Finance Primer for Physicians

1. OSMA Investment
Program

2. 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

3. Case Study
No 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

4. 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)

5. 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”

6. https://vimeo.com/3993848

7. Debt: the necessary evil
• Interest Rates?
• Rank them or Consolidate
1. Student Loans
2. Credit Cards
3. Car Loan
4. Mortgages
• Create a list of what to pay off first

8. 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

9. 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

10. 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

12. Long-Term Disability Class 2
• Benefits are payable 90 consecutive days of
disability.

13. Who is Eligible for Long-Term?
• All active physicians working at least 36
hours a week.

14. Compound Interest
“The most powerful force in the universe is
compound interest”
Albert Einstein

15. 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

16. 0
500000
1000000
1500000
2000000
2500000
3000000
Mattress Compound
Return
Compound Interest

17. 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…

18. $-
$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

19. The Takeaway
• Bob is investing $66,000 just to keep up
with Ginny.
• Its important to start early

20. 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.
FixedIncome
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.
Equity

21. Risk
Rule #2
The longer you hold an investment, the
less overall risk you generally face
Patience pays
Rule #1
There has been a direct relationship
between risk and potential return:
More risk, more gain or loss potential
Less risk, less gain or loss potential
There is usually no free lunch

22. The Risk/Return Trade
Off
Based on group averages.
Individual selections are more risky!
LowerExpected
Return
HigherExpected
Return
Lower
Expected Risk
Higher Expected
Risk
Risk (Increasing)
Return
Cash Equivalents
High Yield Fixed Broad
Domestic Fixed
Defensive Domestic Fixed
Equity
Small Cap
International
Large Cap
Fixed Income

23. 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

24. Example of Investment Growth after 5 years
with each amount of monthly contribution

25. 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%

26. Additional Key Rules
Rule #3
Past results are no guarantee
of future performance!
Hot stocks or mutual funds
may turn cold
Rule #4
Diversify your investments and reduce risk
Include different stocks and bonds
(and cash when appropriate)

27. Benefits of
Diversification
The more investments, the less
specific issue business risk.
* Assumes an equivalent (pro-rata) investment in each company.
5 10 15 20
Number of Companies Invested in *
Specific
Issue Risk
Market Risk

28. 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!

29. Diversification
• Diversification works over time.
• Years, even decades. Not just days, weeks
or even months.
• Investing not trading

30. 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

31. 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

32. https://www.youtube.com/watch?v=mv9-IrGYxMM

34. 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.

35. 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

36. 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

37. Retirement Plans
• Limited
– select list of mutual funds
• Unlimited
– provide a separate individual account for you /
advisor to manage

38. 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

39. 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 AGI
Filing Single: $112,000-$127,000
Married Filing Joint: $178,000-$188,000

40. What is a Mutual
Fund?

41. Mutual Funds: The
Pros & Cons
1. Professional management
ADVANTAGES
Over individual securities
2. Diversification - less risk
3. Easy record keeping
4. Convenience

42. Mutual Funds: The
Pros & Cons
1. Diversification – less risk, less return
DISADVANTAGES
Over individual securities
2. Extra expenses
3. No control over investment selection
4. No control over timing of taxable income

43. Mutual Funds
ABC’s of Share Classes
• Mutual Funds
1. 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).

44. Mutual Funds
ABC’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

45. Mutual Funds
ABC’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

46. Class B: Deferred Load
0%
1%
2%
3%
4%
5%
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7-8
Class B
Convert to Class A after 8 Years!

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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

53. 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.

54. 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

55. 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

56. Questions & Answers
Financial Advice Checklist
Monthly e-mail