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Joel Schofer’s Personal Finance for the Military PhysicianJoel Schofer, MD, MBA, CPE, FAAPL, FAAEMCAPT, MC, USNBureau of Medicine & SurgeryThe views expressed in this publication are those of the author and do not necessarily reflect the official policy or position of the Department of the Navy, Department of Defense, or the United States Government.DEDICATIONTo my wife Wendy and my children Erin and Nicholas, a supportive and understanding family, which is the key to a successful Naval career.CONTENTSAcknowledgmentsi1How I’d Do It12Track Your Net Worth23Get Properly Insured44Establish an Emergency Fund85Manage Your Debt96Max Out Your Retirement Accounts107891011Invest in Stock and Bond Index FundsMistakes and ChangesRent or Buy?Saving for CollegeDo You Need a Financial Planner?1418202122ACKNOWLEDGMENTSI owe special thanks to my father, who started me on the right path when he got me a Vanguard money market fund and IRA early in my 20s.1How I’d Do ItThere are a million personal finance guides, books, websites, blogs, etc. This guide is not designed to be a comprehensive resource, but to take all of my personal experience and knowledge and distill it down to an actionable plan that will allow you to efficiently cover all of your bases when it comes to personal finance. Because everyone’s individual situation is different, this is perhaps not the best plan for you, but it is a solid, safe plan that will protect you and probably make you wealthy.After almost 20 years in the Navy focusing on personal finance as a hobby and perhaps a 2nd job, here is how I’d do it if I was you.2TRACK YOUR NET WORTHYou need to track your net worth so you can see how you are doing. There are a few easy ways to do this.You can use an on-line tool designed to do this automatically. Tools I would consider include:Mint – Some on-line articles/reviews have said that this platform is aging and not keeping up with the times. When I used it, it worked fine. The largest downside was that they were constantly tempting you to sign up for credit cards.Personal Capital – Their investing tools are superior. The downside is that they will solicit you to use their financial advising services. When I used this, I found blocking their periodic e-mails and phone calls easy.You Need a Budget – I have never used this tool, but it has a great reputation on-line.There are probably other tools out there, but these are the three I’d look into. You will need to pick an investment company (Vanguard, Fidelity, Schwab, etc.) for your non-Thrift Savings Plan (TSP) investments. The one you pick may have a tool that allows you to link outside accounts and track your net worth.Finally, you can always go old school and use a spreadsheet, whether that be on paper, in Microsoft Excel, or on Google Sheets. I use Google Sheets so that my wife can log in and see the file. Any updates are automatically shared with her.While I recommend tracking your net worth, I also recommend you look at it as little as possible. Research clearly shows that the more you look at your finances, the more you make changes. The more changes you make, the lower your investment returns turn out to be. I would not monitor your net worth more frequently than monthly, and I think annually would be perfect.3GET PROPERLY INSUREDYou need to make sure you are protected by being properly insured. The most basic plan to achieve this is to:Decide what types of insurance you need.Get quotes from a few companies.Purchase the insurance.Annually review your coverages to make sure they are still adequate.What Types of Insurance You NeedHere are the types of insurance you might need:AutoDisabilityHomeowner’s or renter’sLiability (moonlighting)LifeUmbrellaYou will not need to worry about health insurance because you have TRICARE.We’re going to discuss each of these briefly. As we do so, make a list of the types of insurance you need so you can act at the end of this chapter.Auto InsuranceIf you drive a car, you will need auto insurance. Because you are going to need umbrella insurance, you will not be able to get away with the normal auto insurance liability limits. You’ll probably have to max them out, but there will be more to follow on that when we discuss umbrella insurance.Disability InsuranceWe all have disability insurance (DI) through the military and Veterans Administration (VA), but if we are disabled we won’t be paid like a physician. We’ll be paid like a regular officer. For that reason, everyone should at least look into purchasing supplemental DI.Not many companies offer DI to people in the military, so your options are both limited and relatively expensive, although it can be cheaper if purchased while you are in graduate medical education (GME).Despite the expense of DI, there could be nothing more financially damaging than to get disabled early in your career, limiting your ability to earn a physician’s income. Because of this, everyone needs to at least consider supplemental DI. In addition, you often can’t get a policy when you are overseas, so if you have an OCONUS PCS coming up, don’t wait on this.If you are interested in a deep dive on DI for military physicians, you can read the article I wrote on the White