Financial Literacy Should Be a Required Part of the Residency Training Curriculum

Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.  It is not emphasized in radiology training programs.

Here are 13 reasons why it should be:

  1. 76% of medical students graduate with a median $200,000 of debt, which plays a major role in personal financial problems, contributing to high rates of divorce, bankruptcy, burnout, and suicide among doctors.  
  2. Throughout the course of their training, residents make important financial decisions without having the knowledge, attitudes, and skills required to successfully manage personal finances.    
  3. In a survey of medical students, only 12% reported that they “somewhat” or “strongly agreed” to feeling competent managing their finances.
  4. A survey of residents and fellows (8.8% of whom were in radiology training) showed that trainees had low financial literacy, low investment-risk tolerance, high debt, and deficits in their financial preparedness.  Most respondents, including those with children, lacked a will and only half had reviewed their credit report or credit score in the past year.
  5. Residents want financial literacy education.
  6. Radiologists start their career 10 years later than their age-matched peers, who have already begun buying homes and saving money for retirement.  This “late start” makes it even more important for graduates to be armed with the information they need to overcome debt and begin building wealth.
  7. The American culture does not support talking about money - it is a “taboo” subject, so even financially literate friends, family or colleagues may not be approachable as sources of information. 
  8. Financial literacy arms new graduates with the ability to understand the significance of language within job contracts (e.g., retirement plans, life/disability insurance policies, health insurance benefits) and be in a better position to negotiate optimal terms.
  9. Nearly every radiologist will receive a pitch at some point in their career to buy permanent life insurance (as opposed to term life insurance).  Often, the medical school or radiology department will bring someone in to “advise” residents on buying life insurance, and that person’s goal is often to sell as much expensive insurance as she can.  Residents, and often well-intended departments, may not recognize that the “advisor” is a sales person that does not have the best interests of her clients in mind. Among physicians that purchase whole life insurance, 3/4 of them regret their decision. Among the general population, over 80% of whole life insurance policies, a product designed to be held until death, are surrendered prior to death. 
  10. As many as 80% of physicians need, want, and should use a financial planner or investment manager, either because they don’t know enough to manage their finances on their own or they don’t have/want to spend the time to do it themselves. Yet, they haven’t been taught how to get good advice at a fair price.
  11. A new graduate’s salary is 3-5 times or more than that of a resident’s salary, which jettisons them into a high tax bracket, without the benefit of basic income tax knowledge or even what constitutes a fair price to pay a tax preparer.
  12. American culture expects doctors to spend lavishly and if practicing radiologists (who serve as role models) buy expensive cars, houses, vacations, etc., residents may learn that this is acceptable financial behavior for every radiologist regardless of their level of indebtedness, personal expenses, and future financial needs.  This goes back to the “taboo” nature of talking about money, which leads to radiologists “comparing their insides with other radiologists outsides.”
  13. Since money=time, ignorance in finance leads to mindless consumption of our most precious commodity, which is time.

Barriers to requiring financial literacy education

Residents are already overwhelmed with learning the clinical aspects of radiology in addition to the non-interpretive aspects of the Accreditation Council for Graduate Medical Education's (ACGME) required curriculum.  Adding financial literacy education would further increase the educational burden for both trainees and faculty.

Radiology faculty members are not accustomed to teaching finance to residents.  They may not feel comfortable or competent to teach this material. 

The ACGME should specifically include financial literacy as a required part of the residency curriculum

 

In my opinion…

Fulfilling any new educational requirement takes time and effort on the part of trainees and training programs.  The alternative to not mandating financial literacy education is to allow the laissez-faire approach (i.e., unwillingness to get involved in or influence other people's activities) to financial education to continue.  Providing financial education will contribute to residents having a heightened sense of control over their future and greater short- and long-term well-being.

Coursework about the basics of personal financial planning should be incorporated into the medical school and residency curriculum.  Topics should include but not be limited to the time value of money (effects of compound interest), investing, borrowing, budgeting, insurance, taxes, behavioral finance, retirement plans, estate planning, contract negotiation, and home buying.  In addition to personal finance, business principles for running a successful private or academic practice could be included.

Further research into the needs of trainees, current educational programs, and long-term effectiveness of financial literacy education is needed.  

Radiology societies should make financial literacy a formal part of meeting programs.  

The ACGME should specifically include financial literacy as a required part of the residency curriculum.

What do you think?  I welcome your feedback and additions to the list.  There are more than 13 reasons why financial literacy should be a part of the residency training curriculum.


Understanding Your Tax Bill: Property, Sales Tax, and How to Avoid Sticker Shock

"The power of taxing people and their property is essential to the very existence of government.'' 

-James Madison, U.S. President

https://www.youtube.com/watch?v=fQ0t_BuXIrU&feature=youtu.be

Whether you aspire to build a real estate empire on Park Place and Boardwalk, or just a modest little home somewhere around, say, Baltic Avenue, there’s no avoiding the tax bill. Both on the Monopoly board and in life, paying taxes can feel like the worst part of the game. 

Understanding your property tax bill, and how goods and services can be taxed, may help reduce your risk of sticker shock and may help determine if you’re paying too much. In this post, I’ll first break down the ins and outs of property taxes, and then cover some finer points on sales tax.  

Property Taxes

If you’ve never bought a home but plan to, you’re in luck.  I have some information that might help you understand what you’re getting yourself into!  If you have bought a home, you will probably be able to relate to a lot of what I say in this post, and hopefully, learn a few things you didn’t know that could lower your property tax bill.  And if you’ve been dying to know about how sales tax differs from state to state, I have a few interesting things to share about that too.

I’m quite familiar with property tax because I’ve paid a fair bit of it over the years (like the Farmer’s Insurance guy who says, “We know a thing or two because we’ve seen a thing or two.”).  

Anyway, I was a tad confused when reading about property tax to come across the terms property tax, real estate tax, and personal property tax. I wondered, are they all the same thing?  

You may be confused, too.  So first, a definition:  

People often use the terms property tax and real estate tax interchangeably. By definition, real estate tax is a property tax. However, not all property taxes are real estate taxes.  So here's the difference: 

Real estate tax (i.e., tax on “real property”) is charged on immovable property—land and structures that are permanently attached to it such as a house or other building.  On the other hand, personal property tax (i.e., tax on “tangible property”) is an annual tax imposed on movable assets—mobile homes, RVs, vehicles, boats, planes, etc.  Real estate taxes are taxes on real property only; property taxes can include both real property and tangible personal property.  Got it?  If you’re still confused, no worries.  I’m only going to talk about property taxes as they apply to a home you own and live in.  (But just so you know, forty-three states tax tangible personal property.)  

Property tax is usually imposed by local governments and charged on a recurring basis. For example, homeowners will generally pay their property taxes either once a year or as a monthly fee as part of their mortgage payments.

Property taxes are fundamentally regressive because, if two individuals in the same tax jurisdiction live in properties with the same values, they should pay the same amount of property tax, regardless of their incomes. However, they are not purely regressive in practice because they are based on the value of the property, which can fluctuate based upon a jurisdiction’s assessment of the worth of a property. 

An assessor will evaluate a property using one or more methods: looking at what comparable properties are selling for under the current market conditions (sales method), how much the replacement costs for the property would be (cost method), and any income the owner is making from the property (income method).  

California has a unique tax provision that puts a limit on how much any homeowner's assessed value for property tax purposes can increase from year to year. Proposition 13 imposes a 2% maximum increase on assessed value (with the exception of new construction on the property, which can raise the assessed value beyond the 2% limit). However, when someone sells a home, the new owner can often see a big jump in assessed value and therefore pay higher property taxes, because the Proposition 13 limit artificially deflated the true value of the home.

In the United States, property tax is levied by the local, not the federal government. State governments levy 3% of the total property tax collected and the other 97% is collected by counties, municipalities, schools, community colleges, and many other special-purpose governmental agencies (e.g. libraries, museums, parks, bridge authorities).  Rates vary across the states, between about 0% and 4% of the home’s assessed value. The assessment is made up of two components—the improvement value (i.e., the building) and the site value (i.e., the land). The property tax is the main tax supporting local education, police, fire protection, government, roads, and most infrastructure ( e.g. sewers, bridges, street lights). 

The amount of property tax apportioned to various recipients can change. Local school districts often take the biggest bite from property taxes (50% of my property taxes go towards paying for schools).  If residents of a community have voted to increase the millage rate (the amount per $1,000 that is used to calculate taxes) for a school system, homeowners could see an increase in the tax levied on their properties. Conversely, if property values have fallen due to adverse economic circumstances, property taxes may decrease.  

Property tax assessments are not always based on accurate information.

You may assume that when you get a property tax bill, you should pay it and move on. This is what I used to do.  But then I learned that property tax assessments are not always based on accurate information.  To make sure you are not being overcharged on property taxes, it is imperative to understand the calculations used by the property appraiser's office in your community.

Are you paying too much?

If you feel you are paying too much, do a little research. Property taxes are calculated using two very important figures—the tax rate (also known as millage or mill rate) and the assessed value of your home.  Note: “market value” is the estimated amount active buyers would currently be willing to pay for your home and is only one figure used by an assessor to determine a home’s “assessed value.”  An assessor (who may or may not come to your property) estimates the value of your property, which leads to your property’s “assessment.”  Your tax bill is calculated by multiplying the tax rate by the assessed value. So, if your property is assessed at $500,000 and your local government sets your tax rate at 2.5%, your annual tax bill will be $12,500.

Tax levies for each tax jurisdiction in an area are calculated separately; then, all the levies are added together to determine the total mill rate for an entire region. Generally, city, county, and school districts each have the power to levy taxes against the properties within their boundaries. 

You can get a summary of your property’s assessment from your city or local assessor’s office.  This information is a public record.  If you note any discrepancies, you can point these out to the assessor and she will either make the correction and/or conduct a re-evaluation. You might be surprised to learn, as was I, that mistakes are common.

Personal note (and how to assess your assessor):

When I bought my current home in August of 2018, the current assessment was $635,600. Since I only paid $580,000 for the house, I didn’t think that assessment was fair.  To understand why there was such a big discrepancy between the assessment and the sale price, you need to know about the history of the home’s sell price and tax assessment.  In 2006, at the height of the housing boom, the house sold for $705,000 and subsequently assessed at $695,000.  Then the housing bubble burst.  The value of homes, including mine, decreased dramatically after the housing crash.  My home’s assessment gradually decreased to $635,000, but not to the point of 2018 market value.  

According to my city’s assessment office, homes are assessed after sale or after acquiring a building permit, but otherwise every 5-10 years.  A homeowner can request an assessment at any time, but most don’t because doing so would usually result in an increased assessment. When I bought my home, the sale triggered a reassessment.

When the assessor came to my home, I learned a lot by walking with and talking to her.  For example, brick homes are assessed higher than those with wood siding.  My house has brick in the front but most of it is wood siding.  However, the assessor’s records showed that it was all brick.  She corrected that.  When I pointed out that the finishings in the non-master bathroom and throughout the basement were of lower grade than finishes elsewhere in the house, she wrote that down.  She also noted several other findings that would influence my home’s assessed value. Finally, she told me that it was very helpful to be able to tour the home with me and that many people don’t let the assessor inside the home.  

Things that the assessor verified included build year, remodeling year, square footage (finished versus unfinished), number of rooms, exterior walls, roof type (e.g., asphalt shingles, slate, etc.), type and age of heating and cooling systems, number of bathrooms (full and partial), fireplaces, size of garage, and open versus screened porch.  She then gave my home a grade of A-.

My property tax bill for 2018 was mailed out in December 2018, so the reassessment didn’t affect my first tax bill.  I received my reassessment in April 2019 (for my 2019 tax bill) and it was decreased to $574,900 (less than the sale price - yay!).  The assessment is only one part of how a tax bill is calculated (the other is the mill rate) but it’s a very important piece.  The change in my home’s assessment lead to a decrease in my property tax from $14,608 (2018) to $13,224 (2019).  That’s a decrease of $1,384. 

Property taxes tend to increase over time. You will never be free from property taxes while you own your home, but there are a few things you can do to lower your property’s assessment and/or property tax bill:

Improvements

Any structural improvements you make to your home will increase your tax bill. You might want to think twice before adding a deck, a pool, a large shed, or any other permanent fixture that will increase your home’s value.

Subjectivity

Although tax assessors follow guidelines, their assessment still contains a certain amount of subjectivity. This means more attractive homes often receive a higher assessed value than comparable houses that are less physically appealing.  You will know in advance when an assessor is coming to your home.  You may want to delay any physical improvements or cosmetic alterations (e.g., new wood flooring or stainless steel appliances) until after the assessor finishes the evaluation.

What’s in the neighborhood

Property assessments are public knowledge.  You can find out how similar nearby homes are assessed, and compare that with your home’s assessment.   For example, let's say you have a five-bedroom home with a three-car garage, and your home is assessed at $600,000. Your neighbor also owns a five-bedroom, three-car garage home with approximately the same square footage, built in the same year as your home, yet their home is assessed at $480,000.  There could be several reasons for this.  One is that the other home hasn’t been reassessed for a number of years.  Another is that there were errors in the assessment of either or both homes.  Such discrepancies can be a reason to ask for a reassessment.

Guide the assessor

You do not have to allow the tax assessor into your home. However, many towns have a policy that if the homeowner does not grant full access to the property, the assessor will automatically assign the highest assessed value possible for that type of property—fair or not. 

Many people allow the tax assessor to wander about their homes unguided during the evaluation process. This can be a mistake. The assessor might notice the good points in the home such as the new flooring or lighting fixtures and overlook outdated appliances, lower quality finishings in some rooms, small cracks in the ceiling, etc.  If you walk through your home with the assessor you can point out those deficiencies. 

You can also talk to the assessor and ask about the criteria they are using in their evaluation.  

Utilize exemptions

Check with your taxing authority to see if you qualify for an exemption.  Some states and municipalities lower the tax burden for:

  • Seniors
  • Veterans
  • People with certain disabilities
  • Agriculture properties

What if you don’t like your reassessment?

You can usually correct minor errors and misunderstandings with the assessor, but beyond that you will need to file a formal appeal with the city’s Board of Assessors.  Filing a tax appeal may cost you a small filing fee and generally requires the help of a lawyer, who will also charge a fee, which in some cases is a portion of the savings on your tax bill if your appeal is approved.  Keep in mind, though, that the appeal process is not a guarantee that your bill will drop. It may remain the same or, in rare cases, it may increase if the reviewer feels your assessment is too low.

Taxes on Goods and Services

The sales tax is most often used as a method for states and local governments to raise revenue.  Sales taxes are considered regressive because they take a larger percentage of income from low-income taxpayers than from high-income taxpayers. To make such taxes less regressive, many states exempt basic necessities such as food from the sales tax.

Retail purchases are assessed as a percentage of the sales price and rates vary between jurisdictions and the type of item bought. For example, a pair of shoes may be taxed at one rate, restaurant food at another, while certain items bought at a grocery store may not be taxed at all. 

Some believe that sales taxes are the most equitable form of taxation, since they are essentially voluntary and they extract more money from those who consume more. Others believe that they are the most regressive form of taxation, since poorer people wind up paying a larger portion of their income in sales taxes than wealthier individuals do.

It’s easy to forget about taxes that you don’t pay directly.  Such “excise” taxes are based on the quantity of an item and not on its value. For example, the federal government imposes an excise tax of 18.4 cents on every gallon of gas purchased, regardless of the price charged by the seller. States often add an additional excise tax on each gallon of fuel.  However, when you buy gas for your car, these taxes are baked into the cost for the gas.

User fees are taxes that are assessed on a wide variety of services, such as airline tickets, rental cars, toll roads, utilities, hotel rooms, licenses, and financial transactions. Some purchases, like cell phone or cable service, may have several user taxes, running up the monthly bill by as much as 20 percent.  “Sin” taxes are imposed on items like cigarettes and alcohol. “Luxury” taxes are imposed on expensive or extravagant items, such as expensive cars or jewelry.

Often, states with no sales tax assess higher income or property taxes, so you can’t assume it costs less to live in one state or another based on one tax alone.

