Emails are notoriously difficult to deliver when you are sending hundreds or thousands at a time. So if you weren't able to get all of the Financial Boot Camp emails or if you're just impatient, you can find them here. Either way, we are glad you're here and wish you a warm welcome to our community. Let us know if there is anything else we can do to help you.

This is a 14 email series (12 steps plus an intro and a final email). You can easily navigate to the email you would like to review by using the Table of Contents below.

Email #1: Introduction – Building the Financial Life of Your Dreams

Email #2: Step 1 – Your Greatest Financial Risk

Email #3: Step 2 – Does Anyone Depend On Your Income

Email #4: Step 3 – You Can't Invest What You Don't Save

Email #5: Step 4 – Take Control of Student Loan Debt

Email #6: Step 5 – How to Make More Money

Email #7: Step 6 – Buying Your Dream Home

Email #8: Step 7 – Reducing Taxes and Building Wealth

Email #9: Step 8 – What Should I Invest In?

Email #10: Step 9 – Correcting Past Financial Mistakes

Email #11: Step 10 – Saving for College

Email #12: Step 11 – Passing Assets On and Avoiding Probate

Email #13: Step 12 – Protecting Your Hard Earned Money

Email #14: Conclusion – Committing to Your Financial Well Being

Introduction: Building the Financial Life of Your Dreams

Welcome to the White Coat Investor Community, made up of tens of thousands of high-income professionals who are taking control of their finances to build the life of their dreams.

Dr. Jim Dahle, a practicing emergency physician, founded The White Coat Investor (also referred to as WCI) in 2011 after being fed up with financial professionals ripping him off. After realizing that a high income does not automatically equal wealth, Jim put in the work to become financially literate which enabled him to become a millionaire, to be financially independent, and to practice medicine on his own terms early in his career.

You can do this too and the White Coat Investor can help!

WCI will empower you with the financial knowledge needed to enjoy a life free from financial worries, a career of meaningful contributions to society, and a comfortable retirement at a time of your choosing—all while enjoying life along the way.

Years of School, But No Financial Education

If you are like most doctors, nobody taught you anything about business, personal finance, or investing during your undergrad, professional school, or residency.

Your family—and perhaps even your business—rely on you to be the Chief Financial Officer, but you have never been given the tools to succeed.

Getting rich is simple, although not necessarily easy.

The formula has four key components:

Earn a high income
Create and follow a spending plan
Take the difference and invest wisely
Protect your growing nest egg from financial catastrophe

Simple, right? Just not easy. . .

12 Steps to Bring Your Finances Up to Speed

You've taken the first step to achieve your financial goals, by taking action. We’ll walk you through the rest. You’re officially enrolled in Financial Boot Camp. You will receive an email each week as part of this series and a free monthly newsletter with high-yield financial information.

After reading the 12 emails in the Financial Boot Camp Series and completing the steps defined in each, you will be on the fast track to financial success. These emails may be worth hundreds of thousands or even millions of dollars over the course of your life . . . they have been for thousands and thousands of other white coat investors like you.

Finances can be overwhelming, which is why this email series is simply the information you need to know and exactly what to do next. Each email is like a short book chapter (and, in fact, eventually became a book).

More of paper person? Grab a copy of Financial Boot Camp

Financial Boot Camp Sponsors

Each step in this 12-step program also has a sponsor. They are carefully picked, vetted financial professionals of various types who have worked with hundreds of WCI readers in the past. If you need their services, great! If not, be sure to thank them when the opportunity arises for keeping these emails and content on the site completely FREE TO YOU.

Additional Wealth-Building Resources

Motivated to reduce debt and taxes, protect your assets, and start building wealth today? Enroll in our Fire Your Financial Advisor course which walks you step by step through everything you need to know to exceed your financial goals.

Everybody learns differently. Everybody is at varying phases of their financial journey. We’ve compiled some of the most commonly used resources to help you take control of your finances, no matter where you currently stand.

Get Free Wealth-Building Resources

Congratulations! You've taken the first step on your financial journey, and we're so delighted that you're here with us. Now, let's begin discovering how you can use wealth-building skills to create a fantastic life and lead you to the ultimate goal of financial freedom.

Head up, shoulders back, you've got this.

The White Coat Investor

Step 1 – Your Greatest Financial Risk

You can do this and The White Coat Investor is here to help. Maybe without even thinking about it, you've already made important steps in your financial journey. You've taken your pre-med classes. You've gone to medical school. You've invested in yourself. Now you can begin funding your future.

But you need to protect that investment.

The most expensive risk for you is facing a disability and losing the ability to turn the knowledge and skills you learned into a huge pile of money by working in your profession for decades.

Insurance companies estimate that as many as 1 in 7 doctors will be disabled at some point during their careers. While many imagine this will occur in a sudden traumatic accident, medical illness is actually a more common cause of disability that prevents a doctor from working.

This shouldn't be a risk you take.

Getting disability insurance is not as exciting as investing, but it’s the critical first step in your journey to convert your high income into a high net worth.

Insuring against financial catastrophes provides you peace of mind to live a well-deserved life free from financial worries.

Step 1 in getting your finances up to speed is buying disability insurance from an independent agent.

Can I Skip This Step?

Do you have to work at some point in the rest of your life for financial reasons? If the answer to that question is yes, then you need disability insurance.

If the answer is no, you can skip the rest of this email.

Why You Need Disability Insurance

Disability insurance gives you an income to live on if you become so disabled that you can no longer work. Essentially every high-income professional in their first decade or two out of school should own a policy.

The only exception is if you do not rely on your income to live.

If you are already financially independent, it's OK not to buy a disability policy. If you aren’t and you don’t own one, you need to go get one . . . now.

Well, not RIGHT NOW. You can finish this email first. But then you should put this down and go get one.

Here’s how you do it . . .

Information You Need to Buy Disability Insurance

First, you need to gather up a few things:

Your income (check your last W-2 or 1099 form provided by your employer)
How much you spend (if you’re like most, it’s a very similar number to what is on that W-2)
If your employer offers any disability policies (check with Human Resources)
A copy of the group policy offered through your specialty society or the American Medical Association

Take this information and call an independent insurance agent who specializes in disability insurance for physicians and other high-income professionals.

Get Disability Coverage

What Is an Independent Agent and Why Does That Matter?

An independent agent means this agent can sell you a policy from many different companies, not just one. If it were just one, they would be a “captive” agent, not an “independent” agent.

Northwestern Mutual, for instance, is a company that uses captive agents. You can’t get a Northwestern Mutual disability policy from an independent agent, and you often won't be offered a policy from any other company by a Northwestern Mutual agent.

Going through an independent agent ensures you get the best price for the appropriate coverage.

After you provide a bit of personal information—your age, gender, health status, specialty, and state of residency—the independent agent works to find you the best policy options and then helps you compare them to your employer, specialty association, and the AMA group policies.

Just keep in mind that the agent is incentivized to sell you:

An individual (instead of a group) policy
The largest policy for which you qualify
As many of the bells and whistles as possible

The rest of this email will give you an unbiased opinion on what policy features make sense for you.

Thousands of WCI readers have used our recommended disability agents. They’ll treat you well, but if you have any issues, let us know and we’ll take them off the site.

What to Look for in a Disability Insurance Policy

Take these principles and combine them with your agent’s recommendations. In the end, any disability insurance is better than no disability insurance, and if you go through this process, you will almost surely end up with a good policy.

Read every word in the policy and have your agent explain to you what they mean.
Take notes, right on the policy document, to remind you later what you’ve been told.
Ask for a discount. If you buy from an agent who has worked with hundreds of doctors, they should offer you a “preferred producer multi-life” discount because the agent has already sold several policies to doctors working for your employer.
Be aware that disability insurance is more expensive for women, so men should generally buy a “gender-specific” policy and women should generally buy a “unisex” policy.

Should You Buy Individual or Group Disability Insurance?

Many doctors may buy one of each—your agent will help you decide. Don’t worry, you don’t need to be an expert on disability insurance, but here are a few benefits of each type of policy to consider.

Benefits of an Individual Disability Insurance Policy:

You control the details, including how much coverage and which bells and whistles
The policy is “portable,” meaning you still have it if you change employers (or if your employer just decides to change the policy)
As a general rule, the policy is also “stronger,” meaning it is more likely to actually pay you if you get disabled (disability isn’t always black and white)

Benefits of a Group Disability Insurance Policy Is That They Are Usually:

Dramatically cheaper
Easier to qualify for

You Must Understand the Definition of Disability

The most important part of any disability insurance policy—which you must go over word for word with your agent—is where it defines what a disability is and what it isn’t.

Life insurance is much easier in this regard; you’re either dead or you are not.

This is not the case with disability. Getting disability payouts is an entire niche within the law and it all comes down to how the contract reads.

The strongest definition of disability is one that states that if you cannot work in your chosen occupation (defined as your specialty), the policy will pay out its full amount.

You should look for the words Specialty-Specific & Own Occupation.

Weaker definitions include “modified own occupation” and “any occupation.”

Most good policies also include a provision for a partial disability. That means if you can still work part of the time or you can still earn some money, the insurance company will help make up the difference. This is also an important aspect if your disability is only temporary.

As you gradually recover from the disability, a residual disability rider, which everyone should purchase, will ensure you get some financial assistance to make up for the lost income.

What Disability Insurance Riders Should You Consider?

A disability insurance “rider” is an additional feature of a policy that may or may not add on to the premium amount.

In addition to a residual disability rider, there are other bells and whistles that may make sense for your specific circumstance.

Cost of Living Rider

This rider ensures that your payments will go up with inflation as the years go by. Be aware that this rider does not increase the initial disability payment you receive.

If the policy you bought in 2020 said it will pay you $10,000 a month if you get disabled, it will only pay you $10,000 that first month you get disabled whether that is in 2030 or 2040. But once it starts paying, it will gradually adjust upward.

For this reason, this rider should be considered mandatory in the first half of your career. However, since most policies only pay until age 65 or 67, it doesn’t make sense for someone in their 50s or 60s to buy it.

Future Purchase Option Rider

This rider allows you to buy more insurance later when your income goes up without having to prove you are still insurable (i.e., no questions or exams). It does not lock in the low price you received when you first bought the policy.

This is a smart rider to purchase when the company does not allow you to buy as much insurance as you need. For example, most residents and fellows are limited (by insurance company policy and by their inability to afford it) to buying less benefit than they really want to live on for the rest of their life.

For a resident, it makes sense to buy a future purchase option rider. But if you’re an attending in your peak earning years, just buy the amount you need and save money on the rider.

Catastrophic Disability Rider

This basically says if you’re really, really disabled (i.e., can’t do at least two activities of daily living such as dressing or bathing), it will pay you extra. Sometimes, this rider is just a part of the policy (meaning you don’t have the choice to reject it and save some money).

As a general rule, you are better off using the money the rider would cost to just buy a larger benefit to start with.

Retirement Rider

Some companies allow you to buy a rider that, if you become disabled, pays you a monthly benefit to live on and also puts some additional money into a separate account for your retirement.

Since the investment options the company is likely to use are generally poor compared to what is available on the open market, this is a rider to skip. Of course, you need to make sure the benefit you have purchased is sufficiently large enough that you can live on it and also save for retirement (since the policy will only pay until you are in your mid-60s).

A Few More Disability Terms You Should Know

There are a few more terms used in the insurance world you should be aware of. A policy is one of three things—conditionally renewable, guaranteed renewable, or non-cancelable.

Conditionally Renewable: Insurance company can cancel the policy whenever it likes (but is very rare).
Guaranteed Renewable: Insurance company can raise your rates—so long as it raises the rates of everyone else that is like you with regards to age, state, or specialty—but cannot cancel the policy if you pay the premiums.
Non-Cancelable: Insurance company cannot raise rates at all and must renew the policy so long as you pay the premiums.

Obviously, the non-cancelable policy is the best option, but it is pretty rare for a company to raise rates. If you are offered a substantial discount for a policy that is only guaranteed renewable, consider taking it and putting the money toward another good cause.

How Much Disability Insurance Do You Need?

As a general rule, insurance companies will allow you to buy enough insurance to replace 60% of your gross income. Since most high-income professionals are paying 15%–35% of their income toward taxes, that is usually MORE than enough income to live on.

Disability insurance benefits, unless the premiums were paid for by your employer, are completely tax-free to you.

If you already have a nest egg that by age 65 will be sufficient to provide your desired retirement, then you may need even less.

As a general rule, decide how much to buy based on your actual expenses, not some percentage of your income. If you are spending $8,000 per month and need to put $3,000 per month toward retirement and $1,000 per month toward college, then you need a disability benefit of $12,000 per month whether you are earning $20,000 per month or $40,000 per month.

Exceptions to the rule: If you are already financially independent or can live off of your spouse’s income in the event of your disability, you may not need disability insurance at all.

Choosing a Waiting Period

Policies will often give you a choice of a waiting period, that period of time between the date of disability and the date when payments begin. You should have an emergency fund consisting of at least three months of expenses sitting around in a very safe place.

In the event of disability, use that money to live on for the first three months. This will allow you to choose a 90-day waiting period for your disability insurance policy rather than a more expensive 30-day period. There is not much of an additional discount for a 180-day period.

Next Steps

Gather up your W-2, spending, and the group policies available to you and make an appointment to meet with a good independent disability insurance agent.
If you have disability insurance already, go get your policy out of your filing cabinet.
Does the benefit amount still make sense? Do you have enough? Do you have too much? Are there riders you would like to drop to save some money?

If it all still looks OK to you, put it away and know that you're done with your homework. If it doesn’t, schedule an appointment with a trusted agent and discuss your concerns.

Additional Disability Insurance Resources

Disability Insurance 101

Details of the American Medical Association Group Policy

This is the first step in taking control of your financial life. You can do this, one step at a time.

Step 1 Sponsor

This newsletter is sponsored by Bob Bhayani at Dr. Disability Quotes.Com. He is a truly independent provider of disability insurance planning solutions to the medical community nationwide and a long-time WCI sponsor. Bob specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. He has been extraordinarily responsive to us any time any reader has had any sort of an issue, so it is no surprise we get great feedback about him from readers like this recent one:

“Bob and his team were organized, patient, unerringly professional and honest. I was completely disarmed by his time and care. I am indebted to Bob's advocacy on my behalf, and on behalf of other physicians, and to you for recommending him.”

If you need to review your disability insurance coverage to make sure it meets your needs, or if you just haven't gotten around to getting this critical insurance in place, contact Bob Bhayani at Dr. Disability Quotes.Com today by email at [email protected] or by calling 973-771-9100.

