Inside EWA: Client Case Studies

Speaker 1 – 00:00
Welcome to EWA’s FinLit podcast. EWA is a fee only RIA based out of Pittsburgh, Pennsylvania. We hope all listeners
of this podcast will beneft as we deep dive into complex fnancial topics that we will make simplifed for you. And
we hope that this really serves as a catalyst so that you can make the best fnancial planning decisions for your
family and also save time.
Speaker 2 – 00:28
Welcome everybody to this week’s podcast. I’m joined by Devin. And today we are going to go through a actual case
study. Obviously not going to give any personal information, but just a high level overview of a recent new client and
kind of what they looked like when they showed up, what their assets looked like, what we did with them and then
everything that we implemented.
Speaker 3 – 00:50
Yeah, we got it. I think the, maybe one of the main purposes of doing this is provide people a bit of an insight into
what we actually do to help people reach their goals. Right. Not only for our frm, but also for the industry as a whole.
So I think this would be pretty valuable. Everybody let us know what you think about this episode and we’d love your
feedback and potentially make it as valuable as we can.
Speaker 2 – 01:11
Yeah, and I would say this, we really work with a lot of, I would say two ends of the spectrum with fnancial planning.
So the frst end would be, you know, people that are later in life, let’s call it 50s, 60s, they’ve accumulated assets,
what do we do now? And the second end would be high income earners. Could be a specialized physician, could be
a business owner. Doesn’t have obviously as many assets yet, but they have a very high earning potential. They’ve
started to save and they’re on their way to get there. So that’s, I think it’s a really cool perspective. We can, we can
share the perspective of the older clients with the younger people and vice versa.
Speaker 2 – 01:54
So this specifc case study we’re going to look at is on the frst side of a younger high income earning couple and
everything that they’re doing.
Speaker 3 – 02:03
Yeah, yeah, for sure. Okay, let’s dive in. So Jameson, just generally high level overview of their situation. Maybe
money, where it’s at now, money as it’s coming in.
Speaker 2 – 02:17
Yeah.
Speaker 3 – 02:17
Etc. Etc.
Speaker 2 – 02:18
So one spouse is a specialized surgeon. So he did about, you know, did his med school four years, did his residency
four years. I believe his all in was like 10 years. He did his fellowship, so went through 10 years of training,
essentially schooling, training well, plus your undergrad. So you do four years undergrad, four years med school, it’s
eight four years of residency, that’s 12, probably another two is 14 years. So if you think about it, you know, by the
time people like this really start making money, they’re in their mid-30s, they’ve deferred a lot of their income
gratifcation. They feel really behind, these were their words, they feel really behind compared to their peers because
people that weren’t specialized physicians, they started making money in their 20s.
Speaker 2 – 03:02
So they came to us there at the end of the frst contract, the surgeons at the end of his frst contract. And so he’s
know in line to now start negotiating for another signifcant pay raise. And so just lay the land. High income earners,
no kids, purchased a house, they’ve accumulated some assets, overall net worth about a million bucks. Some of
that’s in the house that they have. And they kind of just had like an array of. And this is very common, we see this all
the time. If you’re not working with an advisor, kind of just like an array of accounts. So they have current employer
accounts, 403B, a TSP, there is a Roth IRA sitting out there’s an old 401K and there’s a pension plan as well. So that’s
kind of the lay of the land, of the assets.
Speaker 2 – 03:50
We’ll get a little bit more detailed here in a second, but anything to add, Devin?
Speaker 3 – 03:53
No, I think you covered it, but you mentioned that they felt that they were a little bit behind it. And I remember them
mentioning that in the meeting. What were some of the other pain points that they brought up or that we uncovered
during our kind of initial conversations?
