By Dr. James M. Dahle, WCI Founder
Most of the articles on this website about term life insurance and disability insurance deal with the front end: how to buy it, what kind of policy to buy, how much to pay for it, etc. There aren't many posts (this one and this one, for instance) about the back end—when and how to get rid of it. This post is going to be a little bit more personal. We're going to talk about our family and our policies and what we've done with them throughout my career and what we were doing with them when I originally wrote this post four years ago.
Today, we're going to revisit why and how I dumped disability insurance.
Insurance Is Temporary
The whole point of term life insurance and disability insurance is to cancel it when it is no longer needed, so you can save those premium payments. Insure well against financial catastrophe while you have a need; then get rid of it once the need is gone (since insurance, on average, always costs more than it is worth). A typical physician is going to have a five-figure monthly benefit from disability insurance and a seven-figure benefit from term life insurance. With the disability insurance policy, the goal is to have a benefit large enough that, after tax, you can both maintain your standard of living AND still save for retirement (because disability insurance generally stops paying at ages 65-67.) That usually means a benefit of $10,000-$20,000 per month.
With term life insurance, many high-income professionals want their family's financial life to be exactly the same with or without them. So, they buy enough that, when combined with their nest egg, their partner would have enough money to raise the kids, send them to college, and live the rest of their lives without ever having to go back to work. That usually means a benefit of $1 million-$5 million.
Some families do a little more or a little less, but the point is you probably need big, expensive insurance policies until you reach financial independence. At that point, when your nest egg would support you and your family for the rest of your lives, you can cancel the policies and use the premiums for something else—spending more, building more wealth, or supporting charitable goals.
What We Have Done with Disability Insurance
I bought my first individual disability insurance policy from The Standard as an intern in October 2003 for a monthly benefit of $2,500. That policy cost $948.70 per year (3.2% of the benefit). Almost half the cost was the riders, including a $5,000 Future Purchase Option Rider, an Indexed Cost of Living Rider, a Total Disability in your Occupation Rider (made it specialty-specific), and a Residual Disability Rider. As an active rock climber, there was an exclusion on the policy—it wouldn't pay if I was disabled rock climbing. It also excluded disability due to war, a concern of mine given my military commitment, and it limited payments to 24 months for disabilities due to mental disorders or substance abuse.
As a senior resident with a slightly higher income, I exercised $1,000 of that Future Purchase Option, and that cost an additional $363.05 per year (3% of benefit—cheaper because no FPO rider). I decided to keep paying the premiums on this policy while I was in the military. While the military provides a military disability benefit, it isn't anywhere near as robust as an individual disability insurance policy. It is particularly hard to buy insurance while on active duty, but The Standard assured me that it would pay me a benefit if I was disabled and it wasn't due to war. So, I kept the policy. Shortly after leaving the military, I exercised the other $4,000 at a cost of $2,066.67 (4.3% of benefit.)
Climbing Red Rocks while protected by only 1 of 2 disability policies
Although older and in a different state, I was still healthy and hadn't picked up any other bad habits, so I suppose I could have bought a completely new policy and saved that Future Purchase Option for later. But I didn't want to deal with the hassle and really didn't see a time when I would ever want a larger individual policy, especially one with a climbing exclusion. At that point, we were quite financially literate, and our net worth was rising rapidly (this was only about six months before the birth of The White Coat Investor.)
My new employer offered a group disability policy. It was fairly inexpensive, but most importantly to me, it didn't have a climbing exclusion. I bought a benefit worth $10,000 a month. I don't recall the exact cost, but it was dramatically cheaper than my individual policy. It was specialty-specific but not as robust of a policy. That cost gradually climbed over the years as I got older and changed from one company to another once or twice. It was also with The Standard, and it cost me $1,659.96 per year (1.38% of benefit).
My total coverage in the event of disability was $17,500 a month or $210,000 per year. That was still more than we spent at the time (you'd be surprised how hard it can be to spend money when you have no debt payments), and it would certainly allow us to maintain our lifestyle and still save for retirement.
Disability Insurance Changes
However, there was a problem. When I first wrote this in 2018, I figured $210,000 was probably more than I was going to be making from practicing medicine going forward. I was down to eight shifts per month (in 2022, that's changed to six shifts a month), and they were all during the lower-paying day and evening shifts (in my group, we heavily subsidize night shifts). In addition, I was earning a lot more income than that from my other work here at The White Coat Investor.
