In This Show:
Things to Consider Before Buying Into a Physician-Owned Practice
“I'd love to write in to ask some questions about buying into a physician-owned private practice. Can you do a podcast answering some of the following? Ask what are the questions you need to ask? What's a typical buy-in and how best to do it—take a loan, work for less pay a few years? After becoming an owner, what changes? How much should you expect pay to increase? Number of hours a week on administrative duties? Do I need to hire a lawyer, an accountant to review the books, pros and cons?”
Buying into a physician-owned private practice requires understanding that every business operates differently, so there isn’t a single list of questions to ask. A potential buyer should dig into every detail: why the current owner is selling or offering partnership, the personalities involved, employee details, compensation and benefits, debts, payer mix, billing processes, and existing insurance contracts. Anyone asking, “What questions should I ask?” is likely not yet ready to buy, because true due diligence means knowing the business inside and out—including how it makes money, who runs it, and what liabilities or quirks come with ownership.
Buy-ins can take many forms, depending on the structure of the practice. In fields like emergency medicine, where the main asset is accounts receivable, buy-ins often occur through sweat equity—working 1-3 years at a lower salary before earning partnership status. In other specialties where the practice owns real estate, equipment, or surgical centers, the buy-in can be much larger—sometimes half a million dollars or more. New physicians rarely have that kind of cash, so loans are common, whether from banks, the seller, or even family members. Some partnerships combine sweat equity with a cash buy-in, and while terms might seem fixed, most agreements are negotiable to some degree.
Once a physician becomes an owner, everything changes. They are now responsible for overhead, payroll, insurance, and other expenses, and they are also the last person to get paid. But they also reap the rewards of what’s left over—which, in a healthy practice, usually means higher income. The increase varies by field and structure, but pay often rises 50%-100% in well-run emergency medicine partnerships. Administrative responsibilities also depend on the setup. Some owners handle none and pay others to do them, while others add 10-15 hours a week on top of their clinical work to manage operations and staff.
Legal and financial reviews are crucial before buying in. Every potential partner should have a lawyer review the partnership agreement or operating contract, ideally someone familiar with healthcare business law. Reviewing the books is equally important, and you must understand the practice’s income, expenses, and cash flow before committing. If that’s outside your skill set, hiring an accountant is money well spent.
The pros of ownership include higher potential income, greater control, and more autonomy over your work environment and future. The cons are the added responsibility, potential stress, and the risk of losses if the business struggles. Ownership isn’t for everyone, and those who just want to clock in and out may prefer employment. But for physicians who value control, long-term growth, and financial reward, owning part of their practice often leads to greater satisfaction and less burnout over time.
More information here:
What Is Net Worth?
“Hi, this is Roy. I'm a hospitalist in California. My question is regarding net worth, the concept of net worth. It gets thrown around a lot on The White Coat Investor and a lot of other financial sites. But what does it really mean? I understand it generally includes assets minus debts. But for example, people don't seem to agree on whether it should include your home equity if you have a home mortgage, because you don't own the home outright. Should it include your home at all, since that's an asset that if you sell it, you're homeless? And should it include things like collectibles, cars, boats, and so on?
Ultimately, I want to know, is it really a useful metric? Does it really tell us much rather than besides just a crude approximation of how much stuff you have vs. how much you owe? Thanks very much. It's a topic that kind of confuses me a little bit.”
Net worth is one of the most commonly referenced financial metrics, but it’s often misunderstood. It’s a simple equation—everything you own minus everything you owe. Your assets include everything from your home, investments, and savings accounts to smaller items like cars, jewelry, and even furniture. Your liabilities include debts such as mortgages, student loans, and credit card balances. For example, if you own a $700,000 home with a $400,000 mortgage, the $300,000 difference counts toward your net worth.
In practice, most people don’t bother tallying up every small possession. They focus on big-ticket items like home equity, investments, retirement accounts, and sometimes business ownership. For many physicians, the home is a large part of their financial picture, so it makes sense to include it. However, smaller personal assets like cars or collectibles tend to lose value quickly, and they often aren’t worth the effort to calculate regularly.
While net worth is a helpful snapshot of financial progress, it’s not particularly useful for making day-to-day financial decisions. It can serve as a benchmark to ensure you’re moving in the right direction, but it doesn’t tell you how well you’re positioned for retirement or how liquid your assets are. The best comparison for your net worth is your own number from last year or a decade ago, not someone else’s.
When it comes to planning for the future, the more meaningful metric is your investable assets, sometimes called your “nest egg.” This includes assets that can actually produce income or be rebalanced as part of an investment strategy—like stocks, bonds, and retirement accounts. Your home typically doesn’t belong in this category because selling it would leave you needing another place to live, and it doesn’t pay dividends unless you count the money saved on rent.
The distinction matters most when calculating financial independence. The “25 times your annual spending” rule applies to your investable assets, not your total net worth. Investments are what will generate the income needed to sustain you after retirement, while home equity or personal property are usually not liquid sources of support. By keeping net worth and investable assets separate, you’ll have a clearer understanding of both your financial position and your path to long-term independence.
More information here:
Track Your Financial Goals with These 4 Measurements
How Much Money Physicians Actually Need to Retire
Special Needs Trusts
“I had a question in regards to trusts and, more specifically, special needs trusts. We had a death of a family member, and they set up a special needs trust for my brother who has intellectual disabilities. And I don't know what to do with the money in the trust. He likely won't be using the money significantly over the next 10 or 20 years.
And so, I'd like an investment strategy that will grow over that time period, but I'm not sure what makes the most sense. Some large banks offer wealth investment services, but they take about 1% of the investment to do that. Am I better off just opening some kind of Fidelity or Vanguard account? And if so, is there a way to open up that account in his name with me as the trustee? And then should I just invest the whole sum of money into VTI or some kind of whole stock market index? I would love some information about how best to manage this special needs trust on behalf of my brother.”
Managing a special needs trust involves two key components. First, understanding how the trust itself functions, and second, creating an appropriate long-term investment strategy. A special needs trust is a separate legal entity not owned by the beneficiary or the trustee personally. Therefore, when you open an investment account, it must be titled in the name of the trust, not in your brother’s name. The trust should have its own tax identification number and official name. As trustee, you hold fiduciary responsibility, meaning you are legally and ethically obligated to manage the assets in the best interest of your brother and according to the terms of the trust.
If you are unfamiliar with serving as a trustee, consider professional help to ensure compliance. Many banks and trust companies offer trustee services, though they often charge high fees, sometimes around 1% annually. For someone comfortable handling financial matters, it is possible to act as your own trustee, but it’s important to take the role seriously and follow all legal and administrative requirements.
Once the trust is set up correctly, the investment approach becomes a more familiar question of how to grow money over 10-20 years responsibly. Since no one can predict which asset class will outperform, diversification is key. A simple, low-cost solution is to use a target date or life cycle fund, such as those offered by Vanguard or Fidelity. These funds automatically adjust their mix of stocks and bonds over time, becoming more conservative as the target date approaches.
