Dividends, 457(b)s, Side Gigs, and 401(k) Wisdom

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 444.

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All right, welcome back to the podcast. Thanks for what you do. Your work is important. Don't let anybody tell you it isn't. And if you just had a rough day, I'm sorry. Tomorrow will be better.

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All right, let's do a correction. My favorite part of this podcast. You guys want to get in the weeds and the harder the questions, well, the more likely I am to screw them up. This one, I don't know that I really screwed up, though. This one's kind of a pretty minor gripe.

KIDDIE TAX

Dr. Jim Dahle:
A couple of podcasts ago, I talked about legacy holdings. One option to deal with could be to give to somebody in a lower tax bracket. A friend or a family member that's in the 0% tax bracket. You give them this legacy holding and instead of cash, they sell it because they're in the 0% long-term capital gains bracket. They have no tax consequences. Nobody pays taxes. You don't pay taxes, they don't pay taxes on the earnings, the increase in value of that particular investment. So it's great.

But somebody writes in and says, “Oh, well, what about kiddie tax?” Well, this is true. You have to keep kiddie tax rules in mind. If you're giving this to your kid that's under 18, the kiddie tax applies. And then they realize a $30,000 capital gain. Well, yeah, you're going to be paying that at your capital gains tax rate. This works for your kids that are independent of you in their 20s or you give it to them now and they just don't realize the gain until the kiddie tax no longer applies, et cetera. So keep that in mind.

Obviously the income from that will count toward their income, and above a certain amount you have to start paying taxes on that at your tax bracket, but up to a certain amount, that would work. Just be aware of the kiddie tax if you use this particular technique with your legacy investments to give them to your minor children.

All right, let's take a question out the Speak Pipe.

REINVESTING DIVIDENDS

Matt:
Hi WCI team, this is Matt from Florida. I was wondering if you could speak to the pros and cons of reinvesting your dividends automatically versus having your dividends come to you and what the thoughts are about doing that in a tax advantage account versus your taxable account. Thanks.

Dr. Jim Dahle:
Okay, great question. I love it. I'll tell you what I do and why. And then I'll argue it's the best way, but obviously some people choose other things. But what I do is in a tax protective account. An HSA, a 529, even my kid's UTMAs, even though those are technically taxable accounts, but certainly, 401(k)s, Roth IRAs, those sorts of things. I just reinvest the dividends. It's very simple. It benefits from being automatic. And automatic is good because you don't have to think about it. It just happens. The day the dividends paid, the dividends reinvested. And so, there's no lag there. There's no cash drag there.

I think it's a great thing, especially for those who might not get around to reinvesting that dividend manually for a while. But in our taxable account, I don't reinvest any dividends. They're all paid to the money market fund associated with the account. Now they sit there in the money market fund and they earn some interest while they're there until we reinvest them.

But I treat those in my taxable account, the same way I treat all the other taxable income we made that month. Whether this is a paycheck from WCI or some profits from WCI, or whether this is a distribution from my physician partnership, or whether this is some income paid from a real estate investment or dividends from VTI or what, it all sits in that money market fund until the first part of the next month when I invest our money.

We figure out, “Okay, well, this is about what we spent. And so, this is how much of what we made we can invest.” And I invested all at once. Everything we made from all sources, including dividends in that taxable account. There are multiple benefits. One, you have fewer tax lots. I am not buying all six or eight or whatever investments we have in our taxable account every month, every quarter even. Every time a dividend is paid, I'm not rebuying that investment. I don't have a gazillion tax lots to keep track of.

Now it's fair point that the brokerage will keep track of that. You don't actually have to keep track of it on a separate spreadsheet or anything, Vanguard or Fidelity or Schwab or whatever will keep track of all those tax lots. But it's a little overwhelming when you log in and you got 420 tax lots. And that's what you're going to have. If you're reinvesting a dividend every month and buying 0.37 shares or whatever of whatever it is you own. And so, that's one benefit. It just kind of simplifies things that way.

The other benefit though, is when I invest manually each month, and sometimes it's every couple months, whatever, I can direct that money to whatever's lagging. This is one of the ways in which we do our rebalancing. We're like, “Oh, well, stocks had a great 2023, 2024 and 2025 so far. So all this money that we're investing this month is going to bonds. Or this month, all the money we're investing is going to go into real estate or international stocks or whatever.” And so, it allows us to manage the portfolio that way. And those are the reasons why we don't do that automatically in the taxable account.

The other thing to keep in mind is that doing things automatically is great, but it doesn't mix well with certain things like tax loss harvesting. If you are automatically reinvesting dividends, well, now you've bought shares of this thing within the last 30 days. So now you've got a wash sale problem. That doesn't mean you can't do tax loss harvesting, but it's one more thing to be worried about, especially if you own the investment in a tax protective account that you are tax loss harvesting in the taxable account. So, keep that in mind. That can be another problem with automatic dividend reinvestment is it can cause wash sales for your tax loss harvesting.

In general, do it in your tax protected accounts. Don't do it in your taxable account. But if you're okay, not ever tax loss harvesting, and you're okay having a gazillion tax slots, you can reinvest automatically, even in the taxable account. It's not the end of the world if you do that. It's not wrong by any means. It's just not how I prefer to do it. Hope that's helpful. Hope that answers your question and helps you decide what you want to do with your own money.

QUOTE OF THE DAY

Dr. Jim Dahle:
All right. The quote of the day today comes from Peter Lazaroff. He said, “With investing, you get what you don't pay for.” I love it. It sounds like Bogle-ism, but it actually wasn't Bogle who said it.

Okay. Let's take another question off the Speak Pipe.

457(b) RISK OF LOSS

Speaker:
Hi, Dr. Dahle and the rest of the WCI team. Thank you so much for the quality content you produce. It's definitely helped my family's financial future, and I really appreciate it. Today, my question is on balancing the risk of retirement savings being held in employer-owned accounts versus the risk of significantly over-saving for retirement.