Remember that the way disability policies are written, companies pay you based on loss of income and/or the inability to perform the “substantial and material duties” of your regular occupation. If I cut off my right hand and could no longer intubate, I couldn't practice emergency medicine. But how much would my income have immediately dropped? Perhaps $200,000. Most disabilities that would keep me from practicing medicine probably wouldn't have much of an effect on our overall income. By percentage of income, my regular occupation is no longer “physician.” It's “blogger” or “podcaster” or “CEO.” If I can't practice but could blog, then we're looking at residual (partial) disability. My Residual Disability Rider says that it isn't going to pay squat if my monthly earnings are reduced by less than 20%.
Let's say emergency medicine provides 20% of my income. If I lose the ability to do EM but can still do The White Coat Investor, I'm only going to get 20% * $17,500 = $3,500 per month or $42,000 per year. And I'm paying $5,038.38 per year for it (12% of benefit.) That's starting to feel a little steep, especially since we were into the net worth range where we really didn't have much of a need for additional income. It seemed dumb to overpay for disability insurance at that stage.
So, we dumped it. That gave us another $5,038.38 after tax per year to invest, spend, or give away.
What We Did with Life Insurance
Let's turn to life insurance. My first life insurance policy was sold to me during medical school by a “friend” (working as an intern at Northwestern Mutual for the summer.) It was a $280,000 term policy and a $20,000 whole life insurance policy. I don't recall the premiums, but they weren't very high because there wasn't much insurance there and I was young and healthy. As an intern, I upgraded. However, I discovered that just like with disability insurance, the term life insurance companies didn't like the fact that I climbed. I ended up with an overpriced policy through Minnesota Life. The base policy itself wasn't too bad; it was the extra $1,000 per year that I was paying simply for going climbing every now and then. However, it was basically a five-year policy that would go up in price every five years. (Remember, I wasn't particularly financially literate when this was sold to me.) The idea my “advisor” had was to upgrade it to a whole life policy when I became an attending.
Once I joined the military, I could buy a policy from the Serviceman's Group Life Insurance (SGLI) program. It wasn't level term, but it was very cheap AND it covered death from acts of war, which my other policy did not cover. It provided a $400,000 death benefit.
I was more financially literate at this point and I was also living in coastal Virginia, where cliffs to climb on were few and far between. Since I hadn't been climbing in a long time and didn't have any climbing planned in the next few months, I could secure policies without a climbing waiver. The first one I got was a $750,000, 20-year level term policy through USAA that I still have. I bought that in 2007 just before deploying. I really hadn't been climbing in a year at that point, and I was headed to the Middle East. Unlike the crummy, overpriced Minnesota Life policy, this one didn't exclude death from acts of war and included a couple of unique military features—an Accidental Dismemberment Rider and a rider that guaranteed my ability to buy 2X my face value in term life upon separation from the military. All for $387.50 a year, about 1/4 of the price I was paying Minnesota Life for $500,000 in coverage. Total coverage at this point was $1.15 million.
A year later, I realized that I was probably still underinsured. I used the term4sale.com site to find an agent and another policy. The agent tried to sell me a more expensive policy and even VERY briefly mentioned whole life insurance (he regretted that), but it didn't take long for him to realize all I was going to do was buy a cheap $1 million, 30-year level term policy as quickly as possible. I still wasn't really climbing, so that wasn't an issue. Within a few weeks, I had a $1 million, 30-year level term policy from Metlife. I still have that policy. It costs $749 per year and I could keep it at that price until 2038 if I wanted to. Total insurance: $2.15 million.
Upon leaving the military in 2010, we decided we had enough of a nest egg that we could just let the $400,000 SGLI policy go without converting it to a VGLI (same thing, but for veterans) policy or buying more insurance. Ever since then, we've had $1.75 million on me. We have never bought insurance on Katie. She wasn't working for pay from 2004 until the last couple of years as she's taken on WCI duties, and I always felt I had enough income that I could have paid for whatever household assistance I would have needed in the event of her untimely death.
We also finally dumped the whole life policy at about this same time. Yup, I held on to that stupid thing for seven years. My overall return was -33%. At least it was a tiny policy.
Why I'm Not Cancelling My Term Life Yet
If I'm canceling my disability insurance, why did I not cancel my term life insurance? Three reasons really.
First, the disability insurance wasn't really going to pay much of anything if I got disabled. If I died, the term life was still going to pay. That's the main reason.
