Financial Planning for Medical Graduates Vanderbilt University School of Medicine

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1 Financial Planning for Medical Graduates Vanderbilt University School of Medicine Presented by Mike Waters, CEBS The Benefit Planning Group, Inc.

2 The Need for Financial Planning

3 The Need for Financial Planning n Step 1: Choose Your Financial Planning Team n Step 2: Develop Your Plan

4 Basic Steps in the Financial Planning Process

5 FINANCIAL PLANNING 101

6 Pyramid of Financial Strategies Level 4: Investing Aggressively Speculative Investments for Greater Growth Potential Art Metals Oil & Gas Commodities Venture Capital Level 3: Financial Growth Wealth Accumulation Overcoming Inflation Level 2: Financial Foresight Capital Accumulation Saving for the Future Level 1: Necessary Foundation Risk Management Investment Real Estate Growth Stocks & Mutual Funds Variable Life Insurance & Annuities Buying a Home Vacations Providing for your Family (e.g. College Savings) Retirement Plans Money Market Accounts Corporate/Municipal Bonds Conservative Equities Medical Insurance Disability Insurance Life Insurance Auto & Property Insurance Emergency Savings

7 Debt Management n Long Term Perspective n View your school debt in relation to your next 10 years of income, not just your resident s salary n Pay Yourself First n Prioritize retirement plans, savings, investments n Rate Reductions n Auto-Pay and timely payments can significantly reduce your interest rate n Repayment Extensions n Stretch out your repayment period to lower monthly payments

8 Student Loan Deduction n Deduct interest for life of loan n Maximum deduction is $2,500 n Income phase-out ranges apply n Single: $55,000-$70,000 n Married: $110,000-$140,000 When phased out, consider using a home equity loan or consolidate to lower interest rates

9 Tuition Deduction n Maximum deduction of $4,000 on higher education expenses n Income phase outs n $130,000 to $160,000 for married, filing jointly n $65,000 to $80,000 for single filers n No need to itemize n Education Credit vs. Deduction n Could claim deduction in lieu of education credits. n Need to compare which would yield greater benefit.

10 American Opportunity Credit n $2,500 annual tax credit for education expenses n 40% of credit amount is refundable n Available for undergraduate, graduate & professional degrees n Income phase outs: Single $ 80,000 to $ 90,000 Married $160,000 to $180,000 n Need to coordinate with new tuition deduction

11 Buying a House? n How long will you live in the house? n What are the taxes? n What is the cost of insurance? n What is the re-sale market?

12 Buying a House? n Deductible mortgage interest on first and second homes n Deduct up to $100,000 in home equity loan or line of credit interest n Deduct points paid on mortgage or refinancing n Deduct real estate property taxes

13 Planning for Your Future INVESTMENT STRATEGIES

14 Key Investment Questions Application question: What do I invest the money in? n What are your investment goals? n How liquid does the investment need to be? n What is your risk tolerance? n What is the impact of income taxes? n What is the economic outlook? n Is the skill and knowledge needed to manage the investment available? n How much money is available to be invested?

15 Compound Growth: Rule of 72 and 115 n How long for your money n To double? Divide 72 by the interest rate. n To triple? Divide 115 by the interest rate.

16 Asset Allocation Sample Financial Portfolio Cash Stocks Real Estate Bonds Sample Equities Portfolio Moderately Aggressive Allocation Category Allocation Fixed Income 20% Large Value 24% Large Growth 26% Small Cap 6% International Equity 24% Total Allocation 100%

17 How a Roth IRA Works n Establishing an account n Open anytime between Jan 1st of current year and the due date of the tax return n Account is typically self-directed n A separate Roth IRA may be establish for a spouse with little or no earnings n Contribution considerations n $5,000 contribution limit in 2010 & 2011 n Earnings accumulate tax-deferred n Contributions are not tax deductible n Distributions typically during retirement or at death n Also, option for first time home buyers

18 Summary / Action Points n Establish a financial plan n Develop the habit of paying yourself first n Establish an Emergency Fund n Roth IRA, 403(b), Money Market account, etc. n View your debt with a long-term perspective n Refinance High-Cost Loans n Consolidate Loans

19 INSURANCE 101

20 Risk Management n If injured or sick, will you have income? n Disability Insurance n If deceased, how will debts be covered and your family afford living expenses? n Life Insurance n If engaged in legal proceedings, how will expenses be covered? n Malpractice Insurance n Umbrella Policy n Property & Casualty

