Estate Planning and Passing Wealth to Your Children

Transcription – WCI – 428

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 428.

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Тhanks out there everybody for being a White Coat Investor. Thanks for what you do. Your work is important. If no one told you thank you, let me be the first today. It is important work you do.

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We're going to talk a little bit about some estate planning kind of stuff today and giving money to kids and so on and so forth. So, let's start with an email that was sent to me by somebody not much older than me.

 

ARE VARIABLE ANNUITIES A GOOD WAY TO PASS ON WEALTH?

The email says, “I'm curious to hear your perspective on a recent article by Jonathan Clements titled: When They're 64. I think it could be an interesting topic on the podcast. In the article, Clements discusses how he purchased variable annuities for his kids and grandkids when they were very young.

I realized that this would be way down on the list of financial priorities. It may not be the most tax or fee efficient way to invest, but it does seem like an interesting way to begin retirement investments for heirs that are too young to have earned income to contribute to a Roth IRA.

For context on if it might make sense in our financial situation, my husband and I are in our mid-30s. Kids are two and three. We've got a couple million dollars in investable assets. Our only debt is a $400,000 mortgage with plans to pay off in the next four to five years. We max out available retirement accounts and HSA and already have two front-loaded 529s for a combined $300,000.

Additionally, my parents are about to get a windfall from selling my childhood home and downsizing. They've been making annual contributions to separate 529s for their grandchildren. Should they consider purchasing variable annuities instead? I look forward to hearing your thoughts. Thanks for the work you do. My husband and I have been faithful listeners for the past eight years. It's not an exaggeration to say that your podcast and blog have been life-changing and led us to be in the secure financial position that we're in today.”

Well, that was nice. Put paragraphs like that in a five-star review wherever you get your podcasts. They're very helpful.

Let's talk about this stuff. This is a fun conversation. This is near and dear to my heart because like this couple, Katie and I have more money than we need. Like this couple's parents, Katie and I have more money than we need. We do a lot of thought about giving to our kids.

There's a lot of ways to screw this up. There's the question of how much do you give? There's a question of when do you give it? There's a question of how do you give it? It's complicated. You got to know your kids and your approach has got to be personalized to your kids because every kid's different. Some kids could get a big inheritance at 25 and they're probably okay with it. Other kids, you're going to ruin their life by dumping a bunch of cash onto them at 25 or worse, 18. You got to be a little bit careful with how much you give.

There was a book that came out a few years ago called How to Make Your Kid a Millionaire. Each chapter of the book involved basically a different financial product. I think there was a chapter, probably one for whole life insurance. There was certainly one for UTMA accounts or UGMA accounts. There's probably something there for 529s.

I know there was something there for annuities. The idea was, yeah, start an annuity when they're super young. And now it can compound in a tax protected way for decades, five, six decades before they use it for retirement. Because annuities, remember, have got the 59 and a half rule, just like IRAs. So you don't put money in annuities that you want to spend before retirement age.

But what if you could fund your kid's retirement? It doesn't take that much money if you got six decades for it to compound. That's a super exciting option there. The problem is most annuities are products made to be sold, not bought. They have high fees. They tend to not have great investing options. Sometimes they have low returns if they're fixed annuities.

And so, if you want to do that, it's really important that you pick the right kind of annuity. It needs to have low fees. It needs to have good investments. But you could do this. How much is tax protection worth? Well, it's worth a lot. The problem is you also are losing something in exchange for it. You're losing fees and you're losing tax treatment when you take the money out. Because you're not getting a tax break when you put money into an annuity.

But when it comes out, the earnings, like for a non-deductible IRA contribution, the earnings are fully taxed at ordinary income tax rates. They're not taxed at lower qualified dividend rates. They are not taxed at long-term capital gains rates. And annuities don't get awesome tax treatment. Whereas with like a whole life insurance policy, you get your principal out first. That's one of the cool benefits of it.

That's not the case for an annuity. Your principal does not come out first. And so, the tax treatment is not awesome. You really do need a long time of tax protected growth to overcome that less than ideal tax treatment and to overcome any fees you're having to pay.

And obviously, if there are huge annual fees and the only thing available in there are some crummy mutual fund equivalents, these sub-accounts in a variable annuity that charge you 1.5% a year, this isn't going to work out well enough for you to be doing this instead of just some sort of other taxable investment.

There's lots of other options besides an annuity. You can invest for their retirement just in a taxable account. Now, if you want them to have control of it, probably at 21 in your state, you can use a UTMA account. That's the type of account we use for my children's 20s fund. The main part of their 20s fund is a UTMA account. But that becomes their money at 21. If you don't want them to have access to that money at 21, you need a different plan.

Now, an annuity that's in their name, they also have access at 21. They could cash the thing out, pay the 10% penalty, pay the taxes on any earnings, and spend it all on cocaine if they want to. There's nothing to keep them from doing that just by putting it in an annuity. Yes, there's a penalty for taking it out before 59 and a half, but they can do it.

If you're legitimately concerned, and this is a really large amount of money for you or for them, if you're legitimately concerned, they will not leave it alone until whenever you think they should be using it. You need to put it in a trust. And it needs to have those terms in the trust and trustee ensuring that they don't get to have it until they're supposed to have it or they fulfill whatever conditions they are supposed to have.

This is a reasonable thing to do over long periods of time. The tax protected growth can overcome the fees if the fees are low, and can overcome that change in tax treatment. But we don't do this. We have chosen to give money to our kids in a lot of different ways. They've all got 529s for college. They've all got this UTMA for a 20s fund. Any money they earn during their teenage years, we gave them the daddy match for. We put in the same amount of money they earned to the Roth IRA and let them keep their money. Technically, they're spending our money and their money went in the IRA, but money's fungible.

We help set up a checking account for them. We don't put a bunch of money in the checking account, but they get a checking account set up and get to learn how to use that.

And the last part that we just started doing the last couple of years is an HSA. While they're still on our family high deductible health plan, but not our dependents, they can actually make a family contribution into an HSA. We started doing that for them between age 19 and age 26. That's their early inheritance. They get some money later, but that's their early inheritance, their 20s fund, if you will.

But we haven't messed around with an annuity to do that, but it's not crazy to do so. If you want to fund your kid's retirement, you can do that. You don't have to put that much money into that account when they're four years old to have it be worth a million dollars in 60 years. You could pay for your kid's retirement if you wanted to. And this couple writing in, they're certainly high income enough and wealthy enough that they could do something like this for their kids. I think they've only got two kids.

They've already got a ridiculous amount of money in 529s. They're almost surely going to have overfunded 529s. And for some crazy reason, the grandparents are thinking about putting even more in there. I don't know what these kids are going to do for their education. They must be planning to go to Yale and then go to dental school or something.

I don't know how they can possibly know that about a two-year-old, but they're going to have enough money to do it. Just $150,000 each they've already got in there at two and three years old. That's going to double twice more by the time they get to college. That's going to be $600,000 for each of them in their 529, not counting any additional contributions, not counting what the grandparents are doing.

Yeah, I think it's time to start thinking about other ways to give money to the kids than just sticking it in a 529. 529s are great until you get into the lowest six figures. And then you got to start thinking, “Is this really what we want to do? Put more money into 529s?” You've got to really want to be going to an expensive kind of school and you got to want to pay for a whole big chunk of it in order to put much more than that into 529s.

Okay. We should also talk a little bit about inheritances. It's interesting. Those of you who've read the book, Die With Zero, and this is a good book for a couple like this. It's already multi-millionaires. They're still young. I think they said they're in their forties. No, they're in their mid-thirties already and multi-millionaires.

