Banking on Dollar Decline

The bulk of my assets is invested in low cost index funds, as all the experts recommend. That should be good enough for most people out there, but if you want to gain an extra edge over the market, there are a few options. I discourage trying to time the market or to bet on individual securities. Rather, if you must deviate from indexing, the safest is to practice strategic reallocation.

What this means is to skew the composition of your index funds towards a mix that fits with your investment thesis. For instance, an aggressive investor may stick with Warren Buffett’s recommended mix of 90% S&P 500 index tracker, and 10% short term US treasury bonds, implemented like this using iShares ETF tickers:

  • 90% IVV
  • 10% SHY

Whereas a more conservative posture with a higher allocation towards bonds may look like this:

  • 40% IVV
  • 20% SHY
  • 40% AGG

There are of course a myriad of other strategies in allocation that can be done. Some popular ones include splitting between growth vs value stocks, international vs domestic, and mixes of various types of bonds (domestic, international, short-term, long-term, TIPS, municipal, business, high-yield). Generally speaking, you get the most diversification when choosing between major categories such as stocks vs bonds rather than within a category.

My own inclination is not to mess around too much with these sub-categories, as they generally have higher fees without adding to extra return. I stick with the tried and true basics to minimize the temptation of tinkering with the portfolio.

However, if you were to force me to make a bet on the future and to structure my portfolio against a macro trend, I would bet against the US dollar. If there’s one thing we can all do to prepare it’s for a slow drop in the value of the US dollar relative to the rest of the world. With soaring deficits and entitlement obligations, declining prestige, tariffs/trade wars, I don’t see how the dollar can rise in the next few decades. At best it will tread water. The implications for quality of life in the US are profound. We can anticipate more costly imports, especially electronics. For food we should be self-sufficient, but overall prices will rise as food is now sold on the world market, and farmers would have incentive to export their hogs and corn instead of keeping them for domestic consumption. While there may be more low-end jobs such as manufacturing and textiles, the country will also be beset by wealthy foreigners 

How can we best position our portfolios to benefit from this trend? I would diversify outside of the dollar with a splash of international equities and bonds (especially in Asia). However, note that with the S&P 500 companies already having significant international operations, even if you invest purely in “domestic” companies you’ll automatically have some international exposure. This is also why when the dollar falls, the earnings (measured in dollar terms) of S&P 500 companies generally rise. No wonder foreign personal finance bloggers look on with envy at the cheap, mature, and diversified American stock market.

This would look something like:

  • 50% IVV
  • 40% IXUS
  • 10% SHY

Which actually is close to my own allocation.

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It’s Never Too Late to Pivot a Career

My wife and I just went to see Ready Player One in the theaters. It blew my mind. I understand why it won’t be everyone’s cup of tea, but it has a tight plot and pays loving homage to tropes, characters, and memes dear to gamers worldwide. We all need our heroes, and the early creators of video games are underappreciated today for their contributions to the field, though their influence was as great as J.R.R. Tolkien.

On a personal finance note, what interested me about the movie was the situation of the author. His Wikipedia article can be summarized as such:

  • Currently 46 years old
  • For most of his youth, was an amateur stand up poet, of no particular note
  • In his mid 20s, transitioned to becoming a screenwriter, without much critical/commercial success
  • In 2010 at age 38, he wrote a novel for the first time and it became a rip roaring success
  • At the same time, he was able to monetize it further by selling the film rights and even writing the screenplay

What can we learn from him?

  • You just need to hit one home run to make it big (unwritten, but we can assume that he tried to sell publishers on other manuscripts which were rejected, before his big break)
  • It’s never too old to transition your career (he actually did it multiple times, from poet to screenwriter to author)
  • You can derive unexpected synergies from past careers (writing the screenplay on his bestselling book, and probably his experience with movie pacing led to a good book)
  • When you do have a success, monetize the crap out of it before it recedes from public memory

Armed with that confidence boost, now you too can go out there and write the next bestseller.

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Think Ahead to Minimize Regrets

Three articles today, all with the same theme about regrets. Each has a different story to tell regarding personal finance.

  1. Going without a car. It’s easy to do in a big metro area with good public transportation. We all know that. Still, the author does a good job crunching the numbers on how much saving they derive, and how to compensate for the lack of a car when you’re out in the countryside and want to visit natural parks or get groceries.
  2. Bride regrets her expensive wedding. This does hit home due to my recent wedding. In planning my wedding, I had an ongoing conversation with my now wife about costs. We are both frugal people, and in the end came to a happy balance where we were able to have a quality memorable experience by not skimping on the things that matter while not fretting about minutia.
  3. Letting go of FOMO. Also known as “fear of missing out” – it’s supposedly big with the millennial crowd. My personal experience with Bitcoin was reading the first summary of its original release posting on Slashdot, back when I followed tech news religiously. In this article, various academic elite all comment on why they, and many other experts, missed the Bitcoin bubble. Yes, many of them thoughtfully evaluated the technology very early on, like I did, and concluded that it had minimal value except as a tool for money laundering and other illegal activities. None of us really entertained buying because we knew the intrinsic value was likely close to zero. Still, it’s not easy to have that kind of lottery ticket regret when you recognize a bubble early and could have ridden it. The article does suggest ways to mentally cope; perhaps the best one was that other experts similar dismissed it too.
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Turbocharge Wealth Accumulation with Naked Puts

Post written per special request from a new reader

I’ve been playing with options for almost a decade now. Some trades have made money, and some have lost money. It’s the nature of the beast. However, I eventually honed in on one strategy that was a sure win-win: selling naked puts. It’s less daunting than it sounds and can be a real moneymaker if you know how to use it right and compensate for its limitations. Let’s first explain the nature of option contracts.