There is wide variability from state to state as to the rate of taxes on goods and services, to the extreme of no sales tax at all.  Often, states with no sales tax assess higher income or property taxes, so you can’t assume it costs less to live in one state or another based on one tax alone.  In addition, the quality of life in a particular state or city is influenced by its ability to invest in infrastructure, education, healthcare, and other important services.  Those services are paid for with taxes.

Do you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming?  If so, you are one of the lucky citizens who pays no state income tax.  However, these states do differ in other regards:

  • The total state and local tax burden on Alaskans, including property, sales, and excise taxes, is just 5.10% of personal income, the lowest of all 50 states.  For comparison, New York’s tax burden is 12.97% of income.
  • Sales and property taxes in Florida are above the national average, but the overall tax burden is just 6.56%—the third-lowest in the country.  But Florida is still not as affordable as most states due to its higher-than-average cost of living, particularly housing costs. 
  • Although Nevada has no income tax, it relies heavily on revenue from high sales taxes on everything from groceries to clothes, sin taxes on alcohol and gambling, and taxes on casinos and hotels.
  • South Dakota has higher-than-average property taxes but lower sales-tax rates than many other states.  South Dakotans pay just 7.28% of their personal income in taxes.
  • Sales taxes in Texas can be as high as 8.25% and property taxes are also higher than in most states, with the net result being an overall tax burden of 8.18% of personal income. 
  • Washington residents pay high sales and excise taxes, and gasoline is more expensive in Washington than in most other states. The overall tax burden is 8.20%. Washington also has a higher-than-average cost of living, particularly housing costs.
  • Wyoming is the second least densely populated state, and in addition to having no income tax, it has low property and sales tax rates. The overall tax burden as a percentage of personal income is 7.51%.

That wraps up a discussion of taxes (see my posts on income taxes here and here if you missed them).  You’ve probably concluded, rightly so, that taxes can be very complicated.  There are ways to minimize (legally, of course!) certain taxes.  The best ways are to 1) prepare your own income tax return (or at least read through the return if prepared by someone else) so that you understand how to optimize the way you save and spend money, and 2) review your property tax assessment and property tax bill (and ask for a reassessment if yours doesn’t seem accurate).  Aside: One of the benefits I realized from reviewing my property tax bill was learning that a portion of the tax collected supported my county library.  I LOVE my library and knowing that my property taxes were supporting it made paying those taxes a little less “taxing.”

There’s really not much you can do about sales taxes, except live in a state with low or no sales tax, but then you might just pay more in income or property tax.  Or you might not be able to enjoy the communal amenities that taxes afford.  Every individual has their own idea of what makes a place a good place to live and low taxes alone do not provide a complete picture of the cost of living or quality of life. Happy filing! 


Test Your Powers of Deduction, Earn Extra Credit! (Income Tax: The Sequel)

Looking to put your powers of deduction to the test? Want to rack up some extra credit? 

Your powers of tax deduction, that is.  And by credit, I mean tax credits. And by tax credits, I mean a lower tax bill and keeping more of your money in the bank. 

If so, then you have come to the right place! This is part two of my discussion of income taxes. If you didn’t read my last post (part 1) you might want to take a detour and look at that before tackling part 2.  

In this post I will review deductions, credits, Social Security/Medicare taxes, and state income tax, as well as provide filing tips, references for further learning, and my personal anecdotes. 

I’ll jump right into it, but first, here’s a little challenge for you. Bonus question for ten points: What does Johnny Cash have to do with calculating your income?  Keep reading to find out.

The difference between deductions and credits is that deductions reduce your taxable income, while credits reduce your tax.

Deductions and credits

A deduction is not the same thing as a credit, although both can lower your tax bill. The difference between deductions and credits is that deductions reduce your taxable income, while credits reduce your tax.

Tax deductions

There are two ways to claim tax deductions: Take the standard deduction or itemize deductions. Both are subtracted from your income so you pay taxes on less earnings.   

Itemized deductions usually arise from your expenses, whereas the standard deduction is a flat-dollar, no-questions-asked reduction in your adjusted gross income. The amount you qualify for depends on your filing status.  For the 2020 tax year, the standard deduction for a single filer is $12,400 and for those married, filing jointly it’s $24,800.  And here’s one of the advantages of getting old:  you get a bigger standard deduction!  People age 65 or older or who are blind can deduct an additional $1,650 if filing single and $1,300 for each spouse if married, filing jointly.  

Itemized deductions include mortgage interest, charitable donations, and unreimbursed medical expenses over 10% of your adjusted gross income.  It also includes state and local taxes (e.g., property tax as well as state and local income taxes) up to $10,000.  When you itemize, you report each qualified deduction on the Schedule A tax form.  Claiming the standard deduction doesn’t require filling out another form so takes less effort.  If your standard deduction is more than the sum of your itemized deductions (as it is for most people since the standard deduction was substantially increased in 2018), you will save more money by taking the standard deduction.

Deductions are categorized as “above the line” and “below the line.”  Some common “above the line deductions” are contributions to a traditional IRA, contributions to a health savings account (HSA), and interest paid on student loans. The “below the line” deductions are those that are itemized.  

QBI deduction or “Section 199 deduction” 

The QBI deduction was created by the Tax Cuts and Jobs Act of 2017, a major reform of the federal tax code. Section 199A details the deduction, so you may also see it called the “Section 199A deduction.”  If you are the owner of a business that is a “pass-through” entity (i.e., does not pay the corporate income tax rates, but instead, the business’ income is passed on to the individual owners, who divide it up and pay tax on it on their individual tax returns, along with any other personal income they have), you may be eligible for a qualified business income (QBI) /199A deduction.  Such businesses include a sole proprietorship, partnership, S-corporation, or an LLC taxed as any of the above.  This deduction allows you to deduct up to 20 percent of your QBI (as well as 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, but I won’t get into that in this post). Income earned by a C corporation or by providing services as an employee isn't eligible for the deduction.

You can claim the 199A deduction whether you take the standard deduction or itemize.  As long as you qualify for the deduction, you can take it. 

Eligibility for the 199A deduction depends upon whether the type of business operated by the owner is Restricted or Non-restricted.  The first category consists of any business involving the performance of services in the fields of health (e.g., radiologists and other physicians), law, accounting, actuarial science, performing arts, consulting, financial science or any business where the principal asset is the reputation or skill of its employees or owners. The second category consists of all other businesses. 

Owners of Non-Restricted Businesses are entitled to claim the 199A deduction regardless of their taxable income (subject to certain limitations).  Owners of Restricted Businesses (which includes physicians), however, can fully benefit from the 199A deduction only if their taxable income is below an income cap of $210,700 if filing single ($421,400 other taxpayers) in 2019, and $213,300 ($426,600 other taxpayers) in 2020. Below these levels, the 199A deduction is phased-out. 

The QBI deduction is not considered an “above the line” deduction because it is subtracted after adjusted gross income is calculated.  But it is also not an itemized deduction; that is, you can claim it as well as the standard deduction in a given year.

The sum of your total income minus above the line deductions equals your adjusted gross income (AGI), referred to as “the line.”

How do you calculate taxable income?

The sum of your total income minus above the line deductions equals your adjusted gross income (AGI), referred to as “the line.”  

As an aside, to “walk the line” means to behave in an authorized or socially accepted manner (e.g., by paying your taxes).  Or, in the inimitable words of Johnny Cash:

As sure as night is dark and day is light

I keep you on my mind both day and night

And happiness I've known proves that it's right

Because you're mine, I walk the line.

I’ll now be resuming normal programming.

Your taxable income is your AGI minus your standard deductions or itemized deductions.  

You can see how above the line deductions are always valuable.  You can claim them regardless of whether you use your standard deduction or itemized deductions, whereas itemized deductions are only valuable if they exceed your allowable standard deduction.

Tax credits

A tax credit is a dollar-for-dollar reduction in your actual tax bill and therefore is much more valuable than a deduction of the same amount because it makes a much bigger dent in your tax bill.  A few credits are even refundable, which are the most beneficial type of credit because they're paid out in full. This means regardless of your income or tax liability, if you qualify for the credit, you are entitled to the entire amount of the credit. If the refundable tax credit reduces the tax liability to below $0, you get a refund.  For example, if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for the difference of $750. That’s an extra $750 in your pocket!  Sadly, most tax credits aren’t refundable. 

Here are a few tax credits that may apply to radiology residents or practicing radiologists:

Earned income credit

This is a tax break for working people whom Congress has determined to be lower-income taxpayers.  The average radiology resident salary in 2019 was $63,200, which is too high to qualify for the earned income credit (EIC).  But the average salary of first year residents (all specialties) was $55,200.  As you can see from the IRS chart below, to be eligible for EIC in 2020, a radiology resident would need to be married, file jointly, and claim three or more children: 

Eligible Income Caps Based on Number of Children Claimed

Zero One Two Three
Single, Head of Household, or Widowed $15,820 $41,756 $47,440 $50,594
Married Filing Jointly $21,710 $47,646 $53,330 $56,844

Investment income must be $3,650 or less for the year.

The maximum amount of credit for tax year 2020 is:

  • $6,660 with three or more qualifying children
  • $5,920 with two qualifying children
  • $3,584 with one qualifying child
  • $538 with no qualifying children

Child Tax Credit
The Child Tax Credit was designed to offset the cost of raising children. To qualify for this credit, you must have a dependent who is under the age of 17 on December 31 and is a United States citizen. The child must be your own or a stepchild, foster child, sibling, stepsibling, half sibling, or a descendant of any of the above. Also, the dependent must have lived with you for half the year (183 nights) and not provided more than half of their support. The Child Tax Credit can be worth as much as $2,000 per child. Up to $1,400 of the credit can be refunded for each child. That means that even if you don’t owe any money to the IRS, and you earned at least $2,500, you can get that money back as a refund.  However, the credit begins to phase out once you reach a modified adjusted gross income (MAGI) of $200,000 ($400,000 for married filing jointly).

Child and Dependent Care Credit
If you are a parent and use a daycare or child care service, you may be eligible for the federal Child and Dependent Care Tax Credit (CDCTC) of up to 35% of these out-of-pocket costs up to $3,000 for one child or up to $6,000 for two or more. This is another tax credit that is refundable up to $1,400, so if you don’t owe the IRS any money and you apply this credit, you’ll get up to $1,400 back.  This credit is available to all those who earned income (or are disabled and unable to work), have a qualifying dependent, and paid someone to provide care for a qualifying person. If you’re married, your spouse must also have earned income.  And the payments must be to someone who can’t be claimed as your dependent (e.g., paying your 16-year-old son to watch your 5-year-old daughter doesn’t count). In addition, the payment can’t be made to the parent of the child for whom the care is being provided.

The credit does have some limitations. It only applies to children under 13, or if you have older children with mental or physical disabilities who are unable to care for themselves. The percentage you can deduct ranges from 20% up to 35%, depending on your income level. The more you earn, the less you can deduct.

Adoption credit

If you welcomed a new child to your family via adoption, there’s a credit for you as well. For the 2020 tax season, you can get a tax credit for all qualifying adoption expenses up to $14,300 per child. Those expenses include reasonable adoption fees, court costs and travel expenses.  

If you adopt a special needs child from within the U.S., you can claim the entire credit, even if your adoption costs were less than $14,300. Keep in mind that adopting a child of your spouse, however, doesn’t count toward the credit.  Also, this credit is nonrefundable and is reduced or eliminated if your MAGI exceeds a cap (in 2020 the credit phases out completely at a MAGI of $254,520 or more).  In addition, there is an income exclusion for employer-provided adoption assistance.

Saver’s Tax Credit
To qualify for the Saver’s Tax Credit, otherwise known as the Retirement Savings Contributions Credit, you must not be a full-time student, are not somebody else’s dependent, and you contributed to either an IRA (of any kind) or a retirement plan at work, such as a 401(k) or 403(b).   If you qualify, you can claim 50%, 20%, or 10% of the first $2,000 you put into a qualifying retirement account ($4,000 if married filing jointly). The credit maxes out at $1,000 ($2,000 if you are married filing jointly).  Most radiologists will not qualify for this credit, but married residents with earned income of $65,000 or less may qualify for a partial benefit.  The amount you can claim in 2020 depends on your income as shown below:

Credit Percentage Single or Married Separate Head of Household Married Joint
50% of contribution $0 to $19,500 $0 to $29,250 $0 to $39,000
20% of contribution $19,501 to $21,250 $29,251 to $31,875 $39,001 to $42,500
10% of contribution $21,251 to $32,500 $31,876 to $48,750 $42,501 to $65,000

 

What makes the saver’s tax credit so great is that it rewards you for doing something that is beneficial to do anyway.  It can reduce your income tax in two ways. First, the contribution to the plan itself qualifies as a tax deduction (unless you contribute to a Roth account, which is not tax deductible). Second, the saver's credit reduces the actual taxes owed, dollar for dollar.

Lifetime learning credit

You may be eligible for this credit if you pay postsecondary education expenses for a student.  The credit is calculated as 20% of the first $10,000 of qualified educational expenses that you pay in a given year (i.e., maximum credit per tax return is $2,000).  You are only eligible if your MAGI in 2020 is $68,000 or less ($136,000 if married filing jointly). The credit phases out for taxpayers with income between $59,000 and $68,000 ($118,000 and $136,000 for married filing jointly).

Energy and Appliance Tax Credits
If you have made improvements that make your home more environmentally friendly and energy-efficient, then you may qualify for a tax credit on the cost of those upgrades. Homeowners can receive a credit equal to 30% of the cost of qualified energy-efficient improvements in 2019 such as solar electric systems and water heaters, wind energy equipment, and geothermal heat pumps. 

To utilize these credits you should get written certification from the manufacturer stating that their product qualifies for a tax credit. This information may be found on the company’s website or the product’s packaging and should be kept with your tax records. Also, note that this credit is planned to phase out after 2019 and cease after 2021.

Social security and Medicare withholding

In addition to withholding part of your earnings for federal income tax, employers also withhold payment for social security and Medicare taxes (and often state income taxes).  Social Security tax is the tax levied on both employers and employees to fund the Social Security program. It (in addition to Medicare tax) is collected in the form of a payroll tax mandated by the Federal Insurance Contributions Act (FICA) or a self-employment tax mandated by the Self-Employed Contributions Act (SECA).

The Social Security tax is applied to income earned by employees and self-employed taxpayers. Employers usually withhold this tax from employees’ paychecks and forward it to the government. The funds collected from employees for Social Security are not put into a trust for the individual employee currently paying into the fund, but rather are used to pay existing retirees in a "pay-as-you-go" system. Social Security tax is also collected to support individuals who are entitled to survivorship benefits—benefits paid to a widow or widower upon the death of a spouse or to a dependent child upon the death of a parent.

Unlike income tax, the Social Security tax is a regressive tax, meaning that a larger portion of lower-income earners' total income is withheld, compared to that of higher-income earners.  As of 2020, the Social Security tax rate is 12.4%. Half of the tax, or 6.2%, is paid by the employer, and the employee is responsible for paying the other 6.2%. The Social Security tax rate is assessed on all types of income earned by an employee, including salaries, wages, and bonuses. However, there is an income limit to which the tax rate is applied. For 2020, the Social Security tax is taken from income up to an annual limit of $137,700. Any amount earned above $137,700 is not subject to Social Security tax.  This is what makes it a regressive tax.

Medicare tax is calculated as 1.45% of your earnings, and is not capped as is social security tax.  In addition, many radiologists will also pay an “Additional Medicare Tax” (added by the Affordable Care Act in 2013) of 0.9%, which applies to wages and self-employment income over certain thresholds ($200,000 for those filing single and $250,000 for married couples filing jointly). 

The Internal Revenue Service (IRS) considers a self-employed individual to be both an employer and an employee.

Self-Employment tax

You're self-employed if you're a sole proprietor (which includes performing radiology services as an independent contractor), a partner in a partnership (including a member of a multi-member limited liability company (LLC) that is treated as a partnership for federal tax purposes), or are otherwise in business for yourself. Earnings from self-employment are subject to the same income tax rates as wages or salaries.  However, instead of being subject to the normal Social Security and Medicare payroll taxes, self-employment earnings are subject to the self-employment tax.

