Investing For Doctors

007 Questions Physicians are Asking About Bonds

Bonds are supposed to be boring. In fact, best-selling author and former British intelligence officer Ian Fleming—the man behind British Secret Service Agent James Bond, code-named 007—thought “bond” was one of the most boring words in the English language.

In his 1962 interview with The New Yorker, Fleming said, “I wanted Bond to be an extremely dull, uninteresting man to whom things happened; I wanted him to be a blunt instrument ... when I was casting around for a name for my protagonist I thought by God, (James Bond) is the dullest name I ever heard.” He lifted the name from an American ornithologist named James Bond.

Ornithology, huh? Big yawn.

Now, I’m no bird watcher, but as a fee-only financial planner for physicians, I also manage more than $50 million dollars for about 40 families and a couple of pension plans, and I happen to believe that bonds are anything but boring.

I think bonds are fascinating, functional and fun, so I’m excited to share some questions clients have asked about them, along with my oh-so exciting answers:

  1. “What is a bond? I mean, how does it work?” A bond is nothing more than a loan. When you buy a bond, you’re basically making a loan to whoever issued the bond. So if you buy a US Treasury bond (the most common kind of bond here in the United States), then you’re making a loan to Uncle Sam. When you own the bond, you can collect interest from it, which is mostly how people make money in bonds.
     
  2. “Can I lose money in bonds?” Yes, you can. Most bonds are sensitive to changes in interest rates. When interest rates rise, bond prices drop, and vice versa.
     
  3. “If I can lose money in bonds, why would I want to own them?” Well, you can make money in bonds, too. When interest rates fall (as they have for several years now), bond prices rise. And regardless of the direction of interest rates, you can still gain interest by owning bonds or bond mutual funds.
     
  4. “What about the Bond Bubble?” Ah yes, the Bond Bubble. Pundits and soothsayers argue that bonds are doomed to lose money because interest rates are at historic lows and “interest rates have nowhere to go but up.” I wish the argument were this simple. It’s true that interest rates on US Treasury bonds are very low, and that these bonds are sensitive to interest rate changes. But it’s also true that you cannot predict the future, not even the future of interest rates. I mean, look at Japan: they've had super-low interest rates for decades now. Calling the future is a fool’s game."
     
  5. “So, should I dump all my US Treasuries?” If you ONLY own Treasuries, then maybe you should lighten up a tad. But before you go off and sell all your Treasuries, you have to remember that Treasuries are a special kind of bond because they are backed by the full faith and credit of the US government. This gives them a special status in the world, and they are seen by US investors and non-US investors alike as a “safe haven” during hard times. For instance, when all hell broke loose back in 2008, US Treasuries were just about the only kind of bond that actually gained value. This makes US Treasuries a good diversifier for an all-stock portfolio.
     
  6. “What kinds of bonds are there besides Treasuries?” Well, it’s a great big bond world out there. According to the Barclays Capital Global Aggregate Bond Index, there are about $32 trillion worth of debt outstanding from 12,000 issuers worldwide, making the global bond market twice as big as the global stock market. There are government bonds and corporate bonds; developed market bonds and emerging market bonds; high yield “junk” bonds and high quality “investment grade” bonds; short term, intermediate term and long term bonds; inflation-adjusted and “nominal” bonds, dollar-hedged and un-hedged foreign bond funds, and just to spice things up, there are floating rate bonds too. (If there is a Bond Bubble brewing, I find it hard to believe that it would impact every one of these at the same time.)
     
  7. “With so many choices, what kind of bonds should I own?” To thrill my compliance attorney and all the regulators who read my blog, I’ll say that you should consider your own personal financial situation, investment objectives and tolerance for risk before you invest in any bond or bond fund. But to address the question head on, I’ll tell you that diversification is a very, very good thing, and it might not be a bad idea to own a wide variety of bonds… a task made far easier these days by the proliferation of bond index funds from Vanguard and DFA.

Bonds may not be as gutsy as guns, as giddy as gadgets, or as glamorous as Bond's babes, but they’re an important part of a balanced investment strategy and they just might help your portfolio be stirred, not shaken, the next time it looks like the world is coming to an end.

Investing: What if Trump wins? What if Hillary wins?

It’s natural to run from danger, and if you have strong feelings about presidential politics, this year’s choice probably looks pretty dangerous to you, no matter which side you’re on. You might even be tempted to do something about it… something that involves your retirement account or your college funds. To put things in perspective, you need to know the stock market has favored Republicans in the past over Democrats but wins by the Incumbent Party (which would be the Democrats in this election) have delivered returns that are almost the same.