Every year, about 55% of our tax-advantaged retirement savings would be held in accounts belonging to our employer, namely in a pension and a 457(b). Obviously, both of those account types are not guaranteed and technically be lost. Is that too risky?

We could try to mitigate the risk by not using the 457(b) and going taxable or by saving as though the pension doesn't exist. However, this seems like losing out on a big upside of both of those accounts. I'd love to hear your opinion on this, and I sent an email with the specific numbers for you. Thanks.

Dr. Jim Dahle:
Okay. Great question. I don't actually have the email in front of me. I don't think we needed to answer your question, though. I suspect I already responded to the email anyway. I'm pretty sure I've responded to every email that any listener has sent to me in the last 15 years.

Let's talk about this, though, because this is a great question. It's not really out in the weeds, but a lot of people probably haven't spent much time thinking about this. It's true. Something can happen to your pension. Pensions are great, especially if you want a guarantee of some kind.

The beautiful thing about a pension is the employer is taking the risk. You're not taking the risk with your investments. They're saying, I'm going to give you this benefit every month from now until when you die. They take the investment risk. If investment performance is poor, they got to come up with the money. They got to put more into the pension. If investment performance is great, maybe they can put less in there and still meet their obligation to you, but they're taking the risk. That's the nice thing about it. It provides you a guaranteed income.

Now, the guarantee is only as good as the employer is. There is a pension guarantee corporation essentially out there, but it typically only protects a certain amount of a pension. It is true that at least some of it is probably at risk to something happening to your employer.

That said, would I not use it at all or get my money out of it just as soon as I can? I probably wouldn't. Just like a single premium immediate annuity, that guarantee has some value. Of course, the tax protection and the asset protection has value. I think a balanced approach is the correct answer.

Now, where you make that balance is going to be a little bit of an individual decision. Before we get to that, though, let's talk specifically about 457(b)s. The problem is there are two kinds of accounts, and they're both called 457(b)s, but they're very different accounts.

The first one is generally called a governmental 457(b). In that type of an account, usually offered by a government employer, your money is actually held in trust, just like with a 401(k) or a 403(b). They may say it's the employer's money because it's a 457 and it's deferred compensation that hasn't been paid to you yet, but it really isn't. It's your money.

You have the option when you separate from the employer of just rolling it into another 401(k) or into your traditional IRA. It's a pretty darn nice retirement account, and you to look at it as just another 403(b) or 401(k) and have no qualms whatsoever about using it.

The other type of 457(b), often called a non-governmental 457(b) or a tax-exempt 457(b), is a different beast altogether. This is not held in trust. It still belongs to your employer. It is subject to your employer's creditors.

Now, up until about a year ago, I would say, I've never heard of a doc ever lose it, non-governmental 457(b) money. But right now, Steward Health, which used to own my hospital and I'm not terribly fond of, is apparently saying at least some 457(b) money of some physicians is at risk. They went bankrupt and maybe some of that is going to other creditors besides those docs who put money in the 457(b).

I cannot say that it's impossible to lose money there. It's always been a theoretical risk, and it looks like it may be showing up. Obviously, that hasn't gone around trip yet, but it's a risk. You start going, “Well, I don't want all my retirement money in a 457(b), a non-governmental 457(b) anyway.”

The other thing to think about is on the backend. What money do you want to spend first? Well, the money that maybe you won't get. The non-governmental 457(b) money is early retiree money. Spend that money first before you get into your taxable account, certainly before you get into your retirement accounts. Withdraw and spend that 457(b) money.

Now, you generally have some limited distributions options, so you got to pick one that's reasonable. You may not want it all in one lump sum, especially if you have hundreds of thousands of dollars in there. But taking it out over the first five years or something after you separate might not be a bad option.

The other nice thing about it is there's no age 55 rule like with a 401(k). There's no age 59.5 rule like with an IRA. There's no penalty for taking money out of the 457(b). Just pay the taxes if any due on it, and you spend it. That's it. It's a great early retiree account, but we've got to differentiate between governmental and non-governmental 457(b)s while having this discussion of how much money you're leaving at risk.

I do not think it should be ignored. Some people do this with Social Security, too. They're like, “Oh, I'm going to ignore Social Security.” But what that means is that you're working in your 60s when you don't have to. You have enough money with Social Security. You don't have enough money without Social Security, so now you're working four or five more years that you didn't need to work.

I don't think that's the right approach. If you want to discount it a little bit or work a little longer because you're worried something might happen to your Social Security or your pension or your non-governmental 457(b), I think that's okay. But totally ignoring it, that seems not a great idea.

The other approach, of course, investing in taxable instead of funding your pension or funding a non-governmental 457(b) has its downsides, too, the least of which is asset protection concerns. If you're sued above policy limits, whether it's a personal injury lawsuit from your kid hitting somebody with the car or whether it's a malpractice lawsuit, if it's a big judgment above policy limits, it's upheld on appeal and you got to declare bankruptcy, you're probably losing your taxable account. You'll keep your 401(k)s. In most states, you're going to keep your IRAs. You might keep some home equity. But the taxable account is probably going away.

And so, that's the reason why you might want to prefer to save for retirement and pensions and a non-governmental 457(b) rather than a taxable account. The other problem is the money grows slower. It's got tax drag on it. Every time it pays out a dividend or every time you realize a capital gain because you got to make some adjustments in the portfolio, you're paying some taxes. And so, it grows slow in the taxable account. So I don't think that's a good option either.

Now, if I was worried about my non-governmental 457(b), I might not fund it more than just a little bit. Maybe you want to put $50,000 total in there, but you don't want to put $500,000 total in there. Or maybe you want to put $5,000 a year in there instead of $23,000 a year in there. Use it a little bit if you're a little worried about it disappearing.

