Today we are talking about annuities, securities, and the three-fund portfolio.

We are reaching the end of the year, which means it's time to take an assessment of how you did this year. I ran a republished post on the 19th of December that you can find on the blog called End of Year Financial Checklist for 2021. This checklist will help you make sure you did everything you need to do at the end of the year. It's got everything on there, including completing your 2021 Backdoor Roth IRA (plus a Mega Backdoor Roth IRA and Roth conversions), making sure you maxed out your 401(k)s and HSAs and 529s ABLE accounts if you have a disabled kid, using up your flexible spending account, making sure you have insurance in place, and giving to charity before the end of the year, if that's something you're interested in doing. There are a number of other things on that list to make sure you do once a year. It might be just calculating your savings rate or your net worth; it might be checking your annual credit reports. But check that post out, make sure you've accomplished what you need to for 2021.

 

Are Deferred Annuities Beneficial in Low-Interest Environments?

“Hi, Dr. Dahle. This is Tom again from California. I have another question on the wisdom of deferred annuities specifically in today's low interest rate environments as a hedge against longevity risk. My question is I read a strategy where one would estimate what their total expenditures in today's dollars would be during retirement and to subtract out the Social Security benefit and their pension benefits. And then whatever is left to seek to purchase a deferred annuity beginning at age 80 or 85. I would love to hear if you think this is a strategy that I should consider. And again, particularly in the case of the low interest rates, if this is something that is wise to do at this time or not. Thanks.”

Let's talk for a minute about deferred annuities. Remember what an annuity is, right? This is a contract with an insurance company that you give them a lump sum of money and they give you some sort of guaranteed income stream guaranteed by the insurance company. Now that's often backed by the state insurance guarantee association as well. But at the end of the day, it's essentially backed by an insurance company. Now the easiest annuity to understand is an immediate annuity. This is when you give the insurance company a lump sum of money, you give them $100,000 now and they give you a guaranteed stream of income for the rest of your life—say $500 a month for the rest of your life. If you die next month, you lost your $100,000. If you die at age 120, they have to pay you the whole time.

The idea behind a deferred annuity is that it does that same thing but on a much bigger scale. It really can sometimes be called longevity insurance because basically you give them the lump sum now, but it doesn't start paying out for a long time. For example, you might give them a lump sum at age 60, and it doesn't even start paying until age 80. Because a lot of those people will die between 60 and 80 and because people won't live that long after 80, it pays a lot more than an immediate annuity that you bought at 60. And so, if you make it to 80, it starts paying you quite a bit of money every month until you die. It functions as insurance. It keeps you from running out of money. If this is at all a concern to you, then this is a good thing to do with a small percentage of your portfolio to provide that insurance. If you are like some people and you keep working for a number of years after financial independence, you probably have so much money that you don't need to do things like buy immediate annuities or deferred annuities.

If you're right on the edge and you're thinking, “Well, I may not be leaving a whole lot to my heirs because I'm going to need that money,” these are more the people that annuities make sense for. Because with an annuity, maybe you can spend more than 4%, at least in those first few years. Most of these aren't indexed to inflation, because you have the guarantee that you're not going to run out. Don't think of an annuity like these as investments. Think of them as a method for spending your money in retirement. So, yes, I think immediate annuities or even deferred annuities can be a part of your retirement spending plan. You have to look at the overall package, what you want to spend, what resources you have. A lot of times it can make sense to annuitize some portion of that money. I probably would never annuitize all of it but it could make sense for some people to annuitize as much as half of it.

The strategy I think you're referring to is simply covering all of your basic needs, all of your fixed spending with fixed sources of income, right? Like Social Security, pensions, annuities. You cover all your basic living expenses with those guaranteed sources of income. Then you use the rest of your nest egg for your variable spending. If it does really well, you go on more vacations, you give more to your favorite charities or to your favorite grandkids or whatever. And that's great. But if that money dries up, if the markets do poorly, at least you have your basic living expenses covered. That's certainly a reasonable way to approach retirement spending, particularly if you're anywhere near the edge of having enough.

More Information Here:

What You Need to Know About Annuities

 

Variable Annuities for Kids

“Dr. Dahle, thanks for all that you do. Reading your book had a great positive impact on my financial literacy, and I've since read many other books that you recommend on your website. My question comes from one of these books, which recommends starting a variable annuity as a retirement plan for my kid who is five years old. The advantage of starting such plans seems to be that the taxes will be deferred, the kid doesn't have to have an income, and it has a 10% penalty withdrawal. So, it's a deterrent for early withdrawal for the kid in the future. And it doesn't impact the college financial aid eligibility. I do understand that disadvantages include higher cost. But starting with probably lower-cost annuities, such as the one with Fidelity, seems like a good option. I know that you don't think very highly of annuities, so I wanted to have your opinion. Should I start something like that? Or should I rather start a taxable account for my kid? Thank you.”

Congratulations on your success and becoming financially literate. When you get to the point where you're starting to worry about your kids, you know you've really succeeded. The book he's referring to is called Make Your Kid a Millionaire by Kevin McKinley. I think it's a great book. It's subtitled “11 Easy Ways Anyone Can Secure a Child's Financial Future.” Another good one on a similar topic is called Silver Spoon Kids by Eileen and Jon Gallo. I also highly recommend it. But this one by Kevin McKinley is very nuts and bolts, very practical. And one of the chapters talks about saving for your kids’ retirement using a variable annuity.

The reason this works is because there's a long time horizon. If you put money in there when they're one year old and they're not going to spend it until they're 65, it gives you 65 years of time for that investment to compound in a tax-protected way. Because as investments grow inside an annuity, it’s tax-protected, meaning that there's no tax drag on the money. And over many decades that can overcome the primary downside of investing inside an annuity. There are two downsides really. One is some additional expenses because it's got this insurance wrapper around the investments. And two, when the money comes out, the gains are taxed as ordinary income, not qualified dividends or long-term capital gains. It takes a lot of years of tax-protected growth to make up for that difference in taxation at the end and the additional fees. But over six decades, it can do that for sure, especially if you have a low-cost variable annuity and, particularly, if that person has a significant tax bracket during their life.

However, you have to keep a couple of things in mind. If they've got earned income, you're way better off using a Roth IRA than a variable annuity because the fees are lower and the tax treatment when it comes out is totally tax-free instead of taxable at ordinary income tax rates. If they've got earned income, use a Roth IRA for their retirement.

If they don't have an earned income, it’s basically a gift from you. And you're allowed to give a kid $15,000 a year. Your spouse is also allowed to give them $15,000 a year. But if you're using some of that up in 529s or UTMA accounts, maybe you don't have anything left to put into a variable annuity. This isn't some extra bucket beyond the gift tax allowances. I don't have variable annuities for my kids. My kids basically get three accounts. They have 529s, Roth IRAs, and a UTMA account. The UTMA is what we call their 20s fund. This is just a taxable brokerage account for a kid where a little more than $2,000 a year is taxed at their income tax bracket. The first half of that is basically not taxed at all; the next half is taxed at about 10%. Beyond that, the kiddie tax applies and you have to start paying it at your income tax bracket on those investments. It’s still not a terrible thing. And if you invest it tax-efficiently, you can get $100,000 in there before any of it is really taxed at your income tax bracket. So that works really well for that purpose.

The downside of a UTMA account is that it is not a retirement account. There's no asset protection for it which you can get in some states with an annuity. There are no penalties for taking money out before age 59 1/2, like there are with an annuity. And it's that kid's money. When they turn 21 in most states, it's their money. If they want to spend it on cocaine and hookers, they can do that. So, you have to be a little bit careful how much you give your kids, right? But we feel like an inheritance is a whole lot more useful in their 20s than it is in their 60s. They can use the UTMA account in their 20s for things like college grad school that the 529 doesn't cover. It can cover the cost of weddings, honeymoons, cars, house down payments, missions, summer in Europe, whatever. All those expenses you have in your 20s, that you really could have used a lot of money for but instead you were like me donating plasma for grocery money. That's the idea behind our 20s fund, or UTMA.

Only you can decide whether you want to put more toward retirement through a variable annuity, through a Roth IRA, or whether you'd rather have that money in their 20s or in 529s. It's really a balancing act deciding how you want to leave money for your kids and for what purpose. But that's the way a variable annuity works. If you are going to use it, make sure you get a low-cost one. That really matters, and Fidelity is usually considered one of the best.

Another nice thing about the variable annuity is you can put as much into it as you want. The gift tax regulations, of course, apply, but you can put as much money into it as you want. You don't have to fund it in any given year. If this year your money is a little tighter and you don't want to put any money in there, you don't have to. There are lots of nice things about that. Good luck with your choice.

 

Should I Wait to Sell My Individual Securities? 

“Hi, Dr. Dahle. This is Tom from California. I'm interested in reducing the number of individual securities that I currently have within my portfolio. I have the securities both in tax-protected and taxable accounts. If I eventually plan to sell all of those individual securities before I retire in about six or seven years, my question is, would it be better to sell some of those securities now from my tax-protected account or from my taxable account, assuming that both are the same securities? I'm asking this given the negotiations that is currently going on with Congress regarding long-term capital gains rates. Is it better to go ahead and sell within the taxable account now and lock in the lower level 15% capital gains or should I wait? Thank you.”

All right. Great question. First of all, anytime we're talking about anything going on in Congress, I need to tell you when I'm recording this because I keep getting people emailing me saying, “Hey, this is in the law and you said it wasn't.” Well, it's because I recorded the podcast three weeks before, and they changed what they're talking about in the law. This has been happening every week for the last several months. I'm recording this answer on December 2, even though this podcast doesn't run until December 30. Keep that in mind with questions like this.

As a general rule, I think it's a bad idea to sell securities and incur capital gains taxes before you actually need the money—even if you think tax rates are going to change. Let me explain why. Tax rates might go up. As I record this, they're not going up. Selling last month, out of this concern, would've been a terrible mistake because the tax rates didn't actually change. If you do that, you're guaranteed to be paying taxes now. Whereas if you hold onto it, it's possible that tax rates might actually go lower. They might still be the same. You might be in a lower tax bracket. You might have an opportunity in some other way to get rid of that tax burden. Maybe you decide you're going to give those shares to charity, in which case you won't pay the taxes. Maybe you die and your heirs get the step up in basis of death.

Selling early just because you are worried tax rates might go from 15% to 20% or 20% to 25%, I think is probably a mistake. I wouldn't do that on that concern. Now, a lot of people have individual securities in their portfolio and they are concerned about them because now they've kind of become a little more financially literate, and they realize maybe that wasn't the best way. Maybe they should have invested in stocks using index funds, which is what I typically recommend. But they now have these legacy holdings in their taxable account. They have these low basis shares of individual stocks in their taxable account and to sell those would cost them a lot of money in taxes. Whereas if they held onto them, again, maybe they could donate them to charity. Maybe they could get the step up in basis of death. If nothing else, at least they can defer paying the taxes on those securities.

And so, then you've got a careful balancing act of lack of diversification with the tax consequences. I then recommend you go through the legacy security algorithm, if you will. If you've got losses, use up your losses to get rid of these portfolio holdings that you don't want. Obviously, don't reinvest the dividends if you don't really want more of this. You can give them to charity, if you give to charity. You can build your portfolio around a few of those stocks. If they're large-cap stocks, maybe you hold a little less money in large-cap index funds, if it's going to cost you a lot. You have to make some individual decisions there about what you do with those legacy securities.

Inside a retirement account, you can do whatever you want. There are no tax consequences to selling those securities. If you don't want them, sell them. If you decide you want to have an index fund in your Roth IRA, and you've got a bunch of Tesla and Facebook stock, well, sell the Facebook stock and buy the index fund. No cost there whatsoever. These days, you probably don't even have commissions you have to pay and there are no tax consequences whatsoever.

I hope that's helpful, but when you start seeing Congress talking about a tax bill, I wouldn't panic and start selling all your individual stocks, thinking you are tax-gain harvesting. You'll probably regret it.

