Financial Questions New and Established Doctors Face

Transcription – WCI – 472

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.

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

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Thanks so much for what you do out there. It is wonderful work you do. By the time this podcast drops, we are nearly at the end of the medical year. So many of you are about to make an exciting transition. I'm super excited for you. You're going to become an intern. You're going to become a PGY-2, or a senior resident, or a chief resident, or a fellow, or you're going to become an attending for the first time. It's exciting.

Congratulations on where you're at. You have worked very hard. You should be proud of yourself. We, not only as the White Coat Investor community, but as society, are proud of what you've done. We're thankful for what you've done. We recognize that it's entirely possible that we will need your abilities, your knowledge, all that you have spent a great deal of time and effort and heartache and taken risks in order to do. We may need you. Someone will need you. That someone might be each of us individually. Thank you for taking the time to dedicate yourself to that wonderful thing that medicine is.

The longer I do this, especially after becoming financially independent, the more beautiful it becomes. The more of a privilege it feels like it is. At this point, I'd probably practice medicine as much as I'm doing completely for free. It's an incredible thing.

Is it a calling? Some of it is for most of us. It's interesting. I do surveys of physician groups all the time and ask them, “If I wrote you a check for more money than you'd ever spend in your life, $10 million, $20 million, whatever it is, what would you do tomorrow?” A third of them would say, I wouldn't show up at work. They're done. If they had the money, they'd be done.

But you know what? 55%, and this has been reproduced multiple times when I've asked this question anonymously, 55% say, “I'd just cut back somewhat. I'd take Wednesdays off and go golfing, or I would stop taking as much call, or I wouldn't do this procedure I really don't like doing, or I'd stop working night shifts.” That sort of thing. Then the rest of them, 8% or 10%, say they'd make no changes at all. I think a lot of those people are already working part-time, quite honestly.

But it's interesting that a certain amount of your motivation to practice medicine, or dentistry, or whatever your profession might be, is that you feel called to do it. As I consider, “Well, do I leave medicine? I'm able to leave medicine. Should I leave medicine?” That part of it speaks to me all the time. Thank you for doing that. It really does make a difference in the lives of a lot of people.

 

CLARIFICATION

Dr. Jim Dahle:
Okay, let's start getting into your questions here. We've got a few other things I need to tell you about. I'll do it later in the podcast. This one's a little bit of a correction, clarification, maybe even a bit of a debate.

I had a fellow by the name of John write in after a podcast, I don't even know which podcast it was that I recorded, but he said, ” You had a call about an S-corp and running payroll at the end of the year.” He is an accountant who pointed out that maybe that's not a great idea to just run your S-corp payroll once a year.

We went back and forth for three or four emails, arguing back and forth about this particular topic. By the end, he had mostly convinced me that he was right, that you probably shouldn't run your S-corp payroll just once a year.

The reason for that is that there are some requirements out there that are admittedly vague. What you have to recognize, though, is that there are some rules about how often you have to run payroll. Clearly, an S-corp needs to run payroll at least once a year. No doubt about that.

If you are taking an S-corp and you are paying your entire income from that S-corp out as a distribution, not salary, that's not okay. You must pay yourself a salary as an owner-employee, greater than 2% owner of an S-corp.

Guess what? You have to pay yourself a salary. The IRS, almost everything they write about this is all about saying you have to pay yourself a fair salary. Because the temptation when you have an S-corp is to minimize your salary and make as much of the profit, as much of the income from this business, make it distribution. Because you save on payroll taxes. You save on the Medicare taxes. If the income is low enough from it, you might even save on social security taxes as well.

When you are paying both halves of those, because you are the employer and the employee, that's like 15%. If you can get out of paying that 15%, you get to keep more of your money instead of paying taxes.

The temptation is always to pay yourself less salary. Everything the IRS writes about this is talking about, no, you have to pay yourself the going rate for what you'd have to pay somebody else to do this work for. Basically telling people they can't say my salary for full-time doctoring is $10,000 a year. You can't do that.

The IRS is very careful to point out that just the 50-50 rule where 50% of what you generate is salary and 50% is distribution is not okay. Just setting your salary at the upper limit of the social security wage limit, I think it's about $180,000 in 2026, something around there, is not okay. It has to be a reasonable salary for the amount of work and your expertise that you're doing.

That's what most of what the IRS spends their time and effort. I think the very rare times when they actually audit S-Corps, I think that's the sort of thing they're looking at. They're not super focused on how often you ran payroll.

But it's interesting when you actually read the regulations, the IRS does say you're supposed to pay the wages before you make a distribution. I guess if you're only making one distribution a year, the last week of December, you could run payroll once a year and that's probably okay. You could justify that. But the truth is most of us with S-Corps are taking distributions more often than once a year.

It would be unusual to not at least be taking a distribution quarterly and I suspect most people are doing it monthly. Well, if you're taking a distribution monthly, you probably ought to be running payroll monthly.

Now, having done payroll by hand with White Coat Investor as an S-Corp, it's actually an LLC filing as an S-Corp, I've done payroll. I know exactly how to do payroll. I did it by hand and I didn't want to do it very often. I actually think we did it quarterly. I think when I was doing it by hand, I was doing it quarterly and it's not that big a deal. It's a form or two. If you're really into this personal finance stuff, you could probably do that.

But most people are going to hire somebody to help them run payroll with their S-Corp. The cost for that's probably something like $50 to $100 a month is what it's going to cost to hire someone to do a payroll service. The more employees you have, the more complex it gets and the more worthwhile it probably is to hire that out.

But that was the bottom line of this discussion that John and I had by email over a week or so. He pointed out something else. He said, “If S-Corp owners start running their payroll solely on 12/31 of each year, they may also have an issue with preparers agreeing to accept them as clients.”

So, it's not just keeping the IRS happy, but you also have to keep your CPA happy. And if they're like, “No, if you're going to do this squirrely stuff, I'm not going to be your CPA.” And now you're having trouble finding somebody to do your corporation taxes.

And I know most of you are not going to do your own corporate income tax. A few of you are going to try it and I did it for a few years. It is possible to do. And I was mostly successful doing it as well. I wasn't making any big mistakes or anything like that.

But be aware that your accountant may have a problem with you doing that and might not be willing to be your accountant because they're worried they're going to get in trouble with the IRS. Even though the S-Corp audit rate is like 0.1% a year, something between 0.1% and 0.2%. That's like one out of 500 to a thousand S-Corp tax returns gets audited. You're just very unlikely to get audited with an S-Corp.

Also, if you want to go back and run payroll, John pointed out, it's very difficult to find a payroll provider who will run a back payroll from a prior year. So that could be an issue as well. You have to run payroll at least once a year, probably at least quarterly. And for a lot of you, frankly, you ought to be doing it monthly, which means you're probably hiring that out.

I invited John to write a guest post on the topic. We'll see if he does. I don't know if he's going to, but the regulations do say that you're required to be compensated as the owner employee with reasonable wages. And that has to be done before making distributions. And of course, that deductible compensation must directly correspond to services provided.

So if you did all the work in January and February, but you paid all the wages in December, that's probably not okay either. You're almost surely not going to get caught, given how rarely S-corps are audited, but that is the right way to do it.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
Okay. Next topic. Oh, we have to do the quote of the day. This is from Samuel Johnson, who said, “Every man is rich or poor according to the proportions between his desires and his enjoyments.” Not income and spending, but between your desires and your enjoyments. So if what you want is making you happy, that’s going to make you feel pretty rich.

 

REVERSE MORTGAGE

Dr. Jim Dahle:
Okay. Let's talk about reverse mortgages for a minute. Here's a call on the Speak Pipe from reverse mortgages about reverse mortgages.

Scott:
Hey Jim, this is Scott in Colorado. I'd like to talk about a subject that we haven't discussed much on this podcast in the past. My mom currently has a reverse mortgage and I'd like to figure out what to do with it long-term. She bought the house back in the 1980s for $85,000 and has a present market value of about $450,000. This has been her principal residence the entire time.

A few years ago, she got a reverse mortgage when the principal value was $188,000. And since then it's accumulated $133,000 worth of interest, leaving us with a current bill of $323,000 if we were to start to pay off the loan again. My mom has had some health problems and I don't expect that she'll be living in the house long-term and we may need to seek specialized care before then.

I'm trying to figure out what to do with the house in the long-term. It's a good value and a good neighborhood, even though the value has been declining for the last couple of years. I wouldn't mind being a long distance landlord, but I understand that we won't get a step up in basis if she has to move for other health related reasons. Just letting you get your thoughts. Thanks. Bye.

Dr. Jim Dahle:
Okay. Let's dive into reverse mortgages. Reverse mortgages are on that list of financial products you hope you never need. Maybe you throw it on the list with whole life insurance. Maybe you throw it on the list with long-term care insurance. There's all kinds of things that you hope you never need or want or don't even want to have to consider.

And the problem is reverse mortgages in a lot of ways are product designed to be sold. Like the vast majority of the annuities out there. There's reasons to buy an annuity. Maybe you're buying a multi-year guaranteed annuity, essentially the insurance industry's equivalent of a CD, or you're buying a single premium immediate annuity, essentially buying a pension from an insurance company, or you want some longevity insurance, so you buy a delayed income annuity of some kind. There are annuities you can buy, but most of them, they put a bunch of bells and whistles on them and the product's designed to be sold.

Well, that's the same thing with reverse mortgages, products designed to be sold, not bought because the vast majority of financially savvy people don't get reverse mortgages because the fees tend to be high. The deal's often not that good for the person getting it, but are there uses for it? Sure.

