Summary:
- The Gist Of Employee Benefits [0:01:30]
- Trevor's Thoughts And Opinions [0:03:12]
- Low Paycheck/With Benefits Vs High Paycheck/No Benefits [0:06:38]
- Basic Things To Know Regarding Employee Benefits [0:10:31]
- HSAs Are Awesome! [0:12:12]
- Another Option: Flexible Spending Account (FSA) [0:19:38]
- Retirement Plans: 401(k) vs 403(b) [0:23:04]
- Other Ancillary Benefits: Group Life Insurance [0:34:30]
- General Recommendation: Get Enough Life Insurance Outside Of Work [0:36:48]
- Disability Insurance: Get It As Soon As You Possibly Can While You're Young And Healthy And It's Cheap [0:39:07]
- A Little Tidbit: If You Pay Your Own Personal Disability Insurance, It's Tax-Free Upon Claiming And Collecting Benefits [0:45:13]
Welcome to the Financial MD Show. This is the only podcast designed specifically for residents and young physicians to help you become educated on financial planning for physicians and avoid many of the common financial mistakes doctors make. Your hosts, Jon and Trevor, explore a different topic with each episode. Jon Solitro is a financial planner and certified financial education instructor. He’s been working with young physicians for the better part of the decade and lectures to graduate medical programs around the country. Dr. Trevor Smith is a board-certified ophthalmologist with a full-time practice and he has learned the ins and outs first-hand what it takes to make smart financial decisions as a young physician. And now here’s your hosts, Jon and Trevor.
Jon: Well, I'm excited to dive into today's show. We're going to get caught up with myself and Dr. Smith and go on a very diversified journey into employee benefits with nothing necessarily pre-planned other than our own experiences and opinions and that will be enough to fill an episode. So, how are you Trevor?
Trevor: I'm doing great. I'm excited to learn from you on this topic as well as contribute my biased opinions.
Jon: Okay, great and I will learn something from you as well because I know the house, I guess, but we always learn when we hear other perspectives and I think I know what might be good, bad, valuable, pros, cons to some people but I'd love to hear your take on it, and for those of you that are watching this on YouTube or listening to snippets or checking it out on just the audio podcast, this is the time where you can start to pull up the comments and get some interaction. Let us know what you think, what questions you got, what the heck are some of the things we're talking about, so keep that open. This is not a live show, but we are going to respond to comments as soon as we possibly can, and whether we agree with you or not or have the answer or not, we're going to let you know that. So, employee benefits – what are employee benefits? I'll preface with that and then we can start on a little bit, understanding employee benefits.
The Gist Of Employee Benefits [0:01:30]
So, the gist of it is employee benefits – or you'll also hear the term group benefits, group insurance, group disability, group like whatever all these other kind of things – it basically means an employer has enough people – enough employees – to go and get discount rates on insurance products, get guaranteed insurability on most things, because they have a large enough sample size so they'll get discounts and then they'll also typically pay a portion – not always – and you have to understand throughout this whole conversation that not all employers include any or all the benefits that we talk about. There's no hard and fast rule necessarily until Obamacare and the Affordable Care Act and there were some rules about if you have a certain-sized number of employees, you have to have a certain type of health insurance, etcetera.
Trevor: If I could jump in, just from a higher level like as a potential employer – almost employer – looking at starting my own practice here in Ophthalmology, the ones I hear about are retirement and then there's like the insurances; you're talking about the insurances – life insurance, disability insurance. There's lots more down the line from that. Those are the top – and then health insurance, right. So those are the top three. I just wanted to throw that out there. Those are the main ones people talk about; are interested in. Probably the most common ones would be health insurance and retirement like a 401(k) either access with or without a match. Yeah, just wanted to give those categories for folks.
Jon: That's exactly it. Those are some of the main examples of things that we see. To give us some context for your thoughts and opinions, Trevor, catch us up on what's going on with you right now and that'll help kind of set the table.
Trevor's Thoughts And Opinions [0:03:12]
Trevor: Sure, yeah. So I've been a W-2 employee. I'm an associate ophthalmologist at a small private practice. I've been there for the last nine months. It's been great personally, professionally; learned a lot about myself. I mean, it's not just a job for me. Ophthalmology – my mindset on it has shifted quite a bit in the last couple of years like I really do see it more or less. I wouldn't call it like a calling but like it's a greater purpose for me to go to work. It's impacting the lives of the people around me, both my staff and my patients, and this is where I find myself. I'm kind of in a different headspace and wanting to just be more intentional about the people I'm around. It's made a lot more fun. So, I've been enjoying my work. I'm a W-2; I'm working about 35 hours a week on average so it's not the heaviest, most intense medicine job and then I'm doing a little bit of loc*ms, coming up here too. It helps bump up the income a little bit since I'm working a small amount of full-time. So, I'm wearing the hat of like potential future employer and then I'm also an employee and then I popped around at a couple of private practices which I've talked about in the past previous episodes. I've seen a few different options but, yeah, it's usually for docs that are listening. It's usually, you know, 401(k) with matching that starts about a year into employment. It ranges from 1 percent to maybe 8 percent, it seems like. Kaiser Permanente – I looked at a position there a while ago. You know, some of them they'll bump it up quite a bit more. They're really trying to keep you attached. They're trying to give you golden handcuffs.
Jon: A lot of that golden handcuffs is they'll put a vesting schedule which we can go into but it basically means you don't get to take your match with you if you leave for anywhere between one to five years on a 401(k).