More Information Here:

2022 Tax Brackets — How They Actually Work

5 Options for Legacy Holdings in Your Taxable Account

 

The Three-Fund Portfolio 

“Hi Jim, I had a question regarding the three-fund portfolio and specifically about its diversity. If I'm looking to get international stock exposure, I look at something like VXUS—Vanguard Total International Stock Index Fund, not including the US. I plotted that out on the Vanguard website, and it looks pretty similar to something like the S&P 500. And I was wondering, am I missing something? If the purpose of getting the three-fund portfolio is to have the diversity of US and international stocks, then shouldn't these two funds perform differently? But from my untrained eye, what I'm looking at, they look to mirror each other pretty closely. So that was my question. If you could comment on that, I would really appreciate it. Thanks for all you do, and I look forward to your response.”

For those who aren't aware, the three-fund portfolio generally consists of three asset classes. Usually, you get those asset classes through index funds—three index funds, one in each of these asset classes. The first asset class is US stocks, and typically, you'll own a total stock market index fund. The second asset class is international stocks, and you'll typically own a total international stock market index fund. And the third asset class is US bonds, which you'll usually own through a total bond market index fund.

That's the three-fund portfolio. Taylor Larimore of Bogleheads fame is perhaps the biggest proponent. He wrote a book called The Three-Fund Portfolio. You can read all about it and why he thinks it's the cat’s meow. I don't think it's a bad portfolio. I have it on my list of “150 Portfolios Better Than Yours.” If you've ever seen that blog post on the website, it's actually about 200 portfolios on it right now, but I left the title the same. The portfolio has a few downsides, though. Like any portfolio, it can be criticized. For example, it's dominated by large-cap stocks, both US and international. Large-cap stocks account for most of the return of a total stock market index fund. Likewise, large-cap stocks account for most of the return of a total international stock market index fund. Now, the correlation between US and international stocks is not perfect. There is a lower correlation, which is what you want. When you're adding asset classes to your portfolio, you want both high returns, which you typically get from stocks, as well as low correlation with the rest of your portfolio. The lower, the better. Ideally a correlation of zero.

Now, international stocks and US stocks do not have a correlation of zero. They never have. The correlation, however, is less than one. That does provide a benefit to your portfolio. The downside in recent years—and by recent years, I'm talking about the last 20—is that correlation between the two has been gradually rising. So, of course, with higher correlation, when one goes down, the other can go down as well. You've probably noticed that. And that's what you're noticing when you look at any recent chart—the correlation between international stocks and US stocks is much higher than the correlation between US stocks and US bonds, for instance. We certainly felt that in 2008, when everything went down. Every risky stock or every risky asset class went down. Real estate went down, small-value stocks went down, large-cap stocks went down, everything went down. Unless it was pretty safe bonds, it went down. That's the rising correlation between asset classes. And it is a concern, but it's not one-to-one. It is not a correlation of one. There's still a benefit in having international stocks. I still own international stocks.

Here's the way I look at it. If there is a diversification benefit there, well, I'm going to get it. If there isn't and they're going to perform just like my US stocks, well, what's the big deal? There's not a huge downside. It only costs slightly more to have international stocks. Yes, you're taking on a little bit more risk there, but you're also getting a little lower price-to-earnings ratio when you buy international stocks. US stocks have pounded international stocks over the last decade or so. But that pendulum swings back and forth. If you look at any sort of long-term graph, there are times when international stocks do better for years and years. And there are times when US stocks do better for years and years.

Lately, growth stocks have done very well over the last decade. And when the pendulum swings back to value stocks doing better, you'll notice that international stocks tend to do better because a lot more international stocks are value stocks. And a lot more of the US stock market is dominated by growth stocks. Keep all that in mind. I think international stocks are an asset class worth including in your portfolio. I recommend you continue to hold them. But is it crazy not to have them? I suppose it's not crazy. You could have a two-fund portfolio and probably do just fine if you funded adequately.

But keep in mind that a lot of people are thinking about skipping out on international stocks these days. They're just performance chasing. They're looking at it going, “Well, US stocks have beat international stocks for the last 10 years, so they must keep doing that going forward.” They skip them and then maybe international stocks pound US stocks over the next decade, and they miss out on that. So, pick something reasonable, and stick with it in the long term. And 10 years is not the long term.

More Information Here: 

Best Investment Portfolios — 150 Portfolios Better Than Yours 

 

Using Losses to Offset Taxable Income

“I'm at the beginning of trying to develop a medical device. And at this point, I've only invested $2,000. It seems likely that the ultimate investment will be at least five figures. And the potential for loss on investment seems high. Do you see any pathway to using those losses to offset my taxable income? At this point, the fledgling device company is not incorporated in any way.”

Well, here's how it works. Any new business you start can generate a loss for three of the first five years, and that offsets your ordinary income. You just put it on Schedule C. If this is a sole proprietorship, it goes on Schedule C and that'll flow through to your 1040.

Now, if you keep losing money, year after year after year, you're at risk for the IRS reclassifying your business activities as a hobby—at which point, those losses are no longer deductible.

If you're starting a new business, you really need to figure out a way to make a profit in two of those first five years. If you're not doing that, maybe it's just your hobby. It's not really a business. You're not really trying hard enough to make money.

But the truth is all those business losses, if you're running a business, yeah, they're totally deductible. They offset your ordinary income. And that's one of the wonderful things about being in business. Hopefully, you actually make money eventually, but sometimes that doesn't happen and that's why there are bankruptcy protections. That's why you get to deduct your losses.

If you recall, when President Trump's taxes finally leaked out, it looked like he basically hadn't paid anything in taxes. And the reason why is because he had a bunch of businesses that lost a lot of money and that offsets your ordinary income. And if you really lose more than your ordinary income, you can carry those losses forward for years and years until they're used up.

 

How Many Mortgages Can You Deduct?

“Hi, Dr. Dahle. I love your podcast. I am a semi-retired physician who brings in about $220,000 a year. I have a net worth of about $3.5 million. My question is about a potential third mortgage period. We have two homes with two mortgages. One has a balance of $384,000 at 2.875%. It matures in 2050. The other has a balance of $116,000 at 3.375%. It matures in six years in 2027.

We're looking at a potential third beachfront condo, which would probably cost around $1 million. And I'm wondering what I should do regarding a potential third mortgage. The two homes we already own are worth between $1.2 and $1.3 million.

I'm considering either paying one of those mortgages off to create a mortgage on the beachfront home, which would allow it to be deductible since you can't deduct three mortgages, or possibly paying cash for the new purchase. So, I'm wondering about your thoughts on that. I appreciate you.”

You can only deduct the interest on two mortgages. If you buy a second home, you can deduct the interest on that mortgage. If you buy a third home, no such luck. So, I think that sounds like what you're most concerned about. However, before we get into that, I think we ought to talk about the elephant in the room here. You've got a net worth of about $3 million already. Almost half of that is in real estate. You're talking about adding another million dollars in real estate and this isn't a real estate investment. This is actually real estate that you are living in. This is a consumption item. It feels to me like too much house for your net worth quite honestly. I would revisit the entire situation and decide if that's really what you want, if you can really afford it. The other thing to consider is, do you really want three homes?

Maybe that's not a concern for you. I have no idea. But I think you have to first revisit that decision of getting another home. I don't really like seeing people going into retirement with much debt anyway, although obviously, a great case for low-interest debt can be made right now, especially with inflation more than most mortgages are. But I don't like it because I think it puts significant cash flow stress on you during retirement. I don't like seeing people dealing with that.

But if you decide that you're OK with that and you decide you're OK with this third home now, then yeah, I think you ought at least to get this big fat mortgage that you're going to have on it to be deductible. That would mean paying off the smallest mortgage. You pay off that one, then you only have two mortgages and you can deduct the interest for this mortgage on the beachfront property. That's probably wise to do. But I think the main decision you've got is to look at where your net worth is at, how much house is too much house for your net worth, and decide on that question first. Because I think that's a much bigger question than exactly how you finance or pay for those houses.

 

Financial Literacy 

“Hi, Dr. Dahle. This is Anna. I'm a long-time listener. I actually have a non-financial question for you today, I was hoping you'd be willing to answer. Clearly in your development, you've become a great teacher and speaker, especially for those of us who consider themselves introverts. I was wondering if you have any pearls for teaching and public speaking, especially on the topic of financial literacy. Thanks again for everything you do.”

I can totally relate to you because I am also an introvert. The best way to figure out if you're an introvert or extrovert is how you recharge. If you recharge by getting away from people and being by yourself for a little bit, you're probably an introvert. If you recharge by being around people and being gregarious and social and talking to people then you're probably an extrovert. A lot of us, especially a lot of us in medicine, are natural introverts. This isn't unusual at all. We've just overcome it enough that we can function in society, that we can do our jobs as physicians—which is a very social job—that we can do our jobs as public speakers or presenters.

It's something you have to train yourself to do. And truthfully, the more you do it, the easier it gets. You just get used to being in front of people and talking, and I'm not sure what else can be done there other than just doing it a lot. There are actually clubs, I think probably the best known one is called Toastmasters, where they literally give speeches in the club and everyone gets their turn and gets up, speaks and gets used to doing it.

I'm trying to encourage more doctors to speak about financial literacy. We give out an award every year. It's a $1,000 cash reward to the financial educator of the year. If you go to the Financial Educator Award under the “WCI Plus!” drop-down menu on whitecoatinvestor.com, you can find a set of slides that I have made to assist you with your presentation. I want you to give these presentations in your hospitals and medical centers and county medical societies and residencies, whatever, because I can't go out and give all the talks. And there are some people that can only be reached in that format. I very much want to encourage you to do this. But here's the secret. Here's why you should be so encouraged. If you listen to this podcast, you know more about finances than 95% of your colleagues. You don't believe me now, I know, but it is true. After you get done giving your talk, whatever it is, you will be gobsmacked by how stupid the questions you get are. Things like, “Now which ones are tax-free and which are ones that are tax-deferred? Was it the Roth one?”

These are the sorts of questions your colleagues usually ask after your presentations. I occasionally get more complex questions, but they're from regular listeners. They're from people who are already listening to this podcast. They ask me some bizarre tax-loss harvesting question. Those aren't the ones you're getting from residents. Those aren't the ones you're getting from your main colleagues. And besides, just like anything else, like in medicine, if you don't know the answer, you just say “I don't know. I'll find the answer and get back to you.” And that's perfectly fine. Go home that evening, shoot me an email. I'll help you find the answer, and you can go give them the right answer tomorrow. No big deal. You don't have to know everything in order to teach some really useful stuff to your colleagues.

Thank you for wanting to do this. Thank you for actually doing this. I assure you, you can get over your introvertedness and give effective talks, even on financial literacy. And I hope you do so. Thanks for what you're doing for your colleagues. I know the people you touch, that it will dramatically affect their life and really help them to have better careers, better marriages, better lives.

 

Dr. Latifat Akintade — WCICON22 Presenter 

Our guest today is Dr. Latifat Akintade, early-career GI doctor, as well as the brains behind moneyfitmd.com, where she podcasts and blogs. She has an online course. She does some coaching there, as well. I was asking her which one's the main gig and which one's the side gig. And she assures me that she loves them all equally.

You're going to be a speaker at WCICON22, the Physician Wellness and Financial Literacy Conference, in sunny Phoenix next February 9-12. We're looking forward to having you there in person and to doing a great presentation. Your presentation is going to be called “How to Be a Cashflow Boss: A Problem-Based Learning Approach.” Tell us what people are going to learn in that presentation.

“Here's the deal. I think everyone in your audience, everyone that has listened to the podcast, everyone that has read the blog, they all want to have money. But the thing is, everyone's like, ‘How can I have money?' There are all those rules about money. ‘Yeah, yeah. Budget. Yeah, yeah. Invest.' If it was that easy, none of us would have the gigs that we're doing right now. But the bottom line is there are issues on why people are not succeeding. And sometimes, it's about math. And other times, it's not about the math. And I think that when you have people on the podcast or you have doctors hearing about other doctors doing things, it's like, ‘Well, it's great for them, but it's not possible for me. I'm a pediatrician. I'm a primary care doctor. I'm a single person.' There are all these extra things that we think are the reason why we should not succeed, when in fact those are the reasons why we will succeed.