Speaker 2 – 04:07
Yeah, I think a lot of it is just, especially if you’re really into your profession, whether you’re a physician, a business
owner, executive, whatever, you probably don’t have a lot of time free time, you’re spending a lot of time working. And
these, and these people, they like to travel. So there’s, you know, traveling in a lot of their free time and a lot of their
concerns. Number one, they felt behind even though they’re in good shape. But the second thing would be they just
didn’t know how much or what they should be spending, what they should be saving. It’s really just kind of not
knowing what they should or shouldn’t be doing, what’s the most tax efcient way to save.
Speaker 2 – 04:44
And it’s just really giving a lot of those clarifcations that we could sit there and talk about numbers and nerdy tax
stuff, investment stuff. But then the day people Just wonder, how much money can I spend? How much do I need to
save? How does this actually impact my life? So I’d say those were feeling behind and then just like what to do and
how much to spend and save.
Speaker 3 – 05:02
Mm. Yeah. Especially on that second piece where again, if I remember correctly, they were. And I, and I think we see
this all the time with specialized physicians and physicians in general of. Because they had that late start, they don’t
know where they, quote, unquote, should be. Yeah, right. And we don’t believe in a should necessarily. But they
wouldn’t. They, they didn’t have much of an idea of where they kind of stand and maybe if they’re set up to reach their
kind of longer term goals.
Speaker 2 – 05:25
So. Yeah, and a lot. Another thing that a lot of physicians struggle with after going through all this training is they’re
not making, you know, they’re not making a ton of money. You’re maybe making 50, 60 grand through. You’re not
making anything in med school, you’re taking out loans, you’re losing money. And then through your training,
especially if you do fellowship, you know, there would be six or eight years, you’re making 50 to 60 grand a year. And
they know this big paycheck’s coming when they sign their frst contract. So a lot of times, and it wasn’t the case
with them, but I’d say a lot of times they start to overspend, they start to spend money they haven’t earned yet.
Speaker 2 – 05:54
And then when you’re around, you’re in your training, you’re in the hospital, around other surgeons, doctors, they’re
talking about the cars they’re driving, the houses they’re by the vacation house. It’s really easy to let lifestyle creep
keep creeping because you’re trying to keep up with the people around you. And we’re social, we’re tribal beings by
nature. So you obviously want to ft in with everyone around you and feel good about it. So that’s another struggle
with people in this situation. Didn’t really apply to them. They did a pretty good job of keeping lifestyle down. They’re
not, they’re not fashy people. They don’t really care about a nice car or, you know, buying a crazy car house or
anything like that. But I’d say that’s a common issue with this situation too.
Speaker 3 – 06:30
Yep. Yep. Okay, so we mentioned goals a few times kind of in general, but what were some of their specifc goals for
both the short and the long term?
Speaker 2 – 06:38
Yeah. So no plans to have kids, which is becoming more and more common now. The younger millennial generation
is just they’re having less kids or if they are, it’s later in life. So when we come across clients like this, which is getting
very common, more common now, you know, a lot of their goals were number one, they wanted to make sure that
they’re traveling, enjoying their time off work because they work a lot and work really hard. They want to be on track
to not necessarily retire because what we heard, one of the spouses would retire soon and the other one said, you
know, I probably would never really stop where I work in my 70s, but fnancial independence was a big goal. So
getting to a point in their mid-50s and again their mid-30s, mid to late 30s, it was mid-50s.
Speaker 2 – 07:26
To be fnancially independent where you have enough money, you’re saving, you’re working because you want to
knocks, you have to, you’re not relying on that hospital give you a paycheck. So I’d say enjoying life now, traveling,
saving for long term goals. Third thing would be buying. They bought a house a while back, just like a frst time
house, nothing crazy. They want to, they want to buy their forever home in a suburb here in Pittsburgh. You know,
we’re talking million and a half house purchase in the next couple years. And then again they don’t have kids, there’s
no education, savings or anything. But family is really important to them. So being able to have money available to
support their family, one of their families overseas. So support their family overseas and then just be able to help
with whatever the family is needs.
