Today, our friend Dr. Tyler Scott is joining Dr. Jim Dahle to talk about disability insurance and help answer your questions. Tyler is a licensed dentist turned financial planner and a columnist here at WCI. Tyler is here to preach the message that all docs need disability insurance, and he shares his story of going on disability. Later they talk about HSAs, saving for future home expenses, capital gains taxes, how to clean up a disaster of an investment account, and more.


 

 

You Need Disability Insurance 

Jim Dahle:
Tyler, this is a great opportunity while we have you on here to talk about disability and disability insurance. I mentioned before we started recording, I think we've had the wrong message for the last 12 years at WCI. We spend lots of time getting into the weeds about disability, why one rider should be included and why another rider shouldn't, how much you should have, and exactly what company it comes from. I don't think we've spent enough time telling people they just need something in place. They need disability insurance. This really does happen. Maybe what we ought to start with, Tyler, is let's have you talk a little bit about your personal experience with disability insurance, then disability, and then using disability insurance.

Tyler Scott:
As you said, I started my first professional chapter as a dentist. I graduated from Oregon Health Sciences in Portland in 2012, and my intention was to be a dentist my whole life. I had a disability insurance policy that I bought right after dental school from Principal, and the original benefit was $4,000 a month. I continued to utilize my future benefit increase rider for the first several years as my income started to grow. Eventually, in my early 30s, our family was growing in size, and these increased benefits came with increased premiums. That started to eat up more and more of our free cash flow, and I was an invincible 33-year-old dentist. Nothing could possibly happen to me. I was super healthy, and I wanted to stop giving so much of my money to the money-grubbing insurance companies. So, I stopped utilizing my future benefit increase rider only to find out a couple of years later that, with Principal at least, if you don't exercise that rider for a couple of years, you don't ever get to exercise it again. That wasn't a problem, because there was never going to be an issue. I was going to be a dentist for 30 more years.

Well, fast forward a few years. I'm 37 years old, and suddenly I'm experiencing tremendous and worsening back problems. Some of that is normal for a dentist. We're not the most ergonomic bunch, and some neck and back pain is normal. But this was really bad, and it was worsening rapidly. I drug my feet to get my medical work done. But my good wife, Megan, encouraged me to go take care of myself. Eventually, I saw a provider, and we got imaging and found out that I had a degenerative back problem. I had the lumbar spine of an 84-year-old. It was deemed that I could not perform dentistry safely for myself or to my patients. At 37 years old, I found myself very suddenly filing a claim on my long-term disability insurance policy. I'm happy to talk more about that story and how that unfolds.

But the big picture is that, to be frank, I liked dentistry just fine. I didn't really love it. I picked it, like I think many of us, early in my 20s as a career. I looked around my community. I met other dentists, and they seemed like they had a good life. I didn't know that I was signing up for over $300,000 of student loan debt at 7%. I didn't know that the macroeconomics of dentistry had changed significantly since my peer group had advised me to go into that field. The actual lived experience of being a dentist just wasn't everything that I thought it would be. I was burning out. My lumbar spine matched my cognitive condition in many ways as it related to dentistry. I had started experiencing this during COVID, when the dental clinics were closed. The back pain was bad. During those three months when I didn't go to work, my back pain was a lot better. Turns out, not doing dentistry really helped me not be in as much pain. I was much happier. I was a better husband. I was a more engaged father.

The seed was planted in my mind that maybe dentistry isn't for me forever for a number of reasons. It was really my friends, my anesthesiology friends, my radiology friends, who got me thinking about doing financial planning. They're the ones who told me, “Hey man, you've helped me get my student loans figured out. You've helped me optimize my Backdoor Roth and my 401(k). You've explained that stuff to me in a way that's more clear than my financial planner ever has. You could really have a future in this, particularly given that you lived the life for so long.”

I had been a White Coat reader since I graduated dental school. I had a sort of self-taught basis of knowledge. I used that time during COVID to go back to school. I enrolled at Cal Berkeley in the certified financial planner coursework and I loved it. It filled out a lot of my understanding I had learned from you, Jim, through the years. Then, my goal was to just do financial planning as a hobby, maybe a side hustle, a little extra income with the idea that in time, maybe I could do part-time dentistry and part-time financial planning. I cold-called a bunch of CFPs in my little town in Medford and asked them if I could do free financial plans just for my friends under their supervision, because you need 4,000 hours or 6,000 hours of supervised work to become a CFP. I found someone who said they'd let me do it. I started doing plans for a few people in town and for my buddies in dental school. I just loved it. I absolutely loved it. I had taken my Series 65 exam previous to this so I was legit and just found this passion. That all coincided with the worsening of the back pain. Once I made the successful claim on my disability policy, I took that opportunity to also change careers and to step into something that I feel is a better fit and something that I have absolutely loved these past few years doing.

Jim Dahle:
So. you bought a policy, the typical type we recommend here: an individual policy, specialty specific, own occupation policy, and then basically got a disability that kept you from doing that specialty. But obviously it doesn't keep you from doing any work at all. Now you collect the disability and you're paid for your other work. 

Tyler Scott:
Exactly. Yeah. That is the beauty of an own occupation policy. Once my doctors and the doctors at Principal agreed that I could not perform the acts of clinical dentistry—the root canals and the crowns and the fillings—I started receiving my $7,000 a month check. I don't make as much being a financial planner as I did as a dentist, but that's OK because I get my disability benefits paid to me each month. That helps fill in the gap and gave me this sort of safety net, this opportunity to transition careers.

Jim Dahle:
Do you wish you'd bought more disability insurance?

Tyler Scott:
I really do. One of the mistakes I made is I got cheap with my premiums. I felt the squeeze as a dad with young kids, and Megan wasn't working at the time. Seeing my benefit increase was great, but seeing the premiums increase was really painful. When I stopped utilizing that future benefit increase rider, that ended up being a $2 million mistake. I'm very grateful for the $7,000 a month tax-free that I received from Principal that's adjusted for inflation. If I would have continued to utilize my increase rider, I'd be getting maybe $10,000 or $12,000 a month tax-free. And when I started collecting in my late 30s on a policy that pays out till age 65 and when you account for the adjustment and inflation, I made a $2 million mistake because I didn't want to pay an extra $800 a year in premiums.

Jim Dahle:
I mentioned earlier, we're trying to make sure our messaging is really where it needs to be for all of you out there, all the White Coat Investors. We've done a lot of work on disability insurance in the last year here at The White Coat Investor. We've tried to make sure, No. 1, that we make it as easy as possible for you to get disability insurance. And No. 2, we made sure we got the very best quality folks with the best training selling you those disability insurance policies. We're collecting a little bit more information on you when we refer you out to them, but we're also collecting a lot more information on the work being done on your behalf. That allows us to increase the quality for that.

But as I see the numbers of people buying disability insurance, I'm shocked at how few doctors are doing it because I know the referrals we send from The White Coat Investor are a pretty big deal in the industry. And it's not that many. There are 30,000 docs coming out of residency every year between dentists and physicians and similar docs. I figure probably half of them at least need to be buying an individual disability insurance policy.

With the insight I now have into the industry, that's not happening. It's not even close. There are a lot of people out there who need insurance and who aren't buying insurance. I just want to emphasize: if you're one of those people out there and you don't have a solid plan to rely on your spouse's income or something or you happen to have a particularly good plan through your employer—which most people don't, even if they have an employer-provided disability insurance—and you're just thinking this isn't going to happen to you, that's too big of a risk for you to be taking. The most valuable asset is your ability to turn time into money at a very high rate. You need to insure it.

As part of that, if you're out there and you're living on your disability insurance benefit or you are disabled without disability insurance, I'd like to hear from you. I think it'd be nice to bring a few people on the podcast, whether it's the regular podcast or whether it's the Milestones podcast, to actually point out how frequently this happens. I've met lots of people over the years who have been disabled as doctors. It's not uncommon at all, but I think too few of us actually know somebody that it happened to. If that's you, I'd like to hear from you. You can email us [email protected], and we'll figure out a way you're comfortable with in sharing your story on the podcast or blog.

More information here: 

A Pain in the Butt – My Dental Disability Story

Thoughts on Disability Insurance from a Disabled Doctor

 

Do You Need Disability Insurance If You Are a 2-Doc Household?

med school scholarship sponsor

“Hi, Jim. This is Emil. I'm a radiation oncology physician in the Midwest. I'd like to thank you for all you do. You turn me from a financial illiterate to someone who feels comfortable in about six months. My question pertains to disability insurance. My wife and I are both radiation oncology physicians making about $400,000 a year each. And we have a disability through work up to $5,000 a month. Given that we're both high earners, we wouldn't necessarily need additional disability. But my fear is that given we're starting the family plan and that we typically carpool and spend a lot of time together, that anything that affects one of us could affect both, like a car accident. I was thinking about taking out additional disability insurance, but I was thinking of just doing it for one of us, probably me, given that I'm a man and it would be cheaper. I would like your thoughts on that.

And also, radiation oncology is a specialty that generally does not require any procedures, any use of your hands other than maybe using a computer mouse. I guess my question is, is there really a benefit to me having a specialty specific policy as opposed to just an own occupation? I just can't imagine a scenario where I could work as another type of physician but not a radiation oncologist.”

Jim Dahle:
There are a lot of questions in there with a lot of stuff to talk about. Let's get started. You want to start off, Tyler, trying to answer some of Emil's questions?

Tyler Scott:
First, let me just validate, Emil. I get the hesitation to buy personal own occupation, long-term disability insurance. It's really expensive. But the reason it's so expensive is because it gets used a lot. One in six physicians or dentists will make a claim on their policy during their career. That's a lot of payments being paid out, and insurance companies are not in the business of losing money. So, they charge a lot in premiums. As we just talked about, I'm one of these people. I'm on long-term disability, and I never thought that would be the case for me. The premiums were off-putting. I get it. And I want to validate the impulse to think twice about buying an expensive product. At the same time, as we're talking about, I really want to encourage docs to be thoughtful and intentional about this choice. The default should really be to get it.

Jim Dahle:
It's hard when it's the two-spouse thing. They each make $400,000. Let's not kid ourselves. Most families in America are not going to have trouble living on just one of those $400,000 incomes. If that is your plan for disability, I don't think it's unreasonable. I don't think it is crazy to say, “You know what, I guess it's possible we could both get disabled, but it's probably not very likely.” If you are married to a stay-at-home spouse, if you are single, or many other kinds of other situations, I think that is too much risk to take. If you spend a good chunk of your $800,000 income, of that second income, if you're really actually using it to live, well, you better insure it. If it would be a big deal to cut back to $400,000 based on your lifestyle because you have some really expensive house in the Bay Area, well, maybe that's someone who does need to buy coverage.

I thought it was very interesting that he talks about having adequate coverage being $5,000 a month for each of them. They're living on $800,000, and if they're both disabled in a car wreck, they're now going to live on $120,000. That is a dramatic change. I get that you really only need to insure what you're spending, but there are very few physician families in this country making $800,000 a year who are only spending $120,000. There's not a lot of you folks out there. If you are, you're probably hitting FI very quickly, and you can drop your disability insurance anyway. But they just sound very, very underinsured to me. There's a big problem, though, with those employer policies. They are not as good. They are not portable, meaning they don't go with you when you go. If you change jobs, they don't go with you, but they're not as good. Almost always, they're not as good. They have exceptions, and the definition of disability is weaker. The reason your employer buys them is because they're cheaper.

You get what you pay for in that space, and you don't have as good of insurance through your employer policy. Anytime you put an employer-offered policy up next to what you can buy—a fully underwritten individual, portable, own-occupation policy—it's not the same. There are differences, and those differences matter. It's not term life insurance where you're either dead or you're alive. There are 50 shades of gray when it comes to disability, and I think your situation demonstrates that great, Tyler. You don't qualify for Social Security disability, because you can work at something. You don't qualify, but you do qualify to get your benefit from your own occupation individual policy that you bought.

Tyler Scott:
Yeah, let's talk about employer-provided policies, and I'll share some of my personal experience. When I was disabled, I was actually working at the dental school here in Salt Lake, and so I ended up making a claim on my personal policy and on my employer policy. I really learned some things in that process. There are some real limitations with employer policies. You mentioned one; they're not portable. Also, you can become uninsurable during that time you're at this job. What if you get cancer and you want to leave this job at some point? Well, good luck getting a personal policy. You're stuck at this job or stuck hoping you find a job that's going to have another group policy without underwriting. I have a client who didn't get a personal policy after residency, took a PSLF-qualifying job, almost there with PSLF, and his plan was to leave in a couple years. Well, last year he got MS at 35 years old, and now he doesn't know exactly when or if the disease will progress and is afraid that he's going to be heavily reliant on this workplace policy. The non-portability is a big deal.

The denial rates are higher. In my personal experience, it took about five months to get through the entire process on my personal policy with Principal, and it required a lot of paperwork and phone calls and back and forth. But overall, it was not a terrible experience. I had a 90-day elimination period, so they paid me some back payments, and then things have been pretty smooth since then. But boy, my employer-provided policy with The Hartford was an absolute nightmare. It took over nine months. It took at least 10X the paperwork and time and emails and only to get denied for the exact same condition under which I was approved at Principal. If you know someone out there with a Unum or Hartford policy at work that got approved, that would surprise me. The denial rates are just a lot higher on those employer policies.