With the presentation at the conference, I'm going to be highlighting some regular humans like myself and other women—and a lot of my clients are women—that are doing the stuff, that have come from wherever they are and talking about what we actually did to help them overcome the challenges that they were having when it comes to money so they can finally start cash flowing. And remember when you cash flow, what do you do? That's the seed money that you can plant into whatever trees you want to plant and grow that money.”

It's so true, though. Personal finance, it's personal and finance. But the finance part, the math part is probably only 20% of it. The 80% is the personal, the behavior aspect of it. And until you get the behavior right, it's pretty hard to win at the math part. It's like debt. Lots of people struggle with debt, and it's not because they can't do math. The math it takes to understand debt and how it works and how to pay it off is fourth grade math. It's not complicated math by any means. It's hardly calculus. And that's why just giving somebody money and paying off their debt doesn't work. If the behavior doesn't change, it doesn't fix the problem.

What techniques have you used to help your coaching clients, to help people you've spoken to, to align their behavior with their values?

“When it comes to behavior, I totally believe that our behaviors are also motivated by our thoughts and our emotions. For example, I want to have money, Jim. However, I work a lot. I'm an emergency medicine doc. I'm working in a freaking pandemic. I'm overworked. I'm stressed out. I don't have a nanny. I probably hate my life. So, what am I going to do? I just want to feel better. So, how am I going to feel better? Hey, I'm going to go shopping. Not because I love shopping, but because it just makes me feel good. Yes, I get the behavior, which is stop spending, whatever, whatever. But the bottom line is, if you don't address the underlying issue, if you don't address the underlying emotional stuff, if you don't address the underlying mindset stuff, the behavior is never going to change. The behavior is important. And yes, it's 80%, but it's behavior and the thoughts and the ability to manage our emotions.

Part of this is really just reminding people of who they truly are. Because if you are a physician—and I know your audience is broad; we have dentists, we have pharmacists and other people—the bottom line is if you are in the healthcare profession, you are incredibly smart, you are badass. However, what happens is, as we go throughout life, as we go throughout our training, there are things that we've learned that actually don't serve us when it comes to money. We've learned that we have to be dependent on someone. We're afraid of losing our income so we're less likely to use our voice. We're thinking that there is this picture of what a physician, what a pharmacist looks like. And we just all have to fit the bill and be monotone walking straight lines.

When we start to understand who we truly are and just cut the crap; when we start to understand the things we've been taught about money—say, growing up—is not necessarily what may be serving us as we go into the future. And then giving people those tools to be able to see that, change that, transform that, then the behavior changes. Then people start to have money. And I cannot tell you how many times I hear people say, ‘I didn't know it was so simple.' I'm like, ‘Yes, it is. It's just the rest of the baggage that's making it look harder and more complicated than it should be.'

I think a lot of people, and even doctors, fall into the same traps that other people fall into. They think they are what they drive. They think they're what they live in. They think they're what they wear. And all those decisions, all those mistakes oftentimes can result in spending money they don't have. Buying things on credit. And what that does is it ends up preventing them from having the time, from having the energy, from having the space and the freedom to really become who they're meant to be and who they really are deep down inside. I think that that's pretty awesome advice.

“And I always remind people that you don't have to wait until the end. You don't have to wait to have all the cash to become who you want to be. You become who you want to be right now, and then the cash happens. Because ultimately most doctors that I work with, it's not like they're greedy. It's not like they're selfish. It's just the fact that there's all this underlying stuff that's going on in the background that nobody's talking about. That is the reason why we're like, ‘We don't have a choice, but to spend. We don't have a choice but to avoid our finances and think that the financial advisors are going to do a great job at it.' But when people empower themselves I think that's how we're going to take medicine back, too, to be honest with you.”

Now you have podcasted before about limiting money beliefs. Can you give us some examples of limiting money beliefs that doctors carry around in their minds?

“Absolutely. I will tell you a couple. One is ‘Money is hard.' And for those that are listening, limiting beliefs is a thought that you've thought about so many times that it feels like it's a fact. Like, of course, it's hard. Actually, it's not. And the way that I tell people to recognize limiting beliefs is if a thought or a belief or a behavior is leading you away from what you're trying to accomplish, that's limiting you. As opposed to one that's empowering by helping you achieve what you want to achieve.

Things like ‘Money is hard. Money is the root of all evil.' I love talking about that. Because I've gone into details to learn about this and remind people, money is not the root of all evil. Obsession with money, cutting people up, doing crazy things, that is the root of evil. Things like ‘Rich people are bad.' And I think a lot of times we don't recognize how deeply this goes, actually. But when you think of people that maybe they're the first in their family to be physicians, maybe they grew up poor, there are lots of thoughts that they may be having underlying how they handle money, because in the back of their mind, people with money don't do good things. Because they have examples in their lives of how bad those people are. Now when they're in this position of having money, potentially what happens is they feel guilty about having it. They feel guilty about spending it. They're maybe hoarding it and not doing anything with it. And we know that when you hoard money, it doesn't actually grow. You may never invite me back to your podcast, but the more you spend, the more money you have, by the way, just FYI. Because spending by itself is completely natural. But the goal is to figure out what to spend on. Spending more on assets, as opposed to liability.

What I do a lot on my platform is helping people almost like brain hack, what they think about stuff, what their natural tendencies are and use that to build wealth. Stuff like ‘Spending is great.' The more you spend, the more you have. Which can then help you find where to spend it so that you can grow your wealth.”

I love a couple of those beliefs. “Money is the root of all evil.” That's not even the correct quote. The correct quote is “The love of money is the root of all evil.”And a lot of people don't realize that.

“The love of money is not. Since we're chatting about this, I literally was like, ‘This makes no sense. How can love of money be a bad thing?' Because in my opinion, love is good, love is patient, love is kind, love is breathable, love is forgiven. How can that be bad when it comes to money? What we really need is to love money, but it's a good kind of love. It's not love that's abusive like when you're not letting your spouse breathe or be themselves or you're manipulative or you're doing everything you can to hoard them and keep them all for yourself. Really, the love of money is not the root of all evil.”

I also see that idea more and more these days. It seems like the rich people are evil or that they got their wealth through doing something immoral, that sort of a thing. And I suppose that would be hard. If you then become rich and you believe rich people are evil, well, how do you reconcile that with you now being rich? You feel evil for sure. I can see why that would cause some problems.

For those who want to learn more about you, they can get more information at moneyfitmd.com or, better yet, come to the Physician Wellness and Financial Literacy conference in Phoenix. You can come virtually. You can come in person. We're going to do all kinds of wellness stuff with it. We have 800-plus people there, between the two options. It's going to be awesome. And the best part is you're going to be able to listen to Dr. Latifat Akintade give her talk on being a money boss, being a cashflow boss, and I'm looking forward to it.

 

Don Wenner — WCICON22 Presenter 

All right, we've got another guest today. His name is Don Wenner, the CEO of DLP Capital Partners. I know a lot of White Coat Investors have enjoyed working with your company over the last few months and are excited about the funds you've offered. There are lots of changes this year at DLP, including some new funds and some other things going on. Let's talk about some of the changes there. Why don't we start with your two new funds? You've got the DLP Building Communities Fund and then the DLP Preferred Credit Fund. Can you give us some of the highlights on the Building Communities Fund?

“The DLP Building Communities Fund is the first fund of its kind for us in a couple ways. It's our first fund focused exclusively on ground-up development, building communities as the fund is called. What we invest in is only building new communities, new communities that are affordable for the local workforce. And it was really spurred by, number one, the fact that we know the biggest way to impact the workforce affordability crisis here in America is simple. We need to build more housing, and there's just not enough housing being built. And that's what this fund is all about.

Another big reason we launched this fund is we've spent much of the last five or six years doing what this fund is going to do or is doing now, which is building new communities. But I took the risk and the investment personally in investing and building new communities. Building out the leadership team, the expertise, the pipeline of new development before we introduced this opportunity to our investors. We wanted to prove out the strategy ourselves.

And we've now completed a number of these ground-up new communities, both multifamily communities and single-family rental communities prior to launching this fund, which is off and running. We have our first few acquisitions closing over the next few weeks. It's an exciting fund with 13-plus % return target net to investors, our highest return of any of our funds, great tax shelters, and you get to be a part of building new affordable workforce housing communities, which is pretty exciting.”

What kind of an investor should be looking at that fund? Who's that designed for?

“DLP today has five total fund offerings, including the two new funds we are talking about today. And out of our five offerings, this is the fund that generates the highest return. It has equally as most tax-efficient funds as what we call the DLP Housing Fund. If you want the highest returns and you want great tax shelters, this is a fund you should be looking at. The detriment of this fund in comparison to our other funds is this is the only fund that DLP runs that doesn't provide the option of monthly distributions. Because this fund is investing in the development of new communities, we're not generating monthly cash flow like the rest of our funds. If monthly cash flow is most important for this investment for you, this wouldn't be the right investment for you. But if over the next three years, five years, 10 years, you wanted the highest return, especially if you wanted the highest tax adjusted, or after-tax return, this is a fund you would definitely want to look at. I say in the next three, five, 10 years, you don't have to make any long-term commitment in the fund. It's evergreen. You can invest today and redeem out of this fund in Q1 of next year if you wanted to, but you have the ability to be in this fund for many years and grow tax deferred at what's targeted to be north of a 13% return.”

Maybe a little bit less income and certainly less frequent income distributions in exchange for hopefully a higher return and better tax efficiency. Let's talk about the second new fund. This is the DLP Preferred Credit Fund. Tell us about that and maybe distinguish how it differs from the Lending Fund.

“I would say the DLP Lending Fund is DLP's largest and longest standing fund and probably in the White Coat community, probably the most active fund that White Coat members have invested in. This DLP Preferred Credit Fund is a very similar fund to the DLP Lending Fund. What's similar about it is both funds make short-term bridge loans to real estate investors. That's what they both do. They're both evergreen open-ended funds with 90-day liquidity. They're both funds that are designed to produce double-digit monthly distributions, annualized returns distributed monthly net to investors. They both lend money only to full time real estate investors, non-owner occupied loans.

The difference between the two funds. First, the biggest positive is the fund is targeted to generate a 1% higher return than the Lending Fund. So, slightly higher returns than the Lending Fund. The difference in the actual strategy is that the Preferred Credit Fund, the new fund, in addition to doing first-position mortgages will also and often will do second-position or subordinate loans. Those loans are always preferred, meaning they're sitting ahead of significant equity. The negative from a risk side is they're not always in first position. Often, they won't be. The positive in addition to the higher returns is we only make loans out of this fund to the very top-level real estate borrowers that we lend to. And there's always going to be the largest amount of equity invested behind us. To give you an idea, the DLP Lending Fund today has an average borrower who has a $3 million net worth. They've completed more than 20 real estate investments. And on average, there's about $150,000 of equity invested by the borrower behind our loan.

In the DLP Preferred Credit Fund, the average borrower will complete north of a hundred real estate investments, and have a net worth north of $5 million. And on average will be north of $1 million of equity invested behind our loan. We're lending to the best borrowers with significant equity, but sometimes we'll be sitting behind a first-position loan, which could even be the DLP Lending Fund.”

In some ways higher risk, some ways lower risk. Similar type of fund for a similar type of investor, though. People looking for income, not necessarily super tax-efficient, but its entire return is income and does so frequently. Again, very liquid for a private fund.

“Yes, exactly. Double returns distributed monthly. And they both do qualify—the Lending Fund and the Preferred Credit Fund have qualified business income. So, you do get a 20% reduction from your ordinary tax bracket. Not as efficient as real estate owned funds that own real estate, but some tax efficiency to your point.”

