Forum Mailbag: Dave Ramsey’s Advice To Residents, Tilt Away From Healthcare, Modeling Inflation, 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. This is a roundup of my favorite discussions happening around the internet.

1. E-mail: Paying Off Loans Or Invest For A New Medical Student

Question: Jeff, a reader who will be starting medical school this summer, e-mailed me with the following questions, that began as a comment to my article about building 3-fund portfolios with Fidelity. 

I have a ~$9k car loan at a low interest rate that I’m currently paying off (1.65%). I had enough in savings to not need the loan but I figured it would be better to invest the principal in an index fund with a (historically) higher return. Should I switch that out to an ETF since it’s being held in a taxable account to save on the taxes? Is the activity assessment fee ($0.01-$0.03 per $1,000 principal, otherwise known as the SEC fee) from selling ETFs going to affect that in any way since I may need to sell once or twice a year?

I actually already used the principal to purchase the index fund several weeks ago– ETFs had totally skipped my mind. My current tax bracket is 15%, my income stops in 2 months since I’ll be starting medical school. I just wasn’t sure if it was worth selling and repurchasing as an ETF.

One more question while I can, for my Roth IRA. Just to confirm you’d recommend investing in the ETF equivalent of the premium class index fund instead of the investor class index fund even though it’s a tax-deferred account?

WSP’s Take: When it comes to paying off loans versus investing, the correct answer financially is to keep the loan and invest the amount in the stock market. The expected return of the stock market is higher than the 1.65% interest rate. Dave Ramsey (see topic #2 below) would feel slightly differently. The psychological burden of debt, especially to someone about to take hundreds of thousands of loans, can outweigh any financial benefits of borrowing.

Since he is a medical student, it actually doesn’t matter much whether he invests in ETFs and index funds, even in a taxable account. The vast majority of dividends paid in both ETFs and index funds are qualified dividends, which are taxed at the long-term capital gains rate, which will be 0% for him during medical school. Capital gains are also distributed only in index funds, which may be taxed either at the short-term or long-term capital gains rate. Assuming he makes no other income during medical school, he will be taxed at 0% for those capital gains as well, assuming he is not claimed as a dependent by his parents.

He should eventually switch his index fund to an ETF before finishing medical school. I would make sure to wait 1 year so that he pays (0%) long-term capital gains on any gains, or earlier if the market is down and he has capital losses. Be sure to not run afoul of wash sale rules or short-term trading fees instituted by the mutual fund.

The activity assessment fee of ETFs is negligible, representing a 0.001%-0.003% one-time fee when you sell your ETF shares.

Even in a tax-deferred account, the ETF is preferable to the investor class of mutual funds because it generally will have lower fees. The premium shares (or Admiral shares at Vanguard) typically have very similar expense ratios as the equivalent ETF. For example, to buy the S&P 500 with Vanguard, the ETF (VTI) and the Admiral shares have an expense ratio of 0.04%, while the Investor shares have an expense ratio of 0.14%. Vanguard Admiral shares of index funds have a minimum investment of $10,000.

2. White Coat Investor: Dave Ramsey’s Advice to Medical Residents

Question: Dave Ramsey was very tough on this family medicine / psychiatry resident couple with $670,000 in student loan debt, punctuated by the statement “I wouldn’t want you operating on me”:

FutureDoc thinks that Dave Ramsey is out of touch when it comes to the student loan debt situation of current medical students and residents-in-training.

WSP’s Take: While $670,000 is on the higher side for a resident physician couple, it is completely within the realm of possibility in today’s environment. Dave Ramsey did go a little overboard with the “I wouldn’t want you operating on me” comment, but it is the flair of a live radio show (and it certainly went viral, with 400,000 views and counting).

He may not be aware of the student loan burden of current medical students, with some schools reporting average medical student debt in excess of $250,000. He certainly isn’t aware of the current salaries of family physicians, claiming that they make around $150,000 (less than Roderick’s assertion of $200,000). Doximity’s survey of physicians lists the average family medicine salary at $227.541, although you probably won’t make that straight out of residency.

The important thing to take out of Dave Ramsey’s philosophy as it pertains to medical students is to have a healthy respect of debt. Debt, even if it is “good” medical school debt, should not be taken lightly. It is not Monopoly money. It is real money and you should aim to minimize that debt while you are in medical school and residency. Once you’re done with residency and can pay off the debt, you should save aggressively, consider a financial fellowship, and start paying down that debt.

3. Bogleheads: Tilting Away From Healthcare With Investments

Question: Smesman wonders whether it makes sense to tilt away from the sector that you work in? For example, should physicians underweight healthcare stocks so they are not overexposed to the healthcare sector?

WSP’s Take: While an interesting concept, it is difficult to execute in practice. The correlation between a physician’s income and the healthcare sector of the S&P 500 or any individual healthcare stock is low. For example, XLV, the S&P 500 Healthcare sector ETF, fell 33% during the financial crisis and has subsequently gone up over 250% since then. We can only wish our salaries went up 250% since 2009!

4. Reddit: How Should Inflation Impact My Target Portfolio Amount?

Question: BlueDemon24 has been using this simple calculator to determine how much he will need to save to reach a $1 million nest egg. He is wondering how to adjust the $1 million amount for inflation.

WSP’s Take: I usually make projections using real (after-inflation) investment returns rather than nominal (before-inflation) investment returns. This way, you don’t need to account for inflation and you can make savings projections using today’s dollars. Of course, when you execute your plan in practice, you’ll need to account for inflation (i.e. if you plan to save $10,000 a year for the next 20 years, you’ll probably need to save more than $10,000 in year 10 or 20).

Wall Street Shares: 5 Articles I Enjoyed Reading This Week

1. Physician Couple: Our story: where we started, where we are, and where we are going — this dual-physician household paid off $726,000 in loans in just 3 years. I think that’s a new record!
2. Mama Fish Saves: How We Spent Almost $13,000 on Our Son in His First Year — raising kids is expensive, and Chelsea outlines how much she (and her family and friends) spent on her first kid.
3. Physician on FIRE: Our Drawdown Plan in Early Retirement — PoF shares how he plans to withdraw his nest egg when he moves to part-time work in the fall.
4. Passive Income, MD: The Three Biggest Mistakes I’ve Made in Real Estate Investing — I don’t invest in real estate, but it’s definitely an asset class where skill matters, since you’re competing against other individuals rather than the collective market.
5. The Curiosity Lab: No Sugar, No Cry — Dr. Curious, a radiologist, decided to drastically cut his sugar intake for a month, with great success.

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?