The Basics of Options

An option is a promise or a bet on a security. You can be either the buyer or seller (also known as writer) of options. As the seller, you get to choose the security, the date the option expires, and the strike price. Then there’s the type of option. The big two categories are calls and puts. You can remember them with the mnemonic call me up and put me down. In other words, a call is a bet that a the subject of the bet will rise, while a put is a bet that it will fall.

The main permutations of the above controllable aspects of options thus becomes translated as such. A seller of a call option sells the promise of “I will sell you ___ security on ___ date at ___ price.” Correspondingly, a buyer of the same call option has the option (that’s where the terminology comes from) of “buying ___ security on ___ date at ___ price.” At the scheduled date, the buyer can decide if it’s worthwhile to exercise the option. Obviously, that will depend on if the price of the security is above or below the strike price. If the buyer chooses not to exercise the option at the date, it expires worthless. In return for owning this flexibility, the buyer pays the seller a certain amount of money called the premium.

Our strategy focuses on put options, so let’s explore that side of things. Using the same terminology, the seller of a put option sells the promise of “I will buy ___ security from you on ___ date at ___ price.” This is selling downside protection, or insurance against a market crash. As you can imagine, there would be a lot of people interested in this type of insurance, namely those sitting on big gains who fear losing it all in a market crash. It’s here where we can exploit a psychological inefficiency. People feel a lot more pain losing money than they gain in pleasure from making the same amount of money. Thus, premiums on put options are quite high. If only there were a way to pocket that for ourselves.

Creating a Win-Win

Here’s another reason that put options are win win for the seller (the one exploiting the fears of buyers). Let’s imagine the two possible outcomes, based on what I actually do each year. Every year in January I check to see what level the S&P 500 index fund (SPY) is at. Let’s say it’s selling right at $200 per share. I then sell/write a put option for a year out (next January) for the SPY security at $180 (my preferred 10% margin of error). In return for doing so, I pocket about $7 per share upfront as the premium. Fast forward a year later. If the stock market stays the same or rises, the option expires worthless and I make money. If the market has dropped, I would be forced to buy in at $180. The only way I would lose money from this is if the price of SPY is less than $180 – premium, which comes out to a break even price of $173. Although it looks like in this situation I would have lost money, I choose to see it in a different light psychologically. I’m a young person with a long time horizon, and stock indexes over the long run have done well. If I would have been comfortable buying in at $200, I should be ecstatic to be able to buy in at an even lower price. Even if I’ve lost money in the short run, I’m in the accumulation phase of my investing life where dollar cost averaging and staying disciplined buying at regular intervals will pay off.

In other words, think of put options as being paid to hold a limit order at the strike price you want.

You can also tweak the margin of error to suit your personality. If you are more conservative or are worried about imminent market drops, set a larger margin of error (known as selling options far out of the money) and sell fewer options. Keep in mind that each option is equal to 100 shares of the underlying security.

I would never sell options like this on individual stocks. That’s far too risky and exposes you to company specific random tail risk events (like Deepwater Horizon). Instead, the SPY security is widely traded, incredibly liquid, and a low cost investing vehicle that I would love to own at any time and at almost any price.

I also like to set my options for a year out. YMMV, but I’ve found that this gives me a reasonable time window to avoid being hit by flash crashes. My options tend to get exercised less the longer out I write them for. This makes sense because over longer time horizons, the more likely it is that the stock market will go up.

Swimming Naked

The astute investors among you may notice a problem. In selling an option, you need to place on hold the underlying security (for call options) or money (for put options) as a kind of escrow. Using the above strategy, this can easily tie up hundreds of thousands of dollars each year. That’s huge opportunity cost due to not being fully invested. This is why my strategy really only took off once my brokerage approved higher level options trading – naked options. Selling naked options means that I don’t put down the escrow. Rather, due to a large portfolio size, the brokerage has calculations that estimate how much margin they can extend you. Mind you, this is different from margin trading, which actually uses margin. Having margin on hand allows us to sell the above put options and use our margin buffer as escrow. An added benefit is that since the margin is not being used unless the option is exercised, we don’t get charged interest.

This also raises the importance of risk management when using margin. Again, I’m a conservative investor who likes having enough buffer to survive unexpected market situations like a big crash. This means that I never write more options than is the value of half of my margin. I also try to keep the total dollar value of all options to be less than my yearly salary. This way I can start planning to save up the cash in case it looks like the market is dropping and there is a chance that the option may be exercised by whoever bought it.

The Perfect Setup

Now for the kicker. While my dad likes to invest in real estate, I’m much more of a stock person. However, from talking to him I’ve discovered the perfect complement to the above naked put writing on margin strategy – home equity lines. Think about it this way. We all need a place to live, and real estate is generally a good investment, as long as you’re in a growing rather than dying area. Most people have a substantial amount of their net worth locked up as equity in a house. That to me is idle cash sitting around not doing any work! Why not use that to act as the “cover” for naked put options?