This is a good book for a couple like this to read called Die With Zero. It's by Bill Perkins. First of all, people that shouldn't read it. If you're a brand new attending, you owe $300,000 in student loans and you don't have much money, this might not be the best book for you to read right now. But once you are becoming wealthy, it should be on your list. It's not perfect. I've written some blog posts about some issues I have with the book, but for the most part, I think it's the best book out there for people who frankly need to spend more money or give more money away.

I like a few things about it. One of the things I like about it is it talks about inheritances. The average age to get an inheritance is 60. When your parents keel over. That is not a great time to get an inheritance for most people. By the time you're 60, if you've been listening to this podcast, you don't need money from your parents by the time you're 60.

When do you need money? When would you really benefit from an inheritance at some sort of earlier age? When you pull large groups of people, according to Bill Perkins, and ask them, “When would an inheritance really be useful to you? When should you get an inheritance?” they say 26 to 35. Decades before age 60.

And so, one of the main ideas in the book is, the book's called Die With Zero. And the idea is you don't want to leave money accidentally to your kids when you die at 85 and they're 60. You want to leave money deliberately, intentionally at the times in their life when it really will make a difference. And so if you're giving money to charity, he says give it now. Even if you could give more later after it grows, if you are sure this money is going to charity, give it now. If you're sure this money is going to your kids, give it now.

That's maybe not when they're 18, but he thinks by the time they're 26 to 35, yeah, give them the money now when they can buy a house with it, when it can really make a difference in their life.

Think about giving inheritances earlier. And the idea is, you can spend money in earlier decades a lot better in ways that bring you lifelong happiness and memories. Whereas when you're 80, maybe you don't feel up to traveling the world or up to buying some fancy new boat or airplane or truck or whatever you want. And maybe you ought to buy that stuff a little bit earlier. And so, you have less money when you die.

He's literally trying to die with zero. And there's some tools to help you avoid the obvious problem with trying to die with zero, which is running out of money before you die. And so, you can use some immediate annuities. You can delay social security to 70. You can even consider things like a reverse mortgage to help you not run out of money.

But if there's money, you're pretty darn sure you're not going to be needing. He says, give it to him earlier. He says give it away to charity earlier, et cetera. Think about that as you craft your estate plan. Maybe some of that inheritance, you're surely not going to need, and you can give it earlier. We were aware of these concepts before I ever read this book.

When we set up our estate plan, we not only were giving our kids money in their 20s, when we think an inheritance is most useful and when we wish we'd gotten a bunch of money from our parents, but we also are giving them money periodically throughout their life. We'd set it up at age 40, age 50 and age 60. Since we read the book, we were thinking maybe we need to move that up a little bit. Maybe there should be another big chunk of money to help buy a home, especially with housing prices, the way they are these days. So we may be changing that plan.

But the idea is if you are doing so well that you're thinking about funding variable annuities, do you really just want to leave them money that they can't use until they're 59 and a half? Or would you rather maybe give them enough to buy a house down payment?

Of course, money's fungible. If you're funding their retirement, maybe they can use their money to buy the house. But lots of things to think about when you have more money than you actually need.

Okay, let's take another question about an annuity from the Speak Pipe.

 

RECEIVING AN ANNUITY AS AN INHERITANCE

Noah:
Hi, Dr. Dahle. This is Noah from the East Coast. Thanks for all that you do. My grandfather recently passed away and I received a letter from an insurance company stating that I'm the beneficiary of an annuity contract from his estate and asking me to determine how I want to receive the annuity.

My options apparently are a lump sum, which would be about $50,000, a five or 10 year deferral where the lump sum would be paid in five or 10 years from his death, or annuity payments totaling about $80,000.

The letter states that for the annuity payments, they must be in within a year of his death and generally the final payment must be received in the 10th year following his death. I think it makes the most sense to take the annuity payments over 10 years, which would be larger than the lump sum.

I do think I would have to pay taxes on these at ordinary income rates. Is that correct? Have you ever come across anything like this? And am I making the right choice? For some context, my wife and I are both W-2 employees and our total income is about $400,000 per year. We currently max out our 401(k)s, HSA, and backdoor Roth each year. We don't have any current student loans. Thanks.

Dr. Jim Dahle:
All right, Noah, let's talk about inheriting an annuity. Here's the good news. The good news is you're in a great spot. You've paid off your student loans. You're making $400,000 a year. It really doesn't matter what you do with this. It's extra money for you. You weren't planning on it. It's a windfall and it's not a huge windfall for you. So you don't have to spend a lot of time stressing about it.

One of the benefits of annuities is you get tax protected growth. And if you spread this thing out as long as you could, you would have more tax protected growth. Sounds like you can stretch it out over up to 10 years. Wonderful. Maybe stretch it out over up to 10 years. Yes, you're going to be paying taxes on it. You may not be taxed on the entire thing. Some of them may represent principal.

I don't know if this was qualified money, i.e. money that was in a retirement account. If it was in a tax deferred retirement account, you're going to owe taxes on the whole thing. If it was bought with taxable money, there's going to be some percentage of it as it comes back to you with each annuity payment that will not be taxable. But all the earnings are going to be taxed at your ordinary income tax rates.

Taking it all at once some of them might be taxed in a higher tax bracket than your current marginal tax rate. That might not be wise. It might be good to spread it out at least over a few years. If it's not the world's worst annuity and seems to be giving you some sort of reasonable return, whether that's fixed or whether that's investing it into more variable investments, spreading it out can make some sense. I'd probably look into maybe spreading it out.

The one upside of just taking the money now, paying your taxes on it, moving on, is it eliminates complexity in your life. If you're gone spread this thing out over a decade, well, you got to deal with it for a decade. And you probably wouldn't buy something like this yourself. So, you got to deal with that. And it may not be worth it, especially if it's only $80,000 in your financial situation, it might not be worth it.

That's really the question is additional tax protection, additional tax protected growth, really, versus reducing hassle in your life. Those are the things to be thinking about. It's kind of a similar question to if you inherited an IRA. You could take all the money out right now, there's no penalty, you just got to pay taxes on it. But you could stretch it out for 10 years. And most of the time, stretching it out is probably the right move to make. So I think that's probably the case for this annuity as well. This is a particularly terrible annuity.

 

ESTATE TAXES

Okay, let's talk a little bit about a separate subject. Let's talk about state estate taxes. I got an email recently, said, “I recently learned that a handful of states have a state inheritance and or gift taxes. And it's not hard to figure out which ones. And unlike the federal limit, the thresholds, they say, are quite realistic.” I would say quite low rather than as high as the federal limit is.

“I came across this information while reading one of the blog posts of White Coat Investor and I consider myself well educated in personal finance, but I never heard of a state death tax. So I thought you should share it with more White Coat Investors.”

Okay, that's why we're talking about this. If you're not aware there are state estate taxes, now you know. The good news is most states don't have these. So let's do the list of which states have estate taxes. And I'm just going to read the list here because a lot of you are not aware of this. Let's just tell you which states have state taxes. A whole bunch of you will quit worrying about this that you just learned about.

All right, here they are. They're mostly blue states, by the way. Washington, Oregon, Minnesota, Nebraska, Iowa, Illinois, Kentucky, Pennsylvania, New York, New Jersey, Connecticut, Vermont, Maine, Massachusetts, and Hawaii. Those are the ones that have a state or an inheritance tax. So, if you're in any of those states or planning to move there, you ought to look up what your state taxes, when it starts doing it, et cetera.