Trevor: And there's nothing inherently wrong with that. It's a great bonus. I mean, you definitely make more per dollar of production, so you're only doing so much work and you get to keep more of the money in that format. If you're like a long-term lifer, you kind of more of a corporate person which you can only find out by experience as a doctor, very few people are like working their way up the ladder and then going to medical school and they're like, 'Oh, I'm a corporate guy.' Maybe some of the military types, that's a nice natural fit. So it's kind of where I'm at. I'm wearing two hats and looking at having at least one employee coming up for at least one of the companies either in Ophthalmology or kind of the Bitcoin business stuff I'm working on. I need more help. I don't have the bandwidth to keep up what I'm doing, if with everything. So, wherever I bring them on, I'm like everybody wants benefits and I want to build a team that wants to stay, right, so I'm not afraid of offering benefits. Not to jump into my hot take too early, but basically, I'm kind of amazed. I think people have read articles online like ask for benefits like benefits are the Holy Grail of employment. I feel like I could offer somebody double what they would actually take home in terms of their benefits and they would turn the job down. Basically, they would take a lower paycheck and the worst benefits versus a higher paycheck and no benefits.
Jon: Why do you think that is? Does it give them some sort of sense?
Low Paycheck/With Benefits Vs High Paycheck/No Benefits [0:06:38]
Trevor: I don't know. I'm curious if you have any thoughts on it because it doesn't make any sense to me but I'm financially literate. I wonder if there's an illiteracy component of they don't know what they don't know and they just kind of heard like you got to get benefits. Benefits is a good job, you know.
Jon: I can see that mantra in America especially from the previous generation; our parents growing up and saying get a job with good benefits or whatever.
Trevor: Right.
Jon: But I think some of the psychology behind it is you get the salary but also when they're doing the recruiting or interviewing, here's this whole list of free stuff that you get, and everybody has free stuff.
Trevor: Yeah, I do think so.
Jon: I think it's some of that like open up a checking account at our bank and you get a free coffee mug.
Trevor: Yeah. So I'm looking at hiring an amazing employee. I'm like super pumped to have heard about him, really well-trained ophthalmology technician who has interests outside of eyes, so I'm really excited and I plan on employing this guy, if possible. He would be better off like I'm going to do the benefits, right. I'm going to give him what he wants because I want to hire him. My goal is having this guy work for me.
Jon: That's the great thing about your first employee is you can just say, 'What kind of benefits do you want?'
Trevor: Yeah, right, it's totally true. I mean, I think with benefits, you have to match like there's no favoritism allowed. I'm sure there's probably ways around this but I'm not aware of what they are. So you have to have the same benefits for yourself now that you have employees. You can be your own employee, somebody else can be your employee, and I'm learning about this so color me naive on the details but you got to share the same thing. S if I want to have a good healthcare plan and I'm hiring him, he gets a good healthcare plan which makes it a little more expensive. I think that's, you know, where it gets tricky and people want to save on stuff. I don't really care. My attitude is if this person is contributing and I'm productive, I will outearn the front-end cost of giving someone what they want. Especially nowadays, it's hard to hire good people. So if you find a good person, you want to make it worth their while, right.
Jon: Yeah, for sure.
Trevor: Yeah, so my observation is like I would love to educate him. I'm like, 'You could be 1099 and then a consultant and then you can write off all your stuff,' but that's me. That's my interest; that's me as an employee, you know. That's not my employees. I want to meet them where they're at and I think that'll be like a 401(k), maybe a match, and figuring that out so I'm hiring a consulting group to help me with a lot of this. When I say I don't know exactly what I'm going to do next, that doesn't mean I have no plan. My plan is it's hire smarter people than me as consultants.
Jon: There you go. That's it.
Trevor: I'll have insights on this that are more detailed in the future but that's my context so far.
Jon: Awesome. So that's kind of the employer side and especially at the starting out point, we don't get to hear that very often. We might hear, 'Here's what we offer.' We might hear, 'Here's what I want.' But it's interesting to hear from your end of the startup, 'Okay, I'm just beginning to think about benefits. I know this guy wants benefits. How do I go about finding those?' And we know we don't have a ton of employers listening to this show. You all are mostly employees. I think the show tends to appeal to residents, young physicians, that are just stuck with whatever benefits they get but quick sidebar: for those of you that are employers or want to be or at 1099, you know, some of these things you kind of got to piece together but there are some firms, groups, that will do everything – the health, the 401(k), the group life, the group disability – kind of do a whole benefits package for you. Let us know. I'm sure we can get referrals for you if you're that person but that's our little business owner corner there.
Basic Things To Know Regarding Employee Benefits [0:10:31]
For most of you getting employee benefits, there's a few basic things to know. Number one, you don't get to decide unless you're so fortunate that you're Trevor's first employee then you do get to pick a little bit but, ultimately, it's up to the business owner, the employer. Let's say, you're at a hospital, it's up to the CEO or the Board or whomever is figuring that out. This is what they have. It applies to pretty much everybody and you have hardly any choice on the matter. Now, they'll give you options sometimes. So, let's take it from the top and the most common being health insurance that might be offered somewhere. There are…often I see two or three – sometimes more – about options of what health insurance you want to take, and without getting too deep into a health insurance segment – we can do that another show – but with health insurance, the first thing you look at is how much does it cost – or the last thing. How much does it cost me? How much is the employer going to cover? The employer may cover some of it or all of it or none of it. Either way, the total cost is going to be cheaper, typically, than if you went out and got it on your own. Of course, there's subsidies and things like that but most of us are not going to qualify for those. Now, you have these options to pick from. They vary in price but they also vary in a couple of things. They vary in deductible, so the amount that you'll have to pay before the insurance kicks in. They vary in copay amount or co-insurance and they vary in out-of-pocket max. So between the deductible and the copay, combine those possibilities together and they give you a worst-case scenario which is called an out-of-pocket max. It's the most that you would have to pay per year no matter what.
