Advanced Financial Planning Q&A for Physicians

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:
Welcome to the White Coat Investor podcast.

This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or just get this critical insurance in place, contact Bob at whitecoatinvestor.com/protuity today. You can email [email protected] or you can call (973) 771-9100.

All right. Welcome back to the White Coat Investor podcast. I am here with Tyler Scott, my co-host today. Welcome, Tyler.

Tyler Scott:
Thanks, Jim. Glad to be back.

Dr. Jim Dahle:
We got great feedback last time Tyler was on here. So apparently he was allowed to come back. So this is great. It's always fun to have somebody here that's going to make me look like I don't know that much. No, I’m just kidding. It is true, though. I am a blogger and a doc. I do not do financial planning full time.

And so, I'm actually thrilled that somebody who does knows more about some of the details of financial planning than I do. That's the way it's supposed to be. When you go hire an expert, you're supposed to get an expert. And it's been frustrating to me for the last 16 years that I keep running into these people who are supposed to be experts that I know more than. So I'm actually thrilled to know financial planners to know more about financial planning than I do because I don't do financial planning. So it's great anyway.

Tyler Scott:
You can do a tracheotomy a lot better than I can.

Dr. Jim Dahle:
Well, I don't know if that's true. I've never actually done a tracheotomy. In fact, I've never actually done a tracheotomy on a live patient. Thankfully, we've always been able to get the tube in. I haven't had bad luck where I've had to do that, but I do know how to do it. And I've certainly done it on plenty of cadavers.

Okay, let's talk a little bit about WCICON27. Because we are now in the early bird pricing period. This is like the cheap time to buy a ticket to come to the Physician Wellness and Financial Literacy Conference. Best deal you're going to get between now and the conference. You have until September 22nd, you save $300.

And I know it's hard to decide where to spend your CME dollars each year. And I have a feeling if you're listening to this podcast today, maybe you're a little more focused this year on your financial life. Investing some time and resources to attend WCICON could very well be the best next thing you can do to take the next step in your journey. The dates are February 24th through 27th. The place is Orlando.

As I sat at the conference this last winter, I kept telling myself I am underselling this conference. It's really a great conference. And I don't know if it's a humble thing or if I'm just worried the whole thing is going to implode when you all show up.

This conference is awesome. You should come. But don't just trust me on this. Here are some quotes, feedback from last year's attendees. Here's one. “It's absolutely worth your time and money as there is no better investment than yourself.” Another, “It's a life altering experience that can change your outlook on life, career and family for the betterment of it all.”

“I had so much fun connecting with colleagues and returned home eager to implement the next right steps in my financial plan.” – “My end of career net worth could very literally be worth millions more based on the principles I learned at the WCI conference.” – “WCICON is absolutely worth it. I cannot wait to attend again in the future.” – “There's something for everyone no matter where you are in your path. You will not regret going.” – “The earlier in your career, the better.” – “The lessons learned and the people I've met continue to bring me back year after year.”

This is how all the feedback is. I remember the first time we did this in 2018 in Park City, 99.3% of people, there was one person that apparently did not mark this box. I still haven't figured out who it is. If you're that person, I want to interview you though. 99.3% of the attendees said they would recommend it to their colleagues. That's basically the same feedback we get every year.

At any rate, go to whitecoatinvestor.com/wcicon through September 22nd. You get $300 off what it will cost you after that date. So register now, come cheaper.

Tyler Scott:
And on that point, Jim, just I remember you come in and we have our little debrief every night in your hotel room and you'd come in and you'd said kind of what you just said a minute ago about having me here.

Dr. Jim Dahle:
You say hotel room, like we packed 30 people into some room.

Tyler Scott:
It's this presidential suite.

Dr. Jim Dahle:
It's a big space.

Tyler Scott:
It's a nice spot.

Dr. Jim Dahle:
If you rent out the whole hotel they give you a pretty nice room.

Tyler Scott:
Yes, in your conference room where we gather. And you said kind of the same sentiment. You're like, “Man, the people here giving this content are amazing. These are the experts.” And you said the same thing. I think we're underselling this experience. And I learned so much. I think I know a little bit, but there's so much to learn no matter where you are.

I'll add, I think it's Benjamin Franklin's quote. I was scared to quote blind, but “An investment in learning pays the best dividends.” And that's certainly been true for me there. I remember the sincerity of you coming in that room each night and being like, “This is really awesome.”

Dr. Jim Dahle:
It was, it was a great conference and it helps that we have such good staff. I don't know all the details of the conference until I get there. And so there's always a few things that surprise me. And they're all positive, wonderful surprises.

Okay. Now off that positive note, let's do some negative stuff. Because now we get so far into the details on this podcast so far out into the weeds that of course we screwed things up. So let's do some corrections.

All right. We got an email about the last time you and I were together. So now you have to sit on the hot seat with me.

Tyler Scott:
It's my turn.

Dr. Jim Dahle:
“I'm sorry. I feel like I'm badgering you having sent a few emails recently, but on a recent podcast, Tyler and Jim mentioned a 457 can be rolled into an IRA 401(k) to avoid any lump sum distribution issue. Certainly true, but importantly, it loses the ability to be withdrawn penalty free before 59 and a half. It feels like an important point worth noting, especially for the FIRE crowd.”

That is true. 457s are great early retirement accounts, especially the non-governmental ones. The non-governmental ones, you kind of want to get the money out there as soon as you can, because it's at risk to your employers, creditors. But the governmental ones, as long as it's in the 457, you can get to it without any age 55 or age 59 and a half rules. And so, it's still useful. Don't roll it over. If you want to spend it before 59 and a half, just pull it out of the 457, avoid that issue.

Tyler Scott:
And the non-governmental 457s cannot be rolled over.

Dr. Jim Dahle:
Right. Those ones you can't. So they're great to spend early. Okay. And the email goes on. “The other detail for the FIRE crowd that I feel like gets breezed over as a rule of 55 great rule, but not applicable for most FIRE people, unless you leave your employer on or after 55. It isn't applicable if you leave them at say in your 40s, 50, 51, 53, et cetera.”

That's true. I didn't know that. And it's awesome doing this because you guys teach me stuff still every now and then. And that's great. You cannot retire at 53 and then take advantage of the rule of 55. You have to actually be working there up until basically until you're 55. And then you can get into the 401(k) money prior to age 59 and a half, like you would with an IRA. There was another detail about that we talked about this week.

Tyler Scott:
Yeah. Well, because you copied me on your email response to this person. And so my response to them, I was like, “Yeah, the thing I just want to highlight is that the rule of 55, it has to be proactively added to the employer retirement plan. It's not there by default. It's not universally available.”

Dr. Jim Dahle:
The IRS allows it, but the plan still has to allow it.

Tyler Scott:
Yeah. And so, I'm on my fifth 401(k) or 403(b) here and I'm 42. None of my plans have ever had it. And so, it's a really useful thing to know about, but you actually have to find out if it's going to be available to you. So just because it exists in theory, doesn't mean it's going to be accessible to you. Same thing with the 72(t) substantially equal periodic payments, where you can basically annuitize your withdrawals over a period of time to get early access. So those are cool rules and really fun planning options, but they have to be available.

Dr. Jim Dahle:
Well, at least the 72(t), you could roll it into an IRA and get it out of the IRA for sure.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
Okay. So, tell us, how are things going over at White Coat Planning?

Tyler Scott:
Great. Yeah. We're having a great time. We had a really great training last week all together where we spent a lot of time reviewing our workflows and having planning nuggets from all the different planners. It's so fun for me. Like you mentioned, you enjoy having me here to have someone to banter with and that some is greater than the parts.

I feel that way with our crew. They are so smart. They have diverse experience and it was really fun to hear and learn from them and all of their expertise and areas of strength. So we're doing great.

Another fun thing is that our software that we've been developing over the last year is ready to be rolled out to clients. We're all trained up in the software. Clients, depending on what support level they choose, will have different levels of access to that and be able to play around inside their plan. So that's a really fun new change for us.

Dr. Jim Dahle:
Very cool. More details available at whitecoatplanning.com. Good advice at a fair price.

Okay, let's do some questions. We've got a lot of fun stuff to talk about. Far more, knowing how much we like to talk about this stuff, far more than we're going to be able to cover in any sort of reasonably length episode. But let's get started with a question about 529s off the Speak Pipe.

USING ONE 529 FOR MULTIPLE NIECES AND NEPHEWS

Nicolette:
Hi, this is Nicolette from Texas. Thank you so much for all you do. I've learned so much from you. My question is about 529 accounts for nieces and nephews. My husband and I do have separate 529 accounts for each of our children. But for our nieces and nephews, I'm wondering what your thoughts are on opening one 529 account with my husband as beneficiary and then changing the beneficiary as each niece and nephew makes the choice of whether or not to go to college or higher education.

My reason for this is that we don't believe that they will all choose to go to college or choose higher education. At the end of it all, whatever money is left over, we'd like to maybe change that beneficiary to grandchildren.

I know you yourself have multiple 529s, and so maybe your thought is just don't make it complicated by having to change the beneficiary and just make one for each of them. But I'm wondering your approach as, for some reason, this feels more simple to me. We'd also, maybe this changes it, only be covering tuition. And so my thought is, even if multiple are in college at the same time, the timing of changing the beneficiary and just paying out tuition and then changing the beneficiary again and paying out tuition may not be as cumbersome as paying out for every book purchase and rent. So we'd love to hear your thoughts. Thank you so much.

Dr. Jim Dahle:
All right. Well, a little background information for those who aren't familiar with what we're talking about. 529s, college savings accounts. One of the ways Katie and I have chosen to give is we've established 529 accounts for each of our nieces and nephews. We do not find it a hassle at all to have 34 different 529 accounts. It's really not that big a deal. It takes seconds to open the thing.

The hardest part is getting the social security number from the parent. That's the hardest part. After that, it's all very easy, very quick. And I see no reason why anybody would want to only have one 529 account for all their kids or one 529 account for all their nieces and nephews. Maybe it sounds simpler to have one account, but it seems like way more hassle to me.

Now, one of the reasons it would definitely not work in our case is some of this money in the 529 accounts is their money, is their contributions. It's really not fair for me to change the beneficiary on that. In fact, if there is money left over in these accounts when they are done, and we've had one graduate that still had money in the account of the three, I think that have graduated so far, is we're going to sign it over to them. They're going to be the owner of the account. Right now, I'm the owner, but they're going to be the owner if they graduate with money in there. The nieces and nephews are, and frankly, our kids are as well. And so, I view it as their money. It's not my money.

Now, Nicolette, I think is how you pronounce her name. You're not viewing them that way. You're viewing this as your money. And so I can understand why you would be a little hesitant to do that. But the truth is, you still own the accounts. And so, you can change the beneficiary as often as you want. There's some hassle involved in doing it. You got to fill out a form, and I'm sure it takes a few days at least. Maybe it takes a few weeks to get it done. Probably varies by 529 plan.

But what benefit are you seeing here from only having one? I see no benefit. You're not saving yourself anything by doing this. Just open an account for each of them. It's not that big a deal. You can close them. You can combine them. You can change the beneficiary. All this money is mobile and fungible and technically still belongs to you legally. But I get it. It's only one account to look at on the screen instead of 34. You probably don't have as many nieces and nephews as we do anyway. So, you're probably only talking about six accounts anyway. And six seems like nothing to me.

Tyler Scott:
For you, yeah. I agree with you by and large. I am going to see if I can pick a fight with you in the course of this question though.

Dr. Jim Dahle:
I've told you before that disagreements make for good podcasts.

Tyler Scott:
Yeah, it's better TV.

Dr. Jim Dahle:
Make your case and then I'll shoot it down and point out why it's a dumb argument.

Tyler Scott:
I fundamentally agree with you by and large. But I'll get to the fight in a minute. And I'll try to have Nicolette's back here a little bit. I understand the impulse of wanting to have less accounts. In fact, that's something we help clients with a lot is consolidate, have less to take care of, less logins. I understand the impulse.

And one area where I do think it would help with the nieces and nephews or where I can empathize with where she's coming from is the funding flexibility. She's basically saying, “We don't know which of the nieces and nephews will go to college or how much they'll need. So we just want one pot and we'll just kind of draw from that pot as needed for tuition.”

