A Case Study in Financial Planning

Sometimes it's best to learn through an example. Let's play financial planner by working through a specific, real-world scenario.I frequent a number of personal finance forums, namely over at The White Coat Investor and Rockstar Finance.  Every now and then a certain topic will tickle my fancy and break my bad case of writer’s block.  I came across one such thread on the WCI forums and thought it would make an interesting thought experiment.  At the very least it can give us an opportunity to play financial planner for the day.


Asking For Financial Advice

The person who started the topic is a physician who is a little over a year into their practice and is looking for advice regarding their specific situation.  They provide their demographic and financial information, which is summarized below:

  • Married filing jointly; family size of 4
  • Base salary:  $600,000 with an annual bonus of $100,000-$150,000
  • Savings:
    • Currently maxing out 403(b) ($18k per year) with employer match of 6% of income
    • Roth IRA:  $5,500
    • Currently have $250,000 in cash/money market
    • Need to open 529 accounts for children (projected 15-20 years)
  • Expenses:  about $8,000 per month including mortgage
  • Debt:
    • Direct subsidized loan:  about $65,000 at 7.125%
    • Direct unsubsidized loan:  about $400,000 at 7.125%
    • Currently enrolled in REPAYE with monthly payments of $2,250
    • Not eligible for PSLF (Public Service Loan Forgiveness)


First Impressions

My first thought after reading the post was that this doc isn’t in a terrible financial situation.  Did you see their salary?  $600,000!!  Add to that their annual bonus and you get $700-$750k a year!!  Sure they have a mound of about $465k in student loan debt, but that income provides them with a mighty big shovel with which to attack it.  And it’s unclear if the spouse is working or not.  Who knows, there might be even more income that they can use to tackle this debt.

Another thing that stood out to me was the $250,000 sitting in cash.  More on this later.

Finally, their student loans are still sitting at an interest rate of 7.125% even though they graduated from residency more than a year ago.  This tells me that they haven’t refinanced these loans.  Since they are not eligible for PSLF, it doesn’t make sense that they have not done so by now.

As I said before, this physician has a lot going for them… mainly their income.  They are also maxing out retirement contributions and enjoying an employer match of 6% of income.  Still, there are some things that could be done better.  Let’s see if we can come up with a quick-and-dirty financial plan given their situation.


Continue To Max Out All Tax-Advantaged Retirement Accounts

This doc should have no problem maxing out their tax-advantaged accounts.  In fact, I think all physicians should do so before tackling their debts.  Also, it’s unclear who the Roth IRA belongs to and whether or not the spouse works.  Either way, the maximum amount of Roth IRA contributions between the two is $11,000.  If the spouse does not work, they can always do a spousal Roth IRA.


Put That Cash to Work!

There is SO MUCH opportunity cost in having that $250k sitting in cash, especially given the amount of their student loan debt.  Perhaps it’s an emergency fund, a hefty one at that given their $8k of monthly expenses.  Or maybe they don’t know what else to do with the money other than park it in a savings or money market account.

In my opinion, there are a few ways in which this person can put this cash to work.  One thing they can do is actually invest the money.  As I wrote about before, there is a difference between saving money and investing it.  Keeping that much cash sitting in low-yield accounts won’t do much in terms of long-term growth.

Another thing they can do is use that cash to accelerate their student loan debt payoff.  They can put $200k toward the student loans, knock the balance down to $265k, and still have $50,000 left as an emergency fund.


SRGO’s Plan for Student Loan Debt Elimination

Here is what I would do if it were me in this situation.

  1. Pay $200,000 towards the student loans using available cash.  Like I said, this would bring down the balance from $465k to $265k in one single payment.
  2. Refinance the remaining balance.  Since I’m not eligible for PSLF, there is no reason to keep those federal loans at 7.125%.  Refinancing to a lower rate would save me money on interest payments over the life of the loan.  Also, refinancing at a lower debt to income ratio could mean scoring a better interest rate on the new loan.
  3. Throw as much of my income as I can at the debt to pay it off ASAP.  How quickly could I pay things off given a gross salary of $700k?  I ran some numbers* and estimated that I would have $25,500 left per month after accounting for taxes and monthly expenses.  If I applied ALL of this to student loan payments, I could have the loan paid in full in about a year (give or take).
  4. Celebrate!
  5. Commence working toward financial independence and early retirement.


In Summary

Our physician friend had all of the right tools available from the start; they just needed a plan to be able to USE those tools effectively.  But you can’t be too hard on them.  Judging by the sizable cash balance and student loans that have yet to be refinanced, it’s likely that the good doctor just doesn’t have much knowledge when it comes to personal finance.  This example highlights one of the most important steps in taking control of your finances:  learning about the stuff.  Without a basic foundation of knowledge, it’s hard to come up with a financial plan, let alone execute it.


Readers, what would you suggest as a financial plan?  Would it be similar to mine, or something completely different?  Share your thoughts in the comments section below!  And as usual, thanks for read!!


