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OSMA Investment Program
Salaries
• Salary will depend on group• Desirable locations like Dallas or Austin start in
low $200k• OUHSC starts around $250k• Private Group (Board Certified) pay mid to high
$300k – Partnership can depend on board certification – Pay into partnership for 1st few years then participate
Case StudyNo Savings•Debt
– School debt $200,000 at 6% for 10 years ($2,220)– Mortgage $240,000 fixed 5% for 30 years ($1,288)– Car debt $25,000 at 8% for 4 years ($610)– Credit card debt $25,000 at 14% ($550)
•New job earning $375,000 or $31,250 a month– 401(k) retirement plan (wait 1 year before participation)
•Married – 1 Child and planning for more– Spouse works, but possibly stop after more children
Case Study• Income $375,000 or $31,250 month
– Plan on 40% going to a variety of pre-tax deductions (FICA, Federal, State, Insurance)
– Net Income $225,000 or $18,750 month• You have been in school for a long time it will be
tempting to not focus on saving!• Your 1st year
– Begin to pay off your highest interest rate debt – Consolidate (if possible) your remaining debts
• Save at least 10% of your income (setup IRA’s, child’s education account, and $25k emergency fund)
Where are you spending your $?• School Loans
– How Much?– What % Rate?
• List your top priorities after you start generating income– Pay off debt (credit cards, school, etc)– Participate or setup retirement plan– Start a savings or investment account– Children’s education (529 plan)
• www.ok4saving.org• You have been in school for a long time it will be tempting to not focus
on saving!• Set some goals on how much to save
– Try saving at least 10% of your gross income– Best to start early when you don’t have all “the stuff”
Debt: the necessary evil
• Interest Rates?• Rank them or Consolidate
1. Student Loans2. Credit Cards3. Car Loan4. Mortgages
• Create a list of what to pay off first
Disability Insurance• Group vs. Individual• Compare to bank (premium in = claim out)
o Cheaper Premium = Lower Claims• What is a Group – employer or association
o Definition – group is not “occupation specific” RN – good benefit
Specialty physician not necessarily a good fit Benefits can be reduced by other income sources
(social security, workers comp, MMAD) Pre-tax = Pre-tax Benefit
Disability Insurance
• Purpose is to replace lost income if you are unable to work (typically % of your salary)
• Elimination or Waiting Period – The period of time you must wait after you become
disabled to actually start receiving benefits• Residual clause, Cost of living adjustments
– Reduced benefit for partial disability– Option to keep benefits increasing w/inflation
Disability Insurance (cont’d)
• Disability Definition* (key area)– Any job at all– Your specific job
• Benefit Period– Short- term (days, weeks, months)– Long- term (2 years, 5 years, up to age 65)
• Limit of liability is the total amount that the policy can pay to the disabled for the life of the policy
Long-Term Disability Class 2
• Benefits are payable 90 consecutive days of disability.
Who is Eligible for Long-Term?
• All active physicians working at least 36 hours a week.
Compound Interest
“The most powerful force in the universe is compound interest”
Albert Einstein
Understanding Compound Interest
• The interest your money earns becomes part of the money earning interest.
• For Example: Age 32 plan to work until 60 years old save $3,000 per month
– Put in mattress, save a total of $1,000,000
– Put in investments earning 7%, save of total of $3,000,000
0
500000
1000000
1500000
2000000
2500000
3000000
Mattress Compound
Return
Compound Interest
Ginny and Bob
• Ginny,19, opens a Roth IRA and contributes $14,000 over seven years.
• Bob, 26, opens the same Roth IRA and contributes $80,000 over forty years ($2,000 a year).
• Let’s assume a 10% yearly return• These are the results…
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
GINNY
BOB
The Takeaway
• Bob is investing $66,000 just to keep up with Ginny.