That makes sense to me. But there are some drawbacks. Before I get to those drawbacks, I just want to say one thing. She's Nicolette from Texas, which is what I heard in there, which just brings up, in Texas, there's no state income tax. So what's fun about being in Texas, Nicolette, is you get to choose which 529 plan you use. So you can use the Vanguard one, which is really popular. That's the Nevada plan. You can use the Fidelity one, which is the default New Hampshire plan. You can use the one here in Utah, which you and I know and love. I really like it's called my529.

I think you do this too, but you can build your own custom asset allocation and your own custom glide path in the Utah plan. I just wanted to call that out that when you're in a state where there's not much tax benefit or no tax benefit, you do get to go use whatever 529 is best. Do you do that? Do you make a custom asset allocation?

Dr. Jim Dahle:
I do, it's really customized. For the nieces and nephews, it's 50% total stock market and 50% total international stock market. It's very custom. This is interesting, years ago, I set it up for my kids. I made it something that would have more money in it if I had done for them what I did for the nieces and nephews. My kids allocation in there is 50% total international stock market and then 25% Vanguard small value and 25% DFA small value. It turns out the plan will let you put more than 25% into either of those funds. So, I had to use both of them to have a 50% small value tilt.

And as the years have gone by, that has resulted in my kids having less money in their accounts than they would if I had put it all into the S&P 500, which has obviously had this great run in the last five or 10 years. But I'll tell you what, it feels like a little bit of revenge this year.

Tyler Scott:
It's coming back.

Dr. Jim Dahle:
The small value has outperformed U.S. large cap stocks this year and so has total international. And so, my kid's 529 has got this huge boost this year. And a couple of them, number two has barely touched hers. Number three hasn't touched his at all. He has this huge 529 because all these years it's been compounded, we've been adding to it. Well, this year it's up 24% or something.

Tyler Scott:
That small value tilt starts showing up for the first time in 20 years.

Dr. Jim Dahle:
Yeah. If he keeps doing that the next couple of years, he can go to dental school. I don't know if he wants to, but he could. So it's getting exciting that way. Speaking of Paul Merriman, for those of you who will be at the Bogleheads conference, Paul and I are going to have a point by point discussion about tilting. It's a little odd because Paul is obviously a big tilter, and I tilt as well in my portfolio, but one of us has to be the bad guy and point out the downsides of tilting. But it should be a lot of fun for those of you who will be at that conference.

Tyler Scott:
He's clearly taking the case for, and you're going to take the case against.

Dr. Jim Dahle:
I haven't actually had that discussion yet. It would be fascinating to me to see Paul argue against it.

Tyler Scott:
Get him on the other side.

Dr. Jim Dahle:
I'm not sure he can, but to really know your own arguments, you have to know your opponent's arguments.

Tyler Scott:
So Nicolette, I hear you and I know where you're coming from. As I said, the funding flexibility piece, I think there is something to it, but there are some drawbacks. The first one is where I think we can maybe find a little disagreement, which is when I heard this, I thought, man, these kids are going to be different ages, and so they should not have the same asset allocation.

I personally use a target enrollment fund or a target enrollment profile. It's basically a target retirement fund concept, but for 18 years of life. The one-year-old, 90% stocks, but the 17-year-old, maybe 20%, 30% stocks, and a lot more fixed income. You go full static asset allocation, full aggressive, because I've heard you say, “Yeah, if it goes down in value, there's other levers we can pull. We can cash flow it.” And that's certainly true.

Dr. Jim Dahle:
It helps when my kids are at a school that charges like $6,000 in tuition.

Tyler Scott:
Yeah, that is really helpful. Megan and I haven't felt that. That just felt like too much risk for us. So we wanted to have a more conservative allocation as the girls got older. So when I was thinking of Nicolette, I was like, yeah, you've got this big pot of money, and if you want to do what Jim does and have a static asset allocation, no problem. But if you want to do what most of our clients end up wanting to do, and what Megan and I do, you're going to have an asset allocation conundrum. You've got money invested in there for a 17-year-old and a seven-year-old, and so that's one thing that came to mind.

So that's the best I can do for a fight, is that I at least suggest to clients, hey, we think there's some value in having these become more conservative over time, if you don't have other levers you can pull.

Dr. Jim Dahle:
It's all about the consequences of a shortfall.

Tyler Scott:
Yeah, yeah. What's your plan if the kid went to college in 2008?

Dr. Jim Dahle:
It's not just the probability of a shortfall, it's also the consequences, and the consequences are pretty insignificant to you in your financial life. It gives you more ability to take risk and thus have a more aggressive asset allocation. So I do, I invest 529s very aggressively. It's easier for me to do that. I have much more risk tolerance with other people's money.

Tyler Scott:
Yeah, and that kind of goes to your point of, “Do you see it as your own money or someone else's money?” That was one drawback I thought of was the investment issue, Nicolette. The one that just would totally disqualify this for me personally, is the withdrawals issue.

A 529 can only have one beneficiary at a time, and with the new rules, this money can be used K-12, $20,000 a year. It can be used for trade school, vocational school, undergrad, grad school. To me it's very plausible that you would have multiple nieces and nephews needing withdrawals in the same calendar year.

Dr. Jim Dahle:
I've only got eight in college right now. I don't know what the issue is, Tyler.

Tyler Scott:
Yeah, there you go. So, what are you going to do? Are you going to toggle the beneficiary every time someone asks for a withdrawal?

Dr. Jim Dahle:
It's not that quick to change the beneficiary. I've never actually changed the beneficiary, but my impression is this is going to take you a couple of weeks.

Tyler Scott:
It feels that, and then there's this paper trail issue because you're going to get a 1099-Q for whoever was the beneficiary at the time, but then you need your 1098-T that comes from the institution to line up, and those need to be in the same calendar year. And so to me, just the paperwork, it sounds simple now while these nieces and nephews are, I presume they're young, but man, I don't think I'd want to live that life with five people needing distributions in the same year and toggling on and off the beneficiary. So to me, that's the biggest disqualifier.

One other just kind of nerdy in the weeds one is the Roth conversion opportunity. I think people at this point know that the Secure 2.0 Act allows up to $35,000 of unused Roth money to go to the beneficiary's 529.

Dr. Jim Dahle:
You mean the beneficiary's Roth IRA.

Tyler Scott:
Thank you, yes. But there's this 15-year clock, and it is not clear…

Dr. Jim Dahle:
When the clock starts.

Tyler Scott:
Yeah, is that every time you toggle the beneficiary on and off, is that resetting the clock? And it's kind of a niche issue, but that would also…

Dr. Jim Dahle:
There's a lot of those with 529s that people haven't thought through. There's all these estate planning implications that I'm not sure Congress really thought about when they put this law in place. For example, a contribution to a 529 is technically still your money. It's certainly still your money income tax-wise. You pull that money out and spend it on a sailboat, you're going to pay taxes and penalties. You are.

But for estate tax purposes, it's a completed gift. It's now their money as far as the estate tax system goes. If you change the beneficiary, and it's $40,000 529, are you now burning your nieces and nephews' estate tax exemptions? I'm not sure anybody really knows.

Tyler Scott:
No one's thought about it.

Dr. Jim Dahle:
And no one's really looking very closely, but I think technically you are when you change that beneficiary.

Tyler Scott:
For these reasons, Nicolette, I hear where you're coming. You're not wrong. You can change the beneficiary. You are right within the rules. This can be done. I'm just not sure you're going to want to live that way when it actually comes to dispersing the money. I think you have some simplicity now for a lot of hassle later. That's my two cents. I understand where you're coming from. You're not wrong. I just wouldn't do it.

Dr. Jim Dahle:
You're nice. That's why you're the financial planner and I'm the emergency doctor. This is a bad idea, Nicolette. Have separate 529s. All right. Next topic. All right. Let's talk about taxable accounts and capital gains. This is another question off the Speak Pipe.

GIFTING APPRECIATED SHARES TO A CHILD TO REDUCE CAPITAL GAIN TAXES

Speaker:
I have a question regarding flushing out capital gains from a brokerage account. I'm thinking of a large purchase in the near future. I have highly appreciated shares of ETFs in my brokerage account. I have a son who is above the tax age, whose income is only $18,000. Could I gift my son the appreciated shares in my brokerage account, have him sell the shares and then gift me back cash? I'd like to know your thoughts on this. Thank you.

Dr. Jim Dahle:
There are so many good things you can do in multiple generations of a family work together that will reduce the overall tax burden, increase the overall after-tax returns. There are a lot of those out there if you can work together. That's a big if. Just a hypothetical situation. Let's say you give these shares to your son and he decides to go buy a wakeboat with it. It is totally within his right to do that. It is now his money. You gave him a gift. He can do whatever he wants with it.

Now, that might mean he doesn't get as much inheritance from you later or you're mad at him or he doesn't get to come over for Thanksgiving dinner. I don't know what that means in your family. But recognize that is a risk of the strategy. But I think there's more significant risks we have to talk about.

Tyler Scott:
Yeah, yes. Again, I like the proactive thought, there's intelligence in this question. Of, “Whoa, there's a lower tax bracket available to realize some of these gains. How can I make the most of that?” That's coming from a good place.

A couple of things just like to set the table. I like that he said it's beyond kiddie tax. Because that's also an implication. You and I have talked about the Roth conversions of Trump accounts and that's got us talking about kiddie tax lately. So if the kid were your dependent, that would be a problem. You'd end up paying at your own rate. But he proactively said that's not the case.

Dr. Jim Dahle:
Just a word about kiddie tax is not determined by an age. It's determined by whether you're their dependent.

Tyler Scott:
Sure, right. Yeah.

Dr. Jim Dahle:
There's no age. At 26, there's no automatic, no kiddie tax.

Tyler Scott:
Yeah, you can have dependence. In short, yeah. The dependency test is very complicated. I have a blog post coming out about it. But yes, the point is we're going to leave that and say, okay, kiddie tax isn't a factor for him. I thought I'd just say a word about how carryover basis works because I think not everyone, I think he knows. But Jim, if you bought something for $1,000 and it's worth $10,000 and you give it to one of your kids, they assume your basis. Their basis is now $1,000.

Dr. Jim Dahle:
Basis, what was paid for it in the first place and what you subtract from the value when you sell it to determine how much you pay capital gains taxes on.

Tyler Scott:
Yes. I just want to say that out loud that when you give someone something with basis, the basis transfers. And then the strategy part, gifting appreciated shares is something you talk about a lot, a really good way to avoid long-term capital gains. Giving it to charity, super great. No one pays the taxes.

And I actually think this is an underutilized strategy when people have highly appreciated shares and they want to move money and they were going to give money anyway, give that money, give the appreciated shares to your kids in a lower bracket. Again, like where this question's coming from. The problem here is, he's being fairly transparent, which I appreciate that he's like, “Yeah, no, I'm just going to give it to my kid. He's going to sell it. He's giving me the money right back.”

Dr. Jim Dahle:
Step transaction doctrine.

Tyler Scott:
Yeah. I've got my three doctrines here that runs the foul of all three doctrines. So let's just name those for education sake. The first one is assignment of income. This was the first time this came up. This was a tax case in 1930, Lucas versus Earl is the original tax law here, which basically says you can't earn income or have fixed income set to be received and then assign it to someone else just to dodge the tax. We're running a foul of the assignment of income is the first one.

Then we got these substance over form doctrine, which came out of a court case five years later in 1935. And here, the court said, they look at what happens holistically and economically, not just what the paperwork says. The transaction with no purpose except tax avoidance, they're not going to respect. And then what you just mentioned, do you want to talk about the step transaction doctrine? That's doctor number three.

Dr. Jim Dahle:
Yeah. It's basically the idea that if the sum of the steps is not legal, then the steps by themselves are not legal. And in this case, the idea is, well, if you did this all in totality, you're getting the money, you should be paying the capital gains taxes. But by breaking it up into multiple steps, you're trying to get out of it. And maybe that's not going to fly. I couldn't cite chapter and verse of what year that was put in place, though. Do you have that information?

Tyler Scott:
Commissioner versus court and holding company, 1945, established the step transaction doctrine.

Dr. Jim Dahle:
It's a key part of the end of World War II.

Tyler Scott:
Yes.

Dr. Jim Dahle:
It's really important. We had VE day, VGA day and the step transaction doctrine.

Tyler Scott:
Really critical. So, hard no. On the question as asked, “Can I do this as sort of transparently stated as a tax workaround?” No, but there's intelligence in the question and it is okay to give legitimate gifts.