Coat Investor blog.Homeowner’s or Renter’s InsuranceYou will need homeowner’s or renter’s insurance, even if you live on base (where they usually require renter’s insurance). Similar to auto insurance, you will not be able to go with minimal coverage amounts because of your need for umbrella liability insurance, which we’ll discuss shortly.Liability Insurance for MoonlightingIf you are moonlighting, you will need malpractice liability insurance. There are two types of insurance, occurrence and claims-made, and there is a critical difference between these types. Occurrence insurance covers you after you leave your moonlighting job, but claims-made will not. As a result, if you have claims-made insurance you will need to purchase what is called a “tail policy” when you leave your moonlighting gig.Tail coverage can be very expensive, so you are going to want to make sure that before you start moonlighting you know whether you will need to purchase a tail and who will pay for it. You don’t want to make $25,000 moonlighting only to find out that you will have to purchase a $30,000 tail when you leave that moonlighting position.Life InsuranceIf you die and someone would be adversely affected financially, you probably need life insurance. You want to avoid permanent life insurance, which is a combination of an investment and insurance, and instead by term life insurance. In other words, you’ll buy life insurance only for a specific term or period of time, like 10, 15, 20, or 30 years. Eventually, once no one is reliant on your income or you have accumulated a large enough net worth, you will no longer need it. This and lots of other reasons are why you shouldn’t purchase a permanent life insurance policy.How much life insurance do you need? I think that Navy Mutual Aid Association has a pretty good military-specific calculator that you can find here. Another simple but useful rule is to use this equation to calculate your life insurance need:(Annual income x 10) + debt – total value of investments = life insurance needOnce you’ve calculated how much life insurance you need, you can shop for it.Umbrella InsuranceUmbrella liability insurance provides additional liability coverage above and beyond that provided by your auto and homeowner’s/renter’s insurance. Most of these policies max out at $300-500K, and because you can be sued for future income and you have a large future income stream, you should have more liability coverage than $300-500K.In addition, note that this is for PERSONAL liability and has nothing to do with your PROFESSIONAL liability as a physician, which is why you have malpractice insurance if you are moonlighting. Imagine someone slipping on ice at your house, sustaining an injury, and suing you. Or imagine you have a car accident, triggering a lawsuit. In both of these cases, you’d want umbrella liability insurance.How much liability insurance do you need? It is sold in $1 million increments, and a common recommendation is that you have a minimum of $1 million or enough to cover your net worth. The good news is that while getting a multimillion dollar policy sounds expensive, it isn’t. This insurance can cost only $200-$300 per year for $1 million of coverage.How I’d Do ItNow that we’ve discussed the types of insurance you need, here are the steps I would take to make sure you get it:Pick a few of your favorite insurance companies. At a minimum, I’d include USAA and GEICO Military due to their military focus, but the companies you choose is really up to you. I’d say 3-5 is the right number.Call them and tell them you want to get quotes for all the insurance policies you need. If you tell them up front that you need umbrella liability insurance, that will ensure they know you are going to be maxing out your auto and homeowner’s/renter’s insurance policies and not shopping for a minimum policy. Also, no matter what they say, don’t let them try to sell you any permanent/whole life insurance. USAA tried to do this to me. Buy term life insurance only.I would also consider going to a few military focused life insurance companies for quotes. I’d start with Navy Mutual Aid Association (NMAA) and American Armed Forces Mutual Aid Association (AAFMAA). Their policies are likely to be more military friendly.In order to get DI quotes, you will need to contact insurance agents that sell DI. I would recommend two, and Physician Financial Services. Both have experience insuring military physicians and have excellent reputations.Once you have obtained all the quotes, compare the life insurance cost to that of Servicemember’s Group Life Insurance (SGLI) you can get from the military. You can only get $400K, but that may be enough for pare all the quotes, and buy the best deal for what you need.4ESTABLISH AN EMERGENCY FUNDThe standard recommendation is that everyone should have 3-6 months of living expenses (not income) just in case of emergencies. Because you are Active Duty and have TRICARE health insurance, the chances you experience a healthcare emergency are exceedingly low. That said, other emergency expenses can occur that you were not anticipating. Divorce or other legal expenses, a car that suddenly needs to be replaced, a new roof you weren’t expecting, and other things can