But I've certainly had WCIrs write to me that they were worried they were going to lose their 457(b). And there was a couple of years where they're worried the hospital was going to go under and something was going to happen to them. And they told me they wished they'd never invested in the 457(b) in the first place. Now, this is a doc who got the money, didn't lose anything in the end, but wished he'd just done it in a taxable account to avoid that worry and hassle. And so, keep that in mind if you're making that decision, find the balance there.

Now, in this particular case, you're talking about 55% of your savings going into the pension, presumably a non-governmental 457(b). That feels like a lot to me. I think if I were in that situation, maybe I wouldn't use the 457(b) and I'd invest in taxable instead. Or maybe I'd limit how much I'd put in the 457(b) or just use it for two or three years or something like that in order to maybe decrease that ratio.

Because it does make me a little uncomfortable that 55% of your savings is going into accounts that are subject to your employer's creditors. It's probably fine if the employer was the state, for instance, I wouldn't worry about it nearly as much, but it does make me think about it a little bit. So, moderation and all things, maybe dial it back a little bit and maybe build yourself a little bit larger taxable account than you would otherwise because of that concern.

MEGA BACKDOOR ROTH

Dr. Jim Dahle:
All right. Our next question came in by email. “A couple of weeks ago, you talked about setting up the backdoor Roth 401(k). You mentioned there had to be three sub-accounts, a pre-tax, a post-tax, and a Roth. Then you outlined the steps of contributing to the post-tax and converting to the Roth.

For 1099 people who set up their 401(k)s through an outside party, this person used mysolo401(k), then you just write a check from the business to the Roth 401(k) sub-account and not have that after-tax sub-account. I met with my accountant and she said, you can contribute employee and employer contributions directly to the Roth 401(k). She said that it's not a mega backdoor Roth when you do this.

I guess my question is, what's the difference? Why do you need the extra sub-account and the extra step? What's the difference between mega backdoor Roth and just contributing directly to the Roth 401(k)?”

Okay. Let me go over this and see if I can make it crystal clear. You can make Roth employee contributions. The employee contributions, sometimes called an employee deferral, for 2025 is $23,500 for those under 50. It's going to go up in 2026 and later years. Obviously, it goes up with inflation every year. That thing can be Roth. It can also be tax deferred.

The employer contributions, 20% of net income can also now be Roth. Employer match, for lack of a better term, is what that is. And that can be Roth too. So if you can get to $70,000 between the employee contribution and the employer contribution, $70,000 is the maximum 415(c) limit for the 401(k) for 2025. It'll go up a little bit in 2026. But if you can get to your $70,000 just from those two, then you don't need to do mega backdoor Roth.

That's possible that that's what this person's accountant is telling them. More likely, the accountant is just a little bit confused because not very many of their clients ask questions like the ones White Coat Investors tend to ask.

For most of us, you don't make enough at the side gig, you don't make enough at the 1099 to be able to get to your $70,000 just with employee and employer contributions, especially if this is just a side gig. You've got a W2 job somewhere with its own 401(k). Because a lot of times you've already burned the employee contribution in the employee job 401(k). You only get one of those employee contributions. It's a $70,000 limit for every 401(k) you're eligible for, for unrelated employers. But it's only one $23,500 employee contribution, no matter how many you're eligible for. So, if you burned that already at the main gig, you can't use it in your solo 401(k). Well, that's going to make it harder for you to get to the $70,000.

The other limitation is that employer contribution is 20% of net business income. So you have to make a certain amount of money. If you have to put all 70 in as an employer contribution, well, that's 70×5, you have to make in that gig. That's $350,000. That's a pretty good side gig you got going. I guess if that's the only thing you're doing, maybe a doc can get there. But most docs, when we're talking about a second 401(k) and a side gig, you're not going to get to $70,000 just from the employer contributions.

But if you make $80,000 or $100,000 at this side gig, you can still max out that 401(k) at $70,000. You can still hit the 415(c) limit. But it's going to involve doing some or all of your contributions as mega backdoor Roth contributions.

So, this is a two-step process, just like the regular backdoor Roth. It's an after-tax contribution into the after-tax sub account in the 401(k). And yes, it has to have an after-tax sub account for you to do this. And then a Roth conversion. The plan has to allow you to make after-tax employee contributions, not Roth, after-tax employee contributions, and it has to allow for in-plan conversions, or maybe you could roll it out of the plan if the plan allows that and put it into a Roth IRA. But usually it's an in-plan contribution in order to get to that $70,000. I hope that's helpful for this particular question.

It's not a big deal to have a third sub account. It's not like these 401(k) providers charge you extra for that other account. Every employee at WCI has three sub accounts. And nobody ever has any money in that sub account for longer than a day. That third sub account just kind of sits there with $0 or two cents or whatever in it until it gets used again next year for anybody doing a Mega Backdoor Roth. I think it's mostly just Katie and I doing them, but that's how the process works. I hope that's helpful to you.

All right, next question. This one comes from John. Another question about side gigs.

ESTABLISHING YOUR SIDE GIG

John:
Dr. Dahle, I am a surgical subspecialist in the Southwest. I have a solo private practice and have been practicing for over 20 years. Through my practice LLC, I maximize all retirement savings. As my practice has matured, I have taken on several side gig positions, serving as a medical director for a hospital and as a consultant for different companies.

For this side gig work, do you recommend establishing a separate LLC, which is independent from my medical practice? If so, would you also recommend obtaining an insurance policy for this new company, such as an umbrella policy? I do not plan on employing anyone through this new company anytime soon. Thank you for your recommendations.

Dr. Jim Dahle:
Great question. There's a little bit of gray area here of what you need to do, what you want to do, what some people would recommend you do, etc. A few things to think about as you make this decision.

Forming LLCs and buying insurance policies are primarily all about asset protection. You're trying to prevent some terrible liability situation from causing you to lose money. For this reason, when you're practicing medicine, you get malpractice insurance. For this reason, when you're building a rental property empire, you put those rental properties inside LLCs. It provides both internal and external liability protection.