Let’s say you have a $750,000 house that’s fully paid off. You can easily get a $500,000 home equity line of credit on it. Now let’s assume a $1 million stock portfolio. By my above buffer estimates, this is safe enough to write $500,000 worth of options each year on margin and still have all but the most apocalyptic scenario covered. Using the above guide, I write $500k of naked put options on the S&P 500 index in January, for the January of next year. I pocket $17,500 in premiums that I get to keep no matter what (I normally just plow it back into the market). In most years the market goes up or stays steady, so I get to pocket the premium year after year without ever activating my credit line. Once in a decade or so there’s a big enough crash that my options are exercised. Great! That’s the time that I should be buying in anyway (what did I way earlier about market discipline?). Even when that happens all I have to do is withdraw the cash from my home equity line and buy into the market at a bargain bin price. Then I slow down my option writing, keeping it very conservative in the next few years as I diligently pay off my home equity loan with my income and dividends from my portfolio. As it gets paid off, I start writing larger options and the process begins anew.

This setup is infinitely scalable. The more houses and lines of equity you have, the more put options  you can write. I would even add bonds to the mix. With a healthy 10% portfolio allocation to bonds, that’s also kind of like money sitting idle. I mentally add that to my total of liquid cash equivalent instruments that I can tap to cover my options.

So there you have it, this strategy can guarantee you a 1-3% boost in total returns over the market, with very little risk. By mostly holding low cost index funds tracking the market, we can juice our returns and guarantee a beat every year.

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Quick Thought: Have Your Career Early

Quick hitting thought here in reaction to this article. It pays off in more ways than one to have your (hotshot) career early – it simply gives you more options in life. You accumulate more wealth and allow more time for compound interest to work. You can rise up high enough to become indispensable to your company before going on maternity leave. There’s the possibility of continuing to climb the ranks vs shifting gears to something less strenuous, and when you do with a strong CV you’ll be more competitive.

Let’s then count the cons of having fun early and then trying to spin that experience into getting a good job later. Aside from the negative of the above perks, we run into ageism, which is the defining feature of the article. Like it or not, the expectation from most companies is to get in young and then move up or out. It’s unusual for them to hire hire older (read: above 30) works at entry level positions. You’re kind of expected to be mid-career at that point and to apply for director level jobs, which you usually get headhunted for or apply for as part of a lateral move to a different company in the same industry. It’s nigh impossible to graduate and shift careers in one’s 30s and expect to get hired at that level.

That’s not to say it can’t be done. There are stories of people like Elizabeth Pisani and Tai Ming Cheung who have managed to get into a related career from their original one relatively late in life. However, that’s definitely not the norm. Don’t count on being them unless you have exquisite dedication and talent.

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Another Reason to Tune Out Market Gurus

If the examples in my book didn’t already convince you of this, the latest flip flop on Marketwatch should convince you that the so-called experts don’t know what they’re talking about.

On Jan 24, the head of the world’s largest hedge fund said, “if you’re holding cash, you’re going to feel pretty stupid.” That’s the gist of it, but if you click through you’ll hear some blah blah justification about how the market is rising, valuations are reasonable (even though by CAPE they’re expensive), and that there’s still room to run.

Then we had the 10% market swoon in the beginning of February.

The next time we hear from the same guy, he’s singing a different tune: “I think we are in a pre-bubble stage that could go into a bubble stage.” He goes on to say that the chance of a recession are 70%.

Luckily, though Marketwatch doesn’t call him out on the rapid change in tone, it does provide helpful links to his prior comments. Any discerning reader with even a modicum of financial knowledge would think that this guy is utter crap and going along with the prevailing tone, fanning the flames in a bull market and turning on a dime at the slightest whiff of panic. Why would you entrust your money to someone who doesn’t know what he’s talking about?

It amuses me to have recently received mass emails from both Fidelity and Schwab advising clients to stay calm in the recent market turbulence. It seems that with each boom-bust cycle, we attract new speculators without any inkling of what it means to truly invest. What am I doing? Tuning out the noise, rebalancing, and overall staying invested in a stock:bond ratio that matches my risk tolerance and time horizon. The market’s short term gyrations don’t matter a whit.

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The Definitive Guide to Locum Tenens

Having worked in locum tenens for almost 2 years now, I feel that I have a good grasp on ways to maximize the experience. This article will serve to give a honest appraisal of the pros and cons of locums practice, describe the financial/tax advantages of such, and give tips on how to make the setup work for you.

Is locum tenens right for me?

For most people, it’s a qualified yes. Overall, I think locums is a great way for new grads to learn the ropes of the profession, get exposure to different practice patterns, and pay down loans fast. Concurrently, it also works well for those nearing retirement who may not want to work a full schedule but do want to preserve flexibility in their schedule.

Generally, since locums by definition is a temporary assignment without guarantee that the placement will be based in your preferred area, it’s more appropriate for those without firm attachments to a particular place. Often times, family is the reason doctors drop out of locums. Either they get married and have a spouse who is from or has a job in a particular place, or kids come into the picture.

I’d say that locums is generally better for those who are less subspecialized, to maximize the number of opportunities around the country. Someone in primary care, hospital medicine, general surgery, radiology, and ER is much more suited to doing locums work, since shifts and warm bodies are largely interchangeable. In contrast, pathology, neurosurgery, and EP are more specialized and thus tend to only have openings in tertiary referral centers in large metropolitan areas. These are normally hot locations and with a surplus of providers, so there’s less drive for locums positions to open up.

That leads us to…

What are the pros and cons of locums?