always pop up. As a result, everyone needs an emergency fund. Because of TRICARE, if you wanted to lean more toward 3 months than 6 months, I think that is very reasonable.Where should you put it? It needs to be somewhere you can easily access it. It should also pay you interest. Historically, I kept mine in a money market fund at Vanguard. Recently, money market interest rates dropped below those paid by high-yield savings accounts at on-line banks. When that happened I moved my money to an Ally Bank on-line savings account. If you go to you can find a high-yield savings account or money market fund, and that is probably what I’d recommend.The most risk I’d take with your emergency fund is a short-term bond fund at your favorite investing company. As I write this, short-term bond funds aren’t really paying any extra interest compared to high-yield savings accounts, so as of May 2021 a high-yield savings account seems to be the way to go.5MANAGE YOUR DEBTDebt is the downfall for many physicians, often caused by excessive borrowing to meet society’s expectations of “the rich doctor.” Don’t fall for that trap.Early in your career, you may need to borrow money for cars or carry a credit card balance, but both of these behaviors are sloppy. You should make it your goal to:Never carry a credit card balance.Borrow only for appreciating assets (real estate, education, businesses). This means you do not borrow money for cars, which depreciate the moment you drive them off the lot.Be debt free by retirement.If you have student loans, you need to get smart about the various options that exist to manage them. I never had student loans, therefore I’m not an expert on them. I’d recommend you spend a few hundred dollars to get a professional opinion from or . 6MAX OUT YOUR RETIREMENT ACCOUNTSYour goal should be to save at least 20% of your gross or pre-tax income for retirement. That does not include other savings goals like houses, cars, college, or whatever else you want to eventually purchase. Those would all be on top of the 20%. This will allow you to accumulate enough of a net worth that you will not have to work until age 65 and will have options to go part-time or retire at an earlier age. The more you can save above 20%, the more likely it is you’ll have these options at an earlier age.Saving at least 20% should eventually allow you to max out your retirement contributions. In 2021, you can contribute $19,500 to the Thrift Savings Plan (TSP). You can contribute an extra $6,500 if you are 50 or older. If you are deployed to a combat zone with the tax exclusion, you can contribute more than that. This post tells you how.If you participate in the military’s new Blended Retirement System (BRS), you are getting a monthly 5% match, so you will need to contribute at least 5% to get it. If you don’t at least do that, you are leaving free money on the table, so make sure you do it. In addition, the match is MONTHLY, which means that if you fill your TSP too early you may miss out on some monthly matches. In other words, make sure you contribute at least 5% every month of the year. If you’d like to read more about the BRS, you can read my post on the White Coat Investor.Once you fill up your TSP, you should open up an Individual Retirement Account (IRA) at your favorite investment company. I’d use Vanguard, but Fidelity, Schwab, and others work fine too. In 2021, you can contribute $6,000 with an extra $1,000 if you are 50 or older.There are two types of TSP account and IRA - Roth and traditional. With the traditional version, you get a tax deduction now and pay taxes later when you withdraw the money. With the Roth, it is the opposite. You pay taxes now and when you withdraw it is tax free. At its most basic, deciding which to use depends on your tax rate now and future tax rates when you are taking out the money. No one can really predict future tax rates, but I would say that most military physicians (or other high earners) should use the Roth versions. You can read more about it in detail at this post. If you are just not sure, another common recommendation is to just divide your retirement accounts 50/50 between Roth and traditional. This gives you tax flexibility down the line.While you can always contribute to the Roth TSP, the Roth IRA is phased out in 2021 at an income of $125,000 if you are single and $198,000 if you are married. That said, because of known tax loophole you can still contribute to a Roth IRA even if you exceed the income limits. You just use something called a “backdoor IRA” where you contribute to a traditional IRA and then move it to a Roth shortly thereafter. This White Coat Investor post explains it. The bottom line is that if you want to do a Roth IRA but your income exceeds the phase outs, don’t let that stop you.If you have filled your TSP and IRA and still have more money you’d like to invest for retirement, the rest goes in a taxable brokerage account that you open at your preferred investment company (Vanguard, Fidelity, Schwab, etc.). The only way you’ll have additional tax advantaged retirement accounts you can use is if you have another source of income outside of the military.If you moonlight as an employee, you may have additional retirement accounts