HSAs Are Awesome! [0:12:12]
So you look at that number and some of them maybe a PPO which is your pretty standard health insurance or/and within those, you can have an HSA or a high deductible health plan which means you can have a health savings account. What you need to know about that is if you've got a deductible that's over, I think, 1500 dollars – may have changed this year – but you have what's literally technically known as a high deductible health plan which means you can get an HSA with it which, here at Financial MD, we think HSAs are awesome. They're, for all intents and purposes, triple-tax free. They're tax deductible going in so you can tell your company, 'Out of my paycheck, I want a certain amount going into an HSA.' As of this year, the max you can put into an HSA is like 7300 dollars a year, I think.
Trevor: Yeah, for two of you.
Jon: Yeah, for family, and singles like half that. You get that taken out of your paycheck before taxes so it's pre-taxed then what's cool is if you get over 1500, 2000 dollars maybe or something, you can get, for most HSAs, they allow you to pick investments inside of it so then it becomes kind of like this retirement account. So if you really stock that thing full and you don't use much of it, whatever's left over rolls over each year. It's just like an investment account and it grows like a 401(k) and we've helped a lot of our clients pick the investments in their HSA hoping that there'll be money left over in there at the end of the year and grows every year tax-deferred like a 401(k) or an IRA – we've talked about these tax-deferred bucket before – but then as long as you use it for health expenses, your medical expenses, it is tax-free. I talk to our clients about the option of, ʺhey, let's max out this HSA and hope there's money left over and growing every year,ʺ because when you get to retirement – now, you can use it along the way obviously for health care expenses what it's meant for, but if we grow extra in there as well throughout the years, you could have 100,000, 200,000 dollars in here of tax-free money for your healthcare and retirement and we're all going to have a lot of healthcare expenses in retirement, so that gets me excited.
Trevor: The HSA is a fun…it feels like a hack, you know, like a financial hack. It's like a little secret.
Jon: Yeah, I'll be like, ʺhey, do you have access to an HSAʺ, and I've even had some of my high-income surgeons switch their health plan to the HSA option. They pay less monthly premium but the deductible is higher, but the tax savings on that when you're in the 35 percent tax bracket, it's really nice.
Trevor: Yeah, it's awesome. I just switched to an HSA a month ago.
Jon: And you probably got bitcoin, don't you?
Trevor: Yeah, I have Grayscale Bitcoin Trust. That's true, I do. That's always just like arguably the worst investment vehicle of all time.
Jon: Grayscale?
Trevor: I do not even remotely recommend it.
Jon: No? That was my first foray into helping clients into getting some kind of Bitcoin exposure.
Trevor: It's probably better than nothing but, yeah, it's been painful. That's a whole aside but it's a very mismanaged, closed-end trust; rife with controversy as well, so it's not my favorite. But I do own a little tiny, tiny bit.
Jon: Yeah, it's like the easy button and I own some too because I just can't bear to sell it with as much as I've lost over the last two years.
Trevor: That's exactly…I know. It's not my shining example of my investment abilities.
Jon: No, and I mean you've got so many options for doing Bitcoin in an IRA now.
Trevor: Yeah, there's so many companies – Swan Bitcoin which I love; great company, ethical group. They really help people to be educated on Bitcoin even before buying it. I mean, they're not trying to just like make a buck off you and they have an IRA option now too. GBTC, if you Google it, it's a ticker symbol, Grayscale Bitcoin Trust. Really, there's just a lot of articles. They're one of the companies that…with Gemini is owned by the Winklevoss…the Winklevi.
Jon: The Winklevi.
Trevor: It's a pretty well-regulated exchange.
Jon: I agree.
Trevor: I think they disclosed it fairly but like people lent out their digital assets for a yield return.
Jon: Guilty.
Trevor: Oh, yeah. I did temporarily. I pulled mine out. They did a great job. They said like this is being lent out like this is not in our control. I felt like there was full disclosure just like when I put my money in a bank. I'm probably more educated than the average individual for sure just out of my own curiosity but if I did, which I don't, but if I had over 300,000 dollars in the bank in a checking account, I wouldn't expect the FDIC or anybody to cover me for more than 250; that's the rule. So I know that the bank is like a hedge fund that just plays with people's money. I understand I could lose that money if I put it in there which is why I don't. The same thing goes for Gemini. But, anyways, they lent out that money to Genesis Group which they own Grayscale – I don't exactly remember which ones above which one but they're all together. There's a lot of lending that went on and they're the reason lots of things blew up last year; lots of company changes. And FTX, they went to them and it's real sketchy, so I don't love Grayscale but it's hard to get. MicroStrategy is another nice one if you're a stock person or if you're in an HSA. like I use Lively and they connect the TV yeah from my HSA. I use Lively.
Jon: For the HSA?
Trevor: Yeah, from my HSA. I use Lively as the account. Depending on what one you have like it doesn't have to be with your health insurance or with whatever bank they default to, so I use Lively because of ease of transfer to TD Ameritrade to trade within that account. I don't really trade. I just like buy a few things. That's why I'm in Grayscale. I'm basically like just really wanting to make excuses and defend myself for why I own a Grayscale because it's kind of embarrassing.