For example, if you expect that the funds will start being used in about 15-20 years, you might choose a Vanguard Target Retirement 2035 or 2040 fund. These funds are broadly diversified across US and international stocks and bonds, and they rebalance automatically and have low expenses. This type of fund is well-suited to a trustee’s fiduciary duties because it provides prudent, hands-off management with a clear rationale.
Even when your brother begins drawing from the trust, the need for growth continues since spending will likely occur over time. A target date fund can continue serving this purpose by maintaining a portion of the assets in growth-oriented investments while gradually reducing risk. For many trustees, this “set-it-and-forget-it” approach offers an effective balance of simplicity, diversification, and compliance—helping the trust grow steadily while ensuring the funds will be available when your brother needs them.
To learn more about the following topics, read the WCI podcast transcript below.
- What to do with an Air National Guard retirement paycheck
Sponsor
Today’s episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that’s where SoFi can help. It has exclusive, low rates designed to help medical residents refinance student loans—and that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month* while you’re still in residency. And if you’re already out of residency, SoFi’s got you covered there, too.
For more information, go to sofi.com/whitecoatinvestor.
Milestones to Millionaire
#248 — Veterinarian Is Able to Cut Back
Today, we are talking with a veterinarian who has built enough wealth that he was able to cut back his days in clinic and can now spend more time with his family. He is especially enjoying coaching his kids' soccer team. This two-vet couple bought and built their own practice, and they have been highly successful, all while living in California.
Finance 101: Cash Balance Plans
A cash balance plan is a type of defined benefit plan that functions much like a pension, but it behaves in many ways like an additional 401(k). While it has higher administrative costs and must follow specific pension rules, it allows you to contribute significantly more money toward retirement than a standard 401(k). For example, after maxing out a 401(k) at around $70,000 per year (between employee and employer contributions), you can often put even more into a cash balance plan—sometimes over $100,000 depending on your age and how the plan is structured. Older participants, especially in partnerships, can contribute the most since contribution limits rise with age.
Because a cash balance plan is technically a pension, it must be funded consistently. Even during times when you are not earning income, you’re still expected to make contributions. In return, these plans offer valuable benefits. Your investments grow tax-deferred, and because it’s an ERISA-covered plan, your assets are protected from creditors and bankruptcy, just like in a 401(k). Many partnerships choose to close and reopen these plans every 5-10 years. When a plan closes, the balance is usually rolled into a 401(k), continuing its tax-advantaged growth. It’s an effective way to capture large pre-tax deductions during peak earning years while maintaining strong asset protection.
Investment strategy inside a cash balance plan should be conservative. Since the plan credits a fixed rate of return—often between 0%-6%—too much risk can create problems. If returns are too low, you may have to make additional contributions to stay funded. If returns are too high, you can trigger penalties and compliance issues. For that reason, many people hold bonds or other lower-risk assets inside the plan and take their investment risk in their 401(k) or IRA instead. In short, a cash balance plan is primarily a tax and retirement savings tool rather than an aggressive investment vehicle—ideal for high-income professionals who want to boost retirement contributions and minimize current taxes.
To learn more about cash balance plans, read the Milestones to Millionaire transcript below.
WCI Podcast Transcript
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:
This is White Coat Investor podcast number 445.
Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student loans quickly and getting your finances back on track isn't easy. But that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. That could end up saving you thousands of dollars, helping you get out of student debt sooner.
SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. And if you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com/whitecoatinvestor.
SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions apply. NMLS 696891.
All right, some free stuff you should know about. We're giving away a free ticket to WCICON, the Physician Wellness and Financial Literacy Conference. It's a $1,999 value. That conference is March 25th through 28th, 2026. It's in Las Vegas. Head to White Coat Investor on Instagram or Facebook and follow the instructions on the giveaway post this week. You need to enter to win by 11/17.
And of course, most people aren't going to win. You should come anyway. It's going to be a great conference. It's well worth your money. You can use CME funds to pay for it. We're going to have a great time. It's the best time of year to be in Vegas.
And if you want the Vegas experience, you can get that. If you just want to stay away from the strip, you can do that too. We're at a resort hotel, not on the strip. You're going to love it. It's good times. Okay, free ticket for that.
The second thing we're doing for free coming right up is Thursday, November 20th, 06:00 P.M. Mountain Time. This is a real estate webinar for lack of a better term. So if you're curious about real estate, but you're not sure if it's the right move for you, join us for that live session. I'm going to walk through what physicians need to know before investing in real estate.
We're going to talk about the reasons it can fast track your path to wealth, the massive tax advantages most doctors don't take full advantage of, the different types of real estate investments and how to choose the right fit for you, how to avoid common mistakes, the derail returns, and some tools to evaluate real estate opportunities.
Whether you're looking for passive income, a diversified portfolio, or a more hands-on approach to investing, this session is going to help you decide your next steps. And I'm going to stick around afterward and answer your real estate questions. Register at whitecoatinvestor.com/rei. And three people who join live are going to win our no hype real estate investing course, $2,199 value for that. Register now, whitecoatinvestor.com/rei.
All right, that's all the free stuff. Other than the rest of this podcast, that's free too. One of the fun parts about doing White Coat Investor over the years is 98% of what we produce is totally free to you. And we've wondered a few times over the years, is this the right model? Maybe we ought to just get rid of all the ads and just have this be like a subscription thing. You guys pay us a subscription every month and you get the podcast, you get the blog posts as emails or whatever.
You guys let us know in a very resounding way that you do not want that. You're fine with the ads. You want the stuff to be free. So we've continued to produce it for free to you. 98% of everything we do is totally free. You're welcome. But yeah, you do have to listen to an ad every now and then, heaven forbid.
THINGS TO CONSIDER BEFORE BUYING INTO A PHYSICIAN-OWNED PRACTICE
Dr. Jim Dahle:
Okay. Let's take our first question. This one was just emailed to me just this week. And basically they say, “I'd love to write in to ask some questions about buying into a physician-owned private practice. Can you do a podcast answering some of the following? Ask what are the questions you need to ask? What's a typical buy-in and how best to do it? Take a loan, work for less pay a few years. After becoming an owner, what changes? How much should you expect pay to increase? Number of hours a week on administrative duties. Do I need to hire a lawyer, an accountant to review the books, pros and cons? Thanks for your time to hope to hear from you and your team.”
Okay. Well, that was a massive amount of questions and information being asked for. And the problem is every business is different. And that's what a physician partnership is. A physician-owned private practice is a business and every one of them is different. So, the list of questions you need to ask, there's not a 10 questions you got to ask. I mean, I guess I could do a blog post. It'd be really click-baity I'm sure of “10 Questions You Need To Ask For Buying Into a Practice”.
