Podcast#106 Show Notes: Financial Advice for Those Starting a Family

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A listener asks me for financial advice as they start a family. Children are expensive. Does that mean you shouldn’t have children? The decision really comes down mostly to a lifestyle decision. What do you want out of your life? Do you want to raise a family? Do you want to have children? If you do, this is going to work out. My readers and listeners are in the top 1-3% of incomes in this country. If you can’t raise a kid, who can afford to raise a kid?! If you want kids, go ahead and do it. Don’t let the financial consequences dissuade you. But don’t kid yourself that there aren’t financial consequences. When you add more people to your family, you’re going to have some additional expenses. You look at some of these surveys and they estimated that it costs a quarter million dollars raising a child to age 18. There are ways to economize, cut back, and do it cheaper. But either way, it’s not cheap. Also depending on when you have your children that may affect when you can retire, or at least be retired as an empty nester. There is a lot that goes into the decision of if and when to have children.

 

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Quote of the Day

Our quote of the day today comes from Peter Lynch who said,

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

That is absolutely true. People start bailing out of the market two or three years before a market peak and really lose a significant part of the run-up. Most of the time you are better off just buying and holding, riding the market all the way up and getting all of the gains and then riding the market all the way down and getting all of the losses, but not having to incur all the transaction costs and tax consequences of buying and selling all the time, much less doing what most people end up doing, following their emotions and buying high and selling low.

Announcements/Reminders

Don’t forget to get in your submissions for the Financial Educator of the Year. We’re looking for physicians and dentists who’ve been doing a great job teaching their colleagues and their trainees these financial principles. It’s simply impossible for me to go all over the country and give all these talks myself, but there are people that are only going to be reached by a talk that comes to their residency program, or their medical school, or their grand rounds, or their medical staff meeting for their hospital.

For those of you who are willing to give those talks, that’s wonderful. Thank you very much. I put out some slides a few months ago in a blog post you can use to help give these talks. If you’d like to nominate somebody you know doing this sort of work, please send it to [email protected] Email around 250 words or so describing what they’re doing and that will enter them into our contest to get $1000 cash, just to say thank you for educating all of those doctors out there.

Another thing to remember, I think for those of you who are mostly or only listening to the podcasts, I view these podcasts a little bit like the blog. They’re kind of continuing financial education. They are great to pick up some pearls of wisdom here and there but they’re not a framework for you to really learn finances.

Even if you start at the beginning and listen to all of them, I just haven’t put them in any sort of an order to help you really have that framework to understand all these concepts of personal finance. So if you need that framework, if you don’t have your initial financial education, I recommend you also do something else to help you get that framework in place.

Probably the most common thing to do is to read books. I have a  list of great financial books here.  As well as both of my books, The White Coat Investor: A Doctor’s Guide To Personal Finance And Investing, and The White Coat Investor’s Financial Boot Camp are set up in a specific format to help you develop that framework to hang the other principles on and really understand how they work.

If you want a little bit more help, we also have our online course, Fire Your Financial Advisor! It takes you through step by step and helps you write your own financial plan. Now at the end of that, you may still decide to use a financial advisor and that’s fine. The course will teach you how to get good advice at a fair price, but it will also give you the framework you need to insert the things you hear on the podcast or you read on the blog into an appropriate place in your financial understanding. So make sure, if you have never done any sort of initial financial education, that you get that done in addition to what you’re doing, listening to podcasts and reading the blog.

Financial Advice for Those Starting a Family

A listener asked me to comment on any sort of tips or financial advice I would give to physicians who are starting a family.

A lot of the advice is kind of common sense stuff. Realize that this is going to have dramatic impact on your finances. So much so that when people hear a story of somebody who hit financial independence at 40 and find out they don’t have any kids, they just dismiss it because their financial lives are so different, having children versus not.

But realize that this decision to have children has some pretty dramatic changes on your retirement dates. For example, we had our first three kids fairly close together, two and a half years apart, each of them, and then our fourth child is about six years later. So we had a pretty good gap there. At that point we were certainly financially literate, and so the decision whether to have another child meant we either were empty nesters at 52 or at 58, which is obviously very different if you’re thinking you might enjoy an early retirement.

Think long and hard, particularly as you get older, about having children. It really does have an effect on when you can retire. Now, obviously, you can retire with kids still in school. Some people still travel the world with teenagers and homeschool and that kind of stuff. But for the most part, as your kids get into high school, they’re going to be involved in activities and they are not going to be able to miss a lot of days of school and still get good grades. You’ll probably want to be a little bit more stationary. Now, if that situation is just fine with your early retirement goals, then no big deal.

But for a lot of us, we look at that and go, well, I might as well work. The kids are in school all day, five days a week, so I might as well continue to have some sort of work that I find meaningful. Just realize that that can have significant consequences on what early retirement might look like for you.

Now of course, when you add more people to your family, you’re going to have some additional expenses. That might come in the form of a larger house. You need more bedrooms, for instance. You might pay more in utilities because the kids won’t turn the stupid lights off. You might also end up having to buy a lot more food. Now in the beginning, that’s not much because the kid doesn’t eat much but as they get older, and you get a bunch of teenage boys, you are spending a lot more on your grocery bill. Transportation.  You’re going to be hauling them all over the place. You’re going to wear your cars out sooner. You’re going to burn a lot more gas. You’re going to probably get them a car when they’re 16 to drive themselves around, because you’re sick of doing it.

Your insurance is going to be higher. Both your auto insurance and your umbrella policy is going to cost more money while you have a teenage driver on there. The kids have their own activities. If you haven’t seen the Keeping Up with the Joneses that goes on with kids activities, you haven’t seen anything.

I mean, private school is just the beginning. Maybe you’re paying $10,000-$30,000 a year for private school. Maybe you also have them in ballet, a traveling sports team, it just goes on and on. It can be really expensive to have children. You look at some of these surveys and they estimated that it costs a quarter million dollars raising a child to age 18. I know there are doctors out there who spend far more than that but it doesn’t mean they have to cost that much. I’ve got a family down the street with 12 kids. They are clearly not spending $250,000 per kid raising these kids to age 18. There are ways to economize, there are ways to cut back, there are ways to do it cheaper. But either way, it’s not cheap.

This is really mostly a lifestyle decision. What do you want out of your life? Do you want to raise a family? Do you want to have children? If you do, this is going to work out. You are in the top 1, 2, 3% of incomes in this country. If you can’t raise a kid, who can afford to raise a kid?

If you want kids, go ahead and do it. Don’t let the financial consequences dissuade you. But don’t kid yourself that there aren’t financial consequences. Plus, if you don’t have any kids, you’re never going to have any grandkids, and everybody tells me they are so great that you should have them first.

 

Reader and Listener Q&A

Municipal Bonds

There was a question asked in the Facebook Group that basically boiled down to, what do you do if you’ve invested in a bunch of muni bonds in your taxable account, and then your tax bracket drops in retirement, as it does for most people, such that muni bonds no longer makes sense for you?

Municipal bonds are not taxed at the federal level. They’re basically tax-free income, the yield from them is tax-free. As a result of that, they have a lower yield than a typical taxable bond, whether it’s a treasury or a corporate bond or whatever. And so it still makes sense after tax for those of us in high income or high tax brackets to invest in municipal bonds.

But if that changes, you could have a scenario where you used to belong in municipal bonds and no longer do. So what do you do?  If you’ve chosen to invest in individual municipal bonds, you’ve gone to a broker or whatever and bought these individual bonds, the problem is the transaction costs are fairly high. It’s not a super liquid market when you want to get out of them.

So you end up losing a fair amount of your value of the investment when you try to get out. If you have instead invested in municipal bonds in the way I do, with a low cost, broadly diversified, very liquid mutual fund such as those offered by Vanguard, it’s a lot easier. You basically just liquidate it, and can walk away and reinvest in whatever you would like to invest in.

