What the Creator of the 4% Rule Says Today

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 464.

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All right, welcome back to the podcast. Thanks for what you do. Unfortunately, I've had lots of opportunities to interact with the medical profession lately. I don't enjoy that part of it so much, but it is nice to meet you guys and see you at work. And I do appreciate your education and training and how it helps me with whatever my medical challenges might be for the moment.

You are doing good work out there. That's why you get paid so well, but that doesn't necessarily mean that you're getting the thank yous that I know a lot of you enjoy getting from time to time. So, if no one said thanks for your hard work today, let me be the first.

By the way, the White Coat Investor is here to help you be successful. Successful in life, yes, but particularly in your finances. And I'm always surprised when people don't realize that we have recommended lists. Part of what we do, part of our mission is connecting you with the good guys and gals in the financial services industry.

We have these recommended lists. You can see them all if you go to whitecoatinvestor.com/recommended, but whatever you might need, whether it's a financial advisor or an insurance agent or a mortgage lender or somebody to help you with your contract or some advice about your student loans or some surveys you can take as a side gig, whatever you're looking for, we have these lists of people that we can introduce you to and help you with whatever it is you're seeking.

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We have a great interview today. We've got somebody that I was asked to bring on the podcast by some members of one of our online communities. This is Bill Bengen. And let's get him on the podcast and talk with him.

INTERVIEW WITH BILL BENGEN, THE CREATOR OF THE 4% RULE

Dr. Jim Dahle:
My guest today on the White Coat Investor podcast is Bill Bengen. Bill, welcome to the podcast.

Bill Bengen:
Oh, thanks so much for having me. I'm looking forward to this.

Dr. Jim Dahle:
Now, if you paid any attention at all to the personal finance space, to the investing space, to the retirement planning space, you need no introduction to Bill Bengen. He's a very well-known name in this space. For those of you who might be new to the podcast or maybe not as well-versed in this sort of stuff, maybe what you ought to know about Bill is that he's probably the first one to come up with something we talk about all the time, this 4% rule or this 4% guideline. He's one of the very first people out there to start talking about this sort of a safe withdrawal rate concept.

But it's interesting. That is not where he started his career. His degree is actually, I just learned this, in aeronautics and astronomics. You had an interest in being an astronaut and transitioned from there to running the family soft drink business before you eventually ended up at some point in the 80s in financial planning, where you made perhaps the greatest impact. Although, I don't know, 7 Up is a pretty well-known brand. Maybe you made more impact in the soft drink space than you ever made in financial planning. I don't know.

I guess my first question for you is, if the Nobel Prize was ever given out for the concept of safe withdrawal rates, should it go to you or should it go to the authors of the Trinity study?

Bill Bengen:
Well, it depends. I came out with my study about three or four years before Trinity. Theirs was very similar. They verified essentially what I had, which was very comforting to me at the time because that was still pretty new. I was always worried about making some major error. There are other people too you have to take a look at. We have, fortunately, a lot of talented people in the field researching retirement income. I think those names should be considered too.

Dr. Jim Dahle:
Yeah. There's definitely a lot of people that have contributed to it. More and more is coming out every year, of course. People are always trying to come up with new fancier ways to make your money last in retirement. But it's interesting to think about what financial planners were telling people in the late 1980s, in 1990, if somebody walked in to a financial planner and said, “How much of this portfolio can I spend?” What was the answer they would get in 1990?

Bill Bengen:
Well, back then, the subject really hadn't been researched at all before I posted my first paper. I called some of my fellow financial advisors in the San Diego area to ask them exactly that question, and their answers were all over the lot. It's not surprising. If there's no established research that's available, you're going to have to just do it by guesswork. Some of them said 3%. Some said 8%. Some said you should have a lot of stocks in your portfolio. Some said, no, you shouldn't have any stocks in your portfolio. You're a conservative in retirement.

Dr. Jim Dahle:
It certainly was all over the place. What I'd heard a lot was, “Well, if your portfolio average is 8%, well, you can spend 8%.” There's just no concept of sequence of returns risk, even among the financial planners of the world, most of which, unfortunately, were in the business of hawking stocks or hawking mutual funds or hawking insurance products, not really doing planning. Nobody knew. Nobody had really looked into it. Thank you for doing that work and getting people talking about this so we can have this conversation today.

Bill Bengen:
My pleasure.

Dr. Jim Dahle:
Your latest book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More. In the book, you argue that maybe the safe withdrawal rate is a little higher than that 4% guideline that's been around for years. Maybe it's as high as 4.7%, especially if you include some different types of investments in the portfolio, factor investing, maybe we should call it, for lack of a better term. Why did you feel like this was an important enough concept to put out a book about it?

Bill Bengen:
I've been researching this for 30 years. In the last 10 years, I've written articles in various publications, but they're spread all over the place. I wanted to bring all my research together in one place and present my process that I've developed over the years in a very comprehensive, thorough fashion. That was the real reason for the book.

Dr. Jim Dahle:
If you look at the Trinity study, for instance, it just basically looks at US stocks and US bonds, and really, it's just large-cap US stocks. That's it. That's what they did all the study of. In the book, it talks about an allocation of 11% to US large-cap stocks, and 11% to US mid-cap stocks, and 11% to US small-cap stocks, and 11% to micro-cap stocks, and 11% to international stocks, and then 40% in intermediate-term treasuries, and 5% in cash, essentially, treasury bills. I'm curious about that allocation. Is that some sort of a recommendation to retirees? Why did you choose that? In particular, maybe, why did you decide to tilt that allocation, that portfolio toward the small factor and not necessarily the value factor, for instance? Can you talk a little bit about where that allocation came from?

Bill Bengen:
Yeah. Essentially, I had tables showing rates of return for investments going back 100 years, and I pretty much chose the investments that had the highest returns. Micro-caps and small-cap US stocks are the highest, and S&P 500 isn't too far behind, and international stocks have done well too.

I'm a big fan of broad jurisdiction. My research still doesn't reflect the degree of jurisdiction I'd like to see. Somebody asked the class, I have included REITs and emerging market stocks and digital currency and alternative investments. They might make a significant contribution to the future withdrawal rate.

Dr. Jim Dahle:
A lot of people in this space tend to get, for lack of a better term, very pessimistic. I see people talking about a safe withdrawal rate, and all of a sudden, it's not only below 4%, it's closing in on 3%, and sometimes it gets below 3%. So many people out there arguing that 4% is actually too high, and yet your premise in the book is that 4% is probably too low. Are you not being pessimistic enough? Why is this pessimism that people get into, why is that so sexy and so attractive? Why do so many people listen to that and pay attention to it?