Second, we were still in the financial independence gray area, at least without selling The White Coat Investor—which is highly illiquid and whose value is highly dependent on my ability to work in it, at least for a year or two after a sale. We got past that gray area a year or two later, but if I died, I think Katie would appreciate an extra $1.75 million in cash.
Third, term life is much cheaper than disability insurance, and with level premiums, it actually becomes a better deal each year. In retrospect, I wish I had bought annually renewable term insurance since I obviously won't have a need for these policies anywhere near as long as they will last. But I was only paying $387.50 + $749 = $1,136.50 per year for $1.75 million in coverage. That was dramatically less than the disability coverage was costing. In addition, with a level term policy, you're actually overpaying for coverage in the first few years (since you're less likely to die) and underpaying in the last few years. I suspect that fact makes some people hold on to the last 5-10 years of their 30-year level term policies even if they're retired and no longer actually need the policy. It has just become a much better bet than it used to be. We do consider dropping them every year though. Maybe this year is the one.
What do you think? Have you dumped your disability and term life policies? What issues did you take into consideration? If you haven't dumped yours, when do you plan to? Comment below!
[This updated post was originally published in 2018.]
Thanks for letting us have an inside peek at your thought process behind dropping life and disability insurance.
I, too, was sold life insurance by NWM when I was a medical student. It’s not level term-life (it has graduated payments that increase with age), but at least it isn’t whole life insurance either. I also get a decent benefit from my life insurance benefit at work.
Unfortunately, I’ve never been able to get disability insurance because that same NWM agent (who was the brother of a medical school class mate) tried to sell it to me as a medical student with no income and an essential tremor. That led to me getting denied and being unable to secure the “guaranteed” policy provided in residency where the only stipulation is that you can’t have been denied before. I didn’t know any better back then, and now have to depend solely on my group disability policy from work. Not the best place to be in!
Thanks for discussing these important topics.
TPP
Ah the famous NML Term 80 policy. As near as I can tell the main benefit they think it has is that it can be converted to whole life. Otherwise, it is neither level premium nor competitively priced in my view. Sorry you got hosed by that agent not shopping you around informally.
Indeed. I should probably look into getting true level term life insurance from somewhere else.
TPP
We never got disability insurance since we expected a military mishap (and not covered by the Disability Policy) would be the most likely cause, so just planned on one doc spouse covering for the family if the other one became disabled plus a pittance from the VA. Luckily dodged the whole life scam, a good friend of moms was selling life insurance about the time I went into medical school but she wasn’t able to convince me at that time and soon after I learned why it would have been a terrible idea.
We had level term plus SGLI on the constantly working Soldier. After a financial advisor pointed out that if the intermittently working one died it’d be a big cost for childcare homemaker Etc to replace me we got a policy that ran until the baby would be out of college. Then of course we started another baby, but pregnancy is not very good time to get more life insurance. Reached FIRE before the second child was even out of high school, but kept the term policies until the level price stopped just as a cheap Gamble.
A few years after letting all policies end I decided it might be nice to have no change if one spouse died but since we both had a couple of medical diagnoses as we hit our 40s and 50s it was clear that buying an annuity for income lost would be cheaper than buying life insurance over the next 10 to 20 years.
So if I were twenty, I would ladder term insurance as Jim has written about before, somehow having the money which I wouldn’t have at 20 but could have added them in as I was able, or at least once I got married and planned kids, I would have gotten a level 20 year plus a level 30 year plus a level 40 year of such a thing exists and let the shorter term policies drop rather than the longer if we really no longer needed them, and not opted to drop the final one until it ran out or we had really both retired permanently and seem to have so much money that any pensions that would end with one person’s death were truly Superfluous if that is ever the case.
Why would a military mishap be your biggest risk? The likelihood of a doc becoming disabled in war has got to be astronomically low. But a herniated disc, car wreck, cancer, MS, addiction, depression all seem common enough to be worth insuring against.
That said, lots of two doc couples use the other doc’s income as their disability policy. Works fine except for divorce and if both are disabled.
Lots do two doc couples use the other income as insurance. it’s a bad idea for the reasons you describe and also if one becomes disabled the other might want to work less (not more) to help care for sick partner and/or young kids. It seems pretty risky to me.
Certainly you agree DI is less critical for a two doc couple than a one doc + stay at home parent couple, right?
I do
I just think it’s naive to think that if one partner becomes disabled the other one can maintain the same or greater income than previously. Few two physician families can withstand one of them becoming disabled early in their careers so there is still plenty to insure against.