Pros:

  1. Higher hourly income than a full time job. Positions that are desperate to have shifts filled offer premium pay to attract a bunch of providers in a hurry.
  2. Benefits if you know how to use them. It’s a bit of a wash, as the benefits that normally come with a full time position are shifted into base pay and amenities attached with the assignment. We’ll learn later how to maximize them.
  3. No need to worry about billing or productivity. Since you’re paid by the hour, you’re a glorified salary worker with no benefit to seeing higher volume or worrying about maximal billing (though you still should, as we’ll see later).
  4. Taxation. Being paid on a 1099 rather than W-2 basis allows one to legally take all sorts of business deductions, if you play your cards right.
  5. Seeing the country and the world. Imagine being able to go to Maine in the summer, the Caribbean or Hawaii in the winter, and staying there at no cost. There are also international placements – many people go to New Zealand for example.

Cons:

  1. No guarantee of work. Your position can be canned with a month’s notice if the position gets filled by full time hires. In other times, there just aren’t enough shifts to go around to meet your needs, either because of full timers, per diems, or competition from other locums at the site. Other times, the site just plain won’t like you and can terminate you at any time. This can be an endless source of stress if you don’t mitigate it.
  2. Lack of other benefits. Again, I’d put benefits under both pro and con because I think of it as a shift in type of benefit to other things that ultimately comes out to be a wash overall. Essentially, you lose health insurance, retirement benefits,
  3. Travel time. Having to fly back and forth to a remote location can be a real downer, taking up the bulk of a day.
  4. Taxation. Again both a pro and a con. The major con is having to file taxes in multiple states, being responsible for paying estimated quarterly taxes, and double taxation for payroll tax (Social Security and Medicare contributions)

How to maximize the locums payoff

Knowing the above, I’ll now get to how to maximize enjoyment/benefits and minimizing the downsides, based again on my 2 years of experience and background in investing/finance.

The first key is to take advantage of the benefits. Normally, contracts come with housing, flights, and a rental car all paid for by the client. My preference is to have long-term arrangements “living in” each community, with shipping or driving my car (reimbursed of course) to the site. The housing stipend (in my experience $2500-$3500) is generally enough to get a furnished apartment or a private Airbnb in the area close to the workplace. My preference is for Airbnb due to the flexibility of being able to cancel up to a month in advance if the client’s needs change. Living in the community will shorten the commute time and minimize flights back and forth. It will also let you save money by not having to maintain a home anywhere else. Yes, you’ll be a bit of an itinerant tramp, but with furniture provided for, you won’t have to bring much when you move from site to site. Living in the site will also endear you to the client. If there’s a last minute emergency shift that needs filling, you’re already on site and can take it. Also, no matter how many shifts in a month you do, the client won’t have to pay more for extra hotel days. Also, you won’t incur any flight costs for the client by virtue of relocating yourself to each new site. Finally, by shipping your car, you can reimburse the mileage driven from home to work, and again save the client money by avoiding a car rental.

If it’s unavoidable for whatever reason and you have to maintain a home elsewhere and commute back/forth, do the next best thing and take advantage of hotel and airline rewards programs. In my experience, Hyatt has the best rewards and you can accumulate free days very quickly without having to spend a lot of money. Hyatt Place is a great mid tier brand with a full free breakfast, but unfortunately is only located in major metro areas. The next best is Hilton, due to widespread availability, easy to earn status (Gold = free breakfast at HGI and Doubletree), and many free breakfast options (Embassy Suites, Hampton Inn) even without status. IHG is my third choice mainly due to availability, especially in rural areas. Holiday Inn Express, while not the best place to stay, works for a clean, comfortable, hassle-free experience with free breakfast to boot (comparable to Hampton in quality). You will accumulate points easily that can be redeemed for free nights at a fairly frequent basis, but higher rewards tiers don’t come with as good concessions (no free breakfast) compared to Hyatt or Hilton. Other locums have used Marriott or SPG, but my reading of their rewards programs is that they’re on the less generous side of things overall, and aren’t as widespread as either Hilton or IHG.

As for flights, my preference is Southwest plus another. When possible, Southwest is generally the cheapest point to point between major metro areas, and the two free bags is a lifesaver when moving homes. They also have many direct flights from the cities I care about (San Jose and Dallas), and their rewards program is quite fair in terms of availability and usability of points. The next tier in my book is Delta, mainly because their points don’t expire. They also fly to many remote locations and have hubs that I use frequently (Salt Lake, Minneapolis, Atlanta). Of course, in your situation things may be different, and United, Alaska, or American may be better options based on your home city. Sometimes they will be the cheapest and most direct flight, but my preference is not to use those if I have an equal option due to worse frequent flyer benefits (for United and American) or limited geographic reach (for Alaska, though they are improving).

After optimizing your travel/housing situation, you should turn your attention to the direct financial implications of being paid as an independent contractor. The main advantage to this is being able to expense certain things from your business. Although, with most housing and travel expenses paid for, the most rewarding deductions left over is meals while away from home (per diem accounting of this eases record keeping). However, you will be able to set up a SEP IRA or Solo 401k. The former is easier to set up and has fewer reporting requirements but you have to make more than roughly $280,000 per year to reach the maximum contribution limit of $55,000 for 2018. This is a great perk which we should definitely seek to maximize, as it’s a higher limit than standard employed 401k plans ($18,500 limit). The Solo 401k is more hassle but does let you reach the same $55,000 limit with lower income. In terms of investment options, both are the same. For me, I use a SEP IRA since I work a full time schedule and can easily clear that income hurdle.