By external, you're protected from some liability in another part of your life. For example, you get sued for a gazillion dollars for malpractice, and it's not reduced on appeal. And you happen to own some LLC with some other partners. Well, they can't just go take the LLC because it's a totally separate entity.

Now, if you are distributed money from the LLC, that could be used to meet your judgment, but they can't just go force the LLC to sell whatever the LLC owns because it'll hurt the other 15 partners in your LLC. And so, it provides some external liability protection there. It also provides internal liability protection. Let's say whatever that LLC is doing, let's say it's a rental property and somebody slips and falls on the rental property and sues the LLC for a gazillion dollars. Well, the nice thing about it is, at worst, you're only going to lose what's owned in the LLC. That's internal liability protection.

Now, the first line of defense to any of those liability situations, of course, is insurance. On the personal side, you buy homeowners or renters insurance, you buy an auto policy. Hopefully, if you're a good little WCI, you've stacked an umbrella on top of that for additional personal liability.

Most physicians probably ought to have a seven-figure umbrella policy. The good news is that usually only costs a few hundred dollars a year. It's much cheaper than your malpractice policy. Whether that LLC will cover any business liability is a totally separate question. It's certainly not going to cover any of your malpractice liability. I can tell you that. Maybe some little tiny amount of business liability it will cover, but in general, do not expect your personal umbrella policy to do much for your business liability.

Now we get to John's question, which is, “Do I need some additional asset protection? Do I need some additional liability coverage here?” Well, I guess it comes down to what liability do you have. You're serving as a medical director. Okay, well, I guess there could be some liability there. You're doing it for a hospital. Are they providing you some sort of malpractice or liability insurance coverage for that? If not, I'd look into getting it added to my malpractice policy or looking at a personal or rather a business liability policy for that work. I think there's probably enough liability doing that.

Now, the consulting, I don't know exactly what you're doing, how much liability there is there. You might look into a business liability policy for that. Maybe there's just not that much liability there. Lots of things I've done in my life, there's just not much liability. It's probably not worth buying a policy for, but it sounds like there might be. So, maybe it's worth looking into a business liability policy. The good news again, is generally a lot cheaper than malpractice insurance.

Now, should you put that business in an LLC? Well, everybody wants to put every business in an LLC all the time, it seems like, which isn't the end of the world. In Utah, it cost me $70 to form an LLC and then $15 a year and one page of paperwork. It's not a big deal. I've formed LLCs. It's not hard to do.

Do you want to go form an LLC? Form an LLC. But keep in mind that it doesn't do a lot of magic stuff in a lot of situations. A lot of people want to form an LLC or a corporation because they think they're going to save a bunch of taxes. Well, in the end, it doesn't end up saving them any taxes and maybe even increases your taxes, depending on exactly how it's formed. So, keep in mind, you need to know specifically what taxes are you going to save on that you couldn't do as a sole proprietor?

The other reason, of course, is liability. Theoretically, if there was some liability that only applied to this company, to this consulting you're doing for the company, all they could get if they successfully sued you is what the company owns. Maybe the business bank account, that sort of thing.

But when you're the only member of the LLC in a lot of states in particular, it really doesn't provide a lot of extra asset protection there because the court goes, “What are you talking about? This isn't hurting anybody else to sell what's in the LLC other than you and you're the one who has the liability. So we're going to force you to pull that out of the LLC or whatever.” So it really doesn't provide the same protection that a multi-member LLC might.

Now, is it worth separating this business from your main business? I can't really tell. I don't know that I have enough information there, what the downsides might be to just lumping it all in together to your main practice. You might consider doing that. It might save you some hassle or it might make things more complicated. Maybe it's better to have it simpler, have its own bank account, its own credit card, its own LLC. It's not that expensive or that complicated to do all that. So maybe if you want to treat this as a separate business, you can do that.

Chances are if you own the practice and you own this other LLC, you're not going to qualify for another 401(k) though. So, don't think just forming an LLC gives you another 401(k). That's not the way it works because those businesses are probably related. You probably have 80% ownership of both of them. They're related businesses, only one 401(k) for those.

So, sure, go form an LLC. You can look into insurance policy as well, but consider how much liability you actually have. It might not actually be that much depending on what you're consulting on. And the main liability from being the medical director is probably provided by whatever you're being the medical director for. I don't know that you need a separate business liability policy for that.

All right, let's take another question. This one from Chris.

1099 QUESTIONS

Chris:
Hi Jim, this is Chris from California. My partners and I have questions about 1099s. With our finance manager in our office, 1099 has become a bit of a four-letter word. We have a hospitals group that has about 60 physicians and a few administrative staff, and we cover three separate hospitals. We're structured as a C-corp, and we do control the employees in that we make their schedule, their hours, quality metrics, expectations, etc.

The way we interpret the law is that these doctors should be W-2 employees, and they are with our group. However, there's a lot of groups that do 1099s or give people the option to be a W-2 or 1099, and that does make it a little bit difficult to recruit people, even though we've explained to them that you can't deduct all the things they think they can deduct.

Are these groups that are doing these options of W-2 or 1099, or just doing 1099s, breaking the law, and they'll get caught at some point? Or is this something that is so unlikely to get audited they don't care? Or is there some exemption for physicians we can't find? Any input on this would be greatly appreciated. Thanks for all you do.

Dr. Jim Dahle:
No, I think you actually understand the issues here. There are a lot of docs who do not understand the issue. They think this is just a choice they can make. It is not a choice you can make. The IRS gives guidelines on what an independent contractor is and what an employee is. There's a whole long list of what these guidelines are.

There's a little bit of gray in this area, but not nearly as much as most doctors think. If the company is telling you how to do your work, and where to do it, and providing you benefits, and there's a bunch of employees, and all this stuff that goes into this long list of factors that the IRS tells you to consider when deciding if somebody is an employee or an independent contractor, you got to be the employee. That's just the way it is. And the accountants are usually pretty good at pointing that out. Now, sometimes people kind of turn a blind eye to it. And let's be honest, people get away with it a lot.

