Principles for Financial Success- Beginning your

Residency

Congratulations!

Mortgages, Buying a House,

Private Banking, and Basic

Financial Planning

Ralph Broadwater, MD

Financial Advisor

The Busey Investment

Group

Mortgages, Private Banking

Susan Marlowe

Realtor RELO Director

The Janet Jones Company

Outline

• Achieving success- Ralph Broadwater

• Your Banking Relationship

• Buying a Home- Susan Marlowe

• Specific Residency Issues- Ralph

Broadwater

• Questions

Achieving Financial & Personal Success during

your Residency

Achieving Financial & Personal Success during

your Residency

• Setting Goals

• Dynamic tension

• Principles of Financial Success

Goals

• Professional

• Personal

• Financial

• Family

Why is it important to set goals?

We get used to our lifestyle

• We all want to retire and enjoy life

• We will all live longer

• Inflation will affect our income needs

• If you don’t save early you are in

trouble

Example: Income needs for retirement

• $100,000 income

• Age 30

• Retire at 55 (25 yr career)

• 2.5% inflation

• 10% investment return

• Live until age 85

• Deplete savings in retirement

Savings and retirement

• At age 55 will need to generate

$185,000 for same lifestyle

• Will need $3 million

• If start saving and earn 10% return:

Monthly savings requirements

30 30,504 2542

40 94,421 7868

Start saving at age: Per year Per month

Dynamic tension

• Enjoying life

• Saving

• Maximizing retirement savings

• Debt management

Basic Principles

• Develop goals

• Take care of the basics

• Save regularly

• Maximize retirement savings

• Don’t develop a consumption lifestyle

• Start saving now!

• Pay for professional help

– accountant

Take care of the basics

• Disability Insurance

• Simple will

• Personal liability umbrella

• Adequate insurance (life, health, home, auto)

• Life insurance trust

Principles of Financial Success

• The rich vs. the rest of us

• Principles from The Millionaire Next

Door

• Specific suggestions

Understand Wealth Creation

• The rich are different from everyone else.

• They purchase assets.

• Assets generate income that further increases wealth.

• Everyone else buys “stuff”; doesn’t increase income or wealth.

Robert Kiyosaki, Rich Dad, Poor Dad

Robert Kiyosaki, Rich Dad, Poor Dad

Robert Kiyosaki, Rich Dad, Poor Dad

Expenses will expand to entire income. (No matter how much)

A fundamental law of finance

Pay yourself first

• Automatic

• Debit checking

• monthly

Successful Investing

• Slow and steady wins the race

• Power of compounding

• Power of tax-deferred growth

• Maximize both qualified plan and personal savings

• Annual returns of 7-10%

Lessons from the Millionaire Next Door

“Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.” The Millionaire Next Door

80% of American millionaires are 1st

generation rich.

The Millionaire Next Door

Physicians, in general, do not tend to be wealth

accumulators.

BIG HAT, no cattle

UAMS graduatefinancial demographics

Class of 2000

• 134 graduating

• $7,042,440

• 62,879 avg debt

• Avg debt

77,334/109,264

Educational Indebtedness

16%

84%

No debt

debt

Class of 2002

• 140 graduating

• $71,307 avg debt

• 16 students no

debt

Educational Indebtedness

11%

89%

No debt

debt

Total Educational DebtClass of 1999

0 13 17

<10,000 2 2

0-19,999 1 3

>20,000 84 78

UAMS US

Mean/median debt: 62,177/60,000 (80,462/80,000 US)

Credit Card DebtClass of 1999

0 38 56

<10,000 22 24

10-19,999 22 16

>20,000 18 6

UAMS US

Mean debt: 14,108 (7425 US)

Millionare Next DoorSeven Common denominators

• Live well below their means

• Allocate time, energy, and money efficiently

• They believe financial independence is more important than displaying high social status.

Seven common denominators

• Their parents did not provide economic support.

• Their adult children are self-sufficient.

• They target bargains.

• They chose the right occupation.

Frugal, Frugal, Frugal

Save, Save, Save

Creating wealth

• Set goals (have a plan)

• Take care of basics

• Maximize tax free earning (retirement

plans)

• Save routinely

• Measure progress

Barriers to Success

• No clear goals or plan• Inadequate protection (insurance)• Consumption lifestyle• Trying to time the market• Chasing performance• Acting on hot tips• Starting to save too late• Behavioral Finance Issues

Specific Issues During Residency

Specific Issues During Residency

• Should I participate in my institution’s

retirement plan?

• Should I save into a Roth IRA?

• Should I buy a home?

• Should I consolidate my student loans?