Obviously, if there’s been some gains in that fund, or some gains in the individual bonds, there’s going to be tax consequences to selling. But the nice thing about bonds and bond funds is, most of the time there’s not a lot of gains. Sometimes there’s a little bit of losses, and so the tax consequences of selling them usually aren’t that high.

Most of the return from a bond or a bond fund comes in the form of yield. And so you’ve been paying the taxes on it as you go along if any taxes are due. So it’s not that big of a deal to change. It’s actually usually more of a big deal to go from owning stocks in a taxable account to owning bonds in a taxable account than vice versa, just because you’ve usually have a lot more gains and you may have significant capital gains taxes to pay.

If you’ve decided you no longer belong in municipal bonds,  you may want to hold the individual bonds until they mature, just to avoid those costs of selling. If it’s a fund, you can probably transition much more rapidly, but do, like anytime you sell anything in a taxable account, look at the basis, look at the value, see what the tax consequences are going to be. It’s possible it could even be an opportunity to claim some losses you can use on your taxes. You can deduct up to $3000 of capital losses against your ordinary income every year and actually reduce your taxes.

 

Advice for Approaching the Decision to Retire

“So we’re expecting our third baby later this year and thinking about that and planning, I find myself thinking that bouncing two demanding careers and a full time family life, it’s just too much for us. Particularly my current role is not compatible with having a young baby at home due to international travel expectations. So I’m thinking I’d like to either quit or see if my employer can offer some part time, no travel option. I’ve run a lot of retirement scenarios and I feel pretty confident that we’re going to be FI or very close to it at the time we’ve exhausted all of our parental leave options, probably next year. So I want to ask you if you have any other advice on how to approach financial decision making for such a potentially big change in our lives.”

This listener starts her question saying she isn’t my target audience because neither of them are physicians. But I want her to know she is my target audience. Just because you’re not a doctor doesn’t mean you’re not my target audience. Since the very beginning of this blog and this podcast, I’ve always been trying to help high income professionals of all types. Yes, I happen to relate to doctors best because I’m a doctor. I went to medical school, I can speak the language and relate to doctors, but most of what I’m teaching and talking about is far more tax bracket specific than it is profession specific. So I wouldn’t feel like you’re a second class citizen if you’re listening to this podcast, and you’re not a physician or a dentist.

Her question here really is, what do you do if you’re almost financially independent and you kind of want to make a lifestyle change such as have a baby? Well, the options are many, right? You can quit, you can cut back, you can ask your employer to change your job, you can change the job yourself. There’s lots of things you can do. And it really boils down to, what do you want out of your life? If you want to be a stay at home parent and you can afford to do so, go be a stay at home parent.

If you feel like you would miss out on your professional life or you’re worried that your income will drop and never recover, which is a serious concern, or you’re worried that you just won’t like it. Well, try to keep your foot in the door somehow. Whether that’s asking your employer to make your job a little bit easier, letting you work from home, cutting back to part time.

A lot of places in medicine part time works very easily. Anesthesia and radiology and emergency medicine and hospitalist medicine, those sorts of shift work specialties lend themselves very well to part time work. It really works well for those who want to go home and be a stay at home parent. Not only can you work shifts when your spouse is at home, but it’s easy to ramp up or ramp down shifts as you go. So I guess that’s really what it comes down to is, what do you want? It sounds like she can afford to do either thing that she wants to do. So just figure out what it is that you want to do.

 

Insurance Options for Active Duty Physicians

“I’m a military resident and I was wondering what your opinion is, or recommendations are, in regards to life insurance and disability insurance options for active duty physicians.”

Life and disability insurance for active duty physicians is tricky. Of course, you have Serviceman’s Group Life Insurance. That’s $400,000,  five year level term that they won’t turn you down for. So get that. That’s a no-brainer.

You can also, if you have insurance before you come into the military, which is probably a smart way to do it, just buy term life insurance before you become a military doc, and you can take that with you and that continues to work as well. You will notice however that once you are in the military it’s a little bit harder to buy insurance of all types.

I did not have trouble buying term life insurance in the military. The only caveat there was that it didn’t cover death from acts of war, but if you read most insurance policies carefully, you’ll notice that most of them don’t cover that.

I would just go and shop for term life insurance the usual way. Go to my list of recommended agents, call one of them up and say I need to get some term life insurance. You can use a site like termforsale.com or insuringincome.com, without giving any of your personal information. You can see the going rate for the various kinds of policies for somebody in your age and health status.

Disability insurance is much more tricky, however. If you have a policy before you go on active duty, a lot of times it will continue to be in effect, but it’s worth talking to your agent and/or the company to make sure. That happened to me when I went on active duty, I already had a policy that I bought during civilian residency.

I asked them, “Is this going to pay out if I’m disabled while I’m on active duty?” And it basically came down to yes, as long as I’m not disabled from an act of war. So we chose to continue to pay those premiums throughout the time I was in the military.

Obviously, you also have the military disability program that is going to cover you. Now, that’s not that great of a program. It doesn’t pay that much. Most doctors do not feel comfortable living on just the amount that military disability will pay, but it’s not nothing. You can’t just ignore it because it is a meaningful disability policy, particularly if you’re severely disabled, especially when you combine it with the fact that once you go on disability, you’re also getting Tricare, which helps.

But if you actually want to go out and buy an individual disability insurance policy while you’re active duty, the approach to take is to call up an independent insurance agent. They can sell you a policy from any company and just ask them that question. I think most of the time what they’re going with these days is a MassMutual policy for the active duty docs.

 

Health Savings Accounts

“We have a flexible spending account through my current employer. However, I hear there are a lot of benefits of having a HSA health savings account from an investment standpoint period. I want to know if I can have an HSA in addition to an FSA. If so, do I have to purchase my own health insurance since that would be more expensive versus going through employer-sponsored health insurance plan? Please advise how I can take advantage of this health savings account.”

Can you have an HSA in addition to an FSA? And the general rule is no, because an FSA usually comes along with a low deductible health plan that doesn’t qualify for an HSA. So would you purchase a high deductible health plan on your own just to be able to contribute to and invest in an HSA? No. If your employer is going to pay for your health insurance, take the health insurance they’re paying for, even if they’re only paying for a third of it or half of it.

First, you make the health insurance decision, which health insurance plan is right for you, and that’s usually the one that somebody else is helping you pay for. If you have a lot of health problems, you hit the maximum out of pocket every year. A high deductible plan is probably not the right plan for you.

But if a high deductible plan is the right plan for you, be sure to use a health savings account. It’s the best account available to you. If you’re investing, it’s triple tax free. You get a deduction when the money goes in, it grows tax protected and when it comes out, so long as you spend it on healthcare, it comes out totally tax free. You can also use it for other expenses after age 65, penalty free but not tax free.

If you save up your receipts as you go along, you might be able to pull out a big chunk of it, totally tax and penalty free and buy a sailboat with it just based on healthcare expenses you had in the past that you paid for just from your cashflow.

 

What to do with a Frozen Pension Plan

A listener has a frozen pension plan that he needs to do something with. He wanted to know should he roll that over into his 401 (K) tax deferred because they are in the highest tax bracket, and pay taxes at a lower rate when he is older or should he put that into an IRA, roll it over into a Roth, pay the taxes now and then have tax free money to grow over the years?

A frozen pension plan sounds like it is tax deferred money that you can do whatever you want with, so you could roll this over into an IRA. That’s probably the traditional thing that’s done. The problem with doing that, of course, is that you cannot then do a backdoor Roth IRAs because you end up being subject to the pro-rata rule. And so, if you’re going to roll it over, you generally want to roll it into a 401 (K) of some kind, which is probably what I would do most of the time.

Now another option, of course, is just to convert the whole thing, meaning do a Roth conversion. The problem with that is when you take tax deferred money and you move it into a Roth account, you have to pay the taxes on it in that tax year. So they don’t mention how much money this is, but if it’s 2 or 3 or $400000, well that’s going to be a big hefty tax bill and most doctors in that situation would opt not to do that. Particularly, given that you’re in the top bracket now.