But the truth is, most of the risk here is actually not on the doc. It's not on the employee/1099 person. It's on their employer. Because what can happen to them is that you decide you're going to be a 1099, or they decide you're going to be a 1099. They don't withhold any taxes for you as they pay you. And then a few years later, you come back to the IRS and say, “I was basically an employee. They should have been withholding taxes. Go to them and get the taxes.” And the IRS goes to the employer and gets the taxes. That's the risk. These payroll taxes are not withholding.

And so, the actual risk to the employee is pretty minimal. They don't come after them for the taxes. That's kind of the issue there. So if you are the employer, if you're this group that's the employer, yeah, you've got risk. If you hire all these docs and tell them they can be 1099, and really they're employees, and the IRS comes back in a few years and say, really, they're employees, you owe us the payroll taxes. And you got to pay the payroll taxes. And that's your risk.

You really do have to classify people properly. There's a little bit of leeway there, but not as much as most people think. You can go there and you can look these up. If you go to IRS independent contractor, or employee, I'm sure that'll find this a good long list of how to tell one apart from another.

Here we go. IRS.gov says independent contractor or employee. And it gives all kinds of things you ought to be thinking about here. It says the common law rules. Well, there's behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? Well, if so, they're an employee.

Financial, are the business aspects of the worker's job controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools and supplies, et cetera. Third one's a type of relationship. Are there written contracts or employee type benefits? That is pension plan, insurance, vacation pay, et cetera.

Will the relationship continue? And does the work perform the key aspect of the business? The idea is an independent contractor is somebody that comes in for a limited time and does a limited amount of work and takes care of all their own benefits and all their own tools and expenses and decides when and how they're going to work.

Well, that's not the case if you're a doc working in an emergency department. They're scheduling you on a shift. They're providing all of the assistance to you, all the nursing staff, et cetera. All the tools you work with are provided by the employer. And now you want to call yourself a 1099. Really? That's not probably going to fly.

Do people get away with it all the time? Absolutely. Is it an awesome thing to be a 1099? Well, it depends if you get paid enough more that you can cover your taxes, your additional payroll taxes, and you can cover the loss of all those benefits that now you're paying for, it's fine to be a 1099, but the risk is really with the employer. So that sounds like it's you and your partnership is who the risk is with.

And so, if people want to be 1099s, you can't let them just be 1099 just because they want to be. You might get away with it and maybe they won't come back and tell the IRS about what you're doing, but maybe they will. I don't think it's a risk I would do. We don't have 1099 employees or whatever in our group. They're employees. They get a W-2 and that's the way it works. You're either a partner or you're an employee and that's it. So, if you don't want to be one of those things, maybe your group is not for those docs.

But no, you guys are probably doing it right. If you're looking at those IRS factors and deciding these are not independent contractors, they're employees, you're probably doing it right and they are doing it wrong. Whether they get caught doing it wrong or not, totally different question. I don't think this is a super frequently audited item, but I can't tell you exactly how often it gets audited.

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All right. Don't forget about our real estate webinar. Go to whitecoatinvestor.com/rei. That's November 20th, 06:00 P.M. Mountain.

Thanks for those of you leaving five-star reviews and those of you telling your friends about this podcast, a recent one came in and said, “Excellent. I'm a clinical pharmacist and I've listened to almost all of the podcasts since I subscribed. I've recommended the book to my relative who is a physician resident.

These podcasts are informative, confirm what I've been doing right, what I need to change and help me expand my knowledge. I particularly enjoyed the episode on cryptocurrencies. What got me started was the book recommended to me by a colleague and the down-to-earth, easy to understand and honest podcasts. Thank you from Ben.” 5 stars.

Thanks for that review, Ben. That does help us get the word out to other people that need this information just as much as you and I did before we got it.

Keep your head up, shoulders back. You've got this. We're here to help. 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.

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 247 – Primary care doc becomes multi-millionaire and retires her husband.

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All right, welcome back to the podcast. If you're interested in real estate opportunities, you probably ought to sign up for our newsletter for our real estate group. You can sign up for that at whitecoatinvestor.com/REopportunities. And that gets you not only emails to tell you about these sorts of investing opportunities, but also educational emails just to help teach you about real estate investing. No cost to that. Yeah, you can take our real estate course and there's a charge for that, but that's not required to be part of this group.

You can just sign up for it and you get the emails. There's no commitment. You can unsubscribe at any time, just like anything else we send you, but we'd love to have you in the group. And we know that those who are interested in these sorts of investments appreciate what they're getting from it.

All right, we got a great interview today from somebody who also invests in real estate, but that's not the main thing we're talking about on this interview. She has done a fantastic job together with her husband at becoming essentially financially independent, lean FIRE, and really getting her husband out of the workforce at this point.

Stick around afterward though, because we're going to talk a little bit more about FIRE, lean FIRE, the pre-retirement benefits of FIRE, what happens after financial independence, et cetera. So stick around.

INTERVIEW

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

Beth:
Thank you very much.

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

Beth:
I'm a primary care physician, internal medicine and pediatrics trained. I am 13 years out of residency, and I live in the mid-Atlantic in one of the Californias of the East Coast.

Dr. Jim Dahle:
Expensive place.

Beth:
Expensive place.

Dr. Jim Dahle:
Yeah, very cool. Okay, well, you've accomplished a lot. You've been very successful, financially speaking. I'm curious how you're going to answer this question though. Tell us what milestone we're celebrating with you today.

Beth:
We're celebrating a somewhat unique one in that we are celebrating that my husband just retired from the military, and we are in a financial position where he no longer has to work.

Dr. Jim Dahle:
Yeah, very cool. And maybe even more of a financial position than that, given some of the details which we're going to dive into here. All right, tell us a little bit about, he's been in the military, you've been a doc, not in the military, I assume.