They're also not non-cancelable and guaranteed renewable. Your employer can change or drop the policy at any time. You have no contractual guarantee of continued coverage. A sort of pragmatic thing I see with my clients is they say, “Oh yeah, I went to the new hire presentation, and HR said that I'm covered up to 60% of my salary on this employer policy.” Then I say, “Oh cool, send it to me. I'll look at it.” There's a little asterisk next to the 60%. That asterisk is the payment cap. I most often see these cap at $10,000 a month, sometimes $15,000 a month. And boy, that can be news to a lot of people. If you make $500,000, $600,000, and you thought you were insured to 60%, suddenly you're getting $10,000 a month if you can even get it. That insurance may not be adequate for you.

These policies have a bad habit of saying that they're own occupation. But when you read the fine print, they're only own occupation for two years. Then they revert, in many cases, to an any occupation policy. The benefits are taxable. That's something you've talked about, Jim, on the blog, because the employer policies are often paid for with pre-tax dollars. The employers are getting a tax deduction for paying that benefit. The IRS says, “Hey, if you're paying the premiums with pre-tax dollars, we're going to tax the benefit.” You have to reduce your projected benefit by some reasonable tax rate. It may not be your current rate, as your income is going to be lower on disability ostensibly. But some portion of that benefit will be going to the government.

Then, one of the biggest surprises to me was when I went through this, I found out that the benefits can be reduced by any work I do or reduced by my “capacity” to work, based on my education and ability. The lady at The Hartford told me that if I am approved, that, after two years of benefits, my benefit would be reduced by the salary of any job available within the Salt Lake metro area suitable based on my education. If they could find a job that they deemed was appropriate for me, they would find out what that job paid and reduce my benefits accordingly.

To recap all that, if you have an employer policy, that's great. That's certainly better than not having one. But in my opinion, it is not something that you want to rely on exclusively to provide for income replacement in the event of your disability.

Jim Dahle:
I don't pay for it anymore now that we're financially independent, but when I was paying for disability insurance, I had two policies. I had an individual policy that I bought (mine was through The Standard), and it was a top-notch, portable policy. I picked it up during residency and exercised an increase on it. Then, I had one from my employer. The benefit of the employer one, the reason I kept that is it didn't have the exclusion on it that my individual policy did. I had an exclusion that if I got injured climbing or doing something like that, it wouldn't pay. That was the benefit. That's why I kind of split my coverage. I had the good policy that didn't cover climbing and the not-as-good policy that would cover climbing. That may be one reason to use your employer policy, but I like the idea of not relying on it. I think there's a lot of wisdom to that.

Tyler Scott:
If we've convinced you that having a personal policy is probably a good idea, the next question that comes up often is, “Well, how much should I buy? How much coverage is enough?” I'll just say that reasonable people can disagree. Ultimately the way I frame this for clients is the deliverable on insurance is really peace of mind. That's what you want. You want to be able to sleep well at night, enjoy your life, not be stressed out about this stuff. I tell people to get enough that they have peace of mind. That's the metric they should use. But some of the guidance that we provide in that conversation is that first, the coverage needs to be enough, not just to cover your expenses but also any college savings you're doing for your kids and particularly your retirement savings as well. These policies stop paying at age 65 or 67. They are not a retirement plan. You still have to save for your own retirement if you don't want to live on Social Security.

That being said, to Emil's question here, being married to another high earner is a pretty nice insurance policy unto itself. I think it's reasonable to consider carrying less insurance on each of you than if this was a single-provider home. But I don't think it's reasonable to have it on just one person and to sort of arbitrarily choose the male because it's less expensive. It's more expensive for women for a reason. Their chances of making a successful claim are higher. That's priced in. Another consideration that can justify less coverage is what I talked about earlier—the example of my own story. One of the benefits of an own occupation policy is that you can probably still work. You probably did not get hit by a bus or fall off of Half Dome with Jim.

Jim Dahle:
Although if you fall off Half Dome, you're probably not disabled, I might point out. You're going to need to collect on an insurance policy, but it's not your disability insurance.

Tyler Scott:
All insurance has value for different activities. But yeah, you probably didn't get hit by a bus. I can't do clinical dentistry safely for myself or my patients, but I can be a financial planner. I could teach didactic classes at the dental school. I could review insurance claims for a dental insurance company. I don't make as much at this job as I did as a dentist, but that's all right because the disability fills in the gap. Also, Megan works now, which didn't use to be the case. We found ways to cut some expenses post-disability. Buying insurance is not the only way to return your financial life to pre-disability levels. There are many levers you can pull. I just want everyone to be thoughtful and intentional about what their plan is in the 17% chance they find themselves in this situation.

Jim Dahle:
I think that's a really key point. You have to have enough benefit. Not just for your expenses, but also to keep saving for retirement on the benefit. Otherwise, it's only Social Security when you get into your mid-60s. If you need help and you just don't know who to trust and don't know where to get disability insurance, we put that together for you. I say we, but I mean the team here at WCI, obviously. I have a conflict of interest here because we have advertisers that sell disability insurance. Tyler doesn't have a conflict of interest. He's a fee-only advisor, but I have a conflict of interest. But these are people we vetted. They work with dozens of White Coat Investors every month, dozens, hundreds maybe. If they're not doing good service, we hear about it very quickly. We either fix it or we get them off the list, but you can find them all at whitecoatinvestor.com/insurance. That's the place to go.

Emil asked more stuff we need to talk about. One of which he didn't ask about but should have: it sounds like his big fear is both of them getting in a car wreck. I think it's important to point out that most disability is not trauma. It's not falling off Half Dome. It's not getting in a car wreck. It's medical. People get cancer. People get degenerative disc disease. People get rheumatoid arthritis. People get MS. That's what disability is. That's what people are going out on for disability. They're not going out on a train accident. I think that's an important point to make. Do you know any statistics on that, Tyler? What are the percentages are medical vs. trauma?

Tyler Scott:
Yeah, I actually talked with Matt Wiggins at Doc Insure, one of your recommended providers for disability insurance. I talked to him last night in preparation for this, and he was telling me that 60%-70% of the claims are illness, not an injury. It's what you mentioned. It can be autoimmune disease, neurodegenerative diseases. He said there are a ton of mental health claims. You only get paid out two years for that. But depression, anxiety, alcoholism, these things take root as people burn out.

I hear often what Emil said. It is this notion of what I call the difference between proceduralist and “thinking” physicians. From the psychiatrist, I hear a lot like, “What are we talking about? Own occupation. I just sit here. I'm not a vascular surgeon. How am I ever going to get disabled?” Well, if you get throat cancer and your job is to talk to your patients, that's going to be a real problem. If you get rheumatoid arthritis and you can't type chart notes, that's going to be a real problem. I think it's a reasonable consideration, but it’s in my opinion, not a reason not to do it. Matt talked to me last night about how the pricing of the policies is reflective of that. He said anesthesia and OB and neurosurgery are more expensive.

Jim Dahle:
And dentistry. Dentistry is super expensive.

Tyler Scott:
Yes, because those are the people making claims a lot. If the surgeon puts his hand in the snowblower, that's the end. That's not the case if you're a psychiatrist. But because of that, the premiums for pediatrics and psychiatry are a lot lower. To Emil, I would say, “Hey, you're going to get radiology pricing. Don't feel like you're paying someone else's premiums in some pool product.” The other thing Matt pointed out is that that was “lower” paying premium specialties like peds or psych and that in own occupation policies, they're only like 10%-15% more expensive than an any occupation policy.

Jim Dahle:
Like Social Security. When we're talking any occupation, we're talking about qualifying for Social Security. It's got to be that bad.

Tyler Scott:
Right. So it's a no-brainer. It's a tremendous value add to add the own occupation specific in any case. But in Emil's case, if you're like, “Oh, hey, I'm a radiologist,” you're not going to be paying that much more for an own occupation. I know you're sitting there reading films, clicking buttons, but more things than you realize can get to you. If you end up with a neuromuscular issue like me, and you can't sit and stare in the dark reading films for eight hours, you might find yourself on claim in ways you didn't realize.

Jim Dahle:
I have to correct you too, Tyler, because these are two different specialties. Radiology and radiation oncology, two very different things. And lots of radiologists these days are proceduralists. They're doing all kinds of procedures with their hands. I've never done a radiation oncology rotation or anything. I don't know exactly what they're doing. But from Emil's description, it sounds more psychiatry-like as far as your physical use of your body. That's not always the case for radiologists, though. But that's all worked into the pricing. I totally agree with you. If you're a dentist, if you're an orthopedic surgeon, you're paying pretty good premiums for the fact that it doesn't take as much of a disability to disable you. Emergency medicine is there as well. Not quite as expensive as those specialties. As you move into pediatrics, as you move into psychiatry, as you move into PM&R, as you move into radiation oncology, that's already priced in. You're already getting a discount for the fact that you're less likely to have something that's going to keep you from doing your own occupation.

But the bottom line with disability is to get something in place. I feel bad for Tyler. Tyler got disabled and can't do dentistry. His income went down. But you know what? He did find something he can do that pays reasonably well. In the terrible situation where you're utterly and completely disabled and can't do anything, that's when you really need coverage. Having something in place is better than nothing in the event that that's the sort of thing that happens to you. But for most docs, I think it's worth getting an own occupation policy. What that usually means for most of these carriers, these insurance companies, is that it's specialty specific. It's not like you pay a different amount just to cover your specialty in most cases than it is to cover you as a doctor. They price it differently because they view your occupation as the specialty. But it's not like you can just go, “Oh, I just want an own occupation. I don't want specialty specific.” That's not really a thing. I think it's important to understand.

Have we beat disability insurance like a dead horse yet? I think we have. Go buy some disability insurance if you don't have any yet. You can cancel it when you're financially independent. You don't have to have it forever. In fact, I think that's a pretty good idea. Some of the companies will give you graduated premiums where you pay less in the beginning and then the price kind of goes up over time. If you're one of those supersavers that are going to hit FI at 45, that's a really good deal because you get the low premiums while you're actually paying them and then you cancel the policy. You can learn more about it from the agents. They're in it every day, all day. They know the ins and outs of all these policies and show you all the policies from the big five carriers and help you get the one that's right for your age, gender, specialty, state, and medical conditions. You can find all that at whitecoatinvestor.com/insurance.

More information here: 

People Aren’t Buying Disability Insurance, But They Should

How Much Disability Insurance Should You Buy?

 

If you want to learn more about the following topics, see the WCI podcast transcript below. 

  • HSA contributions
  • Simplifying investments

 

Milestones to Millionaire

#168 — Anesthesiologist Becomes a Millionaire

This anesthesiologist has become a millionaire only 3 1/2 years out of training. She has a high income, and she is saving a massive portion of it. Not only is she building wealth for herself, but she also sends money home to help take care of her mother and grandmother. She teaches us about the impact of negotiating hard for yourself when it comes time to sign an employment contract.

 

Finance 101: White Coat Investor Philosophy — 12 Financial Principles for Doctors

The White Coat Investor Philosophy can be broken down into 12 financial principles tailored specifically for doctors. These principles serve as a timeless guide. By embracing these 12 principles and adhering to the basics of sound financial management, you can achieve long-term success and security in your financial life.

  1. Financial planning leads to greater happiness and success.
  2. Wealth is primarily built by earning a high income and saving diligently.
  3. Develop a rational, written investing plan that avoids excessive risk.
  4. Utilize low-cost, broadly diversified index funds as the foundation of your portfolio.
  5. Insure against financial catastrophes, not every potential risk.
  6. Live modestly for the first few years out of residency to accelerate wealth building.
  7. Spend intentionally on what brings you true value and satisfaction.
  8. Seek good financial advice or educate yourself to manage finances effectively.
  9. Understand and maximize the benefits of tax-advantaged accounts.
  10. Pay cash and minimize debt to build disciplined financial habits.
  11. Minimize taxes by structuring financial decisions wisely.
  12. Implement basic asset protection strategies and prioritize cost-effective measures.

 

To read more about The White Coat Investor Philosophy and the 12 financial principles for doctors, read the Milestones to Millionaire transcript below.


Sponsor: PKA Insurance Group

 

Today’s episode is brought to you by SoFi, helping medical professionals like us bank, borrow, and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning, and student loan refinancing . . . featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at https://www.whitecoatinvestor.com/Sofi. Loans originated by SoFi Bank, N.A., NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, Member FINRA/SIPC. Investing comes with risk including risk of loss. Additional terms and conditions may apply.

 

WCI Podcast Transcript

Transcription – WCI – 365

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 365 – Disability insurance with a friend of WCI.

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

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

All right, welcome back to the podcast. Thanks so much all of you out there for what you're doing. Today, we're doing another Friends of WCI episode. I'm here with Tyler Scott. Welcome to the podcast, Tyler.

Tyler Scott:
It's an honor and a tremendous excitement to be here. Thanks for having me.

Dr. Jim Dahle:
Well, we're pretty excited to have you here. I should introduce Tyler. I've known Tyler for quite a while now, actually. Tyler happens to be married to our podcast producer. However, he is a dentist by training, currently works as a financial advisor. We'll get into some more of his story about how he started doing that later in the podcast.

But he's also been a speaker on the panels at WCICON. He's been doing columns for WCI for the last couple of years. You've likely read some of his columns. And so he's what we call a friend of WCI. And I thought it'd be fun to get him on here, especially given his newer expertise since he transitioned careers. And he will help me to answer some of your questions here on the podcast.