The self-employment tax is made up of the Social Security tax and Medicare tax. The Internal Revenue Service (IRS) considers a self-employed individual to be both an employer and an employee.  Thus, if you do radiology work under contract (not as an employee), you have to pay the full 12.4% Social Security tax up to the wage limit and Medicare tax of 2.9%, for a total self-employment tax of 15.3%.  The additional Medicare tax also applies as explained above.

Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.  Half of the self-employment tax can be claimed as an above-the-line deduction, in effect a partial refund on the employer portion.

Alternative Minimum Tax (AMT)

This tax prevents high-income taxpayers from being able to take advantage of so many deductions and credits that they pay very little income tax.  The calculation of the AMT is a bit complicated, and beyond the scope of this post, but suffice it to say that you’re required to pay the greater of either 1) your regular income tax, or 2) your AMT.  

Simply, the AMT is calculated by making several adjustments to your gross income, adding back a few “preference” items (such as state and local tax deductions), and subtracting a large exemption.  The resulting figure is taxed at 26% or 28% depending on the level of income.

State income tax
State income tax is required alongside federal income tax, but can often be deducted from federal taxes. State income tax varies widely among states.  As of 2020, seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—levy no personal income tax.  Two others, New Hampshire and Tennessee don’t tax wages. They do currently tax investment income and interest, but both are set to eliminate those taxes soon. That will bring the number of states with no income tax to nine by 2025. 

The three states with the highest income tax rates in 2019 are California with 13.3%, Hawaii with 11%, and Oregon with 9.9%.  The three states with the lowest income tax rates in 2019 are Pennsylvania with 3.07%, North Dakota with 3.22% and Indiana with 3.40%.

State income tax returns are shorter and easier to prepare compared with federal income tax returns because the taxable income from your federal Form 1040A is used for the state returns, without having to be recalculated.  It’s then usually subjected to a few adjustments, depending on the state’s allowable deductions.  After making these adjustments, you can calculate your state income tax from a state tax table.

Getting professional help

If “shrink” was the first thing that just popped into your mind after reading to this point, it may be a sign you should consider hiring an accountant or tax pro.   If you don’t want to prepare your tax returns on your own, I still recommend you become familiar with the information in this and my prior post and understand how it applies to you.  By doing so, you will be able to judge whether someone you hire to do your taxes for you is doing a good job.  If you want to do it on your own, even just once to learn as much as you can about taxation, you can use the popular TurboTax software, although you will probably learn more by working through the forms on your own.  Alternatively, you can do your own taxes and take them to a tax preparer to bless your work if you aren’t confident in your abilities.  It should cost less if you’ve done much of the work already.

“Collinsism”

Here’s a personal example of how a tax advisor helped me:

When I retired from clinical practice, I hadn’t yet decided whether to fully retire or not.  I was still earning royalty and honorarium income from editorial work, receiving research income, and getting paid as a visiting professor.  I received a postcard from the OH Revenue Service, letting me know that small business owners could deduct their income from state taxes.  This included sole proprietors, I read, a term which was new to me at the time.  I almost threw away the card, thinking it didn’t apply to me.  As fate would have it, I got curious as to what “sole proprietor” meant and discovered this definition:  

A business that legally has no separate existence from its owner. Income and losses are taxed on the individual's personal income tax return.

No formal filing or event is required to form a sole proprietorship; it is a status that arises automatically from one's business activity.

The income I was earning was reported on Schedule C, along with the standard Form 1040.  This is the form used to calculate and report a business’s profit or loss if you run a business as a sole proprietor!

I was a sole proprietor!!!  I contacted my tax advisor and asked her to confirm this.  It turned out that I was eligible to deduct my “net business income” as a sole proprietor on my OH income taxes.  I was up for that!

Ohio’s Business Income Deduction is entirely separate and distinct from the federal Qualified Business Income Deduction (QBID).  Since the Ohio return starts with the federal adjusted gross income, the federal QBID does not factor into Ohio’s income tax calculation.  Only business income earned by a sole proprietorship (that’s me!) or a pass-through entity generally qualifies for the deduction. A pass-through entity includes partnerships, S corporations and certain LLCs (limited liability companies).  Note: If you haven’t read my prior post on different organizational structures, you might want to now.

After learning that I was eligible for the OH business income deduction,I submitted an amended Ohio return for 2015, claiming this deduction, and received a four-figure refund.  It was quick and easy. I was able to deduct 75% of my business income in 2015 and 100% of business income in 2016 and 2017 (then I moved back to WI, which doesn’t have this deduction). 

The moral of this personal story is that professional tax preparers can do most of the work of filling out your tax return, and may save you money in the process.  But they don’t always know or think of everything.  In my case, my tax advisor lived in WI and didn’t know all the ins and outs of the OH state income tax laws.  Working together saved me money.  The more you understand about your personal taxes, the more you will be able to help your tax preparer and evaluate how well she is doing.  Ready to hear it again? No one will look out for you better than you.  

Filing deadline

As of this writing, the filing date for 2019 income taxes is July 15, 2020.  Here are a few tips to keep in mind before you hit the “send” key. 

Filing tips (particularly if you’re preparing your own taxes) based on the most common filing errors:

  1. Check name (did you get married and change your name?) and address - a mistake in either could delay processing of your return or result in a refund being sent to the wrong address.
  2. Be sure to double-check the routing and account numbers on your return if you are anticipating a refund and choose direct deposit (which is typically the fastest way to get your money).
  3. Report all of your income.  Individuals oftentimes don’t realize they generated income that is subject to tax. Omitting income from a tax return can result in additional taxes subject to interest and various penalties. When you receive tax forms, such as 1099s or K-1s, you must report the income on those forms on your individual income tax return. The IRS will know if you don’t because they receive copies of these forms (Uncle Sam is watching you).
  4. File the correct status.  If you were legally married during the year, don’t forget that your filing status may change from Single to Married Filing Jointly or Married Filing Separately. There are other filing statuses that you may not have considered, such as Head of Household or Qualifying Widower, that may yield certain tax benefits.
  5. Watch out for math errors as they are among the most common mistakes that filers make. They range from simple addition and subtraction to more complex calculations. This is when tax prep software can come in handy since it does the math automatically.
  6. Sign the return - an unsigned tax return isn’t valid!  In most cases, both spouses must sign a joint return. Exceptions may apply for members of the armed forces or other taxpayers who have a valid power of attorney. You can avoid this error by filing your return electronically and digitally signing it before sending it to the IRS.

Taxation is a very complicated topic and it’s impossible to cover every aspect that will pertain to each person’s situation.  If you find it as interesting a topic as I do, and want to learn more, here are three references that I recommend:

Beginner

Piper, M.  Taxes Made Simple.  2018, Simple Subjects, LLC.  

This is one of Mike Piper’s “100 pages or less” series, and is a very easy read for the person who knows nothing about income taxes.  Even if you never want to do your own taxes, I suggest you read this so that you’ll be able to evaluate your tax advisor and ask intelligent questions.  

In-the-Middle

I would like to recommend Taxes for Dummies.  The “Dummies” books have always appealed to me once I’ve learned a little bit, want more information, but don’t want the full scholarly opus.  At around 400 pages in length, they’re just the right size.  But, alas, Taxes for Dummies hasn’t been updated since 2008.  So I’m suggesting a niche book:

Nelson SL. Maximizing Section 199A Deductions: How Pass-through Entity Owners and Real Estate Investors Can Annually Save Thousands in Income Taxes. 2019, Stephen L. Nelson, LLC.

Stephen Nelson, CPA, has written dozens of books and this one is all about the relatively new Qualified Business Income (QBI) deduction.  Many radiologists will not qualify for this deduction, based on their income, but if you work part-time or have retired from clinical practice and now earn income as a sole proprietor, this book is a great resource. 

Hard Core

J.K. Lasser's Your Income Tax 2020: For Preparing Your 2019 Tax Return 1st Edition; Wiley.

This text is a big (896 pages), softcover book that has been updated annually for over 70 years.  It’s straightforward, yet comprehensive.  If you read this, there won’t be much you don’t know about income taxes.  And you will learn about more than just taxes, such as how to optimize your investment strategy and other areas of your personal financial life.  It’s a fantastic resource.  I read the 2017 edition cover to cover.

Be sure to return for my next post on property and sales taxes (I promise you, it’s way less boring than it sounds)!  Until we meet again next week. Over-n-out. 


Code Green! The Taxman Cometh: Making Sense of Tax Law Gobbledygook

“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.”

-Arthur Godfrey, entertainer

What’s that noise? Why, that’s the sound of your bank account crying when tax time rolls around. 

Navigating the seemingly complex annals of the tax code and process of filing your taxes can be less painful when you are well-informed (and that knowledge may even save you a little money).   

There are three main kinds of taxes: income tax, property tax and taxes on goods and services (i.e., sales tax), which I will discuss over the next three posts.  Income taxes will be discussed in two parts.  And, yes, there’ll be a  judicious sprinkling of “Collinsisms” for you ahead. 

This post covers income tax rates, types of income and income tax forms.  

As a verb, the word “tax” means “make heavy demands on”, and as an adjective it means “physically or mentally demanding.”  I find it easier to understand a word best if used in a sentence, so I offer this:  Understanding the income tax code and filling out tax forms can be very taxing!

To DIY or not to DIY? (that is the question)

Hiring a professional to do your taxes can be an expensive endeavor, so some radiologists do it themselves. However, if you aren’t comfortable researching tax law, the idea of working with numbers and calculations scares you, or the entire concept of deductions and credits seems like voodoo, you might be better off hiring a professional. There’s also the issue of time - some radiologists would rather pay someone else to spend the time doing their taxes.  On the other hand, if you don’t mind numbers and tax law holds some interest for you, there are advantages to doing it yourself.  

I’m an educator at heart and firmly believe that you learn something best by teaching it to someone else.  This is true because in order to teach something you have to fully understand it.  This holds true with doing your own taxes.  Once you’ve filled out the tax forms yourself, you will have a better understanding of tax laws and how you can optimize them to your advantage in a way that you wouldn’t if someone else did it for you.  Even if you decide one day that you’d rather pay someone else to do it, you will be better equipped to assess whether your tax preparer is doing a good job.  I will say this now and end the post with the same line:  No one will look out for you better than you.

Income tax is progressive

About 20 years ago I told my dad that almost half of my income was going towards paying income taxes.  He looked at me and said, “how can that be?”  I told him that the federal tax rate for married people filing jointly was 39.6% for income over $288,350.  And that there was state tax on top of that, which in WI was 6.75% for income over $165,600.  After a pause, my dad explained the concept of a “progressive tax.”

The word “progressive” means something that happens or develops gradually or in stages; proceeding step by step.  The United States has a progressive income tax scale. The more money you make, the more you’ll pay in taxes. However, earning a high wage doesn’t mean your entire income will be taxed at the same rate because the progressive income tax scale uses marginal tax rates to determine how your taxes are calculated.
To better understand how your income is taxed, imagine your taxable income is divided into sections. The first section is taxed at one rate, then the next section is taxed at a higher rate, and the section after that is taxed at an even higher rate, and so on. These different portions are called tax brackets. There are seven different tax brackets, and their rates differ based on your filing status.  The top tax bracket that applies to your income is called the marginal rate.

For tax year 2020, the top tax rate remains 37%. The rates for singles (and married couples filing jointly) are:

  • 37% for incomes over $518,400 ($622,50)
  • 35% for incomes over $207,350 ($414,700)
  • 32% for incomes over $163,300 ($326,600)
  • 24% for incomes over $85,525 ($171,050)
  • 22% for incomes over $40,125 ($80,250)
  • 12% for incomes over $9,875 ($19,750)
  • 0% for incomes $9,875 or less ($19,750)

Marginal tax rate is best defined as the amount of tax you pay on an additional dollar of income.

For example, a radiologist with a non-earning spouse and a taxable income of $400,000 would NOT pay 35% of $400,000 ($140,000).  Instead, her tax would be:

12% on the first $19,750 (.12 X $19,750) = $2,370

22% on income from $19,751 to $80,250 (.22 X $60,499) = $13,310

24% on income from $80,251 to $171,050 (.24 X $90,799) = $21,792

32% on income from $171,051 to $326,600 (.32 X $155,549) = $49,776

35% on income from $326,601 to $400,000 (.35 X $73,399) = $25,690

TOTAL $112,938

Note that only $73,399 of income is taxed at the marginal rate of 35%.

The effective tax rate is the percentage of your taxable income that you pay in taxes (Note: “taxable” income is total income minus deductions).  Using the above example, the radiologist pays a total of $112,938 in taxes.  Divide that by $400,000 and you get 0.28, or a 28% effective tax rate (compared with a marginal rate of 35%).  Note that sometimes the effective rate is based on state income taxes and/or payroll taxes in addition to federal income taxes.  It can also be calculated using total income (i.e., income before subtracting deductions) as the denominator rather than taxable income.

Most states follow this progressive tax system, but a handful have flat tax rates. They charge the same percentage to everyone, regardless of earnings.

There are five filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child.  A taxpayer may be eligible to choose from more than one (e.g., married filing jointly or married filing separately), but will usually opt for the filing status that results in the lowest tax.

Types of Income

Income is any money or compensation you work for or receive from invested resources. There are several types of income, and each is taxed differently:

Earned income

Annual salary, hourly wages, and earnings from self-employment are taxed at the normal income tax rates, but differ in that instead of being subject to the normal Social Security and Medicare taxes, self-employment earnings are subject to the self-employment tax (see below).

Interest

Most interest, such as from a checking or savings account, or certificate of deposit, are subject to normal income tax rates, but not to Social Security and Medicare taxes.  Some interest, such as from tax-exempt bonds issued by state government and bonds issued by municipalities (i.e., “munis”) are not subject to federal income tax.  Interest income from U.S. Treasuries are subject to federal income tax at ordinary income tax rates, but exempt from state and local income taxes.

Capital Gains

Capital gains tax is a levy assessed on the positive difference between the sale price of an asset (such as a mutual fund) and its original purchase price (i.e. “cost basis”). Long-term capital gains tax is a levy on the profits from the sale of assets held for more than a year. The rates are 0%, 15%, or 20%, depending on your tax bracket. Short-term capital gains tax applies to assets held for a year or less, and is taxed as ordinary income.  Tip: Think twice about selling an asset that has increased in value that you haven’t held for over a year.

Tax on capital gains is triggered when an asset is sold, or “realized.”  When you still own an asset that has increased in value, the gain is “unrealized.”

Even if you don’t sell them, you will probably still accrue capital gains if you own mutual funds.  That’s because each mutual fund shareholder is responsible for income tax on her share of the net capital gains realized by the fund over the course of the year, even if the value of the mutual fund went down (kick me when I’m down why dontcha!).  In this unique situation, your share of capital gains taxes are distributed to you even though you haven't sold your fund shares.  One of the advantages of owning diversified, passive index funds is that they tend to distribute fewer capital gains to shareholders compared with actively managed funds. Note: You don’t pay capital gains tax on investments that are held in retirement and HSA accounts - those investments grow “tax free.”  But you do have to pay capital gains tax on investments held in taxable accounts.  

Capital gains can be reduced by deducting the capital losses that occur when a taxable asset is sold for less than the original purchase price. Capital losses mirror capital gains in their holding periods. Long-term gains and losses are netted against each other, and the same is done for short-term gains and losses. Then the net long-term gain or loss is netted against the net short-term gain or loss to determine “net capital gains”, and the final number is reported on Form 1040. 

If you have a net capital loss for the year, you can subtract up to $3,000 of that loss from your ordinary income.  The remainder of the loss can be carried forward to offset income in future years.  

Selling a home for more than you paid for it can also generate capital gains, but you can exclude up to $250,000 of that gain ($500,000 if married filing jointly) if you meet certain requirements.

Dividends

Dividends are distributions of a company’s profits to the shareholders, and are often subject to lower income tax rates.  So-called “qualified dividends” are taxed at the capital gains tax rate.  

Net investment income (NII) from interest, dividends, and capital gains is subject to an additional 3.8% tax when the NII and modified adjusted gross income (MAGI) exceed certain thresholds.  This tax is on top of ordinary income tax and capital gains tax.  Many radiologists, because of their income level, are subject to this tax.