Beth:
Correct. Civilian the whole time.

Dr. Jim Dahle:
Yeah, okay. So, give us a sense of what your incomes looked like over the last I guess if he's retiring, he's been in for 20 probably, huh?

Beth:
He's been in for 26 years. Went to a service academy and then did a full career in the military. One of the reasons I signed up for the Milestones to Millionaire is I felt like there were a bunch of episodes where people had kind of come out making $800,000 and were very successful. And we could have been on the lower end of physician household earners. In the last couple of years, I did change jobs. The last year or two, we've been up in $380,000, $390,000 range. But before this, we'd always made under $300,000 for both of us gross per year.

Dr. Jim Dahle:
Okay, under $300,000 total. And where are you at now? Give us a sense of where you're at net worth wise, assets wise, debt wise, etc.

Beth:
Yeah, we have no debt. We have investable assets in cash about $1.9 million. I kind of updated our spreadsheets a little bit this weekend while preparing for the show. We have about a million dollars in paid off real estate, both our primary home and a rental property. And we have no debt, mortgage or otherwise.

Dr. Jim Dahle:
Okay. Well, that's a super boring, simple financial life.

Beth:
Sorry.

Dr. Jim Dahle:
Congratulations on being multi-millionaires. But you demonstrate that it doesn't have to be complicated to do that. You got one rental property, you got some retirement accounts, you got some investments, you have no debt. Tell us why you don't have any debt.

Beth:
I did have a little bit of student loan. We paid that off a couple of years after we got married about five years out of training for me. My husband is a little more debt averse than I am. But we go back and forth. Knowing he is retired military and has a pension, we want to be able to someday live off of retirement assets and his pension. And so, part of our impetus was to pay that off early. We didn't have a mortgage as he was going into retirement. And he has just always been much more debt averse, wants to get paid off as quickly as possible and keep expenses low.

I tend to be a little less debt averse in terms of you know, carrying a mortgage on a rental property, but it's also great not to have any debt and to have retired all of our recurring expenses has really opened up a lot of flexibility for us.
Dr. Jim Dahle:
Yeah, I imagine you have a lot of flexibility. You're multi-millionaires. He's got a pension already coming in. At this point, you're probably in some sort of a FIRE state.

Yes, we are. And we were talking about that this weekend that I actually am in a job that I really like. I'm in a small private practice. It's a good group. I love my patients. And I really like working right now. But if we were in a situation where I could no longer work or decided that it wasn't for me, we're in a situation where we'd be able to live very comfortably on what is coming in from his pension in our savings.

Dr. Jim Dahle:
Yeah, pretty awesome. You're basically free to do whatever you want. And in your case, it sounds like you've chosen to continue to work, which is obviously going to bolster you financially, you'll be very surprised how quickly this nest egg grows, when you're not withdrawing from it, and actually still adding to it every year.

And it won't be long before you start going, “Well, what are we going to do with this money? How are we going to give it away? How are we going to increase spending? What can we spend on that actually brings us more happiness?” You'll be dealing with all these wonderful financial independence questions that all of us deal with once we get to that point, especially if we're still working.

But I got to tell you, there's a problem you're going to deal with. It's this existential crisis I've been dealing with for the last seven years of what I'm going to do with the rest of my life.

Beth:
Well, Jim, we have a boat.

Dr. Jim Dahle:
That'll eat up some of it, for sure. For sure.

Beth:
And we bought it in cash. It was something my husband had been scrimping and saving for years. And he sailed in college and has always loved being out at sea. And so it was something he's always wanted to do. And we found the boat. And I said, “Well, this one actually is priced pretty reasonably, maybe we should think about buying it.” And he didn't know how to say no to that.

Dr. Jim Dahle:
It's a sailboat? What is it?

Beth:
It's a sailboat.

Dr. Jim Dahle:
So you're going to take it down to the Caribbean or what?

Beth:
Hopefully, that's the Sunday plan. Part of his retirement enterprise is the boat's about 40 years old. So she needs quite a bit of work before she's ready to go for real.

Dr. Jim Dahle:
Yeah, but that is so fun to see the fruits of all the work and all the effort and all the discipline you put in now for decades, paying off, you have all these options now. You guys sounds like you got on the same financial page relatively early in your marriage. Tell us about those first conversations, if you can remember them.

Beth:
Yeah. Oh, gosh, we started dating, probably close to 15 years ago. And at that time, I was recently out of training in my first attending job still had some student debt, which I think made him pretty nervous, but he married me anyway. And we have largely been on the same page, especially the big priorities in terms of paying ourselves first, maxing out all of our retirement vehicles, and really working towards the future. Neither of us are super big spenders. I'm definitely more of a spender than he is. But I also think we balance out each other really well.

Dr. Jim Dahle:
Yeah. Now, you've done this on what's not necessarily a super high income, and you've done it in a high cost of living area. Tell us about how being in that high cost of living area affected your decisions over the years.

Beth:
Yeah. And one of the things that even in the high cost of living area, I was in a community health center and academic center. So on the lower paid side of physician salaries, even in, even in our area. It's always been about living below our means. We don't exactly live like residents any longer, but we did for quite a long time. And we try to prioritize experiences over stuff.

And then I think one of the other issues, especially that's made it possible for us, is we don't have children. That certainly cuts down on our expenses quite a bit compared to peers I have here, they have kids in school and sports. It's a big amount of their income that goes to the kids.

Dr. Jim Dahle:
Yeah. Tell us about your housing decision. This is a big topic. People who are coming out of training now in the midst of this housing crisis, how much is your house worth compared to the median house in your area?

Beth:
Oh, I don't know what the median house in our area is, but we actually live in a condo that we bought when we moved back to the area right before I started a new job. And we actually look back at that decision and say, if we were to do it over again, we probably would have bought something different. But we bought it intentionally as we'd like to turn it into another rental property down the road. So we bought something looking at it specifically as a property that we'd rent to.