But before we get into that, I want to tell you about an opportunity that you have. And it's a great opportunity. And I hope you take us up on it as well, Tyler. But we are opening the call for speakers for WCICON25. This is going to be in San Antonio, February 26 through March 1 is when the conference is in San Antonio.

But if you want to speak at the conference, you have to apply. It's actually competitive. We had like 250 talks submitted last year. I don't know how many possible speakers, 150 speakers or something. You can apply to speak for this at wcievents.com is where you can sign up for that.

We get lots of applicants, obviously, and we're only going to be selecting about 30 speakers or so. And so, the way to actually win to actually become a speaker at WCICON is not to just submit one topic, because we already have somebody else doing that topic that we think is going to be awesome. We're not going to pick you to do it too. But if you put in for three or four or five topics, your chance of being selected is much higher. We do encourage you to submit for all the topics that you can speak as an expert on that you think would go well at WCICON.

So don't just speak, experience WCICON with your full registration included. Come and really be a part of this three-day experience. We'll tell you in August if you're selected. We'll announce it to the public in September. And shortly after that, the tickets will go on sale again for it. Again, sign up wcievents.com.

 

YOU NEED DISABILITY INSURANCE

All right, Tyler, this is a great opportunity while we have you on here, I thought, to talk about disability and disability insurance. And I mentioned before we started recording, I think we've had the wrong message for the last 12 years at WCI. We spend lots of time getting into the weeds about disability and why one rider should be included, what rider shouldn't, and how much you should have and exactly what company it comes from.

And I don't think we've spent enough time telling people they need something in place. They need disability insurance. This really does happen. And so maybe what we ought to start with, Tyler, is let's have you talk a little bit about your personal experience with disability insurance, then disability, and then using disability insurance. So let's have you start by kind of telling your personal experience with that, and I think that will get the message across a lot more than a more academic discussion.

Tyler Scott:
Yeah, absolutely. As you said, I started my first professional chapter as a dentist. I graduated from Oregon Health Sciences in Portland in 2012, and my intention was to be a dentist my whole life, like most people. I had a disability insurance policy that I bought right after dental school from Principal, and the original benefit was $4,000 a month. And I continued to utilize my future benefit increase rider for the first several years as my income started to grow.

And eventually, in my early 30s, our family was growing in size, and these increased benefits came with increased premiums. And so that started to eat up more and more of our free cash flow, and I was an invincible 33-year-old dentist. Nothing could possibly happen to me. Super healthy. And I wanted to stop giving so much of my money to the money-grubbing insurance companies.

And so I stopped utilizing my future benefit increase rider only to find out a couple years later that, with Principal at least, if you don't exercise that rider for a couple years, you don't ever get to exercise it again. And that wasn't a problem, because there was never going to be an issue. I was going to be a dentist for 30 more years.

Well, fast forward a few years, and I'm 37 years old, and suddenly I'm experiencing tremendous and worsening back problems. And some of that is normal for a dentist. We're not the most ergonomic bunch, and some neck and back pain is normal. But this was really bad, and it was worsening rapidly.

And so I drug my feet to get my medical work done. But as my good wife, Megan, encouraged me to go take care of myself. And eventually, I saw a provider, and we got imaging and found out that I had a degenerative back problem. I had the lumbar spine of an 84-year-old. It was deemed that I could not perform dentistry safely for myself or to my patients. And at 37 years old, I found myself very suddenly filing a claim on my long-term disability insurance policy. And I'm happy to talk more about that story and how that unfolds.

But the big picture is that, to be frank, I liked dentistry just fine. I didn't really love it. I picked it, like I think many of us, early in my 20s as a career and I looked around my community, I met other dentists, and they seemed like they had a good life. I didn't know that I was signing up for over $300,000 of student loan debt at 7%. I didn't know that the macroeconomics of dentistry had changed significantly since my peer group had advised me to go into that field. And the actual lived experience of being a dentist just wasn't everything that I thought it would be.

And so, I was burning out. My lumbar spine matched my cognitive condition in many ways as it related to dentistry. And I had started experiencing this during COVID, where the dental clinics were closed. The back pain was bad. And during those three months when I didn't go to work, my back pain was a lot better. Turns out, not doing dentistry really helped me not be in as much pain. I was much happier. I was a better husband. I was a more engaged father.

The seed was planted in my mind that maybe dentistry isn't for me forever for a number of reasons. And it was really my friends, my anesthesiology friends, my radiology friends, who got me thinking about doing financial planning. They're the ones who told me, “Hey man, you've helped me get my student loans figured out. You've helped me optimize my back door Roth and my 401(k). You've explained that stuff to me in a way that's more clear than my financial planner ever has. You could really have a future in this, particularly given that you lived the life for so long.”

And I had been a White Coat reader since I graduated dental school. I had a sort of self-taught basis of knowledge. And I used that time during COVID to go back to school. I enrolled at Cal Berkeley in the certified financial planner coursework. Loved it. It filled out a lot of my understanding I had learned from you, Jim, through the years.

And then my goal was to just do financial planning as a hobby, maybe a side hustle, a little extra income with the idea that in time, maybe I do part-time dentistry and part-time financial planning. And so, I cold called a bunch of CFPs in my little town in Medford and asked them if I could do free financial plans just for my friends under their supervision, because you need 4,000 hours or 6,000 hours of supervised work to become a CFP.

I found someone who said they'd let me do it. And so I started doing plans for a few people in town and for my buddies in dental school. And I just loved it. I just absolutely loved it. I had taken my series 65 exam previous to this. So I was legit and just found this passion.

And that all coincided with the worsening of the back pain. And so once I made the successful claim on my disability policy, I took that opportunity to also change careers and to step into something that I feel is a better fit and something that I have absolutely loved these past few years doing.

Dr. Jim Dahle:
So you bought a policy, the typical type we recommend here, an individual policy, specialty specific, own occupation policy, and then basically got a disability that kept you from doing that specialty, but obviously doesn't keep you from doing any work at all. And so now you collect the disability and you're paid for your other work.

Tyler Scott:
Exactly. Yeah. That is the beauty of an own occupation policy. Once my doctors and the doctors at Principle agreed that I could not perform the acts of clinical dentistry, the root canals and the crowns and the fillings, I started receiving my $7,000 a month check. Now I don't make as much being a financial planner as I did as a dentist, but that's okay because I get my disability benefits paid to me each month. And that helps fill in the gap and gave me this sort of safety net, this opportunity to transition careers.

Dr. Jim Dahle:
Do you wish you'd bought more disability insurance?

Tyler Scott:
I really do. Yeah. One of the mistakes I made is I got cheap with my premiums. I felt the squeeze as a dad with young kids and Megan wasn't working at the time. Seeing my benefit increase was great, but seeing the premiums increase was really painful. And so, when I stopped utilizing that future benefit increase rider, that ended up being a $2 million mistake.

I'm very grateful for the $7,000 a month tax-free that I received from Principal that's adjusted for inflation. And if I would have continued to utilize my increase rider, I'd be getting maybe $10,000 or $12,000 a month tax-free. And when I started collecting in my late thirties on a policy that pays out till age 65, and when you account for the adjustment and inflation, I made a $2 million mistake because I didn't want to pay an extra $800 a year in premiums.

Dr. Jim Dahle:
I mentioned earlier, we're trying to make sure our messaging is really where it needs to be for all of you out there, all the White Coat Investors. We've done a lot of work on disability insurance in the last year here at the White Coat investor.

We've tried to make sure, number one, that we make it as easy as possible for you to get disability insurance. And number two, we made sure we got the very best quality folks with the best training selling you those disability insurance policies. We're collecting a little bit more information on you and we refer you out to them, but we're also collecting a lot more information on the work being done on your behalf. And that allows us to increase the quality for that.

But as I see the numbers of people buying disability insurance, I'm shocked how few doctors are doing it because I know the referrals we send from the White Coat investor are a pretty big deal in the industry. And it's not that many. There's 30,000 docs coming out of residency every year between dentists and physicians and similar docs. I figure probably half of them at least need to be buying an individual disability insurance policy.

And with the insight I now have into the industry, that's not happening. It's not even close. There's a lot of people out there who need insurance, who aren't buying insurance. I just want to emphasize to you, if you're one of those people out there and you don't have a solid plan to rely on your spouse's income or something, or happen to have a particularly good plan through your employer, which most people don't, even if they have an employer-provided disability insurance, and you're just thinking this isn't going to happen to you, that's too big of a risk for you to be taking. This is your most valuable asset is your ability to turn time into money at a very high rate. And you need to insure it.

As part of that, if you're out there and you're living on your disability insurance benefit, or you are disabled without disability insurance, I'd like to hear from you. I think it'd be nice to bring a few people on the podcast, whether it's the regular episode or whether it's the Milestones podcast, to actually point out how frequent this happens. I've met lots of people over the years who have been disabled as doctors. And it's not uncommon at all, but I think too few of us actually know somebody that it happened to. So if that's you, I'd like to hear from you. You can email us, [email protected], and we'll figure out a way you're comfortable with in sharing your story on podcast or blog, etc.

All right. I think we've teed up our first question from a listener here pretty well, Tyler. So let's start with taking a listen to that.

 

DO YOU NEED DISABILITY INSURANCE IF YOU ARE A TWO-DOC HOUSEHOLD?

Emil:
Hi, Jim. This is Emil. I'm a radiation oncology physician in the Midwest. I'd like to thank you for all you do. You turn me from a financial illiterate to someone who feels comfortable in about six months.

My question pertains to disability insurance. My wife and I are both radiation oncology physicians making about $400,000 a year each. And we have a disability through work up to $5,000 a month.

Given that we're both high earners, we wouldn't necessarily need additional disability. But my fear is that given we're starting the family plan and that we typically carpool and spend a lot of time together, that anything that affects one of us could affect both like a car accident. I was thinking about taking out additional disability insurance, but I was thinking of just doing it for one of us, probably me, given that I'm a man and it would be cheaper. I would like your thoughts on that.

And also, radiation oncology is a specialty that generally does not require any procedures, any use of your hands other than maybe using a computer mouse. I guess my question is, is there really a benefit to me having a specialty-specific policy as opposed to just an own occupation? I just can't imagine a scenario where I could work as another type of physician, but not a radiation oncologist. I really appreciate your thoughts and advice. Thank you.

Dr. Jim Dahle:
All right. There's a lot of questions in there. A lot of stuff to talk about. Let's get started. You want to start off, Tyler, trying to answer some of Emil's questions?

Tyler Scott:
Sure. Yeah. First, let me just validate, Emil. I get the hesitation to buy personal own occupation, long-term disability insurance. It's really expensive. But the reason it's so expensive is because it gets used a lot. One in six physicians or dentists will make a claim on their policy during their career. That's a lot of payments being paid out and insurance companies are not in the business of losing money. So they charge a lot in premiums.

And as we just talked about, I'm one of these people. I'm on long-term disability and I never thought that would be the case for me. And the premiums were off-putting. So I get it. And I want to validate the impulse to think twice about buying an expensive product. And at the same time, as we're talking about, I really want to encourage docs to be thoughtful and intentional about this choice. And the default should really be to get it.

Dr. Jim Dahle:
Yeah. It's hard when it's the two-spouse thing. They got two spouses. They each make $400,000. Let's not kid ourselves. Most families in America are not going to have trouble living on just one of those $400,000 incomes. If that is your plan for disability, I don't think it's unreasonable. I don't think that's crazy to go, “You know what, I guess it's possible we could both get disabled, but it's probably not very likely.” I don't think that's a crazy risk to take.

If you are married to a stay-at-home spouse, if you are single, all kinds of other situations, I think that is too much risk to take. If you spend a good chunk of your income, of that $800,000 income, that second income, if you're really actually using it to live, well, you better insure it. If it would be a big deal to cut back the $400,000 based on your lifestyle, because you got some really expensive house in the Bay Area, well, maybe that's someone who does need to buy coverage.

I thought it was very interesting that he talks about having adequate coverage being $5,000 a month for each of them. They're living on $800,000, and if they're both disabled in a car wreck, they're now going to live on $120,000. That is a dramatic change. I get that you really only need to insure what you're spending, but there are very few physician families in this country making $800,000 a year who are only spending $120,000. There's not a lot of you folks out there. If you are, you're probably hitting FI very quickly and can drop your disability insurance anyway, but they just sound very, very underinsured to me.

There's a big problem though with those employer policies. They are not as good. Not only are they not portable, they don't go with you when you go. If you change jobs, they don't go with you, but they're not as good. Almost always, they're not as good. They got exceptions, and the definition of disability is weaker. There's a reason your employer buys them, because they're cheaper.

And so, you kind of get what you pay for in that space, and you don't have as good of insurance through your employer policy. Anytime you put an employer-offered policy up next to what you can buy, a fully underwritten individual, portable, own-occupation policy, it's not the same.

There are differences, and those differences matter. It's not term life insurance where you're either dead or you're alive. There's 50 shades of gray when it comes to disability, and I think your situation demonstrates that great, Tyler. You don't qualify for social security disability, because you can work at something. You don't qualify, but you do qualify to get your benefit from your own occupation individual policy that you bought.

Tyler Scott:
Yeah, let's talk about employer-provided policies, and I'll share some of my personal experience. When I was disabled, I was actually working at the dental school here in Salt Lake, and so I ended up making a claim on my personal policy and on my employer policy, and I really learned some things in that process.