Dr. Jim Dahle:
We got to stop for a second and recognize here that we have a relatively underfunded IRS with lots of great things that they need to be doing. And in fact, one of the best investments our country could make is to hire more auditors, quite honestly. There are so many people that are just blatantly cheating on their taxes. Not even just making mistakes, which plenty of people are, but just cheating on their taxes that we could more than pay for the auditors many times over.

But the truth is a lot of things like this, you're just not going to get caught. It's audit lottery and I do not advocate that you run the audit lottery and you try to get away with stuff just because you're not getting audited. But the likelihood of you being audited is low, even for high earners. And so, stuff like this, you just get away with.

Tyler Scott:
This is fine. We were just talking about this as a team last week. There are two things that surprised me a lot when I started doing this job, was one, the number of people who are intentionally or unintentionally cheating on their taxes really was a surprise. And the second was how infrequently they get noticed or caught. And I was like, “Oh, the lights aren't really on at the IRS.” Nobody's really home.

Dr. Jim Dahle:
It's an honor system. You may not realize this, but paying taxes is an honor system.

Tyler Scott:
And so, we would have these situations and people would ask questions. And I'm like, “Wait, you haven't listed any auto expenses or cell phone expenses. – Well, I just paid all that for my business.” I'm like, “Wait, you pay for the totality of all of your cars for your kids and their cell phones and all of your family travel through your business?” And they're like, “Yeah.” I'm like, “Well, you can't do that.” They're like, “Sure, I can. I do it all the time.”

Dr. Jim Dahle:
I've been doing it for 15 years.

Tyler Scott:
I tell my kids they can't jump on grandma's couch. And they're like, “Sure, I can. Watch me. I'll do it right now.” When I say can't, I think that's against the stated rules. But there's a bunch of people out there jumping on the couch and just doing their thing. So you're right to pause there. And so, when I say hard no to the question, it's through that lens.

Dr. Jim Dahle:
Okay, now that we've established that integrity maybe matters a little bit in life, I think the next question goes, “Well, how do you prove that you weren't just doing it as a step transaction, that your intent wasn't just that?” Time can be used in an audit to prove that. Maybe he doesn't give it back to you for two or three or four years, or maybe he doesn't give you back the exact same amount of money as you gave him. There's all these things you could use in an audit kind of situation to argue that this wasn't just a step transaction.

Tyler Scott:
Yeah, they're absolutely legitimate. There is a legitimate path here. And the kid really needs to be able to control the money. It has to be a legitimate gift. And the proceeds stay there for some amount of time, at least, that you feel comfortable with.

Dr. Jim Dahle:
But the IRS hasn't stated that it's three weeks, three months or three years.

Tyler Scott:
Right. All we have is these court cases that have these through lines that establish, “Okay, if you get noticed there, you're going to get in trouble for these things.” There's another court case that I thought was interesting when I was looking this up that I remembered from my CFP class. It's called Salvatore versus Commissioner. This woman, this widow, owned a gas station. She got a gas station and she decided to sell it to Texaco. And before closing, she gifted half of the interest to her five kids. And then they executed the deeds alongside of her.

The money wasn't even sent back in this case to the original owner. But just that act alone was enough for the IRS to say, “No, this is not a thing. You had already agreed to a sale. You cannot then make arrangements to move assets to lower the tax impact.”

Dr. Jim Dahle:
It proved the gifts were all given before it was sold.

Tyler Scott:
Yeah, right.

Dr. Jim Dahle:
Maybe even before there was intent to sell it.

Tyler Scott:
And that's kind of what I'm getting at is it's hard to prove intent and that's kind of what you're speaking to. You could give the gift, the kid could hold it and really have access to it and then give it back to you later and in different amounts. Are those things legislated with bright lines? They're not. But there's clear legal precedent through the courts here that if you try to take an asset, give it to someone in a lower bracket, and then just get the money back that's outside the bounds.

Dr. Jim Dahle:
Yeah. So bottom line, you probably shouldn't do this, even if you might be able to get away with it.

Tyler Scott:
I'll also say just the technical point, there's kind of a bidirectional gift tax thing happening here, which, as we talked about last time, isn't the worst thing. If you give more than $19,000, the annual gift tax exemption, you just have to fill out form 709. There's a multi-million dollar bucket available. But if you give the assets to the kid, that's going to trigger that 709. And then if he gives the assets back to you, now you're going back the other way.

Dr. Jim Dahle:
Now you're turning up your estate tax exemptions. Maybe you're not rich enough and neither is your kid that this will matter, but who knows? Maybe the estate tax exemptions in 40 years are $2 million, not $15 to $30. So it may matter to burn up a bunch of these. I would just say technically in that case, you'd be burning the current exemption, not the future one.

Tyler Scott:
It just needs to be legitimate. If there's a wink and a nod and an understanding that the proceeds are going to be returned and it's part of a prearranged orchestration to dodge tax, that's where you've gone sideways.

Dr. Jim Dahle:
Okay. I think we beat that one to death.

Tyler Scott:
Good.

Dr. Jim Dahle:
I think our next question isn't all that different though. What if I didn't want to give it to my kid? Let's listen to this question.

UPSTREAM GIFTING FOR A STEP-UP IN BASIS

Speaker 2:
Hi, Jim, long time listener. Thanks for what you do. I had a question about upstream gifting. My brother is 55 years old, has a very large brokerage account with a pretty low basis. My parents are in their 80s, still healthy, and he was considering gifting it to them and then of course becoming the beneficiary and hopefully receiving that step-up in basis when they both pass.

Just wanted to know, I know this is something that we can do. I'm concerned that the IRS will see this as a loophole and wanted to know if you had any experience or have experience with others doing this method and not having a problem to get that step-up in basis as a beneficiary on the back end. Thanks. Take care.

Dr. Jim Dahle:
I noticed she asked, she said, “And not having a problem”, not “Is this legal?” Well, I'll bet a lot of people do stuff like this and don't have a problem with our underfunded IRS. That wouldn't surprise me one bit.

Tyler Scott:
Not at all.

Dr. Jim Dahle:
A couple of thoughts on this. One, remember it's not just that they don't decide to do something with the money while it's in their possession. The kid buys a wakeboat. Maybe your parents decide to go to Tahiti. I don't know. They do something else with the money.

But it's also exposed to their creditors. Maybe somebody sues them. Maybe your son gets divorced. Now half that money's gone. So, keep in mind there's some asset protection concerns with this strategy as well. But I think all the things, all the doctrines we just talked about apply in this situation as well.

But I love how they're thinking about it. There's something really interesting I learned just this last year that you can kind of do this with a trust where one of the beneficiaries of the trust is in the prior generation. You actually end up being able to borrow a little bit of their estate tax exemption. And this obviously only applies to those with an estate tax problem which is a pretty small subset of White Coat Investors these days. But it feels like more in the last year. I feel like you're running into a lot more deck of millionaires this year than I ever have before in my life thanks to the run-up in equities.

So you may be able to do this using somebody from that prior generation being listed in the trust. But after looking into that, because we actually thought about doing this with our parents, we're like, “This is just not a level of complexity that we want to go to.” But what are your thoughts? Does anything change if it's your parents instead of your kid that you're trying to get these tax benefits from, that you're trying to borrow their exemptions, that you're trying to borrow their tax brackets? What additional problems do you see we haven't already discussed?

Tyler Scott:
Yeah, there are some differences and some clear bright lines in this case. Again, I like the intelligence in the question of multi-generation, lifetime tax planning. I think there's a lot of smart. And upstream gifting is a pretty formal term that you can read about and there's blog posts about.

The bright line in this case, I just want to highlight the rule to be aware of, is anything you give the parents, they still better be alive in one year. So that is a formal legislative…

Dr. Jim Dahle:
Don't give it to them on their deathbed.

Tyler Scott:
Congress thought about this, ma'am, the callers, Congress has thought about this a little bit. And so yeah, this deathbed giving isn't going to work. Anything given upstream, if they don't make it a year, you're not going to get the benefits.

Dr. Jim Dahle:
Even if they spent it or gave it to someone else, you're still not getting the benefits.

Tyler Scott:
Yeah, and that's section 1014 really clearly codified in the law. Sometimes that's called the boomerang rule, that it's going to boomerang back to you. That's just the rule to know.

But I think what you're speaking to more are, “What are the pragmatic drawbacks and risks?” The first thing to say out loud is the wakeboat rule, maybe we'll call it, which is the parent genuinely owns the asset. And so they can do as they will with it. You certainly can hope that they don't blow it, but we need to say out loud, it is now theirs. And that comes with some risk.

There could be some estate planning stuff. Again, people think of, “Oh, it's a $30 million federal exemption.” Not if you live in Oregon, not if you live in Minnesota. You're going to have state level estate taxes. So have you accidentally given them enough that you're going to get over a state level? If you live in Maryland, you get an estate tax and an inheritance tax. So you can get it coming and going. And maybe you didn't think about that.

There's also the Medicaid long-term care hack, which is a whole thing we could talk about later.

Dr. Jim Dahle:
Now you've just made them ineligible for their Medicaid they were counting on or something like that.

Tyler Scott:
One of the strategies for white coat investors, you and I've talked about most of our community should not purchase long-term care insurance. They should sell fund and that's okay. But where I get into long-term care conversations with clients is they're like, “Yeah, I get that, I'll be fine. But my parents don't have a lot of money and am I going to pay for them?”

And so there's this strategy, whether you think it's like ethical or not, where you try to bankrupt the parents as fast as you can by moving what's called countable assets and getting them out of their control so you can get them to Medicaid.

Dr. Jim Dahle:
And this all varies by state. Like your parents are usually allowed to keep a car, but depending on your state, it might be a $3,000 car or a $20,000 car. It's highly variable.

Tyler Scott:
Super state dependent. But I just want to highlight that, “Now we gave mom and dad our $4 million brokerage account or whatever, and these are decidedly countable assets so that it can undermine that strategy.” And you just might be trading capital gains tax for estate taxes in ways you haven't thought about.

Dr. Jim Dahle:
The other thing to keep in mind that I ran into this last year, I thought I'd be really savvy. My kids have 20s funds. And as soon as we can, they're not our dependents anymore. And so the kiddie tax doesn't apply. Well, I suggested to my oldest that she has some relatively low basis in some of her 20s fund. And I suggested, you're well below this year, the 0% capital gains, long-term capital gains bracket. You could tax gain harvest.

Well, what we learned is that that doesn't apply to your state income taxes.

Tyler Scott:
The feds have a 0% bracket.

Dr. Jim Dahle:
The feds have a 0% bracket.

Tyler Scott:
Utah doesn't.

Dr. Jim Dahle:
Utah doesn't. So there was a little tax bill associated with that. And I paid it for her. I didn't dump that on her because it was my idea to do this. But yeah, this is money that maybe she could have gotten later. She could have not paid taxes on. Now she's basically probably just prepaid some of her state taxes on that money, which you got to be a little bit careful of when you play these things. There's a lot of factors at play here. And if you forget about one like I did, it's not that hard to get burned. And this wasn't even giving the money to anybody else. It was all just within her own tax situation between her federal and her state.

Tyler Scott:
Unintended consequences.

Dr. Jim Dahle:
Unintended consequences.

Tyler Scott:
The other thing I would say, and you kind of alluded to this too, is it's all fine and good if the parents, everything's stable and normal, but people pass away and get remarried. There's people in their 80s, 90s getting married for companionship.

Dr. Jim Dahle:
Change their beneficiaries, change their heirs, become demented.

Tyler Scott:
Yeah, these are some of the butterfly effect that you don't always think about. Now, I don't know if this is the kind of trust you were talking about, but when I was thinking about this question, I was like, “I remember this came up. There's some kind of trust that can help with this.”

And it's called an UPSPAT. Upstream Power of Appointment Trust. And so, that's an irrevocable trust that the kid makes, puts this stuff in it, and then gives a general power of appointment that's only executable at the will level. So it's a testamentary level. Because it's a general power of appointment, it allows the step up and basis to still work. But it basically puts the money in trust. And now you've protected against some of these things that they can't buy the wake boat unless the trustee approves. If they get remarried or get demented, that you've got some protections there.

So it's a whole rabbit hole. I don't want to go too far down that. You can also just use a transfer on death account. That's really cheap and clean and easy. But now the funds can be moved and changed and they're available to creditors. To the caller, an UPSPAT might be a way to make the most of it.