You don’t need to maintain the same income. You just need to maintain enough income. I never insured my entire income, only enough to cover my expenses plus enough to save for retirement.
Many two doc couples think like you and buy at least some policy on each of them. Others do not.
Good points all responses! Guess we gambled and won. Wanted to add that the other reason we didn’t continue TERM policies beyond the cheap level price- didn’t want to tempt the other too much by adding that payout to the “benefits” of becoming a widow/er possibly via murder. 😉 Got a good marriage, but would hate for that to change while we could still get half a million or more on each other when we don’t even need it…
And when I returned to a civil service job and I argued in favor of paying $2.4K/year for FEGLI so the kids could win the lottery if I dropped dead (fairly unlikely during the <5-10 years I will work there), he suggested I just send them each $100/month instead.
That… Is an interesting problem to be worried about maybe possibly perhaps having…
Congratulations on having disability insurance in the first place. I lecture doctors about its importance all the time. Congratulations also on doing so well that you no longer need it.
I have kept mine for now. I know I wouldn’t be able to buy my particular policy on the market now and it would be very expensive. Financially I would be fine without it but it is mine for now.
On the other hand, term life is less valuable to me. My wife wouldn’t do anything different whether that paid out or not, so I can stop paying that premium.
I really like this discussion. I need to look at my disability insurance (I got it through the AMA) and see if that is something I feel comfortable dropping at one point. The annual insurance premiums have slowly been increasing through the years (I believe at one point it was $87/mo and no it’s around $123/mo).
As for the life insurance policy, I do have term life policies, but was sold a return of premium rider on it (so part of me is having that sunk cost feeling of keeping it until it expires (age 65) so that I can get return of all the premiums I paid if I hopefully have not died. If I had to do it over again, I would probably not paid extra for this rider, but it is what it is.
One reason I’m not a big fan of return of premium insurance. It’s very much a marketing gimmick but now look, it’s keeping you paying a policy you might have been otherwise willing to cancel:
https://www.whitecoatinvestor.com/return-of-premium-is-not-a-free-lunch/
Exactly. I’m stuck with a critical illness insurance policy with ROP (which I always was self insured for, so never really needed), because by the time I figured it out there was few enough years left to the ROP time, that I couldn’t do better in the market with the remaining premiums than waiting for the ROP date.
Great post and provocative. Awesome to see lots of recent posts on the “back end” of financial planning as well.
I think the biggest questions to ask are:
1. How much do you have saved and what does a 3-5% withdrawal rate on that look like, vis a vis your spending needs?
2. If that is enough to retire on, then technically you need neither disability nor life insurance, but . . . .
3. If you have permanent disability and can’t do EM or the WCI, what would that look like? Would retirement savings work for that? Can Katie run WCI solo or does it collapse? Do you just sell WCI? I think with EM being a low source of income, the bigger risk seems a disability that precludes doing WCI and EM than just EM specific.
4. Are you happy eroding into retirement savings now and not continuing to accumulate to a later age if needed?
5. What estate do you want to leave? Maybe disability won’t be an issue, since you can live off savings; however, you might not have anything left for the kids/charity etc . . . life insurance is an awesome way to fund that need.
6. Depending on your state of residence, one asset protection issue is how much of your retirement funding is protected from the claims of creditors? A 401k/403b is entirely ERISA protected; however, IRA’s/Roth IRA’s are capped at 1.28 million federally and that looks like the Utah cap as well. Insurance is entirely protected from these claims, so it’s one other consideration in keeping insurance in force, even if it seems like you can self-insure.
Awesome post Jim. Keep it up!
PLS
1. 4% of what we have dedicated just for retirement covers everything we spent in 2018, not including charity/gifting, and taxes. And man did we spend.
2. Agreed, but the reason I kept the life is explained in the post. It’s all very squishy/gray.
3. Yes, we could live just on retirement savings. We’re still working on what happens with WCI if I die unexpectedly or we both die unexpectedly. There will be a plan, but in both cases it will likely be sold within a couple of years of my death.
4. Doesn’t matter. I’m not done working for other reasons. Half time EM would also cover all our living expenses from 2018.
5. Enough that they can do anything they want but not nothing. Still figuring out how much that is. Right now I’ve already given them more than I was planning to. All four kids have a Roth IRA, an UGMA, and a 529.