But you basically want to know everything. You want to know why the owner start the business? Why is the owner giving you the opportunity to buy into it or selling it or offering partnership? What craziness does the owner have in their head or do they have in their marriage or do they have in their family or they have in the way they practice medicine. You want to know who are the employees? Are they planning to stay with a new ownership? How much are they being paid? What benefits are being offered now? What debt does this thing have? What kind of money does it make? How does it make money? What does the payer mix look like. What insurance contracts are in place? Who's doing the billing.
Every detail about the business you want to ask about. And so, when you're at the level going, “Oh, what questions should I ask?” You are not even close to being ready to buy this business. Even joining a physician partnership or relatively straightforward one, like an emergency medicine group like ours, there's lots you want to ask. Well, how do you determine who makes the partner? How much do partners get paid? What will I be paid until I'm a partner? How will it be decided if I become a partner? There's all this other stuff that goes into it.
The second question was, “What's a typical buy-in and how's the best way to do it?” Well, it depends. Like most emergency medicine, all the business is, is the accounts receivable. There's nothing else you're buying into. There's no practice real estate. There's really no equipment. There's nothing else you're buying other than the business itself and the ability to make money at low, maybe a little higher rate.
And so, the way most emergency physician groups are structured is a sweat equity buy-in. Typically one to three years, you work as an employee in a pre-partner track, you get paid less than the partners are making, and that's basically your buy-in. Once you finish that period and you're made partner, you get your share of whatever it makes that month and you own some of the accounts receivable. When you leave, you get some sort of a buyout, which is probably your share of the accounts receivable. And that's about it. It's pretty simple and straightforward.
But lots of practices own stuff. Maybe they own three different clinic locations in the real estate there and an outpatient surgical center, and maybe there's a bunch of expensive equipment it owns as well. So maybe your share of ownership is the fifth partner is seven figures. And they're like, “No, sweat equity is not going to cut it. You got to actually pay us something to buy in here.”
And for a lot of young docs just coming out of residency, you don't have much money. So what does that mean? It usually means another loan. Certainly that's how most dentists that are buying a practice buy it and get a practice loan. They can take that from the partnership itself or from the prior owner. They can take back the mortgage, essentially, on the business, or you can go out and get another one from a bank or small business or your grandma. It doesn't really matter. They want cash on the barrel ahead and they don't care where you get the cash from.
Sometimes it's a combination. You do sweat equity for a year and then there's a cash buy-in you got to make. There's lots of different ways to skin this cat. Every partnership is different. You want to understand what the structure is of the business you're buying into though. And like anything, it's negotiable. They might say it's not negotiable, but it is negotiable. Maybe they won't negotiate it because the other 15 partners came in exactly the same way. But you'd be surprised how much it varies from partner to partner when people come in.
So, what's a typical buy-in? It's usually either cash or it's usually either sweat equity for one to three years, sometimes as long as five I've seen, but I think that's really a long time. One of the most painful ones I ever looked at in emergency medicine required me to work all nights for five years. That was a sweat equity buy-in. I'm like, “Eh, I don't think I'm interested in that.”
But a typical buy-in, if you're buying into practice, real estate and outpatient surgical center and some equipment and stuff, it might be half a million dollars or a million dollars. It can be a pretty substantial sum, but highly variable.
The next question is “After becoming owner, what changes?” Well, you're the owner. You're responsible. If it loses money, you lost money. If it makes money, you made money. You're responsible to pay all the overhead. That includes any employees. That includes insurance policies. That includes utilities. That includes billing companies. You're responsible to pay all that. You're the last person to get paid. You're the owner.
The benefit? You get whatever's left. And that usually in a well-run business, a well-run practice means you make more money than if you're an employee. You should. You've got more hassle. You're taking on more risk. You should make more money.
How much should you expect your pay to increase? Well, that's highly variable. Why not just ask? Just ask or calculate it out. In a typical emergency medicine partnership, it's probably 50 to 100% more you get paid. Your pay goes up substantially when you become a partner.
How many hours a week do you do on administrative duties? Well, it depends. In my partnership, I do no hours a week on administrative duties, but I pay my partners to do them. They might get the equivalent of two or three or four shifts a month for the administrative duties they're doing. And guess who pays them? Those of us not doing them. So, it can be pretty variable. It wouldn't be unusual at all, I think, for a practice owner to practice medicine for 40 or 50 hours a week and spend another 10 or 15 doing administrative duties. That would not surprise me at all.
The next question was, “Do I need to hire a lawyer, an accountant to review the books?” Well, using a lawyer is a good idea. There's a partnership agreement. There's a contract of some kind. There's an operating agreement for the business. You need to understand what it says. And for most of us, that means hiring a contract review firm, like some of the ones advertised here at White Coat Investor, or maybe a healthcare attorney in your state to review those sorts of contracts. That's a good idea.
Do you need an accountant to review the books? I don't know. Do you need an accountant to review the books? Or do you understand what you're looking at when you look at the books? Yes, you should look at the books before you buy a business. You should know what it's making, what it's costing, what the expenses are, what the likely sources of revenue are. Yeah, you need to look at the books. And if you need an accountant to help you do that, then hire an accountant, by all means.
What are the pros and cons? Well, the pros are more money, more control. The cons are more control. You're in charge. All of a sudden, when the bad things happen, the bad things happen to you. And you got a lot more work most of the time. If you're looking to just punch your time card, ownership's maybe not the best thing for you. But if you're looking to do all you can with it, and control as much of your work environments, you can control your employees and your future partners and those you work with.
I'm a big fan of ownership. I prefer seeing docs owning their jobs. I think they're happier long term. I think they're less burned out. I think they make more money in general. But that's not an always thing. There are situations where owners are making less money than they would be if they were employees in a similar situation. I hope that's helpful for you.
Okay, let's take a question off the Speak Pipe. This one about net worth.
WHAT IS NET WORTH?
Roy:
Hi, this is Roy. I'm a hospitalist in California. My question is regarding net worth, the concept of net worth. It gets thrown around a lot on White Coat Investor and a lot of other financial sites. But what does it really mean? I understand it generally includes assets minus debts. But for example, people don't seem to agree on whether it should include your home equity, if you have a home mortgage, because you don't own the home outright. Should it include your home at all, since that's an asset that if you sell it, you're homeless? And should it include things like collectibles, cars, boats, and so on?
Ultimately, I want to know, is it really a useful metric? Does it really tell us much rather than besides just a crude approximation of how much stuff you have versus how much you owe? Thanks very much. It's a topic that kind of confuses me a little bit, but thank you again.
Dr. Jim Dahle:
Good question. I think the main problem here is that you're confusing two terms, net worth and investable assets or your nest day, your retirement money, money you're going to live off, whatever you want to call that other part.
Net worth is very simple. It's everything you own minus everything you owe. So with regards to your home, the value of the home goes in the asset column. The mortgage on the home goes in the liability column. If you own a $700,000 home and you have a $400,000 mortgage on it, that's $300,000 to the bottom line. $700,000 in the assets, $400,000 in liabilities, $300,000 at the bottom. That's how net worth works. Everything goes into it. Your clothes, your jewelry, your car, your lawnmower, everything goes into it.