like a 401k, but you are still limited to only $19,500 in 2021 combined in both accounts. This is why if you really want to open up additional tax advantaged space to use, you need to moonlight as an independent contractor or as part of a small business that you own (sole proprietorship, LLC, or something else). If you receive a W2 and the employer withholds your taxes for you, you are an employee. If you received a 1099 instead of a W2 and you have to pay your own quarterly taxes, then you should be able to open an individual/solo 401k. Assuming you earn enough, which will be hard to do, you can put up to $58,000 in this account in 2021 ($64,500 if you are 50 or older). This is what you want.While it is easier to open up a SEP IRA, you should take the extra time to do a solo 401k. You can read why here, but a SEP IRA will mess up your backdoor Roth IRA. Plus, you can put more of your income in an individual/solo 401k than you can put in a SEP IRA. Of note, this is one time when I would not automatically use Vanguard. They don’t allow solo 401k accounts to accept incoming rollovers, which may be a feature you want. If so, I’d go with another provider for this. E-Trade seems to be one favored by bloggers and podcasters although I’ve never invested with them.How do you know what the goal is and how much you are trying to accumulate for retirement? You use something called the 4% rule, which says that once you retire you can withdraw 4% of your retirement nest egg to spend. Every year after that you can adjust your 4% for inflation, and your savings should last 30 years without running out. If you want to plan for longer than 30 years, you may need to use a 3.5% or 3% rule, but the 4% rule will give you a ballpark estimate of the retirement nest egg you are trying to accumulate.Let’s walk through an example to illustrate how this works. Let’s say you are going to need $120,000 per year in retirement and that you stayed in long enough to get a military pension. When adding your pension to your social security, you generate $60,000 per year in income. This leaves another $60,000 you need to generate in additional income. If you divide $60,000 by 4%, you get a target retirement nest egg of $1.5 million.As you can see from the example above, having a military pension can dramatically lower the retirement nest egg you need to accumulate. The chart below is from a Department of Defense report on military retirement that they have to submit to Congress:Numbers above represent the present value of a military pension (how much money you’d need today to equal the pension). As you can see, a 20 year O5 pension is worth $1.46 million. A 21 year O6 pension is worth $1.73 million. If you are participating in the BRS, you need to lower these numbers by 20% since your pension is only 80% of the traditional pension. Even with that adjustment, you can see that the value of an inflation adjusted military pension is extremely high. Plus, unlike your other investments, you can’t screw it up by investing it poorly. For a more complete discussion of the value of a military pension, you can read this post.7INVEST IN STOCK AND BOND INDEX FUNDSIn order to outpace the eroding pressure of inflation, you must take risk with your investments and invest in stock and bond index mutual funds or exchange traded funds (ETFs). You should not buy individual stocks and bonds.In addition, there are two kinds of mutual funds and ETFS, active and passive. Passive index funds simply buy and hold a collection of stocks or bonds in an index. For example, an S&P 500 index fund like the TSP C Fund buys and holds the stocks of the 500 largest companies in the United States. It simply takes whatever return the stocks give, minus expenses to run the fund.An actively managed stock fund might try to beat the performance of the S&P 500 index fund by buying and selling individual stocks. All of this buying and selling increases fees, expenses, and taxes for the investors.Over the long haul, most active funds can’t overcome these additional taxes/fees and will underperform a passive index fund. This is why you should prefer passive index funds and avoid actively managed funds because the passively managed funds will provide a higher return over the long-term.As you invest, you are going to want to focus on things that you can control. You cannot control the return you get from your investments, but you can control two very important things – the cost of your investments and your asset allocation.Let’s pretend that your grandmother gave you $10,000 at the age of 20 to invest in the stock market. You plunk it down in a low cost S&P 500 index fund, which historically has returned about 9.5% per year. If you use a low-cost fund like the TSP C Fund what has an expense ratio of 0.032%, you’ll wind up with $921,000 after 50 years of compound interest. If you instead used the State Farm S&P 500 Index B (SNPBX), an identical fund with a higher expense ratio of 1.36%, you’d only have $500,000. In other words, that small 1.33% difference in expenses cost you $421,000. This is why costs matter.There is one very easy way to make sure that the costs of your investments are among the lowest possible, and that is to do all your investing with the TSP