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* I calculated estimated taxes using the information that was provided.  I also had to make some assumptions and used the tax estimator on SmartAsset.com.  Filing status was married filing jointly with a family of four taking the standard deduction.  I used California as the state and came up with about $280k in total taxes owed.  I subtracted that from $682k ($700k – $18k) and got $402k as after-tax income.  Divide by twelve and you get $33,500 per month.  Subtract monthly expenses of $8,000 to arrive at $25,500.

14 thoughts on “A Case Study in Financial Planning

  • March 20, 2017 at 4:00 pm

    Holy moly what an income! I agree this physician could easily knock out all of his loans within a year or less. I bet there are a lot of folks in similar situations. I remember when I graduated from college, I never once thought about refinancing my loans. It wasn’t until many years after I had paid off my loans that I really learned what refinancing meant. I had only ever heard of it used as some sort of fancy financial scheme for people with houses to lower their payments. It always sounded shady to me because of how mortgage brokers would spin the story to home owners so I stayed far away from looking into anything to do with refinancing.

    If I was this physician I would knock out the student loans while maxing out the pre-tax 401k then I would look into maxing out the after-tax portion of the 401k to $53k a year and then conduct an annual in-service roll-over into a ROTH IRA. He should also look into maxing out the funding for each of his children’s college funds for the next 3 to 4 years, which would leave them set for any school they want to attend. After that I wouldn’t worry about trying to knock taxes down any further because he’s making so much money it doesn’t really matter. I would focus the rest of the money on heavily investing in the stock market and real estate. He could easily pull off an early retirement within 5 to 10 years if he wanted to.

    • March 21, 2017 at 10:17 am

      Thanks for the comment, Stuart. Yes that income is pretty holy moly. The thing is that if this doc implemented our plan from the get-go, they would be student loan debt free by now.

      I like your suggestion about the Megabackdoor Roth if his 403(b) allows the in-service rollover. That would be another great way to funnel money into Roth space.

  • March 20, 2017 at 4:56 pm

    Given his salary he wouldn’t qualify for a Roth, it phases out around 185k agi( forget the exact number). Otherwise I agree. Max out the 401k and the rest goes on the student loan.

    • March 21, 2017 at 8:00 am

      If his spouse worked at a job that doesn’t provide retirement benefits he would be able to fund $5,500 into an account set up in her name. That’s what I learned while doing my taxes this year, since I no longer qualified for IRA or ROTH IRA contributions

  • March 20, 2017 at 6:28 pm

    As Stuart mentioned above, Holy Cow that’s a sizeable income.

    I would max out every tax-advantaged account I could and knock out that student loan as you’ve suggested. Did the doc mention their mortgage situation? With that much income I would at least pay off some extra mortgage principal every month.

    Once the student loans are paid off, 529s are healthy, and all tax-advantaged accounts are maxed out (still need to understand the Backdoor Roth IRA better), then I would just funnel some disposable income into index funds.

    • March 21, 2017 at 10:19 am

      Thanks for stopping by, Mr. N2S! They didn’t mention their mortgage in the post, but I agree that they are in a position to tackle that aggressively if they want.

  • March 20, 2017 at 7:37 pm

    Wow! Wonder what kind of doc he is pulling in $750k just one year into it?

    I like the plan you have laid out. With an interest rate of over 7%, it makes sense to through as much cash at the student loans as possible. I’m not sure what rate he’d be able to refinance at, but my strategy might change if he were able to score a much lower rate. Either way, with such a high income, he should be able to hit FI in no time assuming he doesn’t succumb to lifestyle inflation.

    • March 21, 2017 at 10:24 am

      Not sure, but based on their username they are likely a surgical subspecialist. Agreed, given their income, they should be able to accomplish A LOT if they live below their means.

  • March 21, 2017 at 4:44 am

    An exception to my earlier comment is the backdoor Roth. Still I would not go this way. His tax bracket is higher now then it will likely be in retirement, as such I wouldn’t priortize his Roth. It’s still a tax advantage but it’s muted in light of that huge student loan interest.

    • March 21, 2017 at 10:30 am

      Thanks for the comment, FTF! I agree that eliminating their student loans is a top priority. At the very least they should refinance to a lower rate if possible.

  • March 21, 2017 at 5:39 am

    I agree with the financial strategy you laid out. I would also stress to the good doctor to not let his lifestyle dictate his future. A salary that size can be a blessing and a curse, so the doc should be very careful not to throw money at useless “stuff.”

    • March 21, 2017 at 10:31 am

      Yes, it’s very important to not fall prey to lifestyle inflation, which can be hard to do with such a lofty salary. Thanks for stopping by!

  • March 21, 2017 at 5:16 pm

    I’m like you and I would take the $250k cash that at best is making 1% interest and would crush that student loan. I would continue to attack it until it was completely gone which should take a little less than a year based off his income. With that behind me I would then start investing everything else and enjoy life as I approached FIRE 🙂

  • March 23, 2017 at 8:58 am

    Nice post – like your plan and really wouldn’t change a thing. The key thing is to put that cash to work. There’s no reason that should be sitting in a savings account earning minimal interest.

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