Can New Doctors Afford a Million Dollar Home? | Retire Early, Retire Now Podcast

Can New Doctors Afford a Million Dollar Home? | Retire Early, Retire Now Podcast

In this episode of the 'Retire Early, Retire Now' podcast, host Hunter Kelly of Palm Valley Wealth Management presents a case study featuring Dr. John and Janice Brown. This physician couple, earning a combined income of $625,000, wants to know if they can purchase a million-dollar home while still aiming to retire by age 55. Hunter walks through their financial situation, analyzing their assets, liabilities, savings, and cash flow, and provides valuable insights on budgeting, debt management, and investment strategies. This episode is for educational purposes only and encourages listeners to seek professional financial advice for their personal situations.

00:00 Introduction to the Podcast
00:57 Meet Dr. John and Janice Brown
01:26 Financial Goals and Initial Questions
02:12 Investment and Financial Planning
03:22 Understanding Net Worth
09:18 Five-Year Cash Flow and Savings Strategy
11:54 Home Buying Considerations
19:45 Conclusion and Final Thoughts

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Transcript

Shure MV7 & FaceTime HD Camera-1: 0:00

And welcome to the retire early retire now podcast. I'm your host hunter Kelly owner, Palm valley, wealth management. And today we're going to you, our first case study here on YouTube. Uh, you can also listen to this on your favorite podcast, app, apple, Spotify, and so forth. Um, but going to do a case study a common. Case study that I see with clients. Um, this won't actually be a real client, but these are some common questions that I get from clients and how we kind of go through the process of helping them answer. Uh, to make sure that, uh, they can meet their financial goals, things of that nature. So if you liked this podcast, I refined it useful. Go ahead and leave a five star review on your favorite favorite podcasting app. Uh, subscribe to our YouTube channel, hunter, Kelly, CFP, uh, and give this video a like, so. Uh, let's jump right into it. So today, We have Dr. John and Janice Brown. They're both a physician couple, uh, making a household income of about$625,000. They're both in their early, early thirties. They recently graduated residency. Uh, and just got their first, uh, attending jobs. Uh, John is a surgeon in Janus is a. Uh, primary care physician. And so, uh, their immediate question that they want answered is can they buy. A million dollar home. So they I'm just assuming they live in the Jacksonville, Florida area. Uh, where I am based. And so in order to achieve kind of the home that they would want, uh, it would be approximately about a million dollars. So rather than a residency getting hired on, can they purchase this? Uh, without sacrificing their other goal. Uh, and there are more important goal of retiring by age 55, or at least becoming financially independent. Where they don't have to rely on work. So these are some questions that we'll ask. Um, and so some other recommendations that I've made to clients like this before. Um, is one helping with their investment design, whether that be through their employer plan. Or IRAs or brokerage accounts. Uh, utilizing backdoor Roth contribution strategies. Life insurance analysis, employer benefits, selection. And asset location. Uh, helping them with their retirement asset location, which is just a fancy word. Uh, should they be doing pre-taxed or Roth money? Uh, in their retirement accounts or how much should they have, uh, in their brokerage accounts via their goals and making sure that they can optimize for taxes. And before we kind of really dive into this. Uh, just sort of disclosure. This is for educational purposes only. Uh, these are not financial recommendations. I'm not your financial advisor. Uh, this is just purely to show, uh, how I work with clients and case studies. So, uh, if something. On this podcast episode. Uh, resonates with you. Uh, please seek professional help. Uh, to get your specific needs met, whether that's a booking, a call with me or working with someone else. Um, make sure that you're seeking that, uh, professional advice. And so the first thing that I would want to look at, uh, when we kind of onboard them and start answering some of these questions is their net worth. Um, and so. Uh, not that they actual number the output. Uh, the total net worth, um, necessarily means much to me, but I can see kind of a breakdown. Uh, where are their assets? What are their liabilities look like and things of that nature. And so how do we go about calculating a net worth? So if you've never calculated a net worth, all of that is it's your assets minus your liabilities. So what are assets, assets are things like what's the cash in your bank accounts, the cash. Or investments and your retirement accounts or brokerage accounts. Car's personal assets, real estate assets, um, things of that nature. Um, and you add all those up on one side of kind of the balance sheet. And then you take the other side, your liabilities. So these are debts. So, uh, in the case of Janice and John. Uh, they have about$200,000 