• Its important to start early
Knowing Your Asset Classes
Investments are classified in different groups called asset classes. The following is a list of some asset
classes:
Cash Equivalents: money markets, certificates of deposit, Treasury Bills and any other highly liquid securities with a known market value and maturity of less than three months.Defensive Domestic Fixed: U.S. Government bonds and/or corporate bonds with a maturity of two to five years.Broad Domestic Fixed: U.S. Government bonds (100 million outstanding) and corporate bonds (50 million outstanding) that are issued at a fixed rate, non-convertible and investment grade.High Yield Fixed Income: fixed income securities that are rated below investment grade.Fi
xed
Inco
me
Large-Cap Equities: refers to almost the same thing as large-company stock, like Exxon Mobil or Microsoft whose market cap is greater than $15 billion. A company’s capitalization is the price of a company’s stock times the number of shares it has sold. Mid-Cap Equities: mid-sized company stock, capitalization is between $1 billion and $15 billion.Small-Cap Equities: small company stock whose capitalization is about $1 billion or less.International Equities: common stock in companies based outside the United States.Emerging Market Equities: higher risk companies based in regions like Latin America and Africa.
Equi
ty
Risk
Rule #2The longer you hold an investment, the
less overall risk you generally face
Patience pays
Rule #1There has been a direct relationship between risk and potential return:More risk, more gain or loss potentialLess risk, less gain or loss potential
There is usually no free lunch
The Risk/Return Trade Off
Based on group averages.Individual selections are more risky!
Low
er E
xpec
ted
Retu
rnH
ighe
r Ex
pect
ed
Retu
rn
Lower Expected
Risk
Higher Expected Risk
Risk (Increasing)
Retu
rn
Cash Equivalents
High Yield Fixed Broad Domestic FixedDefensive Domestic Fixed
Equity
Small Cap
International
Large Cap
Fixed Income
Advantage of Long-Term Investing
* Common stocks are defined as a diversified stock portfolio, such as the S&P 500 Index
8% Real Return since 1987
Example of Investment Growth after 5 yearswith each amount of monthly contribution
You can expect greater return if you contribute $200 with a rate of return of just 6% than if you contribute just $150 with the much higher rate of return of 15%
Additional Key Rules
Rule #3Past results are no guarantee
of future performance!
Hot stocks or mutual funds may turn cold
Rule #4Diversify your investments and reduce risk
Include different stocks and bonds (and cash when appropriate)
Benefits of Diversification
The more investments, the less specific issue business risk.
* Assumes an equivalent (pro-rata) investment in each company.
5 10 15 20Number of Companies Invested in *
Specific Issue Risk
Market Risk
Asset Allocation - how you mix up your investments
Asset Allocation is…
Combinations of investments - higher returns and same risk level
Different people and/or circumstances need different allocations
The right allocationsallocations can smoothsmooth out the rideride!
Diversification
• Diversification works over time.
• Years, even decades. Not just days, weeks or even months.
• Investing not trading
More Rules…Rule #5
Market timing increases your chances to decrease your returns
No one knows what the market will do tomorrow
“More money is lost by people
trying to anticipate market corrections than the
actual correction itself”- Peter Lynch, Former Fund Manager
Why is Market Timing Difficult?The Impact of Missing a Few Key Days
32-year period ending 2012
This hypothetical illustration is based on the S&P 500 Index with dividends reinvested, and no fees.Source: Standard and Poor’s
https://www.youtube.com/watch?v=mv9-IrGYxMM
The Millennials
• 18 – 29 year olds• April 2014 Gallup Poll
– 27% said that they owned stocks or stock mutual funds.
– Instead they are stashing away savings in bank accounts earning near-zero interest.
– This is the point in their life when they need to be taking on the most risk.
Risk Aversion
• Fear of losses vastly outweighs sensation of potential gains.
• Unemployment, heavy student-debt loads and the effects of the housing crisis are restraining young people.
• Remember compound interest
Retirement Plans: Tax-Deferred Growth
• Defined-contribution plans:401(k), SEP-IRA, Profit Sharing Plan (PSP) – You contribute defined amount before-tax– 401(k) limit is $18,000/year; ask about
company matching– $53,000/year is the limit for 2014 for combined
defined contribution plans (401k plus PSP) or a SEP IRA
Retirement Plans
• Limited – select list of mutual funds
• Unlimited– provide a separate individual account for you /
advisor to manage
Traditional IRAs• You can still contribute $5,500 per year. Tax deduction
phase out range if modified AGI (adjusted gross income) between:– Filing Single: $59,000-$69,000– Married Filing Joint: $95,000-$115,000
• Still tax-deferred growth (withdrawals taxed at ordinary income rate after retirement)
• Keep records of your contributions and tax returns indefinitely
Roth IRA
• Able to contribute $5,500 per year• “Backdoor Roth”
• There is no income limit on contributing to a nondeductible Traditional IRA, nor on converting a Traditional IRA to a Roth IRA
• Phase out range on modified AGIFiling Single: $112,000-$127,000Married Filing Joint: $178,000-$188,000
What is a Mutual Fund?