Dr. Jim Dahle:
Are we far enough in the weeds? We're going to say something wrong now and someone's going to call in and we're going to have to do another correction.

Tyler Scott:
Yeah. Stop while we're ahead.

Dr. Jim Dahle:
This is a serious ongoing problem. We like getting into the weeds. We think it's fun to talk about this stuff. But the more details there are, the easier it is to say the wrong, especially say the wrong thing. When I got a blog post, I can go back and read through it and make corrections before you ever see it. And even if I publish something that's slightly not correct, well, I can often fix it before most people read it. That's harder to do in the podcast format. You screw it up and you got to hear about it for a month with emails from readers that don't listen to it for three weeks later.

Tyler Scott:
Yeah. So, a legitimate strategy. She was like, “I'm worried the IRS is going to get me.” There was some energy of that in the call. That's not as big a deal here as it was with the previous question. Like you should be worried about giving your kids the appreciated shares, having them sell it for cheap and giving it back.

This, because Congress has section 1014, as long as you make it past a year, like your tax, your IRS anxieties can go away. I think her anxieties are in the wrong place. I wouldn't be worried about the IRS. I'd be worried about mom and dad and all the weird, bad, unintended things that can happen there.

Dr. Jim Dahle:
Yeah. Good advice.

Tyler Scott:
Awesome. So next we're going to finish with lightning rounds.

Dr. Jim Dahle:
I saw these lightning round questions. None of these are lightning round questions, but we'll see how fast we can do them.

Tyler Scott:
They all are worthy of their own podcast, but these are comments that have shown up on YouTube. So, rather than just the Speak Pipe or the email, Meg has said recently, “Oh, there's all these TikTok questions and YouTube and Reddit questions and let's incorporate some of those.”

MANAGING SEQUENCE OF RETURN RISKS IN RETIREMENT

Tyler Scott:
So you've seen them. You've had some heads up. And so, I'll kind of interview style. I'll chime in a little bit. The first one is, “Thanks for talking about a sequence of returns risk. However, I would love to hear some solutions for this problem. Recommendations I've heard you say include a cash bucket for two to three years of expenses or dynamic guardrail withdrawal strategies to take out less than 4%.” This person is looking for sequence of returns solutions. We could talk for an hour and not get there.

Dr. Jim Dahle:
Yeah, what a lightning round question. I don't even know what video this question was posted on. But presumably on some video where we talked about sequence of returns risk.

By way of background, for those of you for whom this is not a term you use in your regular daily life, sequence of returns risk is the risk that you run out of money in retirement, despite having adequate average returns on your investments during your retirement, because the crummy return showed up first.

That's the sequence of returns risk. It can really devastate a portfolio very quickly if you're withdrawing from it while it is falling in value. So, people try to come up with these solutions to avoid this. And one solution is to have only take out what's a safe withdrawal rate. A rate that in any situation in the past 100 years, even if you had taken out this amount while the market was having a terrible crash, it's the 1930s, it's 1987, it's the dot-com bust, it's global financial crisis, it's stagflation, which is actually the worst period.

Tyler Scott:
That is the worst.

Dr. Jim Dahle:
It’s the early 70s. But the idea is your withdrawal rate is low enough that it could survive that. And that's why the 4% rule is 4% instead of 6%, because most people could take out 6% every year and be fine. It's just a few people historically haven't been able to do that because of sequence of returns risk. So, that's one method of dealing with it.

Another method that people have is they use some sort of a liability matching portfolio. The most common one's probably a TIPS ladder. And so, they put enough money for their expenses, at least their required expenses, into a TIPS ladder, Treasury Inflation Protected Security, that matures each year and gives you a real after inflation amount of money for that year to spend.

And that way, even if your stocks crater by 45%, you're not selling them. You can wait for them to recover and you spend what matures out of that TIPS. And you can do the same thing with a big bucket of cash. You can do the same thing. And that's what a lot of people do. They have two or three years worth of spending sitting in cash. And no matter what happens in the market, they can just pull that cash out and spend that instead.

Some people call that a bucket strategy, for example. And so, they have some money that's a long-term bucket and some money that's a this year bucket and money that's a few years from now bucket. And they invest them appropriately based on when they expect to spend that money.

Some people use buffer assets. You can borrow against your house. You can borrow against your whole life insurance policy, something that presumably didn't go down in value with the market. And then you spend that money until the market recovers and then replenish it with withdrawals from your stocks, presumably, later.

So, lots of ways to deal with sequence of returns risk. You should have a way to deal with it when you retire. You should think about this. This should be part of your retirement plan. But there's a lot of different ways to do it. So, I think that was what they're asking for, was what are some of the ways to deal with it. Those are some of the ways to deal with it. What did I not mention about sequence of returns?

Tyler Scott:
I thought that was quite good. Yeah, I'll just add some commentary, which I just want to build on. The 4% rule is sequence of returns insurance. As Jim said, if sequence of returns doesn't show up, you could have had a much higher withdrawal rate. So, when I talk about insurance, that means you're transferring risk or you repaid some premium.

What is the premium you've paid by adhering to the 4% rule? Well, you've worked longer maybe than you need to, or you're going to spend less in retirement than you could have. That's a real cost. That's a pretty meaningful premium. What did you get for your premium? Insurance against sequence of returns. That's what the Trinity study showed us. That's what Bill Bangin was talking about is that even when things are going sideways, you can take out 4% and you're going to make it 30 years. Your portfolio will support you 30 years.

I'm not sure everyone is connecting that as closely as I would want them to. They're starting at the 4% and then adjusting for additional risks. I'm like, no, no, that's the whole thing.

Dr. Jim Dahle:
Although having a 2% withdrawal rate, you also don't have to worry about sequence of returns risk.

Tyler Scott:
We're going to get to that question in a second. I just want to say that the 4% rule solves this already. But my personal, well, before I say my favorite one, the bucket strategy, very popular because it provides a lot of comfort. I've got the next three years in cash. I've got years three through eight in bonds. And I've got years eight plus in stocks. And that is reasonable. Christine Benz has talked about this really eloquently.

I just want to say not in a negative way, but that's just an asset allocation trick. And not to disparage the idea, but basically you have X in cash and Y in bonds and Z in stocks, that's asset allocation. So, that's another way to manage it is to have a really conservative asset allocation.

My favorite way is what was referenced in here is a dynamic guardrail strategy. I love probability-based guardrails. And that's what we use at White Coat Planning is we've got a system and built into the software that says, “Hey, you can start spending this much right now. And it's often more than 4%. But you have to be flexible. If you're willing to be flexible with your withdrawals, you have a lot of options.”

And then we articulate, “Hey, if the portfolio falls in value to this amount, if it goes from $4 million to $3.35 million, that's our trigger. And then your spending has to go from X per month to X minus 20%.”

But what's fun about probability-based guardrails is you also get to do the optimistic and say, “Hey, if it goes from $4 million to $4.4 million.”

Dr. Jim Dahle:
Which is what happens most of the time.

Tyler Scott:
“The vast majority of the time, then I'm going to be on your case to start spending more. And we're going to agree right now that when your portfolio hits $4.4 million, you're going to go from spending X per month to X plus 25% a month.”

And you get to help the client set the guardrails. Like how much volatility are you comfortable with? Do you want to have a certain amount left to leave to legacy? There's a lot that goes into it. But by far, my favorite answer to this is probability-based guardrails.

Dr. Jim Dahle:
Lots of different ways to do it.

Tyler Scott:
Yeah.

Megan:
You guys are so bad at rapid fire.

CHOOSING BONDS FOR A RETIREMENT BUCKET STRATEGY

Tyler Scott:
Faster. Okay, more lightning on this one, Jim. This is a follow-up to the buckets question. I think it's the same person. “Could you please provide some bond fund suggestions for bucket two and a three bucket portfolio? I am skeptical about bond funds like BND.”

Dr. Jim Dahle:
BND, the Vanguard Total Bond Index Fund. Suggest some bonds to use in my bonds bucket, but not the one that owns all the bonds. Okay, well, how about the Vanguard Intermediate Term Bond Fund? It performs almost exactly like Total Bond Market, but it's not. It's a different fund.

Honestly, one of the wonderful things about Vanguard is all their bond funds are good. They basically don't have a bad bond fund. So any bond fund you want to use from Vanguard is probably okay. I'm not a huge fan of long bonds. I think the interest rate risk is probably… I think you're probably not getting compensated for as much as you're running most of the time. But you can use pretty much any bond fund. There's really no shortage.

One of the biggest risks with bonds is inflation. And so, when I start thinking about bonds that are intermediate and especially long-term, I think it's good to have some sort of inflation protection there. And so, I'm a big fan of TIPS because TIPS and I bonds are really the only bonds out there that are indexed to inflation, at least in the US. And so, maybe consider something with some TIPS in it as well. So maybe some combination of Total Bond Market and a regular, some sort of TIPS fund to do that.

If you're really not comfortable with bond funds at all, you can buy individual bonds. This is why people use a TIPS ladder. It's very popular. And I think a lot of people would very much consider that for bucket two. And this is years three to eight or so in a typical bucket strategy. That's a great use for a TIPS ladder. You buy a TIPS that's going to mature in three years, four years, five years, six years, seven years. And that's what you have. There's your bucket two. And you can very easily do that. I think those are probably the main suggestions. What else you got to add to that?

Tyler Scott:
I'll just say that I think the duration of the bond fund is relevant in this case.

Dr. Jim Dahle:
Duration is the measurement of sensitivity to interest rates of a bond fund.

Tyler Scott:
And it is known. You can search up whatever bond fund you're interested in, look up the duration. And it's going to give you a number. It's going to say 6.2 or something like that. And that is a standing guide for what is your time horizon.

Dr. Jim Dahle:
6.2 years. That's what duration is measured in, is years.

Tyler Scott:
Thank you, important point. Yeah, 6.2 years. That's just my two cents on this is whatever bond fund you choose, because this is in the context of the bucket strategy. So, however long you want bucket two to run for, like how far out is it? Because some people's bucket two might go to year four. Some people might be year 10. There's no agreement about this. So, just make sure your bond fund duration fits the timeline.

LEARNING TO SPEND AFTER A LIFETIME OF SAVING

Tyler Scott:
Okay, next one. “I retired in 2022.” Congratulations. “And I have 33 times in my nest egg what I spent last year. I start social security in five years. By that math, I should be good. But the cost of food this week has me really stressed out. So I'm really not sure. Why am I not comfortable with my burn rate?”

Dr. Jim Dahle:
Well, this is the second biggest problem in personal finance. The biggest problem is people don't save enough to retire comfortably. And as soon as you solve that problem, as soon as you do, and it's a hard problem to solve, don't get me wrong, it's hard. A lot of you have already solved it. As soon as you get that problem solved, you need to start working on the second biggest problem, which is the inability of people to spend their money in retirement. Six out of seven retirees are not spending any principal at all, at all.

I've been helping my parents now in their 80s with their portfolio for the last, I don't know, 20 years. And every year I beg them, I beg them to spend more money. And this year they did. They renovated some bathrooms. I'm very proud of them. Good job, mom and dad.

But most years, what do we do with the required minimum distributions? We take them out of the IRA. We invest them in the taxable account. And that's what most retirees are doing? Why do they do that? If you're able to acquire a multi-million dollar nest egg, you're probably a pretty good saver. You've probably been pretty frugal your whole life. And it's pretty hard for a leopard to change their spots. So that's one issue.

A second one is this anxiety you mentioned. You go to the store and all of a sudden eggs are now, I don't know, it's a banana. What could it cost, $10? I don't actually know what eggs cost, all right? I'm going to admit that right now. It might be $5, it doesn't, I have no idea. But you go there and they're $5 a dozen now. They're expensive and they used to be two, I don't know. And it freaks you out and you're like, “Oh, I need two and a half times as much money for my nest egg than I used to. Now I'm anxious.”

So, part of it's just anxiety. And I think the best way to get over that anxiety is to give some money away. I think people need to give. I think it's good for the causes and the people you're giving to. It makes huge differences in their lives. But it's good for your soul. It's good for your soul. It's good for your anxiety. You're sending this subconscious message to your psyche that I have enough. I have so much, I can give some away and not worry about running out of money.