Bill Bengen:
I prefer not to be pessimistic or optimistic. I'd rather look at the data and see the story it presents. The story it presents to me is that even in today's environment, where stocks are very expensive and we're probably not that far from a major bear market, which, as you know, has a very deleterious effect upon withdrawal rates, you will still be able to withdraw somewhere between 5.5% and 5.8%, which is not bad, particularly compared to 4.7% or even 4%.

Dr. Jim Dahle:
I guess it comes down to what's likely to work versus what is safe, what's nearly guaranteed to work. A lot of people get lost between those two concepts. What strategy do you recommend to people that are on the eve of retirement, they're not going to have any more earned income going forward, and they need to develop some sort of strategy to make sure they don't run out of money before they run out of time? Is there a strategy you recommend to them? Do you recommend they start at 5% or 5.8% of the portfolio, or maybe start lower, or set up some guardrails? What strategy do you recommend to them?

Bill Bengen:
It's a very individual thing. What I call the eight elements or the primary determinants of the withdrawal rate vary from person to person. They include things like planning horizon, the type of account you've drawn from, whether you want to leave a legacy at the end of your life or not. You have to consider all those factors in detail. You also have to consider inflation and US stock market valuation.

There's a lot of things to consider. Overall, I don't recommend in my book, I use primarily a buy and hold philosophy. But I also mentioned in my book that I'm not a buy and hold investor anymore. I don't think retirees should be buy and hold, because if they encounter a really bad market like we did in 2008, it can devastate their portfolio and greatly reduce their withdrawal rate. I recommend risk management practices. Use a third-party risk management service to guide your equity allocation, protect and preserve your capital.

Dr. Jim Dahle:
What do you mean by a third-party risk management?

Bill Bengen:
Well, there are companies that do nothing but that. They basically issue recommendations on allocation based upon their perception of risk in the market. I use one. I know there are several others that are very good.

Dr. Jim Dahle:
You mean they recommend you change your asset allocation? Is that what you're saying? They say valuations are high, and we expect a bear market to be here soon. Maybe you ought to cut back from 60% stocks to 45% stocks or something.

Bill Bengen:
Exactly. They do it incrementally, not large jumps at a time. There's a difference between risk management and market timing. Market timing, in my understanding, is where you try to invest all your money at the bottom of the market and sell at the top. I don't think anyone can be that accurate predicting tops and bottoms to justify using that.

The risk management approach assesses risk continually and adjusts the portfolio accordingly. The particular service I use has a great track record. Back in the 2008 bear market, they lost only half of what the market lost. Preservation of capital is paramount to me.

Dr. Jim Dahle:
Isn't it just a matter of degree, though? A wholesale market timer may swap the whole portfolio from stocks to bonds. Somebody doing this risk management might only be swapping out 10%. Isn't it just as difficult to predict the future and get the timing right on 10% of the portfolio as on 100% of the portfolio?

Bill Bengen:
Yeah, I think the risk management makes sense to me because it's constantly reevaluating the risk in the market based on valuation, economic factors, technical factors, and so forth. If you're trying to call tops and bottoms, you don't have much margin for error, but the risk management people do because they're not making huge commitments based upon a forecast. They're looking at the data and what they glean from the data adjusts the allocation accordingly.

Dr. Jim Dahle:
When it comes to these sequences, we talk about sequence of return risk. If you look historically at the times that were really bad for somebody that was withdrawing from a portfolio, usually the Great Depression gets trumped out there because equity returns were so terrible. Really, the worst sequence was actually somebody retiring into the stagflation of the 70s. That's when portfolios failed. It turns out that inflation is actually a bigger risk to decimating your portfolio than poor equity returns.

What lessons should be taken from that when somebody is constructing a portfolio to withstand the possible bad things that can happen to them over the next 20 or 30 or 40 years during their retirement?

Bill Bengen:
Yeah, I always say that inflation is the greatest enemy of retirees. It can devastate your portfolio. What happens is that if you're increasing your withdrawals each year by inflation, and inflation is high, you're going to be very rapidly increasing withdrawal rate, put tremendous stress on your portfolio.

That's why 1929, 1933, the market dropped almost 90%. You still had a withdrawal rate of about 6% for that period, because it was a deflationary period, and people were actually able to reduce their withdrawals. We come to the 1968 period, you had the worst of both worlds. You had high stock market valuations, and you had a high inflation rate. Those combined made it far worse than the depression for retirees.

DID BILL FOLLOW HIS OWN ADVICE IN HIS RETIREMENT?

Dr. Jim Dahle:
I've got a few questions that came from our audience. They wanted me to ask you during this interview. The first one was, “Grill him on whether or not he followed his own advice or punt it.” That's the first question I got. I'm not sure what they mean by your advice, but you wrote these papers back in the 1990s about how much you can withdraw from portfolio. I guess the question is, “What have you done in your retirement? Did you follow your own advice?”

Bill Bengen:
Yeah, I can honestly say I eat my own cooking in that regard. When I retired in 2013, by that time, my research had a worst case scenario of 4.5%. That's what I used. Over the last decade, of course, the stock market has done extremely well. I re-evaluated my withdrawal rate and figured I probably could have taken 5.5% or more. I've adjusted my withdrawal upward. It's very important that people realize that once you have a plan, it's not a static plan. You have to constantly monitor it and make changes up or down.

ASSET ALLOCATION AND SAFE WITHDRAWAL RATE

Dr. Jim Dahle:
All right. Another question I got is people want to know how you think about asset allocation relative to a safe withdrawal rate. You've mentioned a little bit about risk management and some tactical asset allocation, but they want to know, did you test a fixed portfolio versus using a bond tent, this higher percentage of the portfolio in bonds for a few years before and after the retirement date versus this other newer idea out there, a rising equity glide path where you actually increase the amount of money, the amount of your portfolio that's in equities as you move throughout retirement, and whether you thought one of those was a better way to do asset allocation or not?

Bill Bengen:
Yeah. I've only done a small amount of testing on the rising glide path. In my book, I present with a 55% allocation of stocks that the rising glide path was superior to a fixed allocation. When I tested it at 65%, the difference was much less. I suspected higher allocations that the straight fixed allocation would probably be superior.

Dr. Jim Dahle:
You're saying that if you don't have that high of a percentage of your money in equities, that a rising glide path makes more sense than if you're starting with 65%, 75%, 90% equities in retirement, that rising from there doesn't give you the bang for your buck?