Speaker 2 – 08:10
I would say those were main goals. Anything you think I missed?
Speaker 3 – 08:12
No, no, you covered it. Okay, so we’ve, we, this is over the series of a couple of conversations. We uncover their
goals, we kind of do a fact fnder meeting to discover their fnancial situation, etc. And then the third piece is
recommendations. So what did we do, what type of analysis did we do to come up with those recommendations?
And then what were some of the three to fve recommendations that we did come up with for them?
Speaker 2 – 08:38
So the frst thing we always show people, which I think is really important, is hey, let’s assume you never work with
us and you just keep doing what you’re doing. You’re saving into a pre tax tsp. You’re saving into a pre tax 403B.
You’re letting they have a lot of cash. They’re not, they’re not investing a lot of their extra money. What’s life look like?
I believe they were, I don’t remember off the top of my head, I think it was like 60s, 6065 they’re on track for.
Speaker 3 – 09:04
Yeah, yeah.
Speaker 2 – 09:05
So frst thing is here’s where you stand. Just to give you an overall balance sheet, couple hundred grand in cash.
Let’s see what’s this, you know, 10 grand in a Roth IRA that they just started. And then between that there’s 50 grand
in an old retirement plan and existing retirement plans. Let’s call it 600,000 ish. So outside of the real estate, 6 or
700,000 of assets. So they’ve done a good job saving again, live below their means. So frst scenario, hey, if you
didn’t do anything, you kept saving tax inefciently. I would say you’re not maximizing your tax savings. On track for
in your 60s. Live the lifestyle you want, be a fnancial independent and then obviously build in. Here’s how you would
save for that house.
Speaker 2 – 09:51
And a lot of the conversation too is just cash fow management and not telling people how to budget or what to
spend their money on. But you know, they’re making, let’s call it 600,000 right now it comes out to like
30,000amonth. They only spend like 10. So that 20,000 extra, you know, what are we going to do with it? And for
them it was just building up in cash. They weren’t really doing anything with it. So now we’ll get into anything to add
there before we get into actual recommendations?
Speaker 3 – 10:17
No, I think that covers it. Yeah.
Speaker 2 – 10:19
Okay. And then also doing a full. They had some insurance in place, disability life insurance, not in my opinion, not
properly structured. So reviewing that, restructuring that. But then when we get into recommendations it was mainly
around just tax efciency. So the frst thing would be maximizing Roth accounts in your retirement plan. So what that
means tsp, you can do a Roth deferral instead of pre tax. There’s 23,000 going into a Roth tsp. This specifc
employer offered what’s called other spouse offer what’s called a Mega backdoor Roth. So within the 403B they can
do. They were doing 23,000 pre tax. No, after tax contributions do the 23,000 Roth. 6% of your savings can then go
into the mega backdoor Roth. So we can get the full 69,000 less the employer match. So call it 69,000 minus like
1752,000 ish into Roth.
Speaker 2 – 11:18
So those are the frst like low hanging fruit recommendations. Maximize all your Roth accounts. Why we want to do
that, Number one tax free growth Accumulation, tax free, distribution, tax free. Pass on to whoever you’re gonna give
the money to when you die. Second thing is, Roth accounts don’t have retirement distributions. So when you hit 73,
you’re not forced to take the money out. You don’t have to worry about sequence of return risk, selling money when
the market’s down and you have more autonomy and control over when you take it out. For that reason, you’re not
forced to. And I would say the biggest thing with even if we get the question, well, I’m going to be in a lower tax
bracket when I retire. You very well may be, but we don’t know what taxes are going to be.
Speaker 2 – 11:57
So taxes now are historically low. Our opinions are probably going to go up. They’re probably going to go up as soon
as next year, depending on who gets elected in this election. The tax code is set to expire after 2025. Probably
regardless, going to be a tax overhaul. And one of the things that’s been on the chopping block with these tax
reforms has been taking away Roth funding for high income earners. So, you know, one of the things is you may not
be able to fund Roth in the future. Let’s maximize it now. And if that tax code changes, we’ve gotten as much into
Roth as we possibly could. So outside of the retirement plans, we’re maxing out the old 401k, which call it 50 grand.