Is it really wise to do a Roth conversion in the top tax bracket? It can be, but only if you expect to be in the top tax bracket pretty much the rest of your life. Then it can make sense. But for most of us who’re going to drop somewhere south of that when we hit retirement, maybe it’s only down to the 32% tax bracket, but still saving money at 37% and paying taxes at 32%, not to mention your ability to fill all the other brackets with the withdrawals, is a winning combination.

So don’t go too crazy trying to do Roth conversions. Pre-paying all those taxes may not be a good idea unless there are some very dramatic changes in our tax code.

He asks another question that basically comes down to should he time the market if he decides to do a Roth conversion?

“With the upswing in the stock market, do I wait, roll my pension money into a traditional IRA, let it sit momentarily while we’re hoping that the stock markets takes a downslide and that value decreases while holding the same number of shares to pay less tax. It is risky, with the chance of the market continuing to climb. Would you suggest sitting on that for a little bit waiting and hoping that it drops?”

Well if you could time the market reliably, yes. I mean the best time to do a Roth conversion is in the depths of a bear market. Because it’s based on how much money you convert, not on how many shares of stock you converted. So, right after a big market drop, that’s a good time to do a Roth conversion. But you really don’t know if there’s another market drop coming or if it’s about to recover.

So I would do your Roth conversions when the timing seems right based on the other factors in your life rather than trying to look at the market and time the market with respect to a Roth conversion. It’s just too hard to do both when you’re putting in new investments, when you’re shifting around your investments, and when you’re doing Roth conversions. I just think trying to time the market is a fool’s errand and you’ll end up hurting yourself at least as much as you help yourself.

 

Where to Save the Down Payment for Your Dream Home

One listener bought a home and hopes to build their dream home in 5 years. They wanted to know where to put the money they are saving for their downpayment for the dream home. Should they put that into a high yield savings account or some sort of low cost investment fund or pay off their current mortgage in full?

If you already own a home and you are trying to save up for a nicer home, there is really no reason for you to be putting that money into a high yield savings account that’s paying 1 or 2, 2½% maybe if you’re lucky. Especially if you’ve got a mortgage at 3 or 4%. Just pay down the mortgage.

It’s the same thing because when you leave that house, you’re going to sell it and you’re going to take all the home equity you have, everything the house is worth minus what you still owe on it and use that for your down payment. In fact, most of the time when you put in an offer on the new house, you’re going to use a contingency offer. It’s going to be contingent on you selling the other house.

Now, obviously in a really hot market that makes your offer a little bit worse if you’re doing a contingency, but most of the time you can get a bridge loan or something if you have that sort of a problem. This is what we did when we were in the military. We bought a little tiny townhouse and our plan was to save up in that townhouse for our new place. You know, our Dr. House, when we left the military after our live like a resident period was over. We just paid down on the mortgage and that is where we put our savings for that downpayment.

By the time we got out of there in four years, we almost had the thing paid off. Now we had a real problem though because that was 2010 and we couldn’t sell the thing for the life of us. So I ended up having to refinance the mortgage. I thought it’d just be for a few months. I picked one with really low fees because I thought that was going to be the major expense. We ended up keeping that for four or five more years as an investment property. So that didn’t work out super great. But it certainly worked out to save up. I think at the time the mortgage was 6% or something. So we’re a lot better off at that point earning 6% on that money than we would be having it in a savings account, which at that time was probably only paying half a percent. That’s what I recommend you do, pay down the mortgage you have and use that home equity to pay for the next one.

 

Should You Downsize to Reach Financial Independence Quicker?

“We are both physicians and live in a high cost of living area, which has experienced an annual real estate appreciation rate of about 12%, whether that will continue is anyone’s guess. We have lived in the house that we live in now for about three years and it’s worth about $1.2 million, and our unpaid principal is about $770000. We have a fixed 30 year mortgage with a 3.25% interest rate and our monthly payment is about $4600 including escrow. Note, we bought the house before we came to know about FI and we probably wouldn’t in hindsight. It’s more house than we really need. Aside from the house, we were actually doing pretty well. We’re saving about 35% of our income, having paid off our student loans and maxing out our tax advantaged accounts.

The question is this, considering the cost of buying and selling a house in terms of commission, assuming that we’re not going to be moving out of this expensive area anytime soon, and finally considering the 12% prior growth rate in this area, does it make sense to downsize into an 800 or $900000 house or stay put? Does the new tax law and the loss of deductions change that equation since we had our mortgage before 2018?”

 

This is a really fortunate situation. You ended up buying a big house, maybe more than you should have bought in the first place, and then you score in a hot real estate market. So the question now is, do you downsize just so you can hit financial independence sooner? Well, how badly do you want financial independence? I mean, some people downsize their lives dramatically because they hate their job and they want out. They might sell their $30,000 car and drive a beater because they want to be financially independent.

If you’re in that sort of a boat, then this is a great way of free up some money that you can invest and hit financial independence sooner. You’ll have a larger nest egg and you’ll have lower annual consumption costs for your house. Now, are you going to come out financially ahead? I don’t know. It really depends on what your housing market does over the next 5 or 10 years.

So, I would look at it in a couple of ways. One, if you’re then going to go back up in house in a few years, I would just stay where you’re at. Two, it’s not like this is totally unreasonable for this couple to have this house. If you like the house, you really would rather stay in it, then just keep it. It does save you the transaction costs. It’s not insignificant to sell a house and buy another. Round trip, about 15% of the value of the house is what you can expect to pay in most markets. So you’ve got to be a little bit careful anytime you’ve already bought something. All that opportunity cost, all those transaction costs, that’s already water under the bridge. So just let that go.

Do the recent tax laws affect that much? Not a lot. I mean, bear in mind with the new higher standard deduction, if you’re now going to take that, owning a house is not nearly as good of a deal as it was before just because the mortgage is not as deductible, or may not be deductible at all. But with a mortgage this size, it’s probably still going to be a significant itemized deduction for you.

Also, keep in mind with a really expensive house, I think that change was that only $750000 of a new mortgage is actually deductible. But that wouldn’t apply to this couple in this situation because they’re talking about downsizing and their mortgage will clearly be less than that amount. So I wouldn’t worry too much about that.

It really comes down to what you want to do with your life. If really hitting FI just as soon as you can is super important to you, then sure, downsize the house. But otherwise, I don’t think this particular house is unreasonable for you and clearly, if you change your mind later, you can always sell it.

 

Calculating Savings Rate

A listener asked how I calculate savings rate.

“Do you use net pay or total pay each month? Additionally, do you consider student loan payments in that savings calculation?”

When I’m talking about savings rates, I’m talking about everything you save divided by your gross income, not by your net income. But you can calculate your savings rate anyway you like. I’m not a dictator on this topic. If you want to do it based on net income, you can do that. I would encourage you to be consistent as you go throughout the years so you can compare last year saving rate to this year saving rate.

But when I’m recommending 20% as a general rule to doctors to save for retirement, that’s of your gross, and no, I’m not counting money you’re saving up for your kids’ college. I’m not counting money to pay off your credit cards. I’m not counting money that you’re saving up to go toward a wake boat. I’m not counting money that goes towards your student loans. I am just counting money that goes towards retirement in that 20%.

But if you want to calculate your general savings rate and you want to throw in extra payments on your mortgage, or you want to throw in extra student loan payments, I don’t think that’s an unreasonable thing to do. Just be consistent in how you do it. I think the idea in those situations is once you paid off the student loans, or once you paid off the mortgage, that money will be redirected toward retirement.

If that’s the way you’re looking at it, I think that’s fine to include it in your savings rate. But like I said, this is all you, how ever you want to do it. Personal finance and investing is a single-player game, it is you against your goals. It is not you against your neighbor, it is not you against your brother-in-law, it’s not you against anybody else.