There's a lot of military in the area and there are a lot of military in our neighborhood. So down the road, our intention is to make that a rental, but we've been a little tight on space thinking we'd be there for two to three years before converting it into a rental property. We've now been there for seven.

If we had to do it over again, we probably would have purchased something that was a little more long-term view in mind. And living in one of the California's housing prices here are absolutely insane. You're looking at close to a million dollars for a 2000 to 3000 square foot home.

One of the things we've held off on is buying our forever house. A fair amount of our assets right now are in cash with the idea that at some point we will use that to purchase a house with either all in cash or without much of a mortgage. But we're still a few years down the road for that because we just can't stomach buying in this California market, knowing that at some day we may retire to a lower cost of living location.

Dr. Jim Dahle:
Yeah. Or just live on the boat.

Beth:
Or just live on the boat. It's 28 feet long, Jim.

Dr. Jim Dahle:
Very cool. Very cool. All right. It's maybe a little small for something to live on full time, but it does sound like a lot of fun. Yeah. I think about that. My boat's 24 feet long. So 28 is not much to live on for sure. I'll give you that. All right. Well, very cool. Congratulations to you on your success. You two should be very proud of yourselves. And we're very appreciative of you coming on the Milestones podcast to tell us about it.

What tips do you have for listeners? If they're coming out of training now, they want to be like you by mid-career or late career or whatever, what would you tell them to do so they can have options like you do?

Beth:
I think getting the big things right. We've kept our cost low. We really aggressively worked to pay off debt and live below our means. I think if you get those big things right, you have a lot of room to live a really great life and to make mistakes and do things that seem a little bit silly, like buy a boat rather than continue to contribute to taxable savings. But it's been really great. We have a wonderful time and really enjoy the time we have together and the time we have out exploring the Chesapeake on the boat.

Dr. Jim Dahle:
I think as long as you get those big things right, you can use the rest of your income to lead a great life. The other thing I would have done differently is I wish I would have kept better track of things over time. I think we cleared the million mark for investable assets in 2023. But we don't actually remember when we did it. I remember we had a nice dinner and had a bottle of champagne, but I wish we would have kept better track of these milestones over time.

I used one of the financial aggregator sites when I was in residency and paying off my student debt, which was mint.com. And it's out of business now. So all of that tracking is gone. I wish I would have done something better with an Excel spreadsheet on my own laptop to just track our progress over time, because it really does go fast. And I think it would have been neat to look back and see how far we've come.

Yeah, when you're doing it right, it goes fast. It doesn't necessarily go fast for everybody, though. But you're right. Tracking it, it does seem to make it go faster. Just the simple act of tracking it. And it is fun to look back and laugh. I was writing a blog post this morning. I mentioned my big fear when I was going to medical school is that I owe $75,000 when I came out. And it just seems so silly looking back that it's fun to be able to talk about some of those things.

Beth:
And I might actually put in just a plug. I did do National Health Service Corps for medical school and then worked in a community health center for three years as a scholar. So I did have a much lower loan burden than many students do currently. But I had undergrad debt. I had medical school debt. And looking back and thinking what a hole I was in when I finished training and it was $70,000 in the red. It's just shows how slow steady progress and being really boring about it really leads to success.

Dr. Jim Dahle:
Yeah. Did you have a good experience with the National Health Service Corps?

Beth:
I did. I signed up as a first year medical student, so I had no idea what I was getting into. I had no idea if I would actually like primary care. And I do, though the placement process and finding a job was a lot harder and a lot more stressful than I had anticipated. I ended up working in an urban federally qualified health center, which was really hard, but also a really good place to learn how to take good care of patients and to learn how to do good primary care and meeting people where they are.

And you often felt like you were two steps forward, three steps back in terms of making a difference. But I am glad that I did it. And I think that it's something that was worth doing. If I knew what I was getting myself into as a first year med student, I don't know that I would go back and do it again.

Dr. Jim Dahle:
What if you're staring at a $500,000 or $600,000 or $700,000 student loan burden? Would you maybe put it back on the table and consider it?

Beth:
Yeah, I'd probably do it. Looking at today's tuition prices, I think it's a reasonable path. The National Health Service Corps now has an option for students who are in their fourth year. And I think knowing if you really want to do primary care, because if you don't, I think you see a lot of burnout physicians in primary care who perhaps would have been better served by going into a specialty. But if you really are interested in primary care, I think it's a great option. If you're interested in pursuing a specialty emergency medicine, I think the military or some of the other contract options are probably a better fit.

Dr. Jim Dahle:
Yeah. Yeah. There's definitely a lot of contract options out there. But I think the big thing you have to decide is, “Do I want to do this thing rather than doing it primarily for the money?” I think that's where people end up being unhappy with their MD, Ph.D. or their HPSP or their NHSC or their IHS contract or whatever else they've signed. If they're interested in doing that thing primarily, it works out great. If they're doing it mostly for the money, I see a lot of regrets for sure.

Beth:
Yeah.

Dr. Jim Dahle:
Well, Beth, thanks so much for being so successful, number one, so you can tell us about your success. But number two, being willing to tell us about it and inspire somebody else to do the same. Congratulations to both of you on your success and may it continue going forward.

Beth:
Great. Thank you. We will see you at WCICON26 in March.

Dr. Jim Dahle:
Oh, I’m looking forward to it. Hopefully we'll see a lot more people there as well. So if you're hearing this, there are still available slots to come to WCICON. Hopefully they're still available by the time this runs in November, but I suspect they will be. It's going to be a great time down there.

Beth:
Awesome. Great. Thank you so much, Jim and thanks for all that you and the WCI team do.

Dr. Jim Dahle:
All right. I hope that was helpful. It was fun talking to Beth. Beth has followed me for a long time, actually, since before I started the White Coat Investor. A lot of you may not know this. I'm not sure Megan knew this when we were talking after we stopped the recording.

