There is so much great information on personal finance forums. I participate on several message boards, including the Bogleheads and White Coat Investor forums. Here are some of the discussions happening around the internet.
1. Bogleheads: Surgeon vs. CPA/Real Estate Investor
Question: Derivative is a 25yo medical student who is interested in surgery. However, he has seen that many of his friends have become quite wealthy by being a CPA or real estate investor. He was wondering whether on average, a surgeon will make more than an individual who goes down the CPA / real estate route.
WSP’s Take: Ah, the business versus medicine debate. Of course, being a doctor and working in business/finance couldn’t be more different, but I assume the reader is asking about a comparison between the compensation of the two professions.
Medicine has the highest average salaries, but the variability between practitioners (particularly on the upside) is relatively low. On the other hand, business / real estate has a lower average salary (i.e. most people don’t make it big), but those who do make it can earn significantly more than the typical physician.
There’s a reason why the Bureau of Labor Statistics list of the highest-paying jobs contain mostly healthcare jobs — medicine pretty much “guarantees” a top 5-10% salary, but the chance of earning a top 0.1% salary is higher in business than in medicine.
One other point: a real estate investor could start working in their 20s or even their teens, while the surgeon needs 5+ years of training after 4 years of medical school. So the usual plumber versus doctor debate applies here as well.
2. Reader E-mail: Tax Gain Harvesting For New Intern
Question: I received an e-mail from a graduating medical student who read my article on tax-gain harvesting, and is wondering whether tax-gain harvesting could be suitable for him. He estimates that he will make $27,000 in half-a-year as an intern. He has $12,000 in unrealized long-term capital gains. Since he will likely remain in the 12% tax bracket for 2018, his long-term capital gains rate would be 0%. However, he lives in a state with a state income tax of approximately 5%. He is wondering whether the benefits of tax-gain harvesting are worth the upfront state income tax he would have to pay.
WSP’s Take: The answer depends on when he plans to use the money in his taxable account. The benefit of tax-gain harvesting is essentially fixed — in his case, it is $12,000 in profits multiplied by the differential in tax rates (for example, 25% later versus 5% now), or $2,400 in taxes. He would receive this benefit when he eventually sells his stock for good (whether it is in 5 years or 50 years). On the other hand, if he sells his stock now and rebuys it, he will have to pay 5% of his profits in state income taxes today, which could be worth significantly more than that in 30-40 years.
If he plans to not use this money until retirement (e.g. 30-40 years from now), then it is likely better to hold his stocks and not tax-gain harvest. The $12,000 * 5% = $600 in state income taxes he would have to pay today could potentially grow to $6,000 or more over 30-40 years. In addition, the tax benefit would still be only $2,400, which won’t be worth as much in 30-40 years as it is today.
On the other hand, if he were planning to tap his entire taxable account to buy a home during residency or shortly thereafter, then it would probably be worth it to tax-gain harvest now. He would only have to pay the $600 in state income taxes now but would be able to save $2,400 in long-term capital gains.
3. White Coat Investor: Savings Rate Question
Question: Strider_91 knows that White Coat Investor has often stated that a good rule of thumb for physicians is to save 20% of gross income. He was wondering whether things like saving for a down payment on a house should count in that 20%. In addition, he wants to know whether you can dip into this savings to invest in real estate or an office building.
WSP’s Take: The 20% of gross income rule from White Coat Investor is a great rule of thumb for physicians. It is a number that is calibrated to get you to 25x your pre-retirement spending by the time you reach your early 60s. Therefore, in my opinion, you should only include retirement savings if you are following this savings rule. Other savings, such as college savings or saving for a downpayment on a house, should not be included in the calculation. Of course, you could argue that your home equity could potentially be part of your retirement nest egg if you downsize/sell the house and rent in retirement. If you feel strongly that this will be the case, then I suppose you could then include it in your retirement savings rate.
Certainly, you can dip into your retirement savings to invest in an office building or real estate, assuming these investments are part of your overall retirement investment strategy.
4. Bogleheads: Managing Asset Allocation Like A Target-Date Fund?
Question: Rgs92 asks the Bogleheads readership whether they adjust their asset allocation as they age, similar to how target-date funds increase their bond allocation over time.
WSP’s Take: Yes, it would be prudent to adjust your asset allocation as you age. Your risk tolerance may be higher or lower than the typical investor that invests in a target-date fund, but in general, almost all investors become more risk-averse as they become older and their investment time horizon decreases. Therefore, it would be prudent to reduce equity and increase bond exposure as you get older. Ideally, you would set these numbers in advance in a written investment plan.
Wall Street Shares: 5 Articles To Read This Week
- Crispy Doc: My Investor Policy Statement For Time — This emergency doctor shares how he will invest his time (a more scarce and precious resource than money) in the format of an investor policy statement.
- Doc Wife: 10 Dos and Don’ts for marital money bliss — A checklist of things to do and not do when it comes to money and marriage from this wife of a hospitalist.
- Senior Resident: The Case for Leasing a Car — A contrarian take from this radiologist blogger on the buy versus lease debate.
- Passive Income MD: Why I Don’t Flip Homes — I guess we won’t be seeing PIMD on HGTV anytime soon.
- Smart Money MD: Five reasons why doctors leave their first job — Understanding why doctors leave their jobs can help young doctors choose the right first job.
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?
Very sound advice especially on the savings rate question.
I also include money that is channeled directly to my retirement accounts (including employer contributions) as part of my savings rate.
For my asset allocation profile I am a little more aggressive for my age because I have developed some decent passive income streams that give me a high floor of income and thus reduce the chance of me having to sell assets that have declined in a bear market and lock in the loss.
I was both a surgeon and a real estate investor. A few years after beginning in real estate, I made a comment to my wife, “We made more money this year in real estate than I made as a full time surgeon, and the real estate business only takes a few hours a week.”
Today we can live on the real estate cash flow alone, and we started investing in real estate 16 years ago.
Dr. Cory S. Fawcett
Prescription for Financial Success
That’s incredible! Seems like the answer is to do both and as soon as possible. Thanks for sharing Dr. Fawcett.
WSP,
Regarding the savings rate and what should counts toward it, I agree with you: I’d be leery of counting a primary home (or downpayment fund) as part of a retirement savings strategy. WCI has repeatedly confirmed that a home is a consumption item, and there are far more attractive investment opportunities with less volatility. It can be painful not to count this item in HCOL areas (I reside in LA, and although it hurts, I don’t include my home value as part of my retirement-related net worth). My rationale: ignoring home value means a downsize creates a windfall you can enjoy (yeah, we retire a few years earlier thanks to the sale) instead of an asset you find you’ve overvalued and can’t unload as planned. Imagine those who’d relied on a downsize in 2008 – if they’d depended on obtaining a higher home value than was available when a glut of foreclosures flooded the market, it could have derailed their retirement plan. Thanks for the thoughtful analysis (and the shout out).
Fondly,
CD
I have also given a lot of debate to the Physician vs. Real Estate Investor debate myself, not as an “OR” but as an “AND” to compliment my husband’s career. I started exploring this and am taking classes to get my real estate license this summer. Time to tell where our future REI adventures lie but I am happy that I have started.
Also thank you so much for mentioning me in your mailbag 🙂 What an amazing blog you have built in just 1.5 years. I will keep sharing.
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