Now, do most of us, for practical purposes, include everything in it? No, we do not. We tend to include our home equity and we include our investments and maybe our business. Maybe somebody includes the car, but I don't even include cars when I calculate my own net worth. It's just too much of a pain to go look them up. And all that sort of stuff tends to be small potatoes at a certain point, especially if you've been successful with your finances as a white coat investor. You just ignore all that other stuff. But for most of us, our home is a pretty big chunk of our financial life. That one's worth using when you're doing your net worth.
But the truth is your net worth is not a very useful number. What are you going to use it for? Nothing. Maybe you can brag about it on an internet forum. I don't know. That's about it. It's interesting to know. You want to make sure it's moving in the right direction. But the only thing that's really good for comparing to is what your net worth was last year and what your net worth was 10 years ago.
As far as a useful number for your financial life and for making decisions, we're talking about your investable assets, your nest egg or whatever. These are your investments. And the reason you don't put your home in there are some of the things you alluded to. Where are you going to live if you sell it? Well, you're probably going to buy another home. So it's really not going into your investable assets. It's not paying you dividends. Unless you consider a dividend, the rent you're saving by not being in there. But don't put that into your investable assets.
Likewise, with your small business, you're probably not putting that in there. Some things are just better left outside of those investable assets. Because what you really want to do with those investable assets is you want to be able to rebalance them. You want to be able to make calculations like, “When will I be financially independent?” You need about 25 times what you spend in there to be financially independent. Well, it's not 25 times your net worth. It's 25 times your nest egg.
What counts in the investable assets? Well, your investments, whether they're in retirement accounts or not. I guess you could throw in some debts in there if you want. But typically, I would leave those only in the net worth column. Maybe if there's some investment-related debt, you can include that. Like you had a bunch of real estate rental properties. Maybe you include the home equity from those in your investable assets. But for the most part, if you just distinguish between those two things, I think it answers all your questions. And you won't be so confused when you hear the terms being used.
QUOTE OF THE DAY
Dr. Jim Dahle:
Our quote of the day today comes from Warren Buffett, who's been great at giving all kinds of awesome quotes over the years. He said, “The stock market is a device for transferring money from the impatient to the patient.”
I love Buffett's perspective on this. His perspective is when you buy a stock, you are buying a business. Yes, it's a tiny little sliver of business, but you're buying a business. And if you don't want to own that business because of what the business is doing, it's earnings, it's dividends, it's whatever, then you shouldn't buy it.
The stock market is not a place to go speculate on what something's going to be worth more in a year or two or 10. If your favorite holding period, as Buffett says, is forever, you're buying it for its earnings. You're buying it because you think it's going to make profit this year, next year, the year after that, and have a good chance of increasing its profits as the years go by. That's why you're buying the stock. That's the perspective to take, is a long-term one. You're not owning it for a month, you're owning it for decades.
Okay, let's take a question from John. This one is about some Air National Guard stuff. I hope I can answer this one. It sounds complicated.
WHAT TO DO WITH GUARD RETIREMENT MONEY
John:
Hi, Dr. Dahle. I'm an airline pilot and I'm on track to reach my retirement savings goals. I'm also a pilot in the Air National Guard, about to retire after 20 years of service. Due to a few deployments, I will be able to receive my Guard retirement starting at age 57. I plan on flying for the airlines until the mandatory retirement age of 65.
My question is, what is the best use for this Guard retirement paycheck from age 57 to 65? The best idea I've had so far is to save the money for those eight years and then live off of that cash starting at age 65 for the approximate three years that it will last me. All of this as a means of reducing sequence of returns risk. What would you suggest?
P.S. If you answer this Speak Pipe, I will be the third of four brothers to have you answer a question on your podcast. Just some useless trivia and perhaps a WCI podcast record. Thank you very much.
Dr. Jim Dahle:
Well, you're certainly the first one to let us know that three of the four of you have been on the Speak Pipe. Congratulations. I can't wait to get the fourth question. First, thanks for what you do. Thanks for your service. Thanks for being a pilot. It's important work.
But this is like any other money. You don't treat this differently. You treat this the same as if it was dividends from your taxable stock mutual fund. You treat it the same as if you got a raise at your airline job. You treat it the same as if grandma left you some money. You fold it into your financial plan. Whatever your financial plan says to do with your money that comes in every month, that's what you do.
Like our plan says, well, we're going to pay everything we bought. We're going to pay for that. Then we're going to put the rest into a portfolio. Our portfolio is 60% stocks and 20% bonds and 20% real estate. If I was getting a guard retirement paycheck from 57 to 65 while I was still working at another job, it would go 60% into stocks, 20% into bonds or 20% into real estate. Actually, it'd be directed at whatever's not doing particularly well a couple of months before then just in an effort to rebalance the portfolio. That's where it would go. I wouldn't treat it as some separate fund of money or separate source of money or separate type of money.
Money is fungible. Whether you save the guard retirement paycheck for retirement or whether you save your airline paycheck for retirement or whether you reinvest your dividends in your taxable account, it's all the same. It's fungible. So, don't think of it as a separate pot of money.
Now, your other question was how do I deal with sequence of returns risk, which is a totally separate question. There's lots of ways to deal with sequence of returns risk. A common way to do it is just decrease how aggressive your portfolio is. Basically, more money in bonds than you had before. You get into those sequence of returns risk years, which are really a few years before you retire and maybe the first five years after you retire. People set up bond tents and they set up tips ladders and just have less aggressive asset allocation, more money in bonds essentially. However you set that up, it basically makes it so the portfolio will not be so volatile.
The idea with sequence of returns risk is you're trying to avoid pulling money out of your portfolio while it's falling in value because sequence of returns risk showed up. A big nasty bear market showed up just as soon as you retired. That's what you're trying to guard against. And whether you do that by laddering out a bunch of TIPS or whether you do that by qualifying for a pension or whether you do that by buying a single premium immediate annuity or whether you do that by just setting aside some cash for those first five years or whatever, all that's fine.
Now if you want to take that money and you want to just stockpile it in cash to spend for those first few years so you can let your investments ride, I think that's reasonable. But don't get caught in the trap of thinking that money is somehow different from the rest of your earnings. It isn't.
All right, thanks everybody out there. Whether you're a pilot, whether you're a doc, whether you're an attorney, whether you're a small business owner, lots of different types of White Coat Investors out there. And y'all have hard jobs. That's why you get paid a lot. When I get on that plane, I'm counting on that pilot being competent. When I go in the OR, I'm counting on that surgeon being competent. And the reason you're competent is because you spend a long time learning how to do what you do and becoming good at it. So thanks for that.
Okay. Our next question comes from Brian.