But I've been doing White Coat Investor stuff for five years or so before the White Coat Investor was started. I just did it on forums. I did it in places like the Student Doctor Network Forum, and the Bogleheads Forum, and the CERMO Forum.

And so, I was answering doctor questions about their finances for a long time before starting WCI, which kind of explains the tone from those early blog posts that it was already, “Hey, this is something I've done. I can help you do it too”, et cetera, rather than “Come along with me.” That kind of explains that for those who may not understand why I popped up with that tone in 2011 when I started the White Coat Investor. But that's the reason why.

FINANCE 101: FINANCIAL INDEPENDENCE

Dr. Jim Dahle:
Now, I promised you at the beginning, we're going to talk a little bit about financial independence. Financial independence, the basics of it are pretty easy to understand. But I had a really fun experience this last week actually teaching it to one of my siblings that didn't know any of this stuff, which I'm a little embarrassed about that my sibling didn't know this stuff because it means I didn't teach it to him yet. But you know what? When the student is ready, the teacher will appear.

But the basics are this. You got to figure out how much you spend, which my sibling didn't know. You got to figure out how much you have which tells you where you're starting from. And then you can figure out the gap between what you need to be financially independent and what you currently have.

The basic calculation is you take what you spend and you multiply it by 25. So if you spend $50,000 a year, you need 41.25 million. If you spend $100,000 a year, you need $2.5 million. You spend $200,000 a year, you need $5 million. That's the basic calculation. That's what retirement is. It's a number, it's not a date.

And so, if you have $1 million and you need $4 million, well, that gives you a sense of how long it's going to take if you look at what you're spending or what you're investing each year and how much that's earning and how much you have right now. You can calculate out how long it is until you reach financial independence.

And when people first do this, they typically aim for something that's often called lean fire. Which is like the bare minimum for you to meet what you have to spend on your life. Maybe your lean fire number is $2.5 million or something like that. You're like “$2.5 million, okay, well, we could take $100,000 a year out of that. And that would cover the basics. We could pay our taxes. We could pay our property taxes. We could pay our insurance and we could eat and we could go on a couple of road trips a year and we're good.”

But what happens when people get near that area. Well, a couple of things happen. Number one, they realize that the money is starting to have more power than the job. Because it can earn, it can double in size every seven to 10 years. And the return on it starts mattering more than the amount of money you're putting into contributions.

So, people make changes in their life that they've been wanting to make. What that often looks like is going part-time. Maybe you're dropping call. Maybe you're not doing procedures you don't like. Maybe you take every Wednesday afternoon off and go golfing, whatever it looks like, but people make changes in their life.

And the beautiful thing about financial independence is you don't have to be all the way there to make these changes. You don't have to be financially independent before you can go part-time. At a certain point, you get to what's called coast fire, which means you don't have to add anything to your portfolio and it's still going to get you to your financial independence number. And you can either work less and earn less, or you can just spend more in the meantime, but it allows you to quit putting so much money toward your retirement goals.

Even before you get to financial independence, there are benefits of taking care of your finances. But what typically happens once people hit their FI number, it's usually a lean FI number, is they go “I'd actually be a little happier if I could spend more money.” And so, they bump up their number a little bit. They're like, “Yeah, $2.5 million, I could live on that. If something bad happens, that's a number I can cancel my disability insurance, I can cancel my life insurance, whatever. But I'd really rather spend $150,000 a year instead of $100,000 a year. And that's going to take some more money.”

So they decide that they're going to keep going for a little while. They're going to keep working and saving and investing and waiting for their money to earn money, reinvesting that along the way. And that's pretty typical.

When we became financially independent in 2018 or so we looked at a few things we'd like to buy and maybe some ways in which we'd like to increase our lifestyle. Katie loves travel. She loves international travel. I don't love it quite as much as she does. I do think it's fun. I do go on several trips a year, but she loves it. She'd go like every month if she could, she thinks it's awesome. So, we built in more travel into our lives, more travel into how much we needed to really be financially independent at our desired level. That was a couple of more years before we kind of got to that point.

And then when you're truly financially independent, you can't think of anything else you'd spend money on. If you have it, you start looking around and seeing how you can change the world. And maybe that's leaving money to your kids. Maybe that's figuring out ways to improve their lives. Maybe it's helping them with down payments on their houses or something like that. Maybe it's giving money away to extended family members or just friends and people in need. Maybe it's supporting charities. Maybe it's building some sort of a legacy. There's all these things you can do if you continue to work after financial independence.

Because the goal is not to be the richest person in the graveyard. You're not competing against anybody else here. You don't need to be wealthier than your neighbor or the guy at the cocktail party or your partners at work or whatever. That's not the point. The point is that this is a single player game. It's you against your goals.

And if you don't have goals that require all the money you have, maybe it's time to pick a few more goals. And they're probably likely giving goals. Most of us are not nearly as good at giving as we are at some of the other financial activities in our lives, like earning and saving and investing and spending. But you know what? It's an important one to learn how to do well, because it makes a difference. And you really can change some other people's lives for the better by doing so.

SPONSOR

Dr. Jim Dahle:
Our sponsor for today's episode is Goodman Capital, a leading real estate investment firm focused on asset-backed private lending in prime markets across the greater New York metro area.

Since 1987, Goodman has built a cycle-tested platform with more than $850 million-plus in closed transactions, and over 1,000 investors serve, including physicians and medical professionals. Their institutional infrastructure, third-party administrators, auditors, and counsel ensures transparency and compliance, while their focus on senior-secured, low-LTV loans provides strong downside risk protection.

Join Goodman Capital and access tax-efficient, passive monthly income with principal safety at whitecoatinvestor.com/goodman.

I hope you enjoyed the podcast. If you want to come on it, you can sign up at whitecoatinvestor.com/milestones.

Until our next one, keep your head up, shoulders back. You've got this. The whole community is behind you and here to help, and you too will reach these milestones to millionaire.

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.