Adventures In Paying The Moron Tax

crispydoc Uncategorized 9 Comments

There's an old adage that gets trotted out at every elementary school fundraiser: If you think education is expensive, try ignorance.

Today I'd like to explore some of the consequences, both financial and non-monetary, of ignorance in my life through some illustrative case studies.

Case #1: Failing To Contribute To A Roth IRA During Internship

The Roth IRA was established in 1997. My transitional internship year began in 1999. During four years of residency, I missed out on the opportunity to invest $10,000 into a Roth IRA (limits were lower in those days).

If we simplify the math and assume I'd invested $2500 per year during residency in a Roth IRA compounded at 7% annually, I would have had $11,876.85 at the end of residency.

If I made no further contributions, again assuming a modest 7% rate of annual return (it would have been much higher in the past decade), that amount would be worth $35,062.41.

Some would say my far bigger financial mistake was to do a four year residency when I could have been out in three, which is a fair critique. I enjoyed residency in part because my schedule was less compressed, and this was a deliberate consideration in ordering my match list.

My lifestyle was better as a result, but I am fully aware that this is a luxury I enjoyed thanks to a debt-free education from my parents. I might have chosen differently if I'd had significant debt hovering over me.

Case #2: Continuing To Pay 1% Assets Under Management Fee To An Advisor As My Savings Grew

The assets under management (AUM) fee model can either be a great deal or a terrible deal for the consumer.

When you have few assets but the advisor has to do the work of creating and executing your investment strategy, the advisor invests many hours and reaps a low hourly rate.

In contrast, once you have accumulated substantial assets, after the initial work has been done to create your portfolio and the maintenance takes a few hours a year to perform, that same advisor is now making a high hourly rate based on your increased assets.

To adapt a term from medicine, the advisor is being paid out of proportion to the work he or she is doing.

After buying a home in 2009, we rapidly built up our invested assets. We should have negotiated a lower percentage, but I didn't know that was an option. That was before I knew to order off the menu.

My ignorance cost me a pretty penny over the ensuing years until I ultimately broke up with my financial advisor and assumed responsibility for managing my own portfolio.

Case #3: Replacing Bicycle Inner Tube Because I Did Not Understand How A Presta Valve Worked

In February I fell in love with cycling, and I've been riding on average two or three times a week since then. A friend gifted me a bicycle I would never have purchased for myself, and I've gradually been learning to maintain it under the guidance of a local bike shop I've grown to trust.

The fancy new-to-me bike had a different type of valve on the inner tube, and I noticed the rear tire was repeatedly requiring inflation prior to each ride. I assumed there was an air leak, and when I described what was happening to the bike shop proprietor we agreed the inner tube needed to be replaced.

The bike was in the shop for a couple of weeks while I was traveling, and on my return all appeared well. Then the front tire began to leak. An experienced cyclist friend, who spent several years working at the bicycle tour travel company Backroads in the south of France, happened to be visiting before I planned to take it in to the shop.

On inspection, he noted I'd failed to tighten a single nut on the presta valve that was causing the slow leak. He inflated both tires, tightened the valve, and I was good to go. Ignorance caused me to replace a perfectly good inner tube. More importantly, ignorance cost me the pleasure of riding my bike for a couple of weeks.

If you think education is expensive, try ignorance.

Errors of omission. Errors of commission. Errors that cost me money. Errors that lost me opportunities for enjoyment.

All these fall under a category I've nicknamed the moron tax.

I pay this tax in new and unexpected ways every year, and consider it among the most expensive continuing education costs I incur.

The hope is that every year it teaches me something in a new and unforgettable lesson, and that if I am truly learning from it, the amount I pay will continue to be a smaller proportion relative to the whole.

What financial screw-ups have led you to unnecessarily pay the moron tax?

Comments 9

  1. I too failed to take advantage of the Roth IRA during my residency which coincided with your time frame (mine was 7 years of availability before becoming an attending so slightly worse than yours).

    I trusted a financial advisor that was recommended by my cpa (I’m sure they were in cahoots) and got placed into front loaded funds (fortunately the amount of money at play was quite low).

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  2. How appropriate to call these mistakes the moron tax. Most importantly as noted provided you learned your lesson, the effect on the whole becomes small and hopefully insignificant in the big scheme of things.

    Back in the early 90’s variable annuities were the hot new investment product. The usual pitch was you could increase your tax deferred space beyond the limits of your 401k. Additionally in my state it had the same asset protection as cash value life insurance. For 2 years I split my after-tax savings between my taxable account and a VA. But as I learned the rules for retrieving funds from the VA in the future, I figured out it was not as advantageous as I had assumed and the available funds were more expensive than those from my brokerage account. Rather than pay income tax and penalty, I 1035 exchanged it to Fidelity once the surrender charge went away.

