The Doctor's Bill: High, Higher, &Highest of Educations Decision ⋆ XRAYVSN

Johanna’s Take:

Welcome back to another edition of Can You Afford It?

This week, we are looking at a couple in Florida, Dr. Don and his wife, Mel, a pharmacist, who will be empty nesters in 5 years.

Although our applicant disclosed an awful lot of information, there is even more going on beneath the surface.

They have no 529s, but, Holy Bankroll, Batman, I’ve never seen such a gigantic e-fund!

I’ve communicated several times with Dr. D, who claims not to know how well he and Dr. M are setting themselves up for the future.

The purpose of their healthy cash stash is both a 1-yr. e-fund and for potential real estate opportunities.

This strategy seems to be working: they own commercial real estate valued at $4.5M and a practice worth between $4M – $7M, in 2 S-corporations.

According to my calculations, their current net worth is just over $12M, using Dr. Don’s conservative valuations.

But why the huge e-fund?

The good doctor doesn’t like the “current lofty market valuations” and is waiting to “catch the equivalent of a 2009 market bottom.”

Otherwise, he fears “Japanese like stagflation coming to the US over the next decade”.

My eyes popped out when I read that, but who am I to criticize The Donald (or even The Don, for that matter)?

Dr. Don wants to ensure he is prepared for the upcoming major downturn.

Their annual savings estimate of 50%, or ~$600k, is allocated as follows:

$112k to SEPs
$7k to HSA
the remainder to 12-24 month CDs paying 2.4% – 3% APY annually.

If the market doesn’t correct in the next few years, he’ll use it to pay down debt and build the business and/or buy more real estate.

College costs are calculated at $50k/yr (today’s dollars) for 4 years each of undergrad and medical school for 2 children.

Ivy begins college in 2021 and Don, Jr. starts in 2024.

Don and Mel also question whether the children should have some skin in the game and asked my thoughts.

I believe that depends on how the children were raised and family values.

If they are responsible, have grown up with expectations beyond making good grades (I personally don’t look at that as a “job”), and have some kind of grounding in financial principles (saving, maybe even some investing), I don’t think “skin in the game” is necessary.

If this is very important to the parents, however, I think they should stick to their principles and expect the kids to do the research and take out some loans.

I asked why they don’t just allocate some of the current nest egg for education, to which Dr. Don replied: “…given the up to 13 year into the future total time frame (5 years to start plus 8 years of expenses for the younger child), God willing our future income will continue to grow these liquid asset reserves faster than our growth in expenses.”

To me, all this cash is pretty fungible sitting in low-interest bearing accounts, so I just allocated a lump sum out of current funds and reduced the current investments accordingly when calculating future value.

The positives:

· High earnings and passive income

· Planned long career

The negatives:

· The only one I could really come up with is market timing.

The Trumps have a huge shovel, but I believe they are under-utilizing their opportunities with some extreme point of views.

Assumptions (I use conservative estimates wherever there is an uncertainty.)

· 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)

o By my calculations, you will have between $59M and $60M (future value) at retirement. Given that a significant part of the portfolio is in the business and real estate, I included those in my estimate.

o Their real estate currently returns 15%/yr, so this is a conservative estimate.

· Average inflation

· You retire in 21 yrs

· You have plenty of appropriate life and LTDI in place.

· No divorce

· Reasonably good health

Even though – let’s face it – Don and Mel will have no problem paying for college and the verdict is a foregone conclusion, I believe I can salvage this week’s column with a few recommendations:

· An S-corporation is not a good vessel for real estate due to potential taxes due at distribution from the corp.

Put future RE purchases in an LLC.

· Set up 529s and invest aggressively.

Given your fondness for liquidity, you’ll have plenty available to pay for college and med school if the market is down for the full 12-year cycle the children are matriculating.

If you don’t empty them for the kids, the 529s can continue to grow for future generations.

· I don’t ask about estate planning in my questionnaire but Dr. Don made no mention of any assets held by trusts in our correspondence.

I strongly recommend considering irrevocable trust planning in the context of both estate planning and asset protection.

· If you don’t have high levels of PUP (Personal Umbrella Policy) insurance, I recommend you increase your limits accordingly.

You included tithing when I asked you to break down your budget.

Consider looking into a Donor Advised Fund (DAF) to smooth out income cycles and accelerate tax deductions.

The ability to contribute appreciated assets for a full deduction at current market value may also be appealing.

· We all theoretically believe that market timing is impossible until we become convinced we have special dispensation to discern that once-in-a-lifetime event that only we have the ability to foresee.

I direct you to item 15 on this list and humbly ask that you consider the words of Sir John.

My conclusion is, however, that Don and Mel have worked hard and done very well.

They can afford to make a few mistakes – even some whoppers – and still pay cash for 8 years of higher education for Ivy and Don, Jr.

They have obviously done many things right – I admire and applaud their success!

Xrayvsn’s Take:

“I am a family physician with essentially no financial training other than that which is self-taught or instinctual.”

Wow with instincts like this who needs financial training?

One of the great things this submission highlights is that physicians of any specialty can create a multi-million dollar net worth.

Yes it takes a lot of work, ingenuity, and a bit of luck, but those who are driven (which most individuals who go through the gauntlet of medical school and residency are) are quite capable of amassing a significant nest egg.

As Johanna aptly pointed out above, there are so many positive financial factors going for this household that the good doctor could send several more children to college if he chose to without much issue.

The monthly debt service number of $22k/mo is quite staggering however it is buoyed by the income generated through the many sources.

A lot of net worth and revenue is tied up in the medical business and that could be a future concern given the uncertainty of future medical reimbursements.

However, with quite the additional real estate empire under his belt, there is downside protection for this potential event.

I too raised my eyebrows at the market timing philosophy Dr. D has regarding the stock market.

If he is waiting for the market to bottom down to 2009 levels he may never pull the trigger to invest and could leave a lot of money on the table.

Having that much cash in an emergency fund does create quite a cash drag and this doctor is certainly leaving money on the table because of this philosophy.

Which leads me to another interesting observation:

This doctor does employ what I call “interest arbitrage” by having money in his savings account/CD’s outpace the low (or zero) interest rates he is being charged by his credit cards and auto loans.

However, he may be stepping over dollars to pick up pennies as the cash drag of not investing in the market far surpasses the minimal extra cash he is gaining from this strategy.

If it was me I would pay off these debts just to have them off my books and reduce the hassle factor.

This doctor could easily afford to buy a vehicle with cash on hand rather than through financing.

In the end this was an easy decision as the finances were of such magnitude that this household will do just fine after the desired expenditure.

The Decision:

Johanna: Thumbs Up

Xrayvsn: Thumbs Up