I think that's the best way to overcome this anxiety. People with 33X. If the 4% rule is 25X, 33X is the 3.3% rule. You have more than enough. You could give away probably millions of dollars and still only be at 25X and be okay. So, it's clearly not a math problem. It is a “you” problem. So, you have to work on you. It's a behavioral thing. It's an anxiety thing. And I think the best way to get over that is practice spending your money. And then you see next year, “Hey, I have more money than I had last year despite spending that.” Or even better yet, give some of it away.

And if you have to start small, start small. Give $100 bucks away.” And before long, you might find you're giving $10,000 away or $100,000 away. And what that will do is it will convince you that I do have enough and I am going to be okay. And you get all the other benefits out of it as well.

What other advice you got for people that are struggling to spend? Because it's a real problem. It's the second biggest problem in personal finance.

Tyler Scott:
You alluded to this, the very muscle that you used to get the giant nest egg is the muscle preventing you from spending the nest egg. It's an adductor, abductor problem. You've been adding, you've only been doing one exercise. So, your adductors are really strong. And then when you go to do an abducting move, you're totally atrophied. You don't have that muscle, you never trained it. The abductors need to get trained. I liked your thought of giving some away.

Yeah, I will bully clients into spending more money. I'm like, “You must fly first class on this next trip. You have to do it. If you can't do it, I'll get on the screen and we'll buy the tickets together.” But you've got to train this muscle.

Dr. Jim Dahle:
What you need to do is make them promise to give it to the political party they oppose. They can either spend it or they got to give it to the Republicans or the Democrats.

Tyler Scott:
If you don't fly first class…

Dr. Jim Dahle:
Or their friend's favorite charity or whatever. You got to penalize it somehow, but it's true. I was just in New York City. I had a great weekend, by the way. On Saturday, I was floating on the Colorado River. It was a wonderful time. We did Westwater Canyon. It's very low water right now, but that didn't make the rapids any easier. We had carnage. We had two raft flips. We had another raft that dumped truck, dumped everybody out, but didn't flip. All our people in inflatable kayaks ended up swimming at some point in there. Mine was the only raft that didn't flip. I was feeling pretty good, but I was also on a bigger raft than everybody else.

I went straight from that, came home, packed a bag, and early the next morning went to New York City. And I'm a small town kid by comparison to New York City. Salt Lake's a small town compared to New York City. And of course, I struggle every time I go there with trains and subways and navigating around. And why I didn't just get an Uber, I don't know. I was a little worried it would take longer in a car than it would in a train to go nine miles, which ended up taking me two and a half hours to go nine miles. I could have run it in less time, literally.

But when I went back to the airport, I also took the trains. And why? Was I just cheaping out? I'm clear that I could afford the Uber. It was $80 or something. It was all it was going to cost me to Uber out to the airport. But no, I rode the train back out there for $17.50 in a $3.50 subway to get to the train.

We do this. It's hard for all of us to spend money. And you constantly got to be coming up with tricks to talk yourself into doing it. One of the tricks I use all the time is I let Katie do the spending. And it doesn't bother her nearly as much as it bothers me. We go out to eat for a WCI thing. Like I said, it's a business dinner. And do I physically hand them my card and sign the sheet? No, one of my staff members does. Why? Because it's hard for me to spend money. So you got to find these tricks to do it. It doesn't bother me. I know I have the money, but I don't actually like doing it.

This is a hard problem to solve. So, it is not just you. I think a majority of wealthy people have this problem. It's hard to spend money. Second biggest problem in personal finance.

Tyler Scott:
And to just put a bow on that, the question, “Why am I not comfortable with my burn rate?” Because you're human. And because we are risk-averse. Darwin's evolution taught us to be afraid of things that are dangerous. And so, we lead with anxiety and fear. And some of that is valuable and good. But that's why. Because you're responding to your human instincts.

And that's why another reason I'll put in a plug for probability-based guardrails. I've just seen this unlock the permission to spend for clients. Because you let the anxious client set the guardrails. You have total control. You tell me how nervous you are, what percentages you're comfortable with. You set all the controls. “Okay, now with all of that anxiety baked in, you can spend this much.” And there's literally no chance you'll ever run out of money. And now go do it. I haven't spent $12,000 a month in my life. Well, next month's the first time. And so yeah, it is a challenge.

Dr. Jim Dahle:
And one of the solutions, honestly, that people ought to be considering more often, if you can't spend 4%, I bet you can spend and give a total of 4%. If you can only spend 2.8%, you're given 1.2% this year. And that's okay. And see how much good you can do with that 1.2%.

WHOSE TAX RATE MATTERS WHEN MAKING A ROTH CONVERSION?

Tyler Scott:
Okay, last one. Megan's going to completely fire us from the lightning round. We're clearly awful at this. The last one, short question, hour and a half long answer. “When you convert to Roth, does it consider the child's income or the parents when paying taxes?”

And before you respond, I will say you did a great post on the most difficult question in all of personal finance, which is to Roth contribute, which is the same question as should I Roth convert? And in there, in big giant letters, you said, “Who's going to spend the money and when are they going to spend it.” I want to acknowledge there's intelligence in the question when they say, “Do I consider the child's income or the parents?” Okay, Q, you're favorite.

Dr. Jim Dahle:
I don't know what the context to this question is. I think it might be referring to Trump accounts. That's what I think this question's referring to. I don't know, this is lightning round, so I'm not 100% sure. But obviously, with the Roth conversion question overall, you're comparing your tax rate now doing the conversion to the tax rate of whoever is pulling that money out of the account, whether it's you or your heirs or a charity down the road. That much is totally true.

But this might be referring to the Trump accounts. In which case, if they are your tax dependent and the kiddie tax still applies, then it's the parents' income when it comes to paying taxes and determining what the Roth is. If they're financially independent of you and you're now converting this Trump account-turned IRA into a Roth IRA, well, really, they are, you aren't, because it's not your money anymore, then it's all about their income. I think that might be what this question is alluding to.

Tyler Scott:
You're on the socials more than me, so you remember the context. But yeah, I agree with that if it's a Trump account. If it's the broad question, I just want to validate the question. I would just ask back to the asker, “Well, who do you think's going to spend it and when? – Oh, well, I'm going to leave it to a charity. – Well, don't. That's the dumbest thing you could do.”

Dr. Jim Dahle:
Charity's not going to pay taxes.

Tyler Scott:
Yeah, so definitely don't do that. “Oh, I'm going to leave it to my kids. – What tax bracket is your kid in? – Oh, they're 14. I don't know.” I'm like, “Well, then I don't know either”, because we don't know. “But they're a radiation oncologist married to an orthopedic surgeon. – Oh, well, they probably want Roth money. I bet their rate's going to be higher when they receive it from you.” So that is a vote in favor of the Roth conversion. “Oh, they're a professional hacky sack and Frisbee guy.” Well, maybe they are going to do okay with traditional IRA inheritance. So, who's going to spend the money and when is a smart question.

Dr. Jim Dahle:
Yeah, for sure. I mentioned I was in New York. I didn't actually say why I was in New York, but this was actually a pretty fun trip. I was only there overnight. But I went to a bell ringing ceremony at the New York Stock Exchange. I was invited by Vanguard.

Tyler Scott:
It's cool, man.

Dr. Jim Dahle:
There were about 75 of us there. And it's kind of a who's who of advocates for indexing, because it was the 50th anniversary of the original Retail Index Fund, the Vanguard S&P 500 Index Fund. And so, it was pretty fun to stand on the floor of the New York Stock Exchange. It doesn't look anything like some of the old movies you've seen with, they will ring the opening bell and people start screaming with papers in their hands. It's all electronic now. It's actually relatively quiet and immense amount of data in the room. Tickers everywhere and screens filled with numbers everywhere and the talking heads from CNBC, sitting right behind you, chatting about today's news. Fascinating experience to go to the Mecca of capitalism.

And then when that reception was over, and it was a wonderful reception, had a great time chatting with a bunch of people, I went over to the 9/11 Memorial a few blocks away, where capitalism was attacked on 9/11. And I know many of you are pretty young. Most of you have some sort of recollection of 9/11.

I was a commissioned officer in the military on 9/11. And what that meant was my experience that I was expecting, which is no docs ever got deployed because none of them had been for 20 or 30 years prior to then, was going to be very different than what I expected when I came out of my medical training. And so it felt much more personal to me. And indeed, I did spend some time supporting Operation Enduring Freedom and Operation Iraqi Freedom. It took a long time to get Bin Laden. That was nine years. It was a long time.

And it's pretty sobering if you have not yet been to that museum. It's an experience I lived through. I thought I knew the history pretty well. My father-in-law was in the Pentagon, when it was struck. My wife was on a plane when all the air traffic was stopped. This was a very personal experience. And even so, going to ground zero and going to this memorial and this museum is something that everybody ought to do when they have a chance when they're in Manhattan.

We forget sometimes that some of our systems, this great wealth creation machine that the American economy and the ability to invest and the ability to trade freely has been created is maybe more fragile than sometimes we think, and we ought to be grateful for it. And that was kind of the message I took away from the trip.

And then I had an existential crisis coming home, going, I can navigate the Colorado River through some of its nastiest rapids, but I can't navigate the train and subway system in New York City. And I had great empathy and appreciation for those of you living in big cities. Thank you for doing that. They need doctors too.

Tyler Scott:
On that, that was lovely, by the way. Thank you for sharing that. That was a cool story. I think the listeners will appreciate that. I like hearing the human side of you and your experiences. And that made me think, as you were saying, that's a great note to wrap up on. I don't think we've thanked the listeners for what they do.

Dr. Jim Dahle:
Yeah, we have not. We haven't, and thanks for what you're doing. I was in the ER an hour before we started recording today, and there were real patients there. They really did need stuff.

One of my colleagues, and this is an example of why we ought to appreciate people. His shift ended at 02:00. When I came in at 06:00 A.M., he was still there. He was there till 08:30 this morning, taking care of a patient that had died on him, came in walking and talking, with oxygen saturation of 60%, and then literally died. Nobody dies until the doctor says they're dead, and he didn't say she was dead, so we brought her back to life.

He resurrected her and stayed with her until she was transferred to a higher level of care through some pretty difficult management. And he had an intensivist at our facility up out of bed helping him do it.

And you know what? Not a thought. Other than just do the right thing for the patient. He was there for six and a half hours after his shift, taking care of this one patient that he picked up right at the end of his shift.

And that's what a whole bunch of you are out there doing. And it deserves a thank you. Thank you for what you're doing. It took a long time to learn how to do that. And it's hard to do. At three or four in the morning, and when my shift ended at 02:00, all I'm thinking about is getting home and getting to bed. And it takes an incredible amount of selflessness to do something like that.

And oftentimes there isn't a lot of thank you. I'm not even sure the family of this patient who are very eager to see her still alive recognize the sacrifice that doc made. He didn't just sign her out at 02:00 o'clock in the morning and go home. He stayed and took care of her the whole time. And so, that deserves a kudos. And all of you, many of you deserve the same kudos today because you did something similar.

QUOTE OF THE DAY

Dr. Jim Dahle:
All right, a few reminders. Oh, you know what else we didn't do? We didn't do the quote of the day. We don't have a quote of the day today. So we'll make one up. It's one I've been thinking about a lot, actually. Megan's like, “I can't believe this podcast is still going.” We're still going.

Tyler Scott:
I gave you a Benjamin Franklin earlier.

Dr. Jim Dahle:
Yeah,. Oh, you did, that was pretty good. But the one I've been thinking around about a lot is from Thoreau, who said, “Our life is frittered away by detail. Simplify, simplify, simplify. I say, let your affairs be as two or three and not a hundred or a thousand. Instead of a million, count half a dozen and keep your accounts on your thumbnail.” And I think there's some benefit to that.

All right, we do have to wrap this up eventually. Don't forget, if you want to come to WCICON through the 22nd, it's $300 off. Go to whitecoatinvestor.com/wcicon.

SPONSOR

Dr. Jim Dahle:
We're grateful for Bob Bhayani, who's our sponsor for this episode. A listener has said that “Bob has been absolutely terrific to work with and has always quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications and the underwriting process in a clear and professional manner.”

Contact him at [email protected], by calling (973) 771-9100 or simply going to whitecoatinvestor.com/protuity.

If you don't have disability insurance and you need it, please go get disability insurance this week. Tyler, you've heard him before. This is a significant part of his income now. Is his disability insurance payout. It does pay out on lots of docs. So, it's worth getting.