Tell us about some of the other things going on. This year you've had a lot going on with the prosperity membership. Tell us about the prosperity membership and the live events that you've been having, how they interact, and what's available as far as special deals for White Coat Investors and so on.

“The prosperity membership is something we launched in earnest a year ago. It was really our intent of impacting what we think to be a pretty big crisis in America, which we call the legacy crisis. But maybe better known by people as the shirt sleeves to shirt sleeves and three generations kind of crisis. And probably most have heard of that concept before. It came from us building really, really deep relationships with the families who invest with us. Now over 1,900 families invested with us, including hundreds of families here, part of White Coat. And as much as investors love our investment vehicles and the returns we generate, obviously, that's only one piece of their investment picture and their life.

The prosperity membership, we call it Prosperity Family Wealth & Legacy Membership. And really wealth is probably the smallest component of what we focus on, but we wanted to really help make an impact on avoiding that shirt sleeves to shirt sleeves and three generations, helping strengthen the family, which I think is a big part of why that crisis exists. A lot of successful professionals and business owners spend so much time building and creating wealth that they miss out on certainly some of the needed planning, such as estate and tax planning that's necessary, which we certainly address. But they miss out on really first figuring out why they created the wealth, what impact they want to make in the wealth, how they want to affect it and how they want that wealth to work within their family, what they want it to accomplish for their kids, for their grandkids, for the ministries they are passionate about, what kind of impact they want to leave on the world.

We focus on things like living and leaving a legacy. We focus on going from success to significance. We focus on introducing things like running family meetings, helping educate and guide your children. I now have three kids. I adopted a baby boy a few weeks ago, which is pretty cool. For my kids, I want to be able to give them enough money to do anything but not enough money to do nothing. I think it's a great philosophy. And it starts with education. This is a membership about education. We provide a lot of really cool tools and education and resources to our members. And then we also bring in a lot of incredible experts. We just did our first ever virtual event a couple days ago. We brought in guys like Lloyd Reeb, who runs an organization called Halftime Institute, which I highly recommend, from a famous book called Halftime by Bob Buford.

We brought in fitness and health experts like David Sinclair who's the leader in longevity. We brought in best-selling authors like Michael Clinton of Roar and entertainers like mentalists. And just a lot of fun and education around what we call the eight Fs of life—Faith, Family, Friends, Freedom, Fun, Fulfillment, Fitness, and Finance. The really cool thing with all that, it sounds like I gave a really big sales pitch. And I'm about to drop a really big expense. The really cool thing for White Coat Investors is we provide all of this to White Coat Investors at no cost. It's really our focus on helping to make a positive impact and bring value. In addition to a lot of things we do virtually and a lot of tools and education we provide, we host these large onsite events. Our next one is going to be March 17-20 in beautiful Ponte Vedra Beach, Florida, which is about 20 minutes north of where I'm talking to you from right now in northeast Florida, near Jacksonville. It's going to be a really, really incredible event and we'd love many of the White Coat community to come join us and have a lot of fun. You will be in the 70s weather in March, that’s always nice. Be inspired, be motivated, work on our families, work on ourselves, and our wealth.”

Awesome. And now the membership is free. The live events now, do you have an additional charge?

“For example, at our March event, our budget right now is $3,100 per person that comes to the event. That's what it costs us to host the event. The cost to prosperity members is $995. Really, we're still paying money for people to come and improve themselves. It's actually still a cost to us, but yes, we are asking for our prosperity members to subsidize a part of the cost. But we're still committing a significant amount of resources to really provide additional value to the families who invest with us and are part of our community.”

Now, the current minimum for your funds is $200,000, but that can be spread across all five of the funds, if you want. Correct?

“I’ll just caveat that if you were to go on our website or talk to our sales team per se—or we call them investor success management team—and you weren't a White Coat Investor, our minimum is $500,000. For White Coat, we have reduced the minimum to $200,000. And yes, you can invest in any of our funds at the reduced minimum.”

Well, I'm looking forward to having you out to WCICON22 out in sunny Phoenix in February. You'll be given a lunchtime talk there. What can people expect to hear from you there?

“That's a good question. I'm still finalizing the kind of talk, but what I'm leaning toward today is a talk actually that I've only given one time about intentionality and something I think is at the starting point of really having a life of significance. It’s the intentionality we approach, not just our business or our careers with, but all areas of our life.”

Well, I'm looking forward to it. It's wonderful to have you back on the podcast. For those who are looking for more information, they can find that at whitecoatinvestor.com/dlp and learn more about their funds as well as the prosperity membership.

 

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at drdisabilityquotes.com today by email  or by calling (973) 771-9100.

 

Course Sale

Don't forget about our course sale! This goes through January 3. If you buy any of our big three online courses—Financial Wellness, Fire Your Financial Advisor with eight hours of wellness material so you can use your CME dollars to buy it, or CFE 2021—we're going to throw in the CFE course from 2020, the one recorded in Las Vegas, for free. That is roughly 50 more hours of material absolutely free if you buy one of those courses by January 3. Just go to whitecoatinvestor.teachable.com. It'll show up as a course bundle and you get it all at once.

 

WCICON 2022

Time is almost up to register for The Physician Wellness and Financial Literacy Conference. The conference is in Phoenix on February 9-12, 2022. We will, of course, have incredible speakers and presentations on financial literacy but will also have a big focus on the wellness side of the event. There will be fantastic speakers, presentations, and activities to help revitalize you after what has been a difficult few years for everyone. If you cannot attend the in-person event, we are also offering a virtual component. Get your tickets today!

 

Milestones to Millionaire

#46 – Dual Physician Millionaires

We can learn several lessons from this dual-doctor couple. The first two years they had no savings as they had no financial education. Having a child motivated them to be more intentional about getting their financial lives in place. Fortunately they had physician incomes, so even if you are not perfect in the first few years you still have that income to become financially successful quickly. High income makes it easier. Do what you can to get your income up.



Sponsor: Bob Bhayani at drdisabilityquotes.com

 

Quote of the Day

Our quote today comes from John Montgomery of Bridgeway funds. He said,

“I see two big problems with watching one's investments too closely. First, investors tend to become more nervous. And second, investors tend to chase hot returns.”

While you want to pay attention to your finances, you don't necessarily want to pay too much attention to your finances.

 

Full Transcript

Transcription – WCI – 243

Intro:
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. Here's your host, Dr. Jim Dahle.

Dr. Jim Dahle:
This is White Coat Investor podcast number 243 – Annuities, securities and the three-fund portfolio.

Dr. Jim Dahle:
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.

Dr. Jim Dahle:
Bob 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 drdisabilityquotes.com today. You can email him at [email protected] or you can call (973) 771-9100.

Dr. Jim Dahle:
All right, we're getting to the end of the year. It's been a rough year for a lot of us. Thanks for what you do. There's a reason they pay you as much as they do. It's because your job is hard. And that's why you're probably feeling at least a little bit of burnout if you're like most docs.

Dr. Jim Dahle:
Something like 50% of docs at any given time, feel a little bit burned out. We're doing all we can to help with that, both on the financial side and trying to do more and more on the burnout on the wellness side, as you've noticed as time has gone on. Watch for announcements in January to hear more about that.

Dr. Jim Dahle:
But given that we're at the end of the year, keep in mind that this is kind of the time to take assessment of how you did this year. I ran a republished post on the 19th of December that you can find on the blog. If you go to whitecoatinvestor.com/end-of-year-financial-checklist, it's an end of year financial checklist, and you can run through that and make sure you did everything you need to do at the end of the year.

Dr. Jim Dahle:
It's got everything on there from completing your 2021 backdoor Roth IRA, plus minus a mega backdoor Roth IRA and Roth conversions. Making sure you maxed out your 401(k)s and HSAs and 529s ABLE accounts if you have a disabled kid. Using up your flexible spending account, making sure you have insurance in place. Giving to charity before the end of the year, if that's something you're interested in doing.

Dr. Jim Dahle:
And a number of other things on that list to make sure you do once a year. It might be just calculating your savings rate or your net worth, it might be checking your annual credit reports. But check that post out, make sure you've accomplished what you need to for 2021.

Dr. Jim Dahle:
A couple of things, housekeeping items. If you are coming to WCI con, make sure you register for your rooms ASAP. When that block is gone, it's gone. And it costs more outside of that block. Now, as I record this and we're recording this at the beginning of December, if there is room left in the block, but at a certain point, even if we don't sell all the rooms in the block, the hotel takes them back and sells them to other people. So, make sure if you're coming to the conference that you have registered.

Dr. Jim Dahle:
If you still want to come to the conference, you can. We've actually been able to extend the registration deadline up until January 24th for those coming in person. And the reason why we have to cut it off there is because we got to finalize the food. This thing starts on February 9th and it just takes the hotel a while to get ready to feed hundreds of people. And so, that's when we got to cut it off for in person registration. But we're able to extend it that far anyway.

Dr. Jim Dahle:
For the virtual registration, you can register halfway through the event if you want. And we encourage you to do so. Even if you miss some stuff, you get it all. we package it into a course and give you that course for free as part of your registration. You'll still get all of the content there by doing this.

Dr. Jim Dahle:
We have a course sale going on right now, I told you about it last week. But this goes through January 3rd. Basically, if you buy our Financial Wellness course, our CFE 2021 course, or the Fire Your Financial Advisor course, these are our three big courses. If you buy any one of those, we're going to give you the CFE course from Las Vegas absolutely for free. Another 50 hours of material in addition to those courses that you buy.

Dr. Jim Dahle:
A really great offer. We've been running it since December 24th. It's going to run through January 3rd at midnight mountain time. Great offer. The link will be in the show notes. You can go to whitecoatinvestor.teachable.com and get it as well. It'll show up as a course bundle there.

Dr. Jim Dahle:
All right, let's get into some questions. We're going to be answering a number of questions from you guys today. I've got a couple of special guests we'll talk to for a few minutes in between those questions. But let's start with this question about deferred annuities from Tom.

Tom:
Hi, Dr. Dahle. This is Tom again from California. I have another question on the wisdom of deferred annuities specifically in today's low interest rate environments as a hedge against longevity risk.

Tom:
My question is I read a strategy where one would estimate what their total expenditures in today's dollars would be during retirement and to subtract out the social security benefit and their pension benefits. And then whatever is left to seek to purchase a deferred annuity beginning at age 80 or 85.

Tom:
I would love to hear if you think this is a strategy that I should consider. And again, particularly in the case of the low interest rates, if this is something that is wise to do at this time or not. Thanks.

Dr. Jim Dahle:
All right, let's talk for a minute about deferred annuities. Remember what annuity is, right? This is a contract with an insurance company that you give them a lump sum of money and they give you some sort of guaranteed income stream guaranteed by the insurance company. Now that's often backed by the state insurance guarantee association as well. But at the end of the day, it's essentially backed by an insurance company.

Dr. Jim Dahle:
Now the easiest annuity to understand is an immediate annuity. This is when you give the insurance company a lump sum of money, say, you give them $100,000 now and they give you a guaranteed stream of income for the rest of your life, say $500 a month for the rest of your life. And if you die next month, well, you lost your $100,000. If you die at age 120, they got to pay you the whole time.

Dr. Jim Dahle:
And so, its nice that way, it's like social security, it'll keep paying as long as you're alive. And there is some data out there suggesting annuitants actually live longer. Now whether that's selection bias or not, it is a little hard to say. But certainly, what it does is it keeps you running out of money.

Dr. Jim Dahle:
The idea behind a deferred annuity is that it does that same thing, but on a much bigger scale. It really can sometimes be called longevity insurance because basically you give them the lump sum now, but it doesn't start paying out for a long time.

Dr. Jim Dahle:
For example, you might give them a lump sum at age 60, and it doesn't even start paying until age 80. And because a lot of those people will die between 60 and 80 and because people won't live that long after 80, it pays a lot more than an immediate annuity that you bought at 60. And so, if you make it to 80, it starts paying you quite a bit of money every month until you die. It functions as insurance. It keeps you from running out of money.