Jon: That's totally fine. That's what the show is all about. We'll explain what we do and the mistakes we made and we'll try to have links to all this stuff in the show notes too with the disclaimer: Obviously, none of this is financial advice. We're just telling you what we're doing.
Trevor: Yeah, and I'm not a financial advisor so I can't give any anyway. Yeah, basically.
Jon: So that's the HSA; really cool option if you can get it and it makes sense for your tax-bracket income level but I think, you know, when you're looking at health insurance as well, if you've got the option to pick within your employee benefits, you may have preexisting conditions that you'll want to see what's covered and some of the options you've got may cover this and some don't and this particular doctor you like and those are the kind of questions you want to look into. So that's kind of the gist of the health insurance side of things. You got anything to add?
Another Option: Flexible Spending Account (FSA) [0:19:38]
Trevor: No. I think there's the FSA as well which is another spending account. Some accounts have that. It's either or; I don't think there's such thing as an account. I'm not an expert on health insurance by any means but in looking for myself, I don't think they ever occur together. It's FSA or HSA. FSA has to be spent by the end of the year as it currently stands and has been in the past. So that's different than an HSA and I don't think either's in the investment vehicles for that reason with an FSA. Similarly, sometimes with an FSA, you actually get a stipend though like you might get 1000 dollars or something in an FSA account with a certain company. There's no such thing as like a rule where HSA is always the best. The deductible is too high and if you need to use your health insurance a lot, you know, if your employer offers a 6000-dollar deductible or a PPO with just payment as you go – why am I forgetting the term – when you go in and you just pay the doctor a fixed amount…
Jon: A copay?
Trevor: Yes, thank you. I'm a doctor; I should know my copays. I'm just blanking them the term copay. Yeah, so copays can be nice with different plans and then, you know, you don't have as high a deductible and all that kind of stuff. There's different thoughts on that. It's a tough decision because the person who's advising you is often if you're in a small practice, it's just your in-house person that just coordinates with the plan provider. This is where a financial advisor can actually be very helpful if they want to look over your health plans and your utilization of the health plan in the past help you make an informed decision because, maybe, if you're a urologist, it doesn't matter. You're making 700k. If it's 2000 a year or 10,000 a year, you might not really care if you're that guy but if you're making regular doctor money like 220, 250, it can be a huge difference in how much you're putting away into retirement per year.
Jon: Yeah, no, for sure, and if you're asking a financial advisor – I mean, this is general advice – but get a CFP because they're going to be at least educated and trained in insurance and benefits so you should be able to…especially if you're paying them a fee. Take it to them and say, advise me on this as well, assuming they're doing financial planning.
Trevor: Yeah, that's a really good point because like you might have a financial advisor assigned to you or available to you because you work at the hospital and they partner with Northwestern Mutual or something and they're just like assigned to your account like they don't care if they're going to save you some money, you know.
Jon: So that's health insurance. I'll say one last thing on the HSA. The employers sometimes will do – not a match – but they'll put a stipend or a direct contribution into your HSA every year as well, so something to ask, maybe something to negotiate…I don't know. All this comes back to us trying to get you guys to take advantage of free money that's on the table or understand, let's say, you're coming out of residency or fellowship and you're looking at two different job offers that the dollar amounts, the salary, might be the same but the benefits are very different, understand there's value in those benefits and it's all part of the compensation package and so if you are unaware of that, you might be kicking yourself thinking, ʺshoot,ʺ you know, or ʺI thought I took a little bit higher pay in this one,ʺ but it turns out the benefits were so good at the other one they outweighed it. So keep that in mind.
Retirement Plans: 401(k) vs 403(b) [0:23:04]
All right, on the retirement plan side, I'll kind of cut to the chase of what I hear questions either from clients or in lectures or dinners that we do just all across the board. There's 401(k)s and there's 403(b)s. Now, there's also 457s and 401As in those. I'm not going to dive too deeply into that. If you have something, you're going to at least have a 401(k) or a 403(b). The main difference is a 403(b) is typically government or non-profit; 401(k) is typically for-profit, usually. There's no difference to you as the employee. For all intents and purposes, same rules, same tax implications, same investment options, same limits, annual limits…all that kind of stuff. We'll just get that out of the way. But between different companies, different providers, different platforms, they can vary greatly in the investment options you have whether a company matches at all. When you're eligible to start, you could start day one sometimes. Sometimes they make you wait a year; usually they make you wait a year if they match, or if they do a straight-defined contribution. Defined contribution means it's not a match; they're just going to do, let's say, 4 percent a year for you, and then like sometimes they'll match on top of that. So a defined contribution is not contingent on what you put in but a match is. They're only going to put a match in if you put some in. And there's different formulas for that; there's no rule, so get up to speed on what that is. Again, the match and the defined contribution like Trevor was saying, those are real dollars so consider that part of your salary. So when you're comparing some different job offers, if there's a match or defined contribution into your 401(k), that's money. You don't have options on where you can hold your 401k typically. They say it's going to be here at Vanguard or Fidelity or Transamerica or wherever, which is fine, and your employer will also pick the investment lineup options that you have to pick from. By default, you're typically going to be putting what's called a target-date fund. It's based on your age assuming you retire at 65. Let's say, I'm 39. It's 2023 now, so I'll be 65 in 2048. So then my target-date fund…they usually go every five years, so it might be 2045 or 2050...it'll say on the name of that target-date fund which means the manager inside that fund way back in New York City is managing it to be aggressive now when they know you're 25 years away from retirement to conservative as you get closer to try to hold on to your money and we've kind of talked about that in the past of aggressive versus conservative, risky versus stable, etcetera, but just want you to know that's what they're going to put you into by default unless you pick something else. My encouragement to you – if you're young and listening to this which you probably are – pick something else, and just last night, I was sitting with one of my clients and realized we hadn't changed their 401(k) investments. Him and his wife were both in a target-date fund. One was Vanguard, one was Transamerica, and they were fine. Sometimes, they're low fees. Typically, they're higher fees because they're actively managed, and so what I did for both of them is we just went in and picked an S&P 500 Index Fund because they're like 35 or 36 and they got 30 years until retirement and it's cheap and that's one thing I know. That's one thing we could control was the fees. So we picked that or VTI or something and I said, just leave it here for a few years, 10 years whatever, and then we'll reassess. Plus, the target-date funds are never all equity. They're always going to have – no matter how young you are – some like bond and fixed income exposure. These guys at age 35, they had 10 percent in bonds which, personally, I don't think there's a reason to have any bond exposure unless you're within 5 to 10 years of retirement, but that's just my general opinion.