What is a reverse mortgage? Well, a reverse mortgage is when you own a home and you're essentially house poor. Most of your net worth is in your home. For whatever reason, you were able to buy a home years ago and you were able to get it paid off or almost paid off or significantly paid down or whatever, but you never acquired a whole lot of other wealth or you ended up having your expenses go through the roof, maybe due to long-term care issues and used up all your money and really all you have left or almost all you have left is that home equity.

And you got some life left and you're like, “Well, maybe I can't leave this great inheritance to my kids because I need the money, but the money I have is home equity.” Well, how can I get that? Well, you have a lot of options. You can sell the house. There might be some capital gains taxes associated with it, often not for people that need a reverse mortgage, but you could, especially since that exemption on those capital gains is not really adjusted for inflation, certainly hasn't been adjusted for the housing crisis the last five or 10 years.

So you could owe capital gains. That'd be a downside of selling. Plus it's a hassle to sell. You got to pay the realtor typically 6%-ish is what you lose in the value of the house when you sell it. That's going to the realtors selling it. There's other closing costs that the total cost to get out might be closer to 10%.

And so you lose some value there. And it's a hassle and you got to find a buyer and you might have to put some money into it and fix it up. So somebody will actually buy it for a reasonable price.

Well, the beautiful thing about a reverse mortgage compared to that, well, there's other options too. You can just take out a home equity loan, for instance. And you can pledge the home and basically take out a home equity line of credit. And you can spend that for a while.

You could also have a family member get in some sort of a situation with a family member that's going to inherit the house and say, “Hey I need some money. All I've got is a house. I know you're planning to inherit this house. If you'll support me for the years I've got left a year or two or three or whatever, then you get the house.” And that can work out really well.

But if none of those solutions work and you really need the money, you might consider a reverse mortgage. Every product is a little bit unique, but typically the way they work is that you get paid. Instead of paying on your mortgage, you're getting paid. That's why it's a reverse mortgage. And you're getting paid. And so, that's cool. They're basically distributing your home equity to you some so much every month, or it could even work as a line of credit that you could take more out or less out over time. And you're basically spending down an amount they give you.

And then when you die this is a classic reverse mortgage. They can put some bells and whistles and other features on it. When you die, the mortgage company gets the house. That's it. So you are guaranteed never to run out of money while you lived in the house. When you die or you have to be moved into a permanent long-term care kind of situation, nursing home or whatever, they get the house.

Obviously there can be times when this does not work out very well financially for you. Yes, you had that guarantee that you could stay in your as long as you were able to, you wouldn't run out of money, but a great deal of the time, the majority of the time that company offering the reverse mortgage is coming out ahead financially on this deal. I'd encourage you to look at some of those other solutions. Including selling the house and renting, selling the house, putting the money in an immediate annuity, and then using that to pay rent. There's so many other options that I would consider those before buying a reverse mortgage.

All right. That's my spiel on reverse mortgages. Lots of fees, lots of shady characters in the sales industry, lots of deals that aren't that great. You really have to shop around if you're sure this is what you need. And the problem is that people that need reverse mortgages tend to be not that good at shopping for financial products. And so they often end up buying something maybe they shouldn't have. And maybe that's the case with your family member in this situation.

But that's not what you're asking. You're not asking whether she should get a reverse mortgage. This reverse mortgage was already bought years ago. She's already gotten some benefits from it. And now you're trying to decide what to do about it at this point. Well, you can just let it play out the way she expected it to. Which is that the mortgage company gets the home when she has to move into a sniff or whatever.

And you can just let that play out. It's fine. That was the whole point. At some point, she made a conscious decision that that's what she was going to do. And this is one where maybe there's some cash that she gets back or something. That's what she chose.

Another option is often to pay off the loan. When she took this thing out, it was worth less than $200,000. Now she would have to pay off $320,000 to get this, whatever it was, a $450,000 home. That may or may not be worth it. You just got to run the numbers. You got to look at it and go, “Okay, we get to keep it. If we put this much in.” And you might say “That actually makes sense. I can get a $450,000 house. It's only going to cost me $320,000. That might make a lot of sense. That's a great deal for you even if you turned around and sold it the next day.”

Because if it only costs you 10% to sell it it's $450,000. So that's $400,000. If you got it for only $330,000, well, it's $70,000 in profit. So you could sell it. You could also rent it out as an income property if that makes sense to do so. You got to ask yourself though, “Of all the properties in the country, why would I buy this one as an income property?” It's not in your state. You haven't evaluated it as an income property. It doesn't make sense by its cap rate and potential rent and potential future return. It probably doesn't make sense to do that. You're just going, “Wow, I can get a good deal on this house. So maybe I'll buy it.”

If you want to be a landlord, fine. If you can find good property management in that state, fine. This could be the start of your rental property empire, but it sounds a lot more like a kind of accidental landlord situation. And people often regret that. That often doesn't work out nearly as well as a very intentional focus on buying properties as income properties from the very beginning.

So, run the numbers. Maybe it makes sense to buy and then just sell it. Or maybe it makes pay off the mortgage and then sell it. Or maybe it makes sense to incorporate this into your rental property empire. But try to be intentional about that.

If you need more help deciding if you want to get into direct real estate investing, I would encourage you to take our No Hype Real Estate Investing course. It's relatively inexpensive compared to what you're talking about buying a rental property, especially these days. And that'll help you get the knowledge to decide if that's something you want to do and how you might go about doing it.

But I think you just got to get the numbers. What's it going to take to be clear for the home to be pretty clear of this mortgage? And does it make sense for you to pay it off? Or should you just let what was going to happen, happen? Which is that the company gets the home when she moves out of it. I hope that's helpful to give you a framework to think about your decision.

REFINANCING A MORTGAGE AS A RESIDENT

Dr. Jim Dahle:
Our next question comes in by email titled, “Refinancing a mortgage as a resident.” Okay, that's interesting. The emailer says, “I appreciate you continuing to take time to read through listeners' questions. I'm a PGY-3 ortho resident.” I'll leave out where.

“I have a question about if it's worth refinancing my mortgage when we're roughly two and a half years away from graduating residency. We purchased our home in 2023 with a physician loan with 0% down. It was $245,000. Interest rate was 6.125%. My spouse had a credit score around 750. Mine was around 700, just limited credit to graduating from medical school.

We've increased our score substantially since then. Spouse is 800 plus. The docs is in the 760s. We have a lot more collateral in our name. Combined incomes are now $110,000. We got serious about savings, had some small financial windfalls with an early inheritance, and have about $25,000 in our emergency fund and $34,000 in our retirement accounts.

I feel like we've taken a big step up in our financial stability since our original purchase. Is there an advantage now to refinancing our home to a better interest rate? How would you go about this? Is it worth the hassle with such a short lifespan left for when we'll be living in the home? Would the lender even entertain the thought of refinancing when they do not stand to gain anything from the deal? In fact, we'll lose out on it.”

Let's talk about refinancing in general. Let's talk about buying homes and residency. Let's talk about refinancing. First of all, be aware that my general advice to people in residency and fellowship, etc., is that renting ought to be the default option. The reason for that is that it typically requires you to be in a home for three to five plus years to come out financially on owning instead of renting.

The reason why is because the home needs to appreciate enough to overcome the transaction costs of buying the home and selling the home. Everyone talks about, “Oh, you're throwing money away when you're renting.” That's not true. You're exchanging money for a place to live. If it feels like you're throwing money away when you pay rent, I assure you, you're also throwing money away when you pay mortgage interest, when you pay property taxes, when you pay realtor fees, when you replace a water heater. That feels like throwing money away too, just as much.

“You’re throwing money away”, either way, whether you own or whether you rent. Be aware of that. It just takes time for the house to appreciate it. Typically, on average, it's going to take about five years for a home to appreciate enough that owning it made more sense than renting.

Obviously, there are time periods when you don't have to own it five years to come out ahead. In a really hot real estate market, you might come out ahead after two years. That's possible. In a really bad market, if you bought a home like I did in 2006, you might still be selling at a loss nine years later, much less getting enough appreciation to overcome the transaction costs. I still lost money nine years later when I sold that property. It can go either way.

Historically, at five years, it's about a 50-50 proposition. You'll make money half the time. You'll lose money half the time. Just be aware that selling it for a little higher price than you bought it for three years earlier or five years earlier when you started your residency does not mean you came out ahead. You got to include all the costs that went into it, not to mention the hassle of your time. It's just more hassle to be a homeowner than it is to be a renter.

Now, obviously, some people have come out ahead, especially the last few years during the housing crisis when homes went through the roof. But if your crystal ball is cloudy like mine, you don't know what housing is going to do for the next three to five years, you ought to be pretty hesitant to buy a house that you're only going to be in for a few years.

I still have a very hard time talking residents out of buying homes. People just want to do it. They have this pent-up desire. They feel like that's the American dream, even though that's probably messaging from the mortgage industry and the realtor industry. Especially if they have a spouse or partner that's been hanging on for four years of undergrad and four years of medical school. Maybe it's a little hard to find what they want to live in to rent, although you can rent homes with backyards, with fences for your dog. It doesn't mean you have to live in an apartment just because you're renting, but people are still going to buy. I can't talk you out of it. I understand that.

The good news is, even when you lose money, which is probably two-thirds of the time in a three-year residency and half the time in a five-year residency. Even when you lose money, you can usually make up for it. Because what happens when you leave residency? You get a huge raise. Your income goes up 3X, 4X, 5X, 8X when you come out of residency. You can afford that financial mistake. Even if you lost $20,000, who cares? Somebody's dropping $30,000 off into your checking account every month going forward. You can afford to make that mistake.