Presidential Election Stock Market Performance History

While this may seem straight forward, “It’s really hard to predict the outcome of politics, and even if you get the outcome right, it’s even harder to predict the market reaction,” says Eric Veiel, head of equity management at the T. Rowe Price family of mutual funds.

In fact, getting an “edge” in your investments is so hard as to be impossible. If it were possible, some whiz kid techie out there would have built a data mining algorithm to sift through social media, find the winner in advance, and arbitrage away all the extra profits that one could have garnered.

“It may be tempting for investors to try to link presidential election results to market outcomes, but there are really no consistent relationships between party affiliation and long-term investment success,” says Veiel. That’s why we caution clients not to make investment decisions based on expected election outcomes.

The reason that investing offers a prospective return at all is precisely because of the perceived danger or “risk.” If it weren’t risky, everyone would be doing it and they would have sopped up all the excess returns already. That’s why fundamental factors, such as oil prices, corporate earnings, and monetary policy usually outweigh political developments. While sectors such as health care and energy could be affected by proposals of leading candidates, Congress, the Federal Reserve and the commodities markets tend to have more power over these factors than any one man or woman in the White House.

Remember, this is only one election among many you will see and hopefully vote in during the course of your life. Investing for retirement and saving for college are long term goals, so the best thing you can do between now and November 8 is to make a plan for your future and vote with your ballot—not your investment account.

3 Ways to Save Taxes While You Invest | Oncology Practice Management

Physicians pay more than their fair share of taxes, so when it comes to your investments, why would you pay more than you absolutely have to? While it may be too late to save taxes on investments you made last year, itís the perfect time to focus on saving money this year, so we want to share some tax tactics to keep your tax bill for 2016 in check.

1. Slip Contributions in Through the Back Door

If you are a physician who is covered by a retirement plan at work, your accountant may have told you that you do not qualify to contribute to an Individual Retirement Account (IRA). That is simply false. Physicians who have earned income can indeed contribute to an IRA, even if they cannot deduct the contribution from their taxable income.

This may leave you wondering why you should make an effort to contribute if you donít receive any immediate tax benefit. The answer is that your nondeductible contribution puts you in an ideal position to convert your traditional IRA to a Roth IRA, using a strategy known as a ìbackdoor Roth IRA. This lets the balance in your Roth IRA grow tax-deferred indefinitely, with no requirement for mandatory distributions at age 70Ω years, and no taxes due on qualified withdrawals.

To make a backdoor Roth IRA contribution, you need 2 accounts – a traditional IRA (preferably an empty account) and a Roth IRA. To do that, start by contributing the maximum allowed amount to your traditional IRA ($5500 for 2016, or $6500 if you are age 50 years or older). Next, you can instruct your financial institution to convert your traditional IRA balance to a Roth IRA account. The institution will distribute the balance from your traditional IRA and then deposit that amount to your Roth IRA, generating a Form 1099-R that is sent to you in January of the following year.

If you are taking advantage of this strategy, however, you must be careful. It is simple if the entire balance in your traditional IRA hails from nondeductible contributions, and if the account has not gained value. If that is the case, you should owe no taxes on this transaction; however, if you have any other IRA accounts (including SEP-IRAs, SIMPLE IRAs, and/or rollover IRAs) that were funded with pretax dollars, the taxable portion of any conversion made from these accounts will be prorated over all your IRA accounts.

Therefore, to truly benefit from the backdoor Roth IRA and avoid the ìpro-rata rule,î you must either convert your other IRA accounts as well, or you must transfer your IRA contributions that were funded with pretax dollars to an employer-sponsored plan that accepts IRA rollovers, so all that remains are IRA accounts funded with posttax dollars.

2. Put Taxable Income in Its Place

Although veteran investors know that a taxable bond fund generates ordinary income that is fully taxable, for some reason we continue to see physicians, even those who are under the care of financial advisors who should know better, owning taxable bond funds in taxable accounts.

For example, an oncologist earning $700,000 owns a joint account with her husband that holds $1.2 million in mutual funds, including $400,000 invested in corporate bonds. Those bonds yield dividends of approximately $13,000 this year. Since this couple is in the top marginal income tax bracket (39.6% for federal income), their tax bill for these dividends is approximately $5000, so only $8000 remains in the account after the taxes are paid.