There's two types of taxes we're talking about here. There's an estate tax, which is levied on the estate. When you die, your money is owned by your estate. That's an estate. And the estate has to pay taxes. They have to pay an estate tax if your money is more than the estate tax exemption.

Now, federally, that's a huge amount of money that most White Coat Investors are never going to get to. I think it's up to $14 million or something. It's something around there each. If you're married, it's another $14 million. So, it's like $28 million total. It's the index to inflation that goes up every year.

Under current law, it's supposed to be cut in half starting next year. But the likelihood that that isn't fixed during 2025 by the Republican House, the Republican Senate, and the Republican White House seems very low to me. I think this is going to be extended.

But the state estate taxes can have much lower exemption amounts. For example, Connecticut basically matches the federal amount. Hawaii has a significantly lower amount. It's like $5.5 million. Maine’s $6.8 million. Some are really low. Oregon's only $1 million. After a million dollars in Oregon, you start paying a huge estate tax.

Washington has recently had changes. This list I'm looking at on the internet has not updated for those changes. Washington has a new estate tax that those of you in Washington should know about so you can move out of Washington before you die. Just kidding. Maybe. Maybe some of you do want to move out of Washington.

It becomes effective if you die after July 1st, 2025. So it's now in effect by the time you're hearing this. The estate tax exemption amount will be increased to $3 million, but the rate is really high, 35%, highest in the nation for Washington. It's possible if you have a really large estate that you're going to lose 40% of it to the federal government, and you're going to lose 35% of it to the Washington state government. I assume most wealthy people are moving out of Washington before they die now that this is in effect, because that's a lot of money.

Okay. That's how estate taxes work. Any amount above that exemption amount, you got to pay estate tax on it, whatever the rate is. It's typically not 35%. It's typically much lower than the federal rate, but it can be high. For example, you look at Connecticut, it's 12%. Hawaii is 10 to 20%. Maine's 8 to 12%. Maryland's 0.8 to 16%. Some of these rates are relatively low. D.C.'s got one, 11.2 to 16%. I don't know if I mentioned that earlier. D.C. has an estate tax as well.

The other type of tax is an inheritance tax. That is not taxed to the estate. It's taxed to the person who inherits the money. Now, those exist. Sorry, I said there's an estate tax in Iowa. There's not. That's an inheritance tax. But in Iowa, Kentucky has both kinds of taxes. Oh no, it just has inheritance tax in Kentucky. It just has a really small exemption for it.

Maryland has got an inheritance tax. They're one of those that have both inheritance and estate taxes. Nebraska has an inheritance tax. New Jersey, theirs is an inheritance tax. Pennsylvania has an inheritance tax. Some of these are not estate taxes. They're inheritance taxes. They're taxed to the inheritor.

Now, I believe if the decedent dies in a state without an estate tax or inheritance tax, but you live in one of these states with an inheritance tax, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, you got to pay taxes. So if you're expecting a big inheritance, you might want to move out of an inheritance tax state as well.

But be aware that these taxes exist. The exemption amount is often dramatically lower than the federal estate tax limit. If you're not in one of those states that I've named, and you don't have 13 or $14 million a piece, you don't have to spend a lot of time worrying about this. That's not the purpose of your estate planning.

Maybe you want to avoid probate with some revocable trusts and beneficiary designations, but mostly your estate planning is just going to be making sure your money goes to who you want it to go to when you're done. You don't have to mess around with this crazy planning people do when they have estate tax issues. But if you're one of those with either a state or inheritance tax problem, it's worth spending some time looking at your state laws, what that is, what you want to do about it.

 

QUOTE OF THE DAY

All right. Let's do a quote of the day. This one comes from Burton Malkiel. He said, “The greatest of all gifts is the power to estimate things at their true worth.” Love it.

Okay. Let's talk about family properties. We're doing lots of estate planning kind of stuff today.

 

LEGACY PLANNING WITH MULTIPLE PROPERTIES

Jess:
This is Jess in Texas. Longtime listener, first time Speak Pipe caller. My question ties to the great wealth transfer. My family has four cherished Texas properties, two ranches and two lake houses passed down from our grandparents. They're used primarily for family retreats, hunting and cattle on one ranch. They're currently jointly managed by aging siblings.

My generation is financially secure and we want to keep these properties intact across generations, not divided or sold. There's no family conflict, but we have no formal structure like an LLC or trust. With expanded details in a recent email, we're seeking guidance on the best entity structure to ensure longevity, flexibility, asset protection and inclusion of future generations considering state law. Thanks for helping us and other White Coat Investors think through legacy planning.

Dr. Jim Dahle:
Okay. Lots to talk about here. Let's start by mentioning this is not a do-it-yourself project. This is not something you guys just sit down and figure out or you can just email some podcaster and come up with the right answer here. It's time to get a professional.

You got four properties. It sounds like some are really valuable and large, their ranches, their lake houses, et cetera. This is millions of dollars. You could afford to get some advice from an estate planning attorney in Texas and you should do that. If there's not an estate planning attorney in Texas involved in this discussion, you are doing this wrong. So, let's start with that point.

We should also start with the caveat that I am not an estate planning attorney, nor am I in Texas. I don't know all the stuff that may come into play in this sort of a situation, but I can give you some practical advice. This is very kind of generation one to set this up. They did very well for themselves and obviously have passed this on to other generations. It was a wonderful thought. It is a wonderful thing to do.

However, this is not the best way to inherit money and assets. Because it's messy. Not only are you getting something that's pretty darn illiquid, but you're also getting something that is going to involve some conflict with other family members.

Now, maybe in generation two, there's not much conflict. Maybe there's only two or three or four of you and you get along really well and you're all doing really well. Like you mentioned, everybody's financially secure and this is all just bonus stuff for you. You go use the properties. We're going to go out to the lake house. We're going to do the ranch this weekend, whatever. No big deal.

But there's another generation coming. There's generation three, and not only are there going to be more people involved, but maybe they're not all as financially secure as generation two is. The old saying is “Shirtsleeves to shirtsleeves in three generations.” There's a lot of truth to that. It's something like 70% of generation one's wealth is blown by generation two and like 90% by generation three. It's very unusual to have multi-generational wealth.

There's a lot of reasons for that. One of which is just simple division. There's more people in these future generations. One of the reasons is estate and inheritance taxes. Cuts down on how much has passed through generation to generation. But the main reason is the people in generation three are just not the same kind of people as the people in generation one. They've grown up relatively wealthy. They spend money more effectively than generation one might have and they're likely to blow it.

So you got to keep that in mind. What are your real goals here? Are you trying to keep generation three from blowing it, generation four from blowing it? Well, if that's the case, you're going to have to do a lot of ruling from the grave. There's got to be some sort of a trust with all kinds of details about how that trust can be used.

What you don't want to do is every generation you're going into equal ownership of these entities, everybody's names on the title, and now you're really fighting about it. It does need to be in some sort of entity. That entity, I suspect for most families is going to end up being a type of trust, not necessarily a company like an LLC or a corporation. It's almost surely going to be owned by a trust.

Now, the other thing to keep in mind is as White Coat Investors, we're looking for this perfect account, this perfect entity type that not only reduces our taxes, but gives us perfect asset protection, facilitates estate planning and management. It just doesn't exist. There are trade-offs. By setting up a trust one way, you might be getting some more asset protection, but you're losing flexibility. Or you're losing tax treatment.

There's all these trade-offs that go into exactly what entity you choose and exactly how it's set up, whether it's a family LLC, whether it's a family limited partnership, whether it's a some type of an irrevocable trust, you're making trade-offs between flexibility, between asset protection, between how it's treated tax-wise and those sorts of things.