21 Everything you own, plan to own, or plan to pay off, depends on your future ability to earn an income. DISABILITY INSURANCE

22 The Impact of Disability

23 What is the Likelihood I File a Claim? n Approximately 30% of all people aged 35 to 65 will suffer a disability for at least 90 days, and approximately 15% will be disabled for five years or more.* n This is higher than the probability of filing a claim for life insurance, homeowners insurance, or car insurance. *Health Insurance of America, 2000

24 Post-Disability Income Disability income is typically broken into two categories: business and personal It typically takes multiple types of coverage to cover all your expenses through the duration of a disability Busines s Revenue and Cash Flow Overhead Expense Revenue and Cash Flow Personal Sick Pay & Vacation Short-Term Disability Supplemental Individual Disability Group Long-Term Disability Point of Disability Retirement Age

25 Types of Disabilities n TOTAL Inability to work in any occupation n RESIDUAL/PARTIAL Ability to work in your occupation, but with a reduced capacity and earning potential n OWN OCCUPATION Inability to work in your occupation or specialty, but ability to work in another occupation

26 Types of Own Occupation Benefits n INCOME REPLACEMENT Disability would pay a benefit proportional to your loss of income. n TRANSITIONAL OWN OCCUPATION Disability would pay until your new income plus disability benefits exceed your predisability earnings. Income + Benefit = 100% of pre-disability earnings n TRUE OWN OCCUPATION Disability would pay 100% of the benefit regardless of your new income source or amount.

27 Group vs. Individual Disability Insurance Typical Group Quality Individual Tax Free Benefit No Yes Non-cancelable by insurer No Yes Guaranteed Rates No Yes Portable to new job No Yes Own Occupation Benefit Sometimes Yes Benefit Amount % of Income Full Benefit

28 Recommended Insurers for Physicians

29 Disability Insurance Standard Rate

30 Disability Insurance Discounted Rate

31 Disability Insurance Premiums by Age and Specialty Age Non-Invasive Invasive 25 $28.15 $ $29.17 $ $30.21 $ $31.24 $ $32.26 $ $33.23 $ $34.20 $ $35.16 $ $36.05 $ $36.96 $ $37.85 $44.89 Based on $1000 monthly benefit including benefit update, residual disability, $1000 catastrophic coverage, and COLA.

32 Summary / Action Points n Disability Insurance is one of the most underrated Risk Management tools n Locking in now protects against changes in your health status n Take advantage of BPG s negotiated discounts and unisex rates

33 Providing for Your Family, Protecting Your Assets LIFE INSURANCE

34 General Purposes of Life Insurance Death Benefit Uses for Life Insurance n Create an estate n Pay death taxes and other estate settlement costs n Fund a business transfer n Pay off a home mortgage n Protection from the loss of a key employee n Replace a charitable gift n Pay off loans n Equalize inheritances n Accelerated death benefits

35 n Term Types of Life Insurance n Level Term - Premium level for duration of term n Annually Increasing Term Premium increases each year n Decreasing Term Premium remains level, death benefit decreases n Permanent n Universal Life Guaranteed premium and death benefit n Variable Life Few guarantees, cash value tied to the stock market n Whole Life Guaranteed premium, death benefit, and cash value

36 Life Insurance Premiums for $1 Million of Coverage Male 10 year 15 year 20 year Guardian $33 $37 $50 Banner $25 $28 $37 MetLife $28 $35 $40 AIG $27 $29 $45 Female 10 year 15 year 20 year Guardian $28 $30 $40 Banner $22 $26 $33 MetLife $23 $31 $37 AIG $24 $26 $33

37 Summary / Action Points n Will you have life insurance during residency to cover debts and provide for family? n Term insurance is inexpensive while you re young and in good health

38 Questions? If you have questions or would like to see personalized quotes, please give us a call. (800) info@mybpginc.com The Benefit Planning Group, Inc Croasdaile Drive, Suite 206 Durham, NC 27705

Financial Planning for Medical Graduates

Financial Planning for Medical Graduates Vanderbilt University School of Medicine Presented by Michael C. Waters, CEBS Aaron D.Waters FINANCIAL PLANNING 101 Pyramid of Financial Strategies Level 4: Investing