Passive income

This category includes income from trades or businesses in which you do not materially participate and rental income, even if you materially participate (unless you’re a real estate professional).  Passive income is subject to regular income tax, but not to payroll taxes or self-employment tax.  Losses from these activities can only be used to offset income from passive activities, except when you actively participate in a rental activity (e.g., make decisions about lease terms, property repairs, or who to rent to).  In that case, up to $25,000 of losses can be used to offset your nonpassive income each year.

Pensions and some other retirement benefits

Taxation of pensions varies. Most pensions are taxable; however, some types of military pensions or disability pensions may be partially or entirely tax-free. If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable

Anywhere from 0% up to 85% of your Social Security income may be taxable, but never 100%. If your other sources of income are below the thresholds set by the IRS, then all your benefits will be tax-free, but if your other sources of income are in excess of the threshold, then a formula determines what percentage of your benefits will be subject to taxation. For example, if you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits; if it’s more than $44,000, up to 85 percent of your benefits may be taxable. Most retired radiologists will pay federal income taxes on 85% of SS benefits.  State income tax laws vary. Only thirteen states (Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia) collect state income tax on Social Security payments.

When do you pay income taxes?

If you’re an employee, taxes are taken out of your paychecks in a process called withholding, and your employer sends the money to the government on your behalf. 

If you’re a self-employed radiologist (doing locum tenens or other contract work, for example), you aren't subject to withholding so you have to pay estimated taxes on your income four times a year. If you don’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.  You can avoid this penalty if you owe less than $1,000 in tax after subtracting withholdings and credits.  You can also avoid a penalty if you paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. 

Paying 100% of the taxes you owed in the previous year is referred to as the safe harbor rule.  One important caveat—if your income is more than $150,000 per year (ahem, most of you practicing radiologists), then you’re required to pay 110% of what you paid in taxes last year.  Note: If you live in a state that charges income tax, you may also need to set up quarterly state tax payments.

Forms, forms, and more forms!

If you prepare your own taxes, or review the returns prepared for you, you’re likely familiar with some or all of the forms described below.  If not, here’s a chance to increase your tax form literacy!

 A W-4 form is used by your employer to know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can help you from having a big balance due at tax time. It can also prevent you from overpaying your taxes, putting more money in your pocket during the year.

A W-2 form, also known as the Wage and Tax Statement, is the document an employer is required to send to each employee and to the IRS (Internal Revenue Service) at the end of the year. A W-2 reports your annual wages and the amount of taxes withheld from your paychecks.

Form 1040 is the “U.S. Individual Income Tax Return.” It’s the primary form used by individuals to file their income tax returns with the IRS.  It changed for the 2018 tax year after passage of the Tax Cuts and Jobs Act with the intention of making it “as small as a postcard”, to make filing taxes easier. Sounds good, right? Imagine filing your taxes on a postcard!  What could be easier?  But alas, the 1040 is still two pages in length and the new tax law introduced an additional six new supplemental schedules (more forms).  Some people are eligible to file Form 1040EZ instead of form 1040, but they must meet several requirements to do so, including but not limited to having less than $100,000 of taxable income, and not claiming any above the line deductions or credits aside from the earned income credit.

“Schedules” are attachments to a “form.”  Most tax schedules are attached to Form 1040.  The most frequently used schedules are:

  • Schedule A: Used to list itemized deductions
  • Schedule B: Used to report interest and dividend income
  • Schedule C: Used to calculate and report a business’s profit or loss if you run a business as a sole proprietor
  • Schedule D: Used to report capital gains and losses
  • Schedule E: Used to report income (or loss) from rental real estate, royalties, partnerships, S-corporations, estates, or trusts

Form 1099-MISC is similar to a W2 in that it is provided by employers. However, whereas W2s apply to employees, 1099s apply to independent contractors who have earned at least $600 over the course of the year.  You will receive a 1099-MISC from each entity that you received payment from as an independent contractor.

Form 1099-DIV is used by banks and other financial institutions to report dividends and other distributions (e.g., total capital gains, qualified dividends, non-taxable distributions, federal income tax withheld, foreign taxes paid) to taxpayers and to the IRS.

Form 1099-INT shows interest income from the previous tax year such as that paid from savings accounts, interest-bearing checking accounts, and US Savings bonds. The form is issued by banks, brokerage firms, and other financial institutions.

The SSA-1099 reports any social security benefits earned, including retirement benefits, disability benefits, and survivor benefits. 

The 1098-E is known as the “Student Loan Interest Statement.” Like the name implies, this form displays the amount of interest paid on student loans during the previous tax year. These interest payments can often be deducted from total income on federal income tax returns.

You should now have a good understanding of income tax brackets, the distinction between marginal and effective tax rates, different forms of income and how they are taxed, and common tax forms.  

To finish your education on income taxes, be sure to see my next post, where I will cover deductions, credits, Social Security/Medicare taxes, and state income tax, as well as provide filing tips, references for further learning, and, of course, my personal anecdotes—or more stories from the “Collins collection of lessons learned,” AKA “Collinsisms.” 


Ensure You’re Most Assuredly Insured: Home, Auto, and Extended Warranties

It is generally agreed that insurance is not exactly the most palatable way to spend your money. After all, you’re regularly paying for a product you don’t want to ever actually have to use. From one perspective, one might view it as sort of a rigged system. 

Insurance companies usually pay out less in claims than they receive in premiums, so insurance buyers collectively lose money.  No one likes to lose money, but no one likes to face financial catastrophe, either.  That’s what insurance is meant to protect against.  Major financial risks.  For most people, that would include loss of a home, for example.  Ultimately, this is the big picture perspectiveand why being knowledgeable about insurance is so important.   Insurance is not a luxury; it’s a necessity. 

If you’ve been on the edge of your seat in anticipation for the finale in this series on insurance (see the first three parts here, here, and here), sit back, relax, and enjoy the read. The insurance featured in this post? Home, auto, and extended warranties. A topic trifecta. 

I’ll cover some critical things to know about these insurance products, and (bonus!!) offer suggestions and personal tips (from my own experience) on investing in the types of protection you need at the right price.

Homeowners insurance

(This contemporary stunner is what would be classified as a “Frank Lloyd Wright meets Malibu Barbie Dream House” style home.)

If you're getting a mortgage for your new home, your lender will require homeowners insurance. And even if you're among the lucky 22% of home buyers purchasing without a mortgage, you still should get homeowners insurance to protect against costly perils like fire and wind damage.  

You may be wondering: at what point during the homebuying process should you begin shopping for homeowners insurance? How much coverage should you get, and which features should you choose? Where the heck do you even start? 

Not to worry! I shall address these and other common questions below.  

Where and when to start?

Although you don't actually own the home before your closing, mortgage companies typically want evidence of insurance—also called a binder—a few days before the closing.  

I suggest starting with an independent agent who can compare premiums and isn’t beholden to just one company.  If you shop early, you also give the insurer more time to “underwrite” your home—that is, to determine the appropriate level of coverage. That’s particularly important if your home has lots of unusual or costly details, like woodwork made of a rare species or a fancy built-in sound system. 

How much coverage do you need?  

Don't assume you have to cover your home at its market value or its tax appraisal value or even the value of your mortgage loan. The number that a homeowners insurance company is interested in is how much it would cost to rebuild your home tomorrow. That amount doesn't include the price of your land, so in many cases the insurable amount will be lower than the home price.  Typically, a home that's completely destroyed by, say, a tornado may still have its foundation intact.  The insurance company will look at online real estate listings and other available data to come up with the amount of coverage, and/or it will send an appraiser directly to the house. 

The purpose of homeowners insurance is to cover large catastrophic losses.  It shouldn’t be thought of as a maintenance policy.

When should you file a claim?

The purpose of homeowners insurance is to cover large catastrophic losses.  It shouldn’t be thought of  as a maintenance policy.  Claim frequency and severity of the claim play a considerable role in determining rates, especially if there's more than one claim relating to the same issue like water damage, wind storms, etc.

The amount of the deductible you choose is also a factor in the claims that you may potentially file. The higher the deductible, the more out of pocket you have to pay. Also, the higher the deductible, the lower your annual premiums.

I suggest going as high as you can handle with your savings—say $2,500—and file only when something happens in your home that’s more expensive than that.  

What’s covered?

Not everything. For instance, water damage from a pipe or other system that breaks inside the house is covered, but water coming from the outside will not be (e.g., if your home is flooded because a lawn sprinkler broke or was left on).  In general, events that are preventable by reasonable home maintenance—mold, pest infestations, leaks from roofs worn by wear and tear—aren’t covered.  

You may need to buy separate coverage for perils that a standard homeowners policy doesn't cover.  Keep in mind that some perils, such as liability coverage for dog bites from breeds such as pit bulls and Rottweilers, may not be insurable at all.  For jewelry, furs, and fine art, you can buy a separate policy that covers accidental loss.  Consider business insurance if you run a business out of your home, even as a renter. Work with your agent to buy separate flood and earthquake protection. You may need a separate hurricane or windstorm policy, with a separate deductible, if you live in a high-risk zone.

Sewer backup coverage, to address a blockage in your sewer line, costs around $40 to $100 a year. Flood insurance costs, on average, around $700 a year but can be purchased for far less in a low-to moderate-risk area and may be much higher in high-risk areas.

What if you rent a home?

Your landlord’s policy insures only the rental unit itself, not your belongings in it.  If the value of your possessions is substantial, consider rental insurance, which on average costs $15 to $20 per month. It also covers you for liability (do you own a dog with a dangerous reputation?).

How much does your credit score matter?

Your credit score matters quite significantly. Insurance companies will use any means necessary to determine the probability of risk.  Around 95% of auto insurers and 85% of home insurers use “credit-based insurance scores” in states they are legally allowed to when determining your underwriting risk (the practice isn't allowed in California, Maryland, or Massachusetts).  Why do they do this?  Because actuarial studies show that a person's financial affairs are a good indicator of whether that person will file an insurance claim. A 2017 study found a substantial increase in premiums for people with lower credit scores.  

What about ‘Personal Liability for Damage or Injuries’?

Liability coverage protects you from lawsuits filed by others. This clause even includes your pets! So, if your dog bites your neighbor, no matter if the bite occurs at your place or hers, your insurer will pay her medical expenses. While policies can offer as little as $100,000 of coverage, experts recommend having at least $300,000 worth of coverage, according to the Insurance Information Institute. For extra protection, a few hundred dollars more in premiums can buy you an extra $1 million or more through an umbrella policy (see below).

Is it worth comparison shopping?  

Compare insurance costs by shopping around every couple of years to see whether you can get a better premium from a different insurer. Over half of people who change companies do so because switching saved money.  

Are there any tricks to help cut premium costs?

Yes. There are several ways to cut the cost of premiums:

Maintain a security system

A burglar alarm monitored by a central station or tied directly to a local police station can lower your annual premiums by as much as 5% or more.  Smoke alarms are another biggie. While standard in most modern houses, installing them in older homes can save the homeowner 10% or more in annual premiums. CO2 detectors, dead-bolt locks, sprinkler systems and in some cases even weatherproofing can also help.

When you choose a deductible, you’re picking a number you’re willing to spend out of pocket if you suffer a loss. 

Raise your deductible

Like health insurance or car insurance, the higher the deductible you choose, the lower the annual premiums. You can shave hundreds of dollars off your annual homeowners insurance bill by increasing your deductible.  I don’t just mean going from $500 to $1,000. Think big. $2,500. Already have a $2,500 deductible? Then think bigger. $5,000. $10,000. Or really big. If you have a $5,000,000 home, you might even consider a deductible of $100,000.  

When you choose a deductible, you’re picking a number you’re willing to spend out of pocket if you suffer a loss. It should certainly cover what you think of as run-of-the-mill outlays (when calling the insurer would be more of a hassle than writing a check to the repairman). But if you’re comfortable with laying out even more at the time of a loss, over time you can really save money on premiums.

How much might you save with a bigger deductible? While a typical homeowners insurance policy deductible is $500 or $1,000, you might save $300 a year by going to a $2,500 deductible or $600 a year by going to a $5,000 deductible.  On a house insured for $1 million with a $2,500 deductible, you might save $1,000 a year by going to a $10,000 deductible.

Look for multiple policy discounts 

Many insurance companies give a discount of 10% or more to customers who maintain other insurance contracts with them (such as auto or health insurance). 

Do you really want that pool?

Items such as pools and/or other potentially injurious devices (like trampolines) can drive the annual insurance costs up by 10% or more.

Pay off your mortgage

Obviously this is easier said than done, but homeowners who own their residences outright will most likely see their premiums drop. Why? The insurance company figures if a place is 100% yours, you'll take better care of it.  Note: this must vary from company to company because when I paid off my mortgage I did not get a break on my premium.

Make regular policy reviews and comparisons

No matter what initial price you're quoted, you'll want to do a little comparison shopping.  Get at least a few quotes.  And even after purchasing a policy, I recommend that you comparison shop again at least once every year or two. This should include a review of your existing policy, noting any changes that have occurred that could lower your premiums.  Once they have your business, insurance companies don’t want to lose it (often offering to lower your premium or deductible for your loyalty).  Use comparison quotes as a negotiating tool.   

Personal tips

Since I’ve started looking closely at my home, auto, umbrella, and personal property insurance policies over the last several years, I’ve developed a better understanding of what is covered and the cost differentials for different levels of coverage.  It takes time to read the fine print and shop around, but every year it becomes easier and takes less time.  Knowledge takes the mystery out of it.  I use an independent insurance agent, who has been very responsive to my needs, but I know that no one will look out for my best interests as much as I will.  It’s impossible for an agent to know about all the changes that occur in my life.  

For example, my husband and I wanted to buy a house on the same street, 5 houses down from where we were living.  We had gotten tired of clearing a sloped driveway in the Wisconsin winter.  We liked the new house with a flat driveway that got a lot of sun.  There were other things we liked better about the new house too, but the driveway was the big one.  We managed to buy the new house for a good price and moved before the old house was sold.   

I was surprised when the homeowners insurance premium for the old house went UP by $200 even though we were no longer living there.  That’s when I learned about personal property coverage, which my agent defined as “If you were to pick up your house, turn it upside down and shake it, whatever falls out is personal property - clothing, furniture, kitchenware, household goods, etc. - whatever isn’t permanently attached to the studs."  She told me that the limit of that coverage is automatically 75% of the limit for which the home itself is insured.  I had no idea!  My husband and I don’t furnish our home expensively and didn’t think the value of our property came close to the number that was 75% of our home’s insured value.  Certainly not in the home we’d moved out of, where we no longer had any furniture.  We immediately dropped our personal property coverage to 10% on the old house and to 50% on our new house.

My agent also told me that the “standard” deductible for homes valued under $1,000,000 was $1,000.  I figured I could pay more than that out-of-pocket and asked how much I could save on premium costs by increasing the deductible.  I wound up increasing my deductible to $2,500 and saved $156/year on my premium.  I’m considering increasing my deductible to $5,000, although it may or not not be worth doing so if it doesn’t reduce the premium by a significant amount.

I also asked about flood insurance and learned that the maximum you can purchase from the federal government on a Primary Flood Policy is $250,000 on the dwelling and $100,000 on personal property.  This would have cost me $499.  If I wanted higher limits, I would have to purchase an Excess Flood Policy, both of which would cost around $1,300/year.  I live in an area where the risk of flood is about as low as it gets, so I decided not to get flood insurance.  I am covered for sprinkler flood or water backup.  

My homeowners premium is reduced because of the following: alarm credit, deductible credit, home new purchase discount, insurance score credit, mature homeowner discount, package credit, preferred risk (no losses in 6 years), and superior risk credit.  

Umbrella policy

An umbrella insurance policy is extra liability insurance coverage that goes beyond the limits of the insured's homeowners or auto insurance.  It provides an additional layer of security to those who are at risk of being sued for damages to other people's property or injuries caused to others in an accident. It also protects against libel, vandalism, slander, and invasion of privacy.

If a policyholder is sued for damages that exceed the liability limits of car insurance, homeowners insurance, or other coverage types, an umbrella policy helps pay what they owe. For example, if you run a red light and accidentally hit another car, there might be significant damage to the vehicle and several people might be injured.  If car repairs total $50,000 and the treatment of the injuries eclipses $500,000, you may be liable for expenses that go far beyond the coverage limits of your insurance. An umbrella insurance policy will pick up the additional liability costs beyond the limits of your car insurance coverage.