I think this is way more complicated than a Speak Pipe question can really answer. This is complicated enough that if I were you, I would gather up generation two and go into the estate planning attorney's office and iron this out. If generation one's still around, I'd take them with you. Maybe not if they're totally senile or something, but if they're still around and want to have input into this, and I suspect they probably do, they should come along and this should be set up in an intelligent way that meets the goals.

Another thing to consider is to recognize this just gets harder as the generations go by and maybe it's not a great idea to try to make this last forever. For example, I stayed in a property once with a friend who was a part of generation three. Generation one had paid for this property, expensive property in an expensive place, and they had put together money to maintain it, in trust. Property's in trust, the money to maintain it is in trust.

And the plan was whenever the money runs out, the property is going to their favorite charity, happened to be a university. And so, the family knew, generation two was going to be able to use it a lot, generation three was going to be able to use it some, generation four might be able to use it a little, but eventually it was going away and everybody knew upfront where it was going. It was going to this university as soon as that fund of money being used to pay the maintenance and being used to pay the insurance and being used to pay the property tax was gone.

My understanding is now the money's dwindling pretty good, so it's not much longer. It's just a few more years. Everybody's trying to get out there and use it while they can, because this thing is going away.

But that method eliminates lots of fights, lots of problems, lots of hassles. So you might want to consider something like that if you're setting this up. But if the goal is to try to get this to generation eight, there's a lot of work ahead of you and there's going to be plenty of work for generations four, five, six, and seven, because it's hard to keep this going for a lot of years. Not only do you need to pass along money and assets, but you got to pass along financial sophistication, financial literacy.

For example, imagine a time when this property is not generating any money, but still has substantial expenses. Property taxes, insurance, maintenance, et cetera. It needs a new roof now. Well, who's paying for the roof? Generations four is looking around at each other going, “Well, there's six of us. So, you got one sixth of the roof and the roof on this big ranch is going to cost us $30,000. So pony up, send us $5,000.”

Now what happens if somebody isn't willing to pay the 5,000? What are you going to do? You got to think about these things in advance and set it up in a way that is going to work. Otherwise it's going to cause problems. I hope that's helpful. Work through that with a professional. This is not a do-it-yourself project.

 

INTERVIEW WITH PAUL MOORE OF WELLINGS CAPITAL

Okay, we've got an interview I want to have here. This is with one of our sponsors. Full upfront disclosure. We're going to talk a little bit about real estate investing these days, and as well as an opportunity if you're interested in private passive real estate investing. And afterward, we've got at least one more Speak Pipe question. I think it's also about private passive real estate investing. So, we'll talk about that.

My guest today on the White Coat Investor podcast is Paul Moore, the founder of one of our sponsors, Wellings Capital. Paul, welcome to the podcast.

Paul Moore:
Hey, Jim, great to be here.

Dr. Jim Dahle:
Now, one of the fun things about Welling's Capital is that you are not afraid to invest in more than one type of real estate. When I look at the holdings in the currently closed real estate income fund that I invested in through Wellings, there are self-storage facilities, there are mobile home parks, there's a lot of multifamily in there. I think there's some light industrial, other asset classes. As you sit here in 2025, what real estate asset classes seem most attractive to you?

Paul Moore:
I wrote a book called The Perfect Investment in 2016 about multifamily. I know it's a humble title. And then I went on dozens and dozens of podcasts from 2018 to 2022 saying timeout, the perfect investment's not perfect. If you have to overpay, over-leverage, use risky floating rate debt, and believe that trees, a.k.a rents, have to grow to the sky to make this work. And it did work for a lot of years, and for more years than I ever dreamed. But, of course, the 11 interest rate hikes exposed a lot of these problems, and a lot of people are in a lot of trouble, and a lot of investors are in a lot of pain right now.

But that doesn't mean multifamily is a bad investment. It just means honestly, some of the operators were bad. They didn't really know what they were doing, and it was covered up by this rising tide that lifted all boats. A lot of times the debt structure was the problem. A lot of times these same people overpaid, and some did all three of those things wrong.

And so, multifamily as an asset class, a 2022 study by the National Multihousing Council said that there was a 4.3 million unit shortfall that had to be overcome as of 2035, which is about 10 years from when we're recording this. It's almost impossible to imagine how we'll get to that 4.3 million new units. That's going to be in favor of multifamily investing.

Another asset type I like, which is similar, another type of multifamily, so to speak, is manufactured housing communities, a.k.a mobile home parks. Mobile home parks are the only asset type I know, Jim, that have increasing demand and decreasing supply every year. There really is an affordable housing crisis. 10,000 people will turn 65 today, but six in 10 won't have $10,000 saved for retirement. A lot of them do have home equity though, and they are willing to move to a mobile home park to get their own walls, their own yard, their own deck, their own front door, and at a much lower cost than living in a home and a much better situation in their minds than living in an apartment building.

They're not building any more mobile home parks to speak of, and they're tearing them down every year as they age out or as their septic systems wear out or whatever. And so, I really like mobile home parks. I like multifamily, but I also like the other asset types we invest in as well.

Dr. Jim Dahle:
You said 10 million people are turning 65 this year?

Paul Moore:
Did I say that? I meant 10,000 are turning 65 today.

Dr. Jim Dahle:
Okay, 10,000 are turning 65 today. I thought I heard a million. I don't know if you said that or not. I thought I heard that, and I'm like, “Wow, that's a lot of people”, but it's still a lot of people either way. Very cool.

Now, what do you see as being unique about investing with Wellings Capital?

Paul Moore:
I think the biggest problem in investing is lack of time, knowledge, and resources to do due diligence. It's very hard to find that one cell in a massive spreadsheet that has an error in it or to really understand how the underwriting was done wrong or to know how to check a schedule of real estate owned to see what other assets in someone's portfolio might drag down your asset that you want to invest in or to do a $9,000 net operating income audit.

Most investors don't have the time, the resources, the knowledge to do all that. We do that and so much more. We looked at 745 different investment opportunities last year and only invested in five, which was a huge strain on our company, to be honest, but it meant that our investors can know that at least in our opinion, these are some of the safest, most potentially profitable opportunities to invest in.

Investing with Wellings Capital means you're getting all this due diligence. You're also getting diversification. A lot of folks would love to be in multiple asset types, multiple geographies, multiple handpicked operators, different places in the capital stack, but everybody has limitations on how much they can invest.

With one $50,000 or more investment, investors can get access to diversification across all those different items. And so, investors love the fact that they can just give us, again, a $50,000 or more check and be diversified across these handpicked, well due diligence assets.

Dr. Jim Dahle:
Yeah, I think you summed that up well. There's a lot of people out there that they've finally got enough money that it's reasonable to consider some passive private real estate investments. Let's say it's a doctor with $2 or $3 million now in his or her nest egg and wants to add some private real estate to that nest egg. How would you approach that if you were that doctor now that you have the experience you have from spending a career in commercial real estate?

Paul Moore:
I was talking to a periodontist in the Pacific Northwest and he was excitedly telling me about his investments. He says, “I'm building a 20 home portfolio that's going to replace my income so I can retire. My wife is an orthodontist. I'm excited to do this.” And then he sighed and said, “But I'm on the phone with painters between my oral surgeries and I'm on the phone screening tenants in the evenings.” And then he took a long pause and he said, “And I'm only on my third house.”

I think the most common White Coat Investor that comes to us has tried real estate on the side. They've seen on HGTV how fun and profitable it is. And they're often disappointed with the amount of profits it takes that they make and the amount of time it takes. They're spending evenings, weekends, lunch hours, even vacations looking for deals, painting closets, dealing with toilets.

