What’s the Optimal Portfolio Rebalancing Frequency?

If you’ve read the blog for very long, you probably know that I’m a big proponent of thoughtful and customized asset allocation. The percentage of your portfolio invested in stocks, bonds, cash, and real estate should vary based on your personal financial objectives and tolerance for risk.

In fact there are plenty of studies contending that asset allocation determines the vast majority of your portfolio’s return. In other words, it doesn’t matter as much which stock or bond you choose to invest in. It matters far more how much of your portfolio is invested in stocks or bonds in the aggregate.

The Importance of Portfolio Rebalancing

If you’ve ever managed your portfolio (or anyone else’s for that matter) you also know that over time your portfolio’s asset allocation will change as the market fluctuates. If you start with 60% in stocks and 40% in bonds, you might find your portfolio weighted 70% in stocks and only 30% in bonds after an appreciation in the stock market – especially since bonds tend to fall when stocks rise.

This is why it’s important to rebalance your portfolio over time. The whole point of building a customized asset allocation is to match the risk in your portfolio to your personal risk tolerance. As your individual investments fluctuate in value, selling some of the appreciated positions and replacing them with some of the depreciated positions brings your portfolio back to its intended allocation.

For example, if a 60/40 portfolio became 70/30 after the markets moved, you’d want to sell stocks that represent 10% of your portfolio and use the cash to purchase bonds – returning to your original 60/40 allocation. Without rebalancing, your portfolio would continue to stray over time, ensuring a level of portfolio risk that’s higher or lower than you’d like.

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Mutual Fund Capital Gains Distributions: What They Are & How to Avoid the Tax Hit

If you’ve ever invested in a mutual fund, you may know that they’re required to distribute at least 95% of their capital gains to investors each year. You may also know from experience that these gains are not always welcome since they come with a tax liability attached.

More often than not these capital gains are not large enough to cause investors to stir. But every year there are a few funds that pass massive unwanted gains on to investors, leaving them with a big, stinky tax bill.

This post may be slightly tardy given that some mutual fund families have already distributed their year end capital gains. Nevertheless, it’s an important topic that you should be aware of and keep an eye out for.

If your objective is to minimize your tax bill (hint: it probably should be) you’ll want to know about upcoming distributions at the end of each year, and avoid them when it makes sense. This post will cover exactly what capital gains distributions are, why mutual funds distribute them, and when and how you might want to avoid them.

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The Top 7 Mistakes People Make when Planning for Retirement

Hello ATC Readers!

This post is to announce that I’ll be hosting a free retirement webinar in a few weeks. I’ve been getting a lot of questions recently to the effect of “what am I doing wrong?” when it comes to retirement planning.

As you may know, we’re often our own worst enemy when it comes to retirement planning. As human beings we tend to get emotional when it comes to our finances. Rather than remaining logical, balanced, and objective, we often make poor decisions because our emotions get in the way.

I wanted to cover this issue in more detail than a traditional post, so I decided to focus a 60 minute webinar on the topic:

The Top 7 Mistakes People Make When Planning for Retirement

Presented by Grant Bledsoe, CFA, CFP®

In this live webinar we’ll cover some of the most pressing issues retirees face today:

The top retirement mistakes made today and how to avoid them
How to understand the fees you’re paying your advisor
How your emotions can affect decision making & how to overcome them to make consistently smart investment choices
The 5 components all effective retirement plans must have
How to tell whether your retirement savings are enough for you to stop working

There are two separate dates you can attend:

Tuesday, December 6th from 10:00AM – 11:00AM PST
Wednesday, December 7th from 1:00PM – 2:00PM PST

Even if you can’t attend at these times, make sure to register anyway. After the webinar is over I’ll email you a replay copy you can watch at your own convenience (for a limited time).

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401(k)’s, IRAs & Tax Deferred vs. Tax Exempt Investing

Should I contribute to a traditional or a Roth IRA?

This is a big question I get asked fairly frequently. And really, the conversation expands beyond individual retirement accounts. The decision whether to invest on a tax deferred or tax exempt basis is one you’ll likely make many times over your investing career. Some people prefer a exempt account to “get taxes out of the way”, while others prefer to defer taxes as long as possible in order to “let their money work for them”.