There are some real limitations with employer policies. You mentioned one, they're not portable. And you can become uninsurable during that time you're at this job. What if you get cancer and you want to leave this job at some point? Well, good luck getting a personal policy. You're stuck at this job or stuck hoping you find a job that's going to have another group policy without underwriting.

I have a client who didn't get a personal policy after residency, took a PSLF qualifying job, almost there with PSLF, and his plan was to leave in a couple years. Well, last year he got MS at 35 years old, and now he doesn't know exactly when or if the disease will progress and is afraid that he's going to be heavily reliant on this workplace policy. So the non-portability is a big deal.

Also, the denial rates are higher. In my personal experience, it took about five months to get through the entire process on my personal policy with Principal, and it required a lot of paperwork and phone calls and back and forth. But overall, it was not a terrible experience. I had a 90-day elimination period, so they paid me some back payments, and then things have been pretty smooth since then.

But boy, my employer-provided policy with the Hartford was an absolute nightmare. It took over nine months. It took at least 10X the paperwork and time and emails, and only to get denied for the exact same condition under which I was approved at Principal. If you know someone out there with a Unum or Hartford policy at work that got approved, that would surprise me. The denial rates are just a lot higher on those employer policies.

They're also not non-cancelable and guaranteed renewable. Your employer can change or drop the policy at any time. You have no contractual guarantee of continued coverage. A sort of pragmatic thing I see with my clients is they say, “Oh yeah, I went to the new hire presentation, and HR said that I'm covered up to 60% of my salary on this employer policy.” And I say, “Oh cool, send it to me. I'll look at it.” And there's a little asterisk next to the 60%. And that asterisk is the payment cap. And I most often see these cap at $10,000 a month, sometimes $15,000 a month.

And boy, that can be news to a lot of people. If you make $500,000, $600,000, and you thought you were insured to 60%, suddenly you're getting $10,000 a month if you can even get it. That insurance may not be adequate for you.

Also, these policies have a bad habit of saying that they're own occupation. But when you read the fine print, they're only own occupation for two years. And then they revert, in many cases, to an any-occupation policy.

The benefits are taxable. That's something you've talked about, Jim, on the blog, because the employer policies are often paid for with pre-tax dollars. The employers are getting a tax deduction for paying that benefit. The IRS says, “Hey, if you're paying the premiums with pre-tax dollars, we're going to tax the benefit.” So you have to reduce your projected benefit by some reasonable tax rate. It may not be your current rate, as your income is going to be lower on disability, ostensibly. But some portion of that benefit will be going to the government.

And then one of the biggest surprises to me was when I went through this, that I found out that the benefits can be reduced by any work I do or reduced by my “capacity” to work, based on my education and ability. The lady at the Hartford told me that if I am approved, that after two years of benefits, my benefit would be reduced by the salary of any job available within the Salt Lake Metro area suitable based on my education. If they could find a job that they deemed was appropriate for me, they would find out what that job paid and reduce my benefits accordingly.

To recap all that, if you have an employer policy, that's great. That's certainly better than not having one. But in my opinion, it is not something that you want to rely on exclusively to provide for income replacement in the event of your disability.

Dr. Jim Dahle:
Now, when I was paying for disability insurance, I don't pay for it anymore now that we're financially independent. I had two policies. I had an individual policy that I bought, mine was through the Standard, that I bought, top-notch, portable policy. I picked it up during residency, exercised an increase on it. And then I had one from my employer. And the benefit of the employer one, the reason I kept that is it didn't have the exclusion on it that my individual policy did. I had an exclusion. And if I got injured climbing or doing something like that, it wouldn't pay.

And so, that was the benefit. That's why I kind of split my coverage. I had the good policy that didn't cover climbing and the not as good policy that would cover climbing. And so that may be one reason to use your employer policy, but I like the idea of not relying on an excuse. I think there's a lot of wisdom to that.

Tyler Scott:
Yeah, if we've convinced you that having a personal policy is probably a good idea, the next question that comes up often is, “Well, how much should I buy? How much coverage is enough?” And I'll just say that reasonable people can disagree. And ultimately the way I frame this for clients is the deliverable on insurance is really peace of mind. That's what you want. You want to be able to sleep well at night, enjoy your life, not be stressed out about this stuff.

I tell people to get enough that they have peace of mind, that that's the metric they should use. But some of the guidance that we provide in that conversation is that first, the coverage needs to be enough, not just to cover your expenses, but also any college savings you're doing for your kids and particularly your retirement savings as well. These policies stop paying at age 65 or 67. So they are not a retirement plan. You still have to save for your own retirement if you don't want to live on social security.

Now, that being said to Emil's question here, being married to another high earner is a pretty nice insurance policy unto itself. I think it's reasonable to consider carrying less insurance on each of you than if this was a single provider home. But I don't think it's reasonable to have it on just one person and to sort of arbitrarily choose the male because it's less expensive. It's more expensive for women for a reason. Their chances of making a successful claim are higher. And so that's priced in.

Another consideration that can justify less coverage is what I talked about earlier the example of my own story. One of the benefits of an own-occupation policy is that you can probably still work. You probably did not get hit by a bus or fall off of Half Dome with Jim.

Dr. Jim Dahle:
Although if you fall off Half Dome, you're probably not disabled, I might point out. You're going to need to collect on that insurance policy, but it's not your disability insurance.

Tyler Scott:
All insurance has value for different activities. But yeah, you probably didn't get hit by the bus. And so like I can't do clinical dentistry safely for myself or my patients, but I can be a financial planner. I could teach didactic classes at the dental school. I could review insurance claims for a dental insurance company.

And again, I don't make as much at this job as I did as a dentist, but that's all right because the disability fills in the gap. Also, Megan works now, which didn't used to be the case. And we found ways to cut some expenses post-disability. So buying insurance is not the only way to return your financial life to pre-disability levels. There are many levers you can pull. I just want everyone to be thoughtful and intentional about what their plan is in the 17% chance they find themselves in this situation.

Dr. Jim Dahle:
Absolutely. Well, at least Megan's got a really good 401(k) plan. That's the important thing. Did you mention about how they don't really pay after age 65 or 67? Did you mention that?

Tyler Scott:
Yeah. Yeah.

Dr. Jim Dahle:
I think that's a really key point. You have to have enough benefit. Not just for your expenses, but also to keep saving for retirement on the benefit. Otherwise, it's only social security when you get into your mid-sixties.

Yeah, so a lot of important stuff here. If you need help, you're like, I don't know who to trust. I don't know where to get disability insurance, we put that together for you. I say we here at WCI, obviously, I have a conflict of interest here because we have advertisers that sell disability insurance. Tyler doesn't have a conflict of interest. He's a fee-only advisor, but I have a conflict of interest.

But these are people we vetted. They work with dozens of White Coat Investors every month, dozens, hundreds maybe. And if they're not doing good service, we hear about it very quickly. We either fix it or we get them off the list, but you can find all them whitecoatinvestor.com/insurance. That's the place to go.

All right, Emil asked more stuff we need to talk about. One of which he didn't ask about, but should have. It sounds like his big fear is both of them getting in a car wreck. And I think it's important to point out that most disability is not trauma. It's not falling off Half Dome. It's not getting in a car wreck. It's medical. People get cancer. People get degenerative disc disease. People get rheumatoid arthritis. People get MS. That's what disability is. That's what people are going out on for disability. They're not going out on a train accident. I think that's an important point to make. Do you know any statistics on that, Tyler? What the percentages are medical versus trauma?

Tyler Scott:
Yeah, I actually talked with Matt Wiggins at Doc Insure, one of your recommended providers for disability insurance. I talked to him last night in preparation for this, and he was telling me that 60 to 70% of the claims are illness, not an injury. And yeah, it's what you mentioned. It can be autoimmune disease, neurodegenerative diseases. He said there's a ton of mental health claims. And yeah, you only get paid out two years for that. But depression, anxiety, alcoholism, these things take root as people burn out.

And so, sort of Emil's point, I hear a lot. And this notion of what I call the difference between proceduralist and “thinking” physicians. And so from the psychiatrist, I hear a lot like, “What are we talking about? Own occupation. I just sit here. I'm not a vascular surgeon. And so how am I ever going to get disabled?” Well, if you get throat cancer and your job is to talk to your patients, that's going to be a real problem. If you get rheumatoid arthritis and you can't type chart notes, that's going to be a real problem.

And so, I think it's a reasonable consideration, but it’s in my opinion, not a reason not to do it. And Matt talked to me last night about how the pricing of the policies is reflective of that. And he said anesthesia and OB and neurosurgery.

Dr. Jim Dahle:
And dentistry. Dentistry is super expensive.

Tyler Scott:
Yeah, yeah. Because those are the people making claims a lot. If the surgeon puts his hand in the snowblower that's the end. And that's not the case if you're a psychiatrist. But because of that, the premiums for pediatrics and psychiatry, it's a lot lower. To Emil, I would say hey, you're going to get radiology pricing. So don't feel like you're paying someone else's premiums in some pool product.

And the other thing Matt pointed out is that that was “lower” paying premium specialties like peds or psych, that in own occupation policies, only like 10 or 15% more expensive than in any occupation policy.

Dr. Jim Dahle:
Like social security. When we're talking any occupation, we're talking about qualifying for social security. It's got to be that bad.

Tyler Scott:
Yeah. So it's kind of a no brainer. It's a tremendous value add to add the ONOC specific in any case. But in Emil's case, if you're like, “Oh, hey, I'm a radiologist”, you're not going to be paying that much more for an ONOC. I know you're sitting there reading films, clicking buttons, but more things than you realize can get to you. If you end up with a neuromuscular issue like me, and you can't sit and share in the dark reading films for eight hours, you might find yourself on claim in ways you didn't realize.

Dr. Jim Dahle:
I got to correct you too, Tyler, because these are two different specialties. Radiology and radiation oncology, two very different things. And lots of radiologists these days are proceduralists. They're doing all kinds of procedures with their hands. And so, I've never done a radiation oncology rotation or anything. I don't know exactly what they're doing. But from Emil's description, it sounds more psychiatry-like as far as your physical use of your body. That's not always the case for radiologists though.

But that's all worked into the pricing. I totally agree with you. If you're a dentist, if you're an orthopedic surgeon, you're paying pretty good premiums for the fact that it doesn't take as much of a disability to disable you. Emergency medicine is there as well. Not quite as expensive as those specialties. And as you move into pediatrics, as you move into psychiatry, as you move into PM&R, as you move into radiation oncology, that's already priced in. You're already getting a discount for the fact that you're less likely to have something that's going to keep you from doing your own occupation.

But the bottom line with disability is get something in place. I feel bad for Tyler. Tyler got disabled, can't do dentistry. His income went down. But you know what? He did find something he can do that pays reasonably well. In the terrible situation where you're utterly and completely disabled and can't do anything that's when you really need coverage.

And so, having something in place is better than nothing for sure in the event that that's the sort of thing that happens to you. But for most docs, I think it's worth getting an own occupation policy. And what that usually means for most of these carriers, these insurance companies, is that it's specialty specific. It's not like you pay a different amount just to cover your specialty in most cases than it is to cover you as a doctor. They price it differently because they view your occupation as the specialty. But it's not like you can just go, “Oh, I just want to own occupation. I don't want specialty specific.” That's not really a thing. I think it's important to understand.

All right, have we beat disability insurance like a dead horse yet? I think we have. Go buy some disability insurance if you don't have any yet. You can cancel it when you're financially independent. You don't have to have it forever. And in fact, I think that's a pretty good idea. Some of the companies will give you graduated premiums where you pay less in the beginning and then the price kind of goes up over time. Well, if you're one of those super savers that's going to hit FI at 45, that's a really good deal because you get the low premiums while you're actually paying them, then you cancel the policy. So, not a bad idea.

You can learn more about it from the agents. They're in it every day, all day. They know the ins and outs of all these policies and show you all the policies from the big five carriers and help you get the one that's right for your age, gender, specialty, state, and medical conditions. You can find all that at whitecoatinvestor.com/insurance.

All right, let's talk about a different subject. Let's talk about HSAs. We've got a question on the Speak Pipe about them.

 

HSA CONTRIBUTIONS

Joe:
Hi, Dr. Dahle. This is Joe from Minnesota. First and foremost, I want to thank you and everybody at White Coat Investor for all the work that you do on behalf of us physicians. My personal financial literacy has greatly improved thanks to your work.

I have an HSA question for you. My wife and I are both physicians. Her health care plan does have an exclusion on spouses who are offered medical coverage through their own employers. So therefore, we've crunched the numbers and figured that it was most cost effective for her to have our children on her plan and me to be on my individual plan through my own employer.

The question comes with HSA contributions. Historically, the whole family has been on high deductible plans. We have either had one of us contribute the entire family limit or split it between the two plans so that our tax return does reflect the maximum family contribution. But this year, we're expecting the arrival of a child. And so my wife will not be on that high deductible plan.

Since I am on a high deductible plan that only covers me, am I able to still contribute to an HSA? A follow-up question would also be, I plan to save our receipts from her medical care during her pregnancy for this year. Are those costs still eligible for HSA reimbursement?

Dr. Jim Dahle:
All right. Yes. We put a 90-second limit on those Speak Pipes. So if you got a really long question, you got to talk fast. You can skip all the nice things you say about me at the beginning. That gives you more time to ask your question. But I think we got the gist of his questions.

I think the questions are pretty easy. His questions have right answers. There's not a lot to debate there. But let's debate about HSAs anyway. Tell me what you think about HSAs, Tyler.

