Personal finance - the next steps?
November 29, 2018 7:28 PM   Subscribe

My husband and I have managed, I think, to set ourselves up well in terms of basic personal finance. Now we are at the stage where we are talking about what to do with our money after covering all the basics. I am still clueless about money, and I don't really know how to have a knowledgeable conversation about it.

My husband and I are both doctors, East Coast USA, making around 800K a year combined. We have two kids 10 and 12. Here is what we have: maxed out 401K plans every year, another IRA (I think that's what it is?) with around 250K in it, emergency saving account with around 80K, college funds for our children with around 40K in them so far. We have a house, valued around 1m, with around a 500K mortgage. We have no credit card or student loan debt, or any other payments. Yes, we are in good shape.

We give around 5% of our income to charitable causes, and are planning on increasing that.

My question: Now, my husband wants to meet with a financial planner and talk about "what next" to manage our money. Right now, our income just sort of sits there and every month we add a bit more to our savings account and don't do much else with it. Now, I grew up lower-middle class, and I just don't really know how to talk about this much money. If we go see a financial planner (a one-off visit, our accountant recommended one) what questions do I ask? What are viable ways to manage our money from here? I also have no concept of how to evaluate any suggestions the planner might make. (Example: husband mentioned "whole life insurance" in passing. I understand from my reading that it's not a great option for most ppl, but maybe for us it's OK? I just don't know?)

I would appreciate suggestions of questions, suggestions for stuff for me to read. Yes, I am aware that I have some anxiety about this. Husband doesn't know that more than me about money, but he is much more of the personality of "let the financial person sort it out" and I am less trusting/more anxious.
posted by anonymous to Work & Money (18 answers total) 8 users marked this as a favorite
One thing it's good to know is how tolerant you are of risk.

This is partly a financial planning question and partly a psychological question.

The financial planning part is, like, "If you're going to need the money in X amount of time, you should have Y% of it in high-risk high-yield investments and Z% of it in low-risk low-yield investments." Your financial planner can take care of those calculations. What you need to be able to tell them is what your goals are, what the time frame is on those goals, and how flexible the time frame is (e.g. whether you can afford to postpone something by a few years if the market is down).

The psychological part is, "What do you do if you own some stocks and their value starts going down?" Do you panic and sell them immediately? Do you hold onto them? Do you wait and see? This is important because if you panic-sell when things lose their value, high-risk investments won't go well for you. This is a thing for you to know about yourself, based on your past investment experiences, and to tell to your financial planner so they can tailor their plan to your needs in a more detailed way.
posted by nebulawindphone at 7:48 PM on November 29, 2018

Your tax rate is probably through the roof. What you need is a really good white-glove CPA firm. Because:
1). This is what they do,
2). You have a lot to gain with long-term tax avoidance strategies. and
3). CPAs have a fiduciary duty to you, whereas financial planners don't (and fought tooth and nail to keep it that way)

As far as investing goes, a classic read is "A Random Walk Down Wall Street". Don't try to game the stock market, and don't give money to anyone who says they can. See under Madoff. And trading is all algorithmic nowadays anyway.

Also, real estate.
posted by dum spiro spero at 8:15 PM on November 29, 2018 [6 favorites]

Overall you're doing well, but I don't think 10% of your yearly income in savings is great. You should aim to have at least 3 months, if not 6 months, of emergency funds, especially with two kids and $500k left on your mortgage. This is not just in the case of a job loss, but sudden illness or injury could wreck havoc on your life, financial or otherwise. And it's hard to make lifestyle adjustments at your income bracket. I'd get to at least three months of savings before starting to invest your emergency find, and only conservatively. You don't have credit card debt, so you will always have a month to float if you need to, but it's best not to get there in the first place!

I agree that seeking out a planner is great advice; just be sure you are working with a fiduciary!
posted by ancient star at 8:24 PM on November 29, 2018 [2 favorites]

I've seen The Whitecoat Investor (blog and book) recommended around the traps.