Bill Bengen:
Yeah. I think the concept adds value. It's difficult to understand why it works, counterintuitive, but I remember the authors of the paper who proposed that first said they thought it was due to the fact that if you're using a rising equity glide path, you're going to start with a lower allocation, maybe instead of 65% stocks, maybe 40% and then increase it, maybe 1% a year. If you go ahead with a bad bear market early in retirement, you're not as exposed as you might be if you had a 65% allocation. That helps in many cases, the worst cases, and compounds to the portfolio over the years.

SHOULD YOU ELIMINATE RISK ONCE YOU HAVE ENOUGH?

Dr. Jim Dahle:
Somebody asked me to ask you about Bill Bernstein's idea where he talks about “Once you've won the game, stop playing.” He's a big fan of putting a certain amount of your money into very safe assets. The classic example is a ladder of TIPS, treasury inflation-protected securities, and basically ensuring that you won't run out of money because you've essentially put the money you need to spend at least on your fixed costs into a guaranteed investment. What are your thoughts on eliminating risk when you have enough money that you don't have to take anymore?

Bill Bengen:
Yeah, I haven't tested Bill's idea. I have a respect for him, very bright and listen to what he says. I really can't comment as much as I'd like to on it. I hope later this year to run some tests on that approach and see what it does.

The thing you have to deal with is that if you retire into a favorable environment, and you're heavily into bonds, you're going to lose a lot of gains in stocks you might well have been able to reap if you're stuck with a fixed allocation.

Dr. Jim Dahle:
In my experience, I've run into a lot of people who save up a multimillion-dollar portfolio, this big fat nest egg. When you actually talk to them about what they're spending, they're not even spending 4%. It's a lot of people. It's not a small percentage of retirees that are spending significantly less than 4%. Why do you think that is? What can we do to help people to spend and or give more of their portfolios away as they move through retirement?

Bill Bengen:
I think I'm a retiree now. I understand when you cross that line from the working world to retirement, you have this concern about your income because now you don't have employment income to bail you out if you need it. All you have is income from your own investments, Social Security, maybe a pension plan. It's a little scary for folks. I think it tends to make them too conservative. I'm hoping that my work, which I've researched for 30 years, will help them see it's possible to take a lot more than they might otherwise think without taking undue risk.

Dr. Jim Dahle:
Yeah, for sure. It is a difficult transition. Lately, I've been talking a little bit that there are two challenging problems in personal finance. The first one is figuring out how to save enough of your income that you're actually going to build a nest egg that can support you in retirement. That's hard for people. It's hard for people to save.

I mentioned before we started recording this study that came out, I think, by Goldman Sachs last year that showed even among high earners, something between 18% and 40% of them are essentially living paycheck to paycheck. This is a hard thing for people to do, to start saving enough to actually build a nest egg.

Once you solve problem number one, you basically need to move instantaneously to start working on problem number two, which is how to get yourself psychologically to be able to spend that money that you spent such a long time saving up. This is very hard for people. Almost every retiree I've talked to, I've talked about how difficult it is, even when their portfolio is still getting bigger, to spend as much as they can spend.

I think that's why books like this one that came out a few years ago, Die With Zero. The book's not perfect, but just to get people used to this idea that you're not going to live forever, and it's okay to spend this money that you spend a lifetime saving up for these retirement years and get used to it.

I think another good test run for people is college savings. They put this money aside to pay for their kids to go to college, and then they get in their 50s or so, and the kid's actually in college, and they got to start withdrawing and using that money that they saved for this purpose.

I think it's a great trial run for the retirement spending they're going to be doing a decade later, to get used to pulling money out of those accounts, to get used to actually spending money for the purposes you saved it for. But I don't know if you have any other tips for retirees now that you've been doing it for more than a decade, to help them to actually spend.

Bill Bengen:
It's a tough nut. I just tell them that I've researched this very thoroughly. I feel very confident in my numbers, and they support a withdrawal rate a lot higher than 4.7% in this environment. So if you're taking only 4%, your heirs are going to be very grateful to you because you're going to leave them a lot of money. But is that what you really want? Do you want to enjoy life a little bit more?

ISSUES WITH THE 4% RULE

Dr. Jim Dahle:
Now, there's another fellow that likes to look at this retirement spending puzzle in great depth, in great detail, a fellow by the name of Karsten Jeske, also known as Big ERN out there. I'm sure you're familiar with some of his work.

Eight years ago, he published a blog post as part of his big, long, safe withdrawal rate series. I think this is number 26 in that series. But he titled it, 10 Things the Makers of the 4% Rule Don't Want You to Know. It's a very click-baity title, of course.

But I thought it might be worth spending some time talking about these issues that he brings up with the 4% rule. And his first one is that we actually mean the 4% rule of thumb, that it's a guideline and not necessarily some fixed law of physics in the universe. Do you think that's fair to say that the 4% rule is a guideline or a rule of thumb?

Bill Bengen:
Well, possibly. But I have a very specific meaning for it. To me, it represents the worst case scenario that's occurred over the last 100 years, where you find an investor who had the lowest safe withdrawal rate of all these investors. And that's the number. Obviously, everyone else is going to be able to withdraw more than them, by definition.

So to me, if you're a very conservative person and you don't want to take hardly any risk, you might be satisfied with a withdrawal rate, because it might meet your requirements, particularly if you're in a high inflation, high stock market valuation environment, which was in the 60s. We're not in that now. We have a high stock market valuation. But so far, at least, inflation seems relatively tame. We'll see what happens in the future, though.

Dr. Jim Dahle:
And part of the challenge, I think, is that we can't use our time machine to go back and live in the past. With the inflation and the returns we had in the past, we're facing a completely new environment. There's nothing that says we can't have higher inflation or crummier returns than they had in the last 100 years. How much of that should one take into account when setting up their own personal withdrawal rate?

Bill Bengen:
Well, I always tell folks that basically, I'm a reporter. And I look at history, study what's happened in the past, and report to them the consequences of that. But if we try to extrapolate past results to the future, we run the risk that the future, as you indicated, might be significantly different and more adverse than the past has been. And it's possible that the 4.7% rule might fail at some time if we got up to really high inflation on a protracted basis and the stock market stayed expensive.

Dr. Jim Dahle:
Another point that Karsten makes in this blog post, I think you'll agree with, is that the 4% rule is likely way too conservative for many early retirees. It just goes to show that the vast majority of people can spend more than 4%. They just maybe won't know it for a few years.