Head up, shoulders back, you've got this.

The White Coat Investor

P.S. Take a moment now and add the WCI email address to your contacts or whitelist it. For some reason, many email providers randomly send bulk emails like these to your spam box if you don't do this.

Step 2 – Does Anyone Depend On Your Income?

If you’ve ever wondered whether getting life insurance was worthwhile, ask yourself the following question: Is there anybody in your life who depends on your income besides you?

If the answer is yes, then it’s simple: you need life insurance.

Even if you already own some, you should read on to make sure you have enough of the right kind of life insurance.

Can I Skip This Step?

If no one else is depending on your income and you have enough assets to pay for your burial, you’re in a great place and can skip the rest of this step.

The purpose of life insurance is to eliminate the financial consequences of your death.

To figure out how much insurance you should buy, you will need to determine what the financial plan will be if you died tomorrow. Then, buy enough insurance so that, financially speaking, the consequences are the same whether you live or die.

How Much Life Insurance Do You Need?

Deciding how much life insurance to buy requires you to do some rudimentary math, but most doctors end up with between $1 million and $5 million.

Follow these steps to figure out how much you need:

Determine how much income your loved one(s) would need going forward if you died today. First, calculate your monthly expenses and multiply that by 12 to get your annual expenses. Now, multiply that by 25. That will provide a nest egg for them to live off of for the rest of their lives.
Now, look at your latest mortgage statement. Add on the amount you still owe to the nest egg number from above. If you are currently renting, take a look at what the house you would like your loved ones to live in would cost to buy with cash. Use that amount instead.
Next, consider how much you would like to have for your childrens’ education. If you plan to pay for the entire experience, plan on $50,000–$200,000 per child.
Now, consider any other large-ticket items there may be, such as your spouse’s student loans, the mortgage on a vacation home, or any other debts. Remember that most student loans are forgiven if you die.
Add it all together. Subtract your current nest egg and college savings from it. Now, round up to the nearest $1 million.

That’s how much term life insurance you should buy.

Is the number between $1 million and $5 million? Good. Don’t worry about buying a little too much. Term life is cheap, and it’s better to have a little too much (especially when future inflation comes into play) than not enough.

Term vs. Permanent Life Insurance

There is only a limited period of time where you will need life insurance, and the least expensive way to pay for that need is to buy what is called “term” insurance.

Term insurance only pays out if the policyholder dies during a specific term. There are other types of insurance, collectively called “permanent” insurance, that will pay out whenever the insured dies, whether that is at age 30 or age 90.

You’ve likely heard of “Whole Life Insurance” before. That’s a type of permanent life insurance.

Most doctors should not buy whole life insurance.

Permanent insurance costs a lot more than term insurance (often up to 10x more) because it guarantees that if you keep paying the premiums, your heirs will get the death benefit eventually.

To make matters worse, permanent insurance has an almost endless number of variations and has a veritable army of salespeople working their tail off to sell as much of it to you as you will buy, using dozens of well-honed sales techniques.

For the vast majority of doctors and other high-income professionals, buying any permanent insurance policy is optional at best—and probably a financial error.

The reasons why are a bit beyond the scope of Financial Boot Camp (read more here), but just remember this: at this point in your financial life, what you need is term insurance and a lot of it.

If you wish to add on a permanent life insurance policy at some point down the road, be sure you understand exactly what you are buying and are committed to holding it until death.

Either way, you need some term insurance.

How Long of a Term Should You Buy?

The idea with buying term life insurance is that you need to save and invest enough money every year to eventually become financially independent. In order to decide how long of a term you need, you need to know roughly when you expect to be financially independent.

This will require another financial calculation. If you don’t have the ability or desire to make this calculation, buy a 30-year level term policy.

That gives you 30 years to learn how to make this calculation, and hopefully, you’ll learn it a lot sooner than that. It might cost you a little extra, but since you can’t really buy a term longer than 30 years, at least you won’t come up short.

How to Calculate Length of Term Needed/Years to Financial Independence

If you would like to learn how to do this calculation, it’s not that hard. Open a spreadsheet, such as Microsoft Excel, and input a calculation called “NPER.” You will need to input a few variables.

Here’s how to do it:

NPER is the “number of periods,” i.e., number of years, until you reach your financial goal. This is the solution of the equation.

RATE is the first variable and is the annualized rate of return on your investments. Adjusted for inflation, we think 5% is a reasonably conservative number, and that’s what we would recommend using in this calculation.

PMT is the second variable and is the payment, or the amount of money you intend to save for retirement each year. When you enter it into this calculation, this is a negative number, so put a minus sign in front of it.

PV is the present value, i.e., the current size of your nest egg. It is also a negative number.

FV is the future value, i.e., the amount of money in today’s dollars you need to retire.To get this, estimate how much income you will need per year in retirement and multiply it by 25. This is a positive number in the equation.

Type is either a 1 or a 0, depending on whether you will be adding the payment at the beginning of the period (a 1) or at the end (a 0). It doesn’t matter all that much for the purposes of this equation.

So, let’s say you want $100,000 per year to live on in retirement, and you are saving $40,000 per year toward retirement. How long will it take you to get there? Here is what you would put into the spreadsheet:

=NPER(5%,-40000,0,100000*25,0)

The solution is 29 years. So if that is you, buy a 30-year term policy

However, let’s say you are a bit more frugal and you already have $100,000 saved for retirement. You plan to save $60,000 per year and can live on $80,000 per year in retirement. What would your equation look like?

=NPER(5%,-60000,-100000,80000*25,0)

The solution here is 22 years. A 25-year term policy ought to be adequate.

What if someone is already well into their career but still needs life insurance? Let’s imagine someone who already has $1 million and is saving $50,000 per year but wants $100,000 in retirement income. How long should their life insurance term be?

=NPER(5%,-50000,-1000000,100000*25,0)

The solution here is 11 years, so a 10- or 15-year term is probably adequate.

As you can see, these equations don’t require a precise calculation. If you’re not sure about a variable, just guess and then round up. These are not irrevocable decisions.

How to Buy Term Life Insurance

Term life insurance is essentially a commodity. For the most part, it is a simple product. You pay a premium once a year, and if you die during that year, you get the face value of the insurance policy from the insurance company. If you don’t die, you don’t get anything.

Any reasonably financially secure insurance company is going to be able to pay out if you die, so you shouldn’t spend a great deal of time, effort, and money trying to get a policy from a “better” company. It all works fine.

You want the cheapest policy for the money.

If you are very healthy, this is a simple process. You simply go to an online site using software such as “Compulife” which will provide you quotes from dozens of insurance companies without requiring any personal information. You then print out the list of quotes, go to an independent agent (i.e., one who can sell you a policy from any company), and ask them to sell you the least expensive policy for the face amount and term you have already decided on. It is that simple.

You can use our list of recommended insurance agents that have been vetted by WCI and that are sure to treat you well.

Get Life Insurance Coverage

If you are not healthy or you engage in dangerous hobbies (such as flying, skydiving, scuba diving, or climbing), it gets a little more complicated. Here is where the independent insurance agent really earns their commission. They will have to informally “shop you around” to the various companies to see which one will give you the best price.

How to Avoid Getting Sold Permanent Life Insurance

Most, if not all, insurance agents who you go to for term life insurance will attempt, at least briefly, to sell you a permanent life insurance policy. It is best to be politely persistent.

A phrase like, “I am here today to buy term life insurance only. If you treat me well today, I may be back at a later date to purchase permanent life insurance from you. But that date is not today.”

Better yet, just use an agent off our recommended list, such as this email's sponsor, and you won't have that pressure.

Next Steps

If you do not have life insurance (and are not financially independent), take action today. You’ve got this!

Calculate how much you need and for how long, using the calculations above.
Make an appointment with an independent life insurance agent to purchase a policy.
If you already have life insurance, run the two calculations to ensure you have enough and that it will last long enough. You may find you need to buy some more, but you might also find out you no longer need your policy and can cancel it.

Additional Life Insurance Resources

Term vs. Whole Life Insurance

When Is Permanent Life Insurance a Good Idea?

How to Cancel Your Whole Life Insurance Policy

Advanced Term Life Insurance Strategies

Step 2 Sponsor

Insuring Income is an independent life & disability insurance agency operating nationwide. They are long-time contributors and advertisers with White Coat Investor. For over a decade they have helped hundreds of physicians and white-collar professionals add the term life insurance, and laddered term, protection they need to take care of their families, business partners, and those they hold dear. Working with all the major life insurance carriers that are A rated or higher according to AM Best® means that they sit on the same side of the table as their clients, not a specific insurance carrier. They stand at the ready to help you understand the life insurance process, develop a plan to lock in the coverage you need, and even help you prescreen the carriers before applying if you have health history concerns that might impact the underwriting process. You can get started and review carriers/pricing HERE.

Head up, shoulders back, you've got this.

The White Coat Investor

Step 3 – You Can't Invest What You Don't Save

This email isn’t here to tell you to stop spending money. It’s here to tell you to spend it on things that truly matter to you—to spend your hard-earned money intentionally.

Spending deliberately means weighing every purchase for the amount of happiness it is likely to bring you and the consequences of spending it.

If you spend all your money, you can't save anything. If you can't save anything, you can't invest anything.

Saving and spending deliberately will be a key factor in the financial success you deserve.

Can I Skip This Step?

Do you have any consumer debt (credit card, auto loans, etc.)? Do you have a written spending plan (i.e., a budget) in place that you compare your spending to at least once a month?

If you have no debt and have already aligned your spending with your values—well done! See you next week.

Become Uncomfortable with Debt

Americans have a serious problem. We spend money we don’t have on stuff we don’t want to impress people we don’t like.

The average US household owes $6,000 in credit card debt, $29,000 in automobile debt, $59,000 in student loans, and $219,000 in mortgage debt.

Unfortunately, physicians and other high-income earners aren’t exempt from this phenomenon, and in many cases, despite their high income, their debt totals are even higher.

Being in debt has become “normal.”

Surveys show that 1 out of 4 physicians admits to living beyond their means and carrying credit card balances from month to month.

Many physicians have to borrow astronomical sums to pay for their medical school tuition and living expenses, and that gets them too comfortable with debt.

While there may be some times in life when it cannot be avoided, debt and, particularly, the spending habits that tend to go along with it has a serious drag on the accumulation of wealth and financial independence.

Do yourself a favor and become uncomfortable with debt.

Credit cards aren’t for credit; they’re for convenience (and sometimes rewards). Studies are quite clear that you spend more when you use them for your purchases. If you are saving plenty of money, that’s probably no big deal. If you are not, a great way to decrease your spending is to use a debit card; a checkbook; or, even better, cash.

But whether you use cards or cash, if you are carrying a balance on a credit card, you have proven you cannot handle it. Cut up your cards, treat paying off the balance as an emergency, and never use them again.

Using an auto loan to purchase a car is also silly as an attending physician. A reasonably reliable car that will last years can be purchased for $5,000–$10,000. A typical physician making $200,000 per year gets paid that much every two weeks. Surely that amount of money can be saved up without difficulty within 2–3 months.

If you wish to drive something nicer, that’s fine. But purchasing it on credit means, by definition, you cannot afford it.

Wait until you have the money and then buy the car. If you are currently making car payments, it is reasonable to keep the car if you can have it paid off within one year. Then, keep making the payments to your bank account so you can pay cash for your next one.

If you cannot pay your car off in a year, sell it and purchase a $5,000 car. You can upgrade it in a year or two when you have the money. The same perspective can be taken with most items in your life. Vacations should be paid for in advance. Boats, ATVs, snowmobiles, and other toys are a lot of fun, but they’re even more fun when you know they’re paid for.

Establishing an Emergency Fund

An emergency fund is a pool of money invested very safely that can be accessed quickly in the event of an emergency. The purpose is to prevent you from having to go into debt or to sell long-term investments in the event of a major financial event—such as illness, job loss, car wreck, or appliance malfunction.

A typically recommended amount is 3–6 months' worth of your typical monthly expenses. Some of this can be kept in cash at the house, and some can stay in your checking account. The rest should be invested in a high-yield savings account, a money market fund, CDs, I Bonds, or a short-term bond fund.

An emergency fund allows you to avoid debt, worry less about your investments, and raise the deductibles on your insurance.

Align Your Money with Your Values

“Budgeting” has a bad reputation for making people miserable. Think of a budget as a spending plan.

A spending plan allows you to prioritize how to spend your money. If you’re smart, you will choose to spend your money in a way that maximizes your happiness—that is, you’ll spend more on experiences and stuff that make you happy.

If you’re a car person, buy the flashy car (in cash). Vacation person? Go to Fiji. You should spend your money, but make sure it’s spent intentionally on things you value.

The key to budgeting is to “give every dollar a name” before the month begins. All of your money is allocated to various categories at the beginning of the month—this much for food, this much for utilities, this much for entertainment, and so forth. When you run out of money in a given category, you quit spending until the next month.

This requires some discipline to be successful, but if you have the discipline to become successful in your field, you have the discipline to live on a reasonable budget.

The good news for most high-income professionals is that they don’t even have to be frugal to live on a reasonable budget; they only have to be relatively frugal—that is, frugal relative to their income.

They can probably still spend two or three times what an average American household makes and still be just fine.

Budgeting Tips

There are dozens of different ways to budget and plenty of technology to help you, ranging from pencil and paper to a spreadsheet to software like Mint, You Need A Budget, or Every Dollar. Use whatever works well for you and, if applicable, your partner.

Couples must realize that unless they are both working together, they are unlikely to be successful.

Some successful physicians have discovered that they don’t even need to budget by category if they just take their savings off the top as soon as they’re paid. Even better, you can set up automatic transfers to your savings and investment accounts so this all happens without requiring any work or willpower. They can then spend the rest guilt-free and still be very successful. In some ways, a budget is simply “training wheels” until you can train yourself to get your spending down to a level where you’re saving enough to reach your goals.

Try to minimize your fixed expenses so the majority of your budget consists of either variable expenses that can be decreased as needed or, preferably, truly discretionary expenses that can be eliminated completely if necessary. That way, when an unexpected expense comes up or your income drops for some reason, you don’t even have to touch your emergency fund. You can simply shift spending from other categories to cover it.

Some couples find that having a small “allowance” that they can spend without needing to account to their partner for it helps them to stick with the plan.

If you’re not sure where to start with your budget, start by going back to the last 1–3 months and just write down whatever you spent. Most people who do this realize they’re spending a lot of money on stuff they don’t care about that isn’t making them any happier.