Honestly, I think the ideal investor is someone who recognizes pretty early on that the best way to do this is to stay focused on your career, stay focused on your family, your hobbies, your rest time, your recreation, your exercise and allowing somebody else to do the heavy lifting on real estate.

Investing in Wellings means you have an additional layer of fees. And the question is, is that a problem? Well, if we're able, and there's no guarantee we are, but if we're able to pick the very best of the best operators and deals, chances are we might be able to get enough additional return and enough additional safety to more than offset our fees.

Dr. Jim Dahle:
Yeah. Now, Wellings this year is running out two funds. One is focused on income, one is focused on growth. How can somebody decide which one of those they ought to be investing in?

Paul Moore:
Yeah, if you're an investor who really is trying to replace or augment your income, you can do that through the Wellings Income Fund. We are generally planning to pay out about 7, 8%, maybe 9% per year and have some growth on top of that.

This is an evergreen fund. Investors can have liquidity if they want out in three or four years, they can do that. If they want to stay for decades, they should be able to do that as well.

If you're like me and you're looking for growth, and you're looking more for long-term appreciation, you don't need the income along the way, then you might want to invest in our Wellings Growth Fund, which is a closed-ended fund. It's something we'll be basically accepting commitments for one to two years, and then it'll run probably about seven to 10 years. It will have no promised income along the way, though there'll be some here and there, but it should have much higher total annual returns at the end of the day if things go as planned.

Dr. Jim Dahle:
Thank you very much. For those looking for more information about Wellings, you can go to whitecatinvestor.com/wellings and learn everything you want to about Wellings Capital. Paul, thank you so much for your time on the White Coat Investor podcast.

Paul Moore:
Thanks, Jim.

Dr. Jim Dahle:
Okay, I hope you enjoyed that interview and hope these are helpful. Now, these occasional 10-minute interviews that we have on the podcast with our sponsors, they are sponsors. That's part of their sponsorship package is we interview them once a year on the podcast. We've got, I don't know, 100 hours of podcasting a year, and we got 60 minutes, 70 minutes of interviews with these podcasters over the course of a year. It's a very small percentage of the time on the podcast, but it does help support the podcast so we can keep producing all this great content for you. And we also try to keep the interviews education as well. So, hopefully you learned something about that.

Let's talk a little bit more about passive private real estate with the Speak Pipe question.

 

PRIVATE REAL ESTATE DEBT FUNDS AS AN ALTERNATIVE TO BONDS

Speaker:
Hi, Dr. Dahle. I'm intrigued about private real estate debt funds due to its high returns and relatively low risk and low correlation with the stock market. Its tax inefficiency gives me pause inside a taxable account, and I don't have access to a retirement account to shield the income from taxes. I'm currently in the highest marginal tax bracket. I don't need private real estate in order to reach financial independence, which I should reach about my mid to late 40s. I plan to retire at age 60.

My question is this. What are your views on private real estate debt funds as an alternative to bonds to provide fixed income, especially if my marginal tax rate during my 60s is lower than during my working career? I might be okay with this tax inefficiency if my marginal tax rate is in the 20% range, considering the returns are typically higher than TIPS or bond funds. Also wondering if you think debt funds could be a strategy to mitigate sequence of returns risk as well. Thank you.

Dr. Jim Dahle:
Okay, great question. Let's talk a little bit about real estate debt funds. Most investments, most investments in my portfolio, most investments in most of your portfolios are publicly traded investments. They are totally liquid. Any day the market's open, you can basically take all your investments and turn them into cash. That is one of the benefits of a publicly traded investment.

Now, imagine you're running an investment and you don't have to offer the ability to turn it into cash. Does that give you the ability to do some other things that you might not be able to do if you had to be able to offer that sort of liquidity? Absolutely it does.

One of the theories behind using private investments is that you can be paid some sort of a premium for being willing to be illiquid. Now, that illiquidity is worth something to the investing fund. And so, theoretically you should earn more money doing that.

In addition when something is not traded publicly on the markets, there is at least the appearance of lower correlation with public markets. Now, whether that is just hidden correlation, hidden volatility, it can be debated. But for the most part, most studies show that the correlation between publicly traded stocks and publicly traded real estate is higher than between publicly traded stocks and private real estate. That's another reason why people look into private real estate.

But even moving beyond that, within private real estate, and actually within public real estate, you can invest on the equity side or on the debt side. And just like when you're investing in a company, you can invest on the equity side by buying their stock or you can invest on the debt side by loaning them money, a bond. The debt side is a little bit less risky. Yeah, your returns are probably going to be lower long-term because you're taking less risk.

But you can do that in private real estate as well. For example, you can go out and you can buy a syndicated apartment building. For $50,000 or whatever, now you own one hundredth of this huge apartment complex. When it makes money, you're going to make money. When it loses money, you're going to lose money. And in a syndication, it's typically mailbox money because you are not doing anything. You're not doing any management. You've hired a manager, essentially, who manages not only investment, but the apartment building. So, there's not going to be any toilet calls or anything like that. And a lot of people like that. It's very passive.

But if you don't want to own the apartment building, you can invest on the debt side. Somebody that buys this apartment building and decides they want to fix it up and then sell it again in a year or 18 months or whatever, they often will use borrowed money to do that, this developer. And it's really hard. Takes a lot of time and it's a big hassle to go to a bank to get that money.

A lot of times, they will go to a real estate debt fund that gets them, that understands they need to close quickly, that understands that this is going to be mostly backed by the property, and they understand how to value the property, and they understand what they're doing with this value add strategy they're doing at the property.

And so, it's an easier place to get money. It happens a lot faster and more reliably. And often they go back to the same lender over and over and over using these debt funds to fund their projects. It's just a cost of doing business for the developer.

And because the developer's only paying for this debt for six months or 12 months or maybe 18 months, for a really long one, they're willing to pay a little more for it. So their interest rate is often pretty high. 10%, 12% is not unusual to borrow money from a debt fund. And oftentimes there's points as well. They might be paying 12% plus two points.

The beautiful thing about that on the investor side, if you are funding this debt fund, is the debt fund can pay all those expenses, keep a reasonable profit, and still give you a pretty good return when it's charging 10 or 12% plus two points on these loans. It's not unusual for a debt fund to offer a return of something between 7 and 11%. And it's pretty darn non-volatile, like every month. Well, every month you're getting the equivalent of an annual return of 7, 8, 9, 10, 11%. You don't have these years of minus 20% like you might with stocks or might with on the equity side of real estate. It's pretty reliable most of the time.

Now in a big, terrible real estate turndown, even debt funds that are at the top of the capital stack or the bottom, depending on how you look at it, the least risky part of the capital stack can get into trouble. If the property really drops a lot in value, maybe you can't even get your money back by foreclosing on the property. Maybe you can only get some of your money back so you could lose principal.

But for the most part, in most times, you're in a pretty good position. Most of these funds, all the loans are sitting in first lean position. Meaning when things go bad, you're the one who gets all your money back before anybody else gets any money back. You got to foreclose on the property, you sell the property, you only get 60% of what you thought property was going to be worth. Well, that all goes to you first. So, it's just a lot less risky way to invest in real estate.

Now, you're not going to make 15%. You're not going to make 20%. You're not going to shoot the lights out on some particular project, make 25 or 30%. You're going to get your 7, 8, 9, 10% is what you're going to get out of a private real estate debt fund, assuming it's well run. And they'll loan the money out to 20 or 30 different developers. And there'll be 80 or 90 or 200 loans in the fund. There's some diversification there.