If you really want to buy, knock yourself out. I'm not going to die on this hill, but be aware that it's probably not the ideal financial move. You'll probably be better off delaying a little bit. You should probably delay even for a little bit after becoming an attendee, especially if you're changing towns. You're going from the town where you did your fellowship to the town where you're going to be an attending. You don't know the neighborhoods. You don't know the schools.

Swooping in for three days and buying a house is a good way to not get a great deal on a house and maybe feel like you have to move after a few more years. You're probably better off renting for another six to 12 months once you get there.

Figure out what you really want, what you can really afford, what your financial goals really are, which neighborhoods you really want to be in, which school districts you really want to be in, and then buy. Yes, you have to move twice. That's a downside. There are some expenses and opportunity costs there, but I think it's probably worth it. Consider it.

Anyway, that's all I'm asking. Consider renting during residency. Consider renting for six to 12 months when you change towns or when you become an attending. I think you won't regret it the vast majority of the time.

Okay, but that's not what the question is. This doc's already bought a house, and it's an ortho residency, it's five years, so 50-50 chance of coming out ahead there. Fine. He wants to know if he should refinance. Well, the classic refinancing calculation is, “Are you going to recoup the cost of the refinance in lower interest payments between now and when you get out of the home or when you refinance it again?”

That's the classic calculation. It's hard to do in just two and a half years because you're only getting saved interest for two and a half years. If the cost of refinancing is $5,000 and you're only saving $50 in interest a month or $100 in interest a month, well, two and a half years, that's 30 months, so $3,000 in saved interest. It costs you $5,000 to refinance, not including the value of your time. That's probably not worth it. That's the classic calculation.

But there is a possibility. You can do a no-cost refinance. What is that? Well, that's when the lender pays all the closing costs. Note that that is different from a no-cash refinance. A no-cash refinance, they just put those closing costs into the loan. They tack them onto the size of your loan. I'm talking about a no-cost, true no-cost refinance when they're paying everything.

If you can get a no-cost refinance for a lower interest rate, then the breakeven is one month because it costs you nothing. You paid less in interest that month, and then you sell a month later. It's fine. You saved $100 in interest. You came out $100 ahead. That is an option for short time periods if you're considering refinancing. If rates drop dramatically, you can usually do that. If rates have gone down 1%, 2%, 3% or whatever since you bought, you can often do a no-cost refinance that makes sense even if you're only going to be in there for a year. But if you're paying something for it, it's a lot harder.

There's a rule of thumb out there saying if you can get a rate that's 1% lower, it's worth it. But really, you just got to run the numbers because it's dependent on the difference in interest rates. It's dependent on how long you're going to be in the home. It's dependent on how much money you got to bring to the table to refinance.

Do be careful of something I ran into when I tried to refinance the home we shouldn't have bought during medical school. We refinanced it twice. And at least one of the times, maybe both of the times, the lender tried to slip in a penalty, a prepayment penalty.

We knew we were only going to be in that home another couple of years. This was going to graduate from medical school and go somewhere else for residency. We knew we weren't going to be in there long-term and having a prepayment penalty was stupid. And I wouldn't have even found it if I hadn't read the mortgage paperwork very carefully and noticed that that box was checked that showed there would be a prepayment penalty.

So be careful of that. If there's a prepayment penalty, it almost surely is not worth it. You almost never want a mortgage with any sort of a prepayment penalty on it, especially for a personal house that you're buying or a condo or whatever. So, don't do that.

Anyway, so could this make sense to refinance now that you're in a little better financial situation? Maybe now that rates went down a little bit, could you do better than 6.125%? Maybe you'd get 5.5%. If you get that as a no-cost mortgage, I think that's fine to do. But otherwise, two and a half years, interest rates haven't changed that much to get you something dramatically below 6.125%.

This is probably a “don't do it” kind of situation I'm guessing. It's worth running the numbers and taking a look and talking to somebody. We have all kinds of mortgage lenders that can do refinancing in the White Coat Investor community. If you go to whitecoatinvestor.com/home-loans, you can see all of those resources. We've got six or 10 people that'll do these loans in every state that you can call up, and they'll help you run the numbers and know if this makes sense.

But I'm guessing you're probably going to decide in this situation not to do it. But if you could knock off even a quarter interest point, it might be worth it for you if you can do it as a no-cost mortgage. But you're not going to save a lot. It's a little bit of savings.

One thing you should be aware of when you refinance is that you generally start over as far as the number of payments you make. So, if you've been paying on it for a couple of years and you now have 28 years left in a 30-year mortgage, but you refinance it, it's now a 30-year mortgage again. Instead of paying for 30 years if you stayed in there the whole time, you're now paying for 32 years. And if you refinance it again in four more years, now you're paying for 36 years instead of 30 years. So, be aware of that.

If you want to keep the length of time it's going to take you to pay it off, you got to pay extra every month once you refinance, which is fine. You're still coming out ahead because you have a lower interest rate, but be aware you have to do that. Because what they tend to do is they put these numbers in front of you. They say, “If you refinance, instead of paying $2,200 a month, you're now only going to pay $1,750.” And you're like, “Well, that looks good. I could really use $450 a month.”

But be aware that only some of that is from the lower interest rate. Some of it is from the fact that you agreed to pay for two extra years. You're going to pay for 30 years now instead of 28. So be aware of that. Don't just shop based on how much per month. This is the classic saying that “Wealthy people don't ask how much per month, they ask how much.” And people that never build wealth ask “How much per month?” Don't be one of those people that just asks how much per month.

Okay. Let's talk about brokerage accounts.

 

BROKERAGE ACCOUNTS AND LLCS

Ishan:
Hi, Dr. Dahle. This is Ishan from Georgia. My question is regarding brokerage accounts and LLC. Georgia's yearly cost to start maintaining an LLC is pretty low, and Georgia is classified as a charging order state, thereby protecting the assets of an MMLLC. What is your take on placing a brokerage account within the multi-member LLC for high-income earners to protect those assets from personal liability? What amount of the brokerage portfolio would you consider doing so?

And since it doesn't allow naming beneficiaries, how would you recommend structuring the estate planning for it? The only downside I see is more complex federal and state tax forms. Is there something else I should be considering? Thank you for all you do.

Dr. Jim Dahle:
I get this question pretty frequently. It's an asset protection question. We're talking about asset protection here. What is asset protection? Asset protection, for the most part, is trying to stiff your creditors. You owe somebody money and you don't want to pay them. That's what asset protection is.

And so, there's all kinds of ways you can do that. But the primary one, well, first of all, you got your first line of defense, which is to buy insurance, which works very well almost all of the time. Now you're not paying your creditor. The classic example is a malpractice lawsuit and somebody gets a judgment against you and they're supposed to get $400,000. You're not paying them. Your insurance policy is because you bought insurance against that event.

That's the first line of defense. You buy yourself a malpractice policy to protect you against professional liability. You buy a personal liability policy. Now that's included in your homeowner's or renter's insurance. It's included in your auto policy. Then you buy usually a seven-figure umbrella to sit on top of those policies to protect you if there's an additional liability. Somebody sues you for a million dollars because your teenage kid hit them or they slipped and fell on your property or whatever.

Then the insurance pays for the defense. The insurance pays for the settlement. The insurance pays the judgment, at least up to policy limits. And that's your first line of defense.

Your second line of defense is to declare bankruptcy. Let's say somebody gets a $10 million judgment against you. You got a million dollars in insurance and you appeal it. It gets reduced, but only to $8 million. So now you've got, after the insurance pays out policy limits, you got a $7 million judgment against you. Okay, well, you don't have $7 million sitting around. You're going to declare bankruptcy. That is your second line of defense in asset protection is to declare bankruptcy.

And now you go to the federal and state bankruptcy laws to see what you get to keep in bankruptcy, because you don't lose everything. We don't have debtor's court anymore, or we don't have debtor's prison anymore, rather. We do have a debtor's court, I guess. That's bankruptcy court. But we don't have debtor's prison. You're not going to jail for this. It's like malpractice. It's not a criminal act. It's a civil act. It's all about the money. So you're not going to jail because you owe people money. You just declare bankruptcy.

And in every state in this country, and there are some federal laws that apply as well, you get to keep a pretty significant amount of stuff in bankruptcy. Let me give you some examples. This is the Utah law. The Utah law allows you to keep all kinds of stuff. It allows you to keep the clothing you wear, an inexpensive car. I think you get to keep three firearms and a thousand rounds of ammunition.

And you also get to keep any money you have in the cash value of a whole life policy. You get to keep anything you have, and here's the big one, in retirement accounts. 401(k)s, 403(b)s, 457(b)s, 401(a)s, solo 401(k)s, IRAs, Roth IRAs, cash balance plans. You get to keep all that in Utah.

In Utah, you don't get to keep any of your money in annuities. You don't get to keep any of your money in your brokerage accounts. Your non-qualified taxable brokerage account, you don't get to keep any of that. That all goes to your creditor. If you got an expensive car, you got to sell that. I think in Utah, we get something like, if you're married, something like $80,000 in home equity. The rest of your home equity, you lose.

Other states have better laws. Some states have worse laws than Utah. In Texas and Florida, you have an unlimited homestead law, so you get to keep your whole house. There are some other things that people do sometimes. Sometimes they put assets into trusts, for instance. Utah offers a domestic asset protection trust, so we put our home into a domestic asset protection trust. Maybe it works, maybe it doesn't. When we declare bankruptcy, theoretically, we get to keep the house because we don't own it. This asset protection trust owns it.

The case law on those is not extensive. You don't really know for sure if it's going to work, particularly if you used a trust from out of state, but maybe it'll work and it doesn't cost very much to put your home into an asset protection trust. It's something that you can try in the very unusual event that you have one of these above policy limits judgments and have to declare bankruptcy. Maybe this allows you to keep the home. Those are the techniques people use.