We’re going to convert that to Roth immediately. Why?
Speaker 2 – 12:37
Number one, new contracts going to kick in next year. They’re automatically going to be pressed into 37% tax bracket
and taxes could go up in the future. So let’s pay the taxes with some of that cash built up on that old 401k. It’s
50,000 times. What’s the math there? Probably 2017, 20,000 ish in taxes to get that money into Roth. And then once
that’s done, maxing out backdoor Roth IRAs for each of them. So 7,000 a year each backdoor Roth. So with all of
that we have 14,000. Do some quick math. 23,000, would I say 52? 14 plus 23 plus 52. What does that come out to
be? Quick math. All right. No, yeah, you’re right. 89, 89,000 a year is funded into Roth and that’s without really any
additional savings.
Speaker 2 – 13:29
They’re doing that after tax in the backdoor Roth, but that’s just essentially taking close to what they’re saving now.
Just make it more tax efcient. So that’s the frst discussion point, is just tax efciency. And outside of that, they
could do an HSA, another 8,300 in something that’s tax deductible and then growing tax free. But anything to add on
those?
Speaker 3 – 13:50
No, I think you covered it from a contribution standpoint. Could you speak fairly quickly? Because I know we don’t,
we can get into the weeds in this very quickly. But the asset allocation strategy, what is our overall philosophy and
what we put these folks into?
Speaker 2 – 14:03
Yeah, let’s hit that in a second. We’ll come back to that. Let’s just round out the recommendations. So outside of that,
so again, they’re cut. They have, let’s say they have 30k a month coming in, they’re spending 10. Once we do all this
Roth stuff, let’s say it drops income down to 28amonth. We have 18,000amonth left over. What are we going to do
with that? First thing would be let’s maintain a comfortable amount in savings, which I think we agreed on like 50
grand. And then outside of that, there’s no real reason to just build up cash. So we’re going to take some of that
money. We’re going to set aside for a down payment on a house that they want. They don’t have a mortgage on their
current house.
Speaker 2 – 14:39
So what we probably will recommend to open a home equity line of credit, let’s say a $500,000 house, 80% of that
get about 400,000 available in a home equity line of credit. Now in the next year, if you go to buy that new house, you
can draw on that line of credit, use as a down payment without having a cash contingent offer on your house sale.
House sells, pay that off, net the 100 grand out and do whatever you want with it. But that 18,000, let’s say, you know,
3,000amonth goes into an account for a house, 15,000amonth goes into a joint investment account and that’s going
to be there. Once we’ve maximized all these tax efcient accounts, there’s not a lot of places left to save.
Speaker 2 – 15:18
Put it into a joint account, direct indexed and I think now is a good time we can talk about asset allocation. Anything
to add on those general recommendations.
Speaker 3 – 15:26
That you covered it?
Speaker 2 – 15:27
Yeah, as far asset allocation. So one of their big discussion points, they had a lot of their, and they were self
managing and this isn’t incorrect because they could be right. But we never want to speculate. They said our opinion
is market’s just gone up the last couple years, everything could be overvalued. What if there’s a drop with this
election in the next year? We don’t want to put a bunch of cash in. And so it’s a lot of coaching and just talking
around philosophy around asset allocation, diversifcation, long term investing. And so when you start to teach this,
you really want the only thing that we want in people that are this young, the only thing we want in something safe,
cash, bonds, any alternative like that would be for your short term needs.