Lastly, we’ll talk about mitigating the downsides of being an independent contractor. While there’s nothing we can do about double payroll tax, we can at least deduct the employer half from our gross business income. This leaves health insurance, which most people will either buy from the ACA marketplace or get for free from a spouse, the latter being the best option if you’re lucky enough.

Don’t forget to pay estimated quarterly federal and state taxes. Pay attention as they can be on different schedules! Normally for W-2 wage earners, your taxes owed are deducted from each paycheck. As a small business owner or contractor, you have to calculate taxes on your own. I find that the best way to navigate this is to pay enough to meet the safe harbour clause. For high wage earners (anyone over $150,000 filing as married), this means paying 110% of total federal tax from the previous year. As a simple calculation, if your total federal taxes for 2017 is $60,000, you should plan on paying $66,000 in quarterly installments in 2018 to fall under safe harbour. It doesn’t matter if you ultimately earn more than that. You’ll still have to pay what you owe, but by paying the safe harbour minimum, you won’t be charged fees and penalties for underpayment. As for how much to set aside from each paycheck, I’d go with 35% if you’re in a low tax state and 40% if you’re in a high tax state. While setting this aside it can be helpful to have the money earn interest in a money market account or short-term bond fund until you have to pay.

With the recent tax law overhaul, working professionals stand to benefit from lower rates. Yes, there’s a loophole where high-earning professionals can reduce their taxes substantially without having to incorporate as a pass through S-corp.

Of course, if this is too hard you can always find a tax accountant to do things for you.

I purposefully leave out life insurance as I feel that it’s a big waste of money. The main point is to leave something to your heirs, but if you’ve been doing everything correctly and investing on schedule, your estate should be big enough to more than outweigh any insurance payout.

How to pick assignments

Early on in your locums experience, you may be tempted to commit to one state license or one job. Don’t. Locums who fail to plan can end up with no work at a moment’s notice. Instead, get credentialed in multiple states where you think you can get work and see what’s available. I divide sites into two categories (this will be from a hospitalist perspective now). Tier one is a desirable primary site with low census, good EMR (I like Epic), low-no procedure requirements, closed ICU, and located in or close to a major metro area (to minimize flight time). Due to desirability, this site will require a long-term commitment usually on the order of 4-6 months minimum, with a minimum schedule each month (typically 7-14 shifts). Tier two is a higher census typically rural site that’s more desperate for providers and will take anything from anyone, even on a part time or ad hoc basis. It’s good having a site or two like this in one’s back pocket in the case of a dry spell. You can even have a tier three which is purely per diem arrangements with local hospitals.

This is also a rough guide to how to screen for assignments in general. Again, from the hospitalist perspective, I like bigger groups with more concurrent hospitalists. This means that any unexpected surges in workload is distributed more evenly (only 1-2 extra patients per provider) as opposed to the same volume spread over 4 hospitalists, which can overwhelm the system. No joke. I’ve heard of some hospitalists who start at a site and quit after a day due to the high workload. Average census is probably the next most important to screen for. It can be helpful to get a sense from people on the ground as opposed to just the medical director, who can be biased in trying to sell the position. My general goal is to shoot for 12 patient census for 10 hour shifts, 15 census for 12 hour shifts, and to also inquire if there are concurrent admissions. The most extreme workload that I’ve done is average census 15, 3-4 admissions, 12 hour shift, with no cap. That was brutal. The other end of the spectrum is a census of 9-13, 10 hour shift, no admissions, which usually led me to “finish” the day at 2 PM. I think it’s far better for health/sustainability and med-legal reasons to keep to the lower census sites as much as possible. Even from a financial perspective, it’s better to be able to work 21 shifts and still be fine mentally (and still be able to do stuff each day after work) rather than only 14 shifts and still feel burned out.

As an added bonus, some sites have policies in place that allow rounders to go home early when they’re done with work. These places are worth their weight in gold if you find them, and almost inevitably fill quickly. If I can work 7 AM – 4 PM, get home on time, take the remaining cross cover call from my gym, and get paid for a full 11 hour shift, sign me up to work 28 days straight here!

For me personally, EMR is an important screening criteria for sites. I grew up with Epic. It’s the only EMR I’ve used since starting medical school, barring short stretches at the VA and the local student-run free clinic which was on Allscripts. My comfort level with Epic is so high that I’m twice as efficient on there as compared to any other EMR. I can very easily navigate through all the tabs to get the relevant information on patients. As someone who prefer to type, use templates and add in smartphrases than dictate, I can type out a note in roughly 10 minutes from start to finish on Epic, as compared to closer to 30 minutes fumbling through a dictation and waiting for it to upload (full disclosure: I’ve never dictated before and don’t plan to start). This means I can tolerate sites with high workload if they’re on Epic, while a hospital using Meditech will need to tempt me with far better hours/pay to get my consideration.

As a general rule of thumb, I like to think of the US in terms of geographic areas. The Northeast is a wasteland for hospitalists. Census is generally on the upper end but the area is oversaturated due to the glut of academic programs pumping out providers who like to stay in the area. Even if you’re willing to work full time, good luck finding any position in NYC, Boston, or DC. If you do, it’s probably going to pay far less than $200k. In contrast, the South is what I like to call high workload, high pay. People who gravitate towards places like Florida, Tennessee, and Texas like the lack of state income tax (more take home pay!) and are willing to work hard for it. When I say work hard that means positions routinely advertise 20-25 average daily census, and 10-12 admissions for night/swing shifts. Moving on to the Midwest and Mountain West, I consider this to be my personal sweet spot. Perhaps due to the weather, there are far fewer providers here than anywhere else in the country. Thus, pay is high (for both locums and perm jobs) and census is generally very reasonable. My favourite is the Twin Cities, since I know the health systems well there and the fact that all the major systems are on Epic. The TC also have a great public transportation network, and it’s possible to go carless there including from the airport to all major hospitals. My second choice would be the West Coast (CA, OR, WA). Workload is in between the Midwest and the South, and pay is comparable to the Midwest. California is a great license to have, and there are generally tons of jobs, though not always in the most desirable areas. A big personal plus is that all the major health networks (Providence, Legacy, Kaiser, Sutter, Swedish) are on Epic.