Had this couple purchased a tax-exempt bond fund that pays dividends of $11,000, they may owe no taxes. As a result, this couple would have an additional $3000 this year, and every year thereafter.

It is easy to understand why this mistake happens. Investors routinely focus on the yield or the income from the securities they buy, while ignoring the after-tax total return that the security generates.

3. Save Your Health Savings Account

While Health Savings Accounts (HSAs) were signed into law more than a decade ago, physicians are just now beginning to take advantage of the sizable tax deduction that contributions to these accounts provide. If your family is covered by a qualifying high-deductible health insurance plan (HDHP), you can contribute $6750 to an HSA this year (or up to $3350 if you are covered individually). If you are a physician in the top marginal tax bracket of 39.6%, this contribution can provide you approximately $2700 in tax-savings income.

Having made your contribution and deducted it from your income, now you are in the right position to do the wrong thing: spend the money. Although many physicians will use their HSA balances to cover out-ofpocket healthcare expenses, a better strategy is to leave the balance in the HSA account for as long as you can. Here, the balance can be invested and allowed to grow tax-deferred until retirement. At that time it can be withdrawn tax-free to cover one of the biggest expenses we will all face in our old ageóthe cost of healthcare.

Conclusion

When you understand the ins and outs of tax-advantaged investing, you can stop paying unnecessary taxes and start putting more money toward your retirement, your kidsí college, and anything else money can buy. In fact, Judge Billings Learned Hand once said, 'Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase oneís taxes.'

W. Ben Utley, CFP, is the lead advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping doctors throughout the United States to save for college, retirement or other financial goals. He can be reached at 541-463-0899 or by e-mail at ben@physicianfamily.com.

Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF, is the founder of Physician Financial Services, a New Yorkñbased firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at 516-677-6211 or by e-mail at Lkeller@physicianfinancialservices.com with comments or questions.

This article originally appeared in page 48 of the March 2016 print edition of Oncology Practice Management.

Thinking *inside* the box [Certain Times]

Have you ever felt like there’s more to this financial security thing than meets the eye? Yesterday I spoke with a cardiologist—a smart, hard working, pillar of the community kind of guy—who had spent the better part of the last two decades building a nice seven-figure retirement nest egg out of nothing more than garden variety Vanguard funds.

And do you know what he wanted?

He wanted me to manage his investments.

I gotta tell you: I was stunned.

I told you he was smart. In fact, he had read almost all the same investing books I had. (And I say *almost* because he had, in fact, read more than me.)

Yet no matter how I tried, I could not convince him that he was doing the right thing. I got the impression that he believed that there might be something wrong with what he was doing.

Then I talked with a nephrologist last week who did hire me to put together a financial plan for him.

He’s a family-first kind of guy with a reasonable standard of living, so he can afford to save modestly and invest moderately BUT he was certain that there must be something more to getting on track than simply saving into good old-fashioned mutual funds for the long haul.

And finally, I spoke with a physician family—a married coupe of primary care docs—who have done very well for themselves over all these years BUT every now and then they ask me if they shouldn’t get more aggressive or do “something different”.

I’m beginning to get the impression that you think you need to “think outside the box” to become financially secure.

Nothing could be further from the truth.

Let me tell you: this financial security thing… this “having enough money to last a lifetime” thing that I’m talking about all the time… It’s not hard. It’s not new. And there’s nothing out-of-the box about it.

In fact, the tried and true way to become financially secure is way, Way, WAY *inside* the box.

Want to see what’s inside?

First you set a goal. Then you make a plan. Then you get on track.

And if you ever find yourself “outside the box” then you run like you’re hair is on fire until you get back inside that box.

Sure, some of your colleagues are venturing outside the box with their brother-in-law’s new restaurant chain or their partner’s latest and greatest get rich quick scheme. And yes, they might make a killing... or just get killed.

But you—If you’re smart—will look around you and see that there’ simply no substitute for hard work, steady saving and wise investing.

And when you gain this perspective, you’ll stand a much better chance of building financial security that can last a lifetime.

Demystifying the defined benefit pension plan| W. Ben Utley CFP® writes for Orthopreneur

When it comes to money, there’s only one thing more complicated than the tax code, and that’s the rules surrounding qualified retirement plans. While they may be complicated, these plans are simply the best way for surgeons to beat the tax man at his own game.