SPECIAL NEEDS TRUSTS
Brian:
Hi there. Thank you for all you do at White Coat Investor. I had a question in regards to trusts and more specifically special needs trusts. We had a death of a family member and they set up a special needs trust for my brother who has intellectual disabilities. And I don't know what to do with the money in the trust. He likely won't be using the money significantly over the next 10 or 20 years.
And so, I'd like an investment strategy that will grow over that time period, but I'm not sure what makes the most sense. Some large banks offer wealth investment services, but they take about 1% of the investment to do that.
Am I better off just opening some kind of Fidelity or Vanguard account? And if so, is there a way to open up that account in his name with me as the trustee? And then should I just invest the whole sum of money into a VTI or some kind of whole stock market index? I would love some information about how best to manage this special needs trust on behalf of my brother. Thank you.
Dr. Jim Dahle:
We need to divide this into a couple of things. First, let's talk about some trust specific stuff. And then let's talk about just investing. Because a lot of this is just a regular old boring investing question that we all ask every day about our portfolios.
First the trust stuff. No, when you go to Fidelity or Schwab or wherever and open an account, you don't put it in his name. It's not his account. It belongs to the trust. A trust is a separate entity from your brother. It's a separate entity from you. The trust should have its own tax number, and it should have its own name. And that's what you open accounts in. If you're the trustee, you have to act as a trustee. You now have fiduciary duty to the beneficiaries of this trust, and you got to do it right. So, if you have no idea how to be a trustee, you might need to hire help to do that.
There's lots of trust companies, banks, et cetera, that offer these sorts of services. Most of them charge a whole bunch of money for it. So it's good if you can learn how to be your own trustee, but somebody's got to be the trustee for this trust, and they got to treat it as a separate entity and follow the rules of the trust, et cetera, et cetera.
Now I function as one of the trustees for our trust. And so I know that can be a do-it-yourself project, but you also have to be capable of doing it yourself. And all I've heard from you is 30 or 45 seconds or whatever questions. I have no idea what your level of financial literacy or competence is, whether you are competent to be a trustee for this trust. That sounds like maybe somebody dumped on you with or without checking on you. I have no idea. If you need help, go get help setting things up. But yeah, it's open the account in the trust name.
The second question is just general investing. What should I invest in? Well, if I knew what you should invest in, I would pick whatever's going to do the best over the next 10 or 20 years. And I just have you put all your money in that. If we go back in the time machine to 15 years ago, we'd say, “Oh, Bitcoin's going to do the best. Put all the trust money in Bitcoin.”
But you don't know that. You're working with a cloudy crystal ball. So you have to pick a mix of investments that's going to do reasonably well under a wide variety of potential economic outcomes over the next 10 to 20 years. And there are lots and lots of different investments that probably meet that criteria. An easy way to do this though, is to use something like a life cycle fund, called target retirement funds at Vanguard. They go by different names, but generally, you pick an age at which you think you're going to retire 2035, 2040, 2045, et cetera. And that's the fund you buy.
And what the fund does is it's a fund of other mutual funds. It just rebalances for you each day and makes it less aggressive as you move closer to that date, but if chosen from a right company like Vanguard, you're going to get a low cost, broadly diversified investment that's going to be an autopilot for the next 10 to 20 years. Sounds perfect for someone in your situation.
Maybe you're like, “He's going to need this in 10 to 20 years.” Maybe you go pick a Vanguard 2035 or 2040 retirement fund. You're going to get some stocks and some bonds, US stocks and international stocks is going to be very broadly diversified. No one can say you didn't meet your fiduciary duty to the beneficiary by choosing an investment like that. It will get less and less aggressive as you get closer to the time of him needing the money.
And even when he starts needing the money, he's going to need it over time. So it will remain somewhat invested over time to continue to help keep up with the inflation adjusted spending needs from that. That might be the approach that I'd take is go to Vanguard or Fidelity or whatever, put it in a very low cost target retirement fund and let it ride. I think that will meet your duty as a fiduciary to your brother and likely give him the financial outcome that he needs and deserves.
I hope that's helpful. There's obviously lots and lots of ways to invest, but you need to do it in a way that's most likely to grow the money in a reasonably safe way because it really does need to be there in 10 to 20 years it sounds like.
SPONSOR
Dr. Jim Dahle:
As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.com/whitecoatinvestors to see all the promotions and offers they've got waiting for you.
SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions apply. NMLS 696891.
Don't forget about the WCICON ticket giveaway. Go to White Coat Investor on Instagram or Facebook. Follow the instructions there on the giveaway post this week. You need to enter to win by 11/17.
Thanks also for leaving us five star reviews and telling your friends about the podcast. A recent one came in from Q Brill who said “Informative and entertaining. Great advice for physicians from a physician. Follow your doctor's advice. Listen to this show. It is informative and entertaining.” Five stars. Thanks for that great review.
All right. Keep your head up and shoulders back. You've got this. We're here to help. See you next time on the White Coat Investor 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.
Milestones to Millionaire Transcript
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 248 – Veterinarians Able to Cut Back.
This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.
If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at www.whitecoatinvestor.com/protuity. You can also email [email protected] or just pick up the phone and call (973) 771-9100.
Hey, are you curious about real estate but not sure if it's the right move for you? Join me on Thursday, November 20th at 06:00 P.M. Mountain for a live session where I'll walk through what physicians need to know before investing in real estate.
We're going to cover the reasons real estate can fast track your path to wealth. We're going to talk about the massive tax advantages most doctors don't take full advantage of. We'll talk about the different types of real estate investments and how to choose the right fit for you.
We'll talk about how to avoid common mistakes that derail returns and some tools to evaluate real estate opportunities. Whether you're looking for passive income or diversification or more hands-on approach to investing, this session will help you decide your next steps.
Plus, I'll stick around and answer any of your real estate questions afterward. You can register at whitecoatinvestor.com/rei. Three people who join live will win our no-hype real estate investing course, which is a $2,199 value. You can register for that. Again, whitecoatinvestor.com/rei.
All right. We've got a great interview today with a veterinarian. Stick around afterward. We're going to talk for a minute about cash balance plans and some of the ins and outs of those that a lot of docs have a hard time wrapping their minds around. Let's get into this interview. It's a good one.
INTERVIEW
Dr. Jim Dahle:
Our guest today on the Milestones Millionaire podcast is Alex. Alex, welcome to the podcast.
Alex:
Thank you very much for having me. It's an honor to be here. I love the show.
Dr. Jim Dahle:
All right. Introduce yourself to the audience. Tell us what part of the country you're in, what you do for a living, how far you're out of school, etc.
Alex:
My name is Alex. As you said, I am a veterinarian. I am 17 years out of school. I'm a 2008 grad. I own and operate a veterinary clinic on the coast in Southern California, so high cost of living area. My wife is also a veterinarian and my business partner. We run the practice, our lives, and two kids together.
Dr. Jim Dahle:
Awesome. Tell us what milestone we're celebrating today.