and Vanguard. The TSP has ultra-low expense ratios for all its index funds. Vanguard has a unique non-profit-like structure as it is owned by its investors. Contrast this with other common investment companies that are privately owned (Fidelity) or publicly traded on the stock market (Schwab). In both cases, these companies are trying to make a profit whereas Vanguard is running its funds at cost for the benefit of its investors only. This is why its costs are ultra-low like the TSP.The second thing you can control is your asset allocation. At its most basic, this is the percentage of your investments you are going to put in stocks and bonds. There are other investments like real estate, commodities, precious metals, and other alternative investments but they are all optional. If you want to keep your investment portfolio as simple as possible, which is what I strongly recommend, you only need stocks and bonds.The slide below with a graphic from Vanguard shows you various asset allocations and how they perform over the long haul. As you can see, the higher percentage you allocated to stocks, the higher your overall return has been. That said, this came at a price. The more stocks you own, the more volatile your portfolio is.In my opinion, what you want to do early is your career is take as much risk as you can tolerate by allocating a high percentage to stocks. As you age, progress in your career, and accumulate a larger net worth, you gradually shift from a high stock allocation to a lower one.How do you figure out your target asset allocation? There are a few ways to do it. First, you can go with recommendations from a book. One of my favorite books is The Elements of Investing by Malkiel and Ellis. Below are two tables that show the recommended asset allocations in that book. Here is the recommended asset allocation for conservative investors:Age GroupPercent in StocksPercent in Bonds20-30s90-1000-1040-50s80-9010-2060s70-8020-3070s60-7030-4080s and beyond50-6040-50Here is the one for aggressive investors:Age GroupPercent in StocksPercent in Bonds20-30s100040s90-10010-050s80-9010-2060s75-8515-2570s60-7525-4080s and beyond65-7030-35Another option would be to simply use the asset allocation provided the target date retirement fund that corresponds with the approximate year you are going to retire. For example, if you think you will retire in approximately 2050 then you could just use the Lifecycle 2050 or Vanguard Target Retirement 2050 fund. As you approach 2050, the asset allocation would automatically adjust and become more conservative. This way, you don’t have to worry about anything.All the investment companies offer these funds, but you need to make sure they are constructed by low-cost index funds like the TSP and Vanguard funds. Some companies offer target date retirement funds composed of high cost actively managed funds, and you’d want to avoid those. This is another reason why I would just do all my investing with the TSP and Vanguard.In the end, you need to make sure that no matter what asset allocation you select that you can stick to it during stock market declines. They will happen. They happen all the time! You have to make sure that when they occur you do not sell off stocks. You simply rebalance anytime your asset allocation is off by more than 5%. You can even do it only once a year as research has shown that more frequent rebalancing doesn’t really add much to your overall return. You just can’t sell stocks during a downturn as that is when stocks are on sale and you can buy them cheaply.If you are not sure whether you can stick to your asset allocation during a market downturn, be conservative and keep a higher allocation to bonds until you experience a downturn. You can always get more aggressive later on once you have a better idea of your risk tolerance.8MISTAKES AND CHANGESPersonal finance in the military has some unique features which can cause people to make common mistakes. In addition, we are subject to changes in the TSP, so a brief discussion of recent changes is in mon mistakes people make include:Filling their TSP too early, causing them to lose out on the monthly Blended Retirement System (BRS) match money. The BRS matches up to 5% of your pay, which is free money, so you don’t want to miss out on this if you are in the BRS. The match is monthly, though, so if you fill your TSP in October you won’t get the match in November or December. You need to make sure you contribute at least 5% every month to get the match.People will borrow from their TSP, but that is something you should not do unless it is an emergency. Once you put money in a retirement account, it is for retirement. Period.I strongly encourage people to base their TSP contributions on their basic pay, not their special pays. Due to the variable release date of the annual special pay NAVADMINs, the timing of when your special pays are actually paid is too inconsistent to base your TSP contributions on them. I have been burned on this more than once in my career. Don’t make the same mistake. Select a percentage of your monthly base pay as the source for your TSP contributions.If you are using the TSP I Fund for international stock exposure, realize that you are missing out on emerging