Bill Bengen:
Yeah. I think it's important to recognize that the withdrawal rate varies with those elements I mentioned, particularly with a planning horizon. So if a person, let's say some of the FIRE folks are looking at 50, 60 years of retirement, 4% may not be a bad number for them, actually. I think 4.1% is where I've indicated the thing bottoms out. But for shorter time horizons, the normal retirement 25, 30 years or so, yeah, that's way low.

Dr. Jim Dahle:
I think Karsten makes a good point with this next one. He says, one of these 10 things that the makers of the 4% rule don't want you to know, we conveniently ignore expense ratios, transaction costs, taxes, etc. The 4% has to include any advisory costs you have, and of course, your tax bill as well. Do you think a lot of people forget about that?

Bill Bengen:
Yeah, it's an interesting point. It's a way to really underline how the money you pay to an advisor is going to affect the long-term performance of your portfolio. But I've avoided including those expenses because they vary so much from individual to individual, including investment advisory fees. I know people paying a quarter of 1%. I know people paying 1.5%. That's a huge spread.

I wanted my research to be as universally applicable as possible. I treat those expenses as budget expenses, including your expense budget, rather than necessarily adjusting the withdrawal rate. Because also, you may have other sources of income for which you may elect to pay the advisor's fees, social security, pension plan, annuity.
Dr. Jim Dahle:
Absolutely. Another point he wanted to make was that some of these cohorts of people that didn't run out of money, they survived, withdrawing 4% or 4.5% or 5% or whatever. They didn't actually run out of money, but they would have had a very scary and turbulent retirement because they would have gotten close.

Dr. Jim Dahle:
How big of a deal do you think that is in real life? Somebody gets a relatively poor sequence of returns, they still withdraw their 4% or 4.5% or 4.7% or whatever, and they almost run out of money, but they don't. How big of a deal is that psychologically? Do you think that is a problem?

Bill Bengen:
Yeah, I think it is a legitimate issue. The danger there is that market events may cause you to jump out of the market with fear, which is why I'm such a strong proponent of risk management because risk management does it gradually and preserves capital that way. I don't think, quite frankly, retirees can get away from risk management during retirement.

SHOULD YOU HAVE A HIGHER SAFE WITHDRAWAL RATE?

Dr. Jim Dahle:
Okay. The book talks about adding some other asset classes to your portfolio, and by adding them, having a higher safe withdrawal rate. How far do you take that? Should people be investing deliberately in small stocks? Should they be investing deliberately in value stocks, in real estate, in international stocks? What portfolio construction advice does your research lead you to give to other people?

Bill Bengen:
Yeah. As I said, I'm a broad proponent of broad diversification. The portfolio I use in my book only has seven asset classes. I use more than that personally. I include some digital currency, include emerging market stocks and bonds, include alternative investments, precious metals, REITs, and so on. I haven't tested them yet, so I don't know how much of an improvement they'll make in the portfolio. My guess is not so much the rate of return there, but how they correlate with the other assets in your portfolio. It's like a recipe with a lot of ingredients. If they all work together harmoniously, it's very tasty. If they don't, the result is less than you could hope.

Dr. Jim Dahle:
Well, there's a lot of people out there that love having a little slice of Bitcoin in their portfolio, that love having a little bit of gold in their portfolio. Obviously, Bitcoin over the last 15 years has had some pretty serious volatility, but overall has performed pretty well despite its current downturn. Everybody loves gold the last year or two. It's had a spectacular last couple of years. I think people would be curious to hear how much of your portfolio you have in those assets.

Bill Bengen:
Gold, I have about 4% of my portfolio in gold. Wish based on the last year, I had more than that. Bitcoin, just 1%. I have two minds of that asset class because I've heard some very smart people praise it and others condemn it. What chance do I have to get it right? I just settled for a small allocation to that. I have some REITs in my portfolio called foreign stocks, emerging market stocks, and so forth.

Dr. Jim Dahle:
Some people might argue that 1% doesn't matter, that it's not enough to actually really influence your portfolio. If you really believe in it, you ought to have more in it. What do you think of that argument? Do you think it's still worth hassling with something that's only 1% of your portfolio?

Bill Bengen:
I think so. I had 1% in silver a year ago, and I held it, just recently sold it. I was very happy with the results of that 1%. I felt it was riskier than gold, and it turned out to be that was the case by the recent decline. No, I think 1%, if you get a high enough return, could have a surprisingly good effect on your portfolio.

LIVING A FULL AND ENRICHING LIFE

Dr. Jim Dahle:
Now, you're living close to my old stomping ground. I spent three years living in Tucson while I was training as an emergency physician. Turning away from finances for a minute, one of the things you've said on your website is that in life, you need family, friends, and a passionate interest in something to fully enjoy life. Cultivate all three, they will not fail you. Can you expand on that? What advice do you have for people for living a full, enriching life and maybe not spending too much time focusing on the financial part of it?

Bill Bengen:
Yeah, I think it's really important to think about what's important in life. The money supports that, but it doesn't necessarily represent the goal you have in retirement, money alone. It's what you do with the money that counts.

I mentioned those three factors. If you have strong family ties and good friends, I also admitted, but I add good health is very, very important to those elements. You'll have a successful life as well as successful retirement, because I think those are the most important things.

Dr. Jim Dahle:
Yeah, for sure. All right. Our time is now short, but this is a chance. You've got the year of 25,000 or 30,000 high-income professionals out there, many of whom look forward to retirement or are retired or are on the eve of retirement. What have we not talked about in this interview that you think they ought to know?

Bill Bengen:
I think they need to actively manage their portfolio during retirement or have someone else actively manage it for them. There are two circumstances you're likely to meet. One is a big bear market early in retirement. My research indicates that unless it's something the size of 2008, you can probably ignore it. Don't change anything. Allow your withdrawal rates to stay the same, and the subsequent strong market recovery will put you back on plan.

If, on the other hand, you're faced with an attractive period of high inflation like we had in the 1970s, you want to do immediate rescue work on your portfolio. You want to cut your withdrawals drastically and do it immediately. The longer you wait, the more severe the problem will become.

Dr. Jim Dahle:
It's interesting. You talk about managing the portfolio, but really what you're talking about is managing spending, managing your lifestyle, having as much as you can of your expenses be variable expenses that you can cut back on rather than fixed expenses.

Bill Bengen:
I agree.