Tyler Scott:
Yeah. First, a great question. I love talking about HSAs. Good for him for using it. And I get this question in a lot of different forms every year. And on its face, it seems like it should be a pretty simple question. But in reality, the math is really complex. And these decisions are really hard.

I heard a BYU professor compare this to playing three-dimensional chess because there's so many moving pieces with deductibles and coinsurance and out-of-pocket maximums, marginal tax rates, investment return assumptions. And so she said that she'd have to charge someone $25,000 for the consultation to have any chance to get a right answer. So, if you're feeling lost on these decisions, just know that that confusion is justified and founded.

First, let me just say, I'm allergic to the assumption that just because someone is having a known high healthcare expense, that that automatically means you should not use the high-deductible health plan, which allows you to save into the HSA.

Dr. Jim Dahle:
You don't even think that should be a rule of thumb, that high spenders should avoid high-deductible health plans?

Tyler Scott:
Not necessarily. I think it is more nuanced than that. Sure, the high-deductible health plan has a higher deductible, but that's only one of myriad variables to consider. The first is that the premiums are often meaningfully higher on the non-HSA plan. It's not uncommon for me to see a family save $2,000, $3,000, even $4,000 a year on premiums with the high-deductible plan. That's a pretty big head start on your total annual healthcare expenses as a household. And that's before we start looking at the triple tax-protected value of the HSA.

Dr. Jim Dahle:
I think it's really important that you actually look though, because I've been surprised. I have people come to me, send me emails and go, “My HSA plan is actually more expensive than my PPO plan. Should I still use it?” And the answer, of course, is probably not.
Tyler Scott:
Yeah.

There's a lot of variation. I'm amazed. You would think the HDHP plan, the high-deductible health plan, is always going to be cheaper than whatever the other plan the employer is operating. That's not always the case though.

Tyler Scott:
It certainly should be cheaper, because you're paying more of your own money when the kid's got strep throat. You're not paying $30 for the copay. You're paying $350 for the office visit. So we would certainly expect it. But I agree with you. I'm astonished sometimes at the lack of logic in the pricing of the premiums.

Yeah, I agree that the rule of thumb is let's just not assume anything. And let's look thoughtfully at each person's three-dimensional chessboard to the degree we can. Now, theoretically, let's say you are saving premiums. You have a logical plan. So that counts as favorable.

And then we get our first layer of tax protection. We get a guaranteed tax savings on our contribution equal to our contribution times our marginal tax rate. So if you're in the 35% federal bracket and the 5% state bracket, then your $8,300 HSA contribution this year saves you over $3,300 on taxes. And that's not a tax deferral like a 401(k). That's no tax ever. That's a really valuable tax savings.

So now we've saved a couple grand on premiums and we've saved another few grand on taxes. Our head start on the high deductible health plan is pretty big. And then if we're not contributing, we also lose out on the value of additional compound interest over time. We can do the math on the after-tax value of $8,300 into an HSA versus $8,300 into a taxable account and compare the value in 30 years. And we can see how much we're missing out on by not filling that HSA bucket and using our stealth IRA appropriately.

These are largely quantifiable values that I think can and should be compared to the difference between your out-of-pocket maximums on both plans. And I'm just here to tell you that in most cases, when I do this math, the HSA comes out ahead, even if you are having surgery or a baby next year.

Dr. Jim Dahle:
Yeah, that's a good point. I'm not sure I've thought about that. But there really is the big head start. And you got to look at that high deductible health plan and look at what the maximum out-of-pocket is. If the maximum out-of-pocket, let's say your tax savings in this case is $5,000 between the premium and the taxes. If the max out-of-pocket is not more than $5,000 higher than it is under the PPO or whatever low deductible plan that you have, you may not be coming out ahead. And it's hard to know how much to add for the power of compound interest over the decades. That's a pretty fudgy factor. But it's worth something. It's not worth nothing. So you may very well be right that lots of people would still come out ahead. But boy, you sure do have to run the numbers.

All right, let's answer the questions he asked. He only gets to make an individual contribution amount this year. So for 2024, that's $4,150. You can't make a family contribution, which for 2024 is $8,300. Unless he puts one of the kids on his plan. You only need two people to be a family. You only need a parent and a child or two spouses. That makes you a family. You can make the full contribution. So if you had 13 kids, you could put 12 of them with one parent, and you can put one of them with the other parent and still make a full family contribution. Keep that in mind. You may want to split people between it.

Tyler Scott:
Let me just chime in on that. One thing I see people forget a lot is that that amount, $4,150 individual or $8,300 as a family, is inclusive of any employer contributions. This is not like your 401(k) where you just put in your $23,000 and they put in whatever and you don't have to adjust. It's $8,300 employee plus employer.

Dr. Jim Dahle:
Yeah, that's an excellent point. All right. I think we may have a little bit of debate on his next question. I see your notes here on our recording notes. I think you're wrong, but make your case for his next question about whether those receipts can be saved.

Tyler Scott:
Okay. It's my understanding, I'm very open to be wrong. It's my understanding that if mom who's on the non-HSA plan, if she has a baby and we save $7,000 of receipts and she's not covered at the time that the medical expense was incurred, if she was not on an HSA plan, that we can't fast forward 20 years and go back and reimburse ourselves $7,000 from the HSA because that expense happened at a time she was on a non-qualifying plan. But I learn something new every day, so I wouldn't bet my kid's life on it.

Dr. Jim Dahle:
Yeah, I think you're wrong and I'll tell you why. Let's take the 20 years out of the equation because I think it's irrelevant. The question is, can you use your HSA dollars to pay for the healthcare of somebody in your family that is not currently on a high deductible health plan? And I'm pretty sure the answer to that is yes. Once it's in the HSA, you just have to use it for healthcare expenses, that they don't have to be healthcare expenses incurred while you're under a high deductible health plan. That rule only applies to making contributions. It doesn't apply to how the money is spent. How the money is spent is it just has to be spent on health expenses for you or your family. And so, I'm pretty sure that's legit, that you can actually keep that.

Now, if the insurance company paid the expense, that's not legit. This is money you paid for healthcare. It's deductibles, it's co-pays, it's things you're getting receipts for because you wrote the check or use your credit card or whatever. If the insurance company pays for the delivery or for the appendectomy or whatever, you can't use that cost in 20 years and somehow use that to take money out of your HSA tax-free and buy a sailboat with it in retirement.

But you can use it to buy health expenses that are legitimate in the list. There's nothing in the IRS guidance on HSA withdrawals. Number one, this says you have to take them out in the year you spend the money. And number two, that you can't take it out and use it for medical expenses even after you're on a totally different healthcare plan.

And that includes for you. So let's say you're using a high deductible health plan for five years and then you change. You go to a low deductible PPO plan or whatever, but now you've got this $80,000 HSA you saved up. Well, you can still use that. You're not excluded from using that just because you no longer have a high deductible health plan. I'm pretty sure I'm right. If somebody thinks I'm wrong, email us in and we'll get it corrected on a future podcast episode. I also, as you know, if you listen to the podcast, I'm wrong a lot too. But I'm pretty sure I'm right on this one.

Tyler Scott:
Great. I hope you're right. That would simplify it and be a boon for everyone. What I certainly think we agree on, or maybe just to clarify for people that in the save your receipts strategy, which is a great strategy, let's do the fast forward 20 years and you reimburse yourself $30,000 or whatever because you want to buy a boat before you're 65.

The only reason you would need the receipts is if you get audited. It's not like you need to include the receipts with the tax return. The probability, the statistical probability that anyone's going to come looking or asking is probably low. Now, I think you should keep your receipts. I think you should scan them and keep them on a hard drive. And that's a good and ethical practice. Just practically speaking in the real world, it's not like there's some way to upload all this document when you're filling out your tax return 20 years in the future. Is that fair?

Dr. Jim Dahle:
Right. But I think if you claim $50,000 in a year, that's a pretty big red flag. I think there's a pretty good chance the IRS is going to ask questions about that because it's not the way most people are using their HSAs. The way most people are using them is spending them as they go. And I think it's fine to save the receipts and pull the money out in one big lump sum after you've allowed compound interest to work on it for a number of years. I think it's perfectly legit. I just expect to get a letter from the IRS about it if you pull out $60,000 in a year and hopefully you've got an IVF bill that you can send to them and say, “Yes, I really did spend it.” But I think it's important to keep those receipts.

And you make a good point about scanning them. You'll notice the ink used on receipts is crap ink on crap paper. And if you go back and look at some of your health care receipts two years later, there's nothing on the paper anymore. It's gone. I think you really do need to scan if you're doing that technique.

Tyler Scott:
One other thing that I think is worth mentioning here at the risk of being in the weeds a little bit, but…

Dr. Jim Dahle:
We never get in the weeds on this podcast, Tyler.

Tyler Scott:
Impossible. This was new learning for me. Just like I learned something just now, and I thought it was interesting, which is the option to have adult non-dependent children on your HSA plan. And they can contribute a separate and additional $8,300 to their own HSA, even when they're on their parent's plan and even when their parents have already put the $8,300 in for themselves.

Dr. Jim Dahle:
Whoa, I've never heard of that one. That's cool.

Tyler Scott:
Yeah, I read this in a Kitsis article, which Meg can link to in the show notes. But yeah, because the Affordable Care Act allows kids to stay on until age 26. So let's say you've got a 24-year-old and they are no longer meeting the definition of a dependent, but they're still on the plan. Well, they can put in their own family maximum with either their own money or mom and dad can put the $8,300 in and that'll eat up $8,300 of their annual gift tax exclusion. But under either scenario, the adult non-dependent child can claim the $8,300 deduction on their tax return.

Dr. Jim Dahle:
Now, even if they're not married, they don't have any kids, they can still do the family contribution?

Tyler Scott:
That's my understanding from the article. I trust Kitsis. He didn't write it. It was a guest post on his blog, but no offense. I find that to be an equally valuable resource for me in my financial learning. And those are very long, detailed blog posts. So we can link to that and that's how it's outlined there.

Dr. Jim Dahle:
Yeah, it's pretty interesting. The justification is that you have a family because your parents are also on the plan or… It's interesting. I'm a little unsure about that, but I can totally understand why you'd be able to do an individual contribution at a minimum. $4,150. The rules are that you're covered under a high deductible health plan and no other health plan and you can make an HSA contribution. There's no other rule. That's a pretty cool little trick to think about. I'll have to read the article and decide whether I believe you can actually make a family contribution if you're single. That seems a little over the top, but let's look that up and get a little more information about that.

All right, let's talk for a minute about these folks that get into super complicated HSA situations. Two doc family, they each work for a different employer. They've each got a different high deductible health plan. They're each getting matching dollars. How do they split up their HSA contribution?

Tyler Scott:
Yeah, this is part of the 3D chess. There's a lot to consider here. And so, yeah, let's say both. We've got two working spouses. They both have access to a high deductible plan and it can be good for them to each be on a separate plan, particularly if they both get employer contributions because that's free money. That's like your 401(k) match. If the employer is going to put in $2,000 on each side, that's nice, that's free money. Also, once you get to age 55, that's when you're eligible for catch-up contributions in the HSA. And so if you're on two different plans, well, you both get the additional catch-up contribution. So, that's nice.

The drawback to being on two different plans is if you're all in a car accident or you all have a ton of medical expenses in the same year, well, now you have two deductibles, two out-of-pocket maximums you need to hit instead of just the one family deductible or limit. So that could potentially be more expensive.

And then I don't know if you know more about this, Jim, but he mentioned that something he said, there's an exclusion on my wife's plan from health insurance because he's covered at work. I don't think that's legal. I think there can be spousal surcharges if one spouse has access to health insurance, but you opt onto the other spouse's plan anyway. But I would be surprised if it's legal to outright exclude someone from an insurance plan. That's an unknown for me.

Dr. Jim Dahle:
Yeah, maybe they just use the wrong words to describe it. A big employer, I think they're unlikely to break the law if they've got some decent HR folks there. And that may be what they're referring to is just that there's an extra charge to have more family members on the plan. Lots of places work that way. Here at WCI, as you know, the employee has to pay 20% of the premium. And so, the premium is going to be higher if you have more family members on it. And so your 20%, of course, would be higher. And maybe that's the sort of thing that they're talking about, I don't know.

Tyler Scott:
But yeah, the decision about whether to all be on one plan or to split it up, that's part of the complication. And it feels like a simple question, but man, when you really go down the rabbit hole, it becomes complicated.

Dr. Jim Dahle:
3D chess. The good news is you're only playing around with $8,000 a year or so, and whatever the premiums are. And so it's not the hugest piece in your financial plan, most likely. So hopefully, even if you get it a little bit wrong, it's no big deal.

 

QUOTE OF THE DAY

All right, let's do our quote of the day before we go to our next question. This one's from Jack Bogle. He said, “Don't look for the needle in the haystack, just buy the haystack.” And of course, he's talking about index funds. Rather than looking for the next NVIDIA, just buy all the stocks. And guess what? I owned NVIDIA before it got big. And so, that's what you do too when you buy the haystack by using index funds.

 

SIMPLIFYING INVESTMENTS

All right, our next question comes in by email. “Hi, Dr. Dahle, thank you all for all you've done and continue to do to help our community, even with your April Fool's jokes that occasionally give me an MI. I'm incredibly grateful for the wisdom and knowledge you provide.”

By the way, if you're not yet aware, that April Fool's post about PSLF being canceled was just an April Fool's post. PSLF is still out there, so don't panic too much. And anybody who got an MI from it, I'm very sorry. Hopefully, you recovered okay.