The added coverage provided by an umbrella insurance policy is most useful to high net worth individuals, such as radiologists, who own a lot of assets or very expensive assets and are at a significant risk of being sued. Or they may own dangerous things that can cause injury (swimming pools, trampolines, dogs, etc.). They might also engage in activities that increase their chances of lawsuits, such as being a landlord, coaching kids’ sports, or participating in sports where they could easily injure others (e.g., skiing, surfing, hunting).  Small businesses also use an umbrella insurance policy to guard against potential monetary damages arising due to claims made against them. 

The average annual cost of a $1,000,000 personal umbrella insurance policy is $150 to $300.  I pay $484 for a $5,000,000 policy.  I don’t know that there is a “standard” amount of coverage that radiologists should have, but have seen recommendations that are generally between $1M to $5M.  

Depending on the provider, the policyholder who wants to add an umbrella insurance policy is required to have a base insurance coverage of $150,000 to $250,000 for auto insurance and $250,000 to $300,000 for homeowners insurance.  

Auto insurance

Vrooom. Now we get to the part about cars! Or trucks. Or your motorcycle. Auto insurance is a policy purchased by vehicle owners to mitigate costs associated with getting into an auto accident. The premiums vary depending on age, gender, years of driving experience, accident and moving violation history, amount of coverage, and other factors. You can reduce your premiums by agreeing to take on more risk, which means increasing your deductible.  

Most U.S. states require basic personal auto insurance, and laws vary from state to state. If you are financing a car, your lender may stipulate requirements. Nearly every state requires car owners to carry:

  • Bodily injury liability – covers costs associated with injuries or death that you or another driver causes while driving your car
  • Property damage liability – reimburses others for damage that you or another driver operating your car causes to another vehicle or other property

Many states also require:

  • Medical payments or personal injury protection (PIP) – provides reimbursement for medical expenses for injuries to you or your passengers; it will also cover lost wages and other related expenses
  • Uninsured motorist coverage – reimburses you when an accident is caused by a driver who does not have auto insurance

An auto insurance policy will cover you and other family members on the policy, whether driving your car or someone else’s car (with their permission). Your policy also provides coverage to someone who is not on your policy and is driving your car with your consent.

Personal auto insurance only covers personal driving. It will not provide coverage if you use your car for commercial purposes—such as making deliveries. Neither will it provide coverage if you use your car to work for ride-sharing services such as Uber or Lyft. Some auto insurers now offer supplemental insurance products (at additional cost) that extend coverage for vehicle owners that provide ride-sharing services. 

Personal tips

When the premium was greater than 10% of the value of my husband’s car, we cancelled collision and comprehensive coverage, saving over $200/year.  His Ford Explorer had a retail value of $2,900 and the insurance would have only paid out $1,500-$2,500.  I also cancelled auto towing and medical coverage on my auto insurance (covering other people in my car, not lawsuits), two things that are automatically “recommended”, which I didn’t think I needed.

Extended warranties (like for your iPhone!)

What about minor financial risks, like your iPhone shattering on the pavement, or the washing machine going kaput?  Because insurance will usually be a money loser, I don’t want to pay premiums to protect against risks I can easily pay for out of pocket.  

Extended warranties are a type of insurance that covers what I would consider “minor risks.”  Every time I buy an appliance, automobile, or phone, the salesperson tries to sell me an extended warranty.  They usually don’t cost much but I know there’s very little chance I will ever need it so I don’t buy it.  And I’m in a position where I can buy a new phone with cash.  

While it may sound like a good idea in theory, extended car warranties often come with a high price tag (thousands of dollars) and don’t necessarily cover everything that could go wrong.  Plus, many people who buy extended warranties never use them. In that case, an extended warranty becomes a cost with no financial return. According to a Consumer Reports survey, 55% of respondents who bought an extended warranty didn’t use it and only a quarter of survey participants said they’d buy one again.  And the cost for repairs among respondents who used their warranty was typically less than the cost of the warranty. Here are other “cons” of buying an extended car warranty:

  • Overlap: If the coverage period of the extended warranty overlaps with the manufacturer’s warranty, you may pay for a warranty you’re already getting at no cost. And with a new car, the extended warranty likely will not be in effect until the manufacturer’s warranty expires.
  • Coverage: Extended warranties typically don’t cover everything that might go wrong with your car. 
  • Service requirements: You may only be allowed to have your car fixed at certain repair facilities.
  • Depreciation clauses: Some extended warranties may only pay for a portion of the cost to repair or replace parts that need to be fixed, based on the car’s mileage.
  • Reliability: Under most extended warranties, either the dealer, manufacturer or an independent third party is responsible for paying for repairs. If the entity that’s supposed to pay the bills goes out of business, you may be stuck with a warranty you can’t use.

Personal tip

One type of “extra” insurance that I have bought is travel insurance.  Several years ago, my husband and I plunked down $10,000 for a cross-country bicycle tour.  It was the trip of a lifetime.  We were going to ride our bikes over 3,000 miles in 34 days.  We spent months preparing by riding 100 miles a day or more on our bikes.  

The trip was going great until my knee started to hurt from an overuse injury.  I kept riding (foolishly thinking that continuing to stress my knee would make it better) until the guides had to drag me off the pavement into the van (okay, that’s a bit of hyperbole, but just a bit).  My knee had swollen to the size of a grapefruit and after riding 800 miles along the Pacific Coast highway, through Nevada, Utah, and Colorado to the Grand Canyon, I had to fly back home for a knee MRI and physical therapy.  Fortunately, I had travel insurance, and it kicked in immediately.  A pediatrician on the tour was kind enough to examine my knee and fill out my insurance paperwork. I was refunded for all the trip days my husband and I couldn’t finish as well as first class plane fare back home.  I wasn’t the only person who suffered an injury during the trip and had to abandon.  If you pay a lot of money in advance for a trip and there is a risk of injury or illness (elderly people tend to need to cancel trips for medical reasons, for example), travel insurance may make sense.  

Final remarks

You did it! You just finished reading my 4th installment on insurance!  A note: if you missed any of them, you might want to go back to the last three posts to learn about other types of insurance (e.g., malpractice, life, disability, health, and long-term care). 

It takes some time and effort to learn about the ins and outs of each type, but you should consider it a life-long investment.  Once you’ve mastered the basics, you will be in a better position to make sure that going forward you get what you need, and only what you need, at a reasonable price.  


Building Your Stay-well Game Plan: Health, Long-term Care Insurance

Thus far, we’ve taken a jaunt through the educational pastures of life and malpractice insurance, and dipped our toes into the informative waters of disability insurance. In this post, we shall take a stroll of insight through the valley of health and long-term care insurance. 

Fortunately, or unfortunately, I am neither a gecko nor Dennis Quaid (or insurance spokesperson of any kind). So I’ll  just get right to it. Here are some important things you should know:  

Health insurance is a must.  The potential consequences of contracting a major illness without having insurance can be catastrophic. All medical care is expensive and even more so if you don’t have insurance and have to pay the full, non-insurance-negotiated rate.  Even minor health events can result in 5-figure charges.  You can’t get a federal loan to pay for medical care like you can for college tuition.  Many people without insurance resort to putting medical costs on a credit card, which results in an even larger bill when interest rates are tacked on.  Two-thirds of people who file for bankruptcy cite medical issues as a key contributor to their financial downfall.  People without insurance avoid getting medical care, which in some cases can lead to a delayed diagnosis.

By investing in decent health insurance and also, potentially, long-term care insurance, you can help ensure you’re better able to receive the quality care you may need, while maintaining both your physical and financial health and wellbeing. 

Medical students and residents are offered insurance through their university and employer, respectively.  The premiums, deductibles, out-of-pocket maximums, and coverage types are variable from institution to institution.  In general, the costs are reflective of student unemployment and a resident’s salary.  The premiums I’ve seen range from $0 to $150 for individual coverage and up to $500 for family coverage.  This is a bargain compared with what it costs for a non-subsidized plan on the open market.  Some institutions offer both high deductible and non-high deductible plans.  

The majority of residents work in a hospital and receive their salary and benefits from the hospital.  The illustration below shows that 89% of residents receive health insurance.  

Medscape Residents Salary and Debt Report 2019

Practicing radiologists receive health insurance benefits through their employer, or buy it individually if they are self-employed or don’t have access to a good group plan.  Radiologists at academic institutions get their insurance through the associated university.  Those in group practice may or may not get insurance through their group, depending on the size of the group.  Many groups are too small to offer group insurance.  Or, in some cases, buying insurance on the open market may be cheaper than what the group is offering.

Picking your purveyor 

Most radiologists who buy individual plans will buy it through a health insurance broker instead of through the open marketplace on healthcare.gov since it doesn’t cost more and they won’t qualify for a subsidy.  Health insurance is very expensive and over the past 5 years, I’ve seen the prices increase and the options decrease.  When you go from getting insurance from an employer to buying it on your own, you appreciate how much of the premium an employer picks up.

Greener grass outside the group plan?

When I became self-employed, I initially bought insurance through the marketplace.  Although the coverage and cost was exactly the same as buying it through an agent (or directly through the insurance company), the marketplace allowed me to buy better dental insurance at a lower cost than what I could get on my own.  However, dental coverage through the marketplace changed, and the last time I looked, buying it through the marketplace offered no benefit.  I also found that working with the marketplace was a big hassle.  When I moved, for example, I talked to several people from the marketplace who didn’t seem to know how to let me transfer from an OH plan to a WI plan without incurring a lapse in coverage.  

I’m now able to get my insurance through the State of Wisconsin Group Health Insurance for Retirees.  The coverage is the same as what I can get on my own, but the premiums and deductibles are lower.  And since I’m self-employed, my premiums are an above-the-line income tax deduction (meaning my taxable income is reduced by the full amount of the premiums).

A word about dental and vision

I buy dental insurance outside of the group plan because it’s cheaper and offers benefits that are just as good.  The amount of my premiums are a little less than the cost of twice a year cleanings and x-rays.  And the type of insurance I have gives me a discount on dental work.  This works for me since the insurance covers a large number of dentists in my area that I’m willing to see.  Another big advantage of having dental coverage is getting the insurance-negotiated rate for services, which can be much less than paying full-price for dental work.  

Vision insurance is offered by many group plans and is also available to purchase individually.  I pay for vision insurance through my state group plan because the premium is minimal and more than covers an annual comprehensive eye exam, which is recommended for someone of my age.  If I didn’t need eye exams I wouldn’t pay for the coverage, since I don’t need a discount on glasses or contacts.  

Picking a plan (and comparison shopping)

You’ll encounter some alphabet soup while shopping for health insurance; the most common types of health insurance policies are HMOs, PPOs, EPOs or POS plans. The kind you choose will help determine your out-of-pocket costs and which doctors you can see.  

COMPARING HEALTH INSURANCE PLANS: HMO VS. PPO VS. EPO VS. POS

Plan type Do you have to stay in network to get coverage? Do procedures & specialists require a referral? Snapshot:
HMO: Health Maintenance Organization Yes, except for emergencies. Yes, typically Lower out-of-pocket costs and a primary doctor who coordinates your care for you, but less freedom to choose providers.
PPO: Preferred Provider Organization No, but in-network care is less expensive. No More provider options and no required referrals, but higher out-of-pocket costs.
EPO: Exclusive Provider Organization Yes, except for emergencies. No Lower out-of-pocket costs and no required referrals, but less freedom to choose providers.
POS: Point of Service Plan No, but in-network care is less expensive. Yes More provider options and a primary doctor who coordinates your care for you, with referrals required.

When comparing different plans, consider the amount and type of treatment you’ve received in the past. Though it’s impossible to predict every medical expense, being aware of trends can help you make an informed decision.

HMOs tend to be the cheapest type of health plan.  Over the past few years, more and more insurance providers are offering only HMO plans with no coverage for out-of-network service.  It’s very important to look at the hospitals, doctors, and clinics within the HMO to see if they provide options you would be satisfied with. Costs are lower when you go to an in-network doctor because insurance companies contract lower rates with in-network providers. When you go out of network, those doctors don’t have agreed-upon rates, and you’re typically on the hook for a higher portion of the cost.

Weighing your options: benefits, costs 

If you have preferred doctors and want to keep seeing them, make sure they’re in the provider directories for the plan you’re considering. You can also directly ask your doctors if they accept a particular health plan, although be ready to get an equivocal answer.  In my experience, the people who answer the phone at your clinic or doctor’s office aren’t always able to tell you if you are in their network.  What’s more, there is nothing to prevent a doctor or doctor group from leaving the network after you’ve enrolled.

A high-deductible health plan (HDHP) can be any one of the types above — HMO, PPO, EPO or POS — but follows certain rules in order to be “HSA-eligible.” These HDHPs typically have lower premiums, but you pay higher out-of-pocket costs. They are the only plans that qualify you to open a health savings account (HSA), which is a tax-advantaged account you can use to pay health care costs.  HSAs are also a great way to save money for retirement since the contributions are tax deductible, you don’t pay taxes on the growth, and when used for qualified health care expenses, the dollars are not taxed at withdrawal.  And you can withdraw HSA dollars anytime in the future for health care expenditures that you pay out-of-pocket for today.

If you don’t have a preferred doctor, look for a plan with a large network so you have more choices. A larger network is especially important if you live in a rural community, since you’ll be more likely to find a local doctor who takes your plan.  When looking at different plans, compare what they cover, particularly for things like  physical therapy, maternity care, drug coverage, fertility treatments, mental health care, and emergency coverage. 

As the consumer, your portion of costs may include deductibles, copayments and coinsurance. A deductible is the amount you pay each year for most eligible medical services or medications before your health plan begins to share in the cost of covered services.  A copay is a flat fee that you pay on the spot each time you go to your doctor or fill a prescription. Coinsurance is a portion of the medical cost you pay after your deductible has been met.  For example, if your coinsurance is 20 percent, you pay 20 percent of the cost of your covered medical bills and your health insurance plan will pay the other 80 percent. 

A plan that pays a higher portion of your medical costs, but has higher monthly premiums, may be better if:

  • You see a primary physician or a specialist frequently.
  • You frequently need emergency care.
  • You take expensive or brand-name medications on a regular basis.
  • You are expecting a baby, plan to have a baby or have small children.
  • You have a planned surgery coming up.
  • You’ve been diagnosed with a chronic condition such as diabetes or cancer.

A plan with higher out-of-pocket costs and lower monthly premiums might be the better choice if:

  • You can’t afford the higher monthly premiums for a plan with lower out-of-pocket costs.
  • You are in good health and rarely see a doctor.

Long-term care insurance

Here’s a hair-raising statistic: a 65-year-old couple retiring in 2019 can expect to spend $285,000 in healthcare and medical expenses throughout retirement. 

This doesn’t include the additional annual cost of long-term care, which, in 2019, averaged from $19,500 for adult day care services to $102,204 for a private room in a nursing home.  

The concept of long-term care (LTC) has been evolving over the past 20 years and is now a mainstream consumer product. 

So, what is it exactly? 

The most widely-used definition of LTC focuses on the activities of daily living, or ADL (dressing, bathing, eating, walking, and using the bathroom).  A popular standard states that a person needs LTC when they require assistance with two or more of the ADL.

According to the U.S. Department of Health and Human Services, 70% of those turning age 65 today will need some type of long-term care.  LTC insurance is coverage that will pay for assisted living, nursing home care, or home health care in the event you are unable to care for yourself because of a chronic condition or disability.

Another hair-raising point? It’s not traditionally covered by Medicare. 

You can’t count on Medicare to pay for nursing home, assisted living, or ongoing home health care. Medicare benefits for that type of care are typically only available after a hospitalization or injury and for a limited duration.

Now, for a “tear-your-hair-out” kind of point: LTC insurance is expensive.  

For example, a 65-year-old couple might purchase a policy that will give them base benefits of $180,000 plus 3% inflation growth that will cost them $4,800 per year. The price for that same plan more than doubles to $8,700 per year if the couple waits until age 75 to buy. Others may have health conditions that make them ineligible for coverage at any price.  The average age of a buyer today is 57, down from 67 when policies were first being sold.  It’s easy to see why.  Premium prices steadily go up with age but take a sharp turn at age 65, when they begin to rise by about 8% a year.  