LLCs are a business structure. People often put their business into a format as an LLC or a corporation to provide some additional liability protection. That provides two types of liability protection. One is from internal liability. This is why you put your rental property into an LLC, or if you have a business where you rent out jet skis, and you don't want somebody to get hurt by one of the jet skis and become sue you personally and lose your personal assets. So, you form it as an LLC. If the worst happens, well, you just lose the business. You lose everything in the LLC. That's your internal liability protection.

It also can provide some external liability protection. This is very state-specific. Often, there's significantly more protection provided when there is more than one owner for that LLC, particularly when those owners aren't related to each other like husband and wife.

The idea there is if one of the owners gets sued for a gazillion dollars, they can't force the business to close because it would hurt the other owners. So, all that creditor gets against that business is a charging order. What a charging order is, is when that business distributes money to the owners. Well, the creditor can take the money that was going to the person they have a judgment against. That's the idea of an LLC being limited to a charging order.

With that background information let's get to the question. The question is, “Should you put your brokerage account, which really isn't protected in any state from your creditors in an LLC?” There's not going to be any internal liabilities. It’s a brokerage account. There's no liability from your mutual funds in there.

But the hope is to get some external liability protection by having it in there. And that's the idea behind putting it in the business. But what I always think about with this is this just feels so screwy, borderline fraudulent. To put your brokerage account in an LLC. Because an LLC is a business. It's a limited liability company. What business are you in? You're not in business. You're not selling anything. You're not buying anything. You're not offering a service or a product or anything. You're not in business.

All you're doing is trying to shelter your brokerage account from some external creditor in the unlikely event that you get sued for an above policy limits judgment not reduced on appeal. That's a little squirmy. Especially when you're the only owner. And you're the only owner of this business or the only owner is you and your spouse.

I think there's a significant portion of the time when you really do have an asset protection situation. You get this huge judgment against you and insurance can't cover it and you got to declare bankruptcy that they are going to go, “No, this LLC is screwy and the court is going to order you to take the assets out of the LLC and give them to the creditor.”

I think that's probably what's going to happen most of the time. That is very state dependent. That is very situation dependent. That is probably attorney dependent. And so maybe it works. I put it in the category of those domestic asset protection trusts. It doesn't cost much to do. It's a little bit of extra hassle. Maybe it'll help.

But I would encourage you to step back for a minute and consider the overall philosophy here. And what I find is that a lot of people are trying to protect every dime they have from this very unlikely situation of an above policy limits judgment, not reduced on appeal.

And it turns out it's really easy to protect with a high level of confidence, with very little expense and very little hassle to protect a large percentage of your assets. For most White Coat Investors, a huge percentage of your assets are in retirement accounts. They're already protected. You get to keep those in bankruptcy. And depending on your state, maybe you get to keep a huge chunk of your home equity or all of your home equity.

Okay. Well, what percentage of your assets are your retirement accounts and your home equity? For most White Coat Investors, we're probably talking 80% plus. So in this very unlikely event, it's not like you're going to be eating Alpo. You still have 80% of your assets and you get to start over. And then that debt is wiped out and you move on.

This thing we fear that we're going to lose everything we've worked so hard for is not very realistic. Now, if you have a lot of your assets, large amount of assets that are not protected in any other way, then you can consider some of these more complex asset protection techniques, like putting your brokerage account in LLC.

But you got to ask yourself in that sort of a situation, “Is there a better method?” Because when you're talking about those levels of wealth, where you've been maxing out retirement accounts for years and you still have a brokerage account that makes up 75% of your net worth, well, you're probably pretty wealthy.

And you probably need to do some estate planning. And maybe it makes some sense to have some sort of irrevocable trust or some sort of asset protection trust or some sort of a charitable trust. These other things that would solve some of your other problems, like estate taxes or distributing your money in the way you want to your heirs in a way that also gives you significant asset protection.

That's what we ended up doing. Yeah. We have a lot of money in a brokerage account. Guess who owns a brokerage account? An irrevocable trust. So, we don't need to put that in an LLC. That'd be silly.

And so, I think this is not a very practical solution. And I think if you start your taxable account, now you got $50,000 in there and you're like, “Oh, I don't want to lose this. I'm going to put it in an LLC.” I think you're making your life overly complex. I think you're over-optimizing to be doing that sort of a thing.

But if you want to start a business, say that business's purpose is to buy and sell mutual funds, and I'm going to try to convince a court of that in the event that there's an above policy limits judgment against me, I think you're going to have a hard time winning. But you can do it. This doesn't cost much to start an LLC. In Utah, it's $70 and $15 a year. It doesn't cost much.

So, you'll have a little more hassle transferring assets in there. You'll have a little more hassle managing them. And down the road, it's going to be a little bit annoying because guess what? When you die, there's a step up in basis on the value of the LLC, but maybe not the shares. It starts getting complicated.

So, I don't think most White Coat Investors should put their brokerage account in an LLC. But if you want to try it, you're really paranoid about asset protection for some reason, you want to do this sort of a thing. Knock yourself out. Let us know how it goes. Send us a guest post about it, and we'll go from there.

But I think when you're starting to ask questions like these about asset protection, you've probably jumped the shark. You've probably jumped the shark. Make sure you're at least doing the basics first. What are the basics? The basics are buy insurance. We're talking plenty of malpractice insurance, plenty of personal liability insurance. If you haven't even bought an umbrella policy and you're now putting brokerage accounts in an LLC, you're screwing this asset protection thing up.

Max out your retirement accounts. Even consider Roth conversions because that's a way of getting more of your money on an after-tax basis into retirement accounts. Make sure you're titling your property properly. If you're in a state that allows tenants by the entirety titling and you're married, you might be able to do that for both your home and also your brokerage account. That way, if only you get sued, they can't take your brokerage account because your spouse also owns the entire thing. That's far more likely to work than putting in an LLC.

Do those basics first and then decide if you want to spend thousands of dollars and some additional hassle doing more advanced asset protection techniques. And I think you'll arrive at the right place for you. While it's very hard to protect everything, it's not that hard to protect a whole lot of your assets in a bankruptcy kind of situation.

All right. I appreciate you leaving that on the Speak Pipe. If you'd like to leave your questions for the podcast, you can do so. Go to whitecoatinvestor.com/speakpipe and you can record up to a 90-second question. You don't have to use all 90 seconds. Leave a 90-second question. We'll get it answered on the podcast. Thanks so much. This is driven by you, your questions, what you want to talk about. We're thrilled to be able to have another voice on the podcast and answer your questions.

 

HELPING AGING PARENTS DECIDE WHAT TO DO WITH A VARIABLE ANNUITY

Dr. Jim Dahle:
Okay. Our next one comes in by email. It says, “I'm a long-time devotee. Thanks for providing honest and understandable financial education. My parents each bought a Vanguard variable annuity, now administered by Transamerica. Luckily, they have never needed to annuitize and don't need the cash value for living expenses.

My mom recently received a letter saying that she's about to reach the change of income date and asked for a decision on how to go forward. Her options are to surrender the annuity policy and receive the policy value, which I believe would be completely taxable and not desirable.

The second choice is to annuitize the policy and receive regular scheduled payments. They don't need this cash value for their living expenses, and we're planning on having this as a part of their estate to be distributed among the three surviving children.

The third option is to continue the annuity policy and defer the change of income date to my mom's 99th birthday. I hope she gets there. The letter states that they would still be able to take partial withdrawals, surrender the annuity, or annuitize the policy and begin receiving payments at any time for the new change of income date. Those are just punting, not making a decision.

I remember reading a blog post where you discussed annuities with an expert. I wonder if you could share that person's contact info with me. I'm happy to pay someone smarter than me to advise us on the best route forward.”

I don't know if that service exists, like annuityadvisor.com. I don't think it's out there. The people who will talk to you about annuities sell annuities. I think the only annuity agent I've ever had on this podcast was Stan, the annuity man. It's been years since we had him on there. He'll talk to you about annuities, but he gets paid by selling you annuities. It's not exactly unbiased education, unbiased advice.

If you want unbiased advice about your annuity or about your whole life insurance policy or whatever, you need to pay a fee-only financial advisor to get that. We got a whole list of those. If you go to our recommended page at whitecoatinvestor.com, scroll down there, you'll see financial advisors. You can come to White Coat Planning. You can get advice about your annuities. You can go directly to our list at whitecoatinvestor.com/financial-advisors. Hire somebody there. They can help you with your annuity. If you want to talk to a professional and run the numbers, that would help you do so.

You can often do exchanges between insurance products. You can exchange from a life insurance policy to an annuity. That's called a 1035 exchange. You can't do it in reverse, though, which is unfortunate because if it's money you're for sure leaving behind to somebody, putting it in a life insurance policy is not a terrible way to do it. It's a death benefit.

The nice thing is, if you die tomorrow, you still leave them a whole bunch of money, even if that money hasn't had a lot of time to grow in cash value in the policy because of that death benefit.

If you live to your life expectancy, you might have been better off just investing that money in a brokerage account than putting it in a life insurance policy. The bottom line is they already own an annuity. They can't exchange that for a life insurance policy. That's not an option.

If she really doesn't want the money for herself, the best option to me sounds like just pushing that annuitization date back to 99. Then it'll all be sitting in the annuity still when she dies, probably at an age younger than 99. That can be split up among the heirs. They're probably going to have to pay some taxes on that because a fair amount of that is going to be taxable.