Trevor: That's interesting. How do you read that? Is this like specific to them? With this couple, they just seem like more traditional investors. They want to set it and forget it. That's that.
Jon: Yeah, and they're 401(k). They were kind of…and I've done some where we'll spread it out a little bit if I see some good cheap indexes and options. For them, they didn't have a ton. I'll say, ʺwell, we've got a good Vanguard 500 Index Fund.ʺ But, honestly, so I'll tell you, here's what I can give you – it's not advice – but here's how I advise myself: I'm kind of trying to shoot for the moon still at this point so I'm in like small-capped international emerging markets like stuff that does well over the long-term. Now there's some extreme fluctuation; I could be down 30 percent one year. I don't care.
Trevor: You'll trade volatility for long-term performance.
Jon: Yes, absolutely.
Trevor: Because you know you won't sell.
Jon: Yeah, right. Sometimes, I've made mistakes and sold too soon on some stuff and maybe that'll be a fun show we can kind of peel back the onion on our own investments, and that'll be kind of weird. Wouldn't that be interesting? Feel kind of exposed?
Trevor: Yeah, that'd be interesting for sure. I'm willing to listen to you go through that, if you want to.
Jon: Yeah. Sometimes, I'll be honest, there's not a real rhyme or reason to it other than it'll be…yeah. I've got some individual holdings so I have a SEP IRA because I'm a business owner and I don't make enough to do a solo 401(k) but that's another conversation. But as I think through it, I've got some interesting holdings like I've got one pharmaceutical company that I know a little bit about and I'm just kind of riding that one. I've got an exchange-traded note that's covered calls on U.S. Oil Index which is, again, super random stuff I would never advise anybody on, but if you're curious, I'll show you with the preface this is not financial advice.
Trevor: Interesting.
Jon: It is fun being an advisor and knowing more than most and then playing around in your own accounts.
Trevor: Yeah, you just deal with small amounts, I imagine.
Jon: Yeah.
Trevor: At that point, you're like hobbying and you want to…I mean, people can do what they want with their money, but if you're trying to build wealth, it has to be very, very small quantities and equated depending on what your level of experience is. If it's minimal like most people trading for fun on Robinhood, that falls pretty…it's not considered by the government gambling but it becomes it pretty fast. If you're trying to build a wealth over the long-term, you know, protecting your capital is rule number one. You learn to protect your capital by practicing and by making mistakes so when you're young, it's the best time to be losing money or thinking you have a higher risk tolerance like you just mentioned, 30 percent drawdowns. I think the average person can handle like 15 percent maybe. I don't know if they've done studies on this but just ballparking it, I'd say most people can handle 15 percent drawdowns, and like maybe once a decade, their pooled portfolio that maybe they can handle 30 percent drawdowns. But, you know, we're hitting 30-plus percent in 2008 and 2009 and I know not an insignificant number of doctors specifically who pulled out everything and, you know, ʺgot out of the marketʺ and then we had the biggest bull run in history for 12 years in a row. And then some of them got into, say, silver or gold or precious metals and now those are going on a run so it's like, were they wrong? It's super interesting because it's always just like what's your time horizon? Performance is always start date and end date and you got to compare apples to apples and so you can be a genius one year and you can be the greatest fool the next year, just depending on how you look at your time horizon then.
Jon: It's all on paper until you see it, right.
Trevor: Yeah.
Jon: Your losses are only on paper.
Trevor: You're right. The volatility is such an individual thing which is what makes financial advising still interesting as a profession which you're in and I'm not, so I get to be, Monday morning, quarterbacking 24/7…that's great. So, but…yeah, go ahead.
Jon: I'll tell you, right…obviously, we're digressing on this so we'll come back to it…but to help with myself, I set up…you got to understand the psychology and know yourself well enough to know to not get into it, not get overconfident for one, and when I buy something, I kind of have in mind where I wanted to hit when I'm comfortable selling it and that kind of stuff and I love…like once a year, I dump in some money at tax time for my SEP IRA because my CPA says, 'here, if you don't want to pay a huge amount in taxes, you need to put this much in a SEP IRA.' So, it's okay. If I do that and then I'll have a bunch of cash sitting in the IRA and that's when I can play with stuff or find something that I think is low and buy it and see how it goes over the next 6 to 12 months or something. But if not, and this is a 39-year-old talking, I've got a good chunk of money sitting in Schwab's money market that's paying 4.65 percent right now. It's like its fine.
Trevor: Yeah, you and everybody else, I think.