Speaker 2 – 16:09
So in their situation, let’s say we wanted 200 grand to put into a house that’s going to stay out of the market because
we know they’re going to need that in the next three years. So that could be in treasuries and cash and bonds. But
outside of whatever we decide on that number is for the short term spending we’re going to be in, we’re going to be
long term investors. You have 20, 30 years, you’re going touch any of this money. We’re going to be in all equities and
how we want to position that asset location is really key. So what asset location is putting your tax efcient funds, so
the type of investments you’re holding in tax inefcient accounts and tax inefcient funds and tax efcient accounts.
So to give you an example, let’s talk about a real estate investment. For example.
Speaker 2 – 16:51
We may have, you know, say 3% of the portfolio in a real estate fund. Well, real estate funds generally kick off, there’s
a lot of turnover, they kick off interest, dividends. They’re really tax inefcient. We’re not going to hold that real estate
fund in a taxable investment account because anything that gets kicked out, they’re going to pay ordinary income tax
rates on that 35, 37%. We’re in a position the real estate inside of the Roth accounts. So that’s the frst thing making
sure we’re being tax efcient. But to directly answer your question, yeah, diversifed, hitting all the asset classes and
investing for the long term. So mainly equity investor is, we’re okay taking on risk knowing that we’re not going touch
this money for, you know, 20, 30 years.
Speaker 3 – 17:31
You just, you just mentioned the asset allocation within some of the tax efcient accounts. But what about the
brokerage account that we’re going to build up for them fairly quickly over the next 12 to 18 months? What do we
think we’re going to invest in that?
Speaker 2 – 17:42
Yeah, this is a great question. So the Roth accounts, retirement accounts doesn’t obviously want to be tax efcient,
but that’s where we can hold the tax inefcient funds. Within the brokerage account you’re paying capital gains taxes
on any gains, you realize, interest dividends, you pay tax on a year over year basis. So that’s where we talked a lot
about our direct indexing. So instead of investing in ETFs, mutual funds that are going to mirror an index, we’re going
to invest individual stocks to make up that index. So what that’s going to do is allow us to be as tax efcient as we
possibly can in this account that’s naturally tax inefcient. We can tax loss, harvest the individual stocks and have
these losses carry forward forever on your tax return and ideally offset future capital gains.
Speaker 2 – 18:26
And so it’s a strategy to knowing that high income earners are going to accumulate a lot of their money in a non
qualifed taxable account and we can do it be as tax efcient as possible.
Speaker 3 – 18:37
Regarding direct indexing, it allows us a lot more control as well within that account. And I know that these guys had
mentioned some concerns with effectively value based investing, some companies and some industries that they
didn’t want to own.
Speaker 2 – 18:48
Yep.
Speaker 3 – 18:48
And correct me if I’m wrong, but direct indexing allows us to do that very efciently in a very controlled manner.
Speaker 2 – 18:54
Yeah, we’ve heard this. We generally will our investment strategies stays away from political beliefs, social aspects.
We’re going to put the investments in things that put all that aside. What’s the best investments give you a good
return based on current market conditions. But we do have clients that bring this up and they may say due to
religious beliefs or social beliefs, you want to avoid certain investments. Investments. And we accommodate to that
obviously. So within direct indexing we could say okay, you know, maybe they don’t want to invest in, I’m going totally
make this up. But a healthcare, they don’t want to invest in any healthcare companies. So we can exclude any
healthcare company within that direct index portfolio. Never buy a company in healthcare. And that was totally made
up example.
Speaker 2 – 19:41
But there could be, you know, religion or political reasons to avoid certain types of companies or industries.
Speaker 3 – 19:48
Well, we see a lot of situations, maybe not a lot, but more common than the values based investing situations where
they’re over indexed to a specifc industry. Maybe they have a seven fgure portfolio, sorry a seven fgure holding in
Apple stock and they don’t want any more Apple stock in their other accounts or in the case of physicians that are
over indexed to the healthcare industry. So maybe they don’t want to necessarily own and be too correlated in case
that industry were to ever experience a downturn or something like that.
