Estate Planning, Navigating Your First Attending Job, and 529s

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
Hello WCI listeners, I'm still taking some time off to rest and recover from my accident. But don't worry, I'll be back in a few weeks. Until then, enjoy this episode from one of our friends of WCI.

Dr. Margaret Curtis:
Hi, and welcome to White Coat Investor podcast number 389. I'm Dr. Margaret Curtis. I'm a pediatrician in Vermont and a White Coat Investor columnist, and I'm filling in for Dr. Dahle while he's recovering from an injury. We'll start with an ad from our sponsor.

Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

QUOTE OF THE DAY

Today's quote of the day comes from Walt Disney. “The way to get started is to quit talking and begin doing.”

First, I want to thank you all for what you do. Being a doctor is hard. Being a dentist is hard. Being a veterinarian is hard. You are bringing your best every day, and you're doing good things for good people. So, keep up the good work, and we are here to help you get through it.

Today we're going to answer readers' questions from the Speak Pipe, and our first question is about estate planning.

ESTATE PLANNING IN A MESSY SITUATION

Speaker:
Hello, Dr. Dahle. Thank you for your words of financial wisdom throughout the years. I am half of a two-position household. My question is regarding my mother. She is asking me if she should set up a trust. My mom is recently widowed. She's 73 years old. She's doing some estate planning after the death of my father, and she wants to pass all of her assets on to my brother. My brother is 46 years old, and he's choosing to be financially dependent upon my mom. He still lives at home. He does not make a salary that he can live off of currently, and she is asking if a trust is the best way to pass on her assets to him in a way that she could manage how much money he gets every year for the rest of his life so he doesn't run out of money quickly.

He owns a small house, a three-bedroom, one-and-a-half bath in the middle portion of the United States, in Arkansas, actually. She's wanting me to be in charge of this trust, and so when she dies, her plan is to sell the home that she lives in currently, use the assets to buy a very small one-bedroom, one-bath type of home for my brother to live in the rest of his life, and for the trust to pay out whatever's left from the sale of the house, whatever's left from her retirement yearly until he dies, or monthly, or whatever, until he dies.

She wants me to be in charge of this trust and in charge of selling the house, moving him out, buying a new house. I'm not quite sure this is feasible. This seems like a lot of undertaking that I'm not quite sure I'm prepared to do. I'm not sure my brother will assist me in any of this. I'm not sure I can move someone who lives in a different part of the country that I do, a place that I don't really go to. Anyway, any words of wisdom would be appreciated. Does my mother need a trust? That's my question. If so, where would she go?

She then had a follow-up question. Is it a good idea to put my name or my brother's name on the deed to her house that she currently owns that's paid for? I don't know if any of those are good ideas. Any of your thoughts would be appreciated. Thank you. Bye-bye.

Dr. Margaret Curtis:
Okay. I'm going to get to your questions about a trust and the deed to the house, but first let's talk about your mother's plan. This is a terrible plan. In general, people should leave their estates in equal shares to their descendants, leaving different amounts to different children based on their circumstances, like, “Oh, he's got plenty, he's all set, or they have more kids, they need more money.” This just leads to bad feeling all around.

The exception to this is if someone in the family has a disability or an impairment, or if there are minor children who will need care and support and education until they launch. If that was the case, your mother would be justified in leaving a greater share of her estate to that person, but it would still be tricky.

But from your question, I don't think that's what's going on here. It sounds like your brother is able-bodied and could work, but is in some kind of dependent relationship with your mom. If I'm wrong about that, or if I'm being too hard on your brother, I apologize, but I'm just going to work with this worst case scenario assumption.

If your mother wanted to make an estate plan that ensured your brother's ongoing dependence and your future resentment, she nailed it. Now you can't do anything about this. You can't stop her. It's her estate and she can do whatever she wants with it, as can we all, but there are two things you can do.

The first is you should assume that you will inherit nothing. Now you said you're part of a two-physician family, so you should be fine financially. If you're not feeling fine financially, we've got you covered. You just need to adopt a Zen mindset about this, about her house and her money.

My father came from a very wealthy family. He inherited a lot of money, and if he had just let it be, he probably wouldn't have had to work his whole life. But he mismanaged it, and when he died, I think I inherited $40. And I was like, “Oh, $40”, because it was more than I was expecting, which was zero. It really helped me feel at peace with the decisions he made, and I really encourage you to take a similar mindset.

The second thing you should do, and this is important, is that you should refuse to participate in any of these shenanigans. If she asks you to be a trustee, just say no. If she makes you a trustee anyway, you can decline the position. You are not legally obligated to be a trustee for someone's estate or for a trust when you don't want to be.