And the rates can go up after purchase, by as much as 70% annually on older policies.  Whew!  Why are the rates so high?  Rate hikes seen on older policies (sold in the 1990’s and early 2000’s) are the result of faulty assumptions about the number of claims that would be made and how many policies would lapse. Also, some insurers did little to no underwriting in the early years, making it possible for virtually anyone to buy coverage regardless of the probability of them filing expensive claims in the future.

The good news? Since that time, long-term care insurers have made significant changes in how they issue and price their plans. They now have decades of claims data to base their underwriting, so premiums should theoretically become less volatile.

Who should purchase LTC insurance?

The rule of thumb is that you’re a candidate to buy LTC insurance if you have between $200,000 and $2M in assets.

There are three categories of people to consider when contemplating this question:

  1. Individuals of modest means.  They can’t afford LTC insurance and can’t self-insure.  Medicaid was created to provide LTC for this group, who will spend their modest assets until they qualify for Medicaid, and then they rely on the government to pay for the rest of their care.
  2. Individuals on the opposite end of the wealth spectrum.  They do not need LTC insurance because they can pay for any needed LTC comfortably out of income and assets.
  3. The people in the middle.  But what is the dividing line?  Where’s the donut hole? That’s the ultimate question.  The rule of thumb is that you’re a candidate to buy LTC insurance if you have between $200,000 and $2M in assets.  With less, you can’t afford the premiums and don’t have enough to protect.  With more, you can reasonably plan on paying your own way.

Group Long-Term Care Insurance

You may be offered group coverage as a voluntary benefit at work, although this benefit is not yet widespread.  Given the problems with LTC insurance policies (e.g., high cost, unpredictable premium increases, and insurer solvency, just to name a few), most radiologists are choosing to self-insure, meaning they save up the cash they will need for future long-term care costs.

Life/Long-Term Care Insurance

Life insurance policies that include long-term care riders have become very popular.  A combination life insurance policy simply adds a long-term care rider to a permanent life insurance plan. The American Association of Long-Term Care Insurance said that more than 350,000 Americans purchased long-term care coverage in 2018. The vast majority (84%) of these purchases were for hybrid or combination life insurance. Only 16% were traditional long-term care policies. 

If you read my post on life insurance you know that I don’t generally like mixing investing with insurance. These hybrid plans have positives and negatives:

Positives:

  • You don’t face large rate hikes that can happen with stand-alone long-term care insurance
  • You combine life insurance and long-term care insurance into one policy (i.e., it offers convenience) 
  • You get life insurance protection 
  • Survivors get money not spent on long-term care 

 Negatives:

  • Not available with term life insurance (which means you’re mixing insurance with investing) 
  • Lower payout than stand-alone long-term care insurance 
  • Can be more costly than stand-alone long-term care insurance (which is already expensive) 
  • Paying with one lump sum, which will give you the cheapest rate, is expensive

The combo approach may be a good idea when there are underwriting issues involved (i.e., you don’t qualify or are a poor candidate for either term life insurance or long term care insurance). 

Another option - CCRC 

Continuing care retirement communities, also known as CCRCs or life plan communities, are a long-term care option for older people who want to stay in the same place through different phases of the aging process.  There are nearly 2,000 continuing care retirement communities in the U.S. offering different types of housing and care levels based on a senior’s needs and how they change. A CCRC resident can start out living independently in an apartment and later transition to assisted living to get more help with daily activities, or to a memory care unit or skilled nursing to receive more medical care while remaining in the same community.

The chief benefit of CCRCs is that they provide a wide range of care, services and activities in one place, offering residents a sense of stability and familiarity as their abilities or health conditions change. But all this comes at a cost.  Nearly two-thirds of the communities charge an entry fee, averaging $329,000, but topping $1 million at some CCRCs.  Once residents move in, they pay monthly maintenance or service fees that typically run $2,000 to $4,000.

There are many permutations to how CCRCs function and charge for services, including the following options: 1) a full range of services but high fees (e.g., unlimited assisted living, medical treatment and skilled nursing care with little or no additional cost), 2) a limited set of services, beyond which the resident incurs higher monthly fees, and 3) a fee-for-service contract, where residents pay for whatever specific services that they require.  

Because a lot of money is on the line, buyers should investigate a CCRC thoroughly before signing a contract.  You don’t want to commit to living out your life in a place that you discover is poorly managed and financially unstable.

Many of the highly sought-after CCRCs have a waiting list and require a deposit.  After investigating all the CCRCs in our area of interest, my husband and I put down a $1,000 deposit at the facility we liked best that provides all levels of care.  The waiting list is long and on average, it is 7 years before an independent living unit is available.  The entry fee for life lease apartments (independent living) ranges from $229,900 to $570,300, and the monthly fees range from $2,017 to $2,761 for a single person (2019 rates).  The daily rates for higher levels of care are $231 per day for assisted living, $291 per day for memory care (private room), and up to $418 per day for skilled nursing care.  

The average 65-year-old will need three years of LTC, with about ⅔ of that time spent at home, and the rest in either a nursing home or assisted-living facility.  All of those levels of care can be obtained at a CCRC, but as you can see, it comes at a significant cost.  One year of skilled nursing comes to $152,570 in the example above.

To recap...

Everyone needs health insurance.  If you’re lucky, you get good coverage at a reasonable price through your employer.  Or you can easily afford to purchase a good individual plan.  The high cost of individual health insurance influences many a radiologist’s decision to work for an employer versus be self-employed, as well as when to retire.  Medicare doesn’t kick in until age 65!  Long term care insurance is not as straightforward and given its limitations, and the average radiologist’s wealth, most radiologists will decide to self-insure.

Next up? Home and auto insurance, and extended warranties.  I’ve included some information that should be interesting for everyone.  If for no other reason, you’ll want to read the next post just to be entertained by my personal anecdotes.

 


Buying Disability Insurance: The Biggest Mistake You Never Made

A full post devoted to the topic of disability insurance might sound a little extreme to some; you may be dismissive about the idea of buying disability insurance coverage. At one point in time, I would’ve thought the same thing. 

I have to admit that I didn’t know much about disability insurance as a student, resident, or even for a long time as a practicing radiologist.  Luckily, my naivety wasn’t tested.  I never suffered a disability that prevented me from working.  I’m now at a point in my career when I don’t rely on earned income to pay my bills so I don’t need disability insurance.  But you may not be in my situation now and you may not be as lucky as I was.  

Sure, disability insurance is costly.  And the average radiologist will not benefit from paying for that insurance, except for the benefit of peace of mind.  Some will benefit greatly when tragedy befalls them and their insurance kicks in.  And some, unfortunately, will regret not having insurance when they become disabled and face financial catastrophe.  

That is why I’m devoting a full post to the subject of disability insurance. I’ll help you become more informed by providing an overview, including why you should consider it a necessary investment to protect your future, different types of plans and coverage options, as well as other essential questions and practicalities.    

Hopefully, such misfortune will never befall you, but if it does, investing in disability insurance may be the biggest mistake you never made

For most radiologists, their human capital (i.e., the economic value of their experience and skills) is their most valuable asset and greatest source of wealth.

Words on the “why”

A full-time radiologist earns, on average, just over $400,000.  Multiply that figure, along with adjustments for salary increases (one can only hope) over a career of 30 years and you’re looking at a big pot of gold.  For most radiologists, their human capital (i.e., the economic value of their experience and skills) is their most valuable asset and greatest source of wealth.  It’s worth insuring.  

Major takeaway: Don’t be penny wise and pound foolish

Radiologists often pay attention to life insurance needs but fail to consider the possibility of a debilitating incident. The chance of missing months or years of work because of an injury or illness may seem remote, especially to a young healthy radiologist who doesn’t see much risk from sitting in front of a monitor interpreting images. But the statistics tell a different story. 

Fact: a professional has a greater statistical probability of suffering a severe disability that impedes their ability to work than of dying prematurely.  

Fact: more than one in four 20-year-olds will experience a disability for 90 days or more before they reach age 67.

Fiction: you can rely on the government’s disability program to offer sufficient assistance to see you through a difficult time.

Don’t think Social Security’s disability program will protect you.  Social Security requires you not only to have a disability that’s expected to last more than a year, but also the disability must prevent you from all work.  If you’re able to work just a few hours a week or you’re expected to recover within 12 months, you won’t qualify.  More than half of applicants get denied. And even if you do qualify, it could take a year or more to get approved.   Furthermore, the estimated average Social Security disability benefit amount for a disabled worker receiving Social Security Disability Insurance (SSDI) as of Nov. 2019 was just $1,237 per month.  Finally, SSDI pays benefits to you and certain members of your family only if you are "insured," meaning that you worked long enough and paid Social Security taxes.

Think disability doesn’t happen to radiologists?  Here is a sampling of conditions that I’m personally aware of as affecting a student, resident, fellow, or practicing radiologist’s ability to work:

Traumatic brain injury, ruptured brain aneurysm and stroke, near-drowning, autoimmune disorder with associated cognitive fatigue and “brain fog”, leukemia/other cancers, heart attack, depression, burn out, Parkinson disease, pregnancy-related complications, diabetes, drug addiction, debilitating back pain, and interstitial lung disease.

Note that several of those conditions are common in young individuals.  And that’s just a list of what I’ve personally come across.

Major takeaway: yes, it really can happen to you; you just never know in life

When should you get disability insurance?

James Turner, MD, who blogs for The Physician Philosopher, tells his story of regret regarding the purchasing of disability insurance.  When he was a third-year medical student and his first child was born, he met with an insurance agent (the brother of a friend) to ask about life insurance.  The agent said that was a good idea and also recommended he get disability insurance.  James trusted the agent and applied for a DI policy.  His application was denied because he had an essential tremor.  He didn’t think it was a big deal until he was a resident and found out about the great “guaranteed” policy offered by the hospital, with no medical exam and no medical history taking.  But there was one stipulation: the insurance was not offered to anyone who had previously been denied DI.  To this day, he does not have personal DI because “an insurance agent was trying to earn a commission off of him when that agent should have known that a guaranteed policy would be available to him just 14 months later that didn’t require an exam or medical history.”  

If you have a pre-existing medical condition that would preclude you from getting DI, you might want to wait until you are a resident to apply for DI.  Fortunately for James, who is now a practicing radiologist, his employer’s group disability insurance covers 60% of his base salary.  After tax, that’s about $10,000 per month.  But he has no individual DI policy on top of that.  He describes his real disability insurance plan (If you’re curious, yes he applied for individual DI again with a different company, and was denied again) is to live within his means and to make sure his monthly expenses never go north of $10,000 per month.  However,I’m assuming this means that if he leaves his current employer he would NOT take that group insurance policy with him (although in some cases you can take a group plan with you if you take on the full cost of the premium, including any portion that the group paid for you).  

The disparity between your residency paychecks and your post-residency ones puts your long-term financial health at a unique risk. If you become too ill or injured to work before you reach peak earning potential, you’ll still have to pay back the lender that bankrolled your medical school education.  The lender will not care that you are disabled.

Most residents are offered disability insurance through their employer.  A 2016 survey showed that residents were offered long-term disability insurance that was fully paid (70.9%), cost shared (17.6%), available but not paid by the institutions (9.3%), or not offered (2.2%).  

Group vs. individual plans

Disability insurance can be purchased on an individual or group basis.  Individual insurance plans are typically purchased through a local insurance agent and, in some cases, can now be purchased over the phone or through a company’s website. Most insurance companies will issue disability insurance coverage equal to approximately 60% of earned income. 

Group insurance is usually provided by an employer or purchased individually through a sponsoring professional association. The two main benefits of a group policy is that they cost less than individual policies (perhaps ¼ the cost) and they are easier to qualify for.  Most radiologists will qualify for a group policy because it usually doesn’t require underwriting (i.e., no medical exam).  Getting cheap group insurance through an employer is a no-brainer.  But relying on this alone can be risky.  Group insurance doesn’t automatically go with you when you change employers. 

When I worked in the Department of Radiology at the University of Wisconsin I had good group coverage (although I admit I didn’t know much about it until I looked into it several years after leaving).  At UW, radiologists get paid from two sources: the University and the UW Medical Foundation.  For most, the largest portion comes from the UWMF.  The  DI through the university (to cover university income) is called Income Continuation.  The UWMF portion of salary is covered through a group disability program, which is “own occupation” covering 66 ⅔ of salary.  I was lucky to have good coverage, but I don’t advocate luck as a strategy for financial and professional success.  I suggest you do what I should have done, and that is to learn about the DI offered through your employer before you accept the job and sign the contract.  

There are several advantages to having an individual plan.  They’re portable, meaning you get to keep the coverage if you change employers.  Conversely, employer-paid coverage ends when you leave the company (although you might be able to take the coverage with you if you pay the full premium, including the portion paid by the employer).  And with individual plans you get to choose among the available plan options you want to pay for.  Group policies, on the other hand, are “one-size fits all.”  

Buying your own policy also lets you:

  • Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
  • Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.

The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income. A variety of factors affect the cost:

  • Your age and health. You’ll pay more the older you are and the more health problems you have.
  • Your gender.  Disability insurance generally costs more for women than men because women tend to file more claims.  Therefore, men should generally buy a “gender-specific” policy and women should generally buy a “unisex” policy whenever possible.
  • Whether you smoke. You pay less if you don’t smoke.
  • Your occupation. You’ll pay more if you work in a job with a high risk of injuries (e.g., rock climbing).
  • The definition of disability.  This is probably the most important part of any DI policy.  The strongest definition is one that states if you cannot work in your chosen occupation (i.e., as a radiologist, or an interventional radiologist) that the policy will pay out its full amount.  Specialty-specific, own occupation - that’s what you want.  The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all. 
  • Length of waiting period. This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.
  • Your income. The more income you have to protect, the more you’ll pay for coverage.
  • Length of benefits. The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums.
  • Extra features. Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium.

There are various “riders” that can be tacked on to an individual DI policy, each usually accompanied by an increase in the premium.  Therefore, you should choose only those riders that are important to you and relevant to your personal circumstances.  For example, many riders will not be relevant to radiologists who are close to retirement.

Here are various riders that companies offer:

Guaranteed renewable

Guarantees that the insurance company can never cancel your policy as long as you continue to pay the premiums.  This is a good one!

Automatic increase benefit

Increases your monthly benefit for the first four to five years you own the policy, with no additional underwriting, to cover normal pay increases without any underwriting needed to justify the increase. 

Presumptive total disability

Pays out the full benefit immediately if you lose sight in both eyes, hearing, speech, or the use of at least two limbs, regardless of the elimination period (how long you must be disabled before you receive the benefit) or whether or not you’re working.

Family care benefit

Pays out the full benefit of your policy if you take time off of work to care for a loved one.

Survivor benefit or death benefit

Pays compensation to your beneficiary if you die while on a disability claim. An alternative to this is to make sure you have enough life insurance.

Good health benefit

Reduces the elimination period by two days each consecutive year you go without a claim.

Occupational rehabilitation

Helps pay for vocational training after a disability to help you return to work. This can be especially valuable if you have an own-occupation policy, since you can collect the benefit while still working another job.

Own occupation

Changes the qualification of a claim so it’s specific to your occupation (if you can do another job, you would still get the benefit). There are several different definitions of “disabled” when it comes to own-occupation policies but it’s one of the most important aspects to a policy. Specialty-specific, own occupation is what you want!

Non-cancelable

Guarantees the premium and prevents the insurance company from changing the price you pay. This is a good one!

Partial or residual disability benefit

Pays a benefit if you are still working in your own occupation, but experience a loss of income due to a decrease in hours or productivity. Radiologists whose earnings are predominantly based on productivity (e.g., work RVUs) might want to consider this benefit.

Most residents and fellows are limited (by insurance company policy and what they’re able to afford) to buying less benefit than they want to live on for the rest of their lives.  For them it makes sense to buy a future option rider.

Future purchase option

Lets you increase your coverage in the future with no evidence of medical insurability (i.e., you won’t have to go through the underwriting process again). Anyone who expects their income to increase should consider this rider, which essentially "locks in" your insurability. This means no matter what happens to you medically, you can buy more coverage if your income goes up. This is particularly relevant to residents.  Most residents and fellows are limited (by insurance company policy and what they’re able to afford) to buying less benefit than they want to live on for the rest of their lives.  For them it makes sense to buy a future option rider. For radiologists later in their career, this is probably an unnecessary rider.