Dr. Jim Dahle:
If this is at all a concern to you, then this is a good thing to do with the small percentage of your portfolio to provide that insurance. If you are like some people and you keep working for a number of years after financial independence, you probably have so much money that you don't need to do things like buy immediate annuities or deferred annuities.

Dr. Jim Dahle:
If you're right on the edge and you're thinking, “Well, I may not be leaving a whole lot to my heirs because I'm going to need that money”, these are more the people that annuities make sense for. Because with an annuity, maybe you can spend more than 4%, at least in those first few years, most of these aren't indexed to inflation, because you have the guarantee that you're not going to run out. Don't think of an annuity like these as investments, think of them as a method for spending your money in retirement.

Dr. Jim Dahle:
And so, yes, I think immediate annuities or even deferred annuities can be a part of your retirement spending plan. You have to look at the overall package, what you want to spend, what resources you have and in a lot of times it can make sense to annuitize some portion of that money. I probably would never annuitize all of it but it could make sense for some people to annuitize as much as half of it.

Dr. Jim Dahle:
The strategy I think you're referring to is simply covering all of your basic needs, all of your fixed spending with fixed sources of income, right? Like social security, pensions annuities. You cover all your basic living expenses with those guaranteed sources of income. And then you use the rest of your nest egg for your variable spending.

Dr. Jim Dahle:
If it does really well, you go on more vacations, you give more to your favorite charities or to your favorite grandkids or whatever. And that's great. But if that money dries up, if the markets do poorly, at least you have your basic living expenses covered. And that's certainly a reasonable way to approach retirement spending, particularly if you're anywhere near the edge of having enough.

Dr. Jim Dahle:
The quote of the day today comes from John Montgomery, Bridgeway funds. He said, “I see two big problems with watching one's investments too closely. First, investors tend to become more nervous. And second, investors tend to chase hot returns”.

Dr. Jim Dahle:
While you want to pay attention to your finances, you don't necessarily want to pay too much attention to your finances.

Dr. Jim Dahle:
All right, let's take a question about variable annuities for kids off the Speak Pipe.

Speaker:
Dr. Dahle, thanks for all that you do. Reading your book had a great positive impact on my financial literacy, and I've since read many other books that you recommend on your website.

Speaker:
My question comes from one of these books, which recommends starting a variable annuity as a retirement plan for my kid who is five years old. The advantage of starting such plans seems to be that the taxes will be deferred, the kid doesn't have to have an income and it has a 10% penalty withdrawal. So, it's a deterrent for early withdrawal for the kid in the future. And it doesn't impact the college financial aid eligibility.

Speaker:
I do understand that disadvantages include higher cost, but starting probably lower cost annuities, such as the one with Fidelity, seems like a good option. I know that you don't think very highly of annuity so I wanted to have your opinion. Should I start something like that? Or should I rather start a taxable account for my kid? Thank you.

Dr. Jim Dahle:
Great question. And congratulations on your success and becoming financially literate. When you get to the point where you're starting to worry about your kids you know you've really succeeded. The book he's referring to is called “Make Your Kid a Millionaire”. And this is by Kevin McKinley. I think it's a great book. It's subtitled “11 Easy Ways Anyone Can Secure a Child's Financial Future”.

Dr. Jim Dahle:
Another good one on similar topics is called “Silver Spoon Kids,” by Eileen and Jon Gallo, I also highly recommend it. But this one by Kevin McKinley is very nuts and bolts, very practical. And one of the chapters talks about saving for your kids’ retirement using a variable annuity.

Dr. Jim Dahle:
And the reason this works is because there's a long-time horizon. If you put money in there when they're one year old and they're not going to spend it until they're 65, it gives you 65 years of time for that investment to compound in a tax protected way. Because as investments grow inside an annuity, it’s tax protected, meaning that there's no tax drag on the money.

Dr. Jim Dahle:
And over many decades that can overcome the primary downside of investing inside an annuity. There's two of them really. One is some additional expenses because it's got this insurance wrapper around the investments. And two, when the money comes out, the gains are taxed as ordinary income, not qualified dividends or long-term capital gains.

Dr. Jim Dahle:
It takes a lot of years of tax protected growth to make up for that difference in taxation at the end and the additional fees. But over six decades, it can do that for sure, especially if you have a low-cost variable annuity. And particularly if that person has a significant tax bracket during their life.

Dr. Jim Dahle:
So yeah, that's a reasonable thing to do. However, you got to keep a couple things in mind. One, if they've got earned income, you're way better off using a Roth IRA than a variable annuity. Fees are lower. The tax treatment when it comes out is totally tax free instead of taxable at ordinary income tax rates. If they've got earned income, use a Roth IRA for their retirement.

Dr. Jim Dahle:
If they don't have an earned income, it’s basically a gift from you. And you're allowed to give a kid $15,000 a year. Your spouse is also allowed to give them $15,000 a year. But if you're using some of that up in 529s or UTMA accounts, maybe you don't have anything left to put into a variable annuity. This isn't some extra bucket beyond the gift tax allowances.

Dr. Jim Dahle:
I don't have variable annuities for my kids. My kids basically get three acounts. They've got 529s. They've got Roth IRAs for any money they make. And they've got what we call their 20s fund. And this is a UTMA account. This is just a taxable brokerage account for a kid. Now in the first, a little more than $2,000 a year is taxed at their income tax bracket. First half of that is basically not taxed at all, the next half is taxed at about 10%.

Dr. Jim Dahle:
Beyond that the kiddie tax applies and you got to start paying it at your income tax bracket on those investments. It’s still not a terrible thing. And if you invest it tax efficiently, you get $100,000 in there before any of it is really taxed at, at your income tax bracket. So that works really well for that purpose.

Dr. Jim Dahle:
The downside of a UTMA account is that it is not a retirement account. There's no asset protection for it. You can get in some states with an annuity. There are no penalties for taking money out before age 59 and a half like there are with an annuity. And it's that kid's money. When they turn 21 in most states, it's their money. If they want to spend it on cocaine and hookers, they can do that.

Dr. Jim Dahle:
So, you got to be a little bit careful how much you give your kids, right? But we feel like an inheritance is a whole lot more useful in their 20s than it is in their 60s. And so, this is a big part of their inheritance. It’s getting a UTMA account to use in their 20s for things like college grad school that the 529 doesn't cover. Any weddings, honeymoons, cars, house down payments, missions, summer in Europe, whatever. All those expenses you have in your 20s, that you really could have used a lot of money for but instead you were like me donating plasma for grocery money. That's the idea behind our 20s fund, or UTMA.

Dr. Jim Dahle:
Only you can decide whether you want to put more toward retirement through a variable annuity, then you can put it in a Roth IRA, or whether you rather have that money in their 20s or in 529s. It's really a balancing act deciding how you want to leave money for your kids and for what purpose. But that's the way a variable annuity works. If you are going to use it, make sure you get a low cost one. That really matters and Fidelity is usually considered one of the best. Good luck with your decision.

Dr. Jim Dahle:
And then, another nice thing about the variable annuity is you can put as much into it as you want. The gift tax regulations of course apply, but you can put as much money into it as you want. You don't have to fund it in any given year. If this year your money is a little tighter, and you don't want to put any money in there, you don't have to. There's lots of nice things about that.

Dr. Jim Dahle:
All right, we got a guest. Let's bring her on the line. Our guest today on the White Coat Investor podcast is Dr. Latifat Akintade, early career GI doctor, as well as the brains behind moneyfitmd.com, where she podcasts, she blogs. She has an online course. She does some coaching there as well. I was asking her which ones the main gig and which ones the side gig. And she assures me that she loves them both equally. Dr. Latifat Akintade, welcome to the podcast.

Dr. Latifat Akintade:
Thanks for having me, Jim. Funny, I get that question a lot, but asking which one I love most is like asking which child I love most. I like both of them equally. They're both good.

Dr. Jim Dahle:
Awesome. When my kids ask which one's the favorite, I tell them I hate them all equally.

Dr. Latifat Akintade:
I love it.

Dr. Jim Dahle:
Hopefully that helps them stay humble. Sometimes I feel that way about my two jobs. I hate them both equally, but most of the time I love them both equally.

Dr. Jim Dahle:
You're going to be a speaker at WCI con 22, the Physician Wellness and Financial Literacy Conference in sunny Phoenix next February 9th through 12th. We're looking forward to having you there in person and to doing a great presentation. Your presentation is going to be called “How to be a cashflow boss. A problem-based learning approach”. Tell us what people are going to learn in that presentation.

Dr. Latifat Akintade:
Here's the deal. I think everyone in your audience, everyone that has listened to the podcast, everyone that has read the blog. They all want to have money. But the thing is, everyone's like, “How can I have money?” There are all those rules about money. “Yeah, yeah. Budget. Yeah, yeah. Invest”. If it was that easy, none of us would have the gigs that we're doing right now.

Dr. Latifat Akintade:
But the bottom line is there are issues on why people are not succeeding. And sometimes it's about math. And other times it's not about the math. And I think that when you have people on the podcast or you have doctors hearing about other doctors doing things, it's like, “Well, it's great for them, but it's not possible for me. I'm a pediatrician. I'm a primary care doctor. I'm a single person”.

Dr. Latifat Akintade:
There are all these extra things that we think are the reason why we should not succeed, when in fact those are the reasons why we will succeed.

Dr. Latifat Akintade:
With the presentation at the conference, I'm going to be highlighting some regular humans like myself and other women, and a lot of my clients are women, that are doing the stuff, that have come from wherever they are and talking about what we actually did to help them overcome the challenges that they were having when it comes to money so they can finally start cash flowing. And remember when you cash flow, what do you do? That's the seed money that you can plant into whatever trees you want to plant and grow that money.

Dr. Jim Dahle:
Awesome. It's so true though. Personal finance, it's personal and finance. But the finance part, the math part is probably only 20% of it. The 80% is the personal, the behavior aspect of it. And until you get the behavior right, it's pretty hard to win at the math part.

Dr. Jim Dahle:
It's like debt. Lots of people struggle with debt and it's not because they can't do math. The math it takes to understand debt and how it works and how to pay it off is fourth grade math, it's not complicated math by any means. It's hardly calculus. And that's why just giving somebody money and paying off their debt doesn't work. If the behavior doesn't change, it doesn't fix the problem.

Dr. Jim Dahle:
What techniques have you used to help your coaching clients, to help people you've spoken to, to align their behavior with their values?

Dr. Latifat Akintade:
Absolutely. When it comes to behavior, I totally believe that our behaviors are also motivated by our thoughts and our emotions. For example, I want to have money, Jim. However, I work a lot. I'm an emergency medicine doc. I'm working in a freaking pandemic. I'm overworking. I'm stressed out. I don't have a nanny. I probably hate my life.

Dr. Latifat Akintade:
So, what am I going to do? I just want to feel better. So, how am I going to feel better? Hey, I'm going to go shopping. Not because I love shopping, but because it just makes me feel good. Yes, I get the behavior, which is stop spending, whatever, whatever. But the bottom line is, if you don't address the underlying issue, if you don't address the underlying emotional stuff, if you don't address the underlying mindset stuff, the behavior is never going to change. The behavior is important. And yes, it's 80%, but it's behavior and the thoughts and the ability to manage our emotions.

Dr. Latifat Akintade:
Part of this is really just reminding people of who they truly are. Because if you are a physician, and I know your audience is broad, we have dentists, we have pharmacists and other people, but the bottom line is if you are in the healthcare profession, you are incredibly smart, you are badass.

Dr. Latifat Akintade:
However, what happens is, as we go throughout life, as we go throughout our training, there are things that we've learned that actually don't serve us when it comes to money. We've learned that we have to be dependent on someone. We're afraid of losing our income so we're less likely to use our voice. We're thinking that there is this picture of what a physician, what a pharmacist looks like. And we just all have to fit the bill and be monotone and walking straight lines.