 

What to do When an Employer Doesn’t Offer A Retirement Account

A listener is joining a private practice where they have no retirement account and he wanted to know where to invest his money.

It is very unfortunate that they don’t offer a retirement account.  The first thing I would do is talk to the other partners, talk to the owners and go, “hey, what’s up? Why do we not have a retirement account? This is stupid. We’re leaving our money accessible to creditors. We are leaving our money accessible to Uncle Sam. Let’s at least consider putting it in a retirement account. Maybe it’ll cost too much to provide a match for our employees, but let’s at least consider it and look at it again.” So, that’s number one.

Number two, if you are truly a partner, you’re paid on a K-1 in this practice, or if you’re an employee, if you’re paid on a W-2,  no, you can’t go use a separate individual 401 (K). You just can’t do that. Now for some reason if you’re just a contractor at this job, you’re truly an independent contractor, then you can go use a SEP IRA or better yet an individual 401 (K). But just because your employer doesn’t offer a retirement plan doesn’t mean you can go open a self employed retirement plan. You’re not self employed and that’s a requirement to open those plans.

He has $200,000 sitting around from his investments during training. What can he do with that?

  1. Emergency Fund. Take three months worth of expenses and set that aside. Leave that in cash.
  2. Pay off any debt.
  3. Use some of it for a down payment on your next house.
  4. For the rest that you wish to save toward retirement, put it into a backdoor Roth IRA first. One for you and one for your spouse. In 2019, that $6000 each. If you’re 50 plus, you get an extra $1000 catch-up contribution. If you are going to have a high deductible health plan, you can fund an HSA. For a couple, that’s $7000 per year. Then just invest the rest in a taxable account. Typically, you want to do that in tax efficient investments, like maybe a municipal bond fund or a total stock market fund or a total international stock market fund or some equity real estate, those sorts of things.

If you don’t have enough room inside retirement accounts to save as much money as you need to save for retirement, you’re going to have to do it in a taxable or a non-qualified account, so you might as well get started.

 

Ending

Next week on the podcast we have William Bernstein, MD. That’s right. Bill Bernstein. It’s going to be really exciting. Be sure to tune in next week and not miss that podcast.

 

Full Transcription

Intro: This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high income professional stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle,

Dr. Jim Dahle: Welcome to White Coat Investor podcast number 106, Financial Advice for Those Starting a Family.

Cindy: This is Cindy, the podcast producer, giving you a break from Jim’s voice to introduce this episode’s sponsor, Origin Investments. Are you tired of the ups and downs of the stock market? Private real estate could be your answer and Origin Investments has a great solution. The company recently launched IncomePlus Fund, a diversified private real estate fund designed to deliver a 6% stable annual dividend yield and a total return of 9 to 11%. The principals are investing 10 million of their personal capital alongside investors into the fund. Learn more about the fund at www.originincomeplus.com/WCI. That’s www.originincomeplus.com/WCI.

Dr. Jim Dahle: Thanks for what you do. The work you do is very important. It’s meaningful and you’re changing lives every day. I know you’re not saving lives every day. That’s probably something that a lot of people believe you do. But you know as well as I do that you don’t, but you’re affecting people’s lives. Sometimes you’re just reassuring them they don’t have something bad or helping them manage a condition they have. But there are those times when you really make a big difference. And so thanks for going through all the training you went through in order to do that.

Dr. Jim Dahle: I wanted to put a plugin today for the Facebook group. I think we’re up to 18400 people in that group right now. It’s really quite active. It’s hard for me to even keep up with all the questions being asked, much less the answers being given. So thank you to those of you who are in there answering questions. They range from the complex to the very basic, but I’m always happy to see people getting the help they need and you helping each other and your colleagues there.

Dr. Jim Dahle: So be sure to check that out, it’s a Facebook group called White Coat Investors. You do have to apply, but it’s pretty easy to get in if you are a high income professional and not a financial professional, we’ll let you in. If you want to come in as a financial professional, you’re going to have to sponsor the group.

Dr. Jim Dahle: Also, don’t forget to get in your submissions for the financial educator of the year. We’re looking for physicians and dentists who’ve been doing a great job teaching their colleagues and their trainees these financial principles. It’s simply impossible for me to go all over the country and give all these talks myself, but there are people that are only going to be reached by a talk that comes to their residency program, or their medical school, or their grand rounds, or their medical staff meeting for their hospital.

Dr. Jim Dahle: So those of you who are willing to give those talks, that’s wonderful. Thank you very much. I put out some slides a few months ago in a blog post you can use to help give those talks. And if you’d like to nominate somebody you know doing that sort of thing, that sort of work, please do send it to [email protected], just maybe 250 words or so describing what they’re doing and that’ll enter them into our contest to get $1000 cash, just to say thank you for educating all of those doctors out there.

Dr. Jim Dahle: Our quote of the day today comes from Peter Lynch who said, “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” And I think that’s absolutely true. People start bailing out of the market two or three years before a market peak and really lose a significant part of the run-up.

Dr. Jim Dahle: Most of the time you are better off just buying and holding, riding the market all the way up and getting all of the gains and then riding the market all the way down and getting all of the losses, but not having to incur all these transaction costs and tax consequences of buying and selling all the time. Much less doing what most people end up doing is following their emotions and buying high and selling low.

Dr. Jim Dahle: Another thing to remember, I think for those of you who are mostly or only listening to the podcasts, I view these podcasts a little bit like the blog. They’re kind of continuing financial education, right? They are great to pick up some pearls of wisdom here and there. They hopefully have a little bit of entertainment value although I’ve been listening to a lot of podcasts lately and I’m not sure this one has any entertainment value at all, but they’re not a framework for you to really learn finances.

Dr. Jim Dahle: Even if you start at the beginning and listen to all of them, I just haven’t put them in any sort of an order to help you really have that framework to understand all these concepts of personal finance. So if you need that framework, if you don’t have your initial financial education, I recommend you also do something else to help you get that framework in place.

Dr. Jim Dahle: Probably the most common thing to do is to read books, so both of my books, The White Coat Investor: A Doctor’s Guide To Personal Finance And Investing, and The White Coat Investor’s Financial Boot Camp are set up in a specific format to help you develop that framework to hang the other principles on and really understand how they work.

Dr. Jim Dahle: If you want a little bit more help, we also have our online course, we called it Fire Your Financial Advisor! Right? It’s a little bit of provocative title, but it takes you through step by step and helps you write your own financial plan. Now at the end of that, you may still decide to use a financial advisor and that’s fine.

Dr. Jim Dahle: The course will teach you how to get good advice at a fair price, but it will also give you the framework you need to insert the things you hear on the podcast or you read on the blog into an appropriate place in your financial understanding. So make sure, if you have never done any sort of initial financial education, that you get that done as well in addition to what you’re doing, listening to podcasts and reading the blog.

Dr. Jim Dahle: All right, let’s start with a question out of the Facebook group today. And this question basically boils down to, what do you do if you’ve invested in a bunch of muni bonds in your taxable account, and then your tax bracket drops in retirement as it does for most people, such that muni bonds no longer makes sense for you?

Dr. Jim Dahle: Well, this is a great question, right? Municipal bonds are not taxed at the federal level. They’re basically tax free income, the yield from them is tax free. As a result of that, they have a lower yield than a typical taxable bond, whether it’s a treasury or a corporate bond or whatever. And so it still makes sense after tax for those of us in high income or high tax brackets to invest in municipal bonds.

Dr. Jim Dahle: But if that changes, you could have a scenario where you used to belong in municipal bonds and no longer do, so what do you do? Well, this becomes a problem. If you’ve chosen to invest in individual municipal bonds, you’ve gone to a broker or whatever and bought these individual bonds because the problem with buying those is, the transaction costs are fairly high, right? It’s not a super liquid market when you want to get out of them.