Dr. Jim Dahle:
All right. Well, Bill Bengen, it's been wonderful to chat with you. Thank you so much for your work on retirement research, on safe withdrawal rates, on the 4% rule, now the 4.7% rule. Thank you for your recent book. That can be bought anywhere you buy your financial books. It's called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More. Thank you so much for your time today.

Bill Bengen:
It's been a pleasure. All mine. Thank you.

Dr. Jim Dahle:
I hope you enjoyed that interview as much as I did. It's interesting to talk to one of the big names out there. He's been around for a long time, obviously. He's now been retired for more than a decade, but still writing and still researching. You can hear him talking about some of the things he still wants to look into. He's still in this space and still making a difference. We're appreciative of him. I hope you learned a few things about his thoughts on retirement and how much you can spend and how you ought to manage your money in retirement.

The interesting thing about talking to lots and lots of different experts is they don't always agree about everything. He talks a little bit about some of the tactical asset allocation. I'm obviously not a big fan of that. I find it just as hard to make small movements in my portfolio as large movements in my portfolio.

The more you become educated and you listen to experts, you find the right path for you. You realize what reasonable looks like. You realize the things where all the experts agree. You see the things that the experts don't necessarily agree on. They're usually much smaller things, of course. Getting the big things right, everybody seems to agree on. The smaller things, maybe not so much. There's a little more room for nuance out there. I hope you enjoyed those parts of the interview as well.

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/whitecoatinvestor 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.

CONCLUSION

Don't forget about our recommended lists. You can see all of them, whitecoatinvestor.com/recommended, or you can just go to the White Coat Investor website. Up at the top, you'll see a recommended tab, and if you click on that, you'll see insurance and mortgages and experts and tools and all kinds of things that we have put together for you to help you be successful in your financial life.

Thanks for leaving us five-star reviews. It really makes a difference. You know, wherever you get your podcast, leave us a five-star review there. It helps other people to find the podcast and to have their lives changed in the same way that yours has been changed by getting this information, hopefully earlier in your career rather than later.

A recent one came in from Itman, who said, “Love it. Psychiatry intern here who no longer worries about finances, thanks to WCI.” Five stars. Thanks so much for that kind review.

All right, we'll see you next week on the podcast. Till then, keep your head up, shoulders back. You've got this. We're here to help. See you next time.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

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 267.

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 today by email [email protected] or by calling (973) 771-9100.

All right, if you're listening to this the day it drops, today's your last day for this promotion. It's for Match Week. Basically, if you will book a consult with the experts at Student Loan Advice today, we will throw in a free copy of our online Fire Your Financial Advisor, the resident version, for free after you meet with the Student Loan Advice consultant. The consultation doesn't have to occur today, you just have to book it today. So make sure you do that. Again, go to studentloanadvice.com.

Now, it's still worth it even if you don't get the freebie, but today you get both. So book that if you need some help with your student loans and making sure you have the right plan for you.

Okay, WCICON is coming up. I think this drops on the 23rd of March. So just a couple of days later, we're going to be at WCICON. We're in Las Vegas, but you don't have to come to Las Vegas if you don't want to. You can participate virtually. And to use this code WCICON100, you'll get $100 off that virtual conference attendance. So, go to wcievents.com, use the code WCICON100 and get that discount. We hope to see you there.

Stick around after this interview. We've got a great guest for today's interview. But stick around afterward. We're going to talk for a few minutes about money market funds.

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is Emily. Emily, welcome to the podcast.

Emily:
Thank you.

Dr. Jim Dahle:
All right. Well, you guys have accomplished something pretty awesome. Let's introduce you to the audience a little bit though. Tell us about what part of the you're in, what you and your spouse do for a living, where you're at in your careers.

Emily:
Yeah, we live in the upper Midwest. I am a nurse. I graduated and started in 2015 being a nurse. My husband is a pathologist and he just finished training in November.

Dr. Jim Dahle:
Okay, you've been working as a nurse for the entire training period, med school, residency. Is there a fellowship too?

Emily:
Two fellowships.

Dr. Jim Dahle:
Okay, you have two fellowships. Yeah, it sounds typical these days. Okay, you've been along for the whole ride and you guys just hit a net worth milestone. Tell us what your net worth is.

Emily:
Yeah, we hit half a million dollar net worth right before he graduated training.

Dr. Jim Dahle:
Right before graduating from training. That's pretty awesome because he's just out a few months.

Emily:
Yes, he's gotten two paychecks so far as it is happening.

Dr. Jim Dahle:
Okay, we talked about this before we started recording briefly, but tell us what it was like to look at your bank account after the first one of those attending physician paychecks hit it.

Emily:
I was very astonished. Sometimes they just send you money and you weren't expecting it. So, it's been really cool to be able to have these very aggressive goals of paying off our loans and saving and investing and still have money left over after.

Dr. Jim Dahle:
Yeah, but you guys have been working hard for a long time. Because physicians in residency and fellowship, they don't make all that much money. And nurses don't make all that much money either. Depends on what you do and how hard you work and so on and so forth. But you guys don't have a negative net worth, you've got a half million, at least you had a half million when you applied for this podcast. It's a little bit more now. Tell us how you did that. What have you been doing for the last decade?

Emily:
In med school, we didn't know anything at all about finances. We graduated with $6,000 in our bank account and $17,000 in debt for school. And I didn't know anything. And while I was looking for a job, I just kind of started Googling around and I found Bogleheads. And from there, I found White Coat Investor and JL Collins Stock Series. And I decided that one of us needed to know about finance.

And since my husband was too busy filling his brain with med school, I decided that was something I could do while I look for a job. So, I did that until I found a job. And from there, I met with the HR lady on my first day of work. And she said, “Okay, this is your 401(k). Here's what it is.” And I said, “Okay, well, how much money should I put in my 401(k)?” And she said, “Well, you can put $17,000.” And I said, “But how much should I put?” And she said “As much as you can.” We've never had a job before other than like $10 an hour. And so we decided that we would just max it out. And we've just maxed out our 401(k) and Roth IRAs ever since then.

Dr. Jim Dahle:
Okay, so you were working the whole way through med school?

Emily:
Yeah.

Dr. Jim Dahle:
Working full time?

Emily:
Yeah.

Dr. Jim Dahle:
And you said when you graduated, you had six figures in the bank account and hardly any debt?

Emily:
Only $6,000.

Dr. Jim Dahle:
Oh, $6,000. I heard six figures. And I'm like, “Well, that's pretty awesome.” Okay, so you cash flowed med school.