It's fine to ask questions, all the questions, and take it slow. You're clever, you'll work it out. Just don't take it so slow that you do nothing.

Something that Dave Ramsey (super conservative in both meanings of the word) recommends at your stage is paying off the house. From an interest rate/tax deductions point of view, it doesn't make a huge amount of mathematical sense, however, it's got a few advantages. It's straightforward, it simplifies your life (most investments add responsibility/complexity) and it reduces risk. Your financial planner is very unlikely to recommend it, but it's be worth considering if you hate risk and debt.
posted by kjs4 at 8:29 PM on November 29, 2018 [1 favorite]

Short version: Will, Insurance, Make sure your IRA & 401K are ok, Investment account

1) A well written will, possibly a trust for the kids. Yes you can DIY, but in your position I'd go with a lawyer.

2) At the financial advisor: First, set up good life insurance on both of you, more than you expect. Let's say 2M each. Possibly disability insurance as well. A financial advisor can generally do this for you; it might not be the absolute best deal (see comment below, above, everywhere on fiduciary responsibility) but it's a good intro product that they can get a little commission on and you'll know what you're getting. Regular (term) life insurance - don't get complicated with cash value, things like that. You're not concerned with an investment, this is entirely risk reducing.

3) Find out what your 401K and IRA are invested in, and where they are. Make sure it's something and not just cash. Wherever you hold the IRA will be more than happy to set up a non-retirement account for you (point 4 below).

4) Now, set up a place for investments - could be through the advisor if you trust them, but honestly at this point you may be better off finding a branch of Fidelity, walking in, and say "I want to invest 50K in low cost index funds, please help". You can also do this at Chase (JP Morgan) or any number of other places, I just tend to like Fidelity for their website and ability to go low touch or high touch customer service as needed. I woudn't necessarily move money at this point, but you need to start somewhere. Put some money there every month.

I think the best advice I can give is: If you don't understand it and it can't be explained in a few sentences, don't bother with it for now. What I put above comes down to "Make sure everyone is provided for if either of you die or get hurt. Make sure your retirement money is doing something instead of just sitting there. Put some non-retirement money in the stock market as a general concept but don't try to get cute."

I am not your financial advisor, but good luck!
posted by true at 8:36 PM on November 29, 2018 [2 favorites]

You’re six years away from college and your kids won’t get financial aid. If you plan on private colleges, you’ll need $600,000 over the next twelve years for that. I’d be focused on saving some money towards that. It doesn’t all need to be in restrictive 529 plans but it should be earmarked.

I second life and disability insurance as safeguards against risk. And a will, plus healthcare directives.
posted by Sukey Says at 8:53 PM on November 29, 2018 [8 favorites]

You've gotten pretty good advice for the most part. I'm not part of the intended audience and so haven't dived in too deeply, but what I've seen of the Whitecoat Investor seems great; Bogleheads is also a good and perpetually recommended resource.

1. What to expect: the financial advisor should ask you about your goals for your money (when do you want to retire and at what level of spending, how much do you expect to contribute to your kids' education expenses, how risk averse are you, do you intend to bequeath significant money and if so to what/whom, etc) and then lay out a plan that is relatively simple. If he or she is recommending more than, say, five or six different types of funds, or complicated financial instruments like whole life insurance (no, this is likely not a good choice for you) or any kind of annuity other that single premium immediate annuity (SPIA), it's a red flag. Just because you are high-income doesn't mean that your financial planning needs to be complicated, especially at your current savings level.

2a. So what to ask the financial adviser? I'm making some assumptions about your situation so take these recommendations with a grain of salt. Regarding how to handle your savings: the thing that is conspicuously missing from your description is a plain old investment account outside the IRAs and 401ks, so make sure you know how to set that up. After talking to you about your goals, the adviser should help you come up with an overall asset allocation - how much you want to put in stocks, bonds, commodities, etc - and then help you figure out how to balance that across your 401k, IRA, and investment account. If you don't already know, you should ask them to help you figure out if you're really maxing your 401k - depending on your employment situation (ie if you're in private practice) you may be able to contribute up to $56,000/year in both personal (limited to $19,000) and employer contributions. You should ask about the mega backdoor roth IRA. You should ask about the best place to save money for your kids' education; 529 plan might or might not be the right answer, and the 529 plans offered by different states have different rules that may be more or less advantageous to you.