You really need to stick to your guns on this one, because this is going to be an ongoing saga of dysfunction. Okay, does your mother need a trust? Yes. If she wants to control your brother's access to her money after she dies, she will need a trust, probably an irrevocable one, a not revocable one, so that he can't gain access to it. She will need to ask a lawyer.

The trust should be administered by a professional who has lots of experience. If your brother is as dependent as I'm making him out to be, there's going to be lots of complaints and challenges and asking for more money, so he should be complaining to someone who gets paid for their time, and that is not you.

The other benefit of using a professional as a trustee is that it's a lot harder for someone to sue the professional for possible conflict of interest in administering the trust. Should anyone else's name be on the deed of her house? No, and here's why. Every investment has a basis, which is the original purchase price. If your mother were to sell her house today, she would have to pay taxes on the difference between the original purchase price and the sale price.

If your brother's name is on the deed and he inherits the house and then sells it, he would still have to pay taxes on the difference between the basis, the original purchase price, and the sale price. But if the deed is only in her name, when she dies, the basis resets to the value of the home at the time of her death. If your brother inherits the house and then sells it, he'd only have to pay tax on the difference between the new basis, the value of the house when she died, and the sale price.

This is called a step up in basis, and it saves a lot of money in taxes. So, if anyone else's name is on the deed, you will lose that step up in basis. The second reason you should not be on the deed is that you are not participating in this. This is nonsense, and you have better things to do.

Okay, next question.

COST SEGREGATION STUDY AND RENTAL INCOME

Speaker 2:
Hello, Jim. I hope you are doing well and on the road to a full recovery from your recent injuries. My wife and I are both physicians in our early 50s, about 10 years from retirement. We have an annual income of about $1.1 million. We own a primary home, free and clear, in the state of Wisconsin, and two years ago, we purchased a second home, which we also own, without a mortgage, in Michigan.

We plan to retire, at least during the summer, to the Michigan home, and currently spend about three weeks there in the summer. The rest of the summer, we rent it out to the tune of around $30,000 to $40,000 in rental income. We use a CPA firm that was recommended by your website and are very happy with their service, and the amount of tax that we pay on that rental income is fairly minimal.

A friend of my wife's told her of a strategy called cost segregation study. He is someone that also owns a rental home and apparently uses this to declassify property assets and reduce income tax liability. I was wondering if you've ever heard of this and have any thoughts or input on it. For one, I am a little skeptical, but I wanted to get another opinion. Thanks.

Dr. Margaret Curtis:
This question is about a cost segregation study. First of all, I love the great state of Wisconsin. Go Badgers! Okay, now to your question about rental properties and cost segregation studies. To answer this, I'm going to give some background on rental properties and taxes. This may be more than you wanted, but it may be helpful to some listeners.

Expenses from a rental property can be deducted from the income from that rental property. For example, if you have to pay $10,000 to replace the roof on your rental, you can then deduct $10,000 from the rental income. You can't deduct that $10,000 from your physician income, your W-2 income, unless you fall into one of two categories. You have real estate professional status or you operate a short-term rental and do most of the work yourself.

Now, real estate professional status is a complicated topic and we're going to leave that for another day, but if you and your spouse work full-time doing something other than real estate, then you won't qualify. And you don't say if you operate your rental as a short-term rental, and if it is, you should make sure that your use of it doesn't disqualify it as a business. If you and your family use it more than 14 days of the year or more than 10% of the time that it's rented, you may not qualify. You should ask your CPA about this. There are some workarounds to this, but you need to get qualified professional advice.

That's the background on real estate taxation benefits. The biggest tax benefit of real estate investing is the write-off depreciation. According to the IRS, real estate depreciates from the purchase price to zero over a certain number of years. Of course, in the real world, real estate usually gains in value over time. This is called a paper loss. It's an expense you can take off your taxes. It doesn't actually cost you anything, unlike the roof that you had to replace.

Commercial real estate depreciates over 39 years. Residential real estate depreciates over 27.5 years. Don't ask me where they got those numbers. Land does not depreciate. Even our tax code recognizes that land doesn't lose value over time. But some property depreciates even faster, like five or seven or 15 years. If you are interested in maximizing your tax deductions sooner than later, you would rather have property depreciate faster so you get a bigger chunk of the depreciation up front. This can be helpful maybe if you're planning to sell the property and use the money to buy another rental later on.

That's what a cost segregation study does. It identifies how much of your property should actually depreciate over a shorter timeline than the typical 27.5 years. For example, if you added a road and a fence to your property, that might depreciate over 15 years, even though the building depreciates over 27.5. You might even be able to do something called bonus depreciation, which is when you depreciate 100% of the property all at once in the first year using it for any property that depreciates over five or seven or 15 years. But this typically has to be done the first year you buy a property. Again, ask your CPA.