“I am a 42-year-old married radiologist, making about $450,000. My question is about simplifying our investments. Under your guidance, I've recently fired the financial advisor. I've been working on this since I finished residency and I'm excited to DIY my investments and be rid of the 1.25% AUM fees that advisor was charging.”

Wow, well, I'm glad you were able to get away from that. Remember, my advice when you fire your advisor is to first have your plan in place, then fire your advisor, of course.

“After reviewing the holdings in our IRAs and taxable accounts, I found they contain 37 individual stocks, 29 ETFs, 18 equity mutual funds, four bond funds, and three CDs.” All right, I agree, the advisor needed to be fired.

“The taxable account has a market value of just over $1.4 million, with about $150,000 of unrealized gains that are mostly long-term. But due to the active trading, some have been owned less than a year.”

Active trading, a gazillion individual stocks, 29 ETFs, yeah, this is not someone who's been getting high-quality advice. And the worst part is they're not paying a fair price either. That is a huge AUM fee.

“My intention is to switch everything to a simple three-fund portfolio.” That's fine. “With an overall 80-20 asset allocation.” That's probably fine too. “How do I go about this? Should I sell all these funds before or after I transition to Vanguard? Should I wait until everything has long-term capital gains treatment so I just owe 15%? I'll just clean it up now, knowing some of it will be taxed at a higher rate.

Also, we just found out that our roof needs to be replaced. My wife's car died.” When it rains it pours. “So we are suddenly facing about $80,000 of unexpected costs. Show you some of the proceeds from the sale of the taxable account funds to pay for these expenses, or utilize a HELOC for the roof and finance the car. Thanks in advance for any insights you can provide.”

This is the sort of thing that drives people to a financial planner, isn't it, Tyler? They start getting all these questions about what they should do next. There's a lot of good stuff here. We're going to talk about legacy investments. We'll talk about debt versus investing. And we'll talk about capital gains taxes. So why don't you go first, Tyler? Give me your thoughts. This person just walked into your office and needs financial advice.

Tyler Scott:
Yeah, I'm glad you're here. I'm glad you've been improving on your situation. Good for you for taking it on. And yeah, there's plenty to talk about. First, maybe just a cleanup of something I heard there that some information about what he's expecting his long-term capital gains tax rate to be. It is true that a your income, your federal long-term capital gains tax rate is 15%. But the state of Ohio is going to want some of that. And because you make more than $250,000 on your modified adjusted gross income, you're subject to the net investment income tax of 3.8%.

So your long-term capital gains rate is 15% federal, 4.8% Ohio, 3.8% net investment income tax. And that tax is, of course, part of the Affordable Care Act to help pay for that plan. Bad news, your long-term capital gains rate is 23.6%.

Now that being said, whatever capital gains rates you pay, even a mix of short or long-term in this case, is a pretty small portion of your overall taxable account balance. And it sounds pretty close to what a year or two of AUM fees would have been anyway. My initial impulse is to just clean this all up at once. You have the math, if you've got $150,000 in gains, 23.6%, you're going to owe about $35,000 in taxes, maybe a little more if some of them are short-term. And $35,000 is about 2%, 2,5% of your $1.4 million taxable account. I think that's a pretty small price to play for creating simplicity. And it's only two years of what you would have paid your advisor anyway.

Now that being said, my impulse is to clean it up all in one motion. But a lot of times, a lot of the gains can be traced to just a small number of stocks or funds. And sometimes it can be worth hanging on to a couple of the keepers so that you can avoid those taxes if that feels painful to you.

Now that can be a little complicated to maintain these legacy investments, build your three-fund portfolio and have an overall asset allocation that you want. I tilt towards simplicity, but I wouldn't provide any major pushback if you decided to keep two or three of the winners for a little while.

Dr. Jim Dahle:
Yeah. Legacy investments, it can be tricky. Lots of people have this question. They finally became financially literate and then they realize they're sitting on stuff they want to change away from and there might be consequences to it.

Point number one that I think everyone needs to have crystal clear in their mind is if it's in a retirement account, if it's in an IRA, if it's in a 401(k), 403(b), 457(b), defined benefit plan, whatever, HSA, a 529, whatever. There are no tax consequences to selling it. If you got something you don't want, sell it and buy what you want. No consequence at all.

Two, you actually have to figure out what your gains are on every position and every lot of every position in that taxable account. And this probably calls for a spreadsheet. And if you're not okay with spreadsheets, you probably shouldn't be managing your own money. You really need to be able to do that sort of a thing in order to make proper decisions and be your own financial planner or investment manager.

So make a spreadsheet, every lot of every security in that taxable account and figure out what the gain on it is. Some things you're going to have a loss on, these legacy investments you don't want. Great, sell them. Not only are you not having to pay capital gains taxes on it, it's going to help reduce your capital gains taxes from other things. A lot of other stuff you don't have gains on or it's a minimal gain. Great, sell that.

And now let's see what you have left, that you have significant gains on. And maybe you've already taken care of three quarters of the problem in your taxable account. You might be down now to three ETFs and four individual stocks or something just because of the way things naturally work.

Now at that point, you have to start going, is this something I can build around. So, let's say you want to own the ETF VTI. That's the Vanguard Total Stock Market Index ETF. It's a great fund, it's my favorite fund. I got 25% of my money essentially in that or something like that.

But let's say your legacy holding is the iShares ETF ITOT, which is their Total Stock Market Index Fund ETF. It's the same thing. There's no way I would realize capital gains on ITOT in order to switch it to VTI. There's no way, it's the same thing. Yeah, you got to have two holdings in your account, but there's absolutely no downside to holding it long-term. So, don't sell stuff like that that you're okay holding, even if it's an S&P 500 Index Fund, even if the expense ratio is a little higher than what you'd get at Fidelity or iShares or Vanguard, you may not want to sell that sort of a thing.

But if you got a terrible holding that you're like, “Wow, this is a 1.8% expense ratio, actively managed mutual fund, I do not want this thing long-term.” Well, now the only question is, do you sell it now or do you wait until you have a year and save the long-term capital gains taxes? I'm the type that likes to wait a year. I hate paying capital gains taxes at all, much less short-term capital gains taxes. I'd probably wait a year.

But the first thing I'd do is I would say, “Do I have to pay these at all?” I'm a fairly charitable person. We give a lot of money to charity every year. That is a great use for your legacy holdings. Just flush them out of your account, give them to your charity of choice or give them via a donor advised fund. Then you can get rid of them right away and you get all the charitable benefits. You do have to have owned it for a year though to do that, by the way, to get the full tax benefit from donating it. I think that's a great way.

If you're 85 and not in great health and you're going to die soon, don't be realizing gains. Just wait until the step up in basis of death and let your heirs take care of it. And they won't have to pay any capital gains taxes either. So make sure somebody is actually going to pay the capital gains before you realize them early on there.

But hopefully you can simplify things down and then you can look at each individual holding, each individual lot and decide, “Am I going to build my portfolio around that and just hold on to it? Or am I going to sell it, bite the bullet, maybe use some of the losses from selling the losers to eat it up or even pay some capital gains taxes on it in order to clean it up?”

But I'm not a big fan of paying capital gains taxes. I pretty much don't. I haven't really. I don't pay capital gains taxes. I've gotten far more losses than I'm probably ever going to use in my life unless I ever sell WCI or my home, that sort of a thing. But for the most part, I don't pay capital gains taxes. So it would be a real change in my habits to start paying capital gains taxes, Tyler. Maybe you're a little more comfortable paying them, but I don't pay them very often. I don't like paying them. If I had to, to get out of a crappy portfolio, I would. But I would think twice about every single thing I was selling for a gain, and I'd probably wait until it was a long-term gain at least.

Tyler Scott:
Yeah, we don't want to make unnecessary donations to Uncle Sam when we don't have to. And just my lived experience of work, I've worked mostly with early and mid-career physicians, and they're growing in their financial acumen. They're getting there, but they want it to be simple. That's what comes through is, “I have this thing, and now I've realized the error of my ways. I want to pay the stupid tax and surrender my whole life insurance. I'm willing to pay $20,000 to clean up this taxable account and just get to the other side.”

There's something soothing about it and calming. They don't have to fret about what happens next. And I think that's reasonable as long as it's intentional when it's quantified, and they say, “Yes, I know that I'm paying X dollars in capital gains, and I do that knowingly and willingly in exchange for simplicity and peace of mind.” That's fine. Not everything has to be optimized in every case.

Dr. Jim Dahle:
Yeah, behavior versus math.

Tyler Scott:
Yeah.

Dr. Jim Dahle:
Behavior versus math, the old classic argument.

Tyler Scott:
I'm really learning that in this job, personal finance is about 90% personal and maybe 10% finance on the best days. And I'm maybe more marriage counselor than I am financial advisor. There's a lot of things going on that don't have to do with numbers. But your points about donating the big winners to charity is great. If you've got even maybe VOOs in there, the S&P 500 fund, that has a high enough correlation with VTI that I don't think someone needs to liquidate that. They can build around that pretty reasonably. But not if you bought Snapchat for $65 a share and it's worth $11 today. It's time to move on from GameStop and AMC and those things.

And then the other question there, I'll take a stab out, see what you think to answer their question. Should they sell everything in the current place it's in or after it goes to Vanguard? I don't think it matters that much. My impulse is to do an in-kind exchange to Vanguard first and then sell everything at Vanguard. So you just get 1099 tax documents from one place and that's maybe easier to keep track of in the name of simplicity. And we'll point out, it's not always possible to do an in-kind exchange on every security. If Vanguard doesn't offer that security, you're going to have to liquidate it to cash anyway. But do you have an opinion on the order of operations?

Dr. Jim Dahle:
You have to look at commissions. Sometimes they do cost you if you're a super expensive brokerage or something. I've done in-kind transfers before with my parents' portfolio and it was cheaper to sell them once they moved over. I think we came over from, this is a long time ago. This is when Fidelity and Schwab were charging commissions, I think. I think it was a little bit cheaper and we moved it in-kind and then we got to cleaning it up once it moved over. It was my recollection. It's been a long time though.

But as a general rule, when you're escaping a bad advisor, people just want to get out. Get my money over to the other place. And usually you have to liquidate your IRAs, etc. You don't have to liquidate your taxable accounts. They can usually be transferred in-kind. And usually the place you're going is going to have lower fees because now you're cognizant of fees. Now you're financially literate. So you're usually better off waiting until they get over there and then selling them. Half the time you're waiting for the gains to become long-term anyway. So it's no big deal to wait a little longer.

All right, we got to talk about the roof and the car. This is a millionaire we're talking about who's talking about borrowing money to buy a car, borrowing money to put a new roof on the house. And they got a million dollars in taxable assets.

Tyler Scott:
Yeah, yeah. To just answer the question directly, yes, use the proceeds from the sale of the taxable account cleanup to pay for the roof, pay for the car. HELOC rates are really high right now. Car loans aren't much better. And I'm just allergic to that behavior, regardless of rates.

And I'll add, take some of the proceeds. I'm presuming based on the nature of the question that we don't have an adequate emergency fund in place. So let's also set some of our proceeds aside into a high yield savings account or the money market at Vanguard. Maybe typically three to six months of expenses. And let's park those somewhere liquid and safe so that the next time the furnace goes down or the transmission blows, we've got cash set aside and we're not taken aback by that expense.

Dr. Jim Dahle:
Yeah, well, the best part about that right now is it doesn't cost you anything. Stick your money in the Vanguard Federal Money Market Fund. You're making 5.3% right now. There's almost no opportunity cost to having cash sitting around right now. So why not have a little bit bigger emergency fund? Meanwhile, if you want to borrow money for emergencies, rates are through the roof. Medical students are borrowing right now. A lot of people don't realize this. Their plus loans are 8.05% this year. That's for school. That's as good as it gets right now. You think your car loan is going to be dramatically better? Only if you overpay for the car.

Tyler Scott:
Yeah, this gives me a chance to also talk about one of my favorite financial planning strategies or tools that's been really meaningful to me in my life. And that's what our founder refers to as squirrel funds, Sarah-Catherine Gutierrez, who's been on the podcast before. She's from the South. And so she says really lovely quaint sounding things like we should create squirrel funds. By which we mean, we recommend that clients set up a high yield savings account and preferably one that allows them to create buckets or sub accounts within the high yield savings account. I personally use Ally for this.

Megan and I just have a joint high yield savings account, one account number, but within it, we've opened a number of different buckets or squirrel funds. And into each of those buckets, they're named, the buckets are earmarked for different categories of inevitable future expenses that we know will happen. We just don't know exactly when they'll happen or exactly how much they'll be.

For example, we've got a travel bucket, a home bucket, an out-of-pocket healthcare bucket, etc. We send $833 a month via automatic monthly transfer. I don't have to do anything. And it just goes into our home bucket within Ally, sits there and earns interest. And then when we need a new L-shaped couch, a sectional sofa these days is $10,000 or our roof needs to be repaired. We already have the money set aside in the bucket and the rest of our automated monthly smoothed out financial plan is not impacted by this large episodic expense.

This actually just happened to us. Last fall, we bought this house in Salt Lake two years ago. It was a rental before this and we knew it was not well taken care of as a rental. And so, sure enough, the furnace, the air conditioners, the hot water heater, they were all integrated somehow. The whole thing went out. I got a bunch of bids and was horrified to learn that it was $44,000 to get it fixed.