Cut back on that stuff so you can spend money on what really matters to you.

In the end, a spending plan just helps you align your spending with what you actually value. Whatever it takes for your plan to work, put it in place, write it out, and follow it.

You won’t have anything to invest if you spend your entire income. Spend, but spend to maximize happiness. You can do this, and in the long term, it will make a huge difference in your financial life!

Next Steps

Establish an emergency fund (i.e., open an account, put some money in it, label it your “emergency fund”).
Pay off credit cards like your life depends on it.
Pay off auto loans within one year or sell the car(s).
Develop a written spending plan. (Yes, physically write it down this week.)
Going forward, commit to pay cash for everything in your life except your home.

Additional Spending Plan Resources

How-To Guide to Budgeting

Quit Buying Cars on Credit

Spending in Ways That Increase Your Happiness

Financial Planning and Goals with Your Partner

Three steps down, you’re doing great. Get your homework done and we’ll see you next week!

Step 3 Sponsor

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Head up, shoulders back, you've got this.

The White Coat Investor

Step 4 – Taking Control of Student Loan Debt

Becoming a physician is expensive.

Student loan debt is increasingly becoming a contributor to stress, burnout, and even suicide in doctors and other high-income professionals.

Digging out of debt can be overwhelming, but making a plan to get out of student loan debt is critical to put you on the path to start building wealth.

Luckily, you likely have a high income and can quickly dig yourself out of debt if you so choose.

Grab a shovel . . . you can do this!

Can I Skip This Step?

Do you have student loans? Do you have a written plan to be rid of them within five years of completing your training? If you have no loans or already have a written plan for your loans, we’ll see you next week!

Want the Government to Pay for Your Student Loans?

Although there are several forgiveness programs available for government loans, the one that is usually attractive to physicians is the Public Service Loan Forgiveness (PSLF) program.

Here are the five requirements of PSLF:

Must be direct federal loans
Must be employed full-time (30+ hours per week) by a non-profit 501(c)(3) or governmental employer
Must make 120 on-time (i.e., < 15 days late) monthly payments
Payments must be made in an eligible program—usually an Income-Driven Repayment (IDR) program, such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), or Income Contingent Repayment (ICR)
Must correctly fill out the annual employer certification forms and application

There is a risk that this program may change in the future, but most experts feel those currently in the program will be grandfathered in.

If you are particularly concerned about the risk, save up an amount equal to the loans in a side account, which can be applied to the loans if forgiveness doesn’t materialize.

Save Money by Refinancing

If you are not going to work for the government or a 501(c)(3) after residency, you will generally want to refinance your loans at the completion of residency.

Many doctors have lowered their interest rates by 2%–5%.That could mean that the tens of thousands of dollars that would have gone toward interest can now go toward principal, allowing you to pay off your loans in significantly less time.

It is important to be 100% sure you do not want to go for PSLF before refinancing, since there is no going back. It is also important to be sure you will not need the safety net of the government income-driven repayment programs.

Even if you are going for PSLF, remember that you can only get federal loans forgiven. Any loans that you have that are private loans should be refinanced as soon as possible.

We have negotiated special deals (including significant cashback) for WCI readers that refinance their loans through our links. We also want to give you another tool to help in your success, so anyone who refinances more than $60,000 in student loans through the WCI links will receive our flagship course for FREE. The White Coat Investor’s Flagship course, Fire Your Financial Advisor: A Step-by-Step Guide to Creating Your Own Financial Plan ($799 Value) will give you additional tools to ensure your financial success.

Refinance Your Student Loans

What to Do with Loans in Residency

Figuring out what to do with your loans during residency can be complicated, but it is much less complicated since the institution of the Revised Pay As You Earn (REPAYE) program in December 2015. This is the fourth iteration of the income-driven repayment programs for federal loans.

The first program, Income Contingent Repayment (ICR), is rarely used anymore, but there are plenty of doctors still in the second (Income Based Repayment – IBR) and third (Pay As You Earn – PAYE) iterations.

Each of these programs has its advantages, but as a general rule, each new iteration has gradually gotten more beneficial to those with debt.

For example, the ICR program required payments of 20% of your “Discretionary Income” (your income minus 100% of the poverty line), but that was decreased to 15% for IBR and 10% for the two newest programs with your income minus 150% of the poverty line. It’s potentially a double benefit to help lower your monthly payments in training.

If you’re looking for a deeper dive on what to do with your student loans head over to our Ultimate Student Loan Management Guide.

Live Like a Resident . . . Temporarily

Remember that enrolling in a program or refinancing your loans doesn’t actually get rid of your loans.

The only way to eliminate your loans is to throw massive sums of money at them each month. The big issue isn’t the $1,000–$2,000 in interest each month, it’s the $200,000–$600,000 loan principal.

The best way to get rid of your student loans is to use your great asset—your high-earning income, right at the beginning of your career before you get used to it—to pay off your debt.

You can do this by simply continuing to live as you did as a resident.

If you are earning $250,000 as an attending and living on $50,000 per year, even with the increased tax burden, you should be able to clear all of your student loans very quickly.

Even if you give yourself a 50% raise (huge in any other profession), you should still be able to throw a six-figure amount at the loans every year.

But you can’t buy the fancy doctor house, get the fancy doctor car, take the fancy doctor vacation, AND pay off those loans.

The point of “living like a resident” isn’t to do it the rest of your life. But if you will do it for just a short period of time (2–5 years) at the beginning of your career, it will do wonders for your future financial freedom.

Need Guidance on What to Do with Your Student Loans?

Student loans are overwhelming.

The right plan will set you up for success, reduce the burden, and potentially help you save tens of thousands (or even hundreds of thousands) of dollars. With all of the repayment plan options available and unique family situations, speaking with an expert gives you the peace of mind you need.

That’s why we created StudentLoanAdvice.com. For a small one-time fee, you will meet with a student loan expert, receive a written plan, and even get six months of free follow-up. SLA has helped hundreds of people just like you navigate these challenges and know how to address even the most complex student loan situations.

You’re not in this alone.

Click Here to Connect with a Student Loan Expert

Next Steps

If in training, enroll in REPAYE (or if you think you might be an exception to this general rule, see a student loan professional).
If in training, refinance any private loans.
If you are post-training and going for PSLF, be sure to certify each year.
If you are post-training and not going for PSLF, refinance your loans and make a written plan to have them paid off within 2–5 years of graduation.
Live like a resident until student loans are gone.

Additional Student Loan Resources

Student Loans 101

Student Loan Refinancing Companies with Special WCI Deals

Public Service Loan Forgiveness

Live Like a Resident

StudentLoanAdvice.com

Four steps down. Eight to go. Get your homework done and we'll see you next week.

Step 4 Sponsor

Splash Financial is proud to partner with WCI to help you save thousands when refinancing your medical school loans. Splash partners with credit unions, banks, and other top lenders to bring you market-leading rates. The fast and easy online application allows you to check your rate in under 3 minutes and apply with no application, origination or prepayment fees. Refinancing through Splash will simplify your loans and could lower your monthly payments, helping you achieve your financial goals. Residents and fellows can refinance and pay as little as $100 per month while in training. And if you have questions, the US-based customer service team is available every step of the way. WCI readers also receive a $500 bonus when they successfully refinance over $100K in loans.

Head up, shoulders back, you've got this.

The White Coat Investor

Step 5 – How to Make More Money

Becoming rich (you can substitute wealthy, comfortable, financially independent, or financially free if you don’t like that term) is not particularly complicated.

The formula looks something like this:

Know your “Fair Market Value”
Make a lot of money
Save a big chunk of it
Invest it wisely
Protect it from loss

But the contribution that each of those factors makes to becoming wealthy varies quite a bit. You can estimate that about 45% of getting rich comes from your income. Doctors and other high-income professionals generally command a fairly high-earned income, which is sufficient to build wealth.

Even for a high-income professional, though, it is sometimes easier to make more money than to save more of what you are currently earning. This step in Financial Bootcamp discusses ways to increase your income. You’ve got this!

Can I Skip This Step?

Are you looking for a job, a new job, renegotiation of your current compensation, additional income from the job you have, or additional income on the side? If the answer to all of these is no, then see you next week!

Have Your Employment Contracts Reviewed

Employment and partnership contracts should be reviewed by a qualified expert before you sign them. You need to understand every clause in your contract and what it means. You may not even know what questions to ask about your contract, so be sure to hire a contract review service or a healthcare contract attorney in the same state as the job to review it before signing.

A huge percentage of doctors change jobs within 1–3 years of leaving training, and we’ve heard too many horror stories about physicians who signed a contract without knowing what it really said.

Once in your job, know how to ask for a raise over time or renegotiate every few years. It is amazing how many physicians sit in the same job for three, four, or six-plus years and have no changes to their pay. It is very helpful to have a compensation analysis done every 2–3 years, even if you love your job and “make good money.”

The contract is just the verbal agreements set down on paper. You need to know how everything works—the compensation structure, benefits, call, non-compete clauses, what happens if you leave, what happens if you are fired, etc.

A really good service will also have salary data (such as MGMA) for your specialty and area so you will know if the offer is competitive.

You can hire somebody to negotiate for you, which isn’t a bad idea if you are uncomfortable doing so. But the principles of negotiation are not complicated.

Understand what is in the negotiator’s power to grant and what isn’t, and always try to negotiate from a position of strength—ideally using another job offer that you would be willing to take. You should renegotiate every 2–3 years if you enjoy your job and wish to stay.

Get Your Contract Reviewed

Sometimes the Grass Is Greener. . .

Do you hate your job? Sometimes the grass really is greener on the other side of the fence, especially if you can get a job you like better that pays more in a lower cost of living area that you will like just as much as your current location.

If that sounds like your scenario . . . pursue that other job.

To avoid surprises, make sure you know what your current contract states for termination. If needed, have the agreement reviewed for termination before heading to greener pastures.

Without Career Longevity, Your Financial Plans Fall Apart

The number one threat to your financial plan is physician burnout.

You don’t want to lose the ability to turn the knowledge and skills that you spent a decade learning into a big pile of money by working as a physician for decades. Unfortunately, studies show that as many as 50% of doctors are burned out at any given time. The joy and excitement they felt when they were accepted to medical school or when they matched into their chosen specialty are long gone.

We want to make your future earnings potential burnout proof, and that’s where physician burnout coaching comes in.

We’ve screened the universe of physician coaches out there, particularly those who specialize in helping burned-out physicians rediscover the joy of doctoring.

We’ve found and partnered with the most experienced and effective program we could find.

If you feel your financial plan is being threatened because you're feeling burned out, this might provide some of the tools and skills for which you've been waiting.

Learn About the Burnout ProofMD Program

Generating Extra Income

Continually trying to run faster on the treadmill is a certain recipe for burnout. But if it’s done in moderation or for limited periods of time, working more is a great way to boost your income.

That might mean more call or more shifts, or it might just mean creating efficiencies in your practice that allow you to see more patients and do more procedures.

In some cases, it means a second job. This might be a locum tenens job in another city or even state, a second career, or other side gigs.

A low-barrier-to-entry side hustle for physicians to consider is taking online medical surveys. If that's of interest to you, these are the survey companies we recommend.

(Before pursuing any side gigs or second jobs, make sure you understand the conditions of your employment contract and whether your current employer has issue with your pursuing other income.)

You can often create a synergy between your job in medicine and a job outside of medicine. One great benefit of being self-employed (whether in medicine or in your side gig) for at least part of your income is that it allows for many additional tax write-offs, including perhaps the ultimate one—an individual 401(k) plan to go along with the one from your employer.

Explore Multiple Streams of Income

Most physicians are not the entrepreneurial type, at least at the start of their long careers. However, once they see the benefits, they often develop an entrepreneurial mindset. An entrepreneur sees businesses everywhere. Every unmet need is a business in embryo.

Decades ago, a typical American worked for one company for their whole career. Now, not only do many people switch jobs every few years, but many people live on income from dozens of different sources. Some of these sources are more active than others, but they may include interest, dividends, real estate rents, franchises and other small businesses, websites, speaking fees, book royalties, affiliate marketing/advertising on a blog or podcast, etc.

Keeping your eyes open to these possibilities is likely to increase your income eventually, and it will likely increase your enjoyment and appreciation of your medical career and income. You’ve got the skills; if this is something you want, go out and get it.

Here are some ideas for side gigs and ways to increase your income.

Next Steps

If you are looking at a new job, have the contract reviewed by a review service or qualified healthcare contract attorney in that state.
Consider ways to increase your active income through a raise, a better job, making your practice more efficient, taking on a second job, or exploring non-medical “side hustles.”
Consider exercising your entrepreneurial spirit and developing more passive income streams from franchises, websites, books, real estate, and other small businesses.
Constantly reevaluate your market worth. Do not settle into a job and compensation structure with no changes or updates for many years. Know your fair market value and negotiate to be compensated accordingly.

Additional Income Boosting Resources

Contract Review Services

Contract Negotiation – 10 Tips from the Trenches

Financial Advice for ‘Low Income’ Doctors

Earning Tips from Real Life Physicians

Developing Passive Income Streams

Five steps down. Seven to go. Get your homework done and we’ll see you next week.

Step 5 Sponsor

Contract Diagnostics is a long-term partner with us here at WCI. We love this company as they’ve helped over 10,000 physicians get a ‘fair shake’ when it comes to reviewing and understanding their employment contracts – it's 100% what they do there. This is a company that specializes in physician contract reviews and compensation analysis – specialization is something we can all appreciate here. All contracts are reviewed by an in-house attorney and presented in a simplified educational way back to you. Their system uses custom documentation, proprietary compensation data, and review times from 6am to 8pm (even select weekend slots). They make it simple and easy for you to sign up (it takes a minute) for any package. All packages are flat priced so you know what you will pay upfront – residents and fellows can even make interest-free payments over time. They have a new ‘Compensation Rx’ division (under $300) offering for those of you happy in your positions as well, but just looking for details on how fair your pay is, and how you can potentially ask for more. So look them up today – contractdiagnostics.com or 888-574-5526. They have helped over two thousand of your WCI colleagues and would love to work with you.

Head up, shoulders back, you've got this.

The White Coat Investor

Step 6 – Buying Your Dream Home

There is an intense burning desire among medical students, residents, and their partners to buy a house to show that they’ve made it and to “stop throwing away money on rent.”

You will have to combat all of that to make a sensible housing decision. It won’t be easy, but you can do it.

The most expensive life purchase for most physicians is a home. Large, fancy homes are expensive to rent, buy, maintain, furnish, and sell.