Alex:
The milestone that I thought would be fun to come on is that I am spending an equal or more amount of time coaching my kids' sports than I am in the clinic, running the clinic, and seeing patients on a day-to-day basis. That was a big goal of ours to be involved in our kids' lives while they still like us as much as we could be. It's been really great to be a part of their world.
Dr. Jim Dahle:
If you do it just right, they'll always like you except for about two years between 16 and 18. But it's pretty awesome. I can tell you're passionate about this. Tell us about how you guys have lived your financial life to be in this position at mid-career.
Alex:
My wife and I are a little bit different from the standpoint that we have very similar goals as far as financial things and how we manage money, but different as far as she doesn't really want to be involved in it too much. She just likes that we make it. But we had very similar goals where we wanted to be, and then we just basically reverse-engineered on how to get there.
For me personally, my financial journey started at a very young age. My father was also a veterinarian, and my mom ran his business. I remember my mom coming into my bedroom and watching me count a stack of $100 bills that I had been hiding behind a framed Michael Jordan photo.
She took me to the bank the next day, opened a bank account, and showed me how to balance my checkbook and started investing early. And when I was appropriate age, about 16, she showed me my college fund. She said, “Hey, this is what you have for college. This is all there is. You need to make it work.”
We also had a clothing allowance from the age of 12. You had a certain amount of money to spend on clothes. If you bought the brand new Air Jordans, you better be prepared to wear socks with holes in them or underwear with holes in them. But it really taught us to learn about money and how to use that money. And so, I was very motivated from an early age. In fact, I just went and found a copy of The Millionaire Next Door off my shelf that she gave me at about 14. And I highlighted that book from a very young age. And it really spoke to me because it's very data-driven.
And so, I think that my mom and my dad seeing how hard they worked and instilling that in me and giving me that book honestly is what really set me up. And so I've always been very motivated to live below my means and put as much away as I could as early as I could.
Dr. Jim Dahle:
Okay. As you transitioned into adulthood, went through school in your 20s, et cetera, how did those lessons you learned as a young person result in how you've lived your financial life as an adult?
Alex:
Yeah. They also helped. They also kind of let me make my own mistakes. When I was 20 years old, I actually cashed out my college fund and bought my first house at 20. Not something I would recommend a 20-year-old do or even to my own kids. But at the time, I saw how much I was paying in rent for California cities. I basically bought a house that was big enough that I could rent out all the other rooms and I didn't have to pay rent. And so from age 20, I bought my first house. I then eventually flipped that house into my next house and started my real estate journey. And I've always been very passionate about real estate.
I also realized that as a 20-year-old, the biggest expense was going to be tuition. And so I worked really hard and got a full ride scholarship. I went out to the Midwest for my undergrad, which I didn't want to leave California, but the Midwest offered me a full ride scholarship. To me, that was say $40,000 right there in the first year.
And then I also realized that at the time, UC Davis would let you get into veterinary school if you had all the prerequisites done without an undergrad degree. I actually got into Davis a whole year early after only three years of undergrad. So that saved me another $40,000 to $50,000.
Just kind of finding the loopholes and exploring every possibility as far as saving money from an early age so that I could start my savings and investing journey as early as possible. And my parents were very good at letting me make mistakes. They told me, “This is probably not a good idea for you to buy a house at 20 years old in California.” But I did, it worked out luckily. And honestly they were a safety net that I didn't realize at the time, but it was really worked out well.
Dr. Jim Dahle:
Yeah, it is nice to have a little bit behind you, for sure. You're clearly pretty far out there on the satisficer versus optimizer spectrum. You've done a lot of things to optimize your finances over the years, it sounds like. Okay, you got through school, you became a veterinarian, at what point did you get married?
Alex:
I met my wife in vet school. I don't know if you know, but there's about 20 women for every one man in vet school. So we used to say “The odds are good, but the goods are odd.” But luckily, I found a great wife who has just been my absolute rock and business partner.
We got married shortly after school. Our first job before kids, we both work really hard, her especially doing large animals, she was on call a lot. It would be nothing for her to go try to help pull a calf at seven months pregnant in the middle of the night.
And so, we kind of started looking at each other once we had our first child after eight years of working for somebody else and saying if we really want to make good money, we really got to own a practice. If we really want to set our own schedules, we really need to be the boss. And if we really don't want to be on call all the time, it was really on call. You'd work 50 plus 60 hours a week, and then you get to take a pager home for the middle of the night. And that just wasn't really conducive to a family environment for us how we wanted to raise our kids.
And so, we started looking. Most people who they buy the practice, they buy it from the old retiring veterinarian. We started looking everywhere on the west coast from Washington, Oregon, California, looking for a practice that would fit our needs. And we looked at a lot of them before we found the right one that we felt would be a good fit for us and a good place to raise our family.
And it was very, very difficult to start, I'll be very honest, our sixth day of being open, I was so stressed that we'd made the biggest mistake of our lives, that I actually ruptured my appendix and secum and got a little peritonitis and was so determined, I was literally trying to see a Yorkie with peritonitis. But finally, when I was crawling on the floor, the nurses said, “Yeah, you're going to the hospital.” That was a challenge.
The first few years were very challenging. We didn't make any money. And we thought we'd made a big mistake. But we kept our head down and grinded and got to a point where we are now.
Dr. Jim Dahle:
Awesome. Now, you're getting into real estate investing at 20. I assume this was going on in the background the whole time, even when you're making employee kind of money. When you went to go buy a practice, what would the real estate empire look like?
Alex:
The first place I bought was in Sacramento, I sold that, bought a place in Davis for my vet school. And then I kept that rental going, basically, just through word of mouth through the veterinary school, getting more and more vets in there. And then when we bought our first house at our first job, I managed to buy a property that had two houses on it. A multifamily house. We could rent out the bottom house, which basically cut our mortgage in half.
Dr. Jim Dahle:
This is all house hacking to start with. The first three.
Alex:
Yeah. And then when we were moving, they said, “Oh, well, you got to sell this house. You're buying this practice.” I said, I don't think I do. And I was able to keep it, which has been great, because now that house at this point is fully paid off. And there's two rentals on it that are just like a cash cow. That's been really, really good to have. And then when we bought the practice, I was very, very forward thinking as far as we wrote in the contract, you have to sell us the practice real estate if I come and want to buy it within the first five years of owning the practice.
And the seller was very generous, and accommodating in that and that he let me pay a lump sum for the practice and then have that in the contract so that at year three or four, I was able to buy the real estate that the practice is on. We now have two rentals, the practice that the real estate's on in our primary mortgage.
Dr. Jim Dahle:
Where'd the lump sum come from?
Alex:
The lump sum for the practice came from a little bit of savings as well as grandma. We took a loan out of grandma. We made her take interest, but she did take interest, which we've of course, has since paid off. So it was a good deal for her in her mind, but it was definitely a good deal for us too.