Jon: Yeah, because that's okay too. But, anyway, 401(k) or 403(b), you might get a match, you might get defined contribution. These same thing; it's tax-deductible or pre-tax going in unless you're doing a Roth 401(k) option which may be a good option for you – that's up to you – and there's also after-tax contributions which I'm not going to get super into that but it's kind of the middle ground between pre-tax and Roth dollars so you can put after-tax contributions. So those are tax-free forever, but then the growth on those will be taxed. Anyway, some plans may offer that option, some may not, but the rules on a 401(k), you can take out a loan on your 401(k) – that can be nice if the plan allows it – and you can't take the money out without paying taxes plus a 10 percent penalty before you're 59-1/2. Those are a huge piece of your financial plan and can give you a huge boost because that defined contribution the employer may make, the match that they may offer, the low fees that they may have…all those things can make or break a retirement plan. If you're planning for retirement looking at what if I put in a 401(k) with no match or contribution and what if I put money into a 401(k) with a match and contribution, how does that look over 30 or 35 years? It could be really good, so you got to evaluate that and figure that out for yourself.
Other Ancillary Benefits: Group Life Insurance [0:34:30]
So, besides retirement plans and health insurance, there are several other ancillary benefits you might call them. Group life insurance is one. Again, pretty basic; you'll get life insurance as long as you're at the employer. They typically cover a multiple of salary. The reason they say that is because everybody's got a different salary and everybody's got a different benefit amount based on their salary. Instead of offering everybody 100,000 dollars, they may say…well, we know as we've told you here at Financial MD, you should have 8 to 10 times your income in life insurance so when it comes to employee benefits then you're able to kind of gauge that because they'll offer one-time salary to – I've seen four or five times salary in life insurance – and there may be a cost to it; there may not be. Usually, they've got like basic – they call it basic life insurance – and then they've got supplemental that you may have to pay a little bit for but it's not much and so I don't think I would be out of line I'm recommending that you get as much life insurance as they'll offer you even if you have to pay a few bucks because it's going to be typically cheaper than you'll find it anywhere else. Now, every once in a while, an employer will offer a life insurance policy like a whole life or a universal life that you can take with you. I don't know if that's a good idea or not for you but I don't see it very often. I did have one client at Ochsner in New Orleans Hospital System down there. They offer a group variable universal life insurance policy which was interesting. That's a policy that can build up cash value and be invested in the market inside of it but other than that, I don't see that kind of stuff very often. You may also see child and spouse life insurance and that can be nice again – just stuff that's free or cheap that is part of most financial plans. You need life insurance for the most part especially if you've got dependents or people that depend on you for finances. There's really not much other flexibility when it comes to group life insurance or employer-provided life insurance. I will tell you it's typically, again, a piece of your life insurance.
General Recommendation: Get Enough Life Insurance Outside Of Work [0:36:48]
My general recommendation is get enough life insurance outside of work so just term life insurance so that if work took those away or you lost your job which they can, you've still gotten enough life insurance outside of that.
Trevor: What do you think about locking in your health on life insurance before you have dependents?
Jon: I typically think it's a good idea.
Trevor: I haven't done it personally but I feel kind of silly for not having done that.
Jon: Well, there you go. This is financial advice for Trevor then.
Trevor: I haven't done it because I don't have dependents and I've got enough money set aside that my family could bury me. It wouldn't cost them, you know. Like I'm definitely not ʺself-insuredʺ life insurance-wise because some people they get to like net worth of a few million bucks and they're like, 'okay, do we need another million bucks,' when I die.
Jon: Just extra.
Trevor: It's still it's only like what, maybe, 1000 dollars a year or something and you get more however you manage your million.
Jon: Yeah. I mean, let's say you've got a million bucks of 20-year term, it might be 70, 80 bucks a month, yeah; 1000 bucks a year so.
Trevor: Yeah, so it's 20 grand over your lifetime to cover your partner for a million, you know, at whatever point…I don't know. That's in the personal category, I guess, like all this but it's interesting to think about. If I ever have a million dollars, then maybe I can think about it. In the meantime, I should probably lock in my health and get some term.
Jon: That's what I'm saying. Even 500,000 or a million will make a difference if you end up needing it one day.
Trevor: Yeah, pay off a house or something.
Jon: Right, yup.
Trevor: Yeah, it's a good idea.
Jon: For most people, like I said, 8 to 10 times your income is what you want to shoot for total; the vast majority of that in individual term that you went and got out on your own and then the perks you have at work are just that; they're perks, they're nice, and they're extra and you'll be glad you have them if you're dead.
Trevor: Your family will be glad. You'll be glad.
Jon: Your family will be glad. You'll be dead. I don't know how you're going to feel. That's another episode for another time on philosophy…religion.
Trevor: Yeah, that's right.
Jon: Lastly we're going to touch on disability insurance. You know how we feel about disability insurance here at Financial MD. We're both passionate about it.
Trevor: We're for it.
Disability Insurance: Get It As Soon As You Possibly Can While You're Young And Healthy And It's Cheap [0:39:07]
Jon: We're for it. Thumbs up. Get it as soon as you possibly can. I'm talking to you, med students and first-year residents. Here's one of the dumber things that I often hear: well, I've got disability insurance through my residency program. Yeah, you do and this isn't dumb; it's just ignorant, because you just don't know. I get it. That goes away when you leave residency and you've got 100 percent chance you're going to leave residency so you got to get something while you're young and healthy and cheap. I think we've sent that message enough. If it's your first time listening, get disability insurance. Shoot us a message and ask us about it, either Trevor or I. We love talking about it and it's super important and you'll hear that everywhere from us to the White Coat Investor to The Physician Philosopher to anybody. So, get it.