You should also know that this depreciation is recaptured when you sell the property. Essentially, that means if you use bonus depreciation or accelerated depreciation, you will get a greater tax benefit when you own the property, but you will get less when you sell the property.

To answer your question, should you get a cost segregation study? It depends. It depends on whether you can use the additional depreciation. You might do the math and find that deducting your standard rental expenses counteracts all your rental income, so depreciation won't help you. It also depends on whether you want to accelerate your depreciations or use a bonus depreciation. I hope that helps. I'm going to put some links to some good sources in the show notes.

This question is about navigating and finding your first attending job.

NAVIGATING YOUR FIRST ATTENDING JOB

Will:
Hey, this is Will, a current resident calling from up in the Northeast with a question about navigating the first attending job. My wife and I are nearing the end of our training. She's also in medicine in a similar area, and we're starting to get contacted by recruiters through phone calls, emails, and LinkedIn. I guess they get our information from a listserv and probably get some kind of commission if we were to go through with them.

I'm curious what your thoughts are on how to navigate this next chapter, especially if we have regional preferences and plan to relocate. Before med school, I worked in food service where getting a job was pretty straightforward. You just sent them your resume, but now I'm wondering if it's best for us to leverage our networks that we've developed in training or if there's other things we should consider. Thank you so much.

Dr. Margaret Curtis:
First of all, congratulations on nearing the end of your training. This is a huge accomplishment. You've been working for years to get to be an attending. You didn't go to medical school so you could be a resident. You went to medical school to be an attending, and now you're almost there.

How do you find and sign on for that first attending job? First, it's important to define what's important to you. There are obvious things like location, academics versus private practice, salary, scope of practice. You should assume that you won't stay in this job long term. Maybe you will, but most physicians stay in their first attending job for only a few years. Think of your first attending job as a continuation of your training. As well-trained as you are, making the jump to attending is still a big deal. It will be nerve-wracking. Look for a place where you have support and you'll have mentorship.

This is not when you want to be the only person in your specialty for an entire hospital. You should try to keep your future options open. When you're in training, you get a full array of skills and knowledge. You can practice in just about all of your specialty. Most of us don't continue to use all those skills as we go through our careers. Most of us figure out over time what aspects we want to continue and which we want to let go.

When I was first out of training for the first few years, I routinely did circumcisions. I hated it. So, I no longer do them and I'll probably never do them again. And if any of you surgeons are listening to this and thinking, she doesn't even do circumcisions, zip it. I don't want to hear it.

For the first few years, try and keep your skills up so you have options when and if you do change jobs. Because after a few years of being attending, you'll have a much better sense of what you want your future practice to look like. That will inform your decisions. At that point, you can start letting go of options, letting skills lapse, letting certifications lapse if you want to.

Next, once you have your criteria, now you can start looking. How do you actually find these jobs? Your network is probably your most powerful tool. Medicine is a very small community, especially in certain fields, and everyone knows everyone. When I lived in Maine, I worked with a medical student who wanted to do emergency medicine in California. Within 24 hours, I found him an ER doc in the Bay Area who spent over an hour with him on the phone and then mentored him through the entire process of getting a residency slot in California.

Getting a job is the same. Put the word out that you're looking for a position and generally what you're looking for. You should especially talk with people in your current department because it's in their interest that their grads get the jobs they want. You should check the jobs board of your national specialty, and you should check the websites of employers that interest you.

I got my current job, which I love and which I think will be my final job, by checking a hospital website regularly. It's fine to talk to headhunters. Just remember that they work for employers, not for you. They will try to sell you on a job. They might offer to fly you to interviews, put you up in hotels, that kind of thing. That's fine. You can accept those offers as long as it doesn't make you feel obligated to then take the job. Think of those interviews as good practice, good fact-finding, but not mutually obligating.

I strongly recommend that you don't sign on a job and take an early sign-on bonus. Some employers will offer you a certain amount of money per year throughout residency and fellowship. They're really roping you in very early to a job that might not be what's advertised, might not be what you wanted. You should really go into your first attending job as mobile as possible so that you can make changes when you figure out you need to.

You didn't ask about negotiations or contracts, but I'm going to throw this in anyway, because I really believe that a contract, just as much as location, practice structure, colleagues, can make or break an attending job. When it comes to your contract, you should think hard about signing a non-compete clause. You may have heard that the Federal Trade Commission ruled against non-compete clauses last spring, but there have already been lawsuits filed in court challenging this ruling, so you should assume that any non-compete clause will apply to you.