Speaker 2 – 20:14
Right, yeah, that’s a good point. And then so when we put all these recommendations together on track for 55
Financial Independent, I believe they were spending like between 15, 20amonth in retirement, maintain current
lifestyle goals, totally on track. And then one of the other big talking points was we hear this question a lot. How
much can we spend on a house without ever spending? So looking at their current income situation, two rules of
thumb we want to follow. Number one would be housing costs under 30% of net take home pay. So if they’re taking
home 28amonth. 28amonth, it’s 30% of that 10% 20. So keep housing costs say 7, 500amonth, keep it under that.
That would be mortgage, insurance, anything that goes into that house. And the second thing would be don’t borrow
more than two times your gross income.
Speaker 2 – 21:06
So in this situation, so they’re making 600, don’t take out a loan more than 1.2 their situation, no kids, low expenses.
They could afford a higher, a more expensive house. Especially with a new contract coming in, they’re going to get an
income increase. But those would be two general rules of thumbs to make sure that’s one of the biggest mistakes
we see is overspending on a house or a car and so of keeping these parameters in place to not knock out house
poor.
Speaker 3 – 21:32
Yep, yep, Excellent. Okay. So we’ve kind of set the foundation for the next 12 to 18 months roughly and we’re going to
continue to meet periodically, get the plan on track past that. So two to fve years out. Let’s say we’ve mentioned
contract negotiations a few times here. But in addition to that and let’s certainly touch on that, what else do we are
we doing to kind of help make sure that their goals and their fnancial plan are on track?
Speaker 2 – 21:55
Yeah, so it’d mainly be you know, the next six to 12 months like you said, we’re get this set up and automated, make
sure they’re doing everything tax efciently and then a lot of just like coaching around making sure that they’re
following recommendations. So saving what we’re recommending. They get the mechanisms in place on a month to
month basis to you know, manage cash fow and get money into certain accounts. And then we’re talking about like I
said before, life disability insurance, estate Planning all that stuff as well. Anything specifcally that you’re thinking
about, you.
Speaker 3 – 22:27
Think it’s worth touching upon the negotiations or. Yeah, yeah. So in regards to the one. Sorry, cut. In regards to the
negotiations, the contract negotiations, what exactly do we do to help them in that process?
Speaker 2 – 22:44
Yeah, so this situation, this is really common. Again, you’re used to making 50, 60 grand and you get thrown a
contract at you making 400, you’re gonna sign it all day. Your frst contract, you don’t know any better. This is a lot of
money, but we see this a lot. The second contract comes up and we start actually analyzing it and we pull up the
data and you know, this Surgeon’s in the 90th percentile in his production, so he’s doing the job of two surgeons and
he’s getting compensated in at the 40th percentile. So when we look at the numbers we say, okay, you know, very
familiar with the large healthcare plans in Pittsburgh, how they negotiate, what they’re willing to negotiate. You’ve
done this hundreds of times. So we say, okay, here’s what is fair pay based on market data?
Speaker 2 – 23:30
You know, you may double your income or almost double your income if they were going to pay you appropriately,
they’re probably not going to pay you exactly what the data says. So, you know, if we negotiate this properly, probably
could get him an extra couple hundred thousand a year in salary just because he’s a super productive physician and
he’s basically getting comped for a physician that, you know, that’s half as productive as him. So if you look at it from
the hospital standpoint, and kind of what we’ll shed light on is you could do half your job and get paid what you’re,
you know, at the rate you’re getting paid, you make less money, but get paid at the rate you’re going to paid.
Speaker 2 – 24:05
And the hospital would have to hire another physician to take on the duties that you’re not doing, which is more
overhead to the hospital. It’s worthwhile to them to pay you almost what they would pay to physicians because less
overhead for the hospital. So the fnancial side of it, and then obviously making sure there’s some nuance, some of
this we consult with an attorney for, but some of the nuances in the contract as far as things like locations where
you’re practicing at, what your non compete restrictive covenant says and those sort of things.
Speaker 1 – 24:37
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