Dr. Latifat Akintade:
When we start to understand who we truly are, and just cut the crap. When we start to understand the things we've been taught about money, say growing up, is not necessarily what may be serving us as we go into the future. And then giving people those tools to be able to see that, change that, transform that, then the behavior changes. Then people start to have money.

Dr. Latifat Akintade:
And I cannot tell you how many times I hear people say, “I didn't know it was so simple”. I'm like, “Yes, it is. It's just the rest of the baggage that's making it look harder and more complicated than it should be”.

Dr. Jim Dahle:
Yeah, absolutely. I think a lot of people fall into, and even doctors fall into the same traps that other people fall into. They think they're what they drive. They think they're what they live in. They think they're what they wear. And all those decisions, all those mistakes oftentimes can result in spending money they don't have. Buying things on credit.

Dr. Jim Dahle:
And what that does is it ends up preventing them from having the time, from having the energy, from having the space and the freedom to really become who they're meant to be and who they really are deep down inside. I think that that's pretty awesome advice.

Dr. Latifat Akintade:
Yeah. And I always remind people that you don't have to wait until the end. You don't have to wait to have all the cash to become who you want to be. You become who you want to be right now and then the cash happens. Because ultimately most doctors that I work with, it's not like they're greedy. It's not like they're selfish. It's just the fact that there's all this underlying stuff that's going on in the background that nobody's talking about.

Dr. Latifat Akintade:
That is the reason why we're like, “We don't have a choice, but to spend. We don't have a choice, but to avoid our finances and think that the financial advisors are going to do a great job at it”. But when people empower themselves, honestly, I think that's how we're going to take medicine back too, to be honest with you.

Dr. Jim Dahle:
Yeah. Now you podcasted before about limiting money beliefs. Can you give us some examples of limiting money beliefs that doctors carry around in their minds?

Dr. Latifat Akintade:
Absolutely. I will tell you a couple. One is “Money is hard”. And for those that are listening, limiting beliefs. A belief is a thought that you've thought about so many times that it feels like it's a fact. Like, of course it's hard. Actually, it's not.

Dr. Latifat Akintade:
And the way that I tell people to recognize limiting beliefs is if a thought or a belief or a behavior is leading you away from what you're trying to accomplish, that's limiting you. As opposed to one that's empowering by helping you achieve what you want to achieve.

Dr. Latifat Akintade:
Things like “Money is hard. Money is the root of all evil”. I love talking about that. Because I've gone into details to learn about this and remind people, money is not the root of all evil. Obsession with money, cutting people up, doing crazy things, that is the root of evil. Things that rich people are bad.

Dr. Latifat Akintade:
And I think a lot of times we don't recognize how deeply this goes, actually. But when you think of people that maybe they're the first in their family to be physicians, maybe they grew up poor, there are lots of thoughts that they may be having underlying how they handle money because in the back of their mind, people with money don't do good things. Because they have examples in their lives of how bad those people are.

Dr. Latifat Akintade:
Now when they're in this position of having money, potentially, what happens is they feel guilty about having it. They feel guilty about spending it. They're maybe hoarding it and not doing anything with it.

Dr. Latifat Akintade:
And we know that when you hoard money, it doesn't actually grow. You may never invite me back to your podcast, but the more you spend, the more money you have, by the way, audience, just FYI. Because spending by itself is completely natural. But the goal is to figure out what to spend on. Spending more on assets, as opposed to liability.

Dr. Latifat Akintade:
What I do a lot on my platform is helping people almost like brain hack, what they think about stuff, what their natural tendencies are and use that to build wealth. Stuff like spending is great. The more you spend, the more you have. Which can then help you find where to spend it so that you can grow your wealth.

Dr. Jim Dahle:
Yeah. I love a couple of those beliefs. “Money is the root of all evil”. That's not even the correct quote. The correct quote is “The love of money is the root of all evil”. And a lot of people don't realize that.

Dr. Latifat Akintade:
The love of money is not. Since we're chatting about this, I literally was like, “This makes no sense. How can love of money be a bad thing?” Because in my opinion, love is good, love is patient, love is kind, love is breathable, love is forgiven. How can that be bad when it comes to money?

Dr. Latifat Akintade:
What we really need is to love money, but it's a good kind of love. It's not love that's abusive like when you're not letting your spouse breathe or be themselves or you're manipulative or you're doing everything you can to hoard them and keep them all for yourself.

Dr. Latifat Akintade:
Really, the love of money is not the root of all evil. And we actually went into the Greek of it because my husband is learning Greek. Don't ask me why. But yeah, it's not love the way that we want love. It's the crazy abusive love that none of us want in our life is what is the root of evil.

Dr. Jim Dahle:
I also see that idea more and more these days. It seems like the rich people are evil or that they got their wealth through doing something immoral, that sort of a thing. And I suppose that would be hard. If you then become rich and you believe rich people are evil, well, how do you reconcile that with you now being rich? You feel evil for sure. I can see why that would cause some problems.

Dr. Jim Dahle:
For those who want to learn more about you, they can get more information at moneyfitmd.com or better yet come to the Physician Wellness and Financial Literacy conference in Phoenix. You can still register for that. You can do so at whitecoatinvestor.com/wcicon22. That's right. I’m glad I got Cindy here. Maybe we'll make it whitecoatinvestor.com/conference work too. But I don't think we've done that yet.

Dr. Jim Dahle:
Register for it. You can come virtually. You can come in person. We're going to do all kinds of wellness stuff with it. We have 800 plus people there, between the two options. It's going to be awesome. And the best part is you're going to be able to listen to Dr. Latifat Akintade that will give her talk on being a money boss, being a cashflow boss and I'm looking forward to it. And I hope you are too. Thanks so much for coming on the podcast and for being willing to be a speaker at this year's WCI con.

Dr. Latifat Akintade:
Absolutely. Thanks for having me, and I'm looking forward to meeting everybody. Stop me and say hello at the conference, but you have to register first. So do that and I'll see you then.

Dr. Jim Dahle:
All right. That was great talking to Latifat. Let's get into some more of your questions. Here's one from Tom about individual securities.

Tom:
Hi, Dr. Dahle. This is Tom from California. I'm interested in reducing the number of individual securities that I currently have within my portfolio. I have the securities, both in tax protected and taxable accounts.

Tom:
If I eventually plan to sell all of those individual securities before I retire in about six or seven years, my question is, would it be better to sell some of those securities now from my tax protected account or from my taxable account, assuming that both are the same securities? I'm asking this given the negotiations that is currently going on with Congress regarding long term capital gains rates. Is it better to go ahead and sell within the taxable account now and lock in the lower level 15% capital gains or should I wait? Thank you.

Dr. Jim Dahle:
All right. Great question. First of all, anytime we're talking about anything going on in Congress, I need to tell you when I'm recording this because I keep getting people emailing me saying, “Hey, this is in the law and you said it wasn't”. Well, it's because I recorded the podcast three weeks before and they changed what they're talking about in the law. This has been happening every week for the last several months.

Dr. Jim Dahle:
But I'm recording this answer on December 2nd, even though this podcast doesn't run until December 30th. So, keep that in mind with questions like this.

Dr. Jim Dahle:
As a general rule, I think it's a bad idea to sell securities and incur capital gains taxes before you actually need the money. Even if you think tax rates are going to change. Let me explain why. Well, tax rates might go up. As I record this they're not going up. And so, selling obviously last month, out of this concern, would've been a terrible mistake because the tax rates didn't actually change.

Dr. Jim Dahle:
But if you do that, you're guaranteed to be paying taxes now. Whereas if you hold onto it, it's possible that tax rates might actually go lower. They might still be the same. You might be in a lower tax bracket. You might have an opportunity in some other way to get rid of that tax burden. Maybe you decide you're going to give those shares to charity. In which case you won't pay the taxes. Maybe you die and your heirs get to step up in basis of death.

Dr. Jim Dahle:
Selling early just because you are worried tax rates might go from 15% to 20% or 20% to 25%, I think that's probably a mistake. I wouldn't do that on that concern. Now a lot of people have individual securities in their portfolio and they are concerned about them because now they've kind of become a little more financially literate, and they realize maybe that wasn't the best way. Maybe they should have invested in stocks using index funds, which is what I typically recommend.

Dr. Jim Dahle:
But they now have these legacy holdings in their taxable account. They have these low basis shares of individual stocks in their taxable account and to sell those would cost them a lot of money in taxes. Whereas if they held onto them, again, maybe they could donate them to charity. Maybe they could get the step up in basis of death. If nothing else, at least they can defer paying the taxes on those securities.

Dr. Jim Dahle:
And so, then you've got a careful balancing act of lack of diversification with the tax consequences. I then recommend you go through kind of the legacy security algorithm, if you will. If you've got losses, use up your losses to get rid of these portfolio holdings that you don't want.

Dr. Jim Dahle:
Obviously don't reinvest the dividends if you don't really want more of this. You can give them to charity, if you give charity. You can build your portfolio around a few of those stocks. If they're large cap stocks, maybe you hold a little less money in large cap index funds, if it's going to cost you a lot.

Dr. Jim Dahle:
And so, you got to make some individual decisions there about what you do with those legacy securities. Inside a retirement account, you can do whatever you want. There are no tax consequences to selling those securities. If you don't want them, sell them. If you decide you want to have an index fund in your Roth IRA, and you've got a bunch of Tesla and Facebook stock, well, sell the Facebook stock and buy the index fund. No cost there whatsoever. These days probably don't even have commissions you got to pay and there's no tax consequences whatsoever.

Dr. Jim Dahle:
I hope that's helpful, but when you start seeing Congress talking about a tax bill, I wouldn't panic and start selling all your individual stocks, thinking you are tax-gain harvesting. You'll probably regret it. There's certainly a decent chance that you may enough that I would not do that sort of a thing.

Dr. Jim Dahle:
All right. Our next question comes from Ricardo about the three-fund portfolio.

Ricardo:
Hi Jim, I had a question regarding the three-fund portfolio, and specifically about its diversity. If I'm looking to get international stock exposure, I look at something like VXUS – Vanguard total stock market international fund, not including the US.

Ricardo:
I plotted that out on the Vanguard website and it looks pretty similar to something like the S&P 500. And I was wondering, am I missing something? If the purpose of getting the three-fund portfolio is to have the diversity of US and international stocks, then shouldn't these two funds perform differently?

Ricardo:
But from my untrained eye, what I'm looking at, they look to mirror each other pretty closely. So that was my question. If you could comment on that, I would really appreciate it. Thanks for all you do, and I look forward to your response.

Dr. Jim Dahle:
Okay. Good question. For those who aren't aware, the three-fund portfolio generally consists of three asset classes. Usually, you get those asset classes through index funds, three index funds, one in each of these asset classes.

Dr. Jim Dahle:
The first asset class is US stocks and typically you'll own a total stock market index fund. Second asset class is international stocks and you'll typically own a total international stock market index fund. And the third asset class is US bonds, which you'll usually own through a total bond market index fund.

Dr. Jim Dahle:
That's the three-fund portfolio. Taylor Larimore of Bogleheads fame is perhaps his biggest proponent. He wrote a book called “The Three-Fund Portfolio”. You can read all about it and why he thinks it's the cat’s meow.

Dr. Jim Dahle:
I don't think it's a bad portfolio. I have it on my list of “150 Portfolios Better Than Yours”. If you've ever seen that blog post on the website, it's actually about 200 portfolios on it right now, but I left the title the same.

Dr. Jim Dahle:
The portfolio has a few downsides though. Like any portfolio, it can be criticized. For example, it's dominated by large cap stocks, both US and international. Large cap stocks account for most of the return of a total stock market index fund. Likewise large cap stocks account for most of the return of a total international stock market index fund.

Dr. Jim Dahle:
Now the correlation between US and international stocks is not perfect. There is a lower correlation, which is what you want. When you're adding asset classes to your portfolio, you want both high returns, which you typically get from stocks as well as low correlation with the rest of your portfolio. The lower, the better. Ideally a correlation of zero.

