Money
This is Part 1 of a 5 part series on Financial Advisors:
Part 2 – “What the F? – fee-only vs. fee-based and the fiduciary”
Part 3 – What's the difference between a financial advisor and planner?
Part 4 – How to find and vet a financial advisor
Part 5 – I fired my financial advisor
There is a lot of confusion and distrust around Financial Advisors. It doesn’t help that there are several reasons why your beliefs are justified.
First, anyone can call themselves a Financial Advisor. Did you know that? I can. You can. Just tell people you are and people will believe you. OK, well isn’t there a license real FAs need to get? Sort of. In some ways, this is one of the most highly regulated professional fields you can find. But people have found ways to get around the regulations, and that is what you need to understand. There are over 100 official “license” designations and “financial advisor” is not one of those designations, just a description that anybody can use to describe themselves.
It’s not that different from non-dermatologists calling themselves dermatologists. In fact, there are doctors who trained in family medicine or internal medicine who literally take a test and pay a fee to get a bogus certification without formal training. How can the public really know the difference since both can say they are “board certified”?
The American Board of Dermatology (ABD) is the official body certifying dermatologists. This requires 4 years of formal residency training (after successful completion of medical school) followed by a board certification exam. Like all other specialities, annual continuing education and other measures are required to maintain certification. Throughout residency I had to prove I attained certain milestones and underwent biannual evaluations to ensure I would practice dermatology safely. Again, unless you are a “real” physician, how can you possibly know the difference?
There is no official “Financial Advisor board.” Some, just like the sham dermatology board I mentioned above, simply require a test and a fee. Some don’t even require a test! The good news is that there are only 3 that I believe really matter.
- Certified Financial Planner™ or CFP®
This is probably the most recognized certification for financial planners. The CFP® Board of Standards governs CFPs. A CFP requires: a college degree, completion of a series of courses that cover 6 areas of planning and ethics, 3 years of experience in financial planning, passing a background check and passing a 10 hour exam. Just like doctors, CFPs must complete annual continuing education and renew their licenses every 2 years. The CFP emphasizes the importance of the financial plan in addition to managing investments.
- Chartered Financial Consultant or ChFC
ChFCs was introduced as an alternative to CFPs for insurance-focused professionals. The main difference between ChFCs and CFPs is that ChFCs do not need to have a college degree or pass a comprehensive exam. This is a popular designation for insurance professionals.
- Certified Public Accountant/Personal Finance Specialist or CPA/PFS
A CPA in good standing can get the companion designation PFS by completing 75 hours of personal finance education and experience, passing an exam, and paying a fee.
Stay tuned for Part 2 – “What the F? – fee-only vs. fee-based and the fiduciary”.
If you work for a large healthcare provider, you may have access to a 457(b) retirement account in addition to a 401(k)/403(b). Are you using it? Maybe yes, maybe no. You might want to use your hospital's 457(b).
Here's why:
The Benefits of Your Hospital's 457(b)
- Tax benefits! With your hospital's 457(b), you can invest an additional tax deferred $19,000 annually (in 2019). This escalates to $24,000 annually if you are over 50. Why do this? This lowers your taxable income. Like a 401(k), you pay income tax when you withdraw. Some 457(b)s even offer a Roth option.
- Flexibility! In addition, you can withdraw this money before age 59.5. This is great if you are planning early retirement. Why? Unlike the 401(k)/403(b)/and most IRAs, you'll have access to your money earlier.
Understanding The Types of 457(b)s
There are 2 types of 457(b)s and it's important to know which type your employer offers. There are governmental (or public) and non-governmental (or private) 457(b)s.
Governmental 457(b) Options
If you have a governmental 457(b), this is a “no-brainer”. You should use it if you need more tax advantaged space to save in. Of course, this also depends on if the plan costs and fund choices are agreeable. Public 457(b)s can be rolled over into an IRA or 403(b)/401K(k) when you leave the job.
Private 457(b) Options
Private 457(b)s are different story. The money you deposit technically belongs to your employer and can be used to pay off employer's creditors. This is only an issue if your hospital goes under. A good way to see if your hospital is afloat is to check their credit rating. I know this sounds scary but as far as I know, no one has lost their 457(b).
Exploring Your Hospital 457(b) Plan Options
The next step is to find out what the distribution options (if there are any) are when you leave the job.
Some plans make you take out one lump sum on separation. This is a lousy option, and I would hesitate using it.
You want multiple options. Preferably, you can defer distribution until retirement age and take money over time to control your taxable income. The main “con” of a private 457(b) is that you can only roll it into another private 457(b). Another catch is this. Your new private 457(b) would have to accept rollovers, and they don't have to.
Your best bet is to always get a copy of your employer's 457(b) plan as details can differ widely.
Final Thoughts on Your Hospital's 457(b) Plan
A 457(b) is a way to have access to your money before age 59.5 besides a taxable account
Your retirement savings plan should include different types of accounts to diversify. A 457(b) is a way to have access to your money before age 59.5 besides a taxable account.