6. Not that huge of an issue given the very low likelihood of a suit above policy limits. I typically calculate that out at 1/10,000 for EM. Given that Utah is a relatively non-litigious place, perhaps that’s 1/15,000. Now that I’m half time, that’s probably 1/30,000. Yes, as things are currently structured we could lose some serious money, but I’ll bet half of it is completely protected. We may do the Utah Asset Protection Trust thing to to protect most of the rest. Still trying to decide. We just had a discussion about that last night. And besides, as noted in the post we’ll be keeping the life insurance for at least another year or two.
I also dropped my disability insurance around your age. I had figured out I was FI. If you really have enough money to FatFire you do not need disability. I bought it in residency also.
The only shocker here is that it took you so long, 7 years, to dump your whole life policy! It only took me 5 years to dump mine, (universal life). ?
Well, it helped that it was so tiny it was nearly irrelevant. (It had a face value that was only $20K.) I have some readers that pretty much never made any significant financial mistake. That’s not the case with me. I made most of the mistakes that docs make. I just made them early on with very little money.
We were military so while in military we just carried the SGLI and never had disability. (whoops! guess that worked out ok). By the time we left the military, we were #1 FI and #2 collecting one military pension. At the jobs we have now we have free coverage (I have 525K life, STD and LTD for me my husband has like 250K life and LTD)….doesn’t matter its free and we don’t need it anyways which is why i absolutely know zero details about it.
my only suggestion is for a couple to determine to drop to make sure if there would ever be a divorce and assets are split that you could live without disability or life for yourself (and whatever dependents). a couple might think a 3.5 million nest egg is “oK’, but that becomes 1.75 after a divorce for each person. So when people talk about a “FI” number, I have an assurance that FI number is for each of us.
remember there are also disability and survivor social security benefits. (at least right now…..)
Gambled and won. Obviously could have worked out the other way.
Good point on the divorce issue.
Another reason to keep term life insurance beyond needing the death benefit would be to pay estate tax if your net worth is over the threshold at the time of death, right?
The $22.4M threshold? Sure. But I’m not sure I’m going to have an estate tax problem, much less most of my readers. Obviously state estate and inheritance taxes can apply at lower thresholds.
Bear in mind that estate taxes can be paid with any liquid investment, nothing magic about life insurance proceeds there. But if most of your net worth is tied up in something illiquid (family farm, WCI LLC etc) then you can add liquidity with life insurance.
I cancelled my disability policy when it was up for renewal this year, was surprised how easy it was to just call and tell them I was not going to pay the next premium. No questions from them as to why I no longer needed or them trying to get me to continue payments.
Glad to see the “exit” of DI and TL addressed.
DI has one aspect that might deserve consideration. There can be one time and continuing increases in expenses needed to accommodate the person disabled. Housing, transportation and personal care with mental health lurking as well.
No answers available here. Gray areas are so gray.
I was 39 when I realized the disability coverage (about $3,500 a year) and term life insurance (about $350 a year) were superfluous. Having saved diligently and benefited from this bull market run made those policies redundant since we could be considered self-insured in the event of my demise or disability, I decided to “cancel” those policies. In reality, as mentioned above, all I had to do was stop sending them money and the policies were surrendered automatically.
An extra $4,000 in my pocket annually is the equivalent of about a $7,000 pay raise. Financial Independence pays well.
Cheers!
-PoF
Twenty five years ago I meant to buy disability insurance, but I never got around to it. Every policy I read seemed slow on paying benefits, and I know if I missed a couple of months of work my private practice would have been devastated. I also had the luxury in the early years, of a father with an active license, who was healthy and would be able to step in and run things until I got better or sold. I always carried enough Term life to cover my debt plus a little more. I figured it would be hard to cover my entire family for everything and possibly not the best thing for them to have a bunch of money to spend. My goal was to be debt free by 45. I missed it by a few years due to the real estate crash. College tuition is accounted for, a nice nest egg of diversified investments, so I figured it was time to drop the Term life. I guess I rolled the dice and got lucky.
Thanks for the summary article, Jim.
Me: LeanFI. I have a 500k term. Not life changing, but neither is the $1/day that I pay for a decent (tax-free) payout.
For DI, I have a 5k/mo own occ with no riders but some big exclusions. I’m hanging on to that to pay for a home health aide if needed. Also have a cheap group one for 5k/mo that I will lose/surrender when I go from 0.6FTE to 0.4FTE in 12.5 months.
And as pointed out above, don’t forget SSI. My monthly benefit is $2665. That will hopefully cover the Jevity through a feeding tube.