Now, this question they did not mention whether this annuity is inside a retirement account or not. I'm guessing it's not. Those have a little bit different rules. If it's inside a retirement account, well, RMDs have to come out. Essentially, that's the annuity payment. If you put an immediate annuity into a retirement account, you could do that, and you just pay taxes on what comes out of the immediate annuity because that's the amount that comes out of the retirement account, essentially. It's called a qualified annuity.

But I think this one's probably a non-qualified annuity. When you start taking income from it, some of the income is taxable at ordinary income tax rates. Some of it is basically a return of your principal and is not taxable. I think it's called an exclusion ratio, if I recall correctly, determining how much is taxable and how much isn't taxable.

The nice thing about an annuity is that, like a retirement account, the money grows inside it in a tax-protected way. That's a benefit, especially if the money stays in there for decades and decades. It's possible that that tax-protected growth feature can overcome the two downsides of annuities.

The first downside, of course, is the fees. You've got to pay somebody, some insurance company, for this annuity. You may have paid a big commission upfront to buy it as well. There's a cost to the annuity. You've got to overcome that. It takes time for the tax-protected growth to do that, especially if the fees are relatively high. You may never overcome it.

The other downside of the annuity, of course, is that when you take money out of it, you pay on the growth at ordinary income tax rates, not long-term capital gains rates, not qualified dividends rates. It has to be in there for a long time to get that tax-protected growth to overcome that difference in taxation when it comes out.

It's entirely possible if you're investing it relatively tax-efficiently that it will never provide enough benefit, enough tax-protected growth to overcome the fees and to overcome that difference in tax treatment.

The other upside of just using a regular brokerage account is that your heirs get to step up in basis of debt. You die with a brokerage account, and that inheritance is totally tax-free to your heirs. Assuming there's no estate taxes involved, you're under $30 million married, whatever that goes up over the years, that's indexed to inflation now. It's a significant downside. If it's in the annuity, it's still coming out, and you're still paying taxes on it, whereas you wouldn't have been if it had been in a taxable account.

Given that your mom wants to leave this money to the heirs, I think the variable annuity was probably not the right choice. You have to entertain the possibility that maybe getting the money out, paying the taxes on it, and investing it tax-efficiently in a brokerage account is the right move.

Now, as I mentioned earlier in the podcast, there are some asset protection concerns there. Most brokerage accounts are accessible to creditors. They're certainly accessible when you start doing Medicaid planning and those sorts of things, whereas an annuity might not be in your state, might not be as accessible to Medicaid, might not be as accessible in a lawsuit or something like that. There might be other reasons why you'd keep the annuity, but it wouldn't surprise me if you run the numbers that pulling this money out of the annuity, paying the taxes on it, reinvesting it in a taxable account could possibly come out ahead, or pulling it out and buying a life insurance policy.

You could even buy a single premium one, a modified endowment contract. This is like a whole life policy that you can't borrow against, just a death benefit. That's all it provides. That might be a better way to go. Some things to think about, but I don't think that for the money you're planning to leave behind, these annuities are really the best way to do it.

Most annuities are products designed to be sold, not bought. It's entirely possible this one is not awesome. I am reassured by the fact that they bought it from Vanguard. I don't have all the details on that one in front of me, but it's probably better than most annuities.

Why they used it in the first place, I am not clear. Maybe they had a good reason for it. Maybe they're investing all that money in relatively tax-inefficient assets. Maybe it's all in bonds and REITs or something like that, and it made sense, but it feels like they just got sold a policy or sold an annuity that they really don't want or don't have a purpose for.

The overall financial planning here is a little bit of a mystery to me. I think sitting down with your mother's financial planner, if your mother doesn't have a financial planner, maybe getting her one would be well worth it. Again, you can do that on our recommended list for financial planners.

 

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All right, this is it. We're at the end. If you guys want to have more podcasts, longer podcasts, you got to ask more questions. And the easiest way to do that is going to whitecoatinvestor.com/speakpipe and recording your question.

Until then, keep your head up, shoulders back. You've got this. We're here to help you. Thanks for being part of the White Coat Investor community. Thanks for what you do daily. We'll see you next time on the podcast.

 

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Transcription – MtoM – 275

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 275.

This episode is brought to you by KeyBank. For six years, White Coat member benefit partner, Laurel Road, has been part of KeyBank. As of March, that partnership becomes even stronger, as Laurel Road is now officially under the KeyBank brand.

With the transition to KeyBank, the same tools and services you rely on now come with enhanced resources and support, and the same great experience you trust. White Coat Investors can continue to enjoy the benefits and financial resources they always have, with even more support from KeyBank. To learn more, and for terms and conditions, please visit whitecoatinvestor.com/keybank.

All right, it is now May. By the time you're hearing this, it's time to apply to be a speaker at WCICON27. You do that at wcievents.com. The conference is going to be February 24th through 27th, 2027 at the Rosen Shingle Creek in Orlando.

By being a speaker, not only do you get to speak, which is fun, but you get to experience all of WCICON. You get a full registration. We fly you out, put you up. You know, it's a good time, give you a little bit of a stipend and you get to have the whole three-day experience. Four-day if you count the opening reception beforehand.

But the beautiful thing about our speaking panel, people that come and the faculty for the conference, is they tend to stick around and meet people and talk with people. And the interaction with the attendees is something that the attendees love and the speakers love just as much.

Now, obviously it's a little bit of a competitive process to be chosen as a speaker, but you can't win if you don't even get in the game and so we encourage you to not only apply, but if you think you'd be able to give good presentations on multiple subjects, apply for multiple talks. Again, you do that at wcievents.com. This is a great way to pay it forward, to make a difference in the lives of thousands of physicians and their families and to come to WCICON absolutely for free.

 

INTERVIEW

Dr. Jim Dahle:
All right, we've got a great interview today, so I hope you're looking forward to that. We've got a millionaire we're bringing on the show.

Our guest today on the Milestones to Millionaire podcast is Adam. Adam, welcome to the podcast.

Adam:
Thanks, great to be here.

Dr. Jim Dahle:
Adam, you've been a White Coat Investor for a long time. You were telling me before we started recording that you were reading in 2012 or 2013, you were actually there at our first conference. So thank you so much for being with us for so long.

Adam:
Yeah, no problem. I can't take all the credit. My wife is the one who found you first and said, “Hey, we're going to head in this direction.” So I had to say “Yes, dear.”

Dr. Jim Dahle:
Okay. Well, everybody else doesn't know you though. So, let's have you introduce yourself a little bit to the audience. Tell people how far you are at training, what part of the country you're in, what you do for a living.

Adam:
Yeah, my name's Adam Wrench. I'm a family medicine physician. I am here in rural Nebraska, pretty much right smack dab in the middle somewhere. And I'm just about eight years out of residency training.

Dr. Jim Dahle:
And you've accomplished something recently that's impressive. Tell us what you became.

Adam:
Yeah, we became millionaires. And I guess if you're talking about net worth, that happened a little bit ago. But my milestone that I was really looking forward to was a million dollars in investments. That's what I was going for. And we hit that just right at the end of last year.

Dr. Jim Dahle:
Very nice. And of course, it takes us a few months to get you on the podcast. And I think this doesn't even drop until about May 18th. So, hopefully you'll be a little bit wealthier by then if you're on the track you've been on. I suspect you will be. Tell us a little bit about your net worth. The last time you added it up, whether that's today or a few months ago, how much in home equity, how much in retirement accounts? Tell us what you have.

Adam:
Yeah, I kind of follow it monthly. March wasn't a great month, so it kind of went down a little bit. But total net worth right now is about $1.4 million. The vast majority of that is in all our investments. I have mostly tax deferred accounts. I have a small taxable. But about $1.25 million in the investments now since the end of last year. I had a couple good months. We have our primary residence, which is our only residence, that we have about $180,000 in equity to equal that $1.4 million, almost $1.5 million.

Dr. Jim Dahle:
Now you're in small town Nebraska. Some people listening to this right now are in D.C. or Manhattan or San Diego. Tell us what your house costs. What's it worth today, I should ask? What's your house worth today?

Adam:
Our house taxes just went up. We got one of those lovely little pink postcards last year. The worth went up to about $360,000 to $380,000, I think, this year. When we first moved here, this house is a five bedroom house on a 0.7 acre lot, built in 2013. And when we moved here, we bought it for $297,000.

Dr. Jim Dahle:
So five bedrooms, you said three quarters of an acre.

Adam:
Yes.

Dr. Jim Dahle:
And how many square feet in the house?

Adam:
Yeah, probably around 4,600, I think.

Dr. Jim Dahle:
Okay. 4,600 square feet, five bedrooms, three quarters of an acre. Are you guys in San Diego listening to this here? This is what geographic arbitrage is. You leave your condo in San Francisco or D.C. or whatever and essentially get a mansion on almost an acre in rural Nebraska. Now the downside, of course, is it's in rural Nebraska and you better be okay with that because it's a little bit different. Tell us a little bit about your practice. You're the classic country family doc. Tell us what you do.

Adam:
That's one of the reasons why I chose rural medicine is I grew up in the biggest town in Nebraska, born and raised there. But my parents are from smaller towns. And when I was going through medical school, I liked a little bit of all my rotations. I liked a little bit of OB at the time. Didn't like that later on. I liked psychiatry. I liked hospital medicine. I liked ER.

When you become a family medicine doctor, if you're in a big city, a lot of times you're just seeing a whole bunch of patients in the clinic and that's all you do in and out. And I knew that was going to eventually lead down a path of potential burnout. I like variety. Coming to a rural facility, you get to do all. Just this morning, I went and saw my inpatient because I have a patient in the hospital. I got to round on that and got to do some hospital medicine.

