Revisiting and Revising the Investor Policy Statement - Passive Income MD


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Revisiting and Revising the Investor Policy Statement

February 16, 2019 • 8 Min Read

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I'll be honest, writing an investor policy statement has been sitting on my list of things to do for a while. I even took the Fire Your Financial Advisor Course! to learn how to write one.

Well, after hearing about PoF and how it has impacted his life, I might just have to make it happen soon.

Today's Classic is republished from Physician On Fire. You can see the original here. Enjoy!

In 2016, I published a post with an authoritative, almost demanding title: You Need an Investor Policy Statement. Did you listen? Or even hear me? Most likely not, as my readership than was a fraction of what it is now.

Either way, I encourage you to go back and consider the original post. While you may not need an IPS, this simple document will help you define your goals and the strategies you intend to implement to achieve stated goals.

An IPS is a set of guiding principles. Asset allocation is a vital piece, and if you don’t have an IPS, this is where you should start. I shared a few tools on how to arrive at your desired asset allocation in my 20-Step DIY guide. Once you’ve got that piece figured out, you can add components above and below it, like so many Lego pieces.

Lego Pet Town

Eventually, you’ll have your very own highly personalized masterpiece. Of course, it doesn’t have to be complicated; in fact, it could easily fit on a single page. Mine does.

The IPS is a living document. It should grow along with you and your money. But, remember, it represents a set of guiding principles and those principles shouldn’t be altered on a whim. One blog post, one book, and one conversation with a colleague should not have you running for the word processor.

I recommend revisiting, and perhaps revising your IPS once a year. If ideas come up mid-year, keep a log of them. Write them down or type them in, and after a year has elapsed, review those ideas and decide which ones make the cut.

Over the last year, I’ve done a whole lot of reading, reflection, and writing, which has led me to make some changes in my IPS. Below is my updated IPS, with the changes in red.

I’ll go through each of the changes, explaining my rationale.

Revisiting and Revising the Investor Policy Statement

2019 Investor Policy Statement

Updates Explained


Retire early from clinical medicine. Last shift scheduled ends at 0600 8/12/2019
Acquire a comfortable cushion, with > 36x annual expenses.
$1,500,000 between a taxable account and 457(b)
$1,000,000 between Roth IRAs and 401(k)
$250,000 in our Donor Advised Fund
$200,000 between two 529 Plans
These goals have been met!

Since the last revision in 2017, I have set a retirement date, and it’s less than six months away!

The target of > 36x annual expenses is based on math in my financial freedom post. I believe we are there, and we have met or surpassed each of the outlined goals.


Invest in a diverse portfolio of Passive Index Funds, keeping expenses low.
Accept market returns, rebalancing with monthly investments.
Risk tolerance is quite high. Anticipate the withdrawal rate < 3%

No changes here. If I were to stop earning an income immediately upon retiring from medicine, we might be withdrawing from 3 to 3.5% per year, but I’m not about to stop blogging, and I can cover our living expenses with online income while allowing the nest egg to continue to grow.

Asset Allocation:

60%  US Stocks, 20% International, 10% REIT & Crowdfunded RE, 10% Bond / Cash
U.S. stocks:  Lean toward small and mid-cap value to maximize potential long-term return
International stocks: 50% Developed, 50% Emerging Markets

This has remained relatively steady. I’ve toyed with increasing the international allocation and decreasing the REIT allocation, but now that I’ve invested in a number of crowdfunded real estate deals, I’m comfortable maintaining that combined allocation at 10%.


Maximize tax deductions via 401(k), 457(b), and HSA. Front-load 457(b). Final year as W-2 in 2019.
In future years, maximize solo 401(k) contributions. Roth may be best as tax-deferred reduces QBI deduction.
Annual backdoor Roth contributions of $6,000 each (spouse and I) in January
Tax loss harvest when possible, which will require some attention to balances.
Contribute to boys’  529 accounts to the maximum state income tax deduction.
$10,000+ to taxable account monthly.  Accumulate cash to help pay for home construction.
Forego monthly taxable deposits to cover large expenses (vehicles, home improvement)

This section is under maintenance as I transition from a W-2 employee to earning an income primarily online.