People often discuss whether disability insurance should be paid with pretax or posttax money to get a taxable or taxfree benefit. One idea is to switch from posttax to pretax funding as your nest egg grows. This greatly lowers the cost while only mildly lowering the benefit. Once the nest egg is large enough, the policy can be dropped completely.
If I had the option, I would have paid for it with pre-tax the entire time. Not only is the most likely thing that you’ll never use it (and thus at least get to buy it with pre-tax dollars) but if you do use it, you’ll be in a lower bracket than you otherwise would be. A bit of an arbitrage there. Obviously you’d buy a little more to make up for the fact that the benefits are pre-tax, but you would still come out ahead. It was not an option to buy it with pre-tax dollars however. That’s usually only available through an employer provided policy.
One thing I have always considered. Since depression is in part a subjective thing – how often is a doctor depressed but he or she is still chugging along out of pure tenacity/a sense of dedication? If someone is burned out and depressed and it’s legit and your “escape hatch” is financial independence and cutting back or quitting – consider using the policy instead of punching out. Don’t be a hero, you paid for the benefit. This is why many/most of policies have 24 mo limits, due to the potential for abuse, but I have seen docs not use it out of either ignorance or pride. But $20,000/mo for 24 mo = $480,000 tax free. That’s a lot of money you are leaving on the table for pride. Most people that are checking out way early probably have some aspect of depression I’d wager.
I’d love to hear an article about using depression as the reason for disability and how to protect yourself.
If you can get a doc or two to sign off that your depression is severe enough to keep you from working, then I suppose that’s legit. But I don’t think it is ethical to claim you can’t work due to depression just because you want to do something else.
and the insurance company might hire private investigators to check on you. if they find you’re out and about it’ll be hard to argue that you’re too disabled to work due to depression.
Apparently women (docs especially) are much higher risk for depression disability than men docs. Wonder if it’s because men are less likely to have a partner who can keep the family secure if they reduce or quit work (so they keep chugging along) or because depression in men is sometimes less clear cut and perhaps more of an ignored diagnosis to a man than to a woman given societal perceptions. I personally* might have had a case for disability prohibiting fulltime medicine (ie a true 40 hour work week might have been tolerable!) but the effort to claim it versus retiring early, since we were FI, not worth it (especially when one is having trouble working 50-80 hours a week already). (*My dysfunction was from a non psychiatric ailment, but once that affects your stamina and worklife it’s hard to not also have features of depression, and Provigil and an antidepressant kept me working that extra few months needed to qualify for a pension.) As I have often pondered, if I were paid a lot less I’d probably still be working! Though hopefully if that were the case our spending would be scaled back enough to still permit FIRE at the same ages. Also I had no private DI so getting it via work was even less appealing- I was grateful enough for FMLA.
When I purchased a disability insurance policy, I had never gone scuba. Three years later, I became scuba certified. If I get injured today from scuba diving, is this usually still covered through my disability insurance?
Yes.
I’m curious if you would still dump the DI policy if you made all your income from medicine? (Lets say your net worth is the same–in that gray zone– but WCI doesn’t exist and you pull in a fat paycheck as a plastic surgeon)
I might keep it another year or two.
While I cannot yet go into detail due to closing out the claim, I am truly amazed (or maybe not) that disability insurance is set up as “we have the opportunity and privilege to buy X amount” yet when it’s all said and done, what this really means is “we, the insurance carrier, have the right to negotiate the payout”. I will share that story hopefully soon. It’s shocking how they get away with these type of actions.
Don’t forget overhead expense insurance. Even if a doctor has enough savings to take care of personal expenses, if you are in private practice you need to be able to pay rent , staff etc. Not an issue if you are in anesthesia or employed by a group or hospital.
Great topic.
I would hesitate to drop DI at that age unless truly wealth and financially independent. There is too much unpredictable life yet to be lived. An illness that wiped out both sources of income would be a serious hardship, at least from my belt and suspenders way of thinking.
In WCI’s situation, I would have sought coverage for the blogger income, if that were possible.
With a low income spouse and several kids I would be worried about very long term financial outcomes. I would not be comfortable spending 4% of assets, including taxes, for retirement starting at 65. I would not consider 4%, not including taxes, at 43. MAYBE 2% at that age. Maybe less.
That is a long time for bad things to happen to the markets or to an individual.
Most docs who keep DI longer run into a point where the remainder dollar value of the coverage declines as they approach 65. There is a big difference between 22 years of benefits starting at age 43 and 2 years of benefits at 63.