Dr. Jim Dahle:
Yeah. Very cool. At some point since you're owned the practice, it's doing well enough that you're like, “I can cut back”, which is the goal of a lot of docs, especially by mid-career burnout rears his head, but probably more commonly, you just become interested in other stuff, in your case coaching. So, at what point did you realize I can cut back and do a little bit more of what I want to do?
Alex:
Yeah. We got to a point where the finances were in a good place. It kind of came about that another veterinarian who we had mentored as a student wanted to come back and work at the practice. And so, finding veterinarians is extremely difficult as I assume it is a lot of specialties. And so when that fell on our lap, we made the decision, “Hey, let's take a little less money and spend more time with the kids.”
Dr. Jim Dahle:
You both cut back at the same time.
Alex:
Yeah. And we cut out other things too. When we first started, we were doing boarding. So we were there seven days a week. I was walking dogs, cleaning cages on Sunday mornings and all of those things.
Dr. Jim Dahle:
You're hustling.
Alex:
You have to, you know that. You have to. I was the gardener, I painted, you did everything, IT work, you do it all. And then COVID happened and COVID changed everything. COVID shut down our boarding for the most part. And COVID was an absolute boom to veterinarians. Everybody who was sitting at home quarantining was bringing their cat in the first time it sneezed. If you didn't have a cat or dog, you adopted one. I don't have the stats in front of me, but it was somewhere ridiculous of over 50 million pets were added to American households during COVID. So it was the best years we ever had as vets. And it really changed our perspective.
I remember the first weekend, my wife and I were home together. We never had a weekend together in a few years. We were like, this is nice being home on a weekend with the kids. And so, yeah, when our associate came on, we just changed our schedules to my wife and I both work three days a week each. So we both go in on Fridays, but Monday through Thursday one of us is always there to pick up the kids.
There's chapters in life and our kids, I don't want to say they suffer, they didn't suffer, but it was harder on them to be in daycare for 10, 12 hours a day during those first few years. So it's very nice to be able to pick them up from school and coach little league, coach flag football, coach soccer, and do all those things. So it's been very, very fun for me.
Dr. Jim Dahle:
All right. Let's talk about California. We talk about California all the time on this podcast, as you know, not because there's any particularly unique about California. We're just using it as an example of a high cost of living area. You decided that was going to work for you. You could make that work. Tell us about that decision. You knew from the time you spent in the Midwest, that there were cheaper places to live where you could have lower tax bill, lower cost of living, lower housing prices, et cetera.
But you went ahead, despite being financially literate and knowing what you're in for, you chose to stay in California anyway. Tell us about that decision, those conversations, what your reasoning was.
Alex:
Yeah. I think obviously part of it is we're both from California. So this is home for us. And certainly I see that California hate much of it deserved. It is not the easiest place to run a business. A lot of challenges in owning a business in California, obviously the high tax burden for us. When we started looking, we wanted to be close to family so that our kids could grow up with their cousins who they're really close with and be close to our parents as well.
But the biggest thing when I was looking at practices was the community itself. And so, when I found a coastal California community that was mainly made up of retirees. In my specific community, the median age is 66 years old. And these are all affluent people who had very good careers. Not most of them, but a good percentage of them never had kids. So that dog or cat is their kid. And so they want good care. They want lab work. They want ultrasounds. They want a CT. They want good oral surgery.
Finding the right community was key for us. We're also in a community where there's not big box corporate veterinary practices, which is a pressure on a lot of small business owners. I think finding the right spot was key, but also we never really wanted to leave California.
And honestly, that was one of the reasons I wanted to come on the podcast. Like, hey, not only can this be done in California, but I'm a measly veterinarian. I remember I went to career day and the guy that went in front of me was an ER doc and he said what his salary was. And I kind of balked a little bit. And then obviously I hear on your pod.
Vets don't start out making that kind of money. And I wanted to come on to say, hey, not only can you do this in California, but you can do it as a veterinarian. Because I think too many veterinarians don't take the ownership route or don't explore it. And really for us, it's the only real way to make that kind of money, to make the money to get to financial independence. In my opinion.
Dr. Jim Dahle:
Tell us about the difference between what you're making as an employee, your first couple of real hard years as an owner, and then what you're making working full time as an owner once you got established.
Alex:
My very first job right out of school was $70,000 a year salary, which I thought was the most money I'd ever seen in my life. That would have been in 2008. And I had a lot of on call that went with that.
Our worst year as far as being owners was the first year. We did not take a paycheck the first six months. I think total between the two of us, we grossed $90,000 that first year.
Our very best year as owners would have been 2020 to 2021, the COVID years where we took combined growth salaries of about $440,000. And then our business is set up as an S-corp. And so 2021, we took a dividend of another $325,000. Combined with the dividend, those were our two best years about six and a half to seven and a half, those two years. An average year for us is we always kind of have the set salaries about $440,000, and then we'll take about $100,000 to $150,000 dividend.
Vet salaries have come up a lot since COVID. They were certainly lagging behind. But if you've been to the vet, you can all attest that prices have kind of gone through the roof as veterinary medicine has gone really, really corporate, which is not good for our industry.
Salaries have come up but we still don't make anything as far as what an MD makes or even some dentists make. And so your income to debt ratio is the worst by any white coat profession. And to me your best bet to change that ratio of income to debt is really to be an owner, become a specialist, or just work your absolute tail off or a combination thereof.
And for us, my wife had the grades to be a specialist. I did not. C=DVM. I was good in school, but not great. And I was much more business oriented. I was always wanting to be a business owner. My dad's practice was literally next door to my house growing up. So I walked through that business every day off the school bus and spent every afternoon in there. And I always wanted to own the business. And so, that's been really, really fortunate for me that we found a good one to take over and run with it.
Dr. Jim Dahle:
Very cool. What's next for you guys as far as financial goals?
Alex:
Next for us is really trying to, and this was a mistake I made, despite listening to all the FIRE podcasts and everything, I really think you need to have a plan when you get to this point. And I thought I had a plan, but I did not have a plan to stay busy enough. Most of us who get to this point are hustlers, we're used to being very busy.
And so I spent a decent amount of time on my tractor. I got a little farm stand. I do the coaching obviously, but I'm looking more to do some volunteering at spay and neuter.I've actually gone and I'm going to do some ER shifts just because ER is so exciting. And just to keep excited and into the business.
But I think that was a thing that I would recommend people, if they're trying to get where we are with the balances, really have a plan on how you're going to fill your day. Because you go from working so hard to “What the heck am I going to know?”
Dr. Jim Dahle:
Yeah. Well, the nice thing is you're moving slowly. You're still working part time. And I think that's far more difficult, especially for a doc that has been nosed to the grindstone for 30 years, and then at 65 or 70, just punches out completely overnight. It's way easier to have some sort of a gradual transition, part time work for a few years, etc. So I think you're doing awesome.
Well, our time is up. But I want to thank you for being willing to come on the podcast, share your story and inspire others, whether they're vets, dentists, some other allied health professional or physicians themselves. Now, 75% of physicians are employees. The ownership dream still exists and can still be a significant way to not only control your life, but to make a little bit more money, too. So, thank you so much for being willing to come on inspire others.