2b. Other things you should ask: you should ask them to help you figure out how much you're spending monthly, and how much of that is fixed costs vs. variable. This is important because the amount in your emergency fund depends on the amount you spend; and because the amount you spend translates into how much you need to save in order to maintain a similar lifestyle in retirement. You can ask them to work through some different scenarios with you, for example, if someday one of you wants to retire early or go part-time - what are the implications for your savings needs?

3. A note on life/disability insurance. If you need life insurance the kind that you want is term, but always remember what the purpose of insurance is: to protect you against an event that you otherwise couldn't afford to deal with on your own. It's not clear from your question how long you've been making this combined income (or since you've paid off your loans...) so I'm not sure how much you're spending in your day-to-day life. If you each make $400,000/year and you really need $500,000/year for the lifestyle you want, you need a life insurance amount that would cover the $100,000/year shortfall that you would suffer if one of you passed away. If you each make $400,000/year and you really only need $300,000 annually for your desired lifestyle, life insurance isn't necessary because you can afford to keep on after the other person's death without it.

Most importantly, if you don't understand something, ask the financial adviser to explain it. This stuff can be complicated if you have complex business interests or intricate tax-management needs, but you aren't there at this point so any sound strategy should basically make sense to a layperson. If you feel like the adviser is dazzling you with complicated techniques you don't understand, it's probably because they are trying to take advantage or sell you something you don't need.
posted by exutima at 9:40 PM on November 29, 2018 [1 favorite]

If you feel like the adviser is dazzling you with complicated techniques you don't understand, it's probably because they are trying to take advantage or sell you something you don't need.

Yeah, you're at something of a dangerous point where you're making enough that it's worth a bit more individualized effort to try to fleece you, likely by putting you into questionable direct investments. But at least you don't have the weakness of so many well-off professionals, who like to think that because they're highly skilled in one field, they're naturally genius investors, too.

All your excess funds for the next six to eight years could probably go into college savings without being too much, honestly.
posted by praemunire at 10:06 PM on November 29, 2018 [1 favorite]

If you work for a nonprofit hospital or foundation, check to see if they have a 457(b) plan, which tax defers compensation. You want a fee-only financial planner who isn’t incented to sell you annuities/investments. There should be tax advantages available to you if you’re self-employed (e.g. SEP IRA). You need a good accountant to navigate this as well, and doing some basic personal finance reading might be good. Your retirement provider for 401k/403b might have high net worth advisors available for a consultation, too. John Bogle’s books or the Wall Street Journal’s investing guide would be good reads.
posted by OneSmartMonkey at 10:52 PM on November 29, 2018 [1 favorite]

If I were you, I would pay off the mortgage with excess savings past what you need for a small emergency fund. It's a better return than having cash sitting around in a savings account, it's probably not that much worse of a return than investing in a stock market index fund, there's no risk, and it's satisfying to have no debt.

In the meantime, you might want to check out the Bogleheads wiki if you want to start reading and learning about investing. They have some pretty reasonable-looking book recommendations.

Try not to be anxious about it! With what you have so far and your income you earned the luxury of not worrying about money. Just save as much as you can and don't feel pressured to do things that you don't clearly understand.
posted by value of information at 11:48 PM on November 29, 2018

I think before you meet with the FP, you and your husband have to determine what your financial goals are beyond just financial independence/freedom/wealth. You have already started that. You have a 401k. Retirment at some level is a goal. When? When you are 65 or when you meet some wealth goal or when your kids are away at college? You have college funds so obviously that is another goal. Setting up savings to pay for future material expenses. What other goals do you have? Some people want to pay off their mortgage so that they can manage much better if they lost their jobs or got sick or whatever. Speaking of which, is insurance or planning for the what ifs of major illness, disability or even death of one or both of you. IF that is a goal, talk to FP about that.