Dr. Jim Dahle:
Now, international stocks and US stocks do not have a correlation of zero. They never have. The correlation, however, is less than one. That does provide a benefit to your portfolio.

Dr. Jim Dahle:
The downside is in recent years, and by recent years, I'm talking about the last 20. That correlation between the two has been gradually rising. And so, of course, with higher correlation, when one goes down, the other can go down as well. And you've probably noticed that. And that's what you're noticing when you look at any recent chart is that the correlation between international stocks and US stocks is much higher than the correlation between US stocks and US bonds, for instance.

Dr. Jim Dahle:
We certainly felt that in 2008, when everything went down. Every risky stock or every risky asset class went down. Real estate went down, small value stocks went down, large cap stocks went down, everything went down. Unless it was pretty safe bonds, it went down.

Dr. Jim Dahle:
That's the rising correlation between asset classes. And it is a concern, but it's not one to one. It is not a correlation of one. There's still a benefit in having international stocks. I still own international stocks.

Dr. Jim Dahle:
Here's the way I look at it. If there is a diversification benefit there, well, I'm going to get it. If there isn't and they're going to perform just like my US stocks, well, what's the big deal? There's not a huge downside. It only costs slightly more to have international stocks. Yes, you're taking on a little bit more risk there, but you're also getting a little lower price to earnings ratio when you buy international stocks.

Dr. Jim Dahle:
A bigger criticism I hear these days is people are like, “Why would I invest in international stocks at all?” Because they put those charts together and they realize US stocks have pounded international stocks over the last decade or so.

Dr. Jim Dahle:
But that pendulum swings back and forth. If you look at any sort of long-term graph, there are times when international stocks do better for years and years. And there are times when US stocks do better for years and years.

Dr. Jim Dahle:
Lately growth stocks have done very well over the last decade. And when the pendulum swings back to value stocks doing better, you'll notice that international stocks tend to do better because a lot more international stocks are value stocks. And a lot more of the US stock market is dominated by growth stocks.

Dr. Jim Dahle:
Keep all that in mind. I think international stocks are an asset class worth including in your portfolio. I recommend you continue to hold them. But is it crazy not to have them? I suppose it's not crazy. You could have a two-fund portfolio and probably do just fine if you funded adequately.

Dr. Jim Dahle:
But keep in mind that a lot of people are thinking about skipping out on international stocks these days, they're just performance chasing. They're looking at it going “Well, US stocks have beat international stocks for the last 10 years, so they must keep doing that going forward”. And so, they skip them and then maybe international stocks pound US stocks over the next decade and they miss out on that.

Dr. Jim Dahle:
So, pick something reasonable, stick with it in the long term. And 10 years is not the long term.

Dr. Jim Dahle:
All right, we've got another guest. Let's bring him on the line. We have a guest back on the podcast here. We last had him in April. This is Don Wenner, the CEO of DLP Capital Partners. Welcome back to the podcast, Don.

Don Wenner:
Thank you, Jim. I appreciate the opportunity to be here.

Dr. Jim Dahle:
Yeah. I know a lot of White Coat Investors have enjoyed working with your company over the last few months and are excited about the funds you've offered. Lots of changes this year at DLP. Some new funds and some other things going on. Let's talk about some of the changes there.

Dr. Jim Dahle:
Why don't we start with your two new funds? You've got the DLP Building Communities Fund and then the DLP Preferred Credit Fund. Can you give us some of the highlights on the Building Communities Fund?

Don Wenner:
I’d love to, thank you. The DLP Building Communities Fund, we launched both of these funds the same day. So, I don't know which one I call the 10th fund or the 11th fund or which one's the 12th fund, but over our last 11, 12 years, we essentially launched a new offering every year. But this is unique, and we launched both these funds the same day.

Don Wenner:
The DLP Building Communities Fund is the first fund of its kind for us in a couple ways. It's our first fund focused exclusively on ground up development, building communities as the fund is called.

Don Wenner:
What we invest in is only building new communities, new communities that are affordable for the local workforce. And it was really spurred by, number one, the fact that we know the biggest way to impact the workforce affordability crisis here in America is simple. We need to build more housing, and there's just not enough housing being built. And that's what this fund is all about.

Don Wenner:
Another big reason we launched this fund is we've spent much of the last five or six years doing what this fund is going to do or is doing now, which is building new communities. But I took the risk and the investment personally in investing and building new communities. Building out the leadership team, the expertise, the pipeline of new development before we introduced this opportunity to our investors. We wanted to prove out the strategy ourselves.

Don Wenner:
And we've now completed a number of these ground up new communities, both multifamily communities and single-family rental communities prior to launching this fund, which is off and running. We have our first few acquisitions closing over the next few weeks. It's exciting fund 13 plus percent return target net to investors, our highest return of any of our funds, great tax shelters, and you get to be a part of building new affordable workforce housing communities, which is pretty exciting.

Dr. Jim Dahle:
What kind of an investor should be looking at that fund? Who's that designed for?

Don Wenner:
DLP today has five total fund offerings, including the two new funds we're talking about today. And out of our five offerings, this is the fund that generates the highest return. It has equally as most tax efficient funds as what we call the DLP Housing Fund. If you want the highest returns and you want great tax shelters, this is a fund you should be looking at.

Don Wenner:
The detriment of this fund in comparison to our other funds is this is the only fund that DLP runs that doesn't provide the option of monthly distributions. Because this fund is investing in the development of new communities, we're not generating monthly cash flow like the rest of our funds.

Don Wenner:
If monthly cash flow is most important for this investment for you, this wouldn't be the right investment for you. But if over the next 3 years, 5 years, 10 years, you wanted the highest return, especially if you wanted the highest tax adjusted, or after-tax return, this is a fund you would definitely want to look at.

Don Wenner:
I say in the next 3, 5, 10 years, you don't have to make any long-term commitment in the fund. It's evergreen. You can invest today and redeem out of this fund in Q1 of next year if you wanted to, but you have the ability to be in this fund for many years and grow tax deferred at what's targeted to be north of a 13% return.

Dr. Jim Dahle:
Maybe a little bit less income and certainly less frequent income distributions in exchange for hopefully a higher return and better tax efficiency.

Don Wenner:
Exactly.

Dr. Jim Dahle:
Okay. Let's talk about the second new fund. This is the DLP Preferred Credit Fund. Tell us about that and maybe distinguish how it differs from the Lending Fund.

Don Wenner:
I’d love to. Yeah, I would say the DLP Lending Fund is DLPs largest and longest standing fund and probably in the White Coat community, probably the most active fund that White Coat members have invested in.

Don Wenner:
This is a very similar fund to the DLP Lending Fund. What's similar about it is both funds make short term bridge loans to real estate investors. That's what they both do. They're both evergreen open-ended funds with 90-day liquidity.

Don Wenner:
They're both funds that are designed to produce double digit monthly distributions, annualized returns distributed monthly net to investors. They both lend money only to full time real estate investors, non owner occupied loans.

Don Wenner:
The difference between the two funds. First, the biggest positive is the fund is targeted to generate a 1% higher return than the Lending Fund. So, slightly higher returns than the Lending Fund.

Don Wenner:
The difference in the actual strategy is that the Preferred Credit Fund, the new fund in addition to doing first position mortgages will also and often will do second position or subordinate loans. Those loans are always preferred, meaning they're sitting ahead of significant equity.

Don Wenner:
The negative from a risk side is they're not always in first position. Often, they won't be. The positive in addition to the higher returns is we only make loans out of this fund to the very top-level real estate borrowers that we lend to. And there's always going to be the largest amount of equity invested behind us.

Don Wenner:
To give you an idea, the DLP Lending Fund today has an average borrower who has a $3 million net worth. They've completed more than 20 real estate investments. And on average, there's about $150,000 of equity invested by the borrower behind our loan.

Don Wenner:
In the DLP Preferred Credit Fund, the average borrower will complete north of a hundred real estate investments, and have a net worth north of $5 million. And on average will be north of $1 million of equity invested behind our loan. We're lending to the best borrowers with significant equity, but sometimes we'll be sitting behind a first position loan, which could even be the DLP Lending Fund.

Dr. Jim Dahle:
In some ways higher risk, some ways lower risk. Similar type of fund for a similar type of investor though. People looking for income, not necessarily super tax efficient, but its entire return is income and does so frequently. Again, very liquid for a private fund.

Don Wenner:
Yes, exactly. Double returns distributed monthly. And they both do qualify – the Lending Fund and the Preferred Credit Fund have qualified business income. So, you do get a 20% reduction from your ordinary tax bracket. Not as efficient as real estate owned funds that own real estate, but some tax efficiency to your point.

Dr. Jim Dahle:
Awesome. Tell us about some of the other things going on. This year you've had a lot going on with the prosperity membership. Tell us about the prosperity membership and the live events that you've been having, how they interact and what's available as far as special deals for White Coat Investors and so on.

Don Wenner:
Yeah, I’d love to. The prosperity membership is something we launched in earnest a year ago. It was really our intent of impacting what we think to be a pretty big crisis in America, which we call the legacy crisis, but maybe better known by people as the shirt sleeves to shirt sleeves and three generations kind of crisis. And probably most have heard of that concept before.

Don Wenner:
It came from us building really, really deep relationships with the families who invest with us. Now over 1,900 families invested with us, including hundreds of families here, part of White Coat. And as much as investors love our investment vehicles and the returns we generate, obviously, that's only one piece of their investment picture and their life.

Don Wenner:
And so, the prosperity membership, we call it Prosperity Family Wealth & Legacy Membership. And really wealth is probably the smallest component of what we focus on, but we wanted to really help make an impact on avoiding that shirt sleeves to shirt sleeves and three generations, helping strengthen the family, which I think is a big part of why that crisis exists.

Don Wenner:
A lot of successful professionals and business owners spend so much time building and creating wealth that they miss out on certainly some of the needed planning, such as estate and tax planning that's necessary, which we certainly address.

Don Wenner:
But they miss out on really first figuring out why they created the wealth, what impact they want to make in the wealth, how they want to affect it and how they want that wealth to work within their family, what they want it to accomplish for their kids, for their grandkids, for the ministries they are passionate about, what kind of impact they want to leave on the world.

Don Wenner:
We focus on things like living and leaving a legacy. We focus on going from success to significance. We focus on introducing things like running family meetings, helping educate and guide your children. I like to say with my kids, I now have three kids. I adopted a baby boy a few weeks ago, which is pretty cool. For my kids, I want to be able to give them enough money to do anything but not enough money to do nothing.

Dr. Jim Dahle:
I have the same philosophy.

Don Wenner:
Exactly. I think it's a great philosophy. And it starts with education. This is a membership about education. We provide a lot of really cool tools and education and resources to our members. And then we also bring in a lot of incredible experts.

Don Wenner:
We just did our first ever virtual event a couple days ago. We brought in guys like Lloyd Reeb, who runs an organization called Halftime Institute, which I highly recommend, from a famous book called “Halftime” by Bob Buford.

Don Wenner:
We brought in fitness and health experts like Davidson Sinclair who's the leader in longevity. We brought in best-selling authors like Michael Clinton of “Roar” and entertainers like mentalists. And just a lot of fun and education around what we call the eight Fs of life – Faith, Family, Friends, Freedom, Fun, Fulfillment, Fitness, and Finance.

Don Wenner:
The really cool thing with all that, it sounds like I gave a really big sales pitch. And I'm about to drop a really big expanse. The really cool thing for White Coat Investors is we provide all of this to White Coat Investors at no cost. It's really our focus on helping to make a positive impact and bring value.

Don Wenner:
In addition to a lot of things we do virtually, and a lot of tools and education we provide, we host these large onsite events. Our next one is going to be March 17th to the 20th in beautiful Ponte Vedra Beach, Florida, which is about 20 minutes north of where I'm talking to you from right now in Northeast Florida, near Jacksonville.

Don Wenner:
It's going to be a really, really incredible event and we'd love many of White Coat community to come join us and have a lot of fun. You will be in the 70s weather in March, that’s always nice. Be inspired, be motivated, work on our families, work on ourselves, and our wealth.