How to be a good locums provider

While the previous section focused on what a site can do to be more appealing to locums, this section will be on how to be a good locums candidate and provider.

Put yourself in the shoes of a site. What they want is someone who has the fewest hang ups and is easy to deal with. An ideal candidate is willing to go anywhere, do anything, work at various hours of the day, learn the local system quickly, and not complain. This is why I’m so picky on which sites I screen for before applying. By carefully selecting just the best sites, I create an environment where I can get started on the first day and easily outperform full-time staff.

Aside from medical competence and efficiency, it’s also important to be attuned to the local political and dynamics within the group and between the group and the administration. Getting on the good side of admins, schedulers, care coordinators, and the chief is important. When the group evaluates whether to keep using locums and if there’s a crunch, which locums to cut, they’ll keep only those that they like and who perform well. Remember, you can stand to be picky when applying for jobs, but once you’re in the door, do your best to perform well. On site is not the best time to complain.

Finally, I want to emphasize how important it is to be cost-conscientious. Hospitals and groups don’t have unlimited budgets. If there’s any chance of waiving certain benefits such as rental car, or minimizing flights by living locally in long-term housing, do so. It will improve your standing in the client’s eyes and again make you more competitive to retain or to be asked back when they have options.

Conclusion

So there you have it – the nuts and bolts, inside scoop on the locums life from someone who’s been through it. Personally, I’ve loved locums overall. It might not suit everyone’s lifestyle or approach to things, but it fits what I want from my career at this time. Use the above tips. Structure things well and through careful maximization of benefits, sites, shifts, and tax treatment, you can earn as much as an orthopedic surgeon while working half as much.

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Should I Contribute to an IRA with a 401k?

If you don’t have a 401k offered by your workplace, then an IRA is a no-brainer. You may even be eligible, if you have your own business, to contribute $55,000 (in 2018) to a SEP-IRA. But what if your workplace gives you a 401k? Should you contribute to an IRA on top of that? If so, what type should you choose – traditional or Roth?

First, you should understand that your limit is $5,000 ($6,000 if age >= 50). Since you have a 401k plan already, the limits and rules for an IRA on top of that are less generous. Now let’s first look at the IRS’s rules for contributions:

The key here is tax deductibility. If you stay below certain income limits, your traditional IRA contributions are deductible from your taxes, which is 90% of the benefit from these plans. However, tight income limits of $63,000 for singles and $101,000 for married filers makes this a difficult proposition. The worth of tax deductibility is based on your marginal tax bracket. The higher the bracket is, the more you save on taxes for the year with an IRA contribution. Based on 2018 tax brackets, at those incomes limits, the corresponding tax bracket is 24%. That’s quite low by historic standards. The general rule about Roth vs traditional 401k is that if your tax bracket is low now, you should choose Roth, for which you pay taxes now and everything accumulates tax free within the account. However, if your tax bracket is high now, you may benefit from deferring taxes, taking the savings up front, and withdrawing in retirement at a lower bracket. That’s the traditional IRA plan.

So basically, the conclusion is that if your income is such that you qualify for an IRA while you already have a 401k, your bracket is by default so low that you should only consider the Roth option. Now a wrench in this general guideline is state income tax. If you are in a high state income tax state such as Hawaii, California, Oregon, and Minnesota, be aware that Roth contributions mean paying all taxes up front, including state income taxes. These are the only corner cases where a traditional IRA is still worth considering even with a low federal tax bracket.

Regardless of what you do with the IRA, make sure you maximize the company sponsored 401k first, and put away enough in savings to meet emergency needs.

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Can Locums Doctors Qualify for a 20% Tax Deduction?

The new tax bill has become law and accountants are eagerly poring over the details, dissecting it for loopholes. One of the biggest giveaways is to small businesses, allowing a 20% deduction for income that is passed through (called “pass-thru” in the law) to the individual. It’s called Section 199A, and I expect that this will become a household name as famous as the 401k. The intent of the addition is to benefit small businesses (larger ones tend to go for C-corp style taxation) that employ the bulk of Americans but would otherwise be penalized at higher individual tax rates versus C-corps. To avoid incentivizing too many of these entities to be forced to convert to C-corps, it was decided to offer some token tax cut to pass through businesses. Ron Johnson largely pushed this addition through by himself, given slim margins for Republicans in the Senate.

Remember, this website isn’t interested in debating the ethics of the law or the politics behind its passage or ramifications. Rather, we want to be more practical (or nakedly capitalist if you will) – can I exploit this loophole for my own gain? This will be a more fine tuned analysis geared towards medical professionals, due to my own expertise in this area, but the principles are largely applicable to other professional service businesses as well.