But there may be one developer that has a fairly good chunk of the fund. That wouldn't be unusual for 10 or 15% of the fund to be going to one developer over multiple projects. This is not buying an index fund where you get 4,000 stocks. It's a little less diversified than that, but it's way better than just giving your friend the mortgage, paying for the entire mortgage on some house flip your friend is trying to do down the street. This is way better than that. These are much more professional borrowers. And there's a lot more of them than just using all your money to loan to your friend to flip a house. But that's basically what the idea behind these investments are.

Now, one of the downsides of this, as the caller alluded to, is the entire return is paid out to you every year. Because the only source of this return is interest and points that they're charging to the developer. There's not something else. There's nothing to appreciate. It's just interest. That's it. All of it gets paid out every year, and it's basically all paid out as in a manner in which it's taxed at ordinary income tax rates. So it's like the least tax efficient investment out there.

Now you do get the section 199A deduction. This is the QBI – Qualified Business Income deduction. 20% of that payment is not taxed, but the other 80% is taxed at your ordinary income tax rates. That helps a little bit in a taxable account. But because this is such a tax inefficient asset class, if there was ever an asset class that would ideally be inside some sort of a tax protective account, whether it's a retirement account or some sort of annuity or HSA or something like that, this is a great investment to put in there because it's so tax inefficient.

Katie and I, we own three real estate debt funds to try to diversify between the funds. We have two of them inside retirement accounts. One of them is in a taxable account. And so, it is better to get it inside a taxable account. It's a way better thing to have in there. I would take out even bonds. I would take out REITs, equity REITs into taxable before I would take out real estate debt funds. They're like the least tax efficient thing out there.

Now, does that mean that you shouldn't invest in them even in a taxable account? No, not necessarily. But a lot of your return is going to go to taxes for sure if you're investing in this sort of an investment in a taxable account.

Don't let the tax tail wag the investment dog. I would not necessarily change your asset allocation because of tax reasons. Choose your asset allocation first and your tax location second. But it is something to think about as you're setting up and constructing your portfolio and maintaining that portfolio, that if you can get this sort of investment into a self-directed IRA or a self-directed 401(k), this is probably a good investment to do that with.

I think it's important to recognize that although this kind of acts like a fixed income investment, and although it is the least risky way to invest in real estate, real estate is not bonds. And these are not as safe as something like a treasury inflation protected security from the U.S. Treasury. They're not as safe as a total bond market fund. That's why you're getting 7% to 11% instead of 4% or whatever total bond market fund is paying right now. So, keep that in mind.

A good rule of thumb with fixed income is if the yield is higher, the risk is probably higher, even if you can't see what the risk is. The fact that you're getting a yield of 7% to 11% on a real estate private debt fund would suggest to you that it's significantly more risky than a bond mutual fund or buying individual TIPS or something like that.

I don't think this should take the place of bonds in your portfolio. If you feel like you need bonds in your portfolio, these are not a replacement for that. This is not an ultra-safe investment like a CD or like TIPS or something like that. It is more risky than that. It is an investment in real estate. It just happens to be the least risky way to invest in real estate.

Our allocation to real estate is totally separate from our bond allocation. And I wouldn't necessarily use this as a bond replacement. If you wouldn't use stocks to replace your bonds, if you wouldn't use equity real estate to replace your bonds, you probably shouldn't be using debt real estate to replace your bonds. I hope that's helpful.

 

SPONSOR

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Thanks for those of you leaving five star reviews. One came in from JW, who said “Trustworthy advice. Good to see trustworthy advice exists, been following for a while now. Any conflicts of interest are clearly disclosed. You can get this advice elsewhere via books and blogs, et cetera, but it's compiled in an easy to digest format. So no need to scour the internet, et cetera. Keep up the good work.” Five stars. Thanks JW for that five star review. It does help spread the word.

We're thankful too for those of you who just tell friends and colleagues and students about the White Coat Investor. That is one very important way that we grow our audience, that we are able to help more people. Our goal is to help as many as we can. So, any help that you can give us in reaching that goal is much appreciated.

All right, our time is up. Keep your head up, your shoulders back. You’ve got this. We are here to help. We’ll see you next time on the White Coat Investor podcast.

 

DISCLAIMER

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

Transcription – MtoM – 231

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 231 – Dual dock couple saves $100,000 for retirement during residency.

Many investors know about the historic returns, tax advantages, and wealth building opportunities of commercial real estate investing, but they're confused about where to start or who to trust.

Wellings Capital has created a diversified fund that offers investors an easy on-ramp to access carefully vetted commercial real estate operators and opportunities. Their goal is to provide income growth and tax benefits with limited downside risk. With a minimum investment of $50,000, investors get a stake in a portfolio of self-storage, manufactured housing, RV parks, industrial properties, and more. To learn more, go to whitecoatinvestor.com/wellings.

All right, we've got a great interview today, but before we get there, I want to make sure you are aware of the White Coat Investor recommended lists. Whatever service that you are in need of, financial services, whatever they might be, chances are good we've got a list for it.

We've got companies that help you with your student loan refinancing. We got people that can help you get disability and life insurance. We've got people that'll help you get physician mortgage loans, as well as regular mortgage loans.

Real estate investments. You just heard about one of our advertisers that offers real estate investments, private real estate investments. We have a list for financial advisors. We have a list for contract review. We have somebody for student loan advice, and we have a list of people that offer surveys you can take for additional income. We have legal services. We have real estate agents. We've even got a company that offers a retirement calculator, some personal loans, and some burnout coaching.

Whatever financial services you may need, your fellow White Coat Investors have vetted people that are going to give you good service, give you a fair shake, give you good advice at a fair price, and we keep those lists at whitecoatinvestor.com under the recommended tab.

So, check those out. I hope everybody on the podcast is aware of that. I don't want to spend too much time promoting stuff, but I keep running into people that have no idea we have these lists, and that not only helps support the site, obviously they're paying us, they're advertisers, but it helps you to get the services that you need. And some of these people are vetted by literally thousands of White Coat Investors, depending on what the service is. So, check that out.

Stick around after this interview. We're going to talk about something that we alluded to a little bit in the interview, which is the plan documents for your employer-provided retirement accounts. We want you to learn about those and know exactly what you're being offered. So, stick around after we're going to talk about that.

 

INTERVIEW

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

Carson:
Thank you very much.

Dr. Jim Dahle:
Carson, in between the date we record this and the date that it runs, you are graduating for residency. So, congratulations to you and everybody else who finished residency this year.

Carson:
Thank you. Thank you.

Dr. Jim Dahle:
Okay, now you and your spouse have accomplished something pretty remarkable, actually, for residence. Tell us what you did during residency.

Carson:
Yeah, we saved up $100,000 towards our retirement within the span of the last three years.

Dr. Jim Dahle:
Wow, $100,000 toward retirement while on residency income. Residents make what? $60,000, $65,000 a year? Is that about right for what you guys were making?

Carson:
Yeah, yeah, that's about what we were at.

Dr. Jim Dahle:
Was there a bunch of moonlighting income too, or something else?

Carson:
Nope, not really. I did a couple shifts this last year, but overall, it was primarily just our resident salary.

Dr. Jim Dahle:
Okay. I'm calculating here. This is $120,000-ish a year. You guys made like $360,000. Some of that went to taxes. You've still got $100,000 of it.

Carson:
Yeah, yeah.

Dr. Jim Dahle:
How did you do that?

Carson:
The biggest thing was we had, I think it was up to a 5% match at the place we were at. And so, at the beginning of residency, we sat down. We tried to figure out what we would need to spend and what we could put towards retirement. And so, we set that percentage that would go towards retirement, every paycheck. And then I think we increased it once when we realized we could probably save a little bit more and just let it do its work.