Allows you to purchase additional coverage to pay student loan balances while on claim. Most residents with student loans will be enrolled in an income-driven repayment program and be paying a minimal amount on their loans.  Practicing radiologists, who have large monthly payments, might consider this rider.  The cost of the benefit should be weighed against the alternative of just renegotiating the terms of the loan. 

Retirement protection

Group and individually owned disability insurance plans traditionally are designed only to replace a portion of the insured’s current income, not to replace monthly contributions into company or individual defined contribution retirement plans. This rider covers payments you would have made to a retirement account, like a 401(k). Before considering this benefit you need to know what kind of restrictions there are on the investment options.  If the options are poor, you may want to skip this, particularly if the rider is expensive.

Social Security offset

If you sign up for this rider, you agree to apply for Social Security disability insurance (SSDI) in the event of a disability and, if you qualify, your insurer will subtract your SSDI benefit from the amount they pay you. 

Cost-of-living adjustment (COLA)

Increases the monthly benefit paid to you while you’re claiming disability insurance benefits, pegged to the Consumer Price Index or other cost measurement. This can be an expensive rider, and the benefit only begins to increase while you’re on a claim. Most people will be better off keeping pace with their earnings with future purchase and automatic increase of benefit riders.

Catastrophic disability benefit

Pays an additional benefit amount if you are so disabled that you cannot perform at least two activities of daily living (eating, bathing, getting dressed, toileting, transferring, and maintaining continence) without assistance.

 Unemployment premium suspension

Suspends premiums while you’re unemployed, allowing you to stop paying premiums but continue owning the policy. However, coverage is also suspended while you’re unemployed, so if you become disabled during that time, you won’t receive a benefit. This makes it risky, so it’s recommended that policyholders continue to pay premiums while going through temporary unemployment, so they have protection if they have an injury or illness during that time.

Return of premium

Returns a certain percentage of your paid premiums when you cancel a policy. That means you’ll receive something back if you never use the policy benefit, but a return of premium rider is usually pretty expensive. You’re generally better off saving or investing the additional rider cost. 

How much coverage do you need?

Most experts suggest that a physician’s disability policies should cover approximately 60-65% of their after-tax income.  Since most radiologists are paying 15 to 40% of their income toward taxes (which you presumably wouldn’t be paying if you were disabled), that is usually more than enough income on which to live.  But keep in mind that the benefits are only tax-free to you if you, and not your employer,  paid the premiums.  For example, a radiologist earning $300,000 per year generates $25,000 of monthly income, and would need disability benefits totaling $16,250 per month (65% of gross income). If she has an employer-group plan with a $10,000 monthly benefit, she could purchase an individual plan with a $6,250 monthly benefit, and the total benefit of $16,250 should be sufficient—right? Not necessarily. Since the employer paid the premium for the physician’s group coverage, the $10,000 benefit is taxable and would only create a net benefit of $6,000 (assuming a 40% tax rate). Therefore, the physician’s disability plans only replace $12,250 of income – and is short $4,000. The 40% tax rate used in this example may be high, but the point is that some of the benefit from employer coverage will be eaten up by taxes.

Should two high-income earners in a marriage each get full disability insurance?

I’ve heard this question quite a lot and there’s no one-size-fits-all answer.  I tend to say “yes” for two reasons: 1) you may wind up divorced, and 2) the older you are, the harder DI is to get and the more it costs.  

Hopefully by now, you have a better, big-picture understanding of disability insurance!  I wish I could make it easy for you and tell you exactly what kind of DI policy to get.  Alas, everyone has different needs, depending on their personal financial situation and career stage.  You will have to choose the amount of coverage you need (and can reasonably afford) and the riders that are worth the added expense.  

The most important decision you can make regarding DI, unless you are already financially independent or can live off your spouse’s or someone else’s income if you become disabled, is to buy disability insurance.


Protecting Patient Information in Medical Presentations

The following is an abbreviated overview of the information disseminated by the Radiological Society of North America (RSNA), the American College of Radiology (ACR) and the Society for Imaging Informatics in Medicine (SIIM) in August 2020 about protecting patient information in medical presentations.

Search engines can extract patient identifiers in PowerPoint™ slide presentations that were believed to have been anonymized.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) is a federal law that requires the creation of national standards to protect sensitive patient health information from being disclosed without the patient's consent or knowledge.  Radiologists often use patient images in their teaching presentations.  In order to be HIPAA compliant, those presentations must not contain any PHI (Patient Health Information) that can be used to identify individual patients.  

Beware: Search engines (e.g. Google, Bing and others) can extract and index patient identifiers in PowerPoint™ slide presentations and Adobe® PDF files that were believed to have been anonymized.  The information can be embedded in the image pixels.  This can lead to the following (for example):

When a patient searches her name in a search engine, images from a diagnostic imaging study performed 4 years earlier appears. When she clicks on the images, she is directed to the website of a professional imaging association that stored an Adobe® PDF file as part of an educational presentation. The association was unaware that the file contained PHI. The author of the file was unaware that PHI had not been sufficiently de-identified prior to creating the original presentation in PowerPoint™ format, and that saving the file in Adobe® PDF format also had not preserved privacy.

To prevent a breach of HIPAA, think of dancing the Do-Si-Do, aka Dosey Doe, otherwise known as Do’s and Don’ts

By following these “do’s” and “don’ts” you will prevent the situation described above and assure HIPAA compliance:

Don’t . . .

  • Use a font color that is the same as the background color (changing font color so the text/PHI blends into the background does not remove the information, rather it just makes it invisible in the slide presentation mode) 
  • Put an object over the PHI (this just masks but does not remove the information)
  • Crop the image without deleting the cropped portion of the image (cropping the image using the PowerPoint™ tool does not remove the information and “cropping” can be undone later by another user of the file)

Do . . .

  • Capture images without any PHI (this is the best way to avoid a HIPAA breach)
  • Consider using third-party image processing software (e.g., IrfanView, Adobe Photoshop) that can cut out the PHI and save just the image data, if your image has PHI in the pixel data
  • Make sure all slides have no PHI data in the cropped areas – use specific presentation software functions designed to permanently remove cropped content if applicable
  • Make sure all slides have no PHI data in the notes sections or in areas beyond the displayable slide

 What Constitutes PHI?

  • Names
  • Geographic subdivisions smaller than a state
  • All elements of dates (except year) related to an individual (including admission and discharge dates, birthdate, date of death, all ages over 89 years old, and elements of dates (including year) that are indicative of age)
  • Telephone, cellphone, and fax numbers
  • Email addresses
  • IP addresses
  • Social Security numbers
  • Medical record numbers
  • Health plan beneficiary numbers
  • Device identifiers and serial numbers
  • Certificate/license numbers
  • Account numbers
  • Vehicle identifiers and serial numbers including license plates
  • Website URLs
  • Full face photos and comparable images
  • Biometric identifiers (including finger and voice prints)
  • Any unique identifying numbers, characteristics, or codes

 Note: It is YOUR  responsibility as the individual sharing the medical case to ensure that images and any other data has been properly de-identified and that any legal constraints for sharing data have been met.  For a more detailed explanation of how to apply the “do’s” and “don’ts”, see the full article here

Second Note:  MRI Online follows robust guidelines for protecting patient information.


Risky Business: Your No-BS Guide to Malpractice and Life Insurance

Don’t bother to read this post if you are omnipotent and infallible (but then, of course, you’ll already know that). For the mere mortal, however, we can all benefit from a better understanding of strategic risk management—and by taking steps that can help stack the odds in our favor for our best future.  

While we have only one past, we face all kinds of possible futures—and nobody knows which they’ll get.  We may not be able to predict the future, but we can prepare for it by controlling the range of outcomes. To that end, we have three key levers at our disposal: saving diligently, holding down financial costs and managing risk.  Over the course of the next several posts (see here, here, and here), I’ll delve into the subject of managing risk through insurance.

Do you need insurance?  The answer is YES!  But you may not need every kind of insurance available.  

Without knowing you, I can predict that you need to have health insurance, and if you drive a car you need auto insurance.  If you are a resident, fellow, or young practicing radiologist, you should have disability insurance.  No matter where you are in your career, if you have family members who rely on you for financial support, you should have life insurance (unless you have enough money to self-insure, which is the goal in retirement).  If you are a practicing radiologist, you need malpractice insurance.  If you own a home, you need homeowners insurance.  

It seems we’re more diligent about protecting our possessions than protecting ourselves. Homeowners almost always have homeowner’s insurance, in large part because the mortgage company insists. Similarly, most car owners have auto insurance, because state laws require it.  Other types of insurance?  We’re not as diligent.

Do you need insurance for that new TV you just bought?  The salesperson who sold you the TV offered you an extended warranty, right?  Should you buy such coverage when you purchase an iPhone, washing machine, automobile, snowblower, or lawn mower?  

To answer these questions and to know what kind of insurance to buy and when, you first need to understand the definition of insurance and its purpose.

What is insurance?

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.  The payment to the insurance company is called a “premium.”  When you buy insurance you toss your premium dollars into a risk pool, along with the premium payments from all the other people who bought insurance.  When your house burns down or you total your car, you submit a “claim” to the insurance company.  The money you receive comes from the “risk pool.”

People have a tendency to think that if they paid insurance premiums but never had to file a claim, that their money was wasted.  In fact, they got exactly what they paid for, which is that they didn’t have to worry about a catastrophic event wiping them out financially.  AND they didn’t have an untimely death, lawsuit, car crash, or a burned-down house.  You should hope never to collect!

You can buy insurance for just about anything.  But you don’t need to.  In this and the next three posts I will tell you what you need to know about the following types of insurance 1) life and malpractice, 2) disability, 3) health and long-term care, and 4) home, auto, umbrella, and extended warranties. 

Below, I’ll guide you through some of the essentials on the different types of life insurance and malpractice insurance (spiced with some personal anecdotes), to help you determine the coverage options that may be the best fit for you and your individual circumstances.  

Life insurance

Who needs it?  If anyone depends on your income besides you, such as a spouse, children, parents, or other relatives, then you do.  Otherwise, you don’t.  How much do you need?  The answer depends on the financial goals of those left behind after you die.  If you already have a financial plan (i.e., a plan outlining your income, debts, how you will pay off those debts, how you will invest, and how you will pay for present and future expenses), buy enough insurance that allows your dependents to live just as they would with you alive.  I highly recommend you develop a financial plan if you don’t have one.  The White Coat Investor offers a practical guide to get you started.  

If you are a typical radiologist right out of training, you have little or no savings and a lot of debt.  Let’s say you have a spouse and one child.  If you die, then your federal student loans will be discharged.  Private student loan debt may or may not be.  Do you want to leave your spouse with a nest egg that will last her the rest of her life without having to work?  At what standard of living?  Do you want to leave enough money to pay for your child’s college education?  To pay off the mortgage?  The answers to these questions will determine the amount of life insurance you will need.  Most radiologists will carry between $1M to $5M in life insurance.  Since life circumstances change (e.g., you have more children, you pay off your mortgage, you save enough for your child’s education, you get divorced, or your child or spouse dies), you may need to increase or decrease the amount of life insurance coverage over time. 

Among households with children under age 18, one out of five has no life insurance. That number would likely be far higher without employer-provided coverage. Indeed, today, more families have group life insurance—often through their employer—than individual coverage.

Some married medical students and radiology residents with children choose to purchase life insurance as a student/resident and others wait until they finish training, when they can more easily afford the premiums.  Those who wait are gambling with their spouse’s and children’s financial future.  Another good reason to purchase life insurance early is that you will pay lower premiums (as you will be younger at the time of insurance purchase), and you lock in the insurance rates while you are still healthy. If you wait, and get ill or disabled as a student/resident, your premiums could rise significantly, and you may even become uninsurable.   

Most residents are offered life insurance through their employer.  A 2016 survey showed that residents were offered life insurance that was fully paid (77.1%), cost shared (15.9%), available but not paid by the institutions (5.5%), or not offered (1.6%).  

Still not convinced?  Here’s a real-life story of how tragedy hit a young medical student and his family:

Ryan Folsom was a revered football player at Brigham and Young University.  He went on to be a medical student.  In 2018, he was driving on I-5 south to attend one of several residency interviews.  A car driving in the wrong direction of traffic struck his car, killing him and leaving his wife, who was pregnant with their 3rd child, a widow.  He did not have life insurance.

There are two basic types of life insurance: term and permanent.  

Term life insurance provides a predetermined death benefit and covers you for a predetermined number of years, usually five to 30. You can buy more than one policy, each having a different term (i.e., one at 10 years and one at 20 years).  The idea behind doing this is that after a period of time you will have saved more money and require less life insurance.  The annual premiums are fixed and are based on your health and life expectancy at the time you apply for the policy.

Permanent life insurance combines a death benefit with a savings or investment account.  There are several varieties, including whole life, variable life, and numerous variations of universal life insurance.  The policy covers you for as long as you're alive. The premiums can be fixed or not, depending on the policy you purchase. Like term life insurance, the premiums are based on your health and medical history.  

Permanent life insurance is NOT the best choice for most people. It's several times as expensive as term life insurance for the same amount of coverage. While your policy does accumulate some cash value through its savings or investment component, which a term policy doesn't have, you pay a hefty premium for this feature and for having a policy that will definitely pay out one day. A term policy will hopefully expire before you do.

Nearly every radiologist will receive a pitch at some point in their career to buy permanent life insurance.  Often, the medical school or radiology department will bring someone in to “advise” residents on buying life insurance, and that person’s goal is often to sell as much expensive insurance as she can.  Residents, and often well-intended departments, may not recognize that the “advisor” is a sales person that does not have the best interests of her clients in mind.  Naive radiology residents and practicing radiologists being “sold” permanent life insurance is one of my top financial pet peeves.  

Personal tip

Our chances of dying are 100%.  Thus, the insurance component of permanent life insurance, which is intended to be held until death, will invariably be costlier than that of term life insurance, which provides coverage for maybe 20 or 30 years.  In fact, the premiums on permanent insurance are so high that even after paying thousands of dollars in premium and commission costs, many people let their policies lapse.  Let me say that again.  After paying thousands of dollars in premium and commission costs, many people let their policies lapse!!!  Among physicians that purchase whole life insurance, 3/4 of them regret their decision. Even among the general population, over 80% of whole life insurance policies, a product designed to be held until death, are surrendered prior to death.

For a period of years after purchase, the cash value of a whole life policy, which is based on earnings from the “investment” portion, will be less than the total of premiums paid. Thus, it may take up to 15 years after purchase before you “break even.”  

In general, I don’t recommend mixing insurance with investing.  There’s almost never a reason to do it.  I won’t go into the tiny minority of people who might benefit from a whole life insurance policy but chances are you’re not one of them.  Why do I nix policies that mix insurance and investing?  Because you can almost always do better investing outside of an insurance policy.  

As a personal aside, I was a school teacher before going to medical school.  This was back in the early 1980’s.  My annual salary was around $20,000.  The school brought in a “financial advisor” (an insurance agent, really) to meet with the teachers.  This advisor recommended to me that I buy a whole life insurance policy, which I did.  I had every confidence that my boss wouldn’t have arranged for someone to meet with me unless that person was selling something I needed.  I was young, married to a graduate student, and had no kids.  We had no debt.  We didn’t even need life insurance!  I paid about $35 a month in premiums for that policy, which “conveniently” came out of my salary before I even saw it.  To put this into perspective, $35 in 1980 is equivalent to $110 today.  After a couple years I realized that I was paying for something I didn’t need and dropped the policy.  So yeah, been there, done that.

Way too many of my radiologist colleagues have suffered “buyer’s remorse” from having bought whole life insurance.

How much does life insurance cost?

A healthy 45-year-old non-smoking man could get a 20-year, $500,000 term life policy for about $615 a year. In contrast, he'd have to pay $2,900 to $3,400 per year for a permanent universal life policy with a guaranteed $500,000 death benefit. Invested over those same two decades, the difference in premiums could yield more than $130,000 in savings.

