbies can keep you socially active and engaged.

Keeping Your Brain Active

Radiology can indeed be an intellectual pursuit. But, focusing on anything too much can cause a lack of stimulation. When you branch outside of radiology and medicine, it can keep you more excited about learning and reading. And, this is not just about your hobby, but rather anything else that you pursue, including radiology!

Allows You To Eventually Transition To A Semi-Retirement Or Retirement That You Enjoy

This concept may seem a long way off. But, hobbies you establish today will allow you to do other things the day you decide to partially or entirely retire. Few radiologists can work forever (although I do know a few!) Nevertheless, starting some hobby that you love today is more than a fling. It can become a lifelong mission that you can look forward to in your later days.

Hobbies- More Than Just A Fling!

You may think that hobbies should be the last item on your mind when your days are so busy as a trainee. But, starting a hobby now or continuing with projects from your past should become mission-critical. The best radiologists are happy outside the field the medicine as well. So, don’t forget to pursue other hobbies and projects that you enjoy. It will enhance your career and make you more excited about the day-to-day work!

 

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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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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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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.