A problem for those of us who plan to work past 70 is the inability to insure against the income loss if forced to retire early at, say, 65. We may not need the money, and hence the loss probably should not be insured anyway, but if one needed it, there is no such coverage available.
Would it make you feel better if you knew the business was worth 2-3X the nest egg? And we’re not talking about some bare bones lifestyle at 4% either. This is the lifestyle where we buy a new car every few years and go on vacation every month. We have no debt. I think we can probably squeak by on more than we’ve ever spent in our life if we have to.
As far as 4% being some crazy aggressive number, bear in mind the data that the 4% rule came from including such things as The Great Depression, the Stagflation of the 70s, World War II, the Global Financial Crisis, the Tech boom and bust etc. It’s not like it was from some period where everything was awesome all the time for decades at a time. Plus, on average after 30 years of withdrawing 4% you are left with 2.7X what you retired with. You’ve adjusted your spending to your means your entire life. The ability to do that doesn’t go away on the even of retirement. Those who have the financial discipline to acquire a multi-million nest egg certainly have the discipline required to live on that nest egg, even in rough economic times.
Yes, but the 4% was also based on 30 years of retirement. For a physician and family, from age 43, we could easily be talking about 50+ years of retirement. Yes, the mean long term would have you ahead at the end. But you are concerned with the worst case scenario, not the mean. Predicting 50+ years is harder than predicting 30.
As for the business, that is hard to predict as well, at least for me. You have done great so far. But what will it be worth in the future? How profitable will it be to run a blog like this? How long would the business last if you were not able to run it?
It is easy to assume that we will need emergency medicine physicians for as long as there are humans to treat. The blog business is new and dynamic and unpredictable.
If you had solid offers to sell now and you intended to take one, then you could bank the funds and live off them quite comfortably, apparently. If you are counting on continuing to run it, I would look at it as a pretty high risk venture. If it is worth 2-3x your other assets, then many eggs in one basket. Entrepreneurs tend to be comfortable with this level of risk.
As I said, if it were me, I would be looking to “Insure” the WCI blog income with disability insurance. Or a solid succession plan for who would takeover either by buying you out or working as your employee or co investor.
But then I am a wage slave, not the type to start a successful business from scratch.
I agree your risk tolerance appears to be far lower than mine. Yes, there are a lot of eggs in the WCI basket. But given that the other baskets have enough eggs in them that many physicians would be happy just living on those eggs it doesn’t seem so bad.
Quite frankly, I have at least six methods of providing for our current living expenses, any ONE of which is sufficient:
1) Withdrawing 4% of our portfolio.
2) Spending our passive income- it alone exceeded our ridiculous expenses for about half of the months of 2018
3) My clinical income
4) WCI income
5) Selling the business and living off the proceeds
6) Just going out and doing speaking gigs. I could replace what we’re spending JUST doing that if I were willing to travel more.
I could also go get another JOB. If you were an online entrepreneur how much would you pay to consult with someone who has been there and done that? How about to employ that person? What do you think my market value would be as a part time employee working from home? Certainly enough to feed my family. If I could find another me right now, I’d be willing to pay that person a physician salary to work for me. Part time.
Remember. We have NO debt. We’ve already exceeded our goals for college funding. Our fixed expenses consist of $300 a month in property taxes, maybe $200 a month in miscellaneous insurance, $1400 in health insurance, and a few hundred bucks in utilities. My wife could cover those delivering pizzas. Did I mention she has a master’s degree in a field where she could get a job TOMORROW?
Heck, we could sell the darn boat and live for a year off the proceeds.
I dunno man. You seem to be seeing risk where I see almost none. I want to be Mr. Bragger, but I think it’s ridiculous to argue I have a NEED for disability insurance at this point. I probably should have dropped it a year or two ago and was overly conservative holding it this long.
Ha!
I think WCI will squeak by somehow. Man, I just wish I could buy stock in WCI!
The rank and file physicians aren’t doing so hot though. Many live paycheck to paycheck and have only W-2 income.
First off I wanted to apologize for my previous comments on WCI. This is a very helpful and educational site.
My Question is, I am 46 right now, live in a house worth 1.7 M (still have 1 M mortgage on it), have three real estate condos out of state worth a combined close to 1 M ( have 650 k mortgage on it), have two paid off overseas real estate worth 1 to 1.5 M, I dont have much in savings or retirement, At age 60, I will get a small State pension of 36 k per year (taxable) I am the only working spouse. I feel I have to keep working and working a lot of hours with no end in sight at this time. At what point do we say we are truly financially independent?