Alex:
Thank you very much for having me. It was an absolute honor. Appreciate it.
Dr. Jim Dahle:
I hope you enjoyed that. We don't have a lot of veterinarians on the show. And so it's great to not only showcase one, but showcase one that's hitting it out of the park in a high cost of living area. Now, clearly, there was a lot of work involved. There's a lot of hustling going on. There's some interest in business there. There was some risks taken.
Remember the risk of buying a house with his college funds at 20. That's risky. Did it work out okay? It sounds like it. There was the risk of starting this practice, taking grandma's money and starting a practice and realizing this is hard. But they kept at it, made smart decisions, and worked hard and it paid off. And now look, by mid-career, their life is under control. They get to do what they want with it.
He's got these existential issues that retirees have. “What am I going to do with my time?” He's not even retired yet. You can always work one more day. You've got all kinds of options when you're cutting back like that. And I know a lot of you out there mid-career may be suffering a little bit from burnout or whatever. Just finding other interests in your life.
It's awesome to have your life in a financial place where those opportunities are available to you. I want you to get there. We're trying to help you get there. The entire White Coat Investor community is trying to help you get there.
FINANCE 101: CASH BALANCE PLANS
Dr. Jim Dahle:
All right, I promised at the top of the podcast, we're going to talk about cash balance plans, also known as defined benefit plans. Actually, a cash balance plan is a type of defined benefit plan.
Defined benefit plans are generally thought of as pensions. Think of a cash balance plan though, as an extra 401(k) masquerading as a pension. It has to follow all these pension specific rules and the costs are a little higher than a typical 401(k).
But it allows you to max out your 401(k), which is this year's $70,000 a piece, between the employee and employer contributions. If the plan is set up right, you can put $70,000 in there. And if you have a cash balance plan, you can put a whole bunch more money in there. Maybe it's just a little bit depending on how the partnership or whatever set it up, or it might be a lot.
Some people are putting $100,000, $200,000, et cetera, into a cash balance plan. The older you get when you start these things, the more you can put in there. In my partnership, you can put as much as $120,000 a year into a cash balance plan once you get to a certain age. And if you're willing to commit to that for three years.
The way it's set up like a pension, the funding has to be somewhat stable. For example, when I fell off the mountain last year, I still had to make my payments into the cash balance plan. So we made them from savings for a couple of months when I wasn't working, rather than having come out of my distribution for that month for the partnership.
There are some rules that you have to deal with when you have a cash balance plan. But the benefit is you get way more money into a retirement account. Remember in retirement accounts, your money grows faster because it's not being taxed as it grows. You get that tax-protected growth.
You also get asset protection. This is an ERISA plan. I think I'm pronouncing that right. I was saying ERISA. That was one of the feedbacks we got on our annual survey. Thanks to all of you that filled that out, by the way. But apparently you're supposed to say ERISA. So it's covered by ERISA. Asset protection, you have to declare bankruptcy. You get to keep the money that's in the cash balance plan, just like your 401(k). Pretty awesome.
And then what typically happens with these plans is you close them periodically and open a new one. And you need to have an IRS accepted excuse to do that. But typically, if you've had it open for five or most 10 years, you can close it. And what happens when you close it? You roll the money into your 401(k). So, it's just another 401(k). That's what it is in the end.
But you've gotten this pre-tax deduction upfront during your peak earnings years. Maybe you get an arbitrage on the back end of that tax rate. You certainly get tax protected growth. You certainly get asset protection. Later down the road, you could do a Roth conversion on this money if you want to. It's just all the benefits of having more of your money in retirement accounts rather than in a taxable account. But there are the complexities of the fact that it has to masquerade as a pension.
One of the interesting things about it is a lot of people start wanting to be aggressive in their investments in a cash balance plan. This is not the place to be aggressive though, for a couple of reasons.
One, if you get really crummy returns. Aggressive means you're taking risk and sometimes the risk shows up. If you're getting crummy returns, you got to make up for them. You got to put additional money in there. That's not the end of the world if you have the money. Because you get a deduction for the money you put in too. So it's like you can contribute more that year to the cash balance plan, but you got to come up with the money.
And that's a problem in a lot of partnerships. In my partnership, that would be a problem. Most of my partners aren't even maxing out their 401(k), much less contributing to the cash balance plan. But that's one downside of taking too much risk.
The other downside is if you just smash it out of the park, you have great return year after year, after year, after year, after year, you have this problem if you have too much money in there. Because there's a crediting rate that gets assigned to it. It's typically something in the zero to 6% range. And that's really where you want the returns on the thing to be is within that range, at least in the long run, or else you can end up with some excise taxes and all kinds of other issues.
But the bottom line is you want to take your risk in the 401(k) and put your bonds, your less risky kind of assets in the cash balance plan. So, you don't want to be 100% stocks in the cash balance plan. In fact, some people say you don't even want to be 20 or 40% stocks in the cash balance plan. I think ours is 40% stocks in it.
But the point is you're not taking tons of risk. The point of a cash balance plan is to get that big fat tax deduction, get more money into retirement accounts. It's a tax play more than it is an investment play, but you realize that this is only going to be in there for a short period of time.
If you're closing this thing six years, well, some of that money was only in there for a year or two. And if you wanted to have some money in bonds anyway, no big deal to have some money in the cash balance plan. Just adjust your 401(k) to make up for it. No big deal. You manage all your retirement accounts as one big account and have spread your asset allocation over all the funds that are designated for one goal.
In this case, retirement, whether that's a 401(k) or a Roth IRA, your spouse's accounts, your cash balance plan, your taxable account, whatever, manage it all as one big portfolio, one big asset allocation.
I hope that's helpful, it helps you understand a cash balance plan. You can open these even as an independent contractor, but it's probably more common to see these opened among partnerships for relatively high income physicians. If you're in a cardiologist partnership, it wouldn't be unusual to have a cash balance plan or something like that. If you're an orthopedist or something like that, and you want to be putting away $200,000 or $300,000 for retirement year, well, this might be a really great piece of that puzzle for you, especially if you're in your 50s or 60s.
So, look into it. We've got some people that can help. If you go to whitecoatinvestor.com, you go to our recommended page, go down to retirement plans. We've got a whole list of people that can help you set up these sorts of things.
SPONSOR
Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at Protuity. One listener sent us this review. “Bob has been absolutely terrific to work with. He has quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications underwriting process in a clear and professional manner.”
You can contact Bob at www.whitecoatinvestor.com/protuity or you can email [email protected] or just call (973) 771-9100.
But do it today. If you don't have disability insurance, or you're not sure you have the right disability insurance, get it in place before you need it, or before you develop some problem that keeps you from getting it.
All right, everybody, that's the end of our podcast. Keep your head up, shoulders back. We'll see you next time 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.