Dr. Jim Dahle:
Awesome. And now the membership is free. The live events now, do you have an additional charge? Correct?

Don Wenner:
For example, at our March event, our budget right now is $3,100 per person that comes to the event. That's what it costs us to host the event. The cost to prosperity members is $995. Really, we're still paying money for people to come and improve themselves.

Don Wenner:
It's actually still a cost to us, but yes, we are asking for our prosperity members to subsidize a part of the cost. But we're still committing a significant amount of resources to really provide additional value to the families who invest with us and are part of our community.

Dr. Jim Dahle:
Now the current minimum for your funds is $200,000 but that can be spread across all five of the funds, if you want. Correct?

Don Wenner:
I’ll just caveat that if you were to go on our website or talk to our sales team per se, or we call them investor success management team, and you weren't a White Coat Investor, our minimum is $500,000.

Don Wenner:
For White Coat, we have reduced the minimum to $200,000. And yes, you can invest in any of our funds at the reduced minimum.

Dr. Jim Dahle:
Cool. Well, I'm looking forward to having you out to WCI con 22 out in sunny Phoenix in February. You'll be given a lunchtime talk there. What can people expect to hear from you there?

Don Wenner:
That's a good question. I'm still finalizing the kind of talk, but what I'm leaning towards today is, talk actually that I've only given one time about intentionality and something I think is at the starting point of really having a life of significance. It’s the intentionality we approach, not just our business or our careers with, but all areas of our life.

Dr. Jim Dahle:
Awesome. Well, I'm looking forward to it. It's wonderful to have you back on the podcast. For those who are looking for more information, they can find that at whitecoatinvestor.com/dlp and learn more about their funds as well as the prosperity membership. Thanks again.

Don Wenner:
Thanks Jim. I appreciate it.

Dr. Jim Dahle:
It’s always great to talk with Don. Our next question comes from my email box. “I'm at the beginning of trying to develop a medical device. And at this point I've only invested $2,000. It seems likely that the ultimate investment will be at least five figures. And the potential for loss on investment seems high. Do you see any pathway to using those losses to offset my taxable income? At this point, the fledgling device company is not incorporated in any way”.

Dr. Jim Dahle:
Well, here's how it works. Any new business you start can generate a loss for three of the first five years, and that offsets your ordinary income. You just put it on schedule C. If this is sole proprietorship, it goes on schedule C and that'll flow through to your 1040.

Dr. Jim Dahle:
Now, if you keep losing money, year after year after year, you're at risk for the IRS reclassifying your business activities as a hobby, at which point, those losses are no longer deductible.

Dr. Jim Dahle:
If you're starting a new business, you really need to figure out a way to make a profit in two of those first five years. If you're not doing that, maybe it's just your hobby. It's not really a business. You're not really trying hard enough to make money.

Dr. Jim Dahle:
But the truth is all those business losses, if you're running a business, yeah, they're totally deductible. They offset your ordinary income. And that's one of the wonderful things about being in business. Now, hopefully you actually make money eventually, but sometimes that doesn't happen and that's why there's bankruptcy protections. That's why you get to deduct your losses.

Dr. Jim Dahle:
If you recall, when president Trump's taxes finally leaked out, it looked like he basically hadn't paid anything in taxes. And the reason why is because he had a bunch of businesses that lost a lot of money and that offsets your ordinary income. And if you really lose more than your ordinary income, you can carry those losses forward for years and years until they're used up.

Dr. Jim Dahle:
All right, the next question comes from Steve on mortgages.

Steve:
Hi, Dr. Dahle. I love your podcast. I am a semi-retired physician who brings in about $220,000 a year. I have a net worth of about $3.5 million. My question is about a potential third mortgage period. We have two homes with two mortgages. One has a balance of $384,000 at 2.875%. It matures in 2050. The other has a balance of $116,000 at 3.375%. It matures in six years in 2027.

Steve:
We're looking at a potential third beachfront condo, which would probably cost around a million dollars. And I'm wondering what I should do regarding a potential third mortgage. The two homes we already own are worth between $1.2 and $1.3 million.

Steve:
I'm considering either paying one of those mortgages off to create a mortgage on the beachfront home, which would allow it to be deductible since you can't deduct three mortgages or possibly paying cash for the new purchase. So, I'm wondering about your thoughts on that. I appreciate you.

Dr. Jim Dahle:
All right. Good question. As you know, as you've discovered, you can only deduct the interest on two mortgages. If you buy a second home, you can deduct the interest on that mortgage. If you buy a third home, no such luck. And so, I think that sounds like what you're most concerned about.

Dr. Jim Dahle:
However, before we get into that, I think we ought to talk about the elephant in the room here. You've got a net worth of about $3 million already. Almost half of that is in real estate. You're talking about adding another million dollars in real estate and this isn't real estate investment. This is actually a real estate that you are living in. This is a consumption item.

Dr. Jim Dahle:
It feels to me like too much house for your net worth quite honestly. I would revisit the entire situation and decide if that's really what you want, if you can really afford it. The other thing to consider is do you really want three homes? We go out and buy a second home, but I don't want to deal with it. The last thing I want to do when I go on vacation is be taking care of a home, whether inside or outside or whatever.

Dr. Jim Dahle:
Maybe that's not a concern for you. I have no idea. But I think you got to first revisit that decision of getting another home. I don't really like seeing people going into retirement with much debt anyway, although obviously, a great case for low interest debt can be made right now, especially with inflation more than most mortgages are. But I don't like it because I think it puts significant cash flow stress on you during retirement. And I don't like seeing people dealing with that.

Dr. Jim Dahle:
But if you decide that you're okay with that and you decide you're okay with this third home now then yeah, I think you ought at least to get this big fat mortgage that you're going to have on it to be deductible. That would mean paying off the smallest one, the $119,000 or whatever it was. You pay off that one, then you've only got two mortgages and you can deduct the interest for this mortgage on the beachfront property. That's probably wise to do.

Dr. Jim Dahle:
But I think the main decision you've got is to look at where your net worth is at, how much house is too house for your net worth and decide on that question first. Because I think that's a much bigger question than exactly how you finance or pay for those houses.

Dr. Jim Dahle:
All right. Our next question comes off the Speak Pipe about financial literacy from Anna.

Anna:
Hi, Dr. Dahle. This is Anna. I'm a long-time listener. I actually have a non-financial question for you today, I was hoping you'd be willing to answer. Clearly in your development, you've become a great teacher and speaker, especially for those of us who consider themselves introverts. I was wondering if you have any pearls for teaching and public speaking, especially on the topic of financial literacy. Thanks again for everything you do.

Dr. Jim Dahle:
Good question. I can totally relate to you because I am also an introvert. The best way to figure out if you're an introvert or extrovert is how you recharge. If you recharge by getting away from people and being by yourself for a little bit, you're probably an introvert. If you recharge by being around people and being gregarious and social and talking to people then you're probably an extrovert.

Dr. Jim Dahle:
A lot of us, especially a lot of us in medicine, are natural introverts. This isn't unusual at all. We've just overcome it enough that we can function in society, that we can do our jobs as physicians, which is a very social job that we can do our jobs as public speakers or presenters.

Dr. Jim Dahle:
But when I'm done at the conference, for example, at WCI con, if I've given a talk that day and I've spent 10 hours talking to other people, I'm pretty drained. I go back to my hotel room, put my feet up and maybe cruise around on the internet or play some little video game or something. That's the sort of way I recharge.

Dr. Jim Dahle:
It's something you have to train yourself to do. And truthfully, the more you do it, the easier it gets. You just get used to being in front of people and talking and I'm not sure what else can be done there other than just doing it a lot.

Dr. Jim Dahle:
Now they're actually clubs. I think probably the best known one is called Toastmasters where they literally give speeches in the club and everyone gets their turn and gets up, speaks and gets used to doing it.

Dr. Jim Dahle:
Now, in the church I grew up in, and still attend, the congregation gives the talks, gives the sermons every month. I've been given talks in front of a hundred people or more since I was 12 years old. It's not unusual at all for me to speak publicly. And so, I got lots of training in that as a kid. It's never been terribly difficult for me to do, but that's just because I started doing it young and I've been doing it my entire life.

Dr. Jim Dahle:
One thing when you're particularly speaking about financial literacy and our big fear when we do this. And I'm trying to encourage more and more doctors to do this. We give out a reward every year, it's a $1,000 cash reward to the financial educator of the year. I actually make some slides. If you go to that financial educator award under the WCI plus drop down menu on whitecoatinvestor.com, you can get those slides and they can help you with your presentation.

Dr. Jim Dahle:
I want you to give these presentations in your hospitals and medical centers and county medical societies and residencies, whatever, because I can't go out and give all the talks. And there are some people that can only be reached in that format. I very much want to encourage you to do this.

Dr. Jim Dahle:
But here's the secret. Here's why you should be so encouraged. If you listen to this podcast, you know more about finances than 95% of your colleagues. You don't believe me now, I know, but it is true. After you get done giving your talk, whatever it is, you will be gobsmacked by how stupid the questions you get are. Things like, “Now which ones are the one you tax free and which ones the one that's tax deferred? Was it the Roth one?”

Dr. Jim Dahle:
These are the sorts of questions your colleagues usually ask after your presentations. I occasionally get more complex questions, but they're from regular listeners. They're from people who are already listening to this podcast. They ask me some bizarre tax loss harvesting question. Those aren't the ones you're getting from residents. Those aren't the ones you're getting from your main colleagues.

Dr. Jim Dahle:
And besides just like anything else, like in medicine, if you don't know the answer, you just say “I don't know. I'll find the answer and get back to you”. And that's perfectly fine. Go home that evening, shoot me an email. I'll help you find the answer and you can go give them the right answer tomorrow. No big deal. You don't have to know everything in order to teach some really useful stuff to your colleagues.

Dr. Jim Dahle:
Thank you for wanting to do this. Thank you for actually doing this. I assure you, you can get over your invertedness and give effective talks, even on financial literacy. And I hope you do so. Thanks for what you're doing for your colleagues. I know the people you touch, that it will dramatically affect their life and really help them to have better careers, better marriages, better lives.

Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani, at drdisabilityquotes.com. He has been a longtime sponsor of the White Coat Investor. One listener sent us this review, “Bob and his team were organized, patient, unerringly professional and honest. I was completely disarmed by his time and care. I'm indebted to Bob's advocacy on my behalf and on behalf of other physicians and to you for recommending him.”

Dr. Jim Dahle:
You can contact Bob by calling (973) 771-9100 or by emailing him at [email protected] or just going by the website at drdisabilityquotes.com to get this important disability insurance in place today.

Dr. Jim Dahle:
Don't forget about our sale. This goes through January 3rd. If you buy any of our big three online courses, that's the Financial Wellness one, that's Fire Your Financial Advisor with eight hours of wellness material so you can use your CME dollars to buy it. Fire Your Financial Advisor is the second one and our CFE 2021 course is the third one. The one we recorded from the virtual conference last March.

Dr. Jim Dahle:
If you buy any of those, we're going to throw in the CFE course from 2020, the one recorded in Las Vegas for free. It's like 50 more hours of material absolutely free if you buy one of those courses by January 3rd. Hey, new year, new you. Let's get financially educated this year. We'll help you out by doing that. Just go to whitecoatinvestor.teachable.com. It'll show up as a course bundle and you get it all at once.

Dr. Jim Dahle:
Don't forget the in-person registration for the conference goes through the 24th. The virtual registration goes through the conference itself. We'd love to see you there. Right now, I think we're approaching close to a thousand people total that will be there between virtual and in person. It's going to be a great conference.

Dr. Jim Dahle:
Thanks to those of you who've left the podcast a five-star review and told your friends about the podcast. Our most recent review is short and sweet from Danny. It was “Thank you. Thank you for delivering the best financial advice. You made a tremendous change on my financial life. Five stars”. Thank you for that review.

Dr. Jim Dahle:
Head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.