That is a lot of money at our house. And that would have really derailed the rest of our automated financial plan. That would have impacted how much I can put in the girls 529s, whether or not I could do my backdoor Roth or max out our retirement accounts. But I was really grateful that for many years, I've been sending money to my squirrel funds. And so, I had $30,000 built up in the home bucket and I needed to dip into my emergency fund as well.

I want to make the point that squirrel funds and emergency funds are two distinct and separate ideas. The squirrel funds are for inevitable expenses that we just don't know when they'll happen. The emergency fund is the safety net that sits underneath the squirrel funds. I got $30,000 out of my bucket, got $14,000 out of my emergency fund. I paid the HVAC guys with my credit card so I could get my 2% cash back. And then I paid my credit card bill from the squirrel and emergency funds. And the rest of our financial life wasn't impacted. We didn't have to start eating Alpo or anything. We were able to make it through unaffected.

I just want to plant that idea out there. I wrote a blog post that talks about this, about moderate, some considerations for “moderate” earners. And so I would suggest that for our emailer as well, not just to shore up these short-term cash issues with the proceeds of his cleanup efforts, but also maybe to consider as an ongoing strategy to set money aside regularly so that the next time you need a car, there's already cash built up.

Dr. Jim Dahle:
There's nothing quite like cash when you need cash. I think there's another important point you can make off this, and that's the amount you're putting in there. You said $833 a month is what you're putting in there. And the first thing I think about when I hear that is, boy, I want all those people graduating medical school and wanting to buy a house to hear that number and say that that is the cost of ongoing expenses with your house. It's going to be a roof here, it's going to be a garage door here, whatever it's going to be, each bag goes out, but that's what it costs.

People don't think about that. They just think about the mortgage. They don't realize that a mortgage is the minimum amount you're going to pay for your housing and rent is the maximum amount you're going to pay for your housing. Because when you're renting, all that stuff is the responsibility of the owner, of your landlord. I think it's important to realize that it is not an insubstantial expense to maintain a house.

This is a little bit different from a sinking fund. Have you heard that phrase, a sinking fund? This is for if you got to make your life insurance payment once a year, that you're on an annual payment. And you know, each month, you got to put some money toward that. And so, you put money in every month, put $150 in there every month. And after a year, the bill comes due again, and you've got the money sitting there and you send it to the life insurance company. This is much more something that is you don't know when you're going to spend it. You don't know exactly how much it's going to be. And so, you just keep putting the money in there.

I think the classic example for a squirrel fund, as you call it, would be a car. I tell people, when you pay off your car, make that the last car loan you ever have. Keep making yourself payments, just make them to you. And that way, when it comes time to buy another car, you have the cash to do it this time.

I think that's a pretty cool trick at Ally Bank that you can do that. I've used Ally Bank in the past. I never divided up the account. We just kept a spreadsheet that basically said how much was in each one of the different squirrel funds. And as our wealth grew, we eventually got to the point where we're like, “This doesn't matter anymore. We're not going to do this anymore. We're just going to lump all our cash together.” But we sure did the exact same thing for many years. So I think it's a great practice and I definitely endorse it.

All right, Megan is giving me that look. I think we've been going too long. So we better start wrapping this up.

 

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All right, don't forget, call for speakers. The conference, February 26th through March 1st, 2025 is going to be in San Antonio. Join our world-class speaking team. Yes, we bring back some of our most popular speakers every year, but we try to have new speakers every year as well. You need to apply by June 15th. There's hundreds of applicants each year. That doesn't mean you won't be one of the ones selected, you can increase the odds of that by submitting multiple topic submissions.

So don't just speak, experience WCICON. Get your full registration included and be a part of that three-day experience. Sign up at wcievents.com. We'll tell you by August. Announce it to the public by September 1st.

Thanks for those of you leaving us a five-star review and telling your friends about the podcast. A recent one comes in from Brad, who said, “What a great podcast. I recently started listening to The White Coat Investor podcast and it quickly became my go-to source for financial advice. The host is a real asset to the show. His expertise and insight are invaluable, and he delivers the information in an easy to understand format.

The topics covered are so varied and relevant that I never get bored listening. From investing advice to personal finance, Dr. Dahle covers it all. He also interviews some amazing guests that bring even more value to the show.” Like Tylor today. “I would highly recommend The White Coat Investor podcast to anyone looking for sound financial advice no matter where they are in their journey. Five stars.”

We appreciate that review. Tyler, any last words of wisdom before we let people go?

Tyler Scott:
No, I'm very familiar with that look you're getting from Megan, so we better be done.

Dr. Jim Dahle:
All right. Well, keep your head up, shoulders back. You've got this. All of us here in the White Coat Investor community are here to help you be successful with your finances, your career, your family, and your life. So, we'll see you next time on the podcast.

 

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

 

Milestones to Millionaire Transcript

Transcription – MtoM – 168

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 168 – Anesthesiologist becomes a millionaire.

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All right, those of you who don't know about our free Financial Basics email series, check this out. It's WCI 101. You can find it at whitecoatinvestor.com/basics. Basically, for a period of about 12 weeks, you'll get a couple of very short emails a week teaching you the basics of finance.

If you don't become financially literate, if you can't speak the language of finance, it's very hard to be financially successful in your life. The combination of financial literacy and financial discipline is so powerful and so rare in our society that having them both is like having a superpower. It's pretty amazing what you can do, as you've noticed by listening to people that have combined these two things on this podcast.

This is the Milestones to Millionaire podcast where we celebrate what you've accomplished and use it to inspire others to do the same. But we'll celebrate anything. I don't care if you paid off your credit card. We'll celebrate that with you. I don't care if you're a decamillionaire. We'll celebrate that with you. Whatever it is, we will celebrate, and we will use it to inspire others. Apply at whitecoatinvestor.com/milestones.

 

INTERVIEW

We have a great guest today. Let's get her on the line. Stick around afterward. We're going to talk about the White Coat Investor philosophy. I'm going to give you 12 timeless financial principles for doctors.

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

Jane:
Thank you.

Dr. Jim Dahle:
Tell us what you do for a living, how far out of training you are, and what part of the country you live in.

Jane:
I am an anesthesiologist. I am four and a half years out of training, and I live in the mid-Atlantic area.

Dr. Jim Dahle:
Okay, and tell us what milestone we're celebrating with you today.

Jane:
We are celebrating becoming a millionaire today.

Dr. Jim Dahle:
Awesome. Congratulations. A millionaire, four and a half years out of residency. Or did you do a fellowship?

Jane:
I did a fellowship, yes. I'm three and a half years out from the fellowship, yes.

Dr. Jim Dahle:
Oh, wow. Three and a half years out from the fellowship, and already a millionaire. That's pretty awesome. Let's break it down. Tell us about your assets and your liabilities.

Jane:
Net worth now is $1.2 million, actually. When I filled this out, I was a millionaire about three months ago. Right now, in cash, I have $90,000. In investments, mostly ETFs, I have $1.08 million, and liability student loans are $15,000. And then I have a mortgage, which makes up the rest of my liabilities.

Dr. Jim Dahle:
How much equity do you have in the house?

Jane:
About $70,000 equity in the house.

Dr. Jim Dahle:
Okay, very cool. Very cool. What's your income been since you got out of training?

Jane:
My income has averaged about $600,000 each year since fellowship.

Dr. Jim Dahle:
Is there anybody else in the picture? Are there any kids? Is there a spouse that's working? Is there a domestic partner? Anybody else in the picture?

Jane:
I have a fiancé. We have not merged our finances yet, but I take care of my mom and my grandmother and some other family members.

Dr. Jim Dahle:
Okay, so some dependents, but really nobody else contributing to the income in this story, anyway. This is pretty cool. You're three and a half years out making $600,000, so you've made $2 million in your career, let's say, and you've got over half of it still.

Jane:
Yes.

Dr. Jim Dahle:
That's pretty awesome. Tell us how you did that.

Jane:
I actually give a lot of that credit to you, Jim. I found White Coat Investor during my PGY-2 year. There'd been some incidences of financial abuse in my family, and so I never wanted to be a victim of that. So when I found White Coat Investor, when I was looking into disability insurance, I just started reading the blog posts and just never looked back.

Dr. Jim Dahle:
Wow. I tell people to live like a resident for two to five years, and that's usually about until the time they pay off their student loans. Your student loans aren't actually quite gone, but I don't expect most people to become millionaires during the “live like a resident” period. So this is pretty impressive to me.

About how much of that $600,000 do you think pay in taxes each year?

Jane:
The first year, I was W-2, and I paid about a third of that in taxes. I saw that tax bill, and the tax bill alone was more than anyone in my family ever made ever in life. I was glad that I worked hard and I made all that money, and I was happy to pay my taxes, but I felt like never again. I transitioned to 1099 full-time to make roughly the same amount, if not more, but to utilize tax-saving strategies, continue living like a resident, to use the leftover to take care of family and make sure that my folks were taken care of.

Dr. Jim Dahle:
Did you form an S-corp?

Jane:
I did that this year. I kept going back and forth. I did not do it prior to this year because it was hard to find an accountant to get straight answers from. I kept talking to different accountants, and I'm on my third accountant now. It's been quite a pain actually, but yes, I went S-corp this year.

Dr. Jim Dahle:
Very cool. So, how much do you think on average over the last three years, how much a year do you think you're spending?

Jane:
Oh gosh, I spend a lot. I spend roughly about anywhere from $12,000 to $15,000 a month.

Dr. Jim Dahle:
Okay, so that adds up to $150,000 to $200,000.

Jane:
Yes.

Dr. Jim Dahle:
Something like that.

Jane:
Yeah.

Dr. Jim Dahle:
Okay, very cool. That's pretty awesome. That means if a third is going to tax, maybe a little less, once you kind of sorted out the tax situation, you're spending a little less than a third, you're saving more than a third. Your savings rate over the last three years has been 40% plus.

Jane:
Yes.

Dr. Jim Dahle:
That explains why you have half of your money still, more than half of your money, especially if you include some appreciation on the house, and of course, some increase in your investments. You've now got your money working as hard as you are working.

This is pretty impressive. There's other people out there, maybe they're in residency, maybe they're in fellowship. What advice do you have for them if they want to be millionaires three or four years out of training?

Jane:
I would say what worked for me was getting a bigger shovel. I looked at what my time is worth and I looked at how can I maximize my income without burning out? What do I enjoy doing and how can I do more of that to get a bigger shovel?

I'll say really as a resident, don't get caught up in the small stuff. Your goal, your job really is to get board certified. That's your job. So do all you can to get board certified and prioritize your financial education like you prioritize your medical education.

For me, it was, I set a goal of reading at least one blog article every day. Either White Coat Investor or Money Moustache or Go Curry Cracker, I would read at least one article every day and a couple more on the weekends as a resident. And then as a new attending, I remember you wrote this one article about your first attending paycheck and you wrote that how you spend that money will set the tone for much of your next financial future.

And so I really thought hard about that and I got together an investment plan. Without a plan, without a roadmap, I'm not sure that I would have gotten this far. I made a roadmap and there were times when I deviated from it, but then I was able to come back to that document. I was able to update it, change what wasn't working to what would be a better idea, staying away from individual stocks and doing ETFs and mutual funds.

But really at the end of the day, I think what works and what advice I would give is figure out your “why” and use that as a guiding light and then build your roadmap. With the financial plan and investment plan and stick to it. You say that over and over, make a plan and stick to it, but it really works. It really works. And there's going to be times when you don't stick to it, don't beat yourself up, just figure out why, figure out what you need to change and stick to the new plan and keep going.

Dr. Jim Dahle:
Very cool. Tell us a little bit about your “why.” What motivated you to do this?

Jane:
I'm West African and I'm an immigrant and I saw my parents, especially the women in my family, work their knuckles to the ground to get us this far. And I didn't want to also have to grind my knuckles to make things work, to take care of my family. I wanted to work smart. And so I wanted to be able to take care of my mom because she's gone through so much in her life to get us where we are. I wanted to take care of my grandmother and some other people in my family that are instrumental in my life.

A lot of times with immigrant families, well, I think in a lot of cultures, actually, taking care of extended family is part of the culture. And so, I wanted to be able to set myself up to do that in a smart way without killing myself. A lot of people talk about, “Oh, I have to send money back home.” And that's a big expense. That's about a third of the chunk of money of my expenses. I wanted to make sure I'm still able to send money back home, still able to take care of my mom, but still feel like I'm not sacrificing myself to do that.

Dr. Jim Dahle:
You make about $50,000 a month.

Jane:
Yeah.

Dr. Jim Dahle:
What were your thoughts the first time that paycheck hit your account? And I'm curious, it sounds like you probably share a lot with your mom and grandma. What were their thoughts when your first $50,000 paycheck hit your account?

Jane:
I actually don't share the information with them. They have no idea that this is happening or that I've even hit this milestone. The first thought I had actually at the time, I still had a scarcity mindset. The first thought I had at the time, which I don't recommend is, “Oh, this is not enough.” But when I kind of plugged it into the plan, the second thought I had was, “Oh my gosh, this goes so far, we can do so much with this.” So, those are the first two thoughts I had.

Dr. Jim Dahle:
Very cool. Very cool. You talk about having a big shovel. When I look at the Medscape survey this year, it says the average doc is making $352,000. The average specialist is making $382,000. The average anesthesiologist is making $448,000. You make $600,000.