Okay, thanks for those of you who leave us five-star reviews, tell your friends about the podcast. One came in from Jkismat. He said, “Long time listener. I've been listening to this podcast for years. I first came across Dr. Dahle on QuantiaMD when I was trying to get free Amazon gift cards as a resident. I've learned a lot from Dr. Dahle and the many guests that have come on the podcast. Thanks to WCI, I'm comfortable in my financial skin.” Five stars.

That was a lot of work to put those QuantiaMD presentations together. I'm glad they helped somebody. I do remember doing all those. We do all kinds of things trying to get the word out. And if you can help us, we really appreciate it.

Keep your head up, shoulders back. You've got this. We're all here to help you. Tyler is, I am. Whether it's just free stuff we make, this podcast, the blog, the newsletters, whether it's cheap stuff like the books, whether it's more expensive stuff like come to our conference or hiring Tyler at White Coat Planning to help you with your financial planning.

We hope we're providing the resources you need to move ahead because we believe that financially secure doctors are better doctors. You're better physicians, you're better parents, you're better partners. Tyler, tell them goodbye. I don't know if you're going to be on the next episode.

Tyler Scott:
It's been great to see you. Thanks for having me, Jim. Till next time.

Dr. Jim Dahle:
We'll see if Megan lets him come back. See you guys next time.

DISCLAIMER

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

INTRODUCTION

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

Dr. Jim Dahle:
Welcome to the Milestones to Millionaire podcast.

This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or get this critical insurance in place, contact Bob at whitecoatinvestor.com/protuity. You can also email [email protected] or call (973) 771-9100.

All right, we're going to let you know about a podcast only sale we're having, 20% off if you use PODCAST2026. That's the code you got to put in. This goes through September 14th. I think today is the last day, the day this podcast is dropping. But this is a podcast only discount on all of our online courses. It's 20% off. So, for students, that makes your Fire Your Financial Advisor course just $79.

We built these courses because no one taught us this stuff in medical school. They walk you through exactly how to build a financial plan, pay off your debt faster, invest without guessing, and start turning your income into wealth. Someone told me that Fire Your Financial Advisor saved him $85,000 a year. Another person that took it became a millionaire three years out of residency. That can be you too.

Go to wcicourses.com and use code PODCAST2026 again through September 14th, which I think is the day this podcast is dropping, and get that 20% off. Like all of our courses, it comes with a 100% no questions asked money back guarantee if you return it within a week. We want you to be satisfied with what you're buying from us. And so, we offer that and frankly, people use it very rarely. So we're not all that worried we're going to lose a bunch of money for offering that guarantee.

All right, while I'm talking about podcasts, I wanted to mention some feedback I got. This was about, not about podcasts, about the online courses. Someone that wrote in said, “Thanks for your tireless efforts educating docs. You've helped countless colleagues, especially younger docs, including many of the residents and medical students I interact with. I follow you on social media.” Which I think is key to this comment. “Listen to your podcast and have purchased all your books. You're a trusted voice and you set the tone on many aspects of medicine, financial and otherwise.

However, I do take some issue with the wording in some of your recent advertisements. Your words carry significant weight and you've built a huge following of doctors and a successful messaging platform. I feel that selling a course entitled “Your Fastest Way Out of Medicine” may be sending the wrong message, especially to your younger listeners. We want our well-trained young doctors to realize a long rewarding career. It's important to me to encourage trainees to find their best path forward and embrace healthy ways to deal with the unique stresses and anxieties of medicine without giving up.

I hate to hear people making plans to leave medicine as soon as possible. Many rewards of clinical practice take years to appreciate. From a public health perspective, we need more doctors in America now and not lose them to FIRE.

If doctors want to leave medical practice early, that's their right. It would also be nice to highlight the many benefits of sticking it out and building a long and rewarding career. Thanks for making the medical world a better place and I hope your wrist is doing okay.”

My wrist is doing okay. That's a good description for how my wrist is doing, by the way. But at any rate, first of all, we don't have a course called “Your Fastest Way Out of Medicine.” We do have a course called “No Hype Real Estate Investing.”

And we often talk about how short-term rentals are probably the fastest reasonably reproducible pathway out of medicine. That is true. And so, if you've gotten to 35 or 40 years old and you're like, “Oh crap, I made a mistake with my career. I hate doctoring.” This isn't a bad way out. And I do point that out in the course.

But keep in mind, I don't write all the ads here. There's 20 people working here and I am not in charge of all the marketing. I'm not in charge of all the ad copy, et cetera. And so don't assume that anything that shows up an ad is me personally. We have a really great social media team, a really great marketing team. But don't assume that that's necessarily me saying that.

That said, I have totally empowered them to write the most click baity titles and most click baity ads they can. And I'll tell you why. Whatever it is that gets people into the White Coat Investor universe, it is good for them. It is good because they become more financially literate. They usually become more financially disciplined. They usually become more financially successful. And I'm a firm believer that that makes them better doctors. They become better parents, partners, physicians, et cetera because of that.

Will some of them leave medicine early? Yes. Is that because the White Coat Investor exists? Well, we did make it possible for them to do that. But I think telling doctors to mismanage their money or not teaching them how to manage money in hopes that they will stay in medicine longer is probably not the right message either.

So maybe what we ought to do is exactly what you suggest. We ought to highlight the benefits that come from a long and dedicated and fruitful practice in medicine. And I have certainly experienced that. I am eight years out from financial independence. I was in the ER yesterday taking care of some people that really needed my help, really needed those skills and that knowledge I acquired over a decade plus to have better lives.

I'm working a lot of shifts this week. I think I've got eight shifts or six shifts in eight days. I had a lot of time off earlier this month when we were recording this. And so a bunch of my shifts are stacked together. I don't normally work six shifts in eight days, but I'm certainly still working. And I hope a lot of White Coat Investors out there that become financially independent will choose to continue working in a way that they choose to do so and taking care of people and helping to be great docs.

There are a lot of rewards to practicing for a long time, not least of which are financial. The longer you practice, the more you can save for retirement, the more your investments compound, like you're going to hear today in this interview. And the more that you will be able to get from social security and less time you'll need your investments to support you so you can spend more in retirement.

The financial benefits are great, but the non-financial benefits are great as well. So let me put that plug in there. I think this criticism is somewhat deserved, but we're going to continue to write the ad copy that we can get people into White Coat Investor with. And that's probably going to include things like “Escaping From Medicine” or “The Fastest Route Out of Medicine” on some of the ads, especially for that real estate course.

But that doesn't mean I want you all to leave medicine. I need somebody to take care of me. I'm very grateful for the docs and other professionals that have taken care of me over the years.

INTERVIEW

Dr. Jim Dahle:
All right. We got a great interview today about a doc who has done exactly what this comment says, stayed in medicine, despite having enough money to not be in medicine. And has had some pretty awesome financial benefits for doing it.

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

Alan:
Well, thank you. Thanks for having me again.

Dr. Jim Dahle:
For those who aren't aware, you can go back to Milestones podcast number 86. We had Alan on four years ago with a net worth milestone. He was at $8 million back then. Tell us what's happened in the last four years that's enabled you to come back on with another significant milestone.

Alan:
Well, we crossed the double-decamillionaire stage in our family. So that was an exciting event.

Dr. Jim Dahle:
Double-deca millionaire. I'm not sure I've heard that phrase before. $20 million. $20 million in net worth.

Alan:
Right north of $20 million net worth.

Dr. Jim Dahle:
Wow.

Alan:
Never thought that day would come.

Dr. Jim Dahle:
How does that feel?

Alan:
It is kind of surreal, but at the same time, it really doesn't go any different than it did four years ago. I'm still working and still have a lot of, feels like dependence. I tell people, work all the time. I still have a lot of pigs at the trough. So, that's fine.

Dr. Jim Dahle:
Well, there's some truth to that. But you know what? At this point in life, I suspect you're not mostly working for the money.

Alan:
No, probably more than anything, I'm working for identity validation. And we still have one in high school. And as long as he's still at home, I'll continue to work full time. And that will change next year, though.

Dr. Jim Dahle:
Yeah. I suspect that you may find, as we have, that the limiting factor is not so much work as it is your kids' activities and things they need to be there for that's keeping you from having a retired lifestyle, et cetera.

Alan:
Yes. There's a lot of truth to that.

Dr. Jim Dahle:
Okay. Well, let's break down your net worth a little bit. How much do you have in housing and retirement accounts and taxable accounts and investment properties and go through your assets and your debts?

Alan:
Yeah. We're somewhere between $20 million and $21 million. $3 million of that is in home equity. We own our personal residence we're in now. Within the past year we bought a retirement home out in the Phoenix area and we'll be relocating there. I don't know exactly when, probably another year, maybe a little bit longer than that once I pull back from my full time job here. And so, that's about $4 million of it.

But the other $18 million is essentially just investments. And I wrote it down because I can't always remember it. We have about $11.5 million in taxable accounts and $2.7 million in Roth. Some of that's backdoor Roth for myself and my wife. And some of it is a 401(k) Roth. $3 million in a 401(k) pre-tax account.

We have about another million in equity and some partnerships that our practice has, like I'm a partner in a surgery center and another management company that manages a single specialty hospital. And then the $3 million in the two homes that I talked about. That all totaled up somewhere between $20 million and $21 million. I don't look that often, but the reality is it can vary quite a bit day-to-day depending on what the stock market would do. But there's no point in looking very often.

Dr. Jim Dahle:
About how much of it's in stocks, how much of it's in bonds, anything else?

Alan:
I would say 95% or more is in equities. I have almost no bonds. We do have a REIT. And we have another couple of private equity funds we're involved in. But total of all that's probably less than a million, million and a half.

Dr. Jim Dahle:
Okay. So it's stocks. You wrote a big stock bill in the last few years.

Alan:
Yeah, we have. And now the question becomes is how do we move going forward? And I'm a little bit paralyzed with indecision on that. I read all the White Coat Investor and other investment forums I look at. They talk about as you get closer to retirement, you need more bond exposure. And I've just never gone that route. And there are some people that say, “If you have enough, don't change course to stay where you are. If the market pulls back 30%, you're still fine.”

Dr. Jim Dahle:
Well, there's some truth to that. Even if the market gets cut in half, you're still a decamillionaire.

Alan:
Right. We won't starve.

Dr. Jim Dahle:
Certainly. Okay. You practice OB-GYN and you're still working full time and investing full time, but that does not explain an increase. Even with the tailwind of equity returns the last few years, that does not explain an increase from $8 million to $20 million in four years. So, there's something else in the picture. Tell us what it is.

Alan:
I was part of a partnership group that had partnered with a local hospital here and had built a single specialty hospital over 20 years ago. And it was successful and had done quite well over the years, not just for us individually, but for the system overall. And about five years ago, maybe about four years ago, they approached us about, “Would you be interested in selling your half of this entity out?” It's a 50-50 partnership.

And they had approached us a few years before, and the answer was, “We're not interested.” But this time when they approached us, actually the CEO of the system called me at home one night. It was in February. And he said, “Would you guys be interested?” And my response that time was, “Everybody has a price.”

I went to some of my senior partners in this entity that we had, and we started a negotiation process. And we eventually made the decision to sell. And that ended up being north of a $4 million buyout for each partner when it was all said and done. Now, that's not all hit yet. Most of it's hit by now. I think next year is the last year they owe us any money. But yeah, that was about a $4 million push. But that's pre-tax. This was long-term capital gains, tax rate. So, probably after taxes, somewhere north of $3 million.

Dr. Jim Dahle:
That was a pretty good chunk of it. And the rest was just returns on your stocks.

Alan:
That, and we just continued…

Dr. Jim Dahle:
New contributions.

Alan:
Every month, we just put money in. And so, it just continued to grow.

Dr. Jim Dahle:
Okay. Have you thought about cutting back just because you have enough money to do so?

Alan:
Yeah. The answer is yes, but we're a private group and we're an Eat What You Kill group. So the problem you run into, if you cut back very much, you're working for free. And I just can't mentally make that hurdle to say, “I'm still showing up every day and my paycheck drops by two thirds.” Because your overhead's fairly fixed. Rent's getting paid, employers are getting paid, your health insurance is coming out of that, all that sort of stuff. But I still have not pulled the trigger yet, but we've had those conversations.

But I've told the practice, next summer, I'm going to retire. I don't know what that's actually going to look like for me just yet. We have a labor's program, and I've thought about potentially working three or four shifts a month doing that, just to give me some purpose in life. And hopefully I can do it for a year or two or three, I don't know. Might be a situation where that will help me transition into complete retirement. Not so much from a financial perspective, but more from a professional and personal angle.