Emily:
We cash flowed living expenses and any textbooks. We bought a car that was a junker, had a roommate while we were married.

Dr. Jim Dahle:
That's awkward. All right.

Emily:
Yeah, it was fine. We didn't know any different. We'd always live with roommates.

Dr. Jim Dahle:
Depends on the roommate, I suppose. Right?

Emily:
Yeah. And only one car. And we did take out $258,000 in his student loans.

Dr. Jim Dahle:
Okay, so you paid the tuition, it sounds like, with student loans mostly.

Emily:
Correct. Yes.

Dr. Jim Dahle:
Okay. That was 2015. You came out and he started med school. Is that right?

Emily:
Yes.

Dr. Jim Dahle:
Okay. So, where were you sitting in 2019 when you finished school?

Emily:
Yeah. So, in 2019, we had a negative $160,000.

Dr. Jim Dahle:
That was your net worth.

Emily:
Yes.

Dr. Jim Dahle:
Okay. So you'd been saving something. Kind of a balanced approach. What made you decide to invest as you went along instead of just going, “Let's see if we can just not borrow as much?”

Emily:
I had read some about PSLF. And I also had read a lot about how physicians, when they come out of training, they're really behind in saving. And I was pretty convinced by the compounding interest charts that I found online that probably we should still be investing, even though we were taking out debt. And we really have come out ahead because the market's been gangbusters. And we had the COVID interest pauses. So, even though we're not going to do PSLF, we still did come out ahead. And I think we were kind of lucky.

Dr. Jim Dahle:
Well, you took a risk and the risk paid off. Those sorts of sensible risks usually, but not always pay off. I don't know that I'd borrow money at 10% and try to out-invest it. But the student loans you were taking out in 2015 to 2019 were not at 10%.

Emily:
No, they're like 6%.

Dr. Jim Dahle:
Yeah. And plus they were 0% for about three and a half years in there while he was in training. Okay. So you come out of training in 2019. You've got substantial student loans. You've got some assets already. Now all of a sudden he's making some money too. It's not a lot, but he's making money too. You more or less doubled your income, I assume, something like that. What did you decide to start doing then? How did things change?

Emily:
He now had access to his 401(k). So, we maxed that out too. And then we started paying off his private student loans. He had about $12,000 of those that we wanted to pay off pretty aggressively. And then COVID happened about nine months later. We paid off all the private loans and mostly just invested and did end up buying two cars along the way just because of car accidents. We bought three cars in training, but we just kind of lived and tried to be happy day-to-day.

Dr. Jim Dahle:
What did you do with the student loans during the COVID pause?

Emily:
Yeah, we paused them.

Dr. Jim Dahle:
You didn't make any payments?

Emily:
No, we were pretty sure that we would do PSLF and we did not. Now we get to pay them off.

Dr. Jim Dahle:
You know that now, now that you have the post training job, but all those other years counted, the residency and fellowship years counted. Right?

Emily:
Yes.

Dr. Jim Dahle:
Okay. When did you decide to pay them off? Was this recently or was this a couple of years ago or when did you decide we're not going to do PSLF anymore?

Emily:
He signed for an attending job about a year and a bit ago. Once he had determined, that's when we just said, yes, we're going to pay them off.

Dr. Jim Dahle:
Okay. So, what have you done to pay them off so far?

Emily:
Yeah. We didn't really pay them in the end of fellowship because we needed to move twice just because our lease was a little off cycle. And then we just started paying them off as soon as he got his first paycheck.

Dr. Jim Dahle:
Okay. So, you're just getting started paying them off. How much do you still owe in student loans?

Emily:
Yeah. We have $239,000 student loans.

Dr. Jim Dahle:
Okay.

Emily:
$2,000 of that is from undergrad and the rest is med school. We've paid off about $15,000 so far.

Dr. Jim Dahle:
Nice work. And what are your other debts?

Emily:
Yeah. Our other debt is $19,000 in a car loan and that's it.

Dr. Jim Dahle:
And that's it. Currently renting, owning, where are you at in housing?

Emily:
We're renting.

Dr. Jim Dahle:
Renting right now. Okay. So you can pay off the cars and it sounds like you're going to pay the student loans. What's your plan to pay those off?

Emily:
Just be aggressive and pay them off with a big shovel every month.

Dr. Jim Dahle:
Just write a big check every month. How long do you think it's going to take you?

Emily:
Well, we're doing 20% retirement, 20% of the student loan, which is like just over $5,200 a month. And then he has bonuses that he's supposed to get at the end of the year. And I'm not exactly sure how much, but 90% of the bonus we're going to put in. So, I think it'll take us about three years.

Dr. Jim Dahle:
Yeah. This is really cool because you got a half million plus net worth while still owing a quarter million dollars in student loans and other debt because you've been so good about saving and investing along the way. And it sounds like most of this is inside retirement accounts.

Emily:
Yeah. All of it. We have like $20,000 in cash and the rest is just retirement accounts.

Dr. Jim Dahle:
So, what have you guys invested in?

Emily:
Yeah. We have a three fund portfolio. Just index funds.

Dr. Jim Dahle:
Very cool. Kept it nice and simple.

Emily:
Yes.

Dr. Jim Dahle:
Okay. All right. There's people out there like you were a decade ago and they're like, “Oh man, my spouse wants to go to med school and wants to do something that's going to take forever to learn how to do it. How can we still meet our financial goals?” What advice do you have for that person?

Emily:
I think the biggest thing is realize that we're not poor. My grandpa was a day laborer and my dad was the first person in his family to go to college. Through training, we made between $73,000 and almost $200,000 last year. And that is like more than most people can dream of.

I think it's important to realize that most normal people are not making as much money and be realistic about the fact that yes, you can do it. You can learn and have a growth mindset and feel kind of silly while you're learning. And that's what I did, but you can do it.

Dr. Jim Dahle:
Okay. Now your income in the last couple of months has gone up dramatically. Your tax bill, as you'll soon learn, will also go up dramatically with a year from April, but it's about to go up quite a bit. What are your plans for this for this additional income?

Emily:
Pay off student loans. That should take about three years. We will be millionaires by 35, even at the current rate that we're investing, which is pretty cool. I was able to drop my FTE to, I'm a 0.75 now, which is amazing. I've only ever worked full time as a nurse. We want to give more generously because I think that's a very good way to make sure that you don't feel like you lack stuff. If you're giving, then you know that you have enough for yourself and you have extra even. I want to travel with my husband now that he has all this time off and then have a kid probably in the next couple of years.