Non-compete clauses obviously will limit your ability to move and change jobs. They should be reasonable in their duration. One year is reasonable. Five years is not reasonable. They should be reasonable in their geographic distribution. If you live in Manhattan, a two-block radius might be reasonable. If you live in Vermont, a five-mile radius might be reasonable.

They should be specific as to what kind of practice you are prevented from joining. Let's say you're a radiologist and you were practicing doing IR at your current job, and you want to go across town and read CTs. You should be allowed to go do that. You should not be prevented from practicing all medicine in any aspect of your specialty.

Non-compete should be very specific about which locations are involved. If you work for a large health network, the non-compete should affect the location where you worked primarily. It should not affect every single hospital, clinic, and satellite of that health network. Because you could be talking about the entire state at that point. So, be very careful about non-compete clauses.

Look for something called a mandatory arbitration clause. Mandatory arbitration clause means that if things don't go well and you leave your employer and you want to file suit, even for something like unfair working conditions or violations of labor law, you would not be allowed to file a case in civil court. You would be forced to go to arbitration with your employer.

The problems with arbitration are that it's expensive. In my area, I was quoted $500 an hour. It's by private judges who tend to be repeat customers of employers. They have statistically been shown to more often rule in favor of employers. The proceedings are sealed and they cannot be appealed.

Mandatory arbitration really favors employers. If their employer insists on an arbitration clause, you should at least ask that cost of arbitration be covered by the employer and not by you.

Lastly, keep your eyes out for something called an indemnification clause. An indemnification clause says that in the case that I am sued, and usually my hospital is sued as well by a patient, that I indemnify my employer. I take all liability off of my employer onto myself. We could be talking about judgments in the millions of dollars and malpractice insurance generally won't cover claims arising from an indemnification clause. You could literally be on the hook for millions of dollars personally.

You should never sign an indemnification clause. I really question why an employer would even insist on an indemnification clause, but if they insist, don't sign the contract and don't take that job.

WHAT IS A QUALIFIED EDUCATION EXPENSE FOR 529s?

Noah:
Hey, Jim. This is Noah from the East Coast. Thanks for all you do. I have a question about 529s. What exactly are qualified education expenses? Is this just tuition? Is this room and board? If your kid decides to live off campus in an apartment, can you use the funds to pay for that? What about supplies like laptops or other things they might need for school? And do these rules vary by state or is it consistent across the country? Thanks.

Dr. Margaret Curtis:
Thank you for your phone call. Your question is about 529 expenses. 529 funds can be used to pay for what are called qualified educational expenses for someone who is enrolled in school at least half time.

Now, I should clarify that when you take money out of a 529, you don't have to prove that it's for a qualified educational expense at that moment. You have to check a little box that says, yes, this is a qualified educational expense. So then the bank that holds the 529 knows whether or not they should withhold taxes.

If you are ever audited, of course, you would then have to show that you use the money in an approved manner. That's why you keep all your school statements, receipts, anything that proves that you use the money in the way that it was intended for.

So, what can you use it for? You can use it for tuition and fees. You can use it for books and computers such as laptops. You can use it for room and board, but only up to the school estimate. If your school typically charges $12,000 a year for room and board and you put your kid up in an apartment that costs $25,000 a year, you can only use up to $12,000 of tax-free 529 money.

You can pay off old student loans up to $10,000 total with 529 money. You can use the money for K-12 tuition, but you should be aware that some states will still treat that as a non-qualified expense. So check your state's tax code. And you can use money for study abroad.

Things you cannot use the money for. You can't use it for testing or application fees, for health insurance, for transportation to and from school. And there's a little loophole out here I hear people talking about, which is, “What if I buy a house in the town where my kid goes to school, my kid lives in the house, maybe has some roommates to help with paying down the mortgage, and we use 529 money to pay their share of the rent?” You can do that, but it's not considered a qualified expense. So you will lose the tax benefit of that. You cannot use the tax-free money out of your 529 to pay down your own mortgage. It would be nice if you could, but you can't.

The other thing people should know is that there is now a new feature of 529s, which is that you can roll over money from a 529 to a Roth IRA. Your kid can, I should say. There's rules about it. I think it's a $35,000 lifetime limit. You have to have held the IRA for at least 15 years, and there are annual limits how much you can roll over. But you should be aware of that too. And again, I'll put more information about this in the show notes.

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INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Megan:
Hey everybody, it's Megan, your podcast producer. I'm just here to remind you that Dr. Dahle is still resting and recovering from his accident. But don't worry, he will be back soon. He's doing well. Please enjoy this episode.