Most of my day is clinic, just a regular bread and butter family medicine clinic. I have opportunities to do other things. I actually run a wound clinic because there's no one else around that can do a wound clinic. Usually that's a surgery thing, but we don't have a general surgeon in-house. I run a wound clinic one day a week.

And then every once in a while, we're back up call in the ER or if we want to take a primary shift, I get to cover the ER if I want to. So you can make it your own. There's five whole docs in my office, in my practice. We get to share the load too. So it's not like calls every one in five days. We do weeks of backup at the time. Our PAs take primary call in the emergency room. And if there's traumas or codes, then that's most of the time we have to come in or if they just need some help.

Dr. Jim Dahle:
Okay. So, give us a sense of what your income has looked like for the last eight years since you got out of training, practicing rural family medicine.

Adam:
Yeah. Graduating residency, came out here. I think my first contract was $230,000 which is pretty good for a starting family medicine doctor.

Dr. Jim Dahle:
$230,000, I assume.

Adam:
Yeah. What did I say? Yeah, $233,000. Yeah. There's an opportunity for bonus and production that you get from that. One of the big reasons, I guess another advantage of coming to a rural facility is they're very keen to help you out to get you here. And that for me included a lot of help with loans.

Being in a small town and actually our most rural hospitals, and I don't know if this is true everywhere across the country, but most rural hospitals in Nebraska are actually county hospitals.

And it's a government and they really kind of want you to come and help out. They have a lot of programs, both state and federal programs to get you into these places. And so another big draw was a lot of loan repayment.

Dr. Jim Dahle:
As a county facility, would that job qualify for public service loan forgiveness?

Adam:
It would. And that's one of the conversations that we had when we moved out here, my wife and I, was how we wanted to do that. Three years of residency and then seven years out here, which means right about now or this past year, I would have been done paying for public service loan forgiveness.

But with the federal program that I got when I came out here, it's a federal program would pay for a portion of it as long as your hospital matched the funds. And they paid for a little over two-thirds of my loans, which I graduated with about $240,000 in loans. With them paying two-thirds, we thought, “You know what? I'm not as debt-averse as Dave Ramsey would like me to be, but I really did not want to carry those loans for another seven years.”

So, we just decided we were going to pay as if we were paying our own loans and got them off at about 30. I wanted to do it in three years and I did it in 37 months. So I kind of missed the mark, but I didn't feel like paying my loans for seven years when I already had two-thirds of it done. So I decided to just go through with it.

Dr. Jim Dahle:
Has your spouse been working at all?

Adam:
When we moved out here, she didn't. Our oldest was going to go to kindergarten, but our youngest was only one. Just to try not to find a job, as we moved out here, she stayed home. We didn't have childcare expenses. After my daughter got old enough, she got a part-time job. She works for a nonprofit, but she gets to work at home. So she's here too. The vast majority of our income now is mine and hers is just kind of adding a little bit on the top.

Dr. Jim Dahle:
So, I'm doing the math in my head here. Over the last eight years, you've made something like $2 million. And you've got $1.4 million of it left.

Adam:
Yeah.

Dr. Jim Dahle:
And this is really good. You got some appreciation of the house, and of course, the stock market has done well the last few years.

Adam:
Well, and my income did go up.

Dr. Jim Dahle:
The bottom line is you saved a whole bunch of your income too.

Adam:
Yeah.

Dr. Jim Dahle:
What do you think your savings rate's been on average over those last eight years?

Adam:
I calculated, last year, our savings percentage kind of fell around 32%. It's been nice for a number of reasons. I guess another advantage of me working in this county hospital is that there's a few different strategies that I could use that I probably wouldn't do in your own, I guess maybe not private office, but at least an urban location.

My facility, we have a 403(b) because we're a non-profit, but we also have a 457 that's offered, which is a governmental 457 because I'm a government employee. I had to email, I think the HR department was not very happy with me because I emailed them three times just saying, “Are you sure it says governmental?” Because I'm just a little leery about that. I read too much.

But then also being a governmental employee, I have access to a 414 account, which is for governmental employees. And it's for highly compensated employees. That's how my facility does the match. It's a mandatory 3.5% of my income that I have to contribute. And it's a mandatory 3.5% income for the hospital that employs me.

So, it caps out at, I think the income limit is like $360,000. I think this year it'll be a max of another $25,000 I can contribute. And so, doing the 403(b) plus the 457 plus the 414, along with our Roth IRAs that we do every year, and then whatever we want to throw in taxable. I think last year we saved about $130,000.

Dr. Jim Dahle:
Okay, this is pretty awesome. Before that last paragraph, I'd never heard of a 414. So I'm sitting here Googling, I'm like, “414, what's that?” But indeed this pickup plan, they're often called, is another tax advantage retirement account specifically for government employees. It sounds like it works an awful lot like a 401(a). I don't know if you're familiar with those plans.

Adam:
Pretty similar.

Dr. Jim Dahle:
Sounds like another similar plan to that. That's great that you've learned about what's available to you and taken advantage of them. At what point do you think you'd start thinking about doing Roth conversions or maybe doing some Roth contributions with some of this money now that you've got seven figures in tax deferred money?

Adam:
That's an interesting question. It's one that I've put off from thinking about just because I wanted to focus on putting some money away. But now it's a good problem to have considering that. My wife and I, we both contribute to our Roth IRAs every year. And I think each one of them has $140,000 or $150,000 in it each. That's going the right direction as well. I haven't really thought about that. But now you're giving me another research topic.

Dr. Jim Dahle:
No worries. Okay, let's talk about some advice for people that want to do what you're doing. They're like, “Well, rural medicine sounds good, but I hear the pay is a little bit lower. I know the cost of living is lower, and I don't know anybody that's done it.” What advice do you have for somebody that would consider practicing, not just in the Midwest, but in a small town in the Midwest? What advice would you give to them?

Adam:
I think it has been overall an amazing choice. Yeah, you always worry with family medicine, a lower paid specialty. But again, geographic arbitrage, not only is your cost of living cheaper. I live two blocks from the hospital. My wife makes fun of me because I drive most days, and I probably really shouldn't. I should probably walk. But even then, gas is cheap. Not anymore, but you're only driving two blocks.

It's nice because you get to know the other docs in your practice really well. You get to know the administration. Yes, I'm an employed physician. I work for a county hospital. But really, being one of the five docs, you have a lot of say in what goes on in that hospital. Yes, the CEO probably makes the financial decision. But if he pulls all five of us doctors in your room and says, “Hey, I'm thinking about this”, and all five of them say, “That's not a good idea”, we're not going to like that. Then he tends to go a different direction.

You do end up getting paid more. $233,000 was my initial salary, but I don't quite make double that. But it's getting pretty close to that after bonuses as your practice gets busier. As a rural family medicine physician, I didn't think I would be making around $400,000. And that's kind of where we're at right now.

So it's got a lot of advantages. We get to know your neighbors. You get to know your patients really well. You get to have time. I don't feel like I'm in and out of the office on a rat race. And you get to make it what you want. And if you are worried about seeing 35 patients every single day in a clinic environment, in and out, working on all those notes without doing anything different, then really check out your smaller towns because you can kind of make it whatever you want.

Dr. Jim Dahle:
Yeah, pretty awesome. We get requests a lot for people that are like, “Oh, you only put people on the podcast that make a gazillion dollars. Why aren't there more moderate income physicians on there?”

And here we are. We have a family practitioner on here that demonstrated a few things. One, that there's a pretty good range of income in every specialty. You might have started at $230,000 and now you're closer to $400,000. Well, $400,000 is more than lots of emergency docs are making.

The average emergency doc's making like $375,000. So, half of them are making less than that. The average physician's right about that amount as well, somewhere around $375,000. So here you are doing supposedly a lower paid specialty and getting paid more than the average physician and dramatically lower expenses, thanks to the geographic arbitrage.

It really demonstrates just how possible it is to be successful no matter what you choose to do or where you choose to do it. You can have success. I appreciate you coming on to demonstrate that.

All right, what would you tell somebody that just wants to be successful like you? They're not necessarily interested in rural medicine. They're not interested in family practice. What financial advice would you give to another doc if they ran into you at a conference and asked for your best tips?

Adam:
Probably the thing that worked out best for at least my family is educating yourself. We found you early. We read the books. We didn't have the money to save and do all those things. We didn't make enough money to save $130,000 a year right away, but learning and educating yourself so you know what to expect going forward. It doesn't matter how much you make. It doesn't matter necessarily where you live. If you know what options are available to you, then you can save.

Dr. Jim Dahle:
And on the other side of it, I think that what we've started to do more seeing how quickly our savings has grown is we're trying to spend intentionally, figure out what makes us happy. And in rural Nebraska, like you said, the cost of living is low enough that while we're here, it doesn't cost us much to live. So, one of the things we like to do is travel. We use that money to take a few big vacations, maybe an investor conference every once in a while and live it up while we're there and then come home and repeat.

Pretty awesome. Well, congratulations on your success. Thank you for being so willing to come on the show and share it with others and hopefully inspire them to do the same.

Adam:
No problem. It was great. Thanks.

Dr. Jim Dahle:
All right. I hope that was helpful. The interesting thing about this sort of a situation when somebody becomes financially literate before making the money, how much better they do? His wife introduced him to WCI in like 2012, 2013-ish. He came to WCICON as a senior resident. That was in like 2018. By the time he heard about it, he was a young medical student and he was still years away from the big bucks. By the time the big bucks started rolling in, he knew exactly what to do with it.

I think that's very helpful to get that financial education so early. That's why we do our Champions Program. We're trying to distribute a copy of the White Coat Investor's Guide for Students to every first year medical, dental, et cetera, student in the country. This is one of the things we do each year because we know how powerful it is to get started right up front.