Your biggest enemies when it comes to controlling this critical expense are the industry, society at large, and those people in your family picture.

Spending the right amount of money on a home is crucial to your financial success.

Can I Skip This Step?

Have you already paid off the mortgage on your dream home? If not, can you comfortably pay ahead on your current mortgage? If the answer to both of those questions is yes, you can skip this chapter.

Too Much House Is a Recipe for Financial Catastrophe

Two of the largest industries in the country are the realtor industry and the lending industry. They want you to buy houses early and often. In fact, those industries are so powerful that over the last few decades the American Dream in our national consciousness has somehow morphed from upward social mobility to homeownership.

In addition, society views physicians and other high earners as wealthy—despite the negative net worth possessed by most young professionals—and expects them to live in expensive houses. That society includes your in-laws, partner, children, and even yourself.

Mortgages Should Be Less Than Rent

There is a huge misconception that if your mortgage payment is less than a rent payment, then you should buy a home. What most people don’t realize—at least if they haven’t already gone through the process of buying and selling a home—is that your mortgage payment should be much less than the equivalent rent payment.

Put yourself in the shoes of a landlord. They are running a business and want to make a profit. The sum total of all their business expenses must be significantly less than the sum total of their business revenue. What is their business revenue? The rent you are paying. That’s it.

So, the rent must cover the mortgage, insurance, property taxes, maintenance, upgrades, vacancies, acquisition costs, and (eventually) selling costs. Plus, that landlord wants a profit above and beyond those costs.

Of course the mortgage payment has to be much less than the rent payment!

If an investor is looking at buying a house with a mortgage of $1,100 per month, they want to see that it will rent for something like $2,000 per month.

Don’t mistake paying rent as “throwing money away.” Paying rent gives you the right to live in a place for that month. You’re exchanging it for something you value, not throwing it away.

Besides, mortgage interest, insurance, property taxes, maintenance, and realtor fees all feel just as much like throwing money away as paying rent.

The bottom line is that it’s OK to rent. There are times in life when it makes sense to buy and other times when it makes sense to rent. While the real estate market is hard to predict, your course through life is much easier to predict and should be the main guide you use when making “buy vs. rent” decisions.

Residents and New Attendings Should Rent

The main issue with buying a home is that the transaction costs are so steep. A reasonable estimate is about 5% to buy and 10% to sell—or about 15% round trip. Because of that cost, it will generally require your home to appreciate in value 15% between buying and selling just to break even.

Real estate appreciation is hardly linear, but if you’re expecting to see 15% appreciation in less than five years, you are taking a gamble. It might pay off, but it might not. Since most residencies are five years or less, most residents should rent a home.

Another reason residents should rent is that they won’t see much benefit from the tax advantages of owning. Mortgage interest and property taxes are deductible but only to those who itemize. Even for those few residents who do itemize, only the portion above and beyond the standard deduction is really deductible.

Residents have limited time and money—both of which are required to maintain a home much more than most first-time homebuyers appreciate.

In addition to residents, new attendings should also rent for six months to a year after graduation. A large percentage of doctors change jobs in their first 2–3 years of practice, and that job change often means an expensive relocation.

Don’t buy a house until both your job and your social situation are stable. While you might lose some potential appreciation, you are far more likely to know what you really want (and what you really want to spend) after a few months with the income of an attending.

You will also be in a better negotiating position and will likely qualify for better terms on a mortgage.

Doctor Mortgage

Physicians and similar high income professionals should never pay Private Mortgage Insurance (PMI), which is insurance YOU pay to protect the lender from YOU defaulting on the loan.

PMI can be avoided in two ways:

The first is to make a 20%+ down payment. A down payment is a wonderful thing. It helps you avoid PMI, provides you more options for lenders, and gives you better interest rates and terms. Saving up the down payment also teaches you discipline, and that 20% cushion protects you in the event of a market downturn or if you need to sell shortly after buying.
The second way to avoid PMI is to use a “doctor mortgage loan.” There are several lenders in every state who will loan doctors money without requiring PMI. Rates and fees are generally slightly higher than you would see with a conventional 20% down mortgage, but usually only a down payment of 0–10% will be required. This allows the physician to put limited cash to better uses than a down payment. That might be paying off student loans, maxing out retirement accounts, or even buying into a practice. Whichever route you go, don’t pay PMI when you get a mortgage.

See Doctor Mortgages

Refinance Your Mortgage

Interest rates change from time to time, and when they go down significantly, you should refinance your mortgage. Simple procrastination causes millions of people to pay too much interest on their mortgage every year.

Be careful refinancing, of course. There are fees involved, and they are often hidden (usually by throwing them into the new mortgage).

In addition, refinancing resets the term on your mortgage. So even if you’ve paid on a 30-year mortgage for 10 years already, refinancing gives you a new 30-year mortgage, and you won’t be out of debt for 40 total years if you don’t increase your payments appropriately.

How Much House Can You Afford?

The general rule for how much housing you can afford as a high-income professional is to keep your mortgage to less than 2X your gross income.
If you make $200,000 a year and want to live in a $500,000 home, you had better have $100,000 to put down.

This is much less than what a lender is willing to loan you. But they don’t care if you ever build wealth. They only care that you can make the payments.

If your payments are too large, you will never build real wealth. Even if you eventually pay the house off, you will still be “house-poor.”

Like any rule of thumb, there are always exceptions. If you are located in a high-cost of living area, you might have to stretch that rule a bit. But when I say “stretch,” I’m talking about 3X–4X, not 8X–20X. Some professionals can’t afford a $1.5 million home even if all the homes within 20 miles of their office cost that much. Even limited stretching has consequences. It will mean working more, driving less expensive cars, taking less expensive vacations, retiring later, and sending kids to less expensive schools.

You’ve got this. And remember—you can have anything you want, but not everything.

If you are like most physicians, the amount of joy you get from having a slightly more expensive house will only last a few months, and you will have exchanged years of ongoing happiness for it. A physician in their 60s with a relatively small net worth is often due to the overconsumption of housing.

Create a Plan for When to Buy Your Dream Home

If you are currently renting or if you own a home that is not the one you imagine yourself in for a large part of your life, write down a plan for how and when you plan to acquire that home. The plan should include how much you will put down, how you will save up a down payment, how much you will spend, what you are looking for, and what kind of a mortgage you will get. It need not be long or complicated.

Here are a couple of examples:

We will buy a $600,000 home two years out of residency in Oak Hills School District with a conventional 15-year fixed mortgage. We will put 20% ($120,000) down and will save up the deposit in a high-yield savings account.
We will buy a $400,000 home six months out of residency on the east side of Indianapolis with a 30-year doctor mortgage. We will use the home equity from our current home to make a 5% down payment, keeping it in our money market account in the meantime.

Next Steps

If you already own your dream home but have an above market rate mortgage, refinance.
If you do not own your dream home, write down a plan for how and when you intend to acquire and pay for it.
If you already own a home but it is more home than you should have at this time in your financial life, consider downsizing or making other changes to get back on track with your financial goals.

Additional Housing Resources

How to Get a Doctor Mortgage Loan

Reasons Why Medical Residents Shouldn’t Buy a House

Dealing with Housing in a High Cost of Living Area

Mortgage Refinancing Mistakes to Avoid

Six steps down. You're halfway done with The White Coat Investor Financial Bootcamp. Great job! Now, get your homework done, and we'll see you next week!

Step 6 Sponsor

Looking to take advantage of current low interest rates, but worried your student loan debt will get in the way of refinancing or purchasing a home? Consider exploring Laurel Road’s Physician Mortgage, a home loan tailored specifically for physicians and dentists.

Laurel Road will analyze your overall financial health with the understanding that as a physician, you may have a lot of debt, but also have a high earning potential.

Visit Laurel Road and get one step closer to enjoying the benefits of homeownership.

With Laurel Road’s Physician Mortgage, eligible physicians have access to:

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Disclaimers

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100% financing and no private mortgage insurance (PMI) is only available to interns, residents, fellows, doctors, dentists, clinical professors, researchers, or managing physicians with a current license and a degree of Doctor of Medicine (MD), Doctor of Osteopathic Medicine (DO), Doctor of Podiatric Medicine (DPM), Doctor of Dental Surgery (DDS), or Doctor of Dental Medicine (DMD). Only available when purchasing or refinancing with no cash out on a primary residence and loan amount does not exceed $1,000,000. Retired doctors are not eligible. Additional conditions and restrictions may apply.

Laurel Road is a brand of KeyBank National Association. All products offered by KeyBank N.A. Member FDIC. NMLS #399797. Equal Housing Lender.

Head up, shoulders back, you've got this.

The White Coat Investor

Step 7 – Reducing Taxes and Building Wealth

Often when you talk to physicians, they're interested in some sort of an account that will give them easier estate planning, get them better asset protection, allow them to pay less in taxes, coax their investments to grow better, and get it all to rebalance itself.

What they don't realize is that they have this account available to them . . . tax-protected retirement accounts.

Can I Skip This Step?

Have you read the plan summary document for your employer-provided retirement accounts? If you have self-employment income, have you opened an individual 401(k)? Do you do a personal and spousal Backdoor Roth IRA each year? If you are eligible, do you max out a Health Savings Account each year? Do you know the difference between a marginal tax rate and an effective tax rate? Do you know what your marginal and effective tax rates were last year? If the answer to all of these questions is yes, you can skip this step.

This may seem overwhelming, but take these tasks one at a time, and you’ll soon be on the right track. You can do this — we are going to give you the tools to help.

Retirement Accounts Are Your Best Tax Break

To understand why this is the case, it is important to understand that your marginal tax rate is not the same as your effective tax rate.

Marginal Tax Rate

This is your tax bracket based on income, but given the myriad of phaseouts in our tax code, even that isn’t entirely accurate. Your marginal tax rate is the rate at which you would pay taxes on the next dollar you earn.

The easiest way to calculate this is to use the same tax software you (or your accountant) use to prepare your taxes. Simply add another $100 of earned income and observe the amount by which the taxes you owe increase. If it goes up by $45, you have a 45% marginal tax rate.

Effective Tax Rate

Take the amount of taxes you paid last year and divide it by your gross income. It would not be unusual for someone with a marginal tax rate of 45% to have an effective tax rate of only 25%. While the marginal rate is useful in making decisions about what to do with your money, your effective tax rate gives you a better idea of your actual tax burden.

Feel like lowering your taxes?

For most high-income professionals, the best tax break available to you is to save and invest money inside of retirement accounts.

If your marginal tax rate is 40% and you contribute $50,000 to a tax-deferred retirement account (see more about what this is below), you just decreased your tax bill for this year by $20,000. It would take a very expensive house/mortgage or massive charitable donations to provide you with an equivalent deduction.

The best part of contributing to retirement accounts is that you get the deduction AND you still have the money, unlike when you spend it on interest or give it away. In addition, retirement accounts in most states receive significant asset protection from your potential creditors.

Understanding Types of Retirement Accounts

There are two main types of retirement accounts.

Tax-Deferred Accounts

These accounts give you an upfront tax deduction and allow your money to grow in a tax-protected manner. When you pull the money out decades later, you then pay the taxes on it, usually at a much lower rate than when you contributed the money.

You’ve likely heard of a traditional 401(k) or a traditional Individual Retirement Arrangement (IRA). These are both tax-deferred accounts.

Example: If you are retired and married taking the standard deduction in 2023 and have no taxable income other than withdrawals from a tax-deferred account, your first $27,700 (standard deduction) withdrawn comes out completely tax-free. The next $22,000 comes out at a cost of only 10% in taxes. The next $89,450 comes out at a cost of only 12% in taxes. So, you can withdraw $139,150 a year from tax-deferred accounts at an effective rate of under 10%. Getting a 40% tax savings when you make the contribution and only paying 10% upon withdrawal is a winning combination!

Tax-Free Account

The other type of retirement account is a tax-free or Roth account. With these accounts, you do not get a deduction upfront for the contribution, but it grows in a tax-protected manner. When you pull the money out of the account in a few decades, it comes out completely tax-free.

Both types of accounts have their advantages and are far superior to investing in a regular taxable, non-qualified brokerage account, where you have to pay taxes each year on distributions and pay capital gains taxes when you sell.

Compare Retirement Accounts

Ask for Your Employers’ Retirement Plan Document

Your largest retirement account is likely to be provided by your employer or partnership. Each plan is slightly different with different contribution amounts and investments available.

Your employer is required by law to provide you a summary plan document if you ask for it. You should obtain this document, read it, and log in to your online account to determine what you are actually investing your money in. We’ll walk you through how you should be investing during the next step; for now just get the plan document.

If you are self-employed (i.e., an independent contractor or paid on a 1099), you are responsible for setting up your own retirement account. The best type of retirement plan for self-employed high-income professionals without employees is usually an individual 401(k). In 2022, you can contribute as much as $61,000 to this plan ($67,500 if over 50 years old). If you have employees, you will need professional advice to determine the best plan for your business.

Utilizing a Backdoor Roth IRA

Prior to 2010, high-income professionals with a retirement plan at work could not deduct traditional IRA contributions, could not convert a traditional IRA to a Roth IRA, and could not contribute directly to a Roth IRA. In 2010, Congress removed the income limits on Roth IRA conversions. This opened the “Back Door,” which despite its informal name is a completely legal way for high-income professionals to still receive the benefits of a Roth IRA.

There are two steps to a Backdoor Roth IRA:

Contribute to a Traditional IRA
Complete a Roth Conversion

If you’re under 50, you can contribute $6,500 to a personal traditional IRA and $6,500 to a spousal traditional IRA each year. If over 50, that increases to $7,500 each. Then, you can move that money, for which you received no tax deduction, into a Roth IRA at no tax cost. The end result is equivalent to contributing directly to a Roth IRA.

The only real caveat is that it can make tax preparation a little more complicated. Form 8606 is where this transaction is reported to the IRS and because of the way that form calculates the tax cost on Roth conversions, you will need to ensure you have no money in a SEP IRA, SIMPLE IRA, Rollover IRA, or Traditional IRA on December 31 of the year you do the conversion.

This is one reason why an individual 401(k) is usually a better retirement account for a doctor to use than a SEP IRA. The usual methods of dealing with an outstanding tax-deferred IRA are to either pay the taxes and convert the whole thing (best if a small account) or to do a rollover of the money into a 401(k), 403(b), or individual 401(k) (best if a large account).

We know this sounds confusing. But we have made it easy for you—just follow the steps provided here.

Health Savings Account — AKA the Stealth IRA

Another retirement account that many people overlook is your Health Savings Account (HSA) which can function as a “Stealth IRA” due to the unique rules associated with it.