of student loan debt from medical school and they have about a hundred thousand dollars worth of auto loan deaths because they went out and bought two cars, which is something I often see. Uh, when physicians kind of make that first jump into attending. Uh, physician roles. Uh, they go out and they buy a fancy car. So, um, in this case it's a pretty modest car on both of them, but it is a significant amount of debt. And so how is that going to play into, uh, their ability to buy, uh, a new house also, uh, be able to retire long-term and so, Um, So, what we want to look for here is some information that we want to gather is one. Uh, What's in their emergency funds. How much cash do they have available? Right. So if they went out and they put a down payment on a new home, Is it going to keep them cash strap because they took a essentially. The$75,000 that they have in cash. So if you look here, they have a joint checking, which is probably to pay bills. They have a joint savings, which is their emergency fund of$50,000. If for whatever reason they could not work for a few months. And then they have a joint managed account. Where they're contributing to a, which we'll see in a second, contributing to a brokerage account where they have other types of investments. And so. If they were to use that to use. For a, uh, down payment of, let's say 20%, one. They don't have enough to do that for a million dollar home right now. So, what do they need to do to get there? Um, and if they didn't even have the$200,000 between. These two or three accounts, um, if they use that entire$200,000. Um, then they're not going to have a proper emergency fund. So any. Anything like a flat tire or medical expense or any other large purchase, maybe they have a roof repair. They weren't expecting because they bought a preexisting home things of that nature. Uh, that's really going to, uh, inhibit their ability to, uh, meet those cash needs if that were the case. So the first thing that I see here is that they need to save a bit more, uh, to be able to reach that$200,000 threshold, plus have a little bit of extra. Um, for their emergency fund. Which we'll get to in here in a second. And so the other thing that you may notice is that when you add up all of the assets and subtract all the liabilities actually have a negative net worth, and this is not something to be alarmed about quite yet. Um, because they are just fresh out of medical school residency. They haven't really, uh, Reach their peak potential earning, uh, and they're early, early in their career. So this is something that's very common. Uh, that I see with young, uh, working professionals is they may have a negative net worth. But if they get on the right track, they start saving. Um, and paying down some of this medical school debt, auto loan deaths, things of that nature. Uh, the very quickly get into a positive net worth. Um, and then the next question is, well, how much should our net worth be growing? Uh, each year? And so, um, here, what I like to look at, especially for younger clients, I don't really like doing long, drawn out projections, 20, 30, 40 years. Um, because in some of these softwares one. Uh, they're just going to run. Let's say you do even a conservative, like five to 8% return on, on average. They're not really going to show down markets or anything like that. So, Uh, the numbers can kind of get wonky. Right? And so what I like to look at is short burst of, uh, four or five years. Uh, in the future, right. And help make these more immediate type. Uh, purchases and decisions and less be less wrong, uh, over time. And then once we start getting into that retirement red zone of. Uh, call it 10 years or less than we can really start to look at those projections of, uh, alright. Retirement is a realistic year and things of that nature right now. That doesn't mean we're still not going to plan for that 20, 25, 30 years out. We certainly are. Um, but we're not really going to take. Uh, the, the projection that's 30 years away. Um, as, as gospel, if you will. Um, because there's just so many variables that you can't account for. So, um, when you're young, let's just try to do what we can with what we have. Um, And make sure that we're saving and generating more income. Um, and then the rest will kind of take care of itself as our network. Uh, continues to grow right. And so what we're looking at here is a five-year cashflow. Um, the first table here is, uh, their taxable investments, which is their joint brokerage account that they have, uh, their retirement accounts. So they have a 4, 4, 3 B and a 401k. They've been contributing to for a year or two. And then they have their emergency fund with a little bit of extra cash. So each year they're going to had a little bit to cash to keep up with inflation for their emergency fund. And as their expenses increase, they're going to max out their retirement, both their 401ks and their IRAs through backdoor Roth. Um, and then they're going to add about$80,000 a year to their taxable brokerage account so that they can meet their savings needs. And so what we'll see is that their net worth or their investible assets