Even if you're a relatively low-paid physician, all of a sudden now you negotiate a little bit better. You take a job that pays you a little bit better. You pay attention to the cost of living. You quiz HR about how your retirement accounts actually work and you take advantage of them. You get your entire match. You make sure you have adequate insurance. You do the things right, right from the beginning.

And so, no surprise, the wealth comes. He's eight years out, already a millionaire. His goal is to be a millionaire by 40. He crushed that goal. And you know what? The first million is the hardest. The second one comes a whole lot faster and then they just start piling in. And before you know it, you have enough money that you can do whatever you want with your life.

I hope a lot of you will choose, even once that happens, to still practice medicine like I am on your terms. The way you want to do it, as much or as little as you like. If it makes sense for you to continue to embrace that calling so many of us feel to serve others and to do what we can, do what we spent a decade learning how to do.

But to be able to live your life on your terms intentionally with the trips and the things you want to be able to do for your family and to support the causes you care about, it's a pretty awesome thing that becomes possible simply by becoming financially literate and financially disciplined and a little bit intentional with how you're living your life. And Adam's done that and I’m super proud of him and exciting to be able to discuss those successes he's had with him.

 

FINANCIAL BOOT CAMP: THRIFT SAVINGS PLAN

Dr. Jim Dahle:
The Thrift Savings Plan or TSP is the federal version of the 401(k) for federal employees and military members. And it changes from time to time like any 401(k) plan does, but in general has remained pretty similar across the years ever since I was in the military and was using it as my retirement savings plan.

It currently offers both a tax deferred and a Roth option. Whether you want to make tax deferred contributions into it or Roth contributions into it, you have both of those options in the Thrift Savings Plan. The Thrift Savings Plan has been known for low expenses over the years.

Now, the truth is that over the years, Vanguard and Fidelity and Schwab kind of caught up to them, iShares as well. So you can get very low cost investments in other places as well now. It used to be the TSP was the cheapest index funds you could ever find. That's not the case anymore, but they're still very, very cheap. And certainly to the point where you shouldn't be choosing between Vanguard, Fidelity, the TSP, et cetera, based on expense ratios of their cheapest index funds. They're all very, very cheap and practically free to invest in. That's one big, huge advantage.

Another big, huge advantage of the TSP was that they just kept things relatively simple. It has basically five funds that you can invest in. The first one is the C fund or the common stock fund. And that is basically an S&P 500 index fund.

The next fund is an S fund or a small stock fund. And this is the equivalent of an extended market index fund that you might see at Vanguard or Fidelity. Put those two together and it gives you a total stock market index fund. Put 80% of your money into the Z fund and 20% into the S fund, you basically got a total stock market fund.

The third fund in the TSP is the I fund or international fund. And this is similar to international total stock market index fund. A few years ago, that I fund has changed from just developed markets to include also emerging markets. So, it's most similar to a total international stock market index fund now.

It also has two bond funds. The first one is the F fund for fixed income fund. And it's basically a total bond market index fund. The other bond fund is unique to the thrift savings plan. It's called the G fund for government securities. And it basically offers you treasury bond yields with money market risk. It gives you the average yield of treasuries that are out there, which is usually if the yield curve is not inverted, is usually a little bit more than you can make in a money market fund.

But the duration of this fund is essentially no more than four days. So, it really functions as a money market. You don't lose principal in the G fund. You earn a little bit more than you would with other cash investments over the long run. And so, it's a very safe fund. Because of its uniqueness, a lot of people, even when they leave the military or leave government service, keep their TSP just because they'd like to invest some of their money into that G fund. My entire TSP is invested in the G fund these days. But granted, that's a very small percentage of our overall assets.

If you have access to the Thrift Savings Plan, just like any other retirement plan you have access to, you should probably use it. It's a good 401(k). There are lots of terrible 401(k)s out there. This is not a terrible 401(k). This is a good one. So, if you have access to it, please, please, please use it. You're not going to regret it. You'll have a little bit more money for retirement.

Because in retirement plans, money grows faster because it doesn't get taxed as it grows. It also gives you a little bit better asset protection. In every state, this money is protected from your creditors. So, heaven forbid you have an above policy limits judgment that isn't reduced on appeal and you have to declare bankruptcy. You get to keep your TSP. It's a great reason to max it out every year.

It also facilitates the state plan. That money doesn't have to go through probate. You can just list your beneficiaries and the money goes directly to them relatively quickly after your death. So, very convenient retirement plan. Definitely use it if you have access to it.

Now in the olden days, military members didn't get any sort of a match in the TSP. I never received a TSP match during my military service. That changed a few years ago. And now both civilians that are government employees as well as military members can receive a match of up to 5% of base pay.

Now not receiving your match in a retirement plan is the equivalent to leaving part of your salary on the table. Don't do that. Make sure at a minimum you put enough into the plan to get your entire match.

Now, in addition to the five basic funds in the TSP, there are some other funds they call the L funds. L standing for life cycle. And these are similar to the target retirement funds you might find at Vanguard or life cycle funds you might find at other mutual fund companies.

They are a mix of the other five funds. And you're supposed to choose your mix based on the date that you want to retire. So you can get one that's 2025 or 2030 or 2035 or 2050 or whatever. And you simply choose it based on when you think you're going to retire approximately.

And then the TSP experts choose what percentage of your assets ought to be in each of the funds. And as you get closer and closer to retirement, it becomes more and more and more conservative. More money in the F fund, more money in the G fund, less money in the stock funds as you go along.

But if this is your only retirement account, that's perfectly reasonable to use these L funds. If you're like a lot of docs and you're mixing it with three or four other retirement accounts in a taxable account, you probably are going to have a little more complex portfolio and you're probably going to need to roll your own TSP asset allocation. But if it's your only retirement account, the L funds are a great option.

Okay, now what's wrong with the TSP? Is there anything wrong with it? Well, the expenses can be slightly higher now than some of the stuff you can buy at Vanguard and Fidelity, but it's close enough, you shouldn't worry about that.

I'm not a huge fan of S&P 500 index funds. I think a total stock market index fund is slightly better. And the TSP uses an S&P 500 fund, the C fund. So, that's a little bit of a downside. That's a pretty minor quibble.

It also doesn't have any sort of TSP true small stock fund, even the S fund. It's mostly a mid-cap index fund. It does have some small stocks in it, but it's not a true small stock fund. So, if you want small stocks in your portfolio, heaven forbid small value stocks in your portfolio, you're not going to be able to get that really in the TSP. You're going to have to do that in your taxable account or another 401(k) you're eligible for, your Roth IRA or whatever.

Another criticism some people make is that it errs too far on the side of simplicity instead of diversification. The TSP is traditionally been very slow to add any new asset classes. One big criticism that people have had of it over the years, well, for a while they criticized that you can buy emerging market stocks in it. Well, they've changed that. So now you can, but you can't get foreign bonds or real estate investment trusts or treasury inflation protected securities or small value funds, much less, alternative assets like gold or Bitcoin or something like that. So, that might be a downside for some people. Now, simplicity is usually a good thing. Lots of people have portfolios that are way too complex out there, but that could be a criticism of the TSP.

Another downside to using the TSP in the past was that you could only have one partial withdrawal in your entire lifetime. So that was not really very helpful. So what people would end up doing is when they got to retirement and actually started withdrawing from their plan, they would roll it into an IRA.

Well, there's pluses and minuses to that. One of the minuses was that you'd no longer have access to the G fund, for instance, or the super low cost index funds elsewhere available in the TSP.

There's a few other upsides of having a 401(k) instead of an IRA. For example, you can start withdrawing from a 401(k) at age 55 without any penalty whereas you have to wait until age 59 and a half for an IRA. That was a downside, but that is a little bit better now. They have both hardship-based and age-based in-service withdrawal and just a lot more options after you leave federal service.

This has been a problem with the TSP. They've gotten a lot of criticism here over the years, but they're slowly seem to be improving this aspect of it. The distribution options are still somewhat limited, of course. You can leave the money in the TSP and just take your required distributions.

You can take all the money out at once or roll it over into an IRA or another 401(k). You can take out a certain amount each month until the money is gone. Has to be the same amount each month, and it has to be at least $25. You can take out an amount each month that's calculated based on your life expectancy. It's not technically an annuity. There's no guarantee the payments won't go down over time. And that amount gets recalculated every year, but it is an option.

And then, of course, it lets you annuitize the account. Single annuity, joint annuity with either 100% or 50% of the survivor. Can be flat payments, can be indexed to inflation, which is pretty unusual in annuities these days.

So lots of combinations available when you want to withdraw from the account. I think most people are still doing what most people do with their 401(k)s, which is roll it into an IRA. All they got to manage in retirement is one traditional IRA and one Roth IRA.

Another downside of the federal TSP is that over the years, there has not been a mega backdoor Roth IRA option, meaning you can't do after-tax contributions and in-plan conversions. Well, you could do after-tax contributions, at least while you're deployed as a military member, but you couldn't do in-plan Roth conversions.

Well, that's changing. Starting in 2026, you can do in-plan Roth conversions in the TSP. That's basically going to give you a mega backdoor Roth IRA options for all of you who have tax-exempt money in there from when you were deployed or something like that. That's a real benefit and a good change for the TSP.

Bottom line, the TSP is a good 401(k). If you have access to it, you should use it, especially check out the unique aspect of the G Fund. A lot of people like that in particular because it gives you higher bond-like yields with only taking money-like risk. And they've made lots of improvements to the plan over the years. It's even better than it was back when I was in the military. Take advantage of it if you have it.

 

SPONSOR

Dr. Jim Dahle:
The episode was brought to you by KeyBank. KeyBank is one of the nation's largest full-service banks offering banking, lending, and financial solutions for healthcare professionals at every stage of their career.