Dr. Jim Dahle:
So, I bet you've calculated this. What was your savings rate?

Carson:
So, if I include the match that we got and then what we had put in, it was about 23%.

Dr. Jim Dahle:
This is what I tell attending physicians to save. Save 20% if you're an attendant. To residents, when I talk to them or I write something directed to them, I tell them get in the habit of saving something for retirement during residency. The habit is more important than anything else. You probably won't get rich as a resident.

You didn't necessarily take that advice. You said, “You know what? This is our career. We're going to get started.” And now, to be fair, there's two incomes, not one. And the average American household income is about the equivalent of one residency salary. So, it's not like you were impoverished by any means. But you decided to get started during residency. Tell us why. Why was that important to you?

Carson:
Yeah. I know as a physician, we come late to the game in saving for retirement. We start saving in our 30s instead of when we get our first job out of undergrad in our 20s, like most of our colleagues. And so, I knew we were starting from a little bit of a time deficit there. I just wanted to try to get going on that as early as possible so that we could have compound interest working for us for 30 years instead of 27.

Dr. Jim Dahle:
Were you guys in agreement on this goal? And if so, how did you get there?

Carson:
Yeah, I think so. My wife deferred a lot of the personal finance stuff to me, but was definitely on board.

Dr. Jim Dahle:
You're the math nerd in the couple then.

Carson:
Yeah, a little bit from the finance standpoint, yeah.

Dr. Jim Dahle:
Okay, but she was okay with it?

Carson:
Yeah, absolutely.

Dr. Jim Dahle:
There's lots of other stuff you can spend your money on in residency. You've spent eight years in school and feel like it's time to reward yourself with a new Jaguar. You guys didn't buy a new Jaguar. What was the hardest thing you didn't buy in order to save 23% of your income during residency?

Carson:
I would say probably a different car for myself. We do live in the Midwest, and we have a decent amount of snow every now and then. And I've been wanting maybe an all-wheel drive car, but I stuck it out with my little front-wheel drive Mazda 3, and it's worked pretty well for me. We did get her a little small SUV right before residency. But yeah, that's probably the only big thing that I feel like we've withheld. We've done several nice vacations. We visit family when we can. It's worked out well.

Dr. Jim Dahle:
Okay, we got to talk about the Mazda 3. This is an older Mazda 3. I talk to people all the time about cars, and I have driven older cars. I got a fancy new F-250 now, but I have driven older cars. The car I drove as a new attending cost $1,850 and literally had no problems with it. I had to replace a battery and some windshield wipers and some tires, and that was it in the time I owned it.

I want to hear your story over the last three years with this Mazda. How many times has it gotten stuck in the snow? How many times has it broken down on the way to work? How many big repairs have you had to do over the last three years?

Carson:
Yeah, it's been a great car. And I shouldn't make it sound like I was deprived. I got the car early in undergrad, and it was fairly new at the time. And so, it's been a great car. I did have it parked, and we had a pretty decent snowstorm. And just how things worked out, I was able to either carpool with my wife or didn't have to take it out. And then when I did try to get it unstuck, that took about two hours to just get out of my parking spot. So, that was the only really bad experience.

Dr. Jim Dahle:
At least one day you were stuck. But what about big repairs?

Carson:
No big repairs. It's been super reliable. I enjoy driving it. It's a manual transmission, so that's kind of fun. No, it's been a great car.

Dr. Jim Dahle:
Okay, it never broke on the way to work. You got to your residency job six days out of the week for the last three years without it ever breaking down once?

Carson:
Correct.

Dr. Jim Dahle:
Amazing, amazing. You would think that you would need a $60,000 sedan with less than 20,000 miles on it to get to work these days, hearing from some doctors. All right, you're not what you drive, people. You're not what you drive. Carson has just demonstrated it for the last three years. All right, I assume there's a new car in your near future now that you're in attendance.

Carson:
We'll see, we'll see. I'll probably get used to either an SUV or a small truck or something like that.

Dr. Jim Dahle:
Very cool. All right, two-doc couples often struggle with two docs worth of student loans. Give us a sense of what your student loan picture looks like and given how much you're saving, I know you've got a written plan for your student loans. Tell us about your student loan plan.

Carson:
Yeah, we both went to a DO school, fairly expensive. We've got about $550,000 student loans. That's what we started residency with and it's gone a little bit up since then.
Dr. Jim Dahle:
And what's your plan to take care of it?

Yeah, we met with Andrew, a student loan advisor, right after we matched into residency. That was a point in time where everyone was predicting interest rates were going to go through the roof and we decided we didn't want to do PSLF. And so, we locked in some low interest rates before residency started. And we're going to kind of just slowly whittle away at those over the next 10 years or so.

Dr. Jim Dahle:
Okay, 2022, you refinanced right before rates went up 4%. Tell us what rates you got when you refinanced your student loan.

Carson:
Mine, I think is at 2.9% and my wife's right around the same, I think 3% or 3.1%.

Dr. Jim Dahle:
Okay, this took a lot of, I don't know what the word is, chutzpah, whatever. Your student loans were at 0% at the time. Student loans were at 0% and you decided, “We're going to refinance these because I don't think the student loans are going to stay at 0% forever.” Tell us about that decision. Was that really stressful?

Carson:
Yeah, they were predicting the 0% to end, then obviously what had happened many times before, they extended the 0% interest multiple times and we had made that decision before they had made any extensions. And so, we both knew we didn't want to do PSLS. And at that point, we're like, let's try to lock in a low interest rate.

And that was pretty hard, that following year was a little difficult when we saw how much interest we were accruing and all of our co-residents were still at 0%. But I think in the long term, it will end up paying off for us because we do have good low interest refinance rates now and we weren't really planning on PSLS.

Dr. Jim Dahle:
Did you get the $100 a month payments while residents?

Carson:
Yes, yes.

Dr. Jim Dahle:
At least the payments were still low like they would be under an IDR program, but obviously that wasn't covering the interest, even with your interest rate as low as it is. Now, you also sound like you're comfortable investing on a little bit of margin, using a little bit of leverage, at least for a little while in the beginning of your career. You don't sound like you're in a hurry to pay back those 3% loans.

Carson:
Yeah, if it were higher than 3%, I'd probably be a little more inclined to try to tackle them as soon as we can. We've talked about trying to almost pretend like we're paying them off in two or three years and setting the money aside in a brokerage account, trying to beat that 3% and at least trying to get that money set aside and saved and earmarked for our student loans.

But we'll see how the next year goes. We're obviously going to try to prioritize retirement savings and we'll see maybe we need to house in a little bit or we're starting a family soon. Yeah, there may be some changes there, but we're pretty comfortable with that 3% over. I think mine is seven years versus hers is 10 years, not in a big hurry to pay it off.

Dr. Jim Dahle:
And of course, with money markets paying 4.2% right now, it's not that hard to out invest a 3% loan right now. All right, very cool. Well, that's pretty awesome you've got that plan.

Okay. 23% is way more money than Katie and I saved during residency. We did not save that much for retirement. Tell us about the periodic meetings, budgeting process, whatever you guys use.

Carson:
Yeah. I started using a budgeting app called Monarch and really that was just to try to look at what we were spending. I wanted to make sure that we had a good understanding of what we were spending before making big budgets and whatnot. And it's good to have so we can monitor it.

I really liked that the saving for retirement has all been automated that we don't even see it hit our savings account so that what we have in our savings, we try to keep a little bit of a buffer there, but we can know what we can spend when we're thinking about our next vacation or other expenses that come up. And so, it's been good to have a budgeting app primarily to track what we are spending, knowing where our money is going.