I think the suggestion to determine what kind of risk to take or how much or what percentage of your wealth you are willing to risk is another good idea. What can you afford to lose? How would you and your family cope with investing in something that turned to shite? Some people want the Sominex position. Investments that they can sleep with at night. Some sleep well with big risks. While it is true that big risks often mean potential for big rewards, it is not a given.

What are your liquidity requirements? That needs to be discussed prior to and with the FP meeting. What are your time horizons? You should consider 5 year goals, 10 year goals, etc.

Another really important consideration when investing are your tax considerations. Do you have offsets to ordinary income? Do you have investing expenses? There are a lot of tax consequences to investing and wealth management. Make considering them part of the process.

I think you also need to think about what other obligations you might have in the future. You mention charitable giving. Some people give cash, some give in other ways. (Some don't give.) What if a relative asked you to invest in their business. If you have a pre-planned answer, it helps to respond especially if the answer is a form of a no. Our financial planner handles all of our money outside of our monthly budget is a great thing to say to someone who wants your money but you do not want to be the bad guy.

Do you have elderly parents who may need to move in with you or who may need your financial assistance? Have you budgeted for that? How much of your income are you willing, able or want to set aside for vacations and general personal fun.

I think when you meet with this FP, tell them you are not prepared to make a decision that day, are on a fact finding mission and want to learn about what they can do and what they cannot do for you. Ask them what you should ask the next guy. See what they ask you. Do they ask about your risk tolerance? Do they just fill out a form with your basic info and ask the computer to suggest an investing model or strategy?

I think you need to learn about investing, but that is just a subset of learning about all things related to personal finances and goal setting and risk tolerance, etc. This is not going to be an easy process where you meet two choices, pick one, set it and forget it.
posted by AugustWest at 12:00 AM on November 30, 2018 [1 favorite]

Spouse of Sol and I are meeting our financial planner in a couple hours. Here's how that process worked for us.

We chose a fee-based financial planner and we went through an extensive interview process.

We found someone that we were both comfortable talking about the human issues around money and family - guilt, embarrassment, anxiety, family history, communication within a couple. Advanced knowledge of financial instruments was also important but a distant second.

If the planner had been connected in any way to a financial product I would have avoided them. There are good ethical people who work in commissioned-based financial advising but I just cannot handle the stress of wondering if the advice is benefitting me or the planner.
posted by sol at 3:27 AM on November 30, 2018

I agree with others that the college funds need to increase substantially, given the ages of your children. And yeah, to me there is a HUGE psychological benefit to paying down the mortgage -- a financial advisor can walk you through the actual nickel-and-dime value of that versus other choices, but to me that particular item is really worth throwing money at in a dedicated way.

My understanding is that term life insurance is almost always more beneficial than whole life insurance, but certainly worth asking about. SOME type of life insurance is a must for you both.

If you're looking to increase charitable giving (and already donate $40k per year), would establishing a small family foundation be worthwhile? It's not just for the uber-wealthy! I'm not sure of the precise benefits of that, but could be something to investigate.
posted by Bebo at 5:58 AM on November 30, 2018

It sounds like your long-term goals are:
  • to retire (for which you'll need 25x your annual expenses at retirement age)
  • to pay for your children's college education (between $200k and $600k depending on location and public or private college, needed in six years' time)
  • to donate to charity (as you please)
You also need some protection:
  • emergency savings (3-6 months expenses)
  • life insurance and wills
  • long-term disability insurance
Anything else do you want to do in the future?

To achieve these you need to put aside a lot of money for your kids college, and given the time frame that should be relatively low risk, you need some more money in emergency savings and that should definitely be low risk, and then, if you have no other goals, donate some more, and invest the rest up in tax advantaged retirement accounts, and ordinary investment accounts. Plus make sure you have enough life insurance (term is the way to go) and disability insurance so that your family could meet its needs if something happened to one or both of you.