or. We'll grow significantly. Um, one because a little bit of investment in growth, but mainly because of the amount that they're contributing each year relative to what they, well, they have so. Right now, 80 adding$80,000 or a hundred thousand dollars to their investible assets. Is a very large percentage, but as they move forward, 10, 15, 20 years down the road. Adding the a hundred thousand dollars is not as a big percentage as it will be when they have$2 million,$3 million,$4 million. Right. Um, and so we just want to show that, Hey, upfront. Saving. Uh, is going to be your biggest asset or your, uh, most, uh, your biggest thing. That's going to determine your success down the road. Not necessarily picking the best stop. Uh, picking the best portfolio, whatever that may be. Yes. That certainly helps. But saving and generating more income. Uh, is going to be your best bet here. And so, uh, what we want to look at next. Is okay. Well, what are they saving? Um, and so this kind of just shows, okay, here's their income. John's making 375,000. Janus is making 250,000. Uh, this shows their projected, uh, social security, which doesn't mean much now. Um, and then from this income here, the 625,000. They're saving$80,000 a year into their joint brokerage account. They're getting 3% match at their employer plans or they're maxing everything out as well. And then they're adding about$5,000 a year. Two. Uh, their savings account. Uh, so that they can keep up with inflation on their emergency fund. And so now. What do they need to do to buy a home? What are some things that they need to consider, uh, in order to, um, Purchase this home, right? So one they need, uh, uh, create a budget, right? They need to understand. What can they reasonably afford? Um, and generally we want to apply the 28 30 6% rule. Uh, where we want to keep our housing budget, mortgage interest, uh, insurance, property taxes, uh, our general bills, electric bill, utility bills, water bill, things of that nature under 28% of our. Uh, monthly income. And then we want to keep our total debt, um, under 36% of our income. And we'll, we'll look at that here in just a second for those specifically. So the next thing we want to try to have that 20% down payment now, then being physicians, sometimes there are physician-based loans where, uh, the wonder. I will forego things like mortgage insurance and things of that nature for a lesser down payment, because they know their income is fairly stable and it will be. Uh, It will be. Not necessarily guaranteed, but as long as they're working, uh, they know that there'll be getting that paycheck. Right. The next thing you want to think of is the type of loan. So do you want a 30 year loan? You want a 15 year loan? Uh, in some cases right now, people are looking at. Uh, arms where they are. Essentially looking at adjustable rate mortgage where maybe their rate is a little bit higher now, but they are taking the chances that mortgage rates will be lower five to seven years from now. Um, and then after that, that first period, that five-year period. Their mortgage with lock-in on a lower rate. Um, No, there's some inherent risk because theoretically mortgage rates could increase. Uh, after that five-year period. So, um, if mortgage rates are six and a half percent right now, And they're seven and a half percent later on down the road. Uh, you could potentially have to lock in and it'll add a larger rate. Uh, or end up having to refinance and things of that nature and puts you in a bad spot. So you really have to. Uh, weigh your options there as well. The next thing. You want to consider as location, right? Especially with physicians. They may move around for residency. Maybe they're living somewhere. They've never lived before. Um, they don't know the location that, well, maybe they're planning on moving. Uh, after residency or maybe they thought they were going to live there. Uh, they got an attending physician job. They realized they did not like the town that they were living in and now they're moving. So if you are not sure that you're going to be there for 5, 10, 15 years, buying may not be, uh, the best option for you renting may be a better option. Right? So you really want to look at the location, know the location. Based off your needs, whether it's family or, or, uh, nightlife, um, we're wherever you want to live beach, however that may be, but making sure that you're going to be there for a while. And then that kind of ties in with our future needs. Right. Um, so we want to make sure, okay. Well, in this case of John and Janice. They're married. Uh, maybe they have young kids. Uh, do they want to buy a house where they're going to have to upsize in five years or do they want to go ahead? If they have the ability to be ability to, to potentially buy a house where they can grow into. And live a much, a longer time. That house. Uh, making it more fruitful for them from a financial standpoint. Right. And so if they know the area they've been there a while, maybe they rented it for a few years, they know the areas they like, they know they want, uh, to be able to have a house where their kids can