Dr. Jim Dahle:
Very cool. It's a lot of exciting plans.

Emily:
Yeah.

Dr. Jim Dahle:
I love talking to brand new attending families because it's like the world is their oyster and they're finally out of that training and they're making more money and they've learned how to manage it. It's just wonderful.

Okay. Well, take us back to some of these conversations you and your husband had about money over the last 10 years and how you arranged to get yourselves, if not on the same page, at least reading the same book. Tell us about how you were able to manage money together over some very different situations. Attending hood and residency and during school. Give us a little insight into how you managed to do that successfully.

Emily:
We got married like a month before Michael started med school and we were 22 years old and did not have a lot of practice with this. It has been a little bit of growth of learning how to engage and not come across as aggressive or judgy. I think over time, just learning how to say, “Hey honey, let's have a productive conversation. That's more about like, are we doing well? What are we expecting to come up in the next few months? What are things that are important to us?”

We have always had 100% combined income because it wouldn't have been fair to him to have zero income while he was in med school. And it wouldn't be fair to me to have like way less later. Just working together and saying, “Okay, here's where we're at. What are your thoughts for this year?”

I think he probably would have been perfectly happy to let me just do all of it. I kind of have had to say, “Hey honey, just so you know, you have disability insurance now. I need you to sign this paper.” But he really trusts me a lot with it and he has been much more willing to engage, especially as I wanted to be more positive in the way that I bring conversations.

Dr. Jim Dahle:
Well, clearly you are trustworthy. Obviously you just don't manage money together, even if you're trustworthy. How did you become trustworthy when it comes to finances?

Emily:
I listened to every single podcast. I think I've listened to all of the White Coat Investor podcasts. I read a lot of books. Anytime I didn't know what was being spoken about, I would pause and I'd just go look it up and read a quick little blurb of it. And then I could understand more as I went. And that's just part of my daily practice. I like to listen to things.

Dr. Jim Dahle:
Well, Emily, you two have been super successful. You should be very proud of what you've done. We're very proud of you. And we're so appreciative of you being willing to come on and share your story so that others can do what you've accomplished and inspire them to do that. So thank you so much for being willing to come on.

Emily:
Thank you. It's really nice to meet you. And I really appreciate all the work that you guys have put out. It's helped us a lot.

Dr. Jim Dahle:
It's our pleasure.

That was a great interview. It's a lot of fun to see people having success and they're so excited. They're getting their first couple of physician level paychecks and now they feel like there's money coming out of their ears.

But the beautiful thing about this situation is that high income hit prepared hands. They've already been financially successful. And now their income just doubled, tripled, quadrupled, whatever it is. I don't know exactly what pathologists are making these days. I didn't ask her what the new salary is.

But my point is they already know how to manage money. And now there's a whole lot more money to manage. And so, they're going to be super successful going forward. And the wonderful thing, though, is they've already got that giving attitude and recognize that they may not quite have it yet, but they will soon have more than they need. They will have more than enough. And to recognize that's an opportunity to affect the world around you is a pretty cool thing.

All right. I mentioned at the beginning, we're going to talk a little bit about money market funds. So, let's do that.

FINANCIAL BOOT CAMP: MONEY MARKET FUNDS

Dr. Jim Dahle:
A money market fund is a very low risk way to invest. The best thing to really compare it to is a savings account. It's a similar amount of risk you're taking on when you invest in a money market fund. It's a cash investment. And the thing about a cash investment is the yield on it.

The amount of income you're paid with it can vary over time as interest rates fluctuate. But your principle doesn't vary. Like with a bond, the value of the bond can go down. With the stock, the value of the stock can go down. That really doesn't happen with a cash investment like a savings account or a money market fund.

A money market fund is a mutual fund, kind of like a bond mutual fund or a stock mutual fund, but it's a cash mutual fund. So it's lots of investors pooling their money together to get some economies of scale, daily liquidity, and professional management.

What does that fund invest in? It invests in very short term bonds. These bonds are often just a few weeks long or a few months long, but because they're so short term, their value doesn't fluctuate much. And that allows them to basically offer you stability of principle, meaning you're not going to lose money in these things.

There are various different kinds. The manager can invest into commercial or prime, sometimes it's called, types of bonds. These very short term corporate bonds, for instance, that are a few weeks or a few months long. And that's typically called a prime money market fund. Vanguard used to have one of these. They haven't offered it in a number of years.

Another type is a government or agency money market fund, in which it only invests in short term securities from the government or agencies of the government. There can also be treasury money market funds. A treasury one would only invest in very short term treasuries. So you get some various tax advantages.

If you're only investing in treasuries, that's state income tax free. So you got to compare the yield on a prime or some other type of money market fund to the after tax benefit of investing in a treasury money market fund.

The treasury one's generally considered slightly less risky. All of these are not risky investments at all, but the treasury one's even less risky than you might get from a prime money market fund.

The other type that people think about, especially White Coat Investors in high tax brackets, is a municipal money market fund. And in that case, the manager is buying very short term municipal bonds that are weeks to months long.

And so, that income is generally federal income tax free. The yield is going to be lower. Instead of making 4%, you might make 2.5%. But if you're in a high tax bracket, your after tax yield might be higher in that municipal money market fund. There's lots of different types here.

But in essence, it works like a savings account. You put your money in, when you want the money, you get it right back out. You can take your money out of the thing any day the markets are open, just like you can any publicly traded investment. And typically, you'll link your bank account to it. You can do an ACH transfer back, you have your money in one or two days. It's very safe, it's very liquid.

This is a good place for an emergency fund. This is a good place for the tax money you're going to have to pay on your next quarterly estimated tax payment in a month or three months. This is a good place for short term savings. If you're saving up a down payment, you're going to need eight months or a year, a year and a half, a money market fund can be a good place for that. But that's what we're talking about.

The alternative is generally a high yield savings account. Not the savings account you get when you go down the street to the local credit union or bank, and they pay you point 1% a year. That's not a high yield savings account. There are online banks that tend to offer high yield savings accounts.

But most of the time, you get a little bit higher yield from a money market fund than you do from a high yield savings account. That's not always the case. There are some periods of time when interest rates were 0%, where you could get 1% out of a high yield savings account, you might only get 0.25% out of a money market fund. So, there are times when a high yield savings account does offer a higher yield than a money market fund. But most of the time, a money market fund gets a little bit of a higher yield.