I am using my hospital's private 457(b) account. I almost maxed it out last year ($16K) and will be maxing it out this year. My 457(b) plan is low cost and has a limited fund list but does include some basic Vanguard funds. Fortunately, the distribution options are very flexible so upon leaving this job, I can defer distribution until retirement age.
Since this post went live, I left the hospital job. I chose to cash out my 457(b) despite being able to leave it there indefinitely. Why? I wanted total control over the money. Yes I paid income taxes on it. I promptly deposited the check into my Vanguard taxable brokerage account. With the changing and unstable landscape of medicine, I do not want to depend on the hospital staying afloat.
No matter where you are in your career or where you are on your retirement journey, inquire about your 457(b) plan that your hospital offers. You might be able to get your hands on some serious tax-time benefits and add more flexibility to your retirement plan.
Does your job offer a 457(b)? Do you use it? Why or why not?
Apologies for the hiatus. I was in Hawaii for CME and play. I also got engaged! The above quote is what M said to me (after he promised some other important things like love and happiness).
There are 3 major things in life to insure against – death, disability, and divorce a.k.a. (term) life insurance, disability insurance, and the pre-nuptial agreement AND making sure you and your partner are compatible, especially when it comes to money. Everyone agrees on the first two, but so many neglect the last. People simply think they won't get divorced – it's everyone else. Unfortunately, statistics show otherwise.
The internet has several articles on the leading causes of divorce, but let's look at this one from the Huffington Post. Finances is #7, but #4 “Not having a shared vision of success” includes financial goals too. In any case, I think everyone can agree that being on the same page money-wise is an area that couples need to agree on.
Love feels great, but ultimately a successful marriage is based on much more than that. The NY Times' questions to ask before marrying has finances as the second question:
“Do we have a clear idea of each other’s financial obligations and goals, and do our ideas about spending and saving mesh?”
Around the third month of dating M I asked him how much money he had saved for retirement and what debt he had. I divulged mine as well. We talked about our shared goals like to work in jobs we enjoy, take two big trips a year, live partially abroad in the future, etc. In fact, we drew up an IPS or Investment Policy Statement. OK, I drafted it and he approved it :).
And, I'll let you take a look at our first draft from a few months ago as an example. This document was the culmination of M and I discussing our goals as a couple. We have also discussed how we feel about financial obligations to our parents should that arise.
We recently hired a financial advisor in prep for combining our finances. I realize most of the finance blogs out there promote DIY and I was more than comfortable doing that for myself. I felt more was at stake with managing our finances. I'm also no spring chicken so we don't have much wiggle room for big mistakes – we have ambitious financial goals.
By the way, we did all of the questions in that NY Times article.
And finally, we have discussed the terms of a pre-nuptial agreement, stay tuned for that.
What do you think? How financially compatible are you with your partner? What questions did you wish you asked?
A great thing to do if you know you want kid(s) and are able to is to start funding their college account now.
Why? The cost of college tuition has been outpacing inflation at an astronomical rate. I started college in 1995 at Barnard College in NYC. Tuition at that time was ~ $20,000. 2016-2017 tuition is $48,614. That's over a 200% increase in tuition in about 20 years. I qualified for financial aid and only had $16,000 in loans when I graduated in 1999. Lucky indeed.
Of course, medical school was a different story and that tacked on another $150,000 in loans, but knowing how much other students graduate with now (> $300K !), I still consider myself quite lucky. I qualified for financial aid at Columbia and received a half tuition grant ($20K) and took out only Stafford loans and a private loan from Columbia funded by alumni.
The noose I feel around my neck from these loans is enough for me to want to not have this (entire) burden for my (future) kid(s). So much so that I started a 529 account NY in 2016. A 529 account is an account that you contribute post-tax dollars into that grows tax -free and can be withdrawn tax-free if used for qualified educational expenses. Kind of like a Roth IRA for education (which btw, you CAN use your Roth IRA for qualified educational expenses, but it should not be earmarked as such!) There are numerous 529 accounts and they are state sponsored.
NY is one of the states that allows a state income tax deduction on 529 plans (up to $5,000 per year). You can also benefit from this tax break even if you live outside of NY as long as you have NY income. So I am currently funding this account up to the state income tax max deduction per year. I expect that in about 5 years, I'll be able to increase that to $10,000 per year. I should have anywhere between $150,000-$250,000 in that account once said kid attends college. Time is on my side. Note that the annual limit to contribute to a 529 is limited to $14K per person or $28K per married couple to avoid possible gift taxes and for 529s, you can actually front load the account 5 years at a time.
I do not feel the need to fully fund their college education. Mainly because I may not be able to due to my late start at my own savings (as far as I know, there is no such thing as retirement loans) and I do want my kid to be grateful and have “skin in the game” for their education. I do not think most people appreciate things given to them for free. M and I also feel strongly that unless our kid gains acceptance to a top private school (aka Columbia, NOT Colgate) then they can go to state school.
Edit: You'll need to name yourself as the beneficiary until the kid is born.
Do you have a 529 account for your kid(s)? Are you planning on fully funding their college education?