To qualify, first you must be taxed as a pass through business. This includes:

  • Sole proprietors. If you’re taxed by filling out Schedule C reports of your 1099 independent contractor income, you count in this category. It’s the default if you haven’t gone out of your way to form a more advanced business structure.
  • Partnership. Basically a few sole proprietors working together on the project, each owning a portion of the firm. Each passes through income proportionally. Note that a married couple can be counted as a sole proprietor because they file together.
  • S-corp. This is where things get fun. This business model can scale as big as you want. You have all the responsibilities of a big corporation in terms of payroll, offering 401k, health benefits, getting a corporate board, and filing quarterly tax payments. It’s a big setup and reporting hassle and can be expensive to maintain. Luckily there are software packages out there that can make it easy for you to create one.
  • LLC status is a legal distinction that doesn’t matter to the IRS.

Contracted physicians (this includes the locums category) tend to be either sole proprietors or S-corp. Many have opted for the latter because you can choose to structure some income as wage income (W-2) and the rest as a pass through business distribution that is not subject to payroll tax. The IRS closely scrutinizes the proportion that is in each category to prevent people underpaying themselves and taking almost everything as a distribution. The generally accepted principle is that your income should be close to the national average for your profession and the type of work you do. Given the high incomes of physicians, this won’t save you anything in Social Security (unless you work part time) once you pass the income limit, but it will only save you the 2.9% Medicare portion of payroll tax that is applied to all earned income. It’s up to you to determine whether the tax savings outweigh the setup and maintenance costs as well as tax reporting hassles.

When crafting this carve out, politicians were careful to limit its benefits to favoured categories of individuals. They like businesses that own real estate, employ people, and invest in capital equipment. They most definitely did not want this loophole to benefit high income professionals who don’t employ others. Politically that would be depicted as overly favouring the rich, who presumably don’t need this loophole. Thus the law featured two “tests” – the income test and the profession test.

The Income Test

If you’re single and your total taxable income (this includes all other investment, side job, and interest income) is less than $157,500, great! You can take this deduction no questions asked. If you’re married, the same limit is $315,000. Mind you, if your income is higher than this threshold, it doesn’t mean you can’t take it. Rather, there’s a phase out period up to $207,500 for singles and $415,000 for married individuals. The phase out is essentially linear. What it means is if your income is above the phase out thresholds, you can’t use *any* of this 20% deduction. It doesn’t mean that you can still deduct the portion that’s under $315,000.

Ironically, this creates significantly negative incentives around the phase out line where one’s marginal tax rate goes up temporarily to ~50-60% because of rising brackets and losing benefits. Greg Mankiw may chime in in five years and say that it’s a “upper middle class” income trap with bad incentives.

Don’t fret if your income is above either threshold (lucky you!). Remember this test just wants to check your total taxable income. Anything that reduces this number can make you thin enough to squeeze under the bar and claim the deduction. This includes SEP-IRA, 401k, and business expenses, all of which reduce what’s visible as taxable income.

The Profession Test

If you make more than the income cutoffs, you can benefit from the law if your business fits into one of these categories:

  1. Anyone who is in the business of being an employee (yes, being an employee is considered being in a business), and
  2. Any “specified service trade or business.” 

The IRS will spend several years filing lawsuits and refining this broad definition, but for now you can consider that if your business features your skills and services as opposed to owning property and selling goods, you’re one of the undesirable types. You will fail the profession test. Law, medicine, “consultant” and accounting are some of the professions that are explicitly mentioned as failing this test.

Somehow there are exceptions for architects and engineers. No one knows why but presumably their professional societies lobbied hard.

The Recap

So for our locums physician to take advantage of this benefit, he or she needs to satisfy the income test, because we know that medicine will surely fail the profession test. This is easier to do if you work in one of the lower paying specialties, work part-time, and are married. For our friends with S-corp setups, since the income test evaluates you on your overall income, it doesn’t matter if you slice your earnings as salary or a business distribution, they both will be counted for purposes of the limit. This obviates a big advantage of S-corps relative to sole proprietors.

Some of the more astute readers will note that there is another test called the W-2 test, which is supposed to limit abuse by preventing really high income people from quitting their jobs and becoming a consultant working the same job. Forbes explains better than I can:

I’m a partner at a BIG, PRESTIGIOUS ACCOUNTING FIRM. I am also, however, an employee; one who collects a wage. Now, let’s just assume that my annual wage is $800,000 (it is not). With the new rules coming down and offering a 20% deduction against my income, what would prevent me from quitting my current gig, and then having my firm engage the services of “Tony Nitti, Inc.” a brand new S corporation I’ve set up specifically to facilitate my tax shenanigans? Now, my firm pays that same $800,000 to my S corporation, and my S corporation simply allows that income to flow through to be as QBI. I, in turn, take a 20% deduction against that income, reducing my income to $640,000. See the problem?

My role at my firm hasn’t changed. I provided accounting services before, I provide accounting services now. But before, I was receiving wages taxed at ordinary rates as high as 37%. Now, by converting to an S corporation and foregoing wages in favor of QBI, I am now paying an effective rate on that income of only 29.6% (37% * 80%). That’s not fair, is it? Compensation for services should be taxed at the same rate, whether it’s coming to me as a salary or flow-through income.

To prevent these abuses, Congress enacted the W-2 limitations. Because, in my example, Tony Nitti, Inc. does not pay any wages, in both scenarios my limitation would be a big fat ZERO, meaning I get no deduction. Like so:

My deduction is the LESSER OF:

  1. 20% of $800,000, or $160,000, or
  2. The GREATER OF:
    1. 50% of W-2 wages, or $0, or
    2. 25% of W-2 wages, or $0, plus 2.5% of the unadjusted basis of the LLC’s assets, or $0, for a total of $0..