Dr. Jim Dahle: So you end up losing a fair amount of your value of the investment when you try to get out. If you have instead invested in municipal bonds in the way I do, with a low cost, broadly diversified, very liquid mutual fund such as those offered by Vanguard, it’s a lot easier. You basically just liquidate it, and can walk away and reinvest in whatever you like to invest in.

Dr. Jim Dahle: Obviously, if there’s been some gains in that fund or some gains in the individual bonds, there’s going to be tax consequences to selling. But the nice thing about bonds and bond funds is, most of the time there’s not a lot of gains. Sometimes there’s a little bit of losses, and so the tax consequences of selling them usually aren’t that high.

Dr. Jim Dahle: Most of the return from a bond or a bond fund comes in the form of yield. And so you’ve been paying the taxes on it as you go along if any taxes are due. And so it’s not that big of a deal to change. It’s actually usually more of a big deal to go from owning stocks in a taxable account to owning bonds in a taxable account than vice versa, just because you’ve usually have a lot more gains and you’ve got significant capital gains taxes to pay that way.

Dr. Jim Dahle: So if you’ve decided you no longer belong to municipal bonds, well you may want to hold the individual bonds until they mature, just to avoid those costs of selling. If it’s a fund, you can probably transition much more rapidly, but do look at how much, like anytime you sell anything in a taxable account, look at the basis, look at the value, see what the tax consequences are going to be.

Dr. Jim Dahle: It’s possible it could even be an opportunity to claim some losses you can use on your taxes. You can deduct up to $3000 of capital losses against your ordinary income every year and actually reduce your taxes. All right, let’s take a few questions from the Speak Pipe. This first one comes from Wie.

Wie: Dr. Dahle, thanks for everything you do here on the White Coat Investor. Unlike most of your listeners, I’m not actually a doctor, I am one part of a high income dual professional capable working in tech. So we’re on track to bring about 500K in household income this year. So I know we’re not necessarily in your target audience, but I still do get a lot out of your advice because I think that we face similar situations as your doctor crowd audience does.

Wie: So we’re expecting our third baby later this year and thinking about that and planning, I find myself thinking that bouncing two demanding careers and a full time family life, it’s just too much for us. Particularly my current role is not compatible with having a young baby at home due to international travel expectations. So I’m thinking I’d like to either quit or see if my employer can offer some part time, no travel option.

Wie: I’ve run a lot of retirement scenarios and I feel pretty confident that we’re going to be FI or very close to it at the time we’ve exhausted all of our parental leave options, probably next year. So I want to ask you if you have any other advice on how to approach financial decision making for such a potentially big change in our lives. Thanks.

Dr. Jim Dahle: Okay. So first of all, you are my target audience. Just because you’re not a doctor doesn’t mean you’re not in my target audience. Since the very beginning of this blog and this podcast, I’ve always been trying to help high income professionals of all types. Yes, I happen to relate to doctors best because I’m a doctor, right?

Dr. Jim Dahle: I went to medical school, I can kind of speak the language and relate to doctors, but most of what I’m teaching and talking about is far more tax bracket specific than it is profession specific. So I wouldn’t feel like you’re a second class citizen if you’re listening to this podcast, and you’re not a physician. All right. Or you’re not a dentist. All right.

Dr. Jim Dahle: So question here really is, what do you do if you’re almost financially independent and you kind of want to make a lifestyle change such as have a baby? Well, the options are many, right? You can quit, you can cut back, you can ask your employer to change your job, you can change the job yourself. There’s lots of things you can do. And it really boils down to, what do you want out of your life? If you want to be a stay at home parent and you can afford to do so, go be a stay at home parent.

Dr. Jim Dahle: If you feel like you would miss out on your professional life or you’re worried that your income will drop and never recover, which is a serious concern, or you’re worried that you just won’t like it. Well, try to keep your foot in the door somehow. Whether that’s asking your employer to making your job a little bit easier, letting you work from home, cutting back to part time.

Dr. Jim Dahle: A lot of places in medicine part time works very easily. Anesthesia and radiology and emergency medicine and hospitalist medicine, those sorts of shift work specialties lend themselves very well to part time work. That’s why I’m always kind of amazed when I don’t see a higher percentage of women to men in my field of emergency medicine. I think the last time I looked it was still about three quarters men.

Dr. Jim Dahle: But it really works well for those who want to go home and be a stay at home parent. Not only can you work shifts when your spouse is at home, but it’s easy to ramp up or ramp down shifts as you go. So I guess that’s really what it comes down to is, what do you want? It sounds like you can afford to do either thing that you want to do. So just figure out what it is that you want to do. Okay. Next question comes from Josh, a military resident.

Josh: Hello Dr. Dahle. I’m a big fan of your podcast and your forum posts. I wanted to ask you a quick question. I’m a military resident and I had a few questions that I was hoping you could address in the podcast. I was wondering what your opinion is, or recommendations are in regards to life insurance and disability insurance options for active duty physicians. That’s the first question.

Josh: Secondly, I was curious if you could comment on any sort of tips or financial advice you would have for physicians who are starting a family. My wife and I are expecting our first child soon and I was hoping to get some advice on what sort of financial suggestions you might have regarding that. Thank you.

Dr. Jim Dahle: Let’s take the first question. First of all, life and disability insurance for active duty physicians is tricky. Of course, you have Serviceman’s Group Life Insurance, right? That’s $400000, is basically five year level term that they won’t turn you down for. So get that, right? That’s a no-brainer. Go get that life insurance, it’s basically term life insurance at a reasonable rate.

Dr. Jim Dahle: You can also, if you have insurance before you come into the military, which is probably a smart way to do it, just buy term life insurance before you become a military doc, and you can take that with you and that continues to work as well. You will notice however that once you are in the military it’s a little bit harder to buy insurance of all types.

Dr. Jim Dahle: I did not have trouble buying term life insurance in the military. The only caveat there was that it didn’t cover death from acts of war, but if you read most insurance policies carefully, you’ll notice that most of them don’t cover that. Right? If we have another Pearl Harbor or we have a nuke dropped on San Francisco, insurance companies aren’t going to pay out for those deaths. For the most part, it’s an act of war.

Dr. Jim Dahle: So I would just go and shop for term life insurance the usual way, right? Go to that list on my website where I have recommended agents, call one of them up and say I need to get some term life insurance. You can use a site like termforsale.com or insuringincome.com, without giving any of your personal information. You can see the going rate for the various kinds of policies for somebody in your age and health status.

Dr. Jim Dahle: Disability insurance is much more tricky, however. If you have a policy before you go on active duty, a lot of times it will continue to be in effect, but it’s worth talking to your agent and/or the company to make sure. That happened to me when I went on active duty, I already had a policy for my civilian residency that I bought during civilian residency.

Dr. Jim Dahle: It wasn’t from the residency I suppose, it was from the standard. And I asked him, I said, “Is this going to pay out if I’m disabled while I’m on active duty?” And it basically came down to yes, as long as I’m not disabled from an act of war. So we chose to continue to pay those premiums throughout the time I was in the military and had that in service.

Dr. Jim Dahle: Obviously you also have the military disability program that’s going to cover you. Now, that’s not that great of a program, right? It doesn’t pay that much. Most doctors do not feel comfortable living on just the amount that military disability will pay, but it’s not nothing. You can’t just ignore it because it is a meaningful disability and policy, particularly if you’re severely disabled, especially when you combine it with the fact that once you go on disability, you’re also getting Tricare, which helps.

Dr. Jim Dahle: But if you actually want to go out and buy an individual disability insurance policy while you’re active duty, I think your only choice is MassMutual. But the approach to take is to call up an independent insurance agent. They can sell you a policy from any company and just ask them that question. I think most of the time what they’re going with these days is a MassMutual policy for the active duty docs.