Trevor: Yeah, it is the most no-brainer purchase of your life that everyone puts off for no good reason. Like we all put off lots of other important things because you're insuring your car right now in case it dies. It's probably if you're in med school that your car, it's probably only worth 10 to 15,000 dollars max and you're paying like 1200 dollars a year if you've got cheap insurance on that and this is like in med school, it's going to be maybe 50 to 100 dollars a month – something like that – and then in residency, it might be probably similar and then you get out and in practice, it's typically 1 to 2 percent of whatever you're making at the time so. It's super cheap. It's not going to have a long-term financial impact just like if you wouldn't have worked a summer job when you were 16 years old and you made like maybe 1000 dollars in the summer. You traded your whole summer for 1000 bucks. Well, in residency, you can trade 500 to 800 dollars a year and lock in your health and make sure you're protecting your income which is probably worth 15 to 20 million dollars over your lifetime.
Jon: Pretty good numbers, yup.
Trevor: It is the best trade. If you're on Robinhood and you don't have disability insurance and you're a resident or a med student, you are making the worst trade. I mean, the best trade of your life is locking in your career and I've said this before, it should be called income insurance. It should be called income Insurance. You're insuring your income. It's the trade of a lifetime. I mean, you will never out trade that on Robinhood or with Bitcoin or anything.
Jon: What's interesting is even in the last month, I've seen an article from The Physician Philosopher about the not getting disability insurance is one of the worst financial decisions and then I just did a lecture for McLaren's OB program in Lansing and during my Q&A at the end, they said what's the most common financial mistake you see which is really interesting question that I don't get that much.
Trevor: Interesting question.
Jon: I said, you know, this may seem odd but it's probably not getting disability insurance because I've been doing this long enough that I've seen enough residents or attendings wait and then they go to get it and they either can't get it or it's got exclusions on certain body parts or things that they're screwed honestly.
Trevor: Yeah.
Jon: I've had multiple residents try to get it – I'll wait until I go into practice and I've got some money, I can't afford it right now – okay. So we do and then they get a decline letter and then they're f*cked for lack of a better word because now their income is exposed because once you're declined, that goes on your record.
Trevor: It's very hard to get it again in the future.
Jon: Yes.
Trevor: Yeah, I mean you got COVID. Everybody's depressed, anxious, and then substance abuse rates are like through the moon or through the roof – maybe they're through the moon; they're through the roof. I mean, it's affected healthcare workers probably more than the average individual. It's like you got to think about life is hard, I mean, and things happen outside your control. What you can control is getting insurance.
Jon: Yup.
Trevor: I mean your anxiety level will go down I guarantee if you get disability insurance because you are setting yourself up to have a safety net. Your family might not be your safety net. Your own abilities which have carried you so far are unlikely for 100 percent of the population to be their safety net. A lot of people struggle with health issues and just to know that you're covered is it's peace of mind. I highly, highly recommend it. I have had friends thank me for helping them take this step because they put it off and they just feel like stable and rock solid for their family's future because of just this simple step. It's not tough to get it. The longer you wait, definitely, the harder it is to get.
Jon: Change my mind.
Trevor: Change my mind, that's right.
Jon: So when it comes to group disability insurance, you'll see LTD and STD – not sexually transmitted disease but short-term disability. That means typically anywhere from 12 weeks to 24 weeks, they'll offer short-term disability which is usually measured on a per week basis and is often…sometimes it's 100 percent of your income for 12 weeks or 90 days, and that's why we recommend on your personal disability income insurance, you get an elimination period of 90 days because typically your short-term disability will cover that if you've got it. Then group long-term disability kicks in and, again, this is often free or cheap and they measure how much coverage you have based on a percentage of salary. Most common is 60 to 65 percent of your monthly income – gross income – and sometimes you can buy up extra and, again, consult with your financial planner if you should do that but take the base of whatever they give you and the extra might be for you cheap, and again, you'll be glad you did. You can't customize these things – group life, group disability…all these things. You don't get to customize it. You get what you get and you don't throw a fit. But it's a perk, it's a benefit. We've talked about the value of that.
A Little Tidbit: If You Pay Your Own Personal Disability Insurance, It's Tax-Free Upon Claiming And Collecting Benefits [0:45:13]
Now disability insurance should you go on claim and pay out, if it's group employer-provided disability insurance, if they pay, you pay the taxes on the benefit if you go on claim. If you pay for your own personal disability insurance, it's tax-free if you were to go on claim and collect the benefits. So that's a little tidbit to know. We get that question a lot. Now, something to know the group disability plan may be sh*tty and so you've got to try to get as much on a good personal policy through Principal or Ameritas or Guardian that you can get there. Sometimes they're nice but half the time they're not even true on occupations so you got to be aware of that as well.
Trevor: If you can't take the policy with you, you're not going to have that peace of mind. For me, the product you should get is something that you own. You can take with you anywhere. I mean, otherwise, you're just always tied to your job and the whims of Human Resources. So, if your goal is ensuring your income and protecting your family and your future, you got to control as many components as you can so you got to get your own policy.
Jon: Yeah, and they'll both pay out if you go on claim so you can get a small cheap policy if you've got a really good group LTD at work and then if you go to another job that doesn't have great benefits, you can increase the benefit on your personal one. That's called a future increase option or a benefit update. So that's the other critical piece you've got to make sure it's on there but if it is then you can expand and contract it depending on what your jobs offer throughout the year.