Dr. Jim Dahle:
Way easier than paper and pencil.

Carson:
Yes, yes.

Dr. Jim Dahle:
So, it sounds like you automated everything. Do you have to meet periodically and go over expenditures or you both see in the budget and you're like, “Oh, we're winning. I guess we don't pay any more attention.”

Carson:
More of the latter. I made sure she had a log into the budgeting account so she can look at it as well. And then we have a shared savings account that our paychecks usually hit our checkings first. Then we put them into our savings and both just keep a close eye on things.

Dr. Jim Dahle:
Pretty awesome. Pretty awesome how easy it can be. In a lot of ways, a budget is training wheels till you learn to spend less than you earn. You guys are done with the training wheels. You figured this out. If you can do this as a resident, you're not going to have any trouble doing it as an attendee.

Have you thought about your long-term financial goals? What do you guys want out of life financially?

Carson:
Yeah, I think the biggest goals are to be able to cut back pretty far down the road. I think we'll both be working full time for 20 years or so, but when we get to that point to be able to cut back when we want and then to have the ability to go on the vacations we like, provide good entertainment for our family hosts, do things like that. But yeah, we do have this mindset or lifestyle we're looking forward to at some point, but knowing we have to make a lot of steps currently right now.

Dr. Jim Dahle:
This is fascinating to talk to you at this point. Next summer, I suppose, I hit 20 years out of residency. I know what 20 years of a dual physician full-time income while you're saving 23% of your income looks like. 20 years from now, you are decamillionaires. The equivalent of whatever that is decamillionaires today. The equivalent of whatever that is in 20 years. You're going to have so many options and so many choices and so much financial freedom that you may not know what to do with it.

So, it's pretty inspiring actually to meet you at this point and know that you are this on track because I know where you're going in life and it's a pretty good place. You're going to like it along the way and it's going to give you all kinds of flexibility as you go as well.

Okay, what advice do you have for others who kind of want to get started early like you did? Maybe they're coming out of residency or coming out of med school and they're like, “You know what? We're feeling hardcore, let's do this.” What advice do you have for them?

Carson:
Yeah, I would definitely say learn what your employer offers as far as retirement goes. If there's a match, make sure you're at least getting the full amount of your match. And then I would look at some numbers. I looked at compound interest tables and would see if we save this much during residency, how much does that change down the line in 25, 30 years? And that was pretty inspiring.

Dr. Jim Dahle:
Those hockey stick shaped charts. The hockey stick shaped charts.

Carson:
Yeah, those look great.

Dr. Jim Dahle:
Very cool. Well, congratulations to both of you. You have done amazing work.You should be very proud of yourselves and thank you for being willing to come on the podcast and inspire others to do the same.

Carson:
Awesome, thank you very much. I appreciate it.

Dr. Jim Dahle:
Okay, I hope you enjoyed that interview. It's fun to see people that get all hardcore early on in their career. I did not have $100,000 saved for retirement when we left residency. I think we had $15,000 maybe, something like that is probably what we had saved for retirement from residency. It might've been a little bit more than that but we did the best we could.

Roth IRA contributions back there were much lower and we almost maxed them out. And that's it. That's all we saved for retirement during residency. And we still managed to become millionaires after seven years. So, don't feel like you have to save $100,000 as a resident. The truth is the most important year of your financial life is that first year out of training. Not anything you do during training.

The financial priorities during residency should be things like getting your disability insurance and your life insurance, making sure you're managing your student loans properly. Having a written plan for your first 12 paychecks you get as an attending physician and then just getting in the habit of budgeting and saving something for retirement.

If you can accomplish all that in residency, I think you are winning financially. But obviously, it's possible to do even more as Carson has demonstrated. And obviously the money you save first has the longest time for compound interest to work on it. So, it's not like it's a bad thing to do, but make sure you're not just eating ramen during residency in order to max out your retirement accounts.

 

FINANCE 101: PLAN DOCUMENTS AND EMPLOYER-PROVIDED RETIREMENT ACCOUNTS

The top of the podcast, I mentioned we were going to talk about planned documents and employer provided retirement accounts. Part of becoming financially literate is understanding what is available to you.

Now, all of you out there with earned income have Roth IRAs available to you. You may have to fund them via the backdoor process, but you've got a Roth IRA you can invest in, or you can basically invest in just about anything, certainly any publicly traded non-leveraged, non-option assets, but basically any sort of mutual fund or stock or bond or whatever, you can invest in an IRA.

In your employer accounts, that's not necessarily the case. Your employer provided retirement accounts often have limitations on what you can invest in. They have other rules and other things you need to be aware of as well, other opportunities. For example, the matching dollars that Carson talked about. I've never actually had a 401(k) that provided any matching dollars, but matching dollars are basically part of your salary that you don't get unless you save for retirement in your employer's retirement plan. Not putting enough money into that retirement plan to get the full match is like leaving part of your salary on the table. Don't do that.

So you need to know how these retirement plans work. And the way you figure that out is you go to HR, human resources, and you go, “I want the plan documents for the retirement accounts I am eligible for.” And it might be a 401(k). It might be a 403(b). It might be a 403(b) and a 401(a) and a 457(b). Especially if you're not in an academic center, it might be a 401(k) profit sharing plan and a cash balance or defined benefit plan.

You need to understand the ins and outs of these plans. You need to understand what the fees are. You need to understand where the investments are. You need to understand what the withdrawal possibilities are. Sometimes they're not that good, particularly in something like a non-governmental 457(b). You need to make sure all that stuff's acceptable to you, especially before using a non-governmental 457(b).

But know that you can often move money out of these accounts, pretty much everything but a 457, sometimes a cash balance plan, but even most cash balance plans. As soon as you separate from the employer, you can roll this stuff into your next 401(k) or you can roll it into an IRA, although that can cause you some pro rata issues with your backdoor Roth.

But the point is, tax break is forever. The asset protection benefits and estate planning benefits of those retirement accounts are forever. And you might only be stuck with higher fees and not so awesome investments for a few years.

So, max out that space when you can and take advantage of those employer provided retirement accounts. They really are a huge gift. Not just from the employer, but from the government because the money grows faster in those accounts. It grows faster because it's protected from taxation while it grows, because there's either going to be some sort of tax break, either upfront or at the backend when you take the money out. And it's just a good idea when you have the option to save for retirement in tax protective accounts to do so.

Know what's offered to you. You can understand your plan document, ask for it, read it. If you don't understand what something means in it, ask HR about it. You can ask on the White Coat Investor Forum or White Coat Investor Facebook group or the White Coat Investor Reddit or the White Coat Investor Financially Empowered Women's group. You can ask in all these groups, “Hey, I don't understand what this term means. What should I use in this 401(k)?”

You can ask all these questions. There are people who want to help you absolutely for free. And if you need professional help, as I mentioned at the top of the hour, we've got those lists of recommended people that yeah, they're going to charge you, but they're going to charge you a fair price for good advice. I hope that's helpful to you. Make sure you understand what's available to you and take advantage of it.

 

SPONSOR

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Thanks for listening to another episode of the Milestones to Millionaire podcast. I hope these are helpful to you. If they are not, send us an email, let us know why, and we'll try to make them so they are. We appreciate you being out there. We know no podcast will exist without its audience, and we are grateful for you.

Thank you for what you're doing out there. Thank you for being a member of our community, and thank you for helping to spread the word to other White Coat Investors out there that need this critical, life-improving information. See you next time on the podcast.

 

DISCLAIMER

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