Dr. Jim Dahle: All right. Your second question is the one I titled the podcast after. Actually, I have an unrelated question that we’re going to get to afterward. But basically asking for tips for physicians starting a family. A lot of this is kind of common sense stuff. Realize that this is going to have a dramatic impact on your finances. So much so that when people hear a story of somebody who hit financial independence at 40 and find out they don’t have any kids, they just dismiss it because their financial lives are so different, having children versus being single.

Dr. Jim Dahle: But realize that this decision to have children has some pretty dramatic changes on your retirement dates. For example, we had our first three kids fairly close together, two and a half years apart, each of them, and then our fourth child is about six years later. So we had a pretty good gap there. At that point, we were certainly financially literate, and so it was really a decision whether to have another child because it meant we either were empty nesters at 52 or at 58, which is obviously very different if you’re thinking you might enjoy an early retirement.

Dr. Jim Dahle: So, think long and hard, particularly as you get older and start having children. It really does have an effect on when you can retire. Now, obviously, you can retire with kids still in school. Some people do some crazy stuff and still travel the world with teenagers and homeschool and that kind of stuff.

Dr. Jim Dahle: But for the most part, as your kids get into high school, they’re going to be involved in activities. They’re going to be in school plays or can play on sports teams. They’re not going to be able to miss a lot of days of school and still get good grades. And so you’re probably going to want to be a little bit more stationary. Now, if that jive is just fine with your early retirement goals, then no big deal.

Dr. Jim Dahle: But for a lot of us, we look at that and go, well, I might as well work. The kids are in school all day, five days a week, so I might as well continue to have some sort of work that I find meaningful. And so just realize that that can have significant consequences on what early retirement might look like for you.

Dr. Jim Dahle: Now of course, when you add more people to your family, you’re going to have some additional expenses that might come in the form of a larger house. You need more bedrooms, for instance. You might pay more in utilities because the kids won’t turn the stupid lights off. You might also end up having to buy a lot more food. Now in the beginning, that’s not much because the kid doesn’t eat much or maybe he’s eating only breast milk, et cetera.

Dr. Jim Dahle: But as they get older, and you get a bunch of teenage boys, you going to spending a lot more on your grocery bill. Transportation. Right? You’re going to be hauling them all over the place. You’re going to wear your cars out sooner. You’re going to burn a lot more gas. You’re going to probably get them a car when they’re 16 to drive themselves around, because you’re sick of doing it.

Dr. Jim Dahle: Your insurance is going to be higher. Both your auto insurance and your umbrella policy is going to cost more money while you have a teenage driver on there. The kids have their own activities. If you haven’t seen the Keeping Up with the Joneses that goes on with kids activities, you haven’t seen anything.

Dr. Jim Dahle: I mean, private school is just the beginning. Maybe you’re paying 10, 20, $30000 a year for private school. Maybe you’ve also got them in ballet, a traveling sports team, it just goes on and on and on. And so it can be really expensive to have children. You look at some of these surveys and they estimated that a quarter million dollars raising a child to age 18.

Dr. Jim Dahle: I know there are doctors out there who spend far more than that, especially if they’ve got the kids in private school, K through 12. It doesn’t mean they have to cost that much. I’ve got a family down the street with 12 kids, right? They’re clearly not spending $250000 per kid raising these kids to age 18. There are ways to economize, there are ways to cut back, there are ways to do it cheaper. But either way, it’s not like they’re cheap.

Dr. Jim Dahle: So this is really mostly a lifestyle decision. What do you want out of your life? Do you want to raise a family? Do you want to have children? If you do, this is going to work out, right? You are in the top 1, 2, 3% of incomes in this country. If you can’t raise a kid, who can afford to raise a kid? Right?

Dr. Jim Dahle: So if you want kids, go ahead and do it. Don’t let the financial consequences dissuade you. But don’t kid yourself that there aren’t financial consequences. Plus, if you don’t have any kids, you’re never going to have any grandkids, and everybody tells me they are so great that you should have them first. All right, let’s take our next question from Omar.

Omar: Hi, this is Omar. We have a flexible spending account through my current employer. However, I hear there are a lot of benefits of having a HSA healthcare savings account from an investment standpoint period. I want to know if I can have an HSA in addition to an FSA. If so, do I have to purchase my own health insurance since that would be more expensive versus going through employer-sponsored health insurance plan, period. Please advise how I can take advantage of this healthcare savings account, HSA plan. Thank you.

Dr. Jim Dahle: So this boils down to, can I have an HSA in addition to an FSA? And the general rule is no, because an FSA usually comes along with a low deductible health plan that doesn’t qualify for an HSA. So would you purchase a high deductible health plan on your own just to be able to contribute to and invest in an HSA? No. If your employer is going to pay for your health insurance, take the health insurance they’re paying for, even if they’re only paying for a third of it or half of it, right?

Dr. Jim Dahle: First you make the health insurance decision, which health insurance plan is right for you, and that’s usually the one that somebody else is helping you pay for it. But sometimes if you’d have a lot of health problems, you hit the maximum out of pocket every year. A high deductible plan is probably not the right plan for you.

Dr. Jim Dahle: But if a high deductible plan is the right plan for you, be sure to use a health savings account. It’s the best account available to you, right? If you’re investing, it’s triple tax free. You get a deduction when the money goes in, it grows tax protected and when it comes out, so long as you spend it on healthcare, it comes out totally tax free. You can also use it for other expenses after age 65, penalty free but not tax free.

Dr. Jim Dahle: If you save up your receipts as you go along, you might be able to pull out a big chunk of it, totally tax and penalty free and buy a sailboat with it just based on healthcare expenses you had in the past that you paid for just from your cashflow.

Dr. Jim Dahle: All right, our sponsor on this podcast is Origin Investments. Now Origin is a company that I have both invested with and they have invested with me. They have bought ads on the White Coat Investor over the years and treated us well and they’ve certainly been doing a good job with my investment. It’s interesting that they kind of take a little bit different approach. They don’t take all your money upfront. They call for your money as they have investments to invest in.

Dr. Jim Dahle: So, I think it’s been a year or a year and a half since I committed to invest $100000 with them, and I think I’ve probably only invested about 70 so far, and that’s perfectly fine. I’d stay fully invested elsewhere and when they are ready for more money, that’s my month’s investment allocation. So it goes to there and that keeps them invested only in the properties that they think are the very best ones and doesn’t give them additional pressure to invest money when they don’t see a good deal.

Dr. Jim Dahle: And so I appreciate that about them. They came out to Park City this year, brought their whole team and they were skiing out here, invited me to come up and join them and so I did. And I figured, hey, bunch of people from back east, I think they’re based in Chicago. How good a skiers’ can they be?

Dr. Jim Dahle: I figured they wouldn’t be very good at all. So I took my snowboard. I’m not a bad snowboarder, but I’m not as good as snowboarding as I am at skiing. And so I thought, hey, these guys can’t be any good, I’ll keep up just fine. Little did I know that Michael Episcope, who’s their principal, is a hardcore snowboarder and I spent the whole day trying to keep up with him, and everybody else there was a pretty accomplished skier as well.

Dr. Jim Dahle: I think some people had even skied for college or professional teams and tried out for the Olympics, that sort of a thing. And so it was actually pretty impressive. I joked with them by the end of the day that they weren’t a real estate company, they were skiing company, but I swear that’s one of their interview questions is how well do you ski so you fit in there. We had a good time with them and I would certainly feel comfortable investing with that team, if you’re looking to do that sort of real estate investing. All right, our next question off the Speak Pipe comes from Rick.

Rick: I am a 43 year old nurse anesthetist from the mid-west part of the country. Annually I make around $250000 and I am debt free. I have two children. One is through college with no loans. The other one is a junior in high school, which I have around $24000 in a 529 plan, contributing $500 per month.

Rick: I went through divorce, lost around $250000 in retirement and have been maxing off to recover up from that. So I sit right now with around $320000 in my retirement portfolio. I did get remarried and my wife is a general surgeon and together we make approximately $1.1 million annually. Now the question, my employer has a pension plan that was frozen that I have to do something with.