In this post we’ll explore the topic and discuss which situations may be best for either strategy. But first, let’s review exactly what tax deferred and tax exempt investing actually are.

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The Doctor’s Handbook on Student Loan Forgiveness

It’s no secret that most doctors graduate from medical school with mountains of student loan debt. $183,000 on average in fact, according to the AAMC. And while its easy to assume that you’ll make plenty of money to repay student loans once you become an attending physician, there are many forgiveness and repayment assistance options available to help.

This handbook is a comprehensive review of student loan forgiveness options available to doctors. Even if you expect to have the capacity to repay your loans, forgiveness and repayment assistance can help you get there faster, with less pressure on your bank account.

Public Service Loan Forgiveness

Many doctors these days are pursuing public service loan forgiveness (PSLF). And for good reason. By working at a qualified employer for 10 years, PSLF forgives your federal loans – tax free. Only federal direct loans qualify for PSLF though. FFEL, Perkins, and private loans do not. For this reason, if you’re considering PSLF make sure you consolidate any FFEL or Perkins loans right after you graduate, since federal consolidation loans do qualify for the program. Private loans are simply not an option.

The common misconception about PSLF is that it only applies to teachers or social workers. It’s actually far wider reaching, and depends only on who you work for – not what type of work you do. You can qualify for PSLF by working full time (at least 30 hours per week) at:

Any government organization at the federal, state, or local level
Non-profit organizations that qualify for tax exempt treatment under 501(c)(3)
Other types of non-profit organizations that provide certain types of public services

For doctors, this means that work in a tax-exempt hospital or medical school will likely qualify. To find out, you can submit an Employment Certification Form with the Department of Education. Rather than working for ten years and hoping your employment qualifies for forgiveness, the DoE will verify your status with this form. The form requires the signature of someone familiar with your service record. Since tracking down the signatures of old bosses can be a major pain, best practices are to submit it every few years or whenever you change employers.

Technically you’ll need to make 120 qualifying monthly payments while working at a qualified employer in order to receive PSLF. A qualifying payment is one made under an income driven repayment plan. The standard 10-year repayment option does qualify for PSLF, but after making 120 payments there wouldn’t be anything left to forgive.

If you’re interested in PSLF, run the numbers on the various income driven repayment options and find the one where you pay the very least out of pocket over the next ten years. Once you make the 120 qualifying payments, you’ll need to submit a an official PSLF application in order to receive forgiveness.

The Doctor’s Loophole

The combination of PSLF and several of the income driven repayment options creates a nice “loophole” for doctors. Pay As You Earn (PAYE) and Income Based Repayment (IBR) calculate your minimum monthly payments based on a percentage of your discretionary income. Residents earning around $55,000 per year with $183,000 in debt from med school certainly qualify.

The catch with PAYE and IBR is that there’s cap on monthly payments. Even though your income will jump significantly as an attending, your monthly payments will never be more than what they would have been under the standard 10-year repayment plan when you entered the program.

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Public Service Loan Forgiveness: Everything You Need to Know About PSLF

The Public Service Loan Forgiveness (or PSLF) program forgives any of your student loans remaining after making 120 qualifying payments while working full time for a qualifying employer. While the income driven repayment options also offer forgiveness after 20 or 25 years of qualifying payments, forgiveness under these plans is counted as taxable income. Forgiveness under PSLF is completely tax free. Win-win!

Qualifying Employment

Contrary to popular opinion, employment qualifying for PSLF has nothing to do with what you do. It only matters who you work for. If you work full time for any of the following employers (defined as 30 hours per week or more), your employment will qualify for PSLF:

Any government organizations. This includes state, federal, and local governments.
Non-profit organizations that qualify for tax exempt treatment under 501(c)(3).
Other types of non-profit organizations that provide certain types of public services.

There are a few exceptions too. Labor unions and political organizations do not qualify for PSLF. But, qualifying employment reaches much farther than only teachers and social workers. Anyone working full time for the government or a 501(c)(3) non-profit can qualify:

Lawyers working as prosecutors and public defenders
Physicians working in teaching hospitals & medical schools
Firemen & Police Officers
Soldiers

Some estimates count 33 million public service employees who could qualify for PSLF. As of June, 2015, only 335,520 people were enrolled in the program, or barely more than 1%.