markets. The I Fund only invests in developed countries, and emerging markets represent some of the largest potential for future growth (and volatility, to be fair). This is the reason why all of my international stock exposure is obtained through Vanguard funds and not the I Fund.There are some recent changes to the TSP. The Lifecycle or L funds, the TSP’s target date funds, were very conservative in the asset allocation. They have appropriately made them more aggressive and more in line with target date funds offered by other investment firms. In addition, the moved from 10 year increments (L2030, L2040, L2050) to 5 year increments (L2030, L2035, L2040, etc.). These changes should make the L Funds more attractive to TSP investors.9RENT OR BUY?Buying a house that is too expensive has been the financial downfall of many physicians. How do you decide whether to rent or buy?In general, it takes 3-5 years to make purchasing a house a better financial deal that just renting it. Because we get PCS orders every 2-3 years, renting until you are in a stable geographic area is often the correct financial move. Yes, purchasing can work out, but the correct move is often renting. It is not the American dream, but there is nothing financially wrong with it. You are not “throwing money away.” You are avoiding the SIGNIFICANT transaction costs of buying and selling a house and the associated maintenance costs, which can be substantial. If you want to “run the numbers,” you can use an on-line rent vs buy calculator.10SAVING FOR COLLEGESaving for future college expenses is relatively simple. You either put money in a 529 plan, plan to transfer your Post-9/11 GI Bill to your dependents, or both.You can use any state’s 529 plan. If you go to , you can research if there are any tax advantages to using your state’s plan. If there are, you probably should use it. If not, you can use any state’s plan. I’ve always used the Nevada plan because it is run by Vanguard, and I’ve been very happy with it. I am not a Nevada resident.Transferring your GI bill to your dependents is a process that can easily get screwed up. There is a long line of Navy officers who thought they had transferred their GI bill but found out that the process had never even started. The GI bill is run by the Veterans Administration, but the Transfer of Entitlement (TOE) is a process done on milConnect. Here is a link to the relevant webpage that explains the process. Make sure that you follow the process closely and track completion of all steps involved.11DO YOU NEED A FINANCIAL PLANNER?This is the ultimate question of personal finance. If you are interested in personal finance and willing to learn about it, you can probably manage your finances on your own and obtain help only when you need it. If you have no interest in personal finance or are not willing to learn about it, you probably need to get a financial planner to regularly help you out.There are financial planners who will steer you in the wrong direction, and take money from your pocket and put it in their pocket. Where should you go to make sure you get solid advice at a fair price? I’d go to one of these two places: using Vanguard or an advisor recommended by the White Coat Investor, you will ensure you are getting fair advice at a fair price. Your portfolio will consist of low cost index funds, they won’t try to sell you whole life insurance, or rip you off in any other way.How much should financial advice cost? The White Coast Investor says it should cost you less than $10,000 per year, no matter how large your assets are, and I would agree.If you decide you want to educate yourself on personal finance, here are the books I’d recommend:Get a Financial Life: Personal Finance in Your 20s and 30s - KoblinerHow to Think About Money – ClementsThe Bogleheads’ Guide to the Three Fund Portfolio - LarimoreThe Elements of Investing: Easy Lessons for Every Investor – Malkiel & EllisThe Millionaire Next Door: The Surprising Secrets of America’s Wealthy – Stanley & DankoThe White Coat Investor: A Doctor’s Guide to Personal Finance and Investing or any of the other books by DahleHere are some excellent on-line resources I’d recommend:Bogleheads WikiHumble Dollar On-line Money GuideWhite Coat InvestorYou can find all of my personal finance content here.ABOUT THE AUTHORCAPT Joel Schofer is board certified in Emergency Medicine and currently serves as the Deputy Chief of the Medical Corps at the Navy Bureau of Medicine and Surgery for 4,300 Active and Reserve physicians. He is a Certified Physician Executive, has over 200 professional publications and presentations, has held numerous national and state leadership positions, and has won national academic and educational awards. He holds an academic appointment as an Associate Professor of Military and Emergency Medicine at the Uniformed Services University of the Health Sciences. He is a Fellow in the American Academy of Emergency Medicine and American Association for Physician Leadership. His military decorations include the Combat Action Ribbon, a Defense Meritorious Service Medal, two Meritorious Service Medals, and four Navy and Marine Corps Commendation Medals. ................
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