Otherwise, your affairs should be set up to minimise tax, and then to minimise investment costs at the right level of risk.
posted by plonkee at 6:17 AM on November 30, 2018 [1 favorite]

You're well above the point on the income curve where marginal dollars are going to improve your standard of living in a meaningful way, yet almost all of the financial advice that you receive is going to be focused on extracting more dollars at the margin from your existing base of capital.

You are at a critical financial stage: you have the financial assets of a capitalist, but you still have a working person's view of finance. Society wants you to reframe yourself into a capitalist mindset; your anxiety might not be a problem but a natural response to an unnatural financial stance! It's an inflection point to stop and think: am I interested in learning to be a better capitalist? Is capitalism good?

Consider some radical alternatives:

1) Figure out how to do work that is meaningful and helping the world, even if it requires a big salary cut. You're doctors, so maybe you already feel like you're maximizing the amount of helping that you do in your day to day. But maybe not! Maybe there's another role, for less money, that would help more; maybe you could work half time and donate the other half of your workday to a free clinic.

2) Donate a radical percentage of your income-communities of people do this and call it earn-to-give or effective altruism.
posted by Kwine at 6:37 AM on November 30, 2018 [2 favorites]

Its always good advice to save more and pay less tax. I have only a few points to add
1) It can very very tax efficient to make your charitable donations by gifting appreciated stock. Most of the larger brokers have a set up where they will sell the shares and deliver cash to the charity of your choice on proof of 501c3 statues
2) Not withstanding that it is always good to save more, I'd consider your lack of insurance (think about liability and double checking your homeowners in addition to the term and LT disability mentioned above) and estate planning way more problematic than the college savings thing. Given your level of income and the size of your mortgage (which I'm assuming is your only major fixed cost/liability) you can actually mostly pay for school out of current income if you had to. Not an argument against maxing out the 529 or increasing savings, just saying you needn't feel stressed about it.
3) Don't forget about an HSA as a place to put another 5k a year away tax free if you can make the economics of a high deductible health care plan work for you.
posted by JPD at 6:40 AM on November 30, 2018

When I have met with a financial planner, they spend most of the first meeting gathering information and discussing our goals. They will want to know:
1. Annual income and any expected raises (or drops)
2. Monthly/ annual expenses, which leads directly to...
3. Monthly/ annual savings rate, both inside and outside of 401K, 529 vehicles
4. Any large inflows (inheritances, etc) you are expecting in the next few years

If you have all of those numbers ready, you can then move onto talking about goals, including:
1. When you want to retire (and how - both at the same time, part time work, no salary...)
2. What income you would like to have in retirement (which does not have to be tied directly to your current lifestyle or salary)
3. Other financial goals, such as charity, college, new houses, other caregiving, that will need to be covered and when.

They should also spend some time getting to know your personalities, especially around your tolerance for risk and how actively you want to manage your investments.

Only after they have have learned quite a bit about you and your individual situation and goals should they start recommending a plan - I would be skeptical of anyone who comes in with suggestions before they have full information. Talking about money is just talking about life, so it shouldn't feel like a stressful conversation - it should just be about how you can use your money to have the life you want for your family.

Since most of our money is invested with Vanguard, we used their financial planning service. Yes, it's tied to a specific company, but that doesn't bother me because I agree with their philosophy. But that did mean that we didn't talk as much about wills, insurance, and other broader questions.
posted by oryelle at 7:51 AM on November 30, 2018

Besides life insurance to cover the risk of one of you (or both) getting hit by the proverbial bus, I think you should also discuss the risk that one day, you may fall out of love and want to go separate ways. This happens to more people at your income level than you might guess, and causes them lots of heartburn whether the separation is amicable or not. Often there are tax consequences relating to aspects of untangling the assets. You may not want, or need, a post-nup agreement, but you should discuss the possibility, and at least structure your investments in ways that more easily identify what's shared, what belongs individually to one spouse, etc.
posted by beagle at 8:47 AM on November 30, 2018

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