Rick: Do I roll that over into my 401 (K) tax deferred because we are in the highest tax bracket, and pay taxes at a lower rate when I’m older or do I put that into an IRA, roll it over into a Roth, pay the taxes now around 22500, and then have a tax free money to grow over the years. Doing the math, it appears to me that if I do the Roth route, I will be a plus $100000 post-tax money in retirement. Is that the smartest way? Thank you for what you do. We greatly appreciate your service.

Dr. Jim Dahle: Okay, so we’re talking about a CRNA here that’s married to a general surgeon. They’re making 1.1 million together, and want to know what to do with a frozen pension plan. Well, a frozen pension plan sounds like it is tax deferred money that you can do whatever you want with, so you could roll this over into an IRA. That’s probably the traditional thing that’s done.

Dr. Jim Dahle: The problem with doing that, of course, is that you cannot then do backdoor Roth IRAs because you end up being subject to the pro-rata rule. And so, if you’re going to roll it over, you generally want to roll it into a 401 (K) of some kind, which is probably what I would do most of the time.

Dr. Jim Dahle: Now another option, of course, is just to convert the whole thing, meaning do a Roth conversion. The problem with that is when you take tax deferred money and you move it into a Roth account, you have to pay the taxes on it in that tax year. So they don’t mention how much money this is, but if it’s 2 or 3 or $400000, well that’s going to be a big hefty tax bill and most doctors in that situation would opt not to do that. Particularly, given that you’re in the top bracket now. With an income of $1.1million, you are way into the 37% tax bracket.

Dr. Jim Dahle: And so is it really wise to do a Roth conversion in the top tax bracket? It can be, but only if you expect to be in the top tax bracket pretty much the rest of your life. Then it can make sense. But for most of us who’re going to drop somewhere south of that when we hit retirement, maybe it’s only down to the 32% tax bracket, but still saving money at 37% and paying taxes at 32%, not to mention your ability to fill all the other brackets with the withdrawals is a winning combination.

Dr. Jim Dahle: So don’t go too crazy trying to do Roth conversions. Pre-paying all those taxes may not be a good idea unless there are some very dramatic changes in our tax code. His second question comes here actually on a separate recording.

Rick: Part two to my question. With the upswing in the stock market, do I wait, roll my money pension into a traditional IRA, let it sit momentarily while we’re hoping that the stock markets takes a downslide and that value decreases while holding the same number of shares to pay less tax. Is that a risky chance of the market continuing to climb or would you suggest doing that and sitting on that for a little bit waiting and hoping that it drops. Thank you.

Dr. Jim Dahle: Okay. So this is basically, should I time the market when I do a Roth conversion? Well if you could time the market reliably, yes. I mean the best time to do a Roth conversion is in the depths of a bear market, right? Because it’s based on how much money you convert, not on how many shares of stock you converted. So, right after a big market drop, that’s a good time to do a Roth conversion, right? But you really don’t know if there’s another market drop coming or if it’s about to recover.

Dr. Jim Dahle: And so I would do your Roth conversions when the timing seems right based on the other factors in your life rather than trying to look at the market and time the market with respect to a Roth conversion. It’s just too hard to do both when you’re putting in new investments, when you’re shifting around your investments, and when you’re doing Roth conversions. I just think trying to time the market is a fool’s errand and you’ll end up hurting yourself at least as much as you help yourself. Our next question comes from Mari.

Mari: Hi Dr. Dahle. My husband was a primary care physician for six years. After following your blog he decided to go back and do a new residency and fellowship. After five years we’re just about done. My husband is taking a job in low cost area of living, so here is my question.

Mari: You bought a house at one third a yearly income with 3.25% interest loan. All goes well. We hope to build a dream home in five years. My question is, do we collect the next down payment in a high yield savings account, and some sort of low cost investment fund or do we pay off our current loan in full? Thanks for everything you do.
Dr. Jim Dahle: Okay. If you already own a home and you are trying to save up for a nicer home, there is really no reason for you to be putting that money into a high yield savings account that’s paying 1 or 2, 2½% maybe if you’re lucky. Especially if you’ve got a mortgage, it’s 3 or 4%. Just pay down the mortgage.

Dr. Jim Dahle: It’s the same thing because when you leave that house, you’re going to sell it and you’re going to take all the home equity you have, everything the house is worth minus what you still owe on it and use that for your down payment. In fact, most of the time when you put in an offer on the new house, you’re going to use a contingency offer. It’s going to be contingent on you selling the other house.

Dr. Jim Dahle: Now, obviously in a really hot market that makes your offer a little bit worse if you’re doing a contingency, but most of the time you can get a bridge loan or something if you can’t get that sort of a problem. This is what we did when we were in the military. We bought a little tiny townhouse and our plan was to save up in that townhouse for our new place. You know, our Dr. House, when we left the military after our live like a resident period was over. And so we just paid down on the mortgage.

Dr. Jim Dahle: That’s where we put our extra savings for that down payment. By the time we got out of there in four years, we almost had the thing paid off. Now we had a real problem though because that was 2010 and we couldn’t sell the thing for the life of us. So I ended up having to refinance the mortgage. I thought it’d just be for a few months.

Dr. Jim Dahle: So I didn’t, I picked one with really low fees because I thought that was going to be the major expense. We ended up keeping that for four or five more years as an investment property. So that didn’t work out super great, either as an investment property or because of the loan. But it certainly worked out to save up. I think at the time the mortgage was 6% or something.

Dr. Jim Dahle: So we’re a lot better off at that point earning 6% on that money than we would have having it in a savings account, which at that time was probably only paying half a percent. So that’s what I recommend you do Molly, that you just pay down the mortgage you have and use that home equity to pay for the next one. Our next question comes from Eric.

Eric: Hi Jim. First I want to thank you for all that you do. I have been following you now for a few years and though my wife and I are relatively new to the world of personal finance, we are on the route to FI. My question for today pertains to just that. We are both physicians and live in a high cost of living area. Specifically, we live in Seattle, which has experienced an annual real estate appreciation rate of about 12%, whether that will continue is anyone’s guess.

Eric: We have lived in the house that we live in now for about three years and it’s worth about $1.2 million, and our unpaid principal is about $770000. We’ve a fixed 30 year mortgage with a 3.25% interest rate and our monthly payment is about $4600 including escrow. Note, we bought the house before we came to know about FI and we probably wouldn’t know that in hindsight. It’s more house than we really need. Aside from the house, we were actually doing pretty well. We’re saving about 35% of our income, having paid off our student loans and maxing out our student, excuse me, our tax advantaged accounts.

Eric: The question is this, considering the cost of buying and selling a house in terms of commission, assuming that we’re not going to be moving out of this expensive area anytime soon, and finally considering the 12% prior growth rate in this area, does it make sense to downsize into an 800 or $900000 house or stay put? Does the new tax law and the loss of deductions change that equation since we had our mortgage before 2018. Thanks in advance.

Dr. Jim Dahle: Okay, so this is a really fortunate situation, right? You ended up buying a big house, maybe more than you should have bought in the first place, and then you score it in a hot real estate market, right? Seattle, the Bay Area, Washington DC, New York City, this does happen from time to time. That’s why even at times when you probably shouldn’t have bought a house, sometimes you still get lucky.

Dr. Jim Dahle: So the question now is, do you downsize just so you can hit financial independence sooner? Well, how badly do you want financial independence, right? I mean, some people downsize their lives dramatically because they hate their job and they want out. They might sell their $30000 car and drive a beater because they want to be financially independent.

Dr. Jim Dahle: If you’re in that sort of a boat, then this is a great way of free up some money that you can invest and hit financial independence sooner, you’ll have a larger nest egg, you’ll have lower annual consumption costs for your house, et cetera. Now, are you going to come out financially ahead? I don’t know. It really depends on what your housing market does over the next 5 or 10 years.