Also what are some asset protection strategies in California? and what is the best way to pass Assets to your loved ones?
Not sure what previous comments you’re referring to.
Well, you can’t really use the $700K in home equity to support you in retirement. You also have a $1M mortgage, which obviously requires a lot of cash flow to cover. Your condos are probably barely cash flow positive, so can’t really get much income there. That’s only $350K anyway. Then you’ve got the overseas stuff. So your net worth is $2-2.5M, but you’re servicing a ton of debt. I think I’d restructure the whole thing if I were you. Maybe sell the condos, consider downsizing, and possibly even redeploy the overseas stuff depending on the return I expected there. Whatever you do, you need to be directing a substantial portion of your income toward building wealth.
When 4% of your assets directed toward retirement is more than your annual expenses, then you’re probably financially independent. So….are you spending more than $60K a year? I would guess so. It probably costs more than that much just to service the mortgage on your primary home.
These posts may help answer your other questions:
https://www.whitecoatinvestor.com/introduction-to-asset-protection/
https://www.whitecoatinvestor.com/introduction-to-estate-planning/
https://www.whitecoatinvestor.com/the-california-private-retirement-plan/
My expenses are north of 200 k per year,
Primary house mortgage is 96 k per year
Hoping to pay off the three condos end of 2020 and get passive rental income of approx 5000 after HOA and othe dues
Hoping to have another mortgaged investment of 1 M overseas in 2019 and rent out the other two paid off investments
My colleagues say to have atleast 5 M by age 60 to retire comfortably
any thoughts?
Financial independence/wealth/retirement etc is a very simple math problem. You need 25X what you’re spending. In order to get there, you can work on either of the two factors in the equation. You can either get more money or spend less money. Most of us do both. The nice thing about spending less is that it not only decreases how much you need in retirement, but it helps you save more. Plus, our progressive tax code isn’t working quite as hard against you at lower incomes in retirement.
Your burn rate is VERY high for a doctor. Your level of assets isn’t terrible for your age/stage of career. Kind of averagish. But the burn rate….that’s what’s killing you. Guess what? Even $5M dedicated to retirement isn’t enough for you to be financial independent given your current burn rate. It’ll only support a pre-tax income of $200K, and you’re spending more than that. You might need $6-8M if you can’t do something about the spending.
Your attitude toward debt is also a bit too cavalier in my opinion. I mean, you already have more than $1M in debt (almost $2M) and you’re looking to borrow more? Leverage works, but it works both ways. I know the California cost of living is ridiculous, but you don’t get a pass on math just because you’re a doc or just because you live in California.
I forgot to mention, the 1 M mortgaged property I am looking at overseas has a rental client whose rent will pay off the mortgage. The same applies to my three condos in the US. I have a term life insurance of 2.5 M which ends in 8 years or so.
Have about 300 k saved in savings account. The Stock market I have taken heavy losses and am afraid that I am not good at investing. Can you suggest a stable fund that I can set it and forget it. Are Balanced funds like David Bach’s suggestion good?
Just because rent covers the mortgage doesn’t make it a good investment. There’s a lot more to it than that.
$2.5M barely pays off your debts. Given your tenuous financial status (despite being a multimillionaire) I’d probably get more life insurance.
You need a written investing plan. If you are not capable of writing one, and cannot become capable quickly by reading a few books and blog posts and asking questions on the WCI forum, then consider taking my $499 Fire Your Financial Advisor Course which will take you by the hand and help you write your own financial plan. If you need more help than that, plan to spend $3-7K on a financial advisor to help you do so. But however you do it, get it done. It will be worth the time and money.
https://whitecoatinvestor.teachable.com/p/fire-your-financial-advisor
https://www.whitecoatinvestor.com/financial-advisors/
Your plan is likely going to involve less money in real estate and more money in stock index funds. Stable Value fund has a specific meaning. It’s a bond-like/money market fund like investment. A balanced fund generally owns stocks and bonds. But trying to pick an investment without an underlying plan is a recipe for failure. You might not be good at investing now, but you can be in a very short time period if you really want to be. It’s not that complicated.
43 is still a young age. You don’t need disability insurance. Just keep yourself in the gym, eat right, do the transformation work, up your cardio, think positive, and keep your side hustle blogging going by creating lots and lots of content. 🙂
While I’m confident I no longer need disability insurance, I disagree that working out and eating well is an adequate alternative strategy to buying disability insurance.