An HSA is perhaps the best retirement account available to you since it is “triple-tax-free:”

You receive an upfront deduction similar to a tax-deferred account like a 401(k)
You enjoy tax-protected growth inherent in any retirement account
You can take tax-free withdrawals if used on healthcare

Some people worry about what will happen if they don’t need that much money for healthcare needs.

After age 65, you can withdraw money from the account without penalty, pay the income taxes on it, and spend it on whatever you like. Sweet!

That makes it a little different from your 401(k). In addition, you do not have to withdraw HSA money in the same year you consume the healthcare. Under current law, you can save the receipt and pull that amount of money out tax- and penalty-free in a year or 30 years from now if you desire.

If you use a High Deductible Health Insurance Plan, you can contribute $3,850 single ($7,750 family) to an HSA in 2023. Whatever you do not use in the current year can be left in the account for the next year. In fact, that money need not sit in cash; it can be invested in mutual funds just like any other retirement account.

Next Steps

Calculate your marginal and effective tax rate for last year.
Obtain and read the plan document for your employer-provided retirement accounts.
Physically log in to your retirement account and see what it is invested in.
If self-employed, open an individual 401(k).
If possible, open and start funding an HSA and a personal and spousal Backdoor Roth IRA.

Additional Retirement Account Resources

How Tax Brackets Work

Why an Individual 401(k) Beats a SEP IRA 99% of the Time

How to Do a Backdoor Roth IRA, Including How to Fill Out the Tax Form

Using a Health Savings Account as an Extra Retirement Account

You are doing awesome! Seven steps down. Five to go. Get your homework done and we’ll see you next week!

Step 7 Sponsor

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Head up, shoulders back, you've got this.

The White Coat Investor

Step 8 – What Should I Invest In?

The most common question an investing novice will ask a financial advisor or experienced investor is . . .

“What should I invest in?”

While it is easy and tempting for the one giving the advice to give a quick off-the-cuff answer, it is actually a disservice to these well-meaning folks to answer the question they have asked.

The best thing to do is to answer the question they should have asked, which is: “How can I reach my financial goals while taking the least possible amount of risk?”

The answer to all of these questions then is . . . You need an investing plan.

Can I Skip This Step?

Do you have a written investment policy statement? Do you know how and how much you are paying your financial advisor, if any? If you can answer yes to all of these questions, you can skip this step.

You Need a Written Investing Plan

So . . . what should you invest in?

While it may seem to be a simple question, it is an attempt at shortcutting an involved process. Following the process leads to a good outcome.

Shortcutting it is likely to lead to investing disaster.

The process is as follows:

Set financial goals
Determine the amount to save toward each of those goals
Determine what types of accounts will be used for each goal
Determine an appropriate asset allocation for each goal
Select investments according to the asset allocation

“That all sounds boring and hard! Can’t you just tell me what to invest in?”

“OK, put all your money into the Vanguard Life Strategy Moderate Growth Fund.”

Seriously, if you want to shortcut this process, that’s about the best we can do for you.

You’ll probably come out OK and light years ahead of millions of investors, but let’s not take that shortcut.

Following this five-step process, commonly known as Financial Planning, takes some introspection, some time, and some education.

If you need some help with figuring out how to financially help yourself by writing your own investing plan, we have a course for that. It’s called Fire Your Financial Advisor, and it’s a step-by-step guide for how to create your own path to financial freedom. You can even try it risk-free.

Write Your Own Investing Plan

If you don’t want to DIY your financial plan, it might cost you a few thousand dollars if you decide to hire even a low-cost, competent financial advisor to assist you. But it is worth it.

Take a look at each of these five steps carefully, and then we’ll spend a few minutes on the subject of financial advisors.

Setting Goals for Your Investments

Your financial goals, like other good goals, should be SMART:

Specific
Measurable
Achievable
Relevant
Time-Based

An example of a bad goal is: “Retire someday.”

An example of a good goal is: “Have a $3 million portfolio by July 1, 2025, such that I can withdraw 4% of it per year to support a retirement income of $120,000 per year.”

It doesn’t matter if your goals change as you go along. That’s life. Set them anyway. Without a goal, the rest of the process makes little sense.

You might be surprised how little your goals change over the years. You are going to be so grateful later that you took the time to do this now! And believe us, this is something you CAN do!

You Can’t Invest What You Don’t Save

The most important factor determining whether you will reach your financial goals is how much money you put toward them each year. This “savings rate” is critical and should be calculated and monitored. Most financial goals can be boiled down to a “future value” calculation, which has only four inputs:

How long you have to save
Your investment return
How much you save each year
How much you already have

Going forward, you typically have more control over the savings rate than anything else.

It doesn’t take long playing with a spreadsheet or financial calculator before you realize that saving too little requires unachievable future rates of return.

For instance, if you have $200,000 now and want to retire in 20 years with $3 Million in today’s dollars, saving $15,000 per year will require you to achieve an exceedingly optimistic 12% average return (after inflation, fees, and taxes). Saving $75,000 per year permits a much more realistic 5% return.

What Investment Accounts to Use

The next step is to decide which accounts to invest in.

General guidelines include:

Always obtain any employer-provided match
Prioritize tax-deferred accounts over tax-free accounts during your peak earnings years,
Prioritize any tax-protected account over a non-tax-protected account.

In the case of somebody who wanted to save $15,000 per year for retirement, they could likely do all of that in just a 401(k). A physician wanting to save $75,000 per year might need to use a 401(k) along with a personal and spousal Backdoor Roth IRA, with any remaining savings going into a taxable account.

Some accounts are obviously better for some purposes than others. A 529 is ideal for a college-saving goal but not so useful for retirement. Likewise, a Roth IRA can be used to save for a home down payment, but you would usually be better off using it for retirement and using a taxable account to save up for the home.

Advanced readers may wonder about which assets should go into which accounts. Proper tax location can have a small effect on the overall returns of the portfolio. The general rule is that tax-inefficient, high-expected return assets go preferentially into tax-protected accounts. If that seems complicated, don’t worry about it.

The effect isn’t large.

Asset Allocation

The vast majority of the return from your portfolio will come from your selected asset allocation—in other words, what percentage of the portfolio goes into large stocks, small stocks, value stocks, growth stocks, international stocks, real estate, bonds, precious metals, commodities, cryptocurrency, or other asset classes.

The ratio of stocks to bonds in the portfolio will matter a lot more than which individual stocks or which individual bonds you select.

In fact, since the data suggests you are better off investing in low-cost, passively managed mutual funds instead of individual securities, you should spend most of your time thinking about asset allocation rather than security selection.

The truth about asset allocation is that the “correct” asset allocation can only be known in retrospect.

Your asset allocation needs to take on enough risk that, if adequately funded, it will allow you to reach your goals but not so much risk that you won’t be able to stick with it when the inevitable market downturns occur.

An appreciation of financial history is critical.

For instance, many investors panic and sell stocks when the stock market drops 10%–30%. Buying high and selling low like this can be a financial catastrophe, especially if done within a few years of retirement.

A cursory knowledge of stock market history would show a beginning investor that a drop of 10% or more (called a “correction”) occurs on average about once a year and a drop of 20% or more (called a “bear market”) occurs about once every three and a half years.

If your investing career is 60 years long (30 years before retirement and 30 after), you should plan to pass through about 60 corrections and about 17 bear markets. That is to say, it shouldn’t be surprising when your investments in stocks lose 10%–30% of their value.

That’s what you expect them to do. It is no reason to sell them.

Your goal is to choose a reasonable asset allocation.

There are dozens, perhaps even hundreds of “reasonable” asset allocations. None of them are perfect, but your goal is to avoid an unreasonable one.

Here are some guidelines that may help:

Choose a stock-to-bond ratio between 75% stocks and 25% stocks
Invest somewhere between 20%–50% of your stocks in international stocks
Aim for 3–7 total asset classes with no more than 40% nor less than 5% in any one asset class

Here are some examples of reasonable portfolios, with increasing levels of complexity. All of these have been adjusted to have a stock:bond ratio of about 60/40. You can adjust as needed.

30% US Stocks, 30% International Stocks, 40% US Bonds
30% US Stocks, 25% International Stocks, 5% Real Estate Investment Trusts (REITs), 40% US Bonds
30% US Stocks, 25% International Stocks, 5% Real Estate Investment Trusts (REITs), 30% US Bonds, 10% Inflation-Protected Bonds (TIPS)
25% US Stocks, 20% International Stocks, 10% Small Value Stocks, 5% Real Estate Investment Trusts (REITs), 30% US Bonds, 10% Inflation-Protected Bonds (TIPS)
25% US Stocks, 15% International Stocks, 10% Small Value Stocks, 5% Real Estate Investment Trusts (REITs), 5% Precious Metal Equities, 30% US Bonds, 10% Inflation-Protected Bonds

There are a few dozen more asset classes that can be used, but these are the ones that generally predominate in most mutual fund portfolios. Certainly, a portfolio as simple as these when combined with adequate discipline and a good savings rate is perfectly fine

Good investing need not be complicated. It is supposed to be boring.

Choosing Investments

Once you have an asset allocation, selecting mutual funds to fit it can be very easy. In fact, it is possible to have a sophisticated 3–5 asset class portfolio with a single fund thanks to mutual funds like the Vanguard Target Retirement or Life Strategy funds.

However, the general strategy is to choose one mutual fund for each asset class in your asset allocation.

So, if your asset allocation was number 2 above, you might pick an S&P 500 index fund in your 401(k) for your US stock allocation, a bond index fund in your 401(k), the Vanguard Total International Stock Index fund in your taxable account, and the Vanguard Real Estate Investment Trust Index Fund in your Roth IRA.

There are a few nuances to portfolio construction, but they can be addressed as you learn more about investing.

These include such things as which asset class goes into which account (asset location), when and how to rebalance your portfolio back to the original percentages, and how to make do with a crummy 401(k). See the “other resources” section below for more detail on all of these topics.

Alternatively, you can hire an experienced advisor charging a fair hourly fee to help you write up and implement your investing plan, even if you don’t wish to have the advisor do the ongoing investment management.

When selecting mutual funds, you should generally favor “index” or “passive” mutual funds instead of “actively managed” mutual funds.

While you could expect to find a talented active manager who can assemble a portfolio of individual stocks (or bonds or REITS) that will outperform the market average, it turns out this is a very difficult task to do over the long run after paying the cost required to do so, especially after-tax.

In fact, this “game” of trying to beat the market is so difficult, the winning response to it is simply not to play. Those who don’t play this game and just buy all the stocks or bonds (by purchasing index funds) and accept the market return will end up outperforming 80%–90% or more of active managers over 20–30 years.

There are two reasons this strategy works so much better.

Cost: It is very cheap to get the market return but quite expensive to do all the analysis required to try to beat the market. It isn’t that active management cannot work; it is that it doesn’t work well enough to overcome the costs of doing so.
Talent: Decades ago, it was easier to outperform the market. Ninety percent of trades were made by individual “mom-and-pop” investors. Now, 90% of trades are made by professional investors with far more talent, knowledge, and computer power than you can hope to possess. It isn’t that there aren’t any talented managers; it is that there are too many talented managers. The end result of all of that talent analyzing stock prices is that the market itself becomes more and more accurate and efficient at pricing stocks.

At a certain point, it becomes wiser to simply keep your costs low and just buy them all. That is what an index fund does.

There are index funds for every asset class, and low-cost, well-managed index funds are available from several providers, including Vanguard, the federal Thrift Savings Plan, iShares, Fidelity, and Charles Schwab.

You should have a very good reason to use anything other than an index fund in your portfolio.

Need more guidance on building your own portfolio? We have everything you need here.

DIY Investing or Hire an Advisor?

Many investors, including a sizable majority of high earners, do not have the interest, knowledge, or discipline to successfully design their own investing plan or manage their own investments.

While a person intelligent enough to get into medical or professional school can develop the ability to successfully manage their own investments, they still need to develop enough interest in doing so to be successful.

Like with medicine, a commitment to at least a low level of lifelong learning is required. In addition, you will need to do some upfront learning that consists of, at a minimum, reading a handful of good investing books. In addition to some relatively easily acquired knowledge, you will also need to develop the discipline to stay the course with your plan, particularly when the market goes down.

If you are concerned you lack the required knowledge, the interest in obtaining it, and/or the discipline to properly manage a portfolio over decades, you would be wise to hire the services of a financial advisor who offers good advice at a fair price.

The most important thing is to make sure you’re getting good advice. There is no price too low for bad advice. That means you need to have an advisor with as few conflicts of interest as possible in giving you good advice.

Many people who call themselves “financial advisors” are really just commissioned salespeople in disguise. They may specialize in selling insurance products like whole life insurance or annuities—or perhaps investment products such as private REITs or loaded mutual funds.

That is not the advisor you want.

You want a “fee-only” advisor. Bear in mind that “fee-based” is not “fee-only.” If they are fee-based, they also earn commissions and their investment advice cannot be completely trusted.

You will also want to get an advisor with one of the harder to obtain credentials. Look for one of the following:

Certified Financial Planner (CFP®)
Certified Public Accountant with the Personal Financial Specialist designation (CPA/PFS®)
Chartered Financial Analyst (CFA®)

There is an alphabet soup of credentials out there, but most of them don’t mean a lot in terms of education.

In addition to education, you want someone with some experience. Do they advise a lot of clients with financial lives similar to yours? Do they have any gray hair? Have they helped clients through a bear market or two?

Bear in mind, of course, that even a fair price is very expensive, and it will have a significant drag on your returns over the years when compared to a competent do-it-yourself investor.

If your pre-fee long-term portfolio returns are 8%, and you are paying an advisor 1% of your assets under management per year, that is exactly equivalent to earning 7% a year. If you are saving $50,000 a year for 30 years, the difference between 7% returns and 8% returns is almost a million dollars (about 17% of the end portfolio value). And that fee doesn’t even stop there. If the advisor is managing your portfolio in retirement, they’ll continue to get that 1% every year throughout your retirement.

For the $4 million–$6 million portfolio that we’re discussing, that’s $40,000–$60,000 per year in fees.

Learn How to Make Your Financial Plan

Understanding How Financial Advisors Are Paid

Financial advisors charge fees using various models.

Commission

These include life insurance commissions, annuity commissions, or mutual fund loads. If you’re not sure how you’re paying your advisor or if you think your advisor is advising you for free, this is how you are likely paying them. Unfortunately, this is the worst possible way, since the worst investments have to offer the best commissions to be sold. Thus, a commissioned salesperson, even the most ethical one in the world, faces an insurmountable financial conflict of interest to provide you the advice you really need.