Josh:
Welcome to Milestones to Millionaire, episode number 192 – Hospitalist pays off $380,000 of student loans.

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Make sure to stick around after the interview today for another Finance 101 with Tyler.

INTERVIEW

Okay, welcome back to the podcast. We are going to talk to a doc who will remain anonymous, but she is a hospitalist and she has a great story to tell. Welcome to the podcast.

Speaker:
Thank you.

Josh:
Okay, let's get down to brass tacks immediately. What is your profession? How far are you out of school and what part of the country are you in?

Speaker:
Okay, I'm a hospitalist trained in internal medicine. I graduated residency in 2021, so about three years out. And I live and practice in Southern California.

Josh:
And what is the big milestone today?

Speaker:
Paying off all of my student loans, which in total was about $380,000.

Josh:
That is awesome. When you say that out loud, how does that feel? What do you think?

Speaker:
It makes me feel happy. It's pretty surreal. At this point, it was about a couple months ago, so it's sunk in, but yeah, it's pretty surreal.

Josh:
What did you do to celebrate, if anything?

Speaker:
Nothing so far, actually. I don't know how to celebrate.

Josh:
When you graduate medical school, that is a lot of debt to have. And I know a lot of doctors who listen to the show certainly can relate to having that much or more even. But when you're facing that mountain of debt, do you think you're ever going to be able to pay off? It seems like such a mountain to climb.

Speaker:
It is. I think when you're taking out the loans, you obviously don't fully realize it until you're done and then the payments are due. But it's definitely doable, I would say.

Josh:
Yeah, clearly, you did it very quickly. Jim talks a lot about living like a resident for the first two to five years out of school to pay down that debt. It sounds like that's what you did. How did you make this happen?

Speaker:
That is essentially what I did. I did take Dr. Dahle's advice. It sounds very kind of a little bit cliché, very simple, but if you implement it, it does work. Basically, my sign-on bonus, at least one paycheck per month, and every subsequent bonus or windfall or et cetera, I would put all of it into the loan, which really helped bring the balance down.

Something that helped me a lot was, I don't know if you remember, during COVID, the student loan freeze, the interest was frozen for I think three and a half years, I'm not sure. All the payments are frozen, so that really helped me because I didn't have any interest accruing every month. I tried to strategize that because I didn't know when the freeze would end.

Josh:
I guess you could have paid not anything. I could have just taken a break, right? You didn't do that.

Speaker:
Yeah, break is not going to work for me. Break will not accomplish anything.

Josh:
You could have gone on an overseas trip, but no. That was never a consideration. It was like, “No, I'm going to keep paying, I'm going to take advantage of the 0% interest or this interest freeze and just keep going.”

Speaker:
Yeah, I would say when I compare myself to my colleagues and friends who didn't take this approach, you have to have a plan, basically. From the get-go, I just had a plan, a very set-in-stone-in-my-mind plan, and I stuck to it. Versus a lot of people I know, they start their jobs, after residency one to two to three years in, they're like, “Oh, my loan balance hasn't really moved. I'm paying a couple grand a month and I don't know what to do.” And I can tell they didn't really have a plan from the get-go. You have to have a plan to attack it, such a high amount.

I would say having a plan, sticking to it will be key. And you just have to make a decision once. It's not like every paycheck you ask yourself, “What do I do? Do I want to pay the loan or do I want to do this?” Because as Dr. Dahle says, you have a lot of uses for your money, which is very true. But if you just make the decision once, don't look back, every other paycheck, you just put it to the loan, you don't think about it, it really does start to disappear rather quickly since obviously physician paychecks, they're pretty big.

Josh:
You go to residency and then you get out and become an attending. So what's the range of salaries you were making that you could afford to take every other paycheck, I guess, and shovel it towards loans? How much were you making?

Speaker:
The first year, it's half the resident salary and then a couple months attending, it was about like $150,000. And then it increased. Right now it's around low $300,000.

Josh:
It's always fascinating to me when I've come across somebody who actually, like you said, had a plan of attack. I noticed that for me, coming out of school like that, I would not have necessarily been thinking about my future in finance as far as doing that kind of thing. Where did you learn? How did you grow up with your family or is it just you found the right website? How did you know or how did you think to do that immediately?

Speaker:
Well, during residency, I did have a friend who introduced me to the White Coat Investor. I think that was a very pivotal moment. I didn't really know much about finance before that. And then during COVID, the pandemic, I started listening to podcasts. I really built on my financial literacy slowly.