Dr. Jim Dahle:
Has this increase in wealth change the way you look at giving, whether to your future heirs, or giving to people you care about now, or giving to charity, or anything like that?

Alan:
It has. One thing we've been working on the last several months, my wife and I, is estate planning. And we've met with an attorney, we actually met with him several years ago. In the last several months, it's been a more intense conversation about how we're going to structure trusts and wills and what we want to do to help with our adult children.

I'm of the mindset, “I want to bless them, but I don't want to enable them.” And that is a fine line, in my opinion. But we've paid for a lot of education. My oldest son's a physician. I have another daughter who's an attorney. I have a son who's just actually starting medical school this week. So, of course, we pay for all that. More than anything, we're wanting to kind of give them a hand up, not a hand out, if that makes sense.

I think we're just now more in the process of “What's this going to look like in 5, 10, 15 years? And what do we want to do for our grandkids? Do we want to set up a trust that's going to pay for education?” We're kind of just working the details out and trying to come to some agreement between my wife and I on what would be the best plan going forward.

Dr. Jim Dahle:
Yeah. It's not always the same plan, but just like everything else, there's some compromise, isn't there?

Alan:
Yeah. Oh, yeah. Yeah, it's exactly right. There's things that I think that she would like and things that I would like, and they're mostly in alignment, but occasionally they're not. But I think whatever we decide, we will be able to fully fund it. It's interesting with the growth in the net worth over the years, it's such a mental hurdle for me to take a step back and say, “You've made it.” And it's a very big shift. I don't think I ever would have thought I would been that way, but I'm getting there, I think.

Dr. Jim Dahle:
Well, if you need to hear it from somebody, you have made it. Somebody out there in podcast land listening to this agrees with me, I'm sure. Give us a sense, what's the most you ever made clinically? Not counting your investment income or anything like that. The most you ever made clinically in a year?

Alan:
Between the practice and the surgery center dividends and the hospital dividends, I think it was somewhere around $1.2 million to $1.4 million might've been my peak year. It's hard when I look at you get everything together for your tax return, and a lot of it every year is your dividends that have come in. And so it's hard for me to differentiate all that. It's not hard, I just don't take the time to do it, I guess. But it's north of $1.2 million. That's probably about the peak, $1.2 million, $1.3 million.

Dr. Jim Dahle:
Now, there are people out there that look at surveys, physician income surveys. And if you look that up for an OB-GYN right now, it'll say the average is something like $350,000. And I'm constantly telling people the range of incomes in any given specialty is very wide. But I don't know that they believe me until they hear a story like yours.

Alan:
Well, I think part of it is we're a large single specialty group and that helps. In the area here, we're kind of the big kid on the block. We've been able to negotiate pretty good contracts with the payers. That helps. We do a good job keeping our overhead in check. We have a strong CEO who does a really great job with that. And you work harder.

One thing we struggle with as a practice the last four or five years is trying to replace people when partners have retired, which we've had a few retire. And when you don't replace them, everybody just ratchets things up a notch and you feel like you're working harder.

Me and one of my partners, she's actually a couple years older than me. We were talking just the other day about, “We are working much harder than we ever thought we would be at this point in our career.” But we do have new partners coming in next year, but we've got to keep things coming up from coming apart before they get here, keep everything together. I think that's one reason that we've been able to keep our income up too. Just like I said, not much competition and have some leverage with the insurance carriers.

Dr. Jim Dahle:
Yeah. I can remember feeling like that. You just got to keep it together. I remember when I was a military emergency doc a quarter of the group would get deployed and we still had to cover all the same number of shifts.

Alan:
Oh yeah. Well, I'm prior military too. I know where you're coming from on that. You'd have guys that get deployed and you're like, “Here I am. We still got to take call.”

Dr. Jim Dahle:
Yeah, exactly. Exactly. Okay. So, has your spending changed at all in the last four years as your wealth increased so much?

Alan:
It has, we just bought the house out and it's a Scottsdale Fountain Hills area up in Northeast Phoenix. That was a big expenditure. We had talked about buying another place. Me and my wife were just out there last year or this past year or this year, I guess, over Valentine's day. And we started looking at some houses and next thing I know I had a new house.

Dr. Jim Dahle:
Not counting big purchases like that. How much do you guys spend per month or per year?

Alan:
I'm almost embarrassed to tell you that we don't really have a budget. If we want it, we get it. We pay cash for everything. That's one thing. And it varies. We have six children and we've paid for a lot of education and we've paid for a lot of cars, feels like. We have a pool in our backyard and we had a winter storm this year that collapsed part of the pool and that costs $80,000 to fix the pool. So, it always feels like stuff like that's coming up. I would say outside of events like that, we probably spend somewhere $20,000 to $25,000 a month, something like that.

We travel a lot. My wife travels a lot. I mentioned to you, she does a lot of endurance athletic events. She's done a marathon in every state. She's done one on every continent. That gives her an outlet, but those things aren't free either. We spend money doing that. We travel with our kids quite a bit. So yeah, I think probably in that $20,000 to $25,000 ballpark, but we just don't really keep a tight budget.

Dr. Jim Dahle:
Certainly a lifestyle you're going to be able to afford no problem on $20 million in retirement.

Alan:
Yeah. I've been running some of these, calculating the Monte Carlo simulations and I think we should be fine.

Dr. Jim Dahle:
Yeah, I think that's an understatement. All right. The bigger worry, at $20 million, you don't have an estate tax problem with two of you in the couple. But as that doubles again, which it probably will given how much you spend, you start moving into the terrain of having an estate tax problem. Do you anticipate putting any sort of trusts or family limited partnerships, that sort of thing in place to try to reduce that?

Alan:
Yes. We've been working with an attorney on some of that and I'm sure you're well ahead of me on this, but when you sit down and start working on trust, it snowballs very quickly on how confusing these things get. And we were, probably two months ago, setting with an estate planning attorney and walked out of there an hour after, had about an hour sit down with him and my wife and I walk out and look at each other and it's like, “What just happened?” We felt like, “Did we make any progress here?”

We're getting there, but yeah, we're definitely setting up trust. In fact, everything we have pretty much is in trust now. We're just going to figure out what it's going to look like probably over the next, like I said, 5 to 10 years maybe. And are we going to set up individual trust for each child? Are we going to have a family trust that's going to pay out dividends to children, to our adult children and grandkids as things go along? So yeah, we'll get that figured out. Just not quite there yet.

Dr. Jim Dahle:
Mo' money, mo' problems, but at least they're good problems to have.

Alan:
Yeah, you're right.

Dr. Jim Dahle:
All right. Well, somewhere out there, there's a doc listening to this, maybe they are early career, maybe they are mid-career and they're like, “Man, that sounds pretty awesome. I'd like to get there.” What advice do you have for them?

Alan:
Well, there's three or four things. One of the big ones is stay married to your first spouse. I think that's key right there. Pay yourself first. And I think the advice you give is 20% of your gross should go into retirement. And I think pretty much anybody can do that. Even people complain about certain specialties make more than others. I understand all that, but you can be a $200,000 a year primary care doctor and you can still put back $3,500 a month, that sort of thing.

So pay yourself first and really join a practice where you're happy and you enjoy the partners and the work you're with. And I think the other big thing is, live within your means. And I think we all have been around other physicians and there are some of them that live large.

Dr. Jim Dahle:
Well, congratulations on your success. You have done fantastic. We're very grateful for you not only coming on the podcast once, but coming on twice.

Alan:
Well, it's been great. I said this last time. 10 years ago, we're making progress and I'd look around at my peers and we have a very nice home and we drive nice cars, but it didn't belong to a country club. And my kids went to public schools and I kept thinking “Everybody else seems to be doing something different. Are we doing the right thing?” And then I found the White Coat Investor and I realized there are other people that think like I think and live like we live. So, that was kind of an eye opener for me.

I've talked to some of the younger physicians in our hospital and try to get them on board. We have some medical students that will rotate through with us. And every one of them, I say, “Do you have the book?” And if they don't have it, I buy them one and give the White Coat Investor. I said, “This book will make you more money than probably any other thing you'll do in your life if you'll read it and follow this advice.” And actually I'm surprised most of them have heard of you.

Dr. Jim Dahle:
Well, these days, the younger ones, the ones younger than you and I, most of them have heard of the White Coat Investor. I'm still trying to get to all the docs in their 60s. I don't know that I've reached all them yet.

Alan:
I'm just going to ask you a question, What do you think the average physicians retiring with now? $3 million to 5 million, something like that?

Dr. Jim Dahle:
When you do surveys of physician net worth, it's shocking. The 2019 Medscape survey was the last time I saw them break it out by age, but 25% of docs in their 60s were not millionaires in that survey. But about 25% of them were penta millionaires. So, on average most docs are doing okay, but there certainly are plenty that aren't. And those are the ones we are trying to help the most here at White Coat Investor.

Alan:
Yeah. Well, you've done an incredible job and I think it's been such a service for physicians out there. I was actually doing surgery last night. Here I am still working at 10 o'clock last night. And the guy I was operating with, we were kind of having this conversation, he's close to retirement also. And some of the mistakes that we've seen some of the younger doctors make.

And so, it's really interesting to pick your peers brains and see how they view this also. And he has a son-in-law who's in residency now. We were talking about hopefully they'll make good decisions. I find it insightful to see how we all view money. I always think of it as it doesn't buy you happiness, but it's nice to buy some choices. It certainly does.

Dr. Jim Dahle:
Well, thank you for your time and thanks for being willing to come on.

Alan:
I appreciate it very much. Thank you.

Dr. Jim Dahle:
Okay. Great interview. It's always fun to talk to a decamillionaire and multi-decamillionaire, especially the one that's so open about how he did it. And really, this is a doc that did it just practicing medicine. Yes, paying attention to his income and making sure he was making good money, but saving a whole bunch of it, investing in a boring but wise way. And look what happens after 20 and 30 and 40 years. You have a lot of money. And you can do some pretty awesome things with it for your family, for others, for the next generation, whatever you want.

Pay attention to your finances, please. And hopefully you'll be in a position like this where you'll be on a Milestone to Millionaire podcast as a pentamillionaire, or a decamillionaire, or a multi decamillionaire someday.

FINANCIAL BOOT CAMP: BUYING A NEW CAR

Dr. Jim Dahle:
A lot of people ask me questions about buying cars. What they may not recognize is that I'm a bit of an extremist on this topic. And so, I'll try to temper that a little bit with the recognition that you do not have to be an extremist on this topic to make a good decision and to be financially successful.

A typical doctor these days makes something like $375,000 a year. They might be married to somebody else. Their household income might be $500,000 a year. That wouldn't be unusual in the White Coat Investor community.

If you are making $500,000 per year, it doesn't matter what you do with your cars. You pretty much can't go broke buying regular cars, no matter how you do it, no matter how you finance them, et cetera. Now, if you can go buy a bunch of Maseratis and McLarens or something, then sure, you can go broke buying cars.

But the advice about cars is very important for lower earners. I am firmly convinced that the vast majority of people who don't build wealth in this country fail to do so because of something that's sitting in their driveway. The truth is that you can get an extremely reliable car without spending very much money.

I used to tell people you get a $2,000, $3,000, $4,000 car and have it be reliable. That number's probably gone up in the last few years. Cars have just become more expensive. Insurance or inflation seem to hit it a little bit more than some other areas in our lives. But still, you can get a very reliable car that will get you to work, that will get you the places you need to go with a relatively low risk of breakdown for something between $5,000 and $10,000.

Because of that, because reliable transportation can be had so inexpensively, especially on a high-income professional income, there's little reason for anybody to ever have a car loan of more than $10,000. A five-figure car loan seems kind of dumb to me. If you needed to pay for your car with credit, you should be buying something that costs less than five figures total, and thus you shouldn't have a car loan more than four figures.

But the truth of the matter is that it doesn't matter that much for doctors because they earn enough to make a financial mistake or two, and this is a relatively common financial mistake people make. They just spend too much money on cars.

And why do they do that? Well, they do that because they can, because cars are available. They cost a lot of money. It's not that hard to go buy a Tesla for $120,000. A nicely equipped pickup truck can run you close to $100,000. There are plenty of cars out there for $40,000, $50,000, $60,000. The cars are available. You're driving past them every day, and sometimes that FOMO and desire to keep up with the Joneses causes us to maybe spend more than we otherwise would on cars.