    I still have the Fidelity VA but doubt if I’ll ever need to use it in retirement. I keep it as a reminder every time I look at my portfolio to do my homework.

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      I find there is a wisdom in having a few reminders of humility in the portfolio – they tend to keep me from making similarly poor decisions all over again.

      Although it’s been a while since I attended, the badges for our annual professional society conferences at ACEP used to have small ribbons below your name that displayed the number of committees you participated in and served as a proxy for organizational importance. The more ribbons below your name, the bigger of a big shot you were implied to be.

      The whole scene reminded me of the concept of flair from Office Space.

      What if, instead of preening displays of relative importance, we attended a financial conference (say the upcoming WCI conference?) where we had the choice to append ribbons representing our financial mistakes to our name badges? How much better would we all feel that we were in excellent company with others who have paid similar moron taxes?

      I might have to suggest that one to Jim as I think it would be a great way to foster goodwill and create a sense of camaraderie (instead of shame) among the hoodwinked and financially vulnerable among us.

      Thanks for sharing you variable annuity story, GasFIRE. Let he who is without ribbons cast the first stone.

  3. Today you brought the pain. I also started my internship in 1999 (also a transitional — virtual high five) and didn’t fund a Roth during residency. Now I have a number to think about. It’s 70K. That’s your 35K which would probably double over the next 12 years before my planned retirement date. OUCH!

    I didn’t do an extra year of residency, but I made the equivalent “mistake” (not for me, but financially), by taking a year off before medical school to unwind a bit before throwing myself into the grease fire that is preclinical suffering, I mean learning.

    Case 2: I plead not guilty, your financial honor. Case dismissed.

    I’m not a cyclist, but am a runner. I do buy all of my running shoes at a greatly discounted price by knowing my feet and getting shoes online and on clearance. Last year’s model on closeout at half price? I’ll take it!

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      PoF happened to run a point/counterpoint on the true value of the backdoor Roth, so it’s probably loss aversion at work that we feel it so acutely – it hurts more to have left money on the table now that we know enough to realize our prior ignorance. I suspect you’ll be fine, my friend.

      Kudos for avoiding case 2!

      Strong work on staying a clearance-based runner. With my mismatched cycling gear ($5 lightly used chamois bike shorts, $30 used jacket and $45 almost new Merrells from an REI garage sale) dog walkers who see me coming cross to the other side of the street.

  4. The moron tax is the tax you pay for becoming more astute and process driven. Imagine you find yourself at the top of a 1000ft hill and there is a little pile of rocks that will take you to 1005ft, you can think of that extra 5 ft as a tax, but the real process was the 1000ft you climbed in the first place. In my investing career I’ve put money at risk, just to learn about how a deal works because you can’t understand the hidden risks without engaging the actual process. You can look at that as a tax or you can look at that as tuition. Win or loose there is no deal I ever involved myself in where I didn’t learn.

    If you’re not process driven good luck to you. Being process driven means you suffer the failure (and success but mostly failure) to get to something solid and reliable. It’s in analyzing the failure and it’s causes that you understand how to modify the process. An example PoF just retired and an article was written about his success, and he was immensely successful in crafting his process. In the article he referred to the 4 x 25 rule, but he retired with 36x almost 50% above his 25x projection plus he has several income producing businesses on the side. If you’re basing your future on 4 x 25 what does PoF know, you don’t know? If you can’t answer that question, get ready to pay the MORON tax.

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      The terms moron tax and tuition are complementary, two sides of the same coin depending on what you take from the experience. I also like the idea that it is a progressive tax. You drink beer and skip class at State U, your marginal tax bracket is lower than your buddy who drinks beer and skips class at Private U.

      Tuition is moron tax that alters behavior.

      Every time I climb the mountain, you are up top sitting cross-legged holding that financial lotus flower and playing guitar – thanks for being that guy.

  5. The biggest moron tax is the inability to understand inflation.
    When you don’t, you get killed, without understanding how.
    For example is the Dow goes to 36k, are you richer or poorer?
    You can’t tell, even if your protfolio is through the roof; unless you know the purchasing power of the currency. Lots of billionaires in Venezuela.
    When you do, you end up rich easily. With available hedges available to any doc.
    Keynes said that not 1 in a million person understands it.
    It is lesson #1 of a paper currency system.
    It’s worth studying.

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