Assets Under Management (AUM)

The most common of a fee-based model is to charge a percentage of assets under management (AUM) each year. So, if the advisor is managing $1 million and charges 1% of AUM each year, that is the equivalent of $10,000 per year. While 1% is often considered the industry standard, there are plenty of advisors out there willing to manage assets for less, particularly as your portfolio gets larger than $1 million. Some “roboadvisors” (really smart computers backed by occasional human help) even charge as little as 0.25% per year for asset management.

Flat Fee

Doctors, lawyers, accountants, and many other kinds of professionals are paid this way. So, why not financial advisors? Can you imagine charging your patients an AUM fee? That’s bonkers, right? These are often in the range of $1,000–$10,000 per year. Obviously, the larger your portfolio, the better it usually is to pay a flat fee instead of an AUM fee.

Hourly Rate

Typically in the $200–$500 per hour range. While that seems expensive, it is often the cheapest way to get financial planning advice. This allows you to pay for just what you need.

No matter how you are paying your fee-only advisor, be sure to add up the total annual fee you are paying and then determine whether you feel you are getting that much value out of the relationship.

Summary

Developing a written financial plan is an essential task for anyone interested in being financially successful. This will require you to determine your goals, measure your savings rate, assess the tax-advantaged accounts available to you, select investments, and minimize your investing costs.

This may seem overwhelming, but you can do it. And you will thank yourself over time for getting this done today.

Next Steps

Write down an investing plan including your desired asset allocation.
If using an advisor, determine how you are paying for financial advice.
If using an advisor, calculate how much you are paying for financial advice.

Additional Investing Resources

How to Build and Manage an Investment Portfolio

150 Examples of a Reasonable Asset Allocation

How to Be Your Own Financial Advisor

How to Use Future Value to Determine How Much You Need to Save and for How Long to Reach Your Goals

5 Steps to Help You Choose the Right Mutual Funds

How and Why to Rebalance Your Portfolio How to Build Your Portfolio If Your 401(k) Doesn’t Offer Low Cost Index Funds

How to Make Sure You’re Getting Good Advice at a Fair Price

You made it to the end of the longest step! Good job. You're two-thirds of the way through bootcamp. Don't give up now. Get that investment plan written down and we’ll see you next week! You can do this!

Step 8 Sponsor

Scholar Financial Advising is a fee only, fiduciary financial advisory firm. We specialize in providing executable holistic financial advice to physicians on an hourly, flat fee basis. We do not charge an AUM fee and we do not accept commissions.

Our advisors hold at minimum a Ph.D. in finance and Stephan Shipe, the firm’s lead advisor, is also a CFA charterholder and CFP® Professional.

We work with physicians who find value in expertise, a strong advisor/client relationship, maintaining control of their accounts, and custom-built plans.

Learn more about our advising process

Schedule your free welcome call

Head up, shoulders back, you've got this.

The White Coat Investor

Step 9 – Correcting Past Financial Mistakes

If you’ve gotten to this step in Financial Boot Camp and thought that you’d made a lot of mistakes . . . take a deep breath, you’re not alone. Now is the perfect time to get back on track.

This step in Financial Boot Camp helps you consider financial missteps and how to deal with them.

Can I Skip This Step?

Do you own a whole life policy or an annuity? Have you mistaken a commissioned salesperson for a financial advisor? Are you paying more than $10,000 a year for investment advice? Do you own any investments that you wouldn’t buy again? Have you failed to max out available retirement accounts in the last couple of years? If the answer to all of those questions is “no,” then you can skip this step.

What You Need to Know About Whole Life Insurance

There are some people in this world who believe whole life insurance is the solution to all or most of the world’s financial problems.

Most of those people sell and make significant commissions from the sale of whole life insurance.

And most of those agents prefer to sell their wares to physicians more than to anyone else. In fact, it is rare to find a physician who hasn’t received a pitch to buy whole life insurance at some point, and a large number of them bought a policy, including WCI Founder Dr. Dahle (whoops).

A few years later, most physicians notice that this “investment” doesn’t seem to be nearly as good as the pitch they were given just a few years earlier.

Agents sell these products for several reasons, including because THEY want to be financially successful.

The commissions on a whole life policy are very high, typically in the range of 50%–110% of the first year’s premiums. If you bought a policy that costs $3,000 a month, the commission was somewhere between $18,000–$40,000.

Now you know why the agent was trying to sell it so hard and why they were so willing to give you “free” advice on other matters. In fact, it is often the same agent who sold you a product you actually needed, such as disability insurance.

Now, there are a few agents out there who are simply unscrupulous, and they might have sold you this policy simply to transfer money from your pocket to theirs. But most of them simply don’t know what they don’t know.

All of their financial training came from their insurance company and consisted primarily of sales techniques, not investing information. As a result of that training and years of practice, they are exceedingly skilled in selling whole life insurance to even the most skeptical.

Whole life insurance is a combination of a life-long death benefit and a slow-growing investment side account that you can borrow against, typically called the “cash value.” If you surrender the policy, you walk away with the cash value, owing ordinary income taxes on the gains in the unlikely event that you have any.

A typical whole life insurance policy is a terrible investment.

It generally doesn’t “break even” (where the cash value is equal to the premiums paid) for 10–15 years, and even if held for 50+ years, the guaranteed return for a policy bought today is only about 2%, with a projected return typically in the 4%–6% range.

If you hold it your entire life, expect your returns to fall somewhere in between the guaranteed scale and the projected scale. It is critical to understand that the “dividend rate” is NOT your expected return on the policy. The dividend rate is only applied to the existing cash value, not the entire premium paid. So, the dividend rate is ALWAYS higher than the actual return—and often MUCH higher, especially in the early years.

Buying a whole life policy—particularly when done early in your career, particularly when you still have student loans or a mortgage or when you are not maxing out your available retirement accounts, including Backdoor Roth IRAs and Health Savings Accounts—is generally a mistake.

Even though it was probably a mistake to buy it, staying with it at this point might not be the worst solution.

The poor returns of whole life insurance, mostly due to the large commissions and fees, are heavily front-loaded. If you have already had a policy for a decade or more, chances are good the return going forward isn’t too bad, and that’s the only return that matters to this decision.

In fact, Dr. Dahle owned a whole life policy for about seven years. The overall cumulative return was still a NEGATIVE 33% and luckily it was a tiny policy. That experience and other negative financial experiences are a large part of why The White Coat Investor exists today. Good things can definitely come from bad. If you have made a mistake, just move forward—you’ve got this.

For many high earners, this mistake costs them tens or even hundreds of thousands of dollars. Try not to focus on the “water under the bridge” but rather on what is likely to happen in the future.

You can hire an unbiased professional to help you evaluate whether to drop your policy, or you can do it yourself. The key is to get a copy of an “in-force illustration” from the insurance company. Then, you use the guaranteed and projected scales to calculate your return going forward.

If that return is acceptable to you, then keep the policy. If it is not, then prepare to drop the policy.

There are two considerations to dropping the policy:

You may need to buy additional term life insurance first, assuming you can still get it at a reasonable price.
There will be tax implications if there is a gain on the policy (cash value > the total of premiums paid). You will owe taxes at your ordinary income tax rate on the gains.

Tax implications is an unusual scenario, however. If you’ve already held the policy long enough to have gains, then you’ve probably held it long enough that it makes sense to keep it.

The typical scenario is a large loss. Unfortunately, the loss is not tax-deductible.

The best technique for dealing with a large loss on whole life insurance may be to exchange the cash value into a low cost variable annuity. The proceeds are then invested in an investment you would invest in anyway (such as the equivalent of a mutual fund inside the annuity), and when the value of the annuity grows back to the basis (i.e., the sum of the premiums), surrender it with no taxes due.

What You Need to Know About Annuities

Many high earners have mistaken an insurance agent for a financial advisor and bought a whole life insurance policy. Many have also purchased an annuity.

The vast majority of annuities are products designed to be sold, not bought. The commissions are also quite high, and the tax benefits are heavily oversold. They sometimes offer guarantees of one type or another, but these guarantees are usually offered at too high of a price.

There is one type of annuity, a single premium immediate annuity (SPIA), that is often used by retirees to help them spend their nest egg more efficiently. But there is little reason for someone still in the accumulation phase of their life to own one of these expensive combination insurance/investment products.

It is even worse when these products have been sold “for their tax benefits” or “asset protection benefits” to someone who owns them inside a retirement account that already has tax and asset protection!

Surrendering these annuities and investing the proceeds into low-cost index mutual funds is usually the right move, particularly if the value is close to the basis.

Like with a whole life policy, if you have a very low value-to-basis ratio, you may wish to exchange for a low-cost variable annuity and let the investment grow back to its basis before surrendering it. If you have a very high value-to-basis ratio, you may consider just holding the policy for a few more years and then exchanging it for a SPIA at some point in your 60s.

Should You Fire Your Financial Advisor?

There are two good reasons to fire a financial advisor.

If you’ve mistaken a commissioned salesperson for an advisor, you need to fire them and move on.
If you’re paying more than the going rate for financial advice, you need to fire them or negotiate a much lower fee.

The going rate for financial advice is a four-figure amount per year, somewhere between $1,000–$10,000. If you are paying more than $10,000 per year, even for good advice, you are overpaying no matter what the value they are providing is. That’s because you can get high-quality financial planning and high-quality investment management for any amount of money for less than $10,000 per year.

You have two options, and they’re not mutually exclusive.

The least expensive option is to learn to be your own financial planner and investment manager. This does require some upfront learning, some ongoing learning, some attention to detail, some discipline, and a little bit of work. But many doctors have realized that by the time they know enough to recognize a good financial advisor, they know enough to do it themselves. You can make a lot of mistakes for what it costs you to pay for financial advice and still come out ahead.

The second option is to find a lower-cost financial advisor.

There is a third option, of course. You can negotiate with your current advisor, as long as they’re giving good advice, for a much lower rate. You might be amazed how little they’re willing to work for if the alternative is to lose your business completely.

However, there is nothing wrong with using a financial advisor, as long as you are getting good advice at a fair price. You also don’t have to use an advisor forever. You can use one for a while and then take over yourself when you know enough to do so.

You can also use an advisor a la carte, helping you design your plan upfront and then checking in every year or two to make sure you’re still on track. But the key is to only pay for the services you really need and want.

If you are going to become a do-it-yourself investor, first make sure you’ve got a written financial plan and know what you are going to do with your money once you move it away from the advisor. Then, contact the institution that will be holding the money going forward and arrange for them to “pull” the money from wherever the old advisor had it held. You don’t even have to tell the old advisor unless your contract says otherwise. They’ll figure it out when they get the Vanguard rollover paperwork. It might be your first time sending this paperwork, but it isn’t their first time receiving it. If you are going to use a new advisor, they can take care of all this for you. But make sure you do a better job choosing your advisor this time.

Focus on the following when selecting a new advisor:

How they get paid (hourly rate > annual retainer > asset under management fee >>> commissions)
How much they get paid (the less the better)
What services they offer (the more the better)
What designations they hold (CFA®, CFP®, ChFC®, and CPA/PFS™ are meaningful; others may have little value)
Their experience level (any gray hair? Were they managing money in the 2000 and 2008 bear markets?)
Their investment philosophy (portfolios should be composed mostly of index funds)
Past behavior (check their ADV 2 government disclosure form for any “disclosure events”)

Find Top-Notch Advisors

Investment Should Not Look Like Collections

Some investors, particularly do-it-yourselfers, are prone to become investment collectors. Instead of first designing a coherent, simple, straightforward, intelligent portfolio, they buy a little of this and a little of that.

They may have dozens of individual stocks and bonds and a bunch of overlapping mutual funds, often with high expense ratios. Cleaning up these collections is an important part of getting your financial house in order.

The first thing to do with an investment collection, at least once you figure out what you wish you had invested in instead, is to determine where the investment is held. If it is inside a tax-protected account such as a 401(k) or a Roth IRA, great! You can sell it without any tax consequence and then move the money into your designated investments.

However, if the investment is held in a taxable account, you need to determine what its basis is. Remember, basis is what you paid for the investment. If the value is less than the basis, great! Just sell it and buy what you wish you owned. You can use those losses to reduce your tax bill. Similarly, if the value is similar to the basis, you can sell it with minimal tax consequences. However, if your value is much higher than your basis, you ought to pause and consider your options.

A great option if you frequently give to charity or would like to start is to simply donate the shares to charity. Most churches and other large charities are well set up to receive a transfer of stocks or mutual funds as a “donation-in-kind.” If they’re not, you can give via a Donor Advised Fund.

Another great option if you are already elderly is to simply hold the shares until your death. At that point, your heirs will receive a step-up in basis to the value on the date of your death. That means whatever basis you had is immediately wiped away and replaced with their current-day value. They can then sell the investments without any tax consequences.

However, if neither of those scenarios applies, there will be more work involved.

You’ll need to figure out just how much it will cost you in taxes to sell each investment and then look at each of them individually and determine if it is worth it. Sometimes, an investment isn’t ideal, but it is good enough to keep in the portfolio for tax reasons. For example, a mutual fund composed mostly of US stocks can be retained and then you would simply hold less of your favored US stock index fund than you otherwise would.

You can even build around a few individual stocks if they don’t make up too much of your portfolio. And if the tax cost isn’t too high, perhaps you should just sell it anyway and chalk up the extra taxes as your “tuition in the school of hard knocks” or the “price of your investing education.”

A good financial planner can assist you with these difficult decisions even if you plan to become a do-it-yourself investor eventually.

If you are going to do this yourself—and we certainly believe that you CAN do this—you still might need a little guidance. We recommend our Fire Your Financial Advisor course, where you’ll learn how to make a financial plan and set yourself on the path to success.

Take Advantage of Retirement Accounts

Are you maxing out your retirement accounts? A surprising number of high-income investors don’t even know about all the retirement accounts available to them. Preferentially investing in these tax-protected (and, in most states, asset-protected) accounts can save you thousands of dollars over the course of your lifetime.

Unless you’re already financially independent, make a commitment now to learn about all of the accounts available to you, and max them out every year.

Even if you aren’t saving enough to max out all those accounts, you can move that money into your retirement accounts if you have already a lot of investments in a taxable account. You can simply live off the taxable investments while directing more of your income into retirement accounts. In addition, doing Roth conversions of retirement accounts accomplishes a similar function. You’re exchanging tax-deferred plus taxable money for tax-free money.

You’re taking the next step in your future financial success. Keep up the great work!

