Forum Mailbag: Too Much Money in 401(k), Overslicing And Dicing, Investing Prior to Med School, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. Here are some of the discussions happening around the internet.

1. Reddit: Too Much Money In A 401(k)

Question: Alt-001 overheard some co-workers discussing how some financial advisors were suggesting that they were putting too much money into a 401(k). They were only putting in around 10% of their income to the 401(k), so he was trying to get an explanation about whether it was possible to put too much money in a 401(k).

WSP’s Take: There rarely is such thing as putting too much money in a 401(k). If you end up with a very large 401(k), then potentially the withdrawals may bump you into a higher tax bracket in retirement than when you were working. But this scenario is relatively rare, especially for high-income professionals like physicians who are in the higher tax brackets to begin with.

Some financial “advisors” will argue that the 401(k) is not safe (there is too much stock market risk, etc.). In some cases, they argue that the “alternative” to a 401(k) is something “safer” like a whole life insurance policy — and you know what I and the rest of the physician finance community think about whole life insurance.

2. Bogleheads: Smallest % worth Allocating in your Portfolio

Question: LukeHeinz57 has noticed some Bogleheads users investing very small amounts into asset classes, sometimes as little as 2.2%. He questions what the purpose of slicing and dicing to such small percentages, and asks whether there was any minimum percentage cutoff when forming an asset allocation.

WSP’s Take: I think it depends on your overall net worth and how neurotic you are about your investments.

If you are a resident with $10,000 to invest, slicing and dicing more finely than 10% (probably even 20%) won’t make a difference. Even when you get to a 7-figure portfolio, I don’t see the purpose of slicing and dicing more finely than in 5% increments.

I agree that extra fractions of a percentage point in return might equal tangible money when you have a large portfolio. However, I believe there is false precision when measuring your asset allocation down to the percentage point (or less than a percentage point). Estimates of future risk and returns of asset classes are very noisy, and using something like an efficient frontier to slice and dice finer than 5% is unnecessary.

3. Bogleheads: Where To Invest 100K Prior To Daughter’s Medical School

Question: Roostermt’s daughter is applying to medical school this year. She currently has 100k in her name from gifts and because she finished college a year early. He was wondering how this money should be invested prior to medical school.

WSP’s Take: First, I think that approximately 3 months expenses (~$6,000) should be set aside as an emergency fund.

The standard answer to this question is to put the remaining money in short-term CDs. Many people will recommend this because she needs the money to spend on medical school expenses in the next 1-3 years.

However, I would recommend that she consider investing the remaining money in the stock market instead. This is because from a strictly math perspective, she will be slightly ahead by investing in the stock market. She will go into debt no matter what she does with the money. Assuming medical school will cost $240,000 for 4 years, she will be around $150,000 in debt at the end of medical school.

If the stock market crashes in the next 1-2 years, she will just have to take on more debt. If the stock market soars in the next year, then she will have significantly less debt than if she had just invested in CDs. On average, the stock market will rise significantly more than CDs, and as a result, she will end up accumulating a little less medical school debt.

4. White Coat Investor: Best Credit Card For High-Income Professionals

Question: WCI reader “I Find This Humerus” wants to know what the best credit card is for high-income professionals.

WSP’s Take: There are many good credit card rewards approaches. There are multi-card strategies and single-card strategies. For simplicity, let’s look at the best single-card strategies.

Fidelity and Citigroup both offer 2% cash back cards. With Fidelity, you need to have a Fidelity account, as the cashback rewards will be deposited into that account. You can redeem your Citi DoubleCash rewards via check, statement credit, or gift card.

If you are a Bank of America / Merrill Lynch investor, the Bank of America Travel Rewards credit card might make a lot of sense. The card offers 1.5% cashback on all purchases, but if you are a Preferred Rewards client, the bonus can be increased by 25-75%. To be in the top Platinum Honors class and receive a 75% bonus, you need $100,000 or more in qualifying combined balances between your Bank of American and Merrill Lynch accounts. With the 75% bonus, Platinum Honors members get 2.625% cashback on all purchases.

Wall Street Shares: 7 Articles To Read This Week

1. Life of FI, MD: $10,000 to Bitcoin or VTSAX??? Please Help Me Decide — Pick VTSAX, obviously.
2. The Physician Philosopher: The Second Philosophy: The One Month Rule — Avoid impulse purchases using TPP’s one-month rule.
3. Mama Fish Saves: How To Know Your Target Retirement Savings Rate — Really nice worksheet to calculate your savings rate by new (second-time) mom Chelsea.
4. The Financially Saavy: How I Locked in $2,485 of Tax-Free Gains Through Tax-Gain Harvesting — for people in medicine, tax-gain harvesting only generally applies to medical students, some residents, very part-time attendings, and some retirees.
5. Actuary On Fire: Lump Sum Investing or Dollar Cost Averaging? Part 1 and Part 2: AOF puts his spin on a common investing question. I’ve discussed my thoughts on this topic in the past — the math says lump sum investing, but psychologically it can be easier to dollar cost average.
6. My Curiosity Lab: One Hour Per Month, Or The Beauty of Financial Automation — Investing doesn’t need to be complicated, and Dr. Curious shows you how to do it in just one hour per month.
7. Wall Street Unspoken: Beware the Mutual Fund “C” Share — In this new blog, a former Wall Street insider aims to expose some of the tricks the industry plays on ordinary investors. In this article, he discusses the mutual fund C-share class, which was featured prominently in my list of the highest cost mutual funds.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?