I’ve generally tried to defer taxes whenever possible, but with the final regulations on Section 199A Qualified Business Income Deduction, it appears that Roth contributions might make more sense for me in the future.

I’ve stopped contributing monthly to a taxable account as we prepare to build our “semi-retirement home” on our lakefront property purchased in 2017.

We’d like to do this without taking out another physician mortgage loan.

Drawdown Plan:

Set up 457(B) to pay $3,000 to $4,000 per month starting in 2020.
Receive dividends and capital gains as cash transfers to the bank account
When cash is needed, sell taxable assets and minimize/optimize capital gains
0% capital gains tax bracket would avoid taxes on most taxable dividends. Outside income will negate the possibility for now.
Convert 401(k) / IRA to Roth as income / tax bracket allows
Donate appreciated securities to Donor Advised Fund per charitable mission.
At 59.5, evaluate 401(k) / IRA and estimate RMDs, which kick in at age 70.5
Roth Conversions to fill 0% capital gains tax bracket (will count as IRA distribution for tax purposes) if possible.
Pay for boys’ college with $2000 to $4000 cash (to obtain tax credits), then tap 529 Plans

Why draw from the tax-advantaged 457(b) so soon? Technically, until the money from a non-governmental 457(b) is dispersed, it belongs to the employer and could be at risk in the event of bankruptcy.

While that may seem unlikely, I’ve worked at a hospital that went bankrupt. I didn’t have retirement accounts with them, but I was burned in other ways that continue to burn me years after.

I could take a lump sum, but adding about $200,000 to my taxable income in one year is poor tax planning. Taking $36,000 to $48,000 a year will have a lesser effect on my taxes in those first five to seven years as compared to receiving it all at once. Withdrawing most or all of the money by 2025 while we have the current relatively low tax brackets is probably a good idea.

I had to change “15% federal income tax bracket” to “0% capital gains tax bracket” as the 15% bracket is now the 12% bracket and the two brackets aren’t perfectly coupled anymore. I’ve also realized that I likely won’t be in it, even with large annual donations. I will be donating half of my profits from the website.

Someday, I may no longer have online income or significant passive income sources other than dividends from our taxable account. At that point, Roth conversions in the 0% capital gains tax bracket make perfect sense, and they could be worth doing in the 24% federal income tax bracket, which goes up to over $320,000 in taxable income for married couples filing jointly (MFJ) in 2019.

Finally, assuming the tax credits for paying for your children’s college education still exist in the current form, and I’m not phased out by income, we’ll pay for the first $2,000 to $4,000 (for the American Opportunity Tax Credit).

The first $2,000 spent on a child’s college education is fully refunded as a tax credit. The next $2,000 is refunded at 25% (an additional $500 tax credit). The AOTC currently phases out at an income (MAGI) of $160,000 to $180,000 for MFJ.

Consider Retirement When:

Objectives achieved. Done!
Consider what’s best for the boys. We have and they’re excited for the transition.
Research health insurance options. High priority!
Work part-time as a transition to retirement. Done.

This section will be heavily revised when I revisit the IPS in 2020.

Retirement Asset Allocation

5 years expenses in bonds (in 457(B) and 401(K)), roughly $400,000)
Remainder in Equities, maintaining US / International Ratio
Enact this plan if and when online income is finished.

Since I will be “retired not retired” when I leave medicine, I won’t initially make this transition to the full retirement asset allocation.

There is a distinct possibility that my current 10% bond allocation will eventually match or exceed the prescribed 5 years' worth of expenses. If I’m eventually holding 50 years of expenses invested, that will the point where those are one and the same.

If we reach that point, I’ll probably transition to keeping 5 years in bonds and perhaps watching the percentage dwindle to less than ten percent.

Have you written your IPS yet? Made any recent revisions? This last year has been a year of revelation, study, and discovery for me. I don’t anticipate making nearly as many changes on an annual basis as I have this go-round. How about you?

Disclaimer: The topic presented in this article is provided as general information and for educational purposes. It is not a substitute for professional advice. Accordingly, before taking action, consult with your team of professionals.

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