No qualified plan is more powerful than a defined benefit plan, and no plan is more poorly understood. Here’s a primer to help you get started.

A defined benefit plan is an employer ­sponsored retirement plan that promises to deliver a specific or “defined” amount of money or “benefit” to an employee beginning at retirement and lasting for the rest of their lives. Traditionally known as “pension plans,” defined benefit plans have been around for decades. Actuaries—the bean counters who design and administer these things—refer to them collectively as “DB plans” and the most recent incarnation of the DB plan is called a “cash balance plan.”

No matter what you call it, the DB plan is a wicked sharp tool for deferring income, reducing taxes and protecting assets.

Every dollar that goes into the plan is a dollar that your employer (that’s you, if you’re self-­employed) does not pay out in profits, which means that income is not taxed today. If you’re a surgeon aged 45 earning $210,000 or more, you can receive contributions to your plan of up to $112,000 in 2014 (twice as much as you could contribute to a combination 401(k)/profit­sharing plan). At age 55, you can receive contributions of more than $200,000. Given taxation in the 35 percent Federal marginal tax bracket, surgeons taking advantage of a DB plan are deferring somewhere between $39,000 and $70,000 in taxes every year.

Note the use of the passive voice, here. We did not say “you can contribute.” We said “you could receive contributions.” This is one aspect that sets the defined benefit plan apart from the more familiar defined contribution plans (like 401(k), 403(b) and profit­sharing plans). You, as an employee, have precisely zero control over a DB plan. It all rests in your employer’s hands. They decide how much you can defer, how it will be invested and whether or not you can participate. If you’re not self­employed, you might as well stop reading here because there’s literally nothing you can do about a DB plan.

If you’re self-­employed, though, meaning you’re a partner, shareholder, LLC member or sole practitioner, there are a few things you need to know.

  • Contributions to your DB plan are based on your employee’s age and compensation. Older, more highly­compensated employees (typically the surgeon owners) will require greater contributions, while younger staff with lighter wages will get less.
  • You cannot game the system so that only the owner-­employee benefits. The IRS has strict rules about who must be covered and more rules that prohibit discrimination. A skilled actuary may be able to tilt the playing field in your direction, but you must know that your employees will be treated equitably by your plan.
  • A DB plan requires commitment. While there is no hard and fast rule about how many years you must keep your plan in operation, actuaries generally advise employers to keep their plans open for at least five years, and to keep those plans active/funded in at least three of those years. This means you need to have a reason to believe that your practice will have sustainable positive cash flows in the foreseeable future.

These general guidelines paint a picture of which practices should, and which should not, adopt a DB plan.

The best fit scenario we have seen was a group of four radiologists who had no employees. Two of the physicians were in their early 60s, with one junior partner in her mid ­40s and one newly ­hired physician on track to become a partner. They all earned mid-­six-­figure incomes. Collectively, they could have socked away more than a half million dollars a year.

The worst fit scenario typically involves younger physician owners with highly-­compensated physician extenders, a plethora of older support staff and a hazy or fragile bottom line.

However, some scenarios that seem like a poor fit for a DB plan might be salvageable. Particularly in situations where the employer has a safe harbor defined contribution plan, like a combination 401(k)/profit sharing plan where the employer is already making generous contribution to each employee’s account. In such a case, it might be possible to dramatically increase the overall contributions to owner-­employees while only slightly increasing the share of plan benefits received by employees.

Beyond the tax benefits, DB plans are hugely helpful for surgeons in subspecialties with high rates of malpractice. As entities governed by the Employee Retirement Income Security Act of 1974 (ERISA), they are exempt from the reach of creditors through bankruptcy.

If you decide to explore the option of adding a DB plan to your practice, there is no substitute for a consultation with a pension guru. It is customary for pension actuaries to run a complimentary analysis of your practice to let you know whether or not a DB plan might be right for you. This analysis is usually free of charge.

While the rules surrounding DB plans are painfully complicated, there is no reason to fear what you do not at first understand. The potential benefit is so enormous that you owe it to yourself—or at least you owe it to the next partner who brings this idea into your executive committee meeting—to ask questions and listen to the answers so that you can understand all the costs and benefits to know whether or not a DB plan is a good fit for your practice. 

W. Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to make a plan and get on track with saving for college and invest for retirement.

This article originally appeared in Orthopreneur with the title "Demystifying the Defined Benefit Pension Plan".