Dr. Jim Dahle: So, I would look at it in a couple of ways. One, if you’re then going to go back up in house in a few years, I would just stay where you’re at. Two, it’s not like this is totally unreasonable for this couple to have this house. If you like the house, you really would rather stay in it, then just keep it. It does save you the transaction costs. It’s not insignificant to sell a house and buy another.

Dr. Jim Dahle: Round trip, about 15% of the value of the house is what you can expect to pay in most markets. And so you’ve got to be a little bit careful anytime you’ve already bought something. Right? All that opportunity cost, all those transaction costs, that’s already water under the bridge. So just let that go.

Dr. Jim Dahle: So have this recent tax laws affect that much? Not a lot. I mean, bear in mind with the new higher standard deduction. If you’re now going to take that, owning a house is not nearly as good of a deal as it was before just because the mortgage is not as deductible, or may not be deductible at all. But with a mortgage this size, it’s probably still going to be a significant itemized deduction for you.

Dr. Jim Dahle: Also keep in mind with a really expensive house, I think that change was that only $750000 of a new mortgage is actually deductible. But that wouldn’t apply to this couple in this situation because they’re talking about downsizing and their mortgage will clearly be less than that amount. So I wouldn’t worry too much about that.

Dr. Jim Dahle: So Eric, it really comes down to what you want to do with your life. If really hitting FI just as soon as you can is super important to you, then sure, downsize the house. But otherwise, I don’t think this particular house is unreasonable for you and clearly, if you change your mind later, you can always sell it. Our next question comes from Mike.

Mike: Hey Jim, this is Mike. I wanted to ask you about how you calculate savings rate. Do you use net pay or total pay each month? Additionally, do you consider student loan payments in that savings calculation? Thanks.

Dr. Jim Dahle: When I’m talking about savings rates, I’m talking about everything you save divided by your gross income, not by your net income. But you can calculate your savings rate anyway you like, right? I’m not a dictator on this topic. If you want to do it based on net income, you can do that. I would encourage you to be consistent as you go throughout the years. And so you can compare last year saving rate to this year saving rate and go for it.

Dr. Jim Dahle: But when I’m recommending 20% as a general rule to doctors to save for retirement, that’s of your gross, and no, I’m not counting money you’re saving up for your kids’ college. I’m not counting money to pay off your credit cards. I’m not counting money that you’re saving up to go toward a wake boat. I’m not counting money that goes towards your student loans. I am just counting money that goes towards retirement in that 20%.

Dr. Jim Dahle: But if you want to calculate your general savings rate and you want to throw in extra payments on your mortgage, or you want to throw in extra student loan payments, I don’t think that’s an unreasonable thing to do. Just be consistent how you do it. I think the idea in those situations is once you paid off the student loans, or once you paid off the mortgage, that money will be redirected toward retirement.

Dr. Jim Dahle: If that’s the way you’re looking at it, I think that’s fine to include it in your savings rate. But like I said, this is all you, however you want to do it. Personal finance and investing is a single-player game, it is you against your goals. It is not you against your neighbor, it is not you against your brother-in-law, it’s not you against anybody else. All right, our last question today comes from Rafael.

Rafael: Hi Dr Dahle. My name is Rafael and I am currently a second year GI fellow with one year left remaining in my fellowship. I plan after fellowship just to join a private practice where I will be partner with one other physician. Currently, I have two dependents, my wife and my young son with another child on the way. At present all of our assets are in Chase savings account, amounting to about $200000 in total.

Rafael: We are new to investing and I’m wondering what to do with this sum of money to optimize my gains and returns. I certainly plan on doing two individual Roth IRAs for my wife and I, and then the backdoor Roth IRA when I’ve joined the practice as I imagine I will meet the upper limits that will make me exempt to the Roth IRA. The current practice I’m joining has no retirement accounts.

Rafael: I was wondering what the best retirement account in addition to the Roth IRA would be, such as set 401 (K) for the small business. I’m also wondering in addition to disability, life insurance and liability insurance, how else I should invest the remainder of that $200 after setting up those accounts. Thank you for all that you do and you’ve truly changed my life and my family’s as well as my co-fellows who I’ve spread your message to. Thank you.

Dr. Jim Dahle: Okay, Rafael is starting, he’s joining a practice soon as he gets out of his GI fellowship and that practice is not going to offer a retirement account, it’s very unfortunate. So in that sort of situation, the first thing I would do is talk to the other partners, talk to the owners and go, hey, what’s up? Why do we not have a retirement account?

Dr. Jim Dahle: This is stupid. We’re leaving our money accessible to creditors. We are leaving our money accessible to Uncle Sam. Let’s at least consider putting it in a retirement account. Maybe it’ll cost too much to provide a match for our employees, but let’s at least consider it and look at it again. So, that’s number one.

Dr. Jim Dahle: Number two, if you are truly a partner, you’re paid on a K-1 in this practice, or if you’re an employee, if you’re paid on a W-2 no, you can’t go use a separate individual 401 (K). You just can’t do that. Now for some reason you’re just a contractor at this job, you’re truly an independent contractor, then you can go use a SEP IRA or better yet an individual 401 (K). But just because your employer doesn’t offer a retirement plan doesn’t mean you can go open a self employed retirement plan. You’re not self employed and that’s a requirement to open those plans.

Dr. Jim Dahle: So if you’ve got $200000 sitting around, let’s think about all the things you could do with it, right? That’s a very fortunate position for somebody coming out of their training. Most people have a negative net worth at this point. So if you have that, what can you do with it? Well, I would buff up your emergency fund, right? Take three months worth of expenses and set that aside. Leave that in cash.

Dr. Jim Dahle: I would pay off any debt I had. If I got some student loans leftover or credit card debt or an auto loan, wipe that stuff out. Get it out of your life. Maybe you want to use some of it for a down payment on your next house, right? Instead of using a doctor loan. That’ll get you a little bit better terms. It’ll give you a lot more options for people to borrow from. It’ll probably give you a little bit lower interest rate and lower fees. It’s a good thing to do with money, so maybe use some of it for a down payment.

Dr. Jim Dahle: For the rest that you wish to save toward retirement, put it into a backdoor Roth IRA first. One for you and one for your spouse. In 2019, that $6000 each. If you’re 50 plus, which I presume you’re not coming out of fellowship, you get an extra $1000 catch-up contribution. If you are going to have a high deductible health plan, you can fund an HSA. For a couple, that’s $7000 per year.

Dr. Jim Dahle: You can also just invest the rest in a taxable account. Typically, you want to do that in tax efficient investments, like maybe a municipal bond fund or a total stock market fund or a total international stock market fund or some equity real estate, those sorts of things. That’s certainly a reasonable place to invest. If you don’t have enough room inside retirement accounts to save as much money as you need to save for retirement, you’re going to have to do it in a taxable or a non-qualified account, so you might as well get started.

Dr. Jim Dahle: Okay. Next week on the podcast we’ve got William Bernstein, MD. That’s right. Bill Bernstein, author of the Four Pillars of Investing and a number of other books. It’s going to be really exciting. We’re going to be recording it here in just a few minutes, so I’m excited to talk to Bill. Be sure to tune in next week and not miss that podcast.

Cindy: We want to thank this episode’s sponsor Origin Investments. Are you tired of the ups and downs of the stock market? Private real estate could be your answer and Origin Investments has a great solution. The company recently launched the IncomePlus Fund, a diversified private real estate fund designed to deliver a 6% stable annual dividend yield and a total return of 9 to 11%. The principals are investing 10 million of their personal capital alongside investors into the fund. Learn more about the fund at www.originincomeplus.com/WCI. That’s www.originincomeplus.com/WCI.

Dr. Jim Dahle: Head up, shoulders back. You’ve got this. We can help. We’ll see you next time on the White Coat Investor podcast.
Disclaimer: My Dad, your host, Dr Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor, so this podcast is for your entertainment and information only, and should not be considered official, personalized financial advice.