Now, it does have a little bit more risk in one respect, which is FDIC insurance, the Federal Deposit Insurance Corporation, that basically stands behind up to $250,000 invested in a bank. Money market funds do not get that insurance. Yes, there's a similar brokerage insurance that's called SIPC insurance, but it doesn't work the same way.

Now, just because it doesn't have that doesn't mean money market funds are risky. They're not risky because you got these very short term bonds in the fund that can be turned into cash very easily. They're not dramatically more risky, but you don't have FDIC insurance. If that matters to you, stick with the high yield savings account.

The main benefit though of that money market fund is liquidity, safety and convenience. It's just really easy to use, especially if you already have a brokerage account or you already have a Roth IRA account, a Vanguard or Fidelity or Schwab, they all have money market funds available there at the same place you already have a whole bunch of your money.

Typically, you'll usually see Vanguard's yields being slightly higher than you can get at Fidelity or Schwab. And that's just mostly a function of how Vanguard runs a lot of the business at basically at cost. And so, the yields tend to be slightly higher.

But the fact remains, if you're at Fidelity or Schwab, you can get a very good money market fund there that will give you a nice yield that is better than you're going to get anywhere locally, your credit union or bank.

Is it possible to lose money in a money market fund? Yes, it's possible. Nobody's ever actually done it, but it is theoretically possible. There was some worry about that in the global financial crisis. There have been some money market funds that lost a very small amount of money, like 1 or 2%. They were not aimed at retail investors, they served businesses. It is possible to lose money in a money market fund, but the likelihood of you losing money is very, very low. And certainly the likelihood of you losing a significant amount of money is very, very low.

The bigger risk when you're investing in very safe investments like CDs and savings accounts and money market funds is that your money won't keep up with inflation or won't grow as fast as you need it to. Because it's a safe investment, the returns long term don't tend to be that good, but it's a very safe place to invest.

The way you open it is you just go and open an account at Schwab or Fidelity or Vanguard or wherever. You just go online, you open an account online, you link it to your bank account, and you choose as your investment the money market fund.

Now a lot of times the default investment, like you go to Vanguard, their default investment is their treasury money market fund. If you transfer money to Vanguard, that's where it goes. It goes into a money market fund until you decide to invest it somewhere else.

But it's going to be a lot better place for you to have money if you're actually trying to earn a yield on it. If you're trying to get a return on your cash, this is a great place to have it. It's not quite as convenient to use as your checking account probably is.

Most people aren't using it to have the direct deposit of their paycheck into there. They're not using it to write checks all the time, all month long out of their account. They're probably not linking their Venmo and their PayPal account to it. It's useful to have a checking account for those sorts of things. But for money that you don't need this week, next week, this month, but still want to keep in very safe cash, a money market fund is a perfect place to put that.

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. Bob 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.”

Contact Bob at www.whitecoatinvestor.com/protuity. You can email [email protected] or you can just call (973) 771-9100 to get your disability insurance in place today.

This has been an episode of the Milestones to Millionaire podcast, the podcast where we feature you and your stories to inspire others to also be financially successful so they can concentrate on what really matters in life. If you'd like to be a guest, go to whitecoatinvestor.com/milestones.

Until then, keep your head up, shoulders back. You've got this. We'll see you next time on the podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

When I graduated dental school and knew nothing about personal finance, I had my checking and savings accounts at Chase because they were everywhere and offered a signup bonus. I started building my emergency fund like Jim recommends, but after a year I noticed I had earned just $1.09 in interest. That came out to an interest rate of about 0.02%. This is the classic low-yield savings account that many Americans still use. The goal here is to make sure you don’t fall into that trap—you want your cash earning a reasonable rate.

To do that, don’t leave your money sitting at a local credit union or big national bank. Instead, move it to a high-yield savings account. You can easily find good options with a quick search, and popular choices include Ally Bank, SoFi, Wealthfront, Capital One, and Discover. The most important feature to look for is a reasonable interest rate. As of late 2025, that’s around 3–4%. Don’t stress about finding the absolute highest rate—the difference between 3.2% and 3.9% isn’t nearly as important as the difference between 0.02% and 3%.

To put that into perspective, if you have a $60,000 emergency fund, an extra 1% in interest earns you about $600 per year before taxes. After taxes, that might be closer to $360. That’s nice, but not life-changing. However, the difference between earning essentially 0% and earning 4–4.5% is about $2,700 pre-tax, or roughly $1,600 after tax. That’s meaningful. So aim for a solid rate, but don’t waste time constantly moving your money around for small differences.

The second feature to look for is organizational tools. Some banks allow you to create “buckets” within your account—sub-accounts earmarked for specific future expenses. These are often called sinking funds. They’re designed for expenses you know are coming but don’t know exactly when, like car replacements, home repairs, vacations, or healthcare costs. You can automate monthly contributions into these buckets to stay prepared.

For example, for travel, you might set aside an amount that reflects your goals—maybe $20,000 per year. For healthcare, you might save up to your deductible. For home maintenance, a common rule of thumb is about 1–1.5% of your home’s value annually. For cars, you can estimate replacement costs over time and save accordingly. These funds roll over year to year, giving you flexibility and clarity when expenses arise.

Other useful sinking funds might include backdoor Roth IRA contributions, annual insurance premiums, weddings, cultural celebrations, or even a “surprises and demises” fund for unexpected costs related to aging parents, pets, or other loved ones. The process is simple: pay for expenses with a credit card, then reimburse yourself from the appropriate bucket and pay off the card. This keeps your finances organized while still earning rewards.

It’s important to distinguish sinking funds from your emergency fund. Sinking funds are for expected expenses, while your emergency fund is your safety net for true surprises—expenses that are larger or happen sooner than expected. Keeping both allows you to automate your financial life and avoid disruptions to your monthly cash flow.
If you’re using a bank, another benefit is FDIC insurance, which protects your money if the bank fails. It typically covers up to $250,000 per person and $500,000 for joint accounts. Some institutions extend this coverage even further. For many people, this provides peace of mind, especially for larger cash balances.

That said, not everyone prioritizes FDIC insurance or bucket organization. Some, like Jim, prefer simplicity and slightly higher yields by using a taxable brokerage account instead. For example, Vanguard’s settlement fund—a federal money market fund—often offers competitive rates. These funds are very safe and liquid, though they don’t carry formal FDIC insurance.

At the end of the day, the exact account and rate you choose aren’t the most important factors. What matters is that you’re using a high-yield option instead of leaving your cash in a near-zero-interest account. Making that one change can meaningfully improve both the organization of your finances and your long-term wealth.