And then I realized, honestly, it was the interest freeze. I really realized I was like, “If I can pay this down, this is probably like $40,000 to $50,000 a year savings.” And I just decided this is the best time. Now or never, basically. I didn't want to drag it out for multiple years because the future is unknown. You never know what can happen and how much my ability to work will be down the road.

Josh:
And you didn't mind doing the living with roommates and working extra shifts and not going into credit card debt. All that was fine by you. You were just happy to kind of plug along and live like a resident.

Speaker:
Yes, I would say that's the key. It's not easy, but if you're committed to your goals, I was still able to travel. I take like multiple international trips a year. Honestly, anything I want to buy, I do buy, but you just have to keep your desires and lifestyle at a manageable level. That's the key. Use your short-term versus your long-term goals. You have to assess what works best for you.

Josh:
Now you've certainly accomplished a big time short-term goal. What are you looking at in the future? What are some of your long-term goals with your finances?

Speaker:
That's a good question. I don't know if I have those exactly sorted out. I would say buying a house is inevitable. It's not like something I need in the next year or two, but eventually it's necessary. Saving up the nest egg even more, eventually financial independence, retiring semi-early, like in my fifties, that would be my goal.

Josh:
And this whole thing, you said it wasn't easy, but was it easier or harder than you thought it would be?

Speaker:
During the moment, it wasn't that easy, but looking back, it seems quite easy. The three years, it went by pretty quickly and it feels like such a large burden lifted off of you. When I see my colleagues around me, they're all still having a mountain of debt, whether they feel it or not, it just seems miserable. I would say short-term suffering for a long-term reward was kind of my strategy. And I think it's worked out for me personally. It's really been beneficial.

Josh:
You went on some international trips and you said you did what you wanted to do. Was there never any kind of like a FOMO situation where you thought, “Oh man, I really wish I could do what some of these friends are doing?”

Speaker:
Not FOMO, but my behaviors are definitely different than a lot of people I know. Most of my colleagues will buy brand new cars, Tesla, yada, yada, yada. But I bought my car on Craigslist for like $6,000 cash. I just literally follow Dr. Dahle's advice.

Josh:
What kind of car did you buy?

Speaker:
I bought a Hyundai, like 10 years old.

Josh:
And it runs?

Speaker:
Yeah, it's totally fine. And then at one point, before that, my car, it was like a whole thing, it got into an accident. I was like biking to work basically for a couple weeks. Most people I know would not be doing that. They would think that's totally ridiculous.

Josh:
Yeah, that's amazing. When Jim talks about living like a resident, I think he pictures somebody like you who doesn't worry about the potential trappings of making a lot of money as a doctor and they can just get rid of the debt. And then you can kind of go on your merry way and start accumulating that big old nest egg.

Speaker:
Exactly.

Josh:
For someone who's coming out of school this year, who has $400,000, $500,000 with a student loan debt, what kind of advice would you give?

Speaker:
I would say, first of all, when you're taking out the loans, a lot of times, they'll offer you a range of loans. And a lot of people take the maximum out. If you can try to keep that on the lower side so the interest doesn't compound, maybe take out just the minimum amount you can. Then I would say you should try to get a job that pays similar to how much your loans are. If not, it might be almost impossible to pay off. But lifestyle plays a huge role. Like your number one and two expense would be your housing, your car, your food. You have to find a way to keep those low if you want to pay your loans off in like three to five years.

Josh:
Anything I'm missing? Anything else that you want to talk about that I didn't ask about?

Speaker:
I guess I didn't mention just from the starting loan of $380,000, my parents did gift me $30,000. I had a little bit of help from that. So I paid the $350,000 off myself.

Josh:
Okay. How helpful was that? Percentage-wise, it's not a huge amount of percentage, but just the fact they were being generous enough to do that. How was that for you?

Speaker:
Yes, I agree. It's like under 10%. And honestly, going forward, I wouldn't need it now. But in the beginning, when you're basically faced with a mountain, just to have that much to knock it down a little bit, the total balance, it really does help. Mentally, it helps you realize, “Oh, this is something I can conquer. This debt, it's not impossible.” I think psychologically, it really helps me be more aggressive towards the debt.

Josh:
That's amazing. What a great story. Very inspirational. And it can be done. You've shown it. You can knock out a ton of debt in a very short amount of time if you have the right approach. Thank you so much for being here. It was really great. And I appreciate you telling your story.

Speaker:
Thank you.

Josh:
Okay, that was great. I really enjoyed talking with her. Really, it’s just a cut and dried kind of WCI-inspired success story. She lived like a resident, even when some of her colleagues were getting the fancy cars and maybe buying the houses and doing all the things. She was living like a resident and living with roommates and saving money and really being proactive about how she's going to pay off this big mountain of debt.