Can you tell people what you did to have an above average income for your specialty? Are you working more than average? Did you negotiate harder? Did you go to part of the country where you typically get paid more? How do you get paid a third more than the average for your specialty?

Jane:
That's a good question. I invested in learning how to negotiate. I started with books. Harvard has this negotiation certificate or they have negotiation courses. I did one of those as well. And I subscribed to their newsletter and they send out emails periodically with different negotiation tips. I invested in learning how to negotiate.

My first year and a half as an anesthesiologist, I worked 80 to 100 hours a week. And so, to work that much and then look at that tax bill, for me, that was an absolute no. I actually work less than I did before. I probably average 80 to 120 hours a month. For me, it was negotiating better and then also switching to as an independent contractor. Doing some locums, but then also figuring out how to get my own contracts.

Dr. Jim Dahle:
Very cool. Now we kind of glossed over this, but you mentioned you had like $15,000 worth of student loans left. I'm assuming they're disappearing in the next month or two. So basically you've hit another important milestone here. How much did you owe when you came out?

Jane:
Thank you. Yes. When I came out of fellowship, it was $180,000.

Dr. Jim Dahle:
So not too bad, below average, actually. How did you keep that bill so low, given it doesn't sound like there was a lot of help coming from family? Were you on scholarships, that sort of a thing?

Jane:
Yes, I was lucky to get a lot of scholarships and grants for undergrad. Coming out of undergrad, I did not owe much. It was less than $50,000 coming out of undergrad because I did work-study. I worked three jobs in undergrad as work-study, and then I had scholarships. That helps to keep it low.

And then for med school, I had scholarships, but I also worked as a tutor during med school, tutoring high school kids, and then as a second year, tutoring first years, as a third and fourth year, tutoring first and second years. That helped, plus the scholarships too. And then with interviews, just either driving or staying with family.

I was lucky to come out with $140,000 when I finished med school. And then for much of residency, I either deferred or just paid the absolute minimum, and it was $180,000 when I came out. I refinanced right away, following your advice.

Dr. Jim Dahle:
Yeah, it sounds like the timing on that wasn't awesome, huh? Right before we went into the holiday.

Jane:
Yeah, right. I still would do it again. I feel a little salty missing out on the zero payments, but it's okay. But I refinanced down to, I think like 3% when I refinanced. And then during COVID, I refinanced again to 2.5%. And I've just been paying, I think it's like $2,600 every month since then.

Dr. Jim Dahle:
Does your fiancé know that you're a millionaire?

Jane:
He does, yes.

Dr. Jim Dahle:
Have you guys talked a lot about money?

Jane:
We do. I am very stock heavy, well, really ETF heavy, and he's more real estate heavy. I have not really gotten into real estate yet. Our conversations are very interesting. Sometimes we'll have arguments, whether it's better to invest in the stock market or invest in real estate. But for the most part, we are on the same page about maximizing our savings rate and investing the rest.

Dr. Jim Dahle:
Very cool. You're already talking about that. Well, congratulations to you, Jane. You've been very successful. You should be proud of yourself. I'm proud of you. The whole WCI community is proud of you. You've done a great thing here. And we encourage you to keep it up and use your wealth to not only bless your family, but to bless the world in general around you. So, congratulations to you.

Jane:
Thank you so much. I appreciate it. And really I'm fangirling because I started reading your articles since 2015. And so, it's such a pleasure to be able to talk to you now. And thank you so much for everything, all the content that you put out for us and all the research that you and your team does. We really appreciate it. And all your hard work, you and your team are really instrumental to my success and I'm sure a lot of other high income earners.

Dr. Jim Dahle:
Yeah. It's our pleasure, but let's be honest. It's relatively easy to tell you what to do. You still have to do the hard part, which is to do it. And you've done that. So good job.

Jane:
Thank you.

Dr. Jim Dahle:
I hope you enjoyed that. It's fun to talk to doctors and I love it when they're killing it, when they're just doing awesome. I know most doctors out there aren't doing quite as well as this anesthesiologist. Not making as much, not saving as much, not investing as intelligently, not as financially literate.

That's why we bring people like this on the podcast to inspire you to do a little bit better, negotiate a little bit harder at your next contract, to save a little bit more, to reduce the cost of your investment a little bit and optimize your asset allocation.

We know it's hard to get all this right, but it's worth it. Look at all the fun things you can do once you've got your financial ducks in a row. You can help all kinds of other people all over the world. You can treat your own wellness so you don't get burned out. You can help your family to have a better life than you ever had growing up. There's a lot of cool things you can do with it.

 

FINANCE 101: THE WHITE COAT INVESTOR PHILOSOPHY: 12 PRINCIPLES FOR DOCTORS

Let's talk for a minute about the White Coat Investor philosophy. A year or more ago, I ran a blog post. This is what we called it, The White Coat Investor Philosophy: 12 financial principles for doctors. And I think it's worth going over those again. They're timeless. A lot of times people get confused about what we're really preaching here at the White Coat Investor. We've got a missionary zeal. There's no doubt about it. And we preach, we rant, we try to get people to do the things that are going to help them in their financial lives.

But these are the 12 points. These are the things you really ought to take away from it. These are the points that are not controversial, that nobody has some other opinion and they're true and they're timeless. So let's pay attention to them.

The first one, financial planning makes you happier. I'm 100% convinced that financially secure doctors are better partners, parents, and physicians. If you will do real financial planning, you will have less stress. You will have less burnout. You are less likely to get divorced. You're less likely to kill yourself. You'll be happier. You'll provide better patient care. Do some financial planning.

The second principle, wealth comes mostly from making a lot and saving a lot. It's not that complicated. Make a lot, carve some portion out of it to invest, and invest in an intelligent way. That's the formula to becoming wealthy. It's not complicated. Don't overcomplicate it. Yes, frugality matters. Yes, it's important to pay attention to the details sometimes. But the bottom line is, if you can get those two things right, making a lot and saving a lot, you're probably going to be just fine.

The third point is that you need a reasonable written investing plan. You need a reasonable plan. It can't be some crazy thing like putting all your money in Bitcoin. If you want to own some Bitcoin, fine. Put 5% of your portfolio in Bitcoin. No problem. If it goes to be worth $10 million, you'll be glad you have it. If it goes to zero, it won't hurt you that much.

But don't put 60% of your money in Bitcoin and 30% in gold and 10% in your brother-in-law's business. Have something reasonable. The majority of your money needs to be in risky type investments, stocks, real estate, those sorts of things. Some of your portfolio probably ought to be in something that's not so risky, cash, bonds, that sort of a thing.

Stick with it. Set the percentages, write them down, refer to them from time to time, and you don't have to ask yourself every month when you have some money to invest what you're going to invest in. It's already decided. You decided it 15 years ago when you wrote down your reasonable written investing plan. It makes the whole rest of your investing career a whole lot easier.

Principle number four, index funds are the best foundation for a portfolio. The most profitable companies in the history of the world are known as stocks. These are your Apples and your Amazons and your Walmarts and these sorts of companies. They're all over the world. There's about 10,000 of them, these publicly traded companies.

The best way to invest in stocks is via a low-cost, broadly diversified index mutual fund. These are a great foundation for your portfolio. If you want to add some stuff around the sides, fine. If you want a little bit of real estate here, you want a little bit of Bitcoin there, you want some bonds here, whatever. Add them in. This is a great foundation for your portfolio.

You know that this is not going to go to zero barring some sort of apocalyptic zombie situation. You're not going to get scammed by your index fund. It's going to grow over time. Ask yourself, “Is this likely to be worth dramatically more in 20 or 30 years when I need the money than now?” And the answer is yes. Yes, there's going to be a lot of volatility between now and then. That's okay. You can buy the 10,000 most profitable companies in the history of the world essentially for free using an index fund.

All right. Principle five is to insure well, but only insure against financial catastrophes like disability, death, health, liability, property loss, et cetera. You don't need to insure every little thing. You don't need to insure against things that are not financial catastrophes like dying when you're 90. That's not a financial catastrophe. That's an expected event. You don't need whole life insurance to pay out when you're 90, unless you're in a pretty unique situation that most doctors are not in. It's not unless somebody sell you a whole life insurance policy that you don't need. You've got a better use for your money almost surely.

Principle number six is to live like a resident for two to five years out of residency. Now, the point of this is to front load your wealth building activities to a time of your life before you're used to making a lot of money. It's relatively easy to keep the same lifestyle you had the year before, but now with the dramatically higher income, you've got a lot of that income you can carve out and use for wealth building activities like saving up a down payment, paying off your student loans, catching up to your college roommates with your retirement savings.

Even if you give yourself a little bit of a raise, give yourself 50% raise coming out of residency, you're still following the principle. You just don't want to have a lifestyle explosion when you come out of training and grow into your newfound attending income with the big fat doctor house mortgage and two big fat car payments before you even get out of residency. And then when your student loan payments come due in a few months, all of a sudden you find yourself living hand to mouth on an income of two or three or $400,000 a year.

It happens all the time. 25% of doctors get into their 60s and still are not millionaires. How does that happen? Because they spend all their income. That's the main way. Yes, some of them get disabled or have something terrible happen to them, get divorced and have to split their income and assets in half. But for the most part, that tragedy is completely preventable simply by living on less than you earn. And if you will front load that for just a short period of time at the beginning of your career, you will not regret it.

Principle number seven is to spend intentionally. I don't care what you value. Maybe it's a wake boat. I got a wake boat. Maybe it's a Tesla. I don't have a Tesla. Maybe it's fancy vacations. Maybe it's $10,000 handbags. Maybe it's eating out at Michelin three-star restaurants. Maybe it's a nice house. Maybe it's private school for your kids. Maybe it's supporting your extended family in a developing country. I have no idea what you value most, but spend your money on that. You can buy anything you want. You can't buy everything you want and you need to be intentional about how you spend.

Number eight is to get good advice at a fair price. The most profitable hobby you can have is to learn to be your own financial planner and investment manager. But if you're going to do it, you need to do it right, which means you need to educate yourself well enough that you're doing it about as well as a good professional would.

If you're not going to do that, go hire somebody to help you. It's going to cost you probably four figures a year. $2,000, $6,000, $8,000, something like that a year is what you're going to pay for good financial planning and investment management. That's a fair price, but they need to be talking about the same stuff we talk about at the White Coat Investor. If they're not talking about index funds, if they're not talking about rebalancing, about insuring only against financial catastrophe, then that's not the sort of person you want to be getting advice from. If they're selling you products, you're almost surely getting bad advice.

Number nine is to understand and use your tax-advantaged accounts. Doctors often have a plethora of tax-advantaged accounts provided by their employers or not by their employers. These can include 401(k)s, 403(b)s, 457(b)s, 401(a)s, solo 401(k)s, Roth IRAs, HSAs, 529s. Learn how all these accounts work. Use them to your advantage. Not only do they provide great tax benefits, which makes your money grow faster than it otherwise would, but they give you estate planning and asset protection benefits. Learn about them, use them to your advantage.

Number 10, pay cash and avoid debt. We all become numb at some point during dental school or medical school and we get used to living on borrowed money. You got to get over that when you get out of your training. You got enough income that you can waste quite a lot of it and still be just fine.

So, get used to saving up for stuff. It's a good habit, I promise. It's like that old skit, the Saturday Night Live did with Steve Martin, where he says, “Where would I get this saved money?” Well, you know where it comes from. It's money that you earn, but did not spend. So, minimize your debt, pay cash for stuff. My kids know when I ask them from a very young age, “Would you rather earn interest or pay interest?” They know the right answer. Make sure you know the right answer too.

Principle 11 is to minimize your taxes and know the tax code. For the most part, you lower your tax bill by living your financial life differently, not by knowing some secret loophole or having somebody different file your taxes. Don't go looking for the secret loophole. The secret loophole is to live differently. It might be getting married, it might be having kids, it might be starting a business, it might be saving for retirement, it might be paying for healthcare. Those are the sorts of things that lower your tax bill.

And finally, principle number 12, asset protection is actually pretty easy and it matters a lot less than you think. Do the basics, they're cheap, effective, and pretty easy. Title your property properly, max out your retirement accounts, know the laws about asset protection in your state, buy malpractice insurance, buy personal liability insurance. And as you acquire millions, you may want to look into some more complicated, expensive, less reliable asset protection techniques, but you probably don't have to.

We're all worried about losing money in an above policy limits judgment from practicing medicine or dentistry, but the truth is those are extraordinarily rare events. For the most part, you're playing with the house money and you're functioning as a witness for the defense. Won't help you sleep any better at night if you get sued, I know, but the truth is you're probably not losing any of your personal assets in that lawsuit.

I hope those 12 principles make sense. They're timeless. We're going to keep talking about them here at the White Coat Investor, so don't be surprised by that. But if you incorporate them into your life, you will be successful. This stuff is not that hard. You just concentrate on the basics and get the basics right.

It's like what Jane told you in the interview today. She concentrated on getting a big shovel, she carves a whole bunch of it out, and she invested in just in simple ETFs. It's not that complicated. She's a millionaire. She's going to retire early as a multi-millionaire and have helped a whole bunch of people along the way. You can do the same.

 

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All right, we're at the end of our episode today. There'll be another one on Thursday, the regular White Coat Investor podcast. And another Milestones to Millionaire Podcast will be next Monday. If you'd like to come on, you can apply at whitecoatinvestor.com/milestones.

Until next time, keep your head up, shoulders back. We'll see you next time on the White Coat Investor podcast.

 

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.