Next Steps

Determine if you should drop your whole life insurance policy. If you should, consider doing so by exchanging the value into a low-cost variable annuity.
Unless you’re cleaning up a whole life insurance mistake or perhaps using a SPIA, stop investing inside annuities.
If you are getting conflicted advice or paying too much for advice, find and hire a reputable, reasonably-priced financial advisor. Alternatively, if you are ready to start managing your money yourself, contact the new custodian and have them move your money away from the old advisor. Need some assistance with that? Take our Fire Your Financial Course to learn how to create your own investing plan.
Evaluate your investments for any collector’s items. Sell those inside a retirement account, those with a loss, and those with a minimal gain. Develop a plan for dealing with any others.
Commit now to max out your retirement accounts going forward.

Additional Resources for Correcting Mistakes

Unbiased Overview of Whole Life Insurance

Annuities 101: What You Need to Know

How to Fire Your Financial Advisor

How to Be a DIY Investor

Financial Advisor 101: Are They Worth It?

You made it to the end of Step 9. Good job! You're 75% of the way through Bootcamp. Don't give up now. Get your mistakes corrected and we’ll see you next week!

Step 9 Sponsor

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Step 10 – Saving for College

Student loans are becoming an ever-larger burden on many households. Medical school loans are extremely high, especially when viewed in light of many concerning trends in physician reimbursement. Non-physicians are also encountering life-altering levels of student loan debt burden.

Saving for a child’s education is a consideration for many families, and by virtue of their high income, a physician's family situation is likely to differ significantly from that of the average student's family.

Most families will fill out a Free Application for Federal Student Aid (FAFSA) or the similar College Scholarship Service (CSS) application and discover a difference between the parents’ Expected Financial Contribution (EFC) and the cost of attendance at their chosen school. That is not the case for the typical children of physicians.

College financial aid isn't likely for high-income families, so if contributing to your child’s education is something you would like to do, saving for college will need to be a key part of your financial plan.

Can I Skip This Step?

Have you started saving for the college educations of your children? Are you confident that your plan is highly likely to enable you to reach your college goals? If so, you can skip this step.

The Four Pillars of Paying for College

When it comes to paying for college, consider building your plan on four pillars.

School selection
College savings
The child’s contributions
Your cash flow

There are two things that you should notice about those four pillars.

First, as a physician or other high-income professional, you need to realize that it is unlikely that your child will qualify for any need-based financial aid.

Second, there is no pillar marked “debt.” There is no reason that you or your child needs to borrow for undergraduate education.

While one family might lean more on one of the pillars than another, there is no excuse for a high-income professional family to actually need to borrow for college.

Choose the Right School

Most 17-year-olds need significant parental input in choosing a college. They simply make dumb decisions, like choosing a school because they like the buildings and school colors or because they want to go to the same school as a friend.

A teenager doesn’t understand the difference between $10,000 and $100,000. It’s all Monopoly money to them.

Value matters, and the more expensive the purchase, the more it matters. The annual college ranking list often shows two schools right next to each other with one school costing 4–8 times as much as the other.

Choose a school that you and your child can afford to pay for without debt. There will be plenty of opportunity for that if they decide to go on to professional school.

Saving Up for College

Some parents try to save up the entire cost of a college education in advance. In fact, some well-to-do parents start saving even before the child is born or they frontload the savings shortly after birth.

It is entirely possible to be done saving for college long before the child enrolls, but most have too many other competing uses for dollars to do that.

If you are going to help your children pay for college, you might as well do so in a way that reduces your tax burden.

You can save for a child in their own investing account, typically called a Uniform Gift for Minors Act account (UGMA), but that requires you to give up control once they turn 18 (or 21, depending on the state), allowing them to spend the money on anything they like.

A better choice is to use a college-specific savings account.

A Coverdell Education Savings Account (ESA) is one option, but it’s hampered by a low annual contribution limit (just $2,000 per year per beneficiary under current law, and potentially going away completely).

A better choice for most is a 529 account. These state-specific accounts have much higher contribution limits ($17,000 per year per parent, as of 2023) and can even be front-loaded with a five-year contribution ($85,000 single, $170,000 married in 2023).

In addition, they often come with a state tax deduction or credit.

Both ESAs and 529s allow the money invested to grow in a tax-free manner, and as long as the money is spent on legitimate education expenses, it comes out completely tax-free. In addition, the parent remains in control of the money in ESA and 529 accounts.

If one child decides not to go to college at all, the money can be rolled over to another child’s account.

Considering Child’s Contribution to School Costs

If your child has to sacrifice and work for their education, they will appreciate it that much more. Consider how your child can contribute to their own education.

This could be in the form of merit-based scholarships, the child’s own savings (which may go into the 529 as well), summer work, and a part-time job during the school year.

Some parents fear that having their children work will cause their academic performance to suffer, but when physicians are surveyed, the majority of them worked during their undergraduate years.

Working during undergraduate years seems unlikely to have a dramatically negative effect, and the effect may even be positive.

Some work experience makes them more attractive to future employers and certainly gives them valuable experience managing money and understanding the value of a dollar.

If that means they miss a few keg parties, that’s probably not a bad thing.

Managing Cash Flow

Most high-income professionals are still working, at least part-time, while their children are in college. They can assist using their current cash flow. A doctor grossing $200,000 a year can certainly afford to pay for some of the college expenses as they go along.

For example, if the annual total cost of attendance is $25,000, and the child has a scholarship worth $5,000, earns $5,000 during the summer, earns $5,000 during the school year, and gets another $5,000 a year from parental contributions, the parents’ college savings account need only total $20,000 to allow the child to get through undergraduate without debt.

If you manage to save up more than that, they can go to a more expensive school, or the remaining amount can be put toward their graduate or professional school.

Which 529 to Use?

The 529 system is one of the best programs the government has ever put in place.

It forces states to compete with one another for investor dollars, and that competition has caused prices to fall, investment options to improve, and tax benefits to increase over the years. There are now many states with excellent programs.

The first place to start is with your own state’s program. If your state offers a tax deduction or credit, use your state’s plan, at least up to the amount where the deduction or credit is maximized.

If your state doesn’t offer a state income tax benefit or if you already received the maximum, consider going with another state’s plan. The Utah, Nevada, and New York 529 plans are always found in the top-5 of any rank list for best 529s.

529 Plan Rankings

How Much Money Do You Need to Save?

This is a very personal question. It really comes down to how expensive of a college you are willing to pay for, how much you can put away for college, and how much can be covered by the student and your cash flow.

However, it is a good idea to have a goal and work toward it. That goal can be a “defined contribution” goal, or it can be a “defined benefit” goal.

With a defined contribution, you contribute a set amount each year, such as the amount that maximizes the available state income tax deduction.

With a defined benefit goal, you decide how much you want available in the account when your child reaches college age. Either way, you can use a financial calculator or a simple spreadsheet to make projections.

For example, consider a family who plans to save $4,000 a year from birth to age 18 because that is the amount that maxes out their state income tax benefit. How much can they expect to have in the account at age 18? The answer to this is reached with a Future Value Calculation.

You already know three of the four variables in the equation, so you just need to make an assumption about what the return of the account will be. We typically use 5% real (after-inflation) for calculations like these.

Plug this formula into Excel or a similar spreadsheet:

=FV(5%,18,-4000,0) = $112,529

That $112,000 figure should allow you to withdraw close to $30,000 a year for college expenses. In the formula, the 5% is the assumed rate of return, the 18 is the period or number of years of contributions, the 4000 is the annual contribution (note it is always a negative number), and the 0 is the amount of money you have saved for college already (also a negative number).

If you’ve decided to use a defined benefit goal, you use a related but similar formula, Payment (PMT), which gives you the amount you need to save each year. In this case, let’s assume you only have 10 years left to save, you already have $10,000 saved, you expect a 5% return, and you want to have $150,000 in the account on the day the child enrolls.

How much do you need to save each year?

=PMT(5%,10,-10000,150000)= – $10,630 per year

In this case, the 5% is the rate of return, the 10 is the period or years left to save, the -10000 is the amount you now have saved (always negative), the 150000 is how much money you want at the end (always positive), and the -$10,630 is the amount you need to save each year (always negative).

If you are subscribing to the defined benefit method and your expected returns don’t materialize, you may need to contribute more to the account to reach your goal.

How Aggressively to Invest College Savings

There are two schools of thought when it comes to investing your 529.

The first school of thought, which WCI leans toward, suggests you invest aggressively. The consequences of a shortfall are so much less dramatic than in retirement accounts.

If market risk shows up, simply make up the difference with the other three pillars. In fact, there is no rule that says you have to use your college savings evenly over all four years.

If there is a big bear market the year your kid enrolls, you can cash flow more of it while you let the 529 recover for their junior and senior years. On the other hand, if your aggressive investments pay off, you can either cash flow less, they can go to a more expensive school, or you can save more of the 529 for professional school.

The other school of thought is that you shouldn’t take more risk than you must. Investors who subscribe to this school gradually make their investments less aggressive as they approach enrollment.

In fact, many 529s offer an option to do this automatically. This may be a good approach for an investor who plans to pay for all or most of the education using money saved in advance or someone who plans to be retired and unable to help much from current cash flow.

Whichever school of thought is right for you, 529 investments will likely make up a major pillar of your college plan.

Occasionally, you will run into someone who advocates an alternative method of paying for college, such as using whole life insurance or real estate investments.

Be careful . . . those advocating for life insurance are generally selling the product, and they can be readily dismissed. Real estate investments can be a viable option, but they do require significant expertise (and often additional risk) compared to simply investing in index funds inside a 529 account.

Next Steps

Open a 529 for each of your children. First, read up on your own state plan (google your state name combined with the words “529 plan” and determine if your state offers an income tax benefit and how much it is). If there is no benefit, open accounts with the Utah 529 found at https://my529.org.
Determine your goal for college savings. This should either be a defined contribution (how much you will contribute each year) or a defined benefit (how much you will have in the account when the child graduates from high school).
Share your plans with your teenage children. Emphasize the importance of their contributions.

Additional Resources on Saving for College

Best 529 Plans: Reviews, Ratings, and Rankings

3 Reasons Why You Can Take More Risk with a 529

How to Use Real Estate to Pay for College

Whole Life Insurance Is Not a Great Way to Pay for College

You made it to the end of Step 10! Get those 529s open this week. You can do this, and WCI is here to help!

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Head up, shoulders back, you've got this.

The White Coat Investor

Step 11 – Passing Assets On and Avoiding Probate

Although the topic of estate planning often evokes the image of an old rich relative trying to control their heirs from the grave, there are critical aspects of estate planning that should be taken care of now.

Just about everyone needs to do at least a little estate planning. Certainly, if you have acquired significant assets ($20,000+) and care about who they go to when you die, you need an estate plan.

Likewise, if you have even one child, you need to do at least some estate planning.

Can I Skip This Step?

Do you have a will? Do you have a revocable trust? Have you met with an attorney who specializes in estate planning within the last five years? Are you sure you have the right beneficiaries listed on all of your insurance policies and investment accounts? If the answer to all of these is yes, then you may skip this step.

The Three Purposes of Estate Planning

There are three reasons why people engage in estate planning.

Control where their minor children and their assets go when they die.
Minimize the amount of assets that go through the probate process.
Reduce both estate taxes and income taxes.

It can be a simple and inexpensive task, or it can require the assistance of costly specialists to complete properly—all depending on your individual situation and desires.

Designate Beneficiaries

Most of your accounts can have primary and secondary beneficiaries. This includes retirement accounts, insurance policies, annuities, bank accounts, and investment accounts. You may also be able to use a “pay on death” designation that avoids probate as well. Some families simply add the heirs’ names to their accounts.

A similar technique can be used with real estate by adding the heirs to the title. However, you need to use extreme caution with this technique. Not only can the heir clean you out before you die, but the heir may end up with some undesirable tax consequences. For example, with real estate or an investment account, the heir will lose the step up in basis at death that they would have received if the deceased were the only owner.

Revocable Trusts

Revocable means you can take assets out of the account at any time. A revocable trust has little asset protection benefit, so its main use is to pass assets to heirs without having to go through probate. A trust allows you privacy (no one else gets to know about what you owned), and it allows heirs to get their inheritances immediately. It may even be cheaper than having a will go through probate.

When should you get a revocable trust?

Well, before you die. There is some expense and hassle involved, and chances are good it will have to be adjusted a number of times during your life, so it doesn’t need to be a priority in the early years of your career.

But by mid-career, you will want to sit down with an estate planning attorney in your state to get it done.

What Documents Make Up Your Estate Plan?

There are a number of tasks required for estate planning, but the main one is the preparation of various legal documents that come into play at the time of your death or incapacitation.

Will

Officially known as a last will and testament, it’s usually the first estate planning tool that most people need. If people die “intestate” (without a will), their assets are distributed in accordance with state law—usually to the spouse, or, if not applicable, to the children. If you want your assets to be distributed in some other manner besides to the next of kin, you need a will. Another important function of a will is to name someone to care for your children in the event of your death. Even a medical student with a hugely negative net worth needs a will if they have children.

Living Will/Advanced Medical Directive/Medical Power of Attorney

There is one type of will that most doctors are familiar with, and that is a living will. This generally dictates your wishes in the event you become unable to make your own decisions about your healthcare. It also generally names a healthcare proxy who will make medical decisions for you when you cannot. Even a “Do Not Resuscitate Order” is one form of a living will.

Durable Power of Attorney

Even if you skip the living will and medical power of attorney, it probably is worth naming a trusted family member, friend, or advisor to manage your finances when you can't. We've all known elderly folks who have done stupid things with their money that they would have never done 10 or 20 years earlier. Power of attorney documents can be general (covers everything) and life-long (durable), or they can be limited in both time and scope. For example, when traveling and leaving kids with grandparents, you can provide them with a limited power of attorney to take care of them. Remember your financial and medical power of attorneys do not have to be the same person.

Letter of Intent

While this is not a legal document, your loved ones will likely appreciate this document. It is simply a letter from the deceased to loved ones or the executor explaining any information you want them to know. They can include personal messages or just be simple instructions.

They often include information like:

Personal effects and their location
Passwords for financial accounts, email, social media, etc. (Best to use a service like LastPass and then this letter need only contain the LastPass password, but should obviously be kept very securely.)
Funeral wishes
Financial accounts
Insurance policies
Beneficiary contact information (not generally in the will)

Revocable Living Trusts

This is designed to avoid probate, not to avoid taxes, or to protect assets from creditors. The money and assets are placed into the trust, and at the time of your death, the trustee distributes the assets to your heirs in accordance with the trust document. No probate is required. Of course, the assets in the trust are still subject to estate tax. The main benefit of a revocable over an irrevocable trust is that you can control and use the assets if you want, and you can “revoke” them at any time.