Mutual Funds: The Pros & Cons
1. Professional management
ADVANTAGESOver individual securities
2. Diversification - less risk
3. Easy record keeping
4. Convenience
Mutual Funds: The Pros & Cons
1. Diversification – less risk, less return
DISADVANTAGESOver individual securities
2. Extra expenses
3. No control over investment selection
4. No control over timing of taxable income
Mutual FundsABC’s of Share Classes
• Mutual Funds1. No Load – no commission charged 2. Load – commission charged (A, B, C, etc.)–All funds have annual expenses (Avg. 1.48%).
• Share classes of Load Funds–Same mutual fund with different classes each with different sales charge, expenses–Often a “trailing” commission year after year (12b-1).
Mutual FundsABC’s of Share Classes
• Class A (Front-End Load)– Upfront commission (4.75% to 5.75%)– Subtracted off the top leaving less to invest
• Class B– Higher annual charges for several years– Contingent deferred sales charge if shares sold
within several years of purchase• Class C
– Higher annual charges continue indefinitely
Mutual FundsABC’s of Share Classes
• Which is the Best Class?– Class A – large & long-term investors
• Breakpoints investing over specific amount– Right of Accumulation – combined with other accounts or
family members over $50,000– Letter of Intent – plan to invest $50,000 in 1 year
– Class B – small investors• No Breakpoints
– Class C – short-term investors
Class B: Deferred Load
0%
1%
2%
3%
4%
5%
Year1
Year2
Year3
Year4
Year5
Year6
Year7-8
Class B
Convert to Class A after 8 Years!
Comparison Example $25,000
• Class A– 5.75% Load or
$1,437.50 commission– 1.48% Annual
Expenses– Remaining $23,562.50
invested
• Class B– 5% Deferred Load– 2.53% Annual
Expenses– $25,000 Invested
Hypothetical:After 3 Years earning 10%
$0$500
$1,000$1,500$2,000$2,500$3,000$3,500
Cost
Class A Class B
$29,500
$30,000
$30,500
Value
Class A Class B
How Does OSMA Service Compare?
• Annual Fee of 1% of assets– Incentive is to increase value of assets– No Load funds– No commissions
• Comparison– www.sec.gov– Mutual Fund Cost Calculator
What Is the OSMA’s Service?
• Specialist– Portfolio Manager (time)– CFA - Lot of credentials in the industry, but none as
rigorously focused on investment knowledge – Broker vs. Registered Investment Advisor
• Suitability vs. Fiduciary
• Motivation – Aligned with Physician– Goal is to grow the value of the portfolio– Performance
• Independent Service
Hypothetical:After 3 Years earning 10%
$0$500
$1,000$1,500$2,000$2,500$3,000$3,500
Cost
Class A Class B OSMA
$29,000
$29,500
$30,000
$30,500
$31,000
$31,500
Value
Class A Class B OSMA
Advice from past Anesthesiology Residents
• Previous Anesthesiology Residents prior to practice– $150k-$250k in school loans
• Attempted to make interest only payments
– $20k-$40k in credit card debt– Most married with one child
More Advice
• Start a relationship with a private banker for a better loan and mortgage experience.
• Start your PLLC at Legal Zoom. Between $300 and $400 + state filing fee.
Early Business Decisions in Practice
• Paid off all credit card debt• Paid minimum balance on student loans
– Very low interest rate– Death benefit
• Joined large group– Setup as independent contractor (PLLC)– Have own separate retirement plan
• Solo 401(k)• SEP IRA• Contribution limit of $53,000 a year
Where can I get help?• Financial professionals
– OSMA endorses a variety of advisors:
• Asset Protection (Estate Planning Attorney)
• Investments (Baker Asset Management)
• Magazines
– Medical Economics
– Money, Forbes, Wall Street Journal, Barron’s
• Blogs– White Coat Investor
• Securities and Exchange Commission (www.sec.gov)– Information on specific brokers
Questions & Answers
Financial Advice Checklist
Monthly e-mail