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Federal Student Loan Consolidation: What It Is & When You Should Use It

Financing college and grad school these days is no small task. With tuition costs rising every single year, graduates today are exiting school with laundry lists of student loans. Each one with a different rate, a different servicer, and often with different terms. Sounds confusing, no?

The Federal Direct Consolidation Loan repays your existing federal student loans and replaces them with one loan at a fixed rate. This can be beneficial for a few reasons. It reduces the number of loan servicers you’ll need to deal with, replaces variable interest rates with fixed, and helps you qualify for flexible repayment options your original loans may not have been eligible for.

How it Works

The direct consolidation loan replaces your outstanding federal loans with one combined loan at a fixed rate. This can be very convenient. Loan servicers are prone to making clerical errors, so dealing with only one will probably make your life a whole heck of a lot easier.

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REPAYE: Revised Pay As You Earn Student Loan Repayment

What is REPAYE Student Loan Repayment?

After making the Pay As You Earn (PAYE) student loan repayment system available to borrowers in 2012, President Obama expanded the program by enacting the Revised Pay As You Earn (REPAYE) repayment plan in December of 2015.

While REPAYE has many of the same features as PAYE, the updated plan has several key improvements. Not the least of which is that it’s available to any borrower with qualifying loans – which opens the plan up to an estimated 5 million additional borrowers. This is a huge step up from PAYE, which is essentially only available to the class of 2012 and later.

How it Works:

Monthly payments under REPAYE work basically the same as Pay As You Earn and Income Based Repayment. Your monthly payments are 10% of your discretionary income, which is calculated using the difference between your AGI and 150% of the poverty line in your area. There are also a few key improvements and differences though.

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PAYE: Pay As You Earn Student Loan Repayment

What is Pay As You Earn Student Loan Repayment?

The Pay As You Earn (or PAYE) student loan repayment program was passed in December of 2012, and is President Obama’s spin on income driven repayment. Understanding that student borrowers faced significant challenges once they entered repayment, the President used PAYE to improve on the preexisting Income Based Repayment in several different ways.

Although it has rather strict qualification standards (only the classes of 2012 and later qualify), PAYE is a terrific option for those who can use it.

How it Works

Pay As You Earn is just like Income Based Repayment in how your monthly payments are calculated. Monthly payments under PAYE are 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty line in your area.

Again, poverty guidelines are set by the Department of Health and Human Services, and are updated annually. You can look up the poverty line in your area here.

Like IBR, PAYE has an interest subsidy component and forgiveness of any remaining balances after 20 years of qualifying payments. But, remember that any amount forgiven is taxable as income unless under the public service loan forgiveness program. If you’re counting on forgiveness outside of PSLF, it’s best to plan for the resulting tax bill.

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ICR: Income Contingent Student Loan Repayment

What is Income Contingent Student Loan Repayment?

Income contingent repayment (or ICR) is the oldest of the four income driven student loan repayment options. Originally passed by Congress in 1994, ICR was the government’s first attempt to reduce the burden of student loans by tying monthly payments to borrowers’ adjusted gross income.

While helpful when it was first introduced, ICR has been overshadowed by the other four options rolled out since then. Today, ICR is all but obsolete unless there is a Parent PLUS Loan involved.

How it Works

ICR gives borrowers another option if the monthly payments from the 10 year standard repayment plan are too costly. When borrowers enter ICR, their monthly payment is calculated based on their adjusted gross income and the amount they’d otherwise pay over a 12 year repayment plan.

More specifically, monthly payments under ICR are the lower of:

20% of your discretionary income, or
the amount you’d pay under a standard 12-year repayment plan, multiplied by an income percentage factor

This income percentage factor ranges from 55% to 200% based on adjusted gross income: the lower your AGI, the lower the income factor and the lower the output. It’s updated each July 1st by the Department of Education, and can be found with a quick Google search.

An interesting point to note here is that the income percentage factor ranges all the way up to 200%. It’s possible (whether using 20% of discretionary income or the second calculation) for your monthly payment under ICR to exceed what it would be under a standard 10 year repayment plan. This differs from IBR and PAYE, where your payment is capped when this happens (at what it would have been under the standard 10-year plan).

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