Key suite of services includes student loan guidance and financial education tools to help clients find financial peace of mind. To learn more and for terms and conditions, please visit whitecoatinvestor.com/keybank.

All right, we've come to the end of another episode. If you'd like to be featured on the Milestones podcast, you can apply at whitecoatinvestor.com/milestones.

Until next week, keep your head up, shoulders back. 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

Dr. Jim Dahle:
This is the White Coat Investor Podcast, Financial Boot Camp, your fast track to financial success.

One of the most common questions we get is, what does a good financial advisor look like, or what should we look for when we're hiring a financial advisor? The truth of the matter is, you shouldn't start this search or this question by asking about the advisor. You should start it by asking about yourself and knowing yourself and what you need and what you're looking to have done.

In my experience, there's basically three kinds of investors. There are do-it-yourself investors, and my guess is this is something like 20% of doctors. These are people that do it themselves in lots of things in their life. Sometimes they'll watch a YouTube video and fix a little thing on their car. They'll often mow their own lawn or shovel their own driveway, or maybe prepare their own taxes, those sorts of things. They're do-it-yourself type people. They tend to be fairly fee sensitive and don't mind learning new things. They're not afraid to make a few mistakes, and they view finances as one of their hobbies. They like learning about this stuff. They like reading financial books. They like listening to the White Coat Investor Podcast, or reading the White Coat Investor blog, or they're members of our communities on the subreddit, or the WCI forum, or the Facebook group, right? Those are the sorts of people that tend to do well as do-it-yourselfers, and it's very reasonable if you're willing to learn how to be your own financial planner and be your own investment manager to do this yourself. That is not crazy at all, but it's not for everybody. So, I figure the do-it-yourselfers are about 20%.

On the other end of the spectrum are people that the industry refers to as delegators. These are people who are not financial hobbyists. They're not that into this stuff. They don't want to read financial books, certainly not more than one of them. They want a financial person to help them. They want to outsource all these tasks. They want to outsource acquiring this knowledge to somebody else. They hire somebody to do their taxes. They hire somebody to mow their lawn. Why wouldn't they hire somebody to also do their financial planning and manage their investments? I figure this is probably about 30% of doctors that are delegators, and the good news is the financial services industry is very well set up to take care of delegators. There's a lot of great people that we can send you to if you go to the recommended list of White Coat Investor.com that can serve delegators very, very well.

Unfortunately, that leaves 50% in the middle between the do-it-yourselfers and the delegators. We call these people validators. Maybe you can call them consultants, people that want to consult with somebody from time to time, that want some financial services, that want some financial advice, that want some financial assistance, but they don't necessarily want to pay for a full service financial advisor that's going to do all their financial planning, that's going to do all their investment management. Maybe they're a little more fee sensitive than a typical delegator might be, and they look at the price of financial advice and go, “Wow, that's a lot of money. I bet I could learn to do some of this myself to save that money.” They're not necessarily hobbyists, but they're usually willing to learn a little bit if it's going to save them a bunch of money.

The problem with the validator spectrum is there's a whole bunch of different kinds of validators, some who are willing to do quite a lot, some who are only willing to do a little bit, and finding a financial advisor that matches exactly what you want to do as a validator is actually pretty challenging. So, the good firms offer some sort of option for validators. Maybe they will just do financial planning with you and help you put together a financial plan, then you've got to implement it and maintain it. Maybe they just consult with you for an hour about one subject, like student loans. Maybe they are available to meet hourly for an hourly rate to answer your questions.

Now, a lot of people think they can ask their questions in about three minutes and get answers in about five more minutes. The problem with that approach is the advisor actually has to know a whole lot more about you to give you the right answer. So even what you might think is a simple question might require three or four hours of financial advisor time, and at $200, $500, or $800 an hour, that's not necessarily super cheap either.

The common questions we see out there are, should I do this Roth conversion? Should I make Roth or tax-deferred contributions? Should I invest this money or use it to pay down debt? These all sound like simple questions, but it turns out they're the most complicated questions out there, and nobody can do a really good job answering them without really getting to know you well and your financial situation. That's an operation that just takes time.

So, the main problem with validators is they think the services they want should be a lot cheaper than they actually are to provide those services. But whether you're looking for a financial advisor as a delegator or whether you're looking for a financial advisor as a validator, the key is to know what you want, what services you value enough to pay for them, what services you need, what you're not good at, and make sure the financial advisor is going to be providing those services.

As you look at financial advisors, some of the things to look for are that you want to have a financial advisor that is a fiduciary. What that means is they've essentially agreed to act in a Hippocratic manner, right, to put your needs and desires ahead of their own. So, to do the right thing for you, even if it's not necessarily the right thing for their pocketbook. We're talking about people who are fee-only advisors, meaning they just get paid to give you advice or do service for you. They're not getting paid commissions from somebody else. They're not a salesperson masquerading as a financial advisor.

This is part of the issue with the financial advisor industry, right? There's no legal definition of financial advisor, so somebody that is an insurance agent can call themselves a financial advisor. Someone who is a mutual fund salesman can call themselves a financial advisor. So it's difficult to distinguish the real financial advisors from those who are just masquerading as one, especially if you're not particularly financially literate yourself.

The second thing you ought to be looking for in a real financial advisor is an up-to-date academic understanding of the field. If they don't have any idea what the papers in the financial journals are saying, you probably don't want to be taking advice from them, right? For example, one of the biggest issues out there that there's very good evidence for is that index funds are generally the preferred way to invest in stocks, and so if you have a financial advisor that's recommending another way, you've got to really wonder about their actual understanding of the academics in finance.

A third thing that's nice to see in financial advisors is some sort of meaningful designation. The most common one out there is a CFP, Certified Financial Planner. It requires three years of some sort of experience, often that can be in a sales position, unfortunately, and it requires them to pass a test. That test typically requires a couple hundred hours of studying or so. Now, a couple hundred hours might not sound like a lot to somebody who's been through a medical residency and worked 80-plus hours a week, but it's better than what a lot of people out there calling themselves financial advisors have.

Some of the other more high-level designations include a CFA, Chartered Financial Analyst, although don't expect to see this in a lot of people working as a financial planner. A ChFC is often somebody who came through the insurance industry and now wants to do real financial planning, and so those are more meaningful designations in the field. Personal Financial Specialist, or PFS, is something you often see that's similar to that from people coming from the accounting field. So, somebody with a CPA may also have a PFS, and those are generally the meaningful designations.

But there's another 100 other designations out there, some of which take only a weekend course to acquire. So keep in mind there's often lots of letters after the names of financial advisors, just like there are after nurses, and don't be impressed by the number of letters unless you know what the letters actually mean.

In general, you want an advisor that works with clients that are at least somewhat like you, right? If you're a doctor, there are a few, not a lot, but a few unique financial things in your life. Big debt burden, some asset protection concerns, maybe a complicated retirement account situation, a late start, high tax bill. These are some of the doctor-specific issues. It's nice if you're a doctor looking for a financial advisor if they have at least a few other clients that are doctors like you are, because that means they'll have been through some of the concerns that you're likely to have.

I mentioned earlier about the importance of them having an academic understanding of the field. You want them to have a reasonable investing strategy. They need to be putting your money into things like stocks and bonds and real estate, and those sorts of things, not some crazy strategy involving options on crypto assets sold short with high amounts of leverage or something crazy like that.

You want a reasonable investing strategy, preferably. I like to see them using fixed or static asset allocations or mixes of investment types, and using low-cost, broadly diversified index funds. If that's the mainstay of the portfolios they're putting together, you're probably in good hands.

You want your financial advisor to be unbiased. I mentioned they need to be fee-only. You can't have somebody who's got a duty to somebody else. They might be putting that in front of you. You don't want them to be thinking, “Boy, I'd like to tell them the right thing to do, but I got to send my kids to college and put food on my table too.” You want them to be true fee-only, unbiased, or at least minimally biased. Anytime money changes hands, there's some bias, but minimally biased advisors.

My mantra over the years for financial advisors has been good advice at a fair price. Unfortunately, there are all kinds of prices being charged for financial advice and services, and so I think it's worthwhile understanding what a fair price looks like. What that typically looks like is something between $5,000 and $15,000 per year. The fewer services you need, the closer you are to that $5,000 mark. The more you need, the closer you are to that $15,000 mark.

But my point is, it shouldn't be $50,000. It shouldn't be $100,000, and this often happens when you're paying an “industry standard” 1% assets under management fee. It's a very fair price when you have $200,000. That's only $2,000 per year. It's a very unfair price when you have $20 million, right? 1% per year of $20 million is an awful lot of money, way more than you need to pay to get financial advice.

It's also helpful if the financial advisor is tied in with other services you might need. For example, if you have a need for tax strategizing, tax preparation, and they can also provide you at least good recommendations for people who can do that, if not bring them in house as well. That might also be something that you consider valuable with the financial advisor.

If you need help selecting a good advisor, know that we do some vetting for you. We have a recommended list at White Coat Investor.com under the recommended tab that will help you sort through what a good financial advisor looks like, and you can just go down that list and find the person that looks like they will work best for you, knowing that we've already taken a look at them and their required filings with the government, and had other White Coat Investors working with them for many years. Certainly, if we get complaints, we take people off that list. If something changes, we take them off that list.

But if you want to shortcut this process, that's a great shortcut, recognizing that we've already taken a look and tried to line you up with good financial advisors.

Hope that's helpful to you. Good luck out there figuring out who you are, most importantly, and what you need, but also connecting with somebody that you can trust and work with long term to help you reach financial success.

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.