Irrevocable Living Trusts

In addition to avoiding probate, these trusts also have the advantage of avoiding estate taxes, and they often avoid income taxes. This is because when you place assets into an irrevocable living trust, you are essentially giving them away. You can no longer use the assets or the income they produce. Taxes on the income must be paid by the trust or by the heirs (which may be advantageous if they are in a lower tax bracket). Only money you know you will never need should be placed into a trust like this.

Keep in mind that irrevocable trusts are also excellent asset protection tools. The asset no longer belongs to you, so your creditors cannot seize it. Revocable trusts do not have this advantage.

Estate Tax Reduction

The final reason to do estate planning is to minimize estate and inheritance taxes. The typical high-income professional can eliminate these completely. It is also important to avoid making mistakes that increase the income tax burden of your heirs unnecessarily.

Most high-income professionals will never have to pay federal estate tax. That’s because there is an exemption equal to $12.92 million ($25.84 million married) in the year 2023. If your net worth at death is less than that, you can leave it all to heirs without paying any estate taxes. Those numbers are indexed to inflation, so they will continue to rise.

Many states assess their own estate and/or inheritance taxes and often with far lower exemption amounts, sometimes less than $1 million. So, even if you will not owe federal estate taxes, it may be worth taking a few steps to reduce your state estate tax burden if this applies to the state you live in.

If you are coming up against the estate tax exemption limits, the primary technique used to reduce that tax burden is to give your stuff away before you die.

You can give any amount to charity (and get significant income tax benefits for doing so), and you can give up to $17,000 per year [as of 2023] to anyone you like without using up any of the estate tax exemption. Your spouse can also give up to $17,000 per year.

This strategic gifting technique can really add up. For example, if you are married, have three children that are all married, and they each have three children that are all married, you could give away $816,000 per year [in 2023] without using up any of your exemption.

If you don’t want your heirs to be able to use the money until after you die, you can put it into an irrevocable trust, which removes it from your estate and protects it from your creditors. Of course, that comes at the cost of not being able to use it yourself!

Since trusts are taxed at relatively high rates, many who use an irrevocable trust for this purpose use very tax-efficient assets such as stock index funds, municipal bonds, or even cash value life insurance in the trust.

Hire an Attorney

Estate law is state-specific, so you need an attorney in your state. While very basic estate planning can be a do-it-yourself project using an online attorney/service, most high-income professionals will likely want to sit down across from a real, live attorney to get this done.

This attorney helps you to understand the process, drafts up your documents, answers your questions, and updates the plan periodically as needed.

They can also serve as a trustee and resource for your heirs after your passing.

Attorneys generally charge by the hour, perhaps $250–$350 per hour. So, the cost of your estate planning depends on the complexity of your estate. If your situation is really complex, it will cost you thousands or even tens of thousands to form trusts, family-limited partnerships, and more. But a simple will or power of attorney may cost less than $300.

The initial meeting is often free, so feel free to shop around a bit. It can help you keep costs down if you did your research, figured out exactly what you want before you arrive, and collected all relevant information and documents.

Your goal is to find an attorney that is competent, experienced, and a good fit. You can check to make sure they're in good standing with the bar and that estate planning is what they spend the majority of their time doing. Like with a financial advisor or a doctor, there is some value to a few gray hairs.

WCI keeps a short list of recommended attorneys for your estate planning and asset protection needs.

Recommended Attorneys

Next Steps

Get a will.
Look up your state’s estate and inheritance tax laws.
If you are over 50 or have a net worth of $1 million or more, make an appointment with an estate planning attorney.

Additional Estate Planning Resources

Estate Planning 101

The Importance of Revocable Living Trusts

How Do Irrevocable Life Insurance Trusts Work?

Revocable vs. Irrevocable Trust Pros and Cons

You made it to the end of Step 11! Get that estate planning done, and we’ll see you next week. You can do this, and WCI is here to help.

Step 11 Sponsor

After working with a few thousand physicians, Anderson Advisors have the data and the experience to provide you with the tools you need to prosper in your business, protect your assets, and preserve your wealth. Not only do they help you design a plan to relieve future risks, but they also specialize in tax reduction strategies to build wealth faster.

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Step 12 – Protecting Your Hard Earned Money

Asset protection is the murky underbelly of personal finance.

Most personal finance blogs never talk about it and most people really don't spend much time worrying about it at all. Doctors, however, worry about using the best asset protection strategies a lot.

In fact, a ridiculous percentage of continuing medical education credit is extended each year for what really boils down to risk management techniques rather than actual patient care or practice improvement.

How many times have you heard in a lecture about how and why you should document a visit in a particular way?

Exactly.

Is that really helping the patient in any way? No, it's just CYA medicine. This can be a scary topic, but read on and let’s make asset protection more manageable.

Can I Skip This Step?

Do you have your house titled properly? Are you maxing out retirement accounts? Do you know your state’s asset protection laws? If so, you can skip this step.

Have questions?

Are You Too Paranoid About Lawsuits?

Doctors who manage to accumulate some wealth often become paranoid about protecting it from potential creditors. Unfortunately, that occasionally leads them to do dumb things.

A better understanding of your true risks is useful to eliminate the paranoia and allow you to make more rational decisions.

Many consider the biggest liability for most high-income professionals, particularly physicians, to be professional malpractice. This fear of being sued not only drives the expensive and sometimes harmful practice of defensive medicine, but it also leads to expensive, complex, and sometimes ineffective asset protection plans.

Consider the facts:

The risk of a physician being sued is 7.6%, although it ranges from 19% for neurosurgeons to less than 3% for psychiatrists.

The risk of there being a payout from that suit is 1.6%. While these numbers are from a 2011 article in The New England Journal of Medicine, they have fallen (along with malpractice insur1ance rates) in the years since publication.

Of that 1.6% where there is a payout, the vast majority are settled prior to trial for an amount less than policy limits.

Of those that go to trial, the doctor typically wins, but even when they lose, the payout is generally less than policy limits. And if it is above policy limits, it is usually reduced to policy limits on appeal.

In reality, it is extremely rare for a physician to ever lose any amount of personal assets due to malpractice.

Despite knowing hundreds of doctors . . . can you think of a single one who lost personal assets?

Don’t let this overemphasized risk force you to create an unreasonable and expensive asset protection plan.

Asset Protection Through Date Night

In fact, you are far more likely to lose a significant portion of your assets to your spouse than you are to the thousands of patients you will see in your career. There is a direct asset protection application in the timeless advice of “One House, One Spouse.”

Weekly date night is far better asset protection than a complicated system of family limited partnerships, limited liability companies, and overseas trusts.

On that same note, if you are marrying later in life (after accumulating some assets), remarrying, or blending families, it is essential to get a prenuptial agreement. You should also be careful using the classic technique of putting assets in the name of the non-physician spouse.

Establish a Reasonable Asset Protection Plan

The best asset protection plans are simple and relatively inexpensive. Your first line of defense is liability insurance. This includes professional malpractice insurance (going bare is usually a mistake) and dramatically cheaper personal liability insurance.

Your auto, homeowner’s, and renter’s insurance policies generally contain liability insurance that will cover all kinds of non-professional liabilities.

Umbrella Insurance

Unfortunately, too many people, including high-income professionals, are carrying liability limits that are way too low. Your state may only require you to carry $50,000 in auto liability insurance, but that’s not even enough to replace the Tesla you could hit, much less the cost of medical treatment and disability for the occupants.

Raise those limits into the hundreds of thousands and then stack an “umbrella” policy (excess personal liability) on top of them.

A total liability limit of $1 million–$5 million is appropriate.

The good news is that an umbrella policy probably only costs 1/100th as much as a comparable malpractice policy. For example, a $1 million malpractice policy runs something like $16,000 a year, but a $2 million umbrella policy only costs about $500 a year.

Asset Protection Law Varies by State

After insurance, the key is to realize that asset protection law is very state-specific. Techniques that work in one state may not work in others.

You need to understand what assets are protected in your state and to what level. For example, some states protect all of your home equity, and others protect none.

Some states offer the same protection to your “ERISA” retirement accounts (like 401(k)s) as your IRAs, while others offer less protection to IRAs. Some states protect life insurance cash value and annuities, and others do not. Before doing anything else, review your state laws. The easiest way to do this is with The White Coat Investor’s Guide to Asset Protection book, which gives you techniques you can use to safeguard your money while also providing the most comprehensive list of state-specific asset protection laws ever published.

Get Asset Protection Book

Retirement Accounts

As a general rule, retirement accounts receive a great deal of protection in nearly every state. Thus, maxing out your retirement accounts is not only a great move from a tax-, investment-, and estate-planning perspective, but also from an asset-protection perspective. However, if your state offers significantly less protection to IRAs when compared to 401(k)s, you may wish NOT to roll over a 401(k), even if you could get slightly lower fees and slightly better investments.

Homestead Rules

Homestead laws are laws that protect home equity and are also highly variable. In states like Texas and Florida with very strong homestead laws, it can make sense to preferentially pay down a mortgage instead of investing in a taxable account. In a state like Utah, which only offers $40,000 of home equity protection for married couples, that move may make less sense from an asset protection standpoint. In fact, there are some situations where it could even make sense to take out a home equity loan and put the proceeds into a protected vehicle.

Life Insurance and Annuities

While you now know the problems with investing in life insurance products, like whole life insurance and annuities, these vehicles are offered significant asset protection in some states.

If asset protection is a bigger concern to you than your investment return, you may wish to place a portion of your money into these vehicles.

Separate Toxic Assets

Another important principle of estate planning is to separate toxic assets from non-toxic assets. A toxic asset is one that is likely to bring significant liability, like a rental property or a boat.

If that asset can be justified as part of a business, a common technique is to place it into its own limited liability company (LLC) or corporation. In many states—and particularly if there are multiple members or shareholders in the corporation—this technique reduces both internal and external liability.

Internal liability is liability resulting from the asset itself, such as someone slipping and falling on the sidewalk at an apartment building you own as an income property. Even if this liability exceeds the insurance limits, your losses are limited to the contents of the LLC.

External liability refers to a creditor from something else in your life (such as your professional practice) being able to seize the contents of the LLC. In many states, a creditor of a multi-member LLC is limited to a charging order. That means they can’t get the assets unless the LLC chooses to distribute them.

But since an LLC is usually a pass-thru entity tax-wise, you can actually send the creditor a tax bill without giving them any assets! This sort of protection will often induce a creditor to settle for policy limits rather than pursue a charging order.

There are hassles and expenses associated with forming LLCs and corporations, and these must be weighed against the protections available. But the strongest protection comes from having each toxic asset in its own LLC. Some states offer “serial LLCs” that offer the same protection for a lower price.

Some real estate investors also compromise by placing two or three properties into a single LLC.

Tenants by the Entirety

Another slick trick if you are married and your state allows it is to title your home as “tenants by the entirety.” This phrasing means that you, personally, own your entire house AND your spouse, personally, owns your entire house.

If there is a lawsuit judgment just against one of you, they cannot take your house away because your spouse owns the whole thing. In some states, you can also title taxable investment accounts and bank accounts in this manner.

Giving Money Away

Another great method of asset protection is simply not owning anything.

The less you own, the less a creditor can get.

There can be a lot of creativity in this department. But the bottom line is that if you have a great deal of liability in your life and a family member does not, and you were going to give them an amount of money or an asset anyway, then you might as well do it now.

If you want to delay the gift, use an irrevocable trust. At that point, it is no longer your asset and can’t be taken by your creditor.

There are limits to this. You can’t give something away AFTER you incur a liability, and some state laws even offer a one-year look-back period, but for the most part: if you don’t own it, they can’t take it.

Avoid Complex Asset Protection Plans

Many novice investors want to maximize asset protection, estate planning, investment returns, privacy, and convenience while minimizing taxes.

Unfortunately, there is no magic bullet that does all of these things, although retirement accounts seem to come closer than anything else. As you gain more asset protection, you are often giving up something else such as investment returns or convenience.

There are firms and attorneys that specialize in complicated asset protection plans that involve family limited partnerships, multiple LLCs, and even overseas trusts. There is a great deal of controversy in this area with regards to what works and what doesn’t. A good general rule is that if you can’t stand in front of a judge and give them a good reason for why you have this setup besides asset protection, it probably isn’t going to hold up.

The key is to have a business or estate planning reason that also happens to improve your asset protection. Obviously, there is little reason to even consult with an attorney about this topic until you have significant assets that aren’t protected in some other way.

Luckily, we have another possible solution. The White Coat Investor's Guide to Asset Protection is different than any other physician finance book you’ve ever read. It’s so detailed that Dr. Jim Dahle uses it to answer reader questions (and he’s the one who wrote everything in it!). If you need to protect your wealth (and you most certainly do!) and keep your peace of mind, pick up the book today!

Simple Ways to Reduce Your Liability

Practice good medicine and be nice to patients and their family members.

Don’t engage in criminal behavior. Perform careful maintenance of rental properties or don’t own them at all. Avoid toys like boats, motorcycles, ATVs, snowmobiles, trampolines, pools, dangerous breeds of dogs, second homes, and race cars.

Lock up firearms and ammunition. Treat your neighbors kindly. Drive the speed limit, use a designated driver, and practice defensive driving.

Obviously, a balance needs to be struck, so practice moderation in all things.

Next Steps

Get an umbrella policy.
Review your malpractice policy and keep a copy on file.
Make sure your home is titled “tenants by the entirety” if you are married and your state allows it.
Look up your state’s asset protection laws.
Max out your retirement accounts before investing in taxable accounts.

Additional Asset Protection Resources

Asset Protection Basics for Doctors

How Do Irrevocable Life Insurance Trusts Work?

Controversial Portable Offshore Asset Protection Trusts

You did it! You made it to the last major step of the WCI Bootcamp email series. You’re on the right path to building the financial life of your dreams. You will receive just one more email in this series that will empower you to stay on the road to financial success. You can do this and The White Coat Investor is here to help you all along the way.

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If you would like to increase your knowledge about these topics and get a step-by-step guide to designing your own written financial plan, consider taking the WCI Online Course entitled “Fire Your Financial Advisor.” Spending eight hours with Dr. Dahle is one of the best investments you’ll ever make. It includes video, screencasts, worksheets, quizzes/tests with full explanations, and more!

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Conclusion – Committing to Your Financial Well Being

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