Most radiologists will want at least twice if not ten times that amount of coverage.  It would not be unusual for a radiologist to be paying $20,000 to $40,000 a year in premiums for permanent life insurance.  The agent selling the policy may receive $40,000 as a commission.  Imagine how you will feel if in 5 years you discover that a term policy is all you need and is a lot cheaper, so you buy a term policy and let your whole life policy lapse.  You’ve paid well over $100,000 in premiums and fees for a policy that has little or no cash value.  By the way, if you are or have been in this position, you are not alone.  Way too many of my radiologist colleagues have suffered “buyer’s remorse” from having bought whole life insurance. They were sold something they didn’t need by a person who didn’t have their client’s best interest in mind when the radiologist was naive and vulnerable.  I think that meets the definition of “predatory.”

Another thing I don’t like about whole life insurance is that the premiums are not only much higher than term life premiums, but they are high forever.  With a whole life policy, you are locked into a high fixed expense.  I personally don’t like to have high fixed expenses, especially those that are costly to extricate from, because it affords me less flexibility.  Your life will change.  What if you want to work part-time, transition to a lower paying profession because you got burnt out from reading a volume of radiologic exams at the 90th percentile for 15 years, or take a break from working to raise a child?  With low fixed expenses you have more flexibility to make those changes.  And as I’ve already pointed out, your life insurance needs will likely change over time.  If you win the lottery, you might not need life insurance!  You need a lot of life insurance for 25 to 40 years, but not much after that—which is what term policies are designed for. Why would you want to be tied down to an expensive policy that provides more coverage than you now need?  

Malpractice insurance

While I covered the subject of malpractice insurance in a previous post, here I will expand on the importance of tail coverage.  

There are two types of malpractice coverage:  Occurrence policies and claims-made policies. 

Occurrence policies cover radiologists for events that happened during employment, even after they have left the facility and are no longer paying premiums.  This is the Cadillac of malpractice insurance.  

However, most malpractice policies (as many as 85%) are claims-made because they are significantly less expensive than occurrence policies.  A claims-made policy covers events and claims filed only while the radiologist is employed and paying premiums.  The down side of this type of policy is that coverage must be continued indefinitely to assure coverage for claims filed in the future for actions that occurred in the past. Essentially, once the policy has lapsed the radiologist no longer has coverage.  In this case the radiologist can purchase “tail” insurance to protect her from the past.  

If you have trouble remembering which is which, think of when the coverage is triggered:  occurrence-based coverage triggers when the incident occurred, and claims-based coverage triggers when the claim is made against you.  Or, you can remember that  “claim is lame” (at least from the perspective of requiring tail insurance).

Physicians in all stages of their career may need tail coverage when they leave a job, change malpractice carriers, or retire. In training, malpractice coverage is not a problem, because it’s provided by the sponsoring institution.  Accreditation standards require that teaching hospitals buy coverage, including tail coverage, when residents leave.  Hundreds of residents and fellows (including radiology trainees) lost their jobs, and with it, their malpractice coverage, when Hahnemann University Hospital in Philadelphia went out of business.  Because of the impending liability of not having tail coverage when they went to a new program, and the fact that many hospitals and insurers require tail coverage for privileges, trainees started looking into the cost of purchasing tail coverage.  They received individual quotes of between $25,000 to $50,000.  Eventually, and fortunately, the bankrupt parent of the former Hahnemann University Hospital agreed to buy tail insurance for the trainees (pending approval by the bankruptcy judge at the time of this writing), eliminating the possibility of residents’ losing their licenses by not having the insurance.

More than half of new physicians leave their first job within 5 years, and of those, more than half leave after only 1 or 2 years.  The prospect of having to pay for tail insurance may result in a radiologist feeling forced to stay with a job she doesn’t like.

Many newly graduated radiologists never ask about tail coverage when negotiating a contract.  They aren’t aware of the nuances of malpractice insurance and chances are, their training didn’t include education in the importance and art of negotiation. Large employerssystems, hospitals, and large practicesare much more likely to cover the tail than small and medium-sized practices. 

Ideally, a radiologist’s employment contract will state that in the event of a claims-made policy, the employer is responsible.  This is because tail coverage is very expensive.  And the expense is why many employers are reluctant or unwilling to cover tail insurance.  Also, the employer may feel that providing tail insurance would make it easier for the employee to leave, but that doesn’t mean it can’t be negotiated.  

For example, the employer may be willing to assume part of tail coverage cost based on the length of service (e.g., a portion of the cost per year of service).  Another compromise that would allay the employer's concerns of the employee leaving is for the employee to pay two-thirds of the tail in the first year, but then the employer would pay two-thirds in the second year and the full premium in the third year and beyond.  

It is also advantageous if the contract states that in the event of a malpractice suit, the employee has a right to the patient’s medical records without a subpoena, even when no longer employed.  It’s important to know whether the practice will provide indemnification (i.e., cover the radiologist if the malpractice verdict or settlement is in excess of the malpractice insurance limits).  A contract lawyer can be particularly helpful in explaining the malpractice coverage offered by a group.

Tail coverage premium costs are often waived for older radiologists heading into retirement, if they’ve been with the carrier for at least 5 years and are age 55 or older.  This is very important to confirm because without tail insurance, you are at risk for a lawsuit for many years to come. Even in so-called frivolous suits, radiologists still have to cover the legal expenses of defending a case, which can cost upwards of $250,000.  The statute of limitations varies by state, but is typically between 2-6 years.  However, some states make exceptions to the statute of limitations, such that the clock doesn’t start ticking until the mistake is discovered, or in the case of children, when they reach adulthood.  This means that without a tail, you are always at risk.

Speaking from personal experience

When I was a practicing radiologist at the University of Wisconsin-Madison, I was covered under the State of Wisconsin Self-Funded Liability Program for any lawsuit brought against me while I was acting within the scope of my employment.  UW radiologists are covered by the State of Wisconsin medical malpractice policy under statute. The liability coverage provided by the State is occurrence based, meaning that I was covered by the State for any claims arising out of any acts or omissions during my employment, regardless of when a claim was made. This was true even if the claim was made after my employment with the University ended, meaning I didn’t have to purchase expensive tail insurance when I moved to a different job.  

Wrap-up

After reading all that, I hope you now know whether you need life insurance, and if the answer is yes, that you will get it as soon as possible (if you don’t have it already).  I also hope that you will always ask about the type of malpractice coverage provided by a group that you’re contracting with, and make sure that the terms are clearly stated in the contract.  Don’t feel bad about paying a contract lawyer with experience in radiology contracts in your area to review the contract.  

You don’t want to miss my next post, which is about another very important type of insurance that you MUST know about—disability insurance.  Cue suspense music. 


Asset Class II: Hot Tips on Developing a Sound Portfolio

I like diverse assets and I cannot lie.

My last post (part 1 of this 2 part series on asset allocation) focused on investment philosophy and four things to consider before developing an investment portfolio.

In case you missed it, here’s a quick refresher: asset allocation refers to the process of dividing investments among different kinds of asset classes to minimize risk and maximize return.

In this post, I’ll take a more indepth look at some of the fundamentals of asset allocation (such as asset classes, and how not to lose your hard-earned green due to a narrow-sighted, or foolish investment approach). I’ll also offer some suggestions on how to set up your personal asset allocation plan, plus strategies that can help should your circumstances change. First up, the big “why?”:

Why is asset allocation so important?

By including within your portfolio asset categories with returns that move up and down under different market conditions, you can protect against significant losses. Historically, the returns of the three major asset categories have not moved up and down at the same time. Market conditions that cause one asset category to do well often cause another asset category to have average or poor returns. By investing in more than one asset category, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride. If one asset category’s investment return falls, you’ll be in a position to counteract your losses in that asset category with better investment returns in another asset category.

Another way to think about this is to consider why a local business would sell both snow blowers and lawn mowers.  Or umbrellas and sunglasses.  When someone isn’t needing one, they’re usually needing the other.  If that business sold only lawn mowers in Wisconsin, it wouldn’t make much money during half of the year.

Studies have shown that the biggest factor in a portfolio’s variability in returns is due to asset allocation.  

Diversity (it’s a good thing!) 

Don’t put all your eggs in one basket. There’s a reason this fowl truism is perennially relevantespecially when we’re talking about your money (as opposed to literal eggs, or dating advice from your mother, or someone else’s money). 

Diversity is a strategy that involves spreading your money among various investments in the hope that if one investment loses money, the other investments will more than make up for those losses.

A diversified portfolio should be diversified at two levels: between asset categories and within asset categories. So in addition to allocating your investments among stocks, bonds, and cash equivalents, you’ll also need to spread out your investments within each asset category. The key is to identify investments in segments of each asset category that may perform differently under different market conditions.

One way of diversifying your investments within an asset category is to identify and invest in a wide range of companies and industry sectors. Stocks can be described by size (e.g., large cap, mid cap, small cap), growth versus value, and sector (e.g., technology, health, energy, utilities, finance, and many more).  But the stock portion of your investment portfolio won’t be diversified, for example, if you invest in only four or five individual stocks. 

The easiest way to diversify is to own mutual funds rather than individual investments from each asset category. A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, and other financial instruments. Mutual funds make it easy for investors to own a small portion of many investments. A total stock market index fund, for example, owns stock in thousands of companies. That’s a lot of diversification for one investment!

However, do note: not all mutual funds are created equal.  If you haven’t read my prior posts on investment types you may want to do so now.  Owning one mutual fund that focuses on only one particular industry sector will not provide you with the diversity you need.

Past performance is no guarantee of future results!!!

There’s a whole big stock market world out there

This may come as a shock to some, but the U.S. stock market isn’t the only market in the world (aren’t I cheeky?). History shows us that the U.S. stock market always rebounds from a crash, usually in a few years time.  In fact, there has never been a 20-calendar-year period of negative stock market returns for the S&P 500.  

But here’s another piece of financial wisdom that bears repeating and drumming into every investor’s mind:  past performance is no guarantee of future results.  Past performance is no guarantee of future results!!!  Ahem. That’s why there’s always risk associated with investing in stocks and bonds.  

The strategy of diversification doesn’t only apply to choosing a variety of asset classes and types of assets within those classes, but also to choosing domestic as well as international investments.  

There are a couple schools of thought regarding international investing.  Index fund legend Jack Bogle considered international equity investing to be unnecessary, citing how the U.S. has so many advantages in terms of entrepreneurial spirit, sound institutions and solid governance.  And given the history of the U.S. stock market, that doesn’t seem unreasonable.  But againpast performance is no guarantee of future results! 

We can learn a lot from the Japanese market, which hit an all-time high in 1989.  Then it crashed.  Thirty years later, the Nikkei 225 is still 40% below the 1989 level.  After the technology crash in the late 1990’s, people thought it  took a long time for the Nasdaq Composite Index to return to normal, but that only took 15 years.  If you were reaching retirement age in 1989 and were significantly invested in the Japanese stock market, you would still be waiting for that portion of your portfolio to recover.  If, on the other hand, you had invested some of your stocks in the U.S. and other markets, you would not be suffering as much of a loss.  

Many people were singing Japan’s praises in the 1980s. Who’s to say that what happened to Japanese stocks could never happen here in the U.S?  In the words of Justin Bieber, “Never say never.” Yes, that’s right, I just referenced Justin Bieber. 

Risk tolerance is shaped by our experiences. The average Japanese household stockpiles cash to the tune of over 50% of their financial holdings. This compares to just 14% for U.S. households. While there are probably numerous reasons for Japan’s cash obsession—including cultural reasons, deflation and low financial literacy—the terrible stock market performance of the past three decades is no doubt a major factor.

Q. What do radiologists have in common?

A. Each one is different

It’s difficult to recommend specific portfolios because each investor is unique.  As I pointed out in my last post, each of us have different goals, time frames, risk tolerances, and personal financial situations.  You may also be invested in retirement plans that limit your investment options.  The White Coat Investor provides an example of “150 portfolios better than yours.”  If you’re looking for an easy way to achieve diversity, you can go with one of the options below.

Lifecycle funds (one-stop shopping)

Perhaps the easiest option for investing is to own a “lifecycle” or “target-date” fund.  A lifecycle fund is a diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A lifecycle fund investor picks a fund with the right target date based on his or her particular investment goal. The managers of the fund then make all decisions about asset allocation, diversification, and rebalancing. It’s easy to identify a lifecycle fund because its name will likely refer to its target date. For example, you might see lifecycle funds with names like “Portfolio 2015,” “Retirement Fund 2030,” or “Target 2045.”

Three-fund portfolio

To achieve diversity and have a little more control over the allocation of stocks and bonds (which you might want when selling investments), you can invest in a combination of  1) total stock market fund, 2) total international stock market fund, and 3) total bond market fund.  All of the major mutual fund and brokerage companies (e.g., Vanguard, Fidelity, Schwab, TD Ameritrade, and others) offer such funds that have very low expense ratios.  

How much should you invest in stocks versus bonds?

Again, there is no hard and fast rule here because everyone’s situation is unique.  In general I suggest investing some amount in bonds because it will smooth out ups and downs of the market and might prevent you from selling when the markets crash.  If you still have 20 or more years to invest before retirement, you might invest 80% in stocks and 20% in bonds.  As you get within 10 years of retirement, you might dial back the percentage of stocks.  By then, you will have fewer years for stocks to grow and the added gain may not be worth the added risk.  Some people switch to 50% stocks and 50% bonds around the age of 50.  Depending on the size of your portfolio, you may decide to maintain that allocation indefinitely.  Or at some point, you may want to move to a portfolio of 20% stocks and 80% bonds.  Some people recommend a bond allocation equal to your age (i.e., at age 50 you would invest 50% in bonds).  

What if plans change?

The most common reason for changing your asset allocation is a change in your time horizon. As you get closer to your investment goal, you’ll likely need to change your asset allocation. For example, most people investing for retirement hold less stock and more bonds and cash equivalents as they get closer to retirement age. You may also need to change your asset allocation if there is a change in your risk tolerance, financial situation, or the financial goal itself.  For example, you may start working part-time and cut your income in half.  You may increase your family size (tripletsyay!).  And the Medscape Radiologist Lifestyle Report 2018 showed a 5% divorce rate among responding radiologists.  

Rebalancing  for the win-win

Over time, you’ll find that your asset allocation no longer represents your intended mix.  This is because some of your investments will grow faster than others.  For example, after a stock market increase, your stock allocation that was once 50% of your portfolio may now be 60% of your portfolio, and your bond allocation that was once 50% of your portfolio is now 40% of your portfolio.  What do you do?  You rebalance to bring your portfolio back to your original asset allocation mix.  

You can do this in two ways.  If you are still contributing to your account, you can invest less in stocks and more in bonds.  If you are no longer contributing or not contributing enough to completely rebalance, you can sell off investments from over-weighted asset categories (i.e., stocks in this example) and use the proceeds to purchase investments for under-weighted categories (i.e., bonds in this example).  You will want to be careful about selling funds in a taxable account, as it could trigger a taxable event (which is not an issue when rebalancing in a non-taxable account).

With rebalancing, you are shifting money away from an asset category when it is doing well in favor of an asset category that is doing poorly.  You may be uncomfortable cutting back on current “winners” and buying more “losers”, but by doing so you are “buying low and selling high.”  Win-win.

When should you rebalance?

You can rebalance your portfolio based either on the calendar or on your investments. Many financial experts recommend that investors rebalance their portfolios on a regular time interval, such as every six or twelve months. The advantage of this method is that the calendar is a reminder of when you should consider rebalancing.  Others recommend rebalancing only when the relative weight of an asset class increases or decreases more than a certain percentage that you’ve identified in advance (say, 5%). The advantage of this method is that your investments tell you when to rebalance. 

Those are the basics of asset allocation.  If you’re investing on your own, I’ve offered some simple options.  But don’t be afraid to get professional financial advice (as long as it’s good advice at a fair price, which I’ve discussed in a prior post).  There are many ways to skin a cat, more than one way to crack an egg, and more than one road leading to Rome.  All trite idioms aside, the point is that there are many potential solutions for meeting your unique investment goals. 

Drop mic

I’ll leave you with one last bit of advice.  Pick a plan, after thoughtfully determining your goals, timeframe, risk tolerance, and personal financial situation, and STICK WITH IT.  Change your plan when one of the four considerations changes but NOT according to market fluctuations.