And her saying it's basically short-term suffering for long-term success. Yeah, that short-term is going to be tough. Although she said it, it wasn't that tough. She still got to do the international flights. She still got to kind of buy what she wanted to buy for the most part. But that long-term success is what she was focused on.

We were talking after the interview, it's kind of easy to follow what Jim Dahle has talked about, living like a resident and paying off your debt quickly. It's climbing a mountain, but you're not climbing K2. It's just really great to hear from her and a great success story.

FINANCE 101: TARGET DATE FUNDS

Tyler Scott:
Hello friends, and welcome to another Finance 101 lesson with me, Tyler Scott, standing in again for Jim as he continues to heal up from his adventures in the Tetons.

Today, we're going to talk about target date funds. Target date funds are the ultimate in “set it and forget it” investing because they do three really useful things for us that require no additional work or management on our part.

First, they give us an appropriate asset allocation for our age. By asset allocation, I mean our mix of stocks and bonds. For example, I am 40 years old, I invest in the 2050 target date fund in my Vanguard 401(k). The year 2050 is about the year that I will turn 65. So the fund knows I'm roughly 40 years old and thus it gives me an asset allocation of about 90% stocks and 10% bonds. About two thirds of the stock are US, the other third are international. I get a very reasonable, highly diversified, low cost mix of US and international stocks and bonds that is appropriate for my age.

The second thing target date funds do is they adjust our asset allocation automatically as we age. It's one thing to have a 90% stock, 10% bond portfolio at age 40. It's an entirely different thing to roll with that aggressive of a portfolio into my 60s.

At age 40, I don't really care at all if the stock market loses half of its value tomorrow morning, because I'm more than 20 years away from needing those assets. In fact, perversely and selfishly, I kind of want the stock market to do bad so that all those juicy stocks I want to buy anyway, go on sale.

A stock market crash for a young person is synonymous with Black Friday after Thanksgiving. It's the sale we've all been dreaming of. However, I do not want to wake up on my 65th birthday to see that half of my lifetime savings has disappeared in a housing crisis or pandemic stock market crash.

In order to mitigate against this, we want to shift our asset allocation slowly and deliberately as we age. So, we drop from holding 90% of highly volatile stocks to no more than 50 or 60%, with a corresponding increase of 40 to 50% of more stably priced bonds. That way, if a market crash occurs in my 60s, I might see a 10% decrease in my portfolio, not a 30 or 40% decrease.

Well, you can adjust your asset allocation manually over the years, if you're confident in managing your own portfolio, or you can just choose a target date fund to do it for you. Each year I get closer to the year 2050, the fund slowly ratchets up the percentage of bonds that I own, I don't have to do anything. This concept of adjusting your asset allocation over time is known as a glide path. We glide from a 90-10 portfolio to a 60-40 portfolio as we age. A target date fund will follow the glide path for you.

The final way a target date fund aids us in setting it and forgetting it is that it automatically rebalances itself throughout the year. What I mean by rebalancing is that we want to maintain our desired percentages of assets at all times.

Let's say that desired percentage is 60% US stock, 30% international stock, and 10% US bonds. If you purchased three individual index funds in those relative percentages, they would stay at your desired ratio for a pretty short period of time in most cases. That is because the US bond market and international stock market do not have a perfect correlation with one another. They rise and fall at different rates, and that's a good thing. That's the diversification we want.

The problem is that if the international economy goes on a tear and the US bond market has a terrible year, then you don't have a 30% international stock and 10% US bond ratio anymore. You have something like a 35% international stock and 5% bond ratio. That's not the asset allocation you want. That's the wrong balance for your funds. So you have to go into the account and rebalance by selling the overperforming asset and buying the underperforming one until you achieve your desired balance again.

Well, a target date fund rebalances itself regularly every month or every quarter. You don't have to go into the account and buy and sell anything. That's what makes target date funds awesome. They give you a rational asset allocation, they follow a rational glide path, and they rebalance at a rational interval.

Now that I've got you hopefully pumped up on the glory of the target date fund, let's talk about some important nuances. First, there can be a terminology trap. These funds are known also as target retirement funds because the date you're often picking is allegedly your retirement. But I actually hate the term target retirement funds and do not recommend thinking of your retirement timeline at all when choosing which target date fund to use.

The reason for that is some people will retire at age 45, some at 55, some at 75. This retirement timeline should not really be our primary concern when it comes to the longevity of our nest egg. Rather, the point of “retirement savings” is to make sure we don't run out of money before we die. When we die has nothing to do with when we retire.