Trevor: That's right. Examples can be helpful so let's say you're taking home 20,000 dollars a month and your group disability covers and it's never going to cover everything that you're taking home because you're not going to need it all and they're just not going to cover 100 percent. Exactly, right, so they don't want to incentivize that. So let's say they cover like six grand a month, okay, with a group disability policy. You could cover yourself with your own policy for 1000 to 2000 and there are limits to how much they'll do, again, because the combo amount is what they don't want to overinsure you. So, that's just a good example. Say, it's like 6000 group disability. Well, you might be able to tack on like 2000 more or something like that and then you go somewhere else and you lose that. You get a new job. You move into a different state. You can take that 2000. You can probably bump it back up to like 8000 because that's what they were willing to like totally, you know, total insure as up to 8000. Well, great. Hey, thanks John. I've got to run here and that's good catching up and talking some shop. Hopefully, it's helpful to some folks. We're always open for questions. I am available at trevorsmithmd@gmail.com – that's my forever email – and feel free to shoot me any questions.
Jon: Yeah, and guys, give us a review and a rating as well please on this podcast. That helps a ton. Comment, like. Get the message out and get the word about financial education for young physicians. Let's continue to help stop physicians making dumb financial decisions.
Trevor: That's right.
Jon: This was The Financial MD Show. Thanks for joining us. We will see you next time.
Trevor: See you Jon. Thank you.
Jon: See you later, bud.
Thanks for joining us for another Financial MD Show. Be sure to head over to financialmd.com to get more in-depth resources on financial tips for physicians and don’t forget to join the Financial MD community group on Facebook, where physicians at all stages of their career gather to share tips and get ideas on achieving true financial success. We’ll see you next time.
The Financial MD Show is for informational purposes only and is not an offer to invest. It is not financial, tax, or legal advice. Be sure to seek financial, legal, or tax professionals when making any financial decisions. Before investing, you should make sure that any investment strategy or investment meets your individual investment needs, goals, and objectives. Financial MD makes no claims or guarantees to individual investment performance. All investing involves the risk of loss as well as the potential for gain.
Resources and Links:
- Employee benefits definition – https://www.questionpro.com/blog/employee-benefits/
- Understanding Obamacare – https://www.ehealthinsurance.com/resources/affordable-care-act/understanding-obamacare
- Life insurance retirement plans (LIRPs) – https://www.bankrate.com/insurance/life-insurance/life-insurance-retirement-plans/
- Disability Retirement – https://www.dgs.ca.gov/OHR/Resources/Page-Content/Office-of-Human-Resources-Resources-List-Folder/Personnel-Operations-Manual/Disability-Retirement
- What Is 401(k) and How Does It Work – https://www.investopedia.com/terms/1/401kplan.asp
- What is a W2 Employee – https://www.checkcity.com/taxes-101/what-is-a-w2-employee#:~:text=A%20W2%20employee%20is%20a,name%2C%20%22W2%20employee.%22
- What is a vesting schedule? – https://www.capitalone.com/learn-grow/life-events/vesting-schedule/
- Preferred Provider Organization (PPO): Definition and Benefits – https://www.investopedia.com/terms/p/preferred-provider-organization.asp
- High Deductible Health Plans (HDHPs) & Health Savings Accounts (HSAs) – https://www.healthcare.gov/high-deductible-health-plan/
- Grayscale Bitcoin Trust – https://grayscale.com/products/grayscale-bitcoin-trust/
- What is Swan Bitcoin and how does it work – https://cointelegraph.com/news/what-is-swan-bitcoin-and-how-does-it-work
- What does FTX stand for? The Collapse of FTX – https://bitkan.com/learn/what-does-ftx-stand-for-the-collapse-of-ftx-9171
- MicroStrategy news – https://decrypt.co/125511/microstrategy-buys-more-bitcoin-break-even-price
- Using a Flexible Spending Account – https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/
- What is a 403(b) plan? Retirement – https://www.forbes.com/advisor/retirement/403b-plan/
- What is a 457 Plan? – https://www.investopedia.com/terms/1/457plan.asp
- What are 401(a) Plans – https://smartasset.com/retirement/what-is-401a
- Target-Date Funds – https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-6
- Simplified Employee Pension (SEP) IRA: What it is, How it works – https://www.investopedia.com/terms/s/sep.asp
- Exchange-traded notes: The facts and the risks – https://www.schwab.com/learn/story/exchange-traded-notes-facts-and-risks
- What is a covered call? – https://www.bankrate.com/investing/covered-call-options-strategy/
- What is a Roth 401(k)? – https://www.bankrate.com/retirement/roth-401k/
- Whole Life vs Universal Life Insurance – https://www.progressive.com/answers/whole-life-vs-universal-life-insurance/
- What are the main differences between STD and LTD benefits? – https://www.awaxmanlaw.ca/disability/comparison-ltd-std
- Disability Insurance Future Increase Option – https://www.steadfastagents.com/disability-insurance-future-increase-option/
- Financial MD Website – https://www.financialmd.co/
- Financial MD YouTube page – https://www.youtube.com/channel/UC6qEAQxK8L8JM7joy3wvdkA
- Financial MD Facebook community – https://www.facebook.com/FinancialMD/
- Financial MD TikTok – https://www.tiktok.com/@financialmd
- Financial MD Instagram – https://www.instagram.com/financial.md/
- Financial MD Twitter – https://twitter.com/financialmd2
- Financial MD LinkedIn – https://www.linkedin.com/company/financial-md/?viewAsMember=true
- Financial MD App – https://apps.apple.com/us/app/financialmd/id1507757039
- Financial MD Apple Podcast –
https://podcasts.apple.com/us/podcast/the-financialmd-show/id1548024586