It’s a lot of calculation and looks complicated, but we can actually disregard it all as this limitation will only come into play if you fail the income test. Since we’ve already determined that a physician who fails the income test will automatically fail the profession test and be prohibited from taking the deduction, we shouldn’t even worry about this section.

As Forbes explains:

Section 199A(b)(3)(A) provides that if your TAXABLE INCOME for the year — not adjusted gross income, not QBI, but TAXABLE INCOME — is less than the “threshold amount” for the year, then you can simply ignore the two W-2-based limitations. The “threshold amounts” for 2018 are $315,000 if you are married, and $157,500 for all other taxpayers. These amounts will be indexed for inflation starting in 2019. And quite obviously, you determine taxable income WITHOUT factoring in any potential 20% deduction that we’re discussing here.

The Payoff

Phew. You’ve waded through all of the above because you’re eagerly salivating over seeing how much you can save on your taxes, right?! Let’s crunch some numbers.

Our example physician is married, works as a contractor (paid as 1099), and is set up as a sole practitioner (in the end, S-corp calculations won’t be too different from this) for simplicity’s sake. Assume no kids. This person is based in Texas and to avoid troublesome state income tax calculations performs contract work in Washington, Nevada, Texas, and Florida only. Yearly income starting in 2018, the first year the new law will apply, is estimated to be $400,000.

To fit under the threshold, we maximize our SEP-IRA contributions, which are $54,000. We accumulate $22,000 in deductible business expenses. Then we also take the standard deduction of $24,000 for a married couple. That leaves us with $300,000 exact in visible taxable income. All of it is eligible for the 20% deduction.

Let’s use Marketwatch’s calculator to calculate our total tax under the new bracket system for 2018:

  • $40,179 for federal income tax
  • $0 state income tax
  • $15,958.8 Social Security (double because of 1099)
  • $12,114 Medicare (including surtax)
  • Total of $68,251.8

For comparison, if we earn that $300,000 as W-2 income (employed physician), our total tax will be:

  • $60,578 for federal income tax
  • $0 state income tax
  • $7,979.4 Social Security
  • $6,633 Medicare (including surtax)
  • Total of $75,190.4

There is a net savings of $6,938.6 with business income as opposed to wage income. The numbers are close but not exact, since the business owner will be able to deduct business expenses and half of the payroll tax that the W-2 earner can’t itemize.

I haven’t included calculations for S-corp owners because there are complex rules depending on how much you take as W-2 salary and how much is a distribution. The same thresholds apply, and you are only allowed the 20% deduction on the portion that is a distribution.

 

(Much of the details are from the source text, as well as Forbes Tax Geek and Evergreen Small Business)

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When it Makes Sense to Commute by Plane

True story. I was in Vietnam a few weeks ago and on a street food tour of Hanoi, I met an Australian expat. She was a lively conversationalist and told me the nugget of a story: there are Australian resource workers who choose to live in Bali and commute to Perth to work in the mines.

It’s true (the internet proves it so!) and it makes total sense for those involved.

  1. They get to live in paradise, or at least a place that most people pay thousands to travel to
  2. The flight is cheap (Google Flights shows direct round trip tickets to be $180 if you book a month out)
  3. At 3 hours and 40 minutes, the flight is doable given that the work schedule was described to me as 5 on 5 off
  4. Cost of living is lower in Bali than in Perth
  5. Living expenses are covered at the worksite in Western Australia, which avoids the unpleasant need to maintain two residences
  6. Enough people do it that the visa/residence aspect in Bali must not be a problem

Calculating that the cost of a flight 2-3 times per month is still less than the difference in rent between Denpasar and Perth, the miner comes out way ahead. Of course, this works best if you’re single, mobile, and without significant family attachments to keep you in Australia. But if you are single or can otherwise make this work by moving your spouse to Bali, it can work out really well.

Can this type of arbitrage be applied to other situations in life? Of course! In fact, the cost of housing in most major American cities has become so exorbitant (see $3500 per month rent in SF for a one bedroom apartment) that it’s cheaper to commute to work, even on a business class flight! It’s true. I’ve been investigating this for my own professional life and came up with one such arrangement.

  1. Live in Tokyo, where the monthly rent is about $1200 in the city itself, even cheaper if you live in the suburbs
  2. Catch a direct flight to a west coast city in the US for a job as a locums nocturnist (bonus if the job is in Washington state where there is no state income tax)
  3. Work 7-10 days straight and then take the rest of the month off

Mind you, the living expenses stateside are of course all covered by virtue of being locums, absolving the nocturnist of maintaining a costly car and pied-a-terre in the city. There is a secondary bonus. Normally night shift workers are paid a premium in the US, due to the unsociable hours. However, Japan is far enough away from the US such that accounting for time zone difference, our nocturnist will be working a daytime schedule back home! By keeping the number of contiguous shifts high and the number of trips back and forth low, our nocturnist gets to maximize his # of days off, pay per shift, and minimize overhead expenses (time, money) involved in the commute. With a round trip ticket from Tokyo to Seattle about $850, rent in the US will just need to be more than $2000 per month for this commute to be worthwhile. That’s not even accounting for how much cheaper and better life is in Japan compared to the US.

Of course, one can think of similar arrangements for a British locums physician seeking to live in SE Asia and commute to the UK to work night shifts on an as needed basis.

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