Consider saving for retirement

Resident SalaryUAMS 2003-2004

PGY-1 $36,500

PGY-2 $37,000

PGY-3 $37,500

PGY-4 $38,000

PGY-5 $38,750

PGY-6 $39,750

PGY-7 $41,250

PGY-1 Salary$36,500/yr

Gross pay 2,979

Taxable Income 2,762

Federal tax withholding 171

State tax withholding 122

FICA Social Security 0

FICA Medicare 0

Insurance (pre-tax) 217

Net take home pay 2,476

PGY-1 Salary$36,500/yr with retirement savings

Gross pay 2,979

Pretax deduction (retirement)

298

Taxable Income 2,476

Federal tax withholding 153

State tax withholding 62

FICA 0

Insurance (pre-tax) 217

Net take home pay 2,261

Growth of Retirement Savings5 yr residency

3576 3826 3862 3934

3700 8052 8167 8397

3800 12,682 12,924 13,417

3875 17,715 18,142 19,021

3975 23,209 23,887 25,296

7% 8% 10%Annual savings

18,926 contributed

Growth of Residency Retirement Savingslifetime

40/10 45,656 51,570 65,611

50/20 89,812 111,336 170,179

60/30 176,673 240,367 441,400

70/40 347,542 518,934 1,144,878

7% 8% 10%

18,926 contributed

Retirement Savings During ResidencySummary

Gross pay 2863 2863

Retirement savings 0 298

Federal tax 171 153

Take home pay 2476 2261

Annual retirement savings

0 3576

No saving Saving

Summaryretirement decision

• Take home pay only reduced by $215 per month

• Saving $298 per month

• U.S. government is paying for $996/$3576 of annual retirement (28%)

• Money comes from reduced taxes

• Choice: pay the tax or pay into your retirement (free money)

You have a choice

• You can spend all of your take home pay: consumption lifestyle OR

• You can plan to save

• $298 per month x 5 yrs

• Either have a few more CD’s, clothes

• Or have between 347,000 –1.1 million dollars in retirement

Consider a Roth IRA

Consider Roth-IRA

• tax free growth

• no tax deduction

• income at retirement is tax free

• AGI

Single $110,000

Married filing jointly $160,000

Roth IRA assumptions

• $3000/yr during 4 yr residency

• age 26-30

• 7%,8%,10% returns

Roth IRA

30 9012 9,282 9559

50 42,005 60,628 86,932

65 133,245 253,259 475,830

70 195,781 407,876 838,525

7% 8% 10%Age

Consider Buying a House

Consider Buying a House

• If > 3 yr residency

• Don’t over buy

• Buy for resale

– Neighborhood

– Schools

– Comparables

• Don’t plan to make money on resale

Buying a House

• Improved lifestyle

• More room and amenities for the money

• Government pays part of your “rent”

• Tax benefits

ExampleBuying a Home

• 27% tax bracket

• 100,000 home

• 100% mortgage (no down payment)

• 5.7%

• 30 yrs

New home cost

Principal & Interest

580 6960

Insurance 29 348

Property tax 104 1248

Total 713 8556

Per month Per year

New home: True cost

• Mortgage Interest and Property taxes are itemized on tax returns as a deduction ($6,948)

• At 27% bracket you pay $1,876 LESS taxes

• This is equivalent to reducing your monthly payment from $713 to $557

• So it really only costs you $557/mo to own a $100,000 home

Apartment vs. Home ownership

Monthly cost 300-500 500-772

Quality of life OK Increased

Tax savings None 1500-2200

Hassle factor Less Increased

Appreciation (profit) potential

None Possible

apartment Home ownership

Should I consolidate my loans?

I don’t know.

• Look at cost of consolidation

• Interest rates

• Does consolidation effect deferment or forbearance?

• Is there a prepayment penalty?

• Is simplification important to you?

• Is the company reputable?

Achieving Success in Life: Recommendations for Your

Residency

Recommendations

• Write down your goals

• Take care of the basics

• Develop a relationship with your

personal banker

• Save 10% of your gross pay

Recommendations

• Save for Retirement (Roth vs. 403b)

• Consider buying a home

• Hire an accountant to do your taxes

• Keep credit card debt to a minimum

• Use a balanced no load mutual fund for investments

• Review goals annually

Wealth AccumulationTypical New MD

• Assumptions

– age 30

– 25 year career (retire at age 55)

• Annual Savings

– $30,000/year into Qualified Plan

– $1,000/month

• 7-10% investment returns

Wealth AccumulationNew MD

35 258,438 266,109 282,056

45 1,129,298 1,231,619 1,467,889

55 2,842,412 3,316,085 4,543,634

65 6,212,365 7,816,290 112,521,326

Age 7% 8% 10%

Week 4-Last Chance Course

April 21-25

Medical Economics, Financial Planning, & the Non-Medical Practice of

Medicine

Topics• Financial Planning• Money Management• Risk Management• Real Estate• Insurance• Behavioral Finance• Debt Management• Investment specifics• Wisdom from Private Practice• Seminars

Individual Sessions

• Dr. Broadwater

• Starting April 21

• Call 686-5547

• Email: broadwaterralph@uams.edu

Questions