Decision: Pediatrician Wants A New Crib To Call Home ⋆ XRAYVSN

Johanna’s Take:

Opening:

You’re about to graduate training and start your first job as a new attending.

Fresh start, big bucks (at least compared to residency!), family is about to go from four to five.

This is when need and want finally mate, right?

That’s what Dr. and Mrs. NA (“New Attending”) are hoping.

Should they start house hunting now, before they move to Pennsylvania after residency?

After all, better to lock in rates now before they go up, right?

At least, that’s what all the other doctors say!

Let’s get started…

The positives:

No student loan debt
Considering a reasonably-priced home
Very frugal family
Healthy 5% employer 401k contribution

The negatives:

Salary on the low side
No family in PA
Just starting out in a new job; therefore…
No downpayment saved (doctor loan needed)
Plan to retire early

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

6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)
By my calculations, you will have ~$3M at retirement including employer contributions
Average inflation
You retire in 25 yrs
3 children (no more)
$600k in future dollars needed for college
You have plenty of appropriate life and LTDI [Long Term Disability Insurance] in place.
No divorce
Savings of $54k/yr (including employer match) for 25 yrs
No private school tuition
No significant financial assistance for other family members
Reasonably good health

In this case, Dr. NA starts out with a huge asset that many new attendings don’t have: no school loans.

While I applaud him for that, there are also liabilities:

College, even state school, for 3 children is going to require serious saving.
- Estimating $200k per child in future dollars is probably not going to be enough, but let’s go with it.
- Over 18 years, at an annual return of 6%, the NAs’ will need to contribute ~$1,550/mo to 529 accounts, or about 10% of gross income.

By my calculations, the Dr. NA’s cash flow will break down as follows:

	Dollar Amount	% Total Income
Total	$180k	100%
Living Expenses	$45k	25%
Taxes (state/fed/FICA)	$44k	24%
Savings (Retirement)	$31k	17%
Savings (taxable)	$14.4k	8%
Savings (college)	$18.6k	10%
Balance	$27k	15%

A $250k mortgage at 5% for 20 years will require monthly payments of ~$2,110 or ~14% of gross income ($25,320 annually), including estimated real estate taxes and homeowners’ insurance.

Good news – it appears the NAs can afford the house.

Is it a thumbs up?

Let’s go through a bit more analysis first.

First, I am going to put on my Houdini cape and guess what questions you might have regarding the above data.

Questions:

Why didn’t I include college funding in the savings % given me by Dr. NA?

Because unless he saves at least 25%/yr for retirement along with getting another 5% employer match, he is on track to have only $3M saved at age 55.

So? He said he needs only $45k/yr in retirement. Under the 4% rule, he’ll have $120k/yr in retirement!

At an inflation rate of 3%, $45k/yr today will be $94k/yr in 2044.

While that is lower than the $120k/yr calculated under the 4% rule, it does not include the added cost of health care.

And, quite frankly, I am nervous about the family’s ability to live on only $45k/yr both now and in the future.

Isn’t it silly to waste money on rent? Won’t rent cost as much as mortgage payments?

Perhaps, but not as much as having to sell a house on a short timeline because a job didn’t work out or you ended up in a neighborhood with no kids to play ball.

Renting gives you a degree of flexibility and does not add the pressure of feeling locked in to a job because you’re stuck with a big mortgage and live close to work.

New houses also require unexpected expenses that can be very difficult to budget for.

And that doesn’t include that the NAs will likely need more furniture for a house than they would for a rental.

Shouldn’t the NAs lock in interest rates now before they go up?

We have been hearing this warning for over 10 years now.

Certainty in finance is a myth.

Beginning in 2015, rates began trending upward (which is as much a positive as it is a negative) but we cannot predict where they will be in 1, 2 or even 10 years.

If you look at the 10-year trend in this chart, you may be alarmed.

Stretch it out to 20 years and then to all years for a better perspective.

Never make a big decision based up where you think interest rates will be.

Over the long term, the stock market is far more predictable than the Federal Funds Rate.

Suggestions to improve the NAs’ long-term finances:

Additional locums work for Dr. NA
Full or part-time work for Mrs. NA once the kids start school
Plan for the kids to take loans out for part of their education
Rent for a few years, get to know the area, and save every extra penny for a downpayment.
- It’s easy to move when your children are young and haven’t formed attachments.
Plan to work beyond 55

To be fair, I believe 6% annual returns are at the low end of what the NAs’ should realize on their investments.

Proper management and avoiding behavioral mistakes may yield higher long-term returns.

You are moving to an unknown area with no family nearby.

Choosing a new house in this situation is extremely dicey.

While nobody wants to make a $25k DDD (dumb doctor decision), it would be less painful if you were making $380k/yr rather than $180k/yr.

At $180k/yr, you don’t have a lot of wiggle room if this turns out to be a mistake.

On the other hand…I believe you can afford the house.

So, is the timing right?

My vote is… (see below)

Xrayvsn’s Take:

This situation plays out year after year with each new graduating class of residents.

After years of delayed gratification it is easy to succumb to the siren call of home ownership.

In a matter of months your paychecks start to dwarf what you have been previously making and lifestyle inflation can quickly follow.

I am not immune to this phenomenon as I made the mistake of buying a home not once, but twice while I was still a resident.

There are so many ways to justify this large purchase in your mind:

Renting feels like throwing money away while paying down a mortgage will build equity.
I hate moving and the associated expenses so buying can possibly minimize this.
Obviously the banks think I am creditworthy or they wouldn’t offer “doctor loans” in the first place.
I’m a physician and my friends and family expect me to buy a house now that I am making the “big bucks.”

However I assure you that one can easily poke holes in all of these lines of thinking with critical analysis.

I was initially told that it takes 3 years of home ownership before the financial benefits can be seen over renting due to transaction costs at both ends (buying and selling).

(To be honest I feel that even 3 years may not be enough and would push it closer to the 5 year range.)

Although Dr. NA has done incredibly well finishing residency with absolutely no student debt to speak of, there are many more factors to consider in purchasing a home for your first attending job that goes beyond the financial repercussions.

These factors go beyond the scope of the Doctor’s Bill series but are expertly discussed by Dr. Cory Fawcett in his first book, the Doctors Guide To Starting Your Practice Right.

Cory advises, and I concur, that one should delay buying a home until you truly feel that you can work long term in your new practice.

Renting also offers the advantage of allowing you to learn the locale better and perhaps find a community that fulfills your needs.

Dealing purely with the finances of this particular submission, there are some red flags that certainly raise concern.

Although it is admirable that Dr. NA estimates that his cost of living both currently and in retirement will hover around $45k/yr, I feel this may be a bit idealistic particularly with 2 children and one on the way.

Healthcare costs, costs for education of kids, and feeding a family of 5 would require a very permanent frugal lifestyle to stay within those parameters.

Can it be done?

Of course.

But I still would bet against it.

Speaking as a homeowner I will also tell you that life throws you curveballs at the least opportune times.

Roof maintenance/replacement, HVAC issues, plumbing, and electrical can and will create financial strains during the course of home ownership.

Another concern is that the liquid savings of $10k would serve less than 3 months as an emergency fund.

There is no mention whether the moving expenses would be covered by the practice or would be another expense item for Dr. NA to deal with (which could easily deplete the current liquid savings).

My advice would be to rent for at least a year and determine if the practice is a good fit and has long-term potential.

During this time I would save aggressively, aiming for at least a 20% down payment and 6 month emergency fund before taking any steps toward home purchase.

The Decision:

Johanna’s Take:

Verdict: Thumbs down (for now)

Xrayvsn’s Take:

Verdict: Thumbs down