In financial planning, we do our math to create a nest egg to support us until age 95. I may very well retire in the year 2040, but I will always use a 2050 target date fund because the year 2050 is when I turn 65. I think these funds should be called target 65th birthday funds. That would be more clear and more aligned with their intended purpose.

This brings up another question I see clients wrestle with. Let's say one spouse is 40 and the other is 30. Which target date fund should the household use? I think the answer is to take the average age of the couple. In our example, the couple should think of themselves as 35 years old and use the 2055 target date fund.

I think that's the simplest way to think about this. Otherwise, it becomes very difficult to know and manage the overall asset allocation of the family if one spouse has X dollars in one target date fund and the other spouse has Y dollars in a different target date fund.

Another wrinkle with target date funds relates to risk tolerance. Occasionally, I get a client that says, “Yeah, Tyler, totally get it, but I want to take more or less risk than this glide path will take me on.” So maybe a target date fund is not for me. To that I say, just pick a slightly different fund. If you are 40 years old and want to take more risk, don't pick the 2050 fund. Pick the 2055 or 2060 fund, which will keep more of your assets in stocks for a longer period of time. If you want to take less risk, pick the 2045 or 2040 fund. That'll have more bonds today and it'll shift you away from stocks faster in the years ahead.

One thing to be mindful of with target date funds is that they are not all created equal. Some are awesome and some are awful. You really have to look under the hood to understand which funds the target date fund is purchasing in order to create the underlying asset allocation. And most importantly, what the fees are.

The fees are often expressed in a term known as an expense ratio. I described expense ratios in a previous Finance 101, so go back and check that out for more details if you want. Basically, an expense ratio is a fee you pay to the firm that created the investment. It is expressed as a percentage of your total dollar amount in that investment. If the expense ratio is 1%, you must pay 1% of your total holdings to the investment company each year. Expense ratios are important to pay attention to. They erode your wealth and you want to keep them low.

Some target date funds, like the ones at Vanguard, have very low expense ratios. The 2050 fund I use has an annual fee of 0.08%. That is awesome. If I have $100,000 in the fund, I pay $80 a year for those three benefits we talked about earlier. That is a dang good deal for a fund that guarantees a good asset allocation, follows a glide path, and automatically rebalances.

Some target date funds have terrible expense ratios, like 0.75%, up to 2%. At 1.5%, if you have $100,000 in the fund, you have to pay $1,500 a year for those benefits. Have a million dollars in the fund and you're paying $15,000 every year. That is not a good deal. Don't do that. Find lower cost individual funds and manage the account yourself or find a non-gross financial planner to help you.

I do this all the time with clients. I get them to stop using really awful target date funds and just teach them how to adjust the asset allocation themselves so they don't waste thousands of dollars in these crappy funds every year.

The big brokerages like Vanguard, Fidelity, and Schwab have great low cost target date funds. But you do have to watch out for Fidelity a little bit. They offer three target date funds for each target year. One of them is super cheap and awesome. One of them is a little worse and one of them is pretty bad. You have to make sure you are buying the index fund investor class shares to get the low cost version at Fidelity.

Another thing I like about target date funds is the ease they bring to estate planning. I could follow my own glide path and rebalance my own accounts. I'm a finance nerd. I love this stuff. My wife, she is not a finance nerd and she barely tolerates this type of conversation. She decidedly does not want to create and follow a glide path with quarterly rebalancing. So even though this is my professional field, I use target date funds in almost all of our accounts because if I die, no one needs to do anything. Nothing needs to be changed. The investments will just roll forward on a good track into the future forever.

My closing thought after all that hype about target date funds is don't use them in your taxable brokerage accounts. For myriad technical reasons that transcend this 101 lesson, just know that they are not typically a smart choice in your taxable brokerage account.

Target date funds are awesome in tax protected accounts like 401(k)s, 403(b)s, 457, HSA, and your IRAs. Also in 529s as so-called target enrollment funds with the target year being the year the child finishes high school or starts college. Just don't use them in your taxable account.

They have become nearly ubiquitous in employer retirement accounts these days, which is good except for the ones that are awful. So watch out for those. They are almost always available in your HSAs and they are definitely available in your IRAs as long as you're with Vanguard, Fidelity, Schwab, et cetera.

If you have some horrendous IRA with Wells Fargo or Edward Jones, you probably don't have access to good target date funds. But in that case, you have bigger problems anyway.

Target date funds are pretty cool, you guys. Give them a long look. If you are into maximum simplicity and low stress, they are the ultimate in “set it and forget it” investing. Thanks so much for listening and have a fantastic rest of your day.

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We'll see you next week on the Milestones to Millionaire podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.