Now, a car is a tool. It's generally a depreciating asset. Maybe a few classic cars. That's not the case, but those are the ones you're not really using for transportation anyway. You're just keeping them in your garage and rubbing them with a diaper and pulling them out for a parade a couple of times a year. We're talking about the real cars that you use, that you drive around, that you take to the store, that you take to work, et cetera.

They're depreciating assets. They're tools. You're exchanging money for transportation. And while I get it, it's fun to drive a nicer car with better features that might be slightly more safe than a little bit older car. It is what it is. It's just transportation. It has four wheels. It's a hunk of metal. There's another one down the street.

So, don't get too attached to cars. Remember the lesson that I teach my children, that you are not what you drive. A lot of White Coat Investors have discovered they drive a sensible, relatively inexpensive, often previously owned economical car and park it in the doctor's parking lot. And they walk past a lot of very nice cars on their way into the hospital.

And they do that for a few years. And then they realize that people driving the expensive cars are not actually building much wealth. And they start asking them, these doctors driving these beaters for financial advice.

So, wealth is not what you spend. It's not what you earn. It's what you have after you get done earning and spending. So, keep that in mind. These are depreciating assets. The less you spend on your car, the more money you can use to build wealth. Now, you don't need to die the richest doctor in the graveyard, but you probably ought to wait until you're wealthy before you start trying to live like you're wealthy.

Don't spend too much money on a depreciating asset, especially if you're not wealthy yet. Now, if you're a multimillionaire, fine. Spend a little bit more money on a car. Now, we drove inexpensive cars for a long time. Now, we buy brand new ones, often custom order, because we have the money. And it's fine. It's a relatively small part of our financial world. But if a car is still a big part of your financial world, be very careful how much money you spend on it.

You should generally be buying less car than you can afford. One of the famous people out there said, “If you can't buy it twice, don't buy it at all.” I think there's some wisdom to that. Just buy less than you can afford. Reliable transportation you can have for $5,000, $8,000, $10,000. That doesn't mean you can never buy a car more than $8,000. But it means you ought to be thinking twice before you spend a lot more than that on cars.

You have to think, “Do I have a better use for my money? Would this be better off going into a college fund for my kid? Would this be better off paying off some debt that I have? Would this be better off being used to max out a retirement account or going toward something we want even more, like a really nice vacation or a lake home or something like that?”

Make sure your money's going toward what you actually care about, rather than just trying to keep up with the Joneses or because of some ridiculous fear about not driving the very safest thing on the road. All cars that have been manufactured in the last 10 years are dramatically safer than all cars that were manufactured 40 years ago. You don't need the 2026 model or the 2029 model when your old car was from the year before. It's not dramatically more safer than whatever you could have bought a year or two or five or even 10 years older than that. It's only a little bit safer. Some of those features don't make all that much difference at all. It's been a long time since they sold a car without any seatbelts, airbags, anti-lock brakes, those sorts of things.

Consider buying pre-owned or used. You can buy these off a private party and will often get a better price than you will going to a dealership or going to a car lot. Those guys have additional expenses and they're a little bit more savvy about what cars cost and what people are willing to pay. They generally charge more.

The best deal out there is usually buying from a private party. Now, that comes at slightly more risk. Some risks that you'll have to do a little more work to the car that's generally not that expensive work to make it look a little better or to update a few things or just bring maintenance up to speed that that dealership would have done for you.

When you can get the car for $2,000 less, you can afford to put a little bit of money into it. And often, a private party has different motivation to sell than that used car lot. They'll often give you a much better deal on the car. That's often where you get these cars that were driven by grandma to church once a week and they're 10 years old, but they only have 20,000 miles on them. These cream puff cars, that's where you usually get them, is from that sort of a private party.

In general, you should pay cash for cars. You should pay cash for everything that you can. It's a little bit hard for doctors and similar high-income professionals to pay cash for their educations. They don't come from a wealthy family. They're often having to use some student loans.

Housing tends to be such a big piece of your financial life that waiting years to buy while saving up cash probably isn't very wise. When it comes to a car, a typical physician is getting paid $20,000, $30,000, $40,000, $50,000 a month. If you can get reliable transportation for $8,000 or $10,000, you don't have to save up very long to come up with that cash. Certainly within two or three or four, heaven forbid, six months, you should be able to save up enough money that you can pay for cash.

If you do have to buy a car with a loan, make it the last one you ever buy with a loan. After you finish paying it off, continue making those payments into a savings account so when it comes time to buy your next car, you already have it paid for.

And if you do finance a car, keep in mind that they're selling you loans. Yeah, they sold you a car as well, but they often make more money on the loan. They're highly motivated to get you to finance a car. They want you to buy as much car as you can. They want you to pay for it over as long of a time period as you're willing to. They want you to pay as high interest as you can. If you're going to finance something, try not to finance it all. Try not to buy as expensive of a car. Try not to finance it for very long.

Paying off a car in three months or six months is not dramatically different from just paying cash for it, but paying it off over seven years sure is. I hope doctors can get rid of their student loans in less time than that. There's no reason they ought to be dragging out car payments for seven years.

Don't forget about the hidden costs of car ownership. It's not just the price you pay up front. There's going to be some maintenance. Even new cars break down every now and then. Just buying a car with zero or 20,000 or 50,000 miles doesn't mean you're never going to have it in the shop. You're never going to have it in the dealership. They break down too, maybe not quite as often as a car with 150,000 or 200,000 or 250,000 miles, but they certainly do break as well.

Focus more on reliability than luxury. Luxury is nice. I get it. I've got some nice cars and it's nice to have nice stuff, but at the end of the day, the really frustrating thing isn't that your seat is cloth instead of lever. The really frustrating thing is when the car doesn't get you where you need to go. Focus first on reliability, and then if you have some extra money, feel free to throw in a little bit of luxury.

The bottom line, anytime you buy anything, whether it's a car or something else, is you need to make sure where you're spending your money aligns with your values, the things you care about most. If what you care about is your child's education, maybe you're better off putting money toward private K-12 and a college education than spending a bunch of money on an expensive car. Or if you value vacations, maybe the money ought to go toward that. Or if you value having a really nice home, maybe the money ought to go toward that. But on the other hand, if you're a “car guy”, feel free to spend some money on cars. Just make sure it's money you can afford while still reaching all of your financial goals.

SPONSOR

Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at Protuity. One listener sent us this review. “Bob has been absolutely terrific to work with and has always quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications and the underwriting process in a clear and professional manner.”

Contact Bob by calling (973) 771-9100, emailing [email protected] or just going to the whitecoatinvestor.com/protuity.

Thanks for being here. Without you, it's not much of a podcast. Keep your head up and your shoulders back. We'll see you next time on the Milestones to Millionaire 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.

Cole Anderson:
Hey everyone, my name is Cole Anderson with White Coat Planning, and today Jim has asked me to teach you guys a little bit about expense tracking.

Now, one of the most overlooked, but honestly, most important metrics in financial planning is expense tracking. Most of the time, when folks think about the word expenses, they immediately think about the word budget or budgeting. Now, while I don't have anything personal against budgeting in general, it's absolutely not a requirement for the accomplishment of your financial goals or winning the proverbial financial game. The far more important financial metric when it comes to spending is the tracking of expenses.

Now, what do I mean by that, and why is that different from budgeting? Right? Well, when I talk about tracking expenses, I mean that literally, keeping track of what you're spending your money on and how much you're spending. This is vastly different than budgeting, in our opinion, for one large reason: budgeting is inherently restrictive and leads with a scarcity mindset.

For example, in a budget, you may mark $1,000 per month for something like groceries. If you're following a budget really strictly, once you hit that $1,000 of spending, that means no more money can be spent on groceries. I hope you have some leftovers in the freezer, or that the kids are okay with ice soup for dinner. Right?

Expense tracking, on the other hand, is meant to be fluid, empowering, and leading with that more abundant mindset. When we track what we spend rather than budget what we can spend, we have a deeper understanding of what we value and where our dollars are truly going.

Spending is an extraordinarily important vital sign for any financial patient. If you'll excuse the pun, just as a critical exam requires vitals, building a financial plan that actually works requires accurate spending data. Knowing your spending is critically important when discussing things like a properly funded emergency fund. For instance, how can you set aside three to six months of spending if you don't know what you spend in a month? Things like sufficient life insurance and disability insurance and projecting out an accurate retirement date also critically rely on accurate spending data.

Let me give you an example of why this is so important in practice and why inaccurate numbers, when it comes to spending, can really ruin the usefulness of your financial plan. Let's say my wife Mary Kate and I think that we spend $10,000 a month, or, for you math nerds out there, $120,000 a year. Based on a 4% withdrawal rate, in order for my wife and me to retire comfortably at the same level of spending or lifestyle when we reach, you know, average retirement age, we would need about $3 million in our nest egg. Sounds pretty great, right?

Well, what happens if we have underestimated our spending by a few grand a month? Which, let's be honest, guys, most people are going to underestimate what they think they spend. Let's say we actually spend about $15,000 per month instead of the $10,000 stated in our financial plan. That would mean that instead of the $3 million we thought we would need to retire, we would actually need about $4.5 million. That's 50% more money in our nest egg. And as you can imagine, if this were true, my wife and I would be in for a really rude awakening and probably not have the retirement that we were envisioning at the beginning of this.

Now that we know why expense tracking is so important, it's critical that we talk about actually how you do it. When we talk about categories of expenses, we typically think of three types. We think about variable expenses, fixed expenses, and episodic expenses.

Now, these are all pretty straightforward, with fixed expenses being things like your mortgage or your gym membership, variable expenses being things like entertainment or groceries, and episodic expenses being those big, larger things like, you know, an annual travel budget or home repair and maintenance.

Okay, the simplest way to keep track of all these things is to actually go through and look at your credit cards and debit cards and bank statements and aggregate all of your transactions over a given time period. Remember, I said simplest, not easiest.

I have done this for my wife and me since we got married, and let me tell you, it's a tedious process. Now, I love some tedium in my life. I find it pretty cathartic, but I'm also a dork that does financial planning for a living. So I don't assume that all of you guys out there have any interest in manually sorting through all of your statements and categorizing your expenses by hand.

So if you don't want to do that, there's plenty of services out there that do it for you. I typically recommend to folks Monarch Money or You Need a Budget to do the tracking and categorizing for you. The important thing is that you actually do it. I don't actually care where or how. It's just that you actually do the process of tracking your expenses.

For those of you out there that have never tracked your spending with intent before, have no fear. There are no changes that are needed when you start this process. You're simply looking to gather objective data. Now, as you comb through your expenses, you'll almost certainly find expenses that you either forgot about or no longer desire to spend money on.

For example, literally yesterday, my wife and I saw that we were spending $20 a month on a Canva membership. Don't need that anymore. So, you know, pretty quickly canceled that one. For every $100 a month in reduction in your spending, that actually equates to about a $30,000 reduction in your financial independence magic number, or what you need to be financially independent.

If you take that $100 that you have saved by not spending it and invest that money, that equates to another $60,000 toward your nest egg over a 20-year period. Meaning, just finding $100 that you no longer spend and instead invest can mean an aggregate of $90,000 toward your financial independence goal, which is pretty cool.

Another thing is that as you track your expenses over a few months, you'll start to notice patterns and see areas where your spending does not reflect your values. For example, you know my family. We value time with our extended family, our friends. We value travel, splurging on a good meal out, and convenience whenever appropriate. We don't value things like luxury cars or designer clothes or nice shoes or really more materialistic-type things. Not to say that's a bad thing if you do. It's just not what we put value on.

So as we track our expenses on a month-to-month basis, we look for ways to decrease our spending on things that we don't value and increase our spending on the things that we do value. We start to see a trend, or we start to see a through line where maybe we're spending a lot more money than normal on something like clothes or material goods or whatever. Doesn't really matter, right?

Mary Kate and I sit down, discuss where and why these expenses have gone up, and how we can change things going forward so that more of our money is going to what we value as a family. Over time, expense tracking has the added benefit of allowing you to make sure that you are spending your money on what you value most and get extremely accurate numbers for your financial plan and financial independence calculations instead of just being restricted or constricted by a budget, or just floating through life without a good understanding of what you're spending money on and hoping for the best.

Thanks.