grow up things of that nature. Um, and they're going to be in there a long time. Uh, buying would make a lot more sense, but they're unsure where they want to live. Uh, they're not going to be there very long. Um, it doesn't always make sense to buy because you have transaction fees. Uh, you have to take care of things that break inside the house. And so those costs start to add up very quickly. Whereas, if you're in a house short-term via renting. Uh, you don't have to worry about some of those extra costs that are involved. Uh, with a purchase of a home. And so, uh, speaking on John and Janice's specific situation. Uh, their current debt to income ratio is at 8%. So where their student loan payments and their car payments. Uh, currently 8% of their income is going to pay that debt off each month. And so they are in a healthy spot. Right. Uh, they have gotten themselves to a point where they're generating a healthy income. They're keeping their expenses relatively low. They're saving about 22% of their income. And, uh, they're only using about 8% of that income toward debt. And so they are above, uh, average, if you will, there. Kind of, uh, There. They're doing well. Right. And so now they want to look at purchasing a home. So now the first thing I would discuss with them is one. They don't have the down payment, like we spoke about in previous slides. They need to spend a year or two. Uh, putting into that brokerage account with some conservative investments, maybe some T-bills things of that nature where they can get a little bit of yield. Keep that money safe. Um, and, uh, reach that point where they can get the$200,000 maybe a little bit more. Uh, for, uh, furniture and extra expenses that they'll have as they move into the house. Um, And then they can purchase that home. And so, uh, once they reach that down payment, they're going to look at an$800,000 mortgage. Uh, for a 30 year mortgage. At six and a half percent. Um, hoping, hoping that interest rates come down in a few, few years. Um, and so that new mortgage would cost them about.$5,000 a month. And if he did that and add that to there. Uh, debt to income ratio that would put them about. 18% now. The other thing that you have to consider is taxes and insurance. And even with adding a significant amount of taxes and insurance, that should keep them under. Let's call it 22 to 20% debt to income ratio, which again is well below that threshold of that 28 to 36% that we talked about earlier. Um, so they are well within their means. And the reason why we want to keep this debt to income ratio low is let's say that, uh, their debt to income ratio was at 40%. Well, that's going to inhibit, that's going to take away 40% of their income. To put towards saving for retirement. Uh, potentially helping kids with college, uh, doing other things, increasing their lifestyle. They're essentially putting almost half of their income in that scenario to, uh, paying their house. And, um, we don't want them to be house poor. We want them to be within their means. So that they can accomplish these other goals as well. And so, um, the one thing that you want to consider, uh, when you're buying a home as well is not only working with your, your mortgage lender, but also potentially working with a financial advisor because the mortgage lender isn't necessarily gonna think about your retirement goals or other goals that you may have. They're just going to look at your debt to income ratio. Some other things like income. Um, and, and determine is it within, uh, the guidelines of our company? Can they buy that house? Not considering, Hey, can John and Janice still retire at 55 or king John and Jane is still pay for their kids' college, whatever that may be. Right. And so. We just want to, uh, make sure that we're working with someone that is considering their whole situation, making sure that that's working together. So these are some common questions that I answer for clients all the time. Um, and so. Not, not necessarily a super complicated case study since this is my first one. Just want to kind of show you guys how I work clients, how I help them make decisions. Uh, and make sure that we're asking the right questions so that they can come to the decisions. Uh, and make those decisions that are best for their family. And so, uh, if you like this podcast episode, go ahead and share that with a friend. Maybe someone that's buying a house here in 2025 can, uh, use this podcast. Help jog some questions for them help get their situation answered, or maybe they need to go work with a professional. But, um, Go ahead and share it with a friend. And if you feel like you need help with some of these decisions, go ahead and go to my website. Palm valley, wm.com. Uh, and schedule a call and I can help. Uh, help you make these decisions and keep your, uh, financial. A world and an order. Uh, so thanks again. And we'll see you in the next one. This podcast is for educational purposes only. It is not meant to be financial advice. Please seek a financial professional. If. Uh, about your own situation, uh, Please keep Palm LA wealth management in mind when making those considerations.