Today we have GPS to guide us while traveling, however I am old enough to remember when you needed a map with a predetermined set of directions to get where you’re going. Growing up in SoCal that was essential because you could easily end up in the wrong neighborhood and that would lead to a bad day. We are all on a journey to create generational wealth and financial independence so let’s use a map or in this case directions on how to get there.
1. Employer Sponsored Retirement
Folks like to hate on the 9-to-5 job, but I’ll flat out say, a 9-to-5 isn’t bad based upon the lone fact that you can be eligible for an employer sponsored retirement plan. Some employers may also provide matching contributions, a.k.a FREE MONEY. In addition to helping you save for retirement, these plans are funded with pretax dollars and allow you to lower taxable income. Please remember the higher your salary the more tax conscious you should become.
Employer sponsored retirement plans are very flexible and if you leave your employer you can take the funds with you while rolling them over into a traditional IRA or into another (if eligible) employer sponsored plan. These funds can also serve as your own personal bank.
Your participation in these programs typically allows for you to borrow from yourself at very low interest rates. Now you have to be strategic in doing this, however this loan can be used to fund other investments, pay for unexpected life events, buy a house, etc. The interest rates are going to be better than any bank is going to be able to give you. This is one way to become your own bank.
The easiest way to sabotage your future retirement is not contributing to your employer-sponsored plan in the face of matching contributions. In my opinion, contributing to employer sponsored program should be mandatory if the employer is matching contributions. Its okay to not max this account if you’ve planned accordingly but at least contribute the amount of money required to receive a matching contribution from your employer.
2. Health Savings Account
The next turn in our journey is not applicable to everyone, because a health savings account (HSA) is not available to everyone. However it can be a great tool for retirement if you’re eligible.
To be eligible for a HSA, you have to be enrolled in a qualified high deductible health plan. The HSA is funded with pretax dollars for the the payment of qualified medical expenses such as co-pays, deductibles, etc. However it has the added benefit of being able to withdraw the money after age 65 without tax penalty regardless of its use.
Investment options may be limited, however it is another way to decrease your taxable income and ensure that you have additional funds to cover medical expenses which will occur later in life. If they don’t occur, it becomes another source of income in retirement.
3. Health Insurance
Health insurance in the United States is is complicated. As it currently stands our health insurance is tied to employment. This is a controversial topic and I am not a fan of this fact. Most employers are going to offer a couple options: HMO, PPO, and a high deductible health plan.
If your goal is to utilize a HSA account as a way to build wealth, then this decision is easy (See #2). However the majority of folks typically use HMO or a PPO depending on their need to access medical services.
The overall intricacies of these types of plan are too detailed for this blog, however in general, an HMO manages your care and must approve of medical visits, procedures, etc prior to undergoing them. A PPO provides more options and allows you to take charge of your healthcare decisions however may be more expensive.
Your health is important and a key aspect of wealth building, so pick the option which falls into your wealth building plan.
4. TERM Life Insurance
There are two things that are guaranteed in this life: paying taxes and we are all going to die at some point.
Everyone accepts the fact that we need to pay taxes yearly however not everyone accepts or recognizes the fact that they need life insurance to protect their wealth after they die.
As a kid, my grandmother, no matter how much money we had or what our living situation was, would ensure our policies were valid by consistently checking in with our insurance agent. I also remember how shady that dude was, but thats a story for another day. Despite my own personal bad experiences with life insurance I still believe it is a vital component on building and protecting wealth.
There are several different types of life insurance, which I’ve gone over previously, however while you are in the wealth building phase, I believe term insurance is important.
Please note this is the 80% solution. Meaning term insurance works for most folks, not all. Personally, I am not a huge fan of whole life insurance because its falsely marketed as an investment. While you are building wealth and are years away from retirement, a whole life insurance policy is not helpful, however it becomes a great vehicle to protect your wealth after retirement.
For the majority of us, term life insurance will provide great coverage should we pass before our time. In the military we are provided with service group life insurance (SGLI) which provides up to $400,000 of life insurance coverage while on active duty service.
Life insurance is vital to your journey and should be viewed as a tool to preserve your legacy and wealth.
5. Disability Insurance
I personally love AFLAC commercials that used to play during the Super Bowl. Partly because the duck is pretty funny and their branding is unique. What most folks don’t realize is AFLAC provides disability insurance. As a surgeon, disability insurance is a must have.
Physicians and Surgeons are not the only professions who would benefit from disability insurance, if you work in a trade or a skilled profession, you could benefit as well. This insurance protects you in the event you are unable to work for a short period or long period of time. In the day and age where most Americans do not have $400 in an emergency fund, having some degree of income protection is a must.
This is another area where I am spoiled by the military. A benefit of military service is that your income protected, i.e. I get paid no matter what. as long as I am listed on active duty service. If I am in the hospital, on sick leave, or god forbid a prisoner of war, my income will be paid as long as I am listed on active duty.
So, protect your income and so that you will reach your destination.
6. Traditional IRA
A traditional IRA is a great tool to build wealth. However it has its limits.
One limitation is you can only contribute up to $6000 per year (unless greater than 50 and you are doing catch-up contributions).
A traditional IRA for physicians is a mandatory thing it’s another way for you to grow Money tax-free and decrease your tax exposure.
7. Roth IRA
Roth IRA is another great tool however when you exceed the income limitations it becomes very difficult to use. But not impossible.
One way to contribute to a Roth when you exceed the income limits is via a backdoor contribution. This is the equivalent of taking a detour around traffic to get to your destination. It takes some extra work but you wind up where you need to go.
8. Taxable Brokerage Account
A taxable brokerage account is your traditional investment account. It is your entry point to purchase, stocks, bonds, options, etc. These accounts have no income limitations, however if you are not careful can cost you in taxes if you trade frequently.
They are a vital component of your wealth building journey secondary to the contribution limits in tax-advantaged accounts mentioned above. The goal is to save/invest 20% of your pre-tax income in each year (at least). If your savings number exceeds $31,500 per year, you’ll need to utilize these accounts as a way to grow your money.
9. Small Business/Side Hustle LLC with SEP IRA
Not everyone is built for running a small business. The headaches and frustrations which come with building a business may not be worth it for you. But the reality is having additional income benefits everyone.
Generational wealth is built by having additional multiple income streams. A small business or side hustle, incorporated with a LLC will allow you to open a SEP IRA and could provide up to $58,000 in protected earnings. That is an absolute cheat code for the right person and situation.
There are a ton of articles out there about starting a small-business or making money from a side hustle, so I will leave you to Google and YouTube university to do your research.
10. Real Estate
I love real estate.
Its the greatest equalizer for building wealth because it has unlimited potential if you are diligent in your efforts. According to The College Investor, over the last two centuries, 90% of the world’s millionaires have been created by investing in real estate. However most folks are scared to get started.
As a modern society we are naturally good at spotting what makes a great house to live in, we utilize the product ourselves, and we know the in’s and out’s of different neighborhoods. WE tend make excuses on why we cannot invest in real estate. The reality is its one of the most important tools of building generational wealth.
There are a lot of great tools out there to get started including, books, web forums, webinars, you just have to make an effort to start learning how to get started.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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