Being a Finance Buff with Harry Sit – Podcast #147

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

Dr. Jim Dahle:
This is White Coat Investor Podcast Number 147, Being a Finance Buff with Harry Sit. I hope you're as excited about WCICON20 as I am. It's coming up here in just a week or two. We're really looking forward to it. It's been crazy around here getting ready for it. It's going to be a great time with almost 800 people there and all kinds of awesome speakers. I think we have 37 faculty members at this conference and there're going to be some awesome talks and some great networking going on. We even have some great sponsors for the conference. So those of you coming out, I hope you're getting excited. We're going to have a great time in Vegas.

Dr. Jim Dahle:
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Dr. Jim Dahle:
Our quote of the day today comes from an anonymous Boglehead who went by the name Telemark on the forum who said, “I don't want the smartest guys managing my money. I want the luckiest ones. But since I don't know who those will be, I'll settle for the ones who skim the least off the top.” Thanks so much for what you do. I know your job is not easy. I know that you put in a lot of hard hours and you spend a lot of time and probably money preparing for this career. Sometimes nobody out there is telling you thanks for doing it.

Dr. Jim Dahle:
So I wanted to be the one today, if I'm the only one all week that you hear saying thanks for doing what you're doing, at least you're hearing it from one person. So if you had a hard day, if you had this some bad patient outcomes, if you just had some people making your life miserable, know that what you're doing matters and that it's important. When you sit back about it and you realize that you are living your dream, it doesn't seem so bad that there's a bad day every now and then.

Dr. Jim Dahle:
If you like community, we've got three places here at the White Coat Investor where you can contribute to our community. The first one is the White Coat Investor private Facebook group. White Coat Investors is what it's called. There's over 34,000 people in there, sharing experiences, giving advice, just building a community and supporting each other to become financially independent. If you like Reddit, we also have a White Coat Investor subreddit. r/whitecoatinvestors is our subreddit there. It's all the usual format of Reddit, with minimal, if any, ads and promotion going on there like on most of Reddit. It's a chance to interact in that format with your fellow White Coat Investors.

Dr. Jim Dahle:
Then of course, on whitecoatinvestor.com, we have a forum where we have both high income professionals as well as financial professionals interacting back and forth. You can have an anonymous username there as well. That's a great thing to check out as well, forum.whitecoatinvestor.com. We just revamped it a few months ago. It's even more usable now. We've got a great community that continues to grow there. We have a pretty awesome interview I'm excited about today. Let's get Harry Sit on the line and we'll talk some more about it.

Dr. Jim Dahle:
Okay, on the podcast today, we have Harry Sit who is a bit of an idol of mine. I don't want to embarrass him too much. But for those of you who've been around for a long time, you may have heard the story that when I was considering getting into blogging, I decided to reach out to the only two people I knew who had financial blogs. I don't claim to have ever been really a blog reader that read tons and tons of blogs out there. But I reached out to two people.

Dr. Jim Dahle:
I reached out to Mike Piper, who blogs at The Oblivious Investor and I reached out to Harry Sit, who blogs at The Finance Buff, and just kind of asked them what they thought about me getting into blogging as a business in the niche of reaching doctors. They were both very encouraging and gave me a couple of quick tips that really got me off the ground and running. Now having gotten that same email dozens and dozens of times over the years, I now have even more appreciation for you reaching out and helping me get started with the White Coat Investor, Harry. So welcome to the White Coat Investor Podcast.

Harry Sit:
Thank you for having me. You're very welcome. Whatever I did back then was just a small catalyst. You really hit it out of the park yourself.
Dr. Jim Dahle:
It's certainly been a fun journey, but I got to give credit where credit is due. Without that initial encouragement, I'm not sure there ever would have been a White Coat Investor. So thank you for that. Now a lot of people on this podcast may not be familiar with your work. You've been blogging quite a while, I think, 13 years or so at The Finance Buff. They can find that at thefinancebuff.com, they can also find your book, Explore Tips, which can be bought on Amazon as well. If they want to learn more about you and your work, that's where they can do so.

Dr. Jim Dahle:
You have a remarkable story. I don't really see you blog about it very often but I understand that both you and your wife are immigrants who came to the US in your 20s with just a few hundred dollars in your pocket. Never had a particularly high paying job but still reached financial independence in your 40s. Can you tell us that story? Can you tell us what your upbringing was like and kind of bring us up to the present?

Harry Sit:
Sure. My wife and I came to the US in our mid-20s for graduate school. We didn't have any family in the country. As you said, we only had a few hundred dollars in our pockets. We were able to afford it only because the schools had funding for professors to hire graduate students as assistants. As part of the package, graduate student assistants would get a small salary. I think mine was like $900 a month for nine months, nothing in the summer. But the big deal, the student assistants wouldn't pay tuition so we didn't have to pay and then we got our education.

Harry Sit:
When we first came, we didn't really know how the financial system worked in this country. We had to learn what is a W-4, how does a checking account work, how does a credit card work and how to do a tax return. But also because we had a very small salary, we were forced to stay on budget. I'm on $900 a month. I think $900 for me and about $1,000 for my wife. That was 25 years ago, but even then, translate into today's dollars, maybe 15k per year for each of us. After we graduated, my first job was in an Employee Benefits department at a very large, unionized traditional manufacturing company. Well, part of my job was to go to the new hires every two weeks and present to them the company's benefits.

Harry Sit:
Traditional companies have very good benefits. I had to tell them about their pension, their 401(k), their life insurance, disability, health insurance, medical, dental, vision, flexible spending accounts and everything. Again, I was forced to learn because that was my first job as well. I didn't have any of those benefits. I didn't know how pension worked, how 401(k) worked, how the mutual funds in the 401(k) worked or even what are mutual funds. But all those learning had a great side effect. It made us really pay attention to all these personal finance things. Both of us maxed out our 401(k) since the first year of our first job. Those early savings really, really helped.

Harry Sit:
Also, because we didn't know any better, we started as graduate students and by the time we get our job, we still just continued our lifestyle. We didn't really know the “good life.” That was, I would say, by accident. As our career progressed, we inflated our lifestyle naturally, but we inflated our lifestyle less than our income. As a result, we saved more and invested more. We also had a very good sequence of returns. You know, the so-called lost decade, that's between 2000 and 2009, those years, the stock market didn't go anywhere, but it didn't bother us again, by accident because our income back then was lower and then our saved sum is still low.

Harry Sit:
So even during the first dot com bubble, stock market dropped 50% but we didn't have much money. So whatever small saving got cut in half, but it's okay. 2009 still, we didn't have much money compared to what we have now. After that, we had a larger amount saved and then our salaries were also higher, so the better returns really helped. Low return in the early years would be very bad for retirees, but it would be very good for the savers.

Dr. Jim Dahle:
Can't beat it. That is a nice sequence of returns, isn't it?
Harry Sit:
Indeed. Again, we were very lucky. My wife really loved outdoor sports. When she was working, she had to juggle between work and going to the mountains. She loves climbing mountains and mountaineering stuff. Because we have more money and then she quit in 2015 just so she has more time to do her stuff. I continue working for a few more years. In 2018, I also quit my job and became 100% self-employed.

Dr. Jim Dahle:
That's pretty awesome. Let's talk a little bit about some of the self-employment. The Finance Buff has been around for a long time, for 13 years. That's basically forever in the blogging world. Can you tell us about its origin and journey?
Harry Sit:
Sure. As I said, I had those early forced learning. I had to learn all the personal finance stuff in order to do my job. Because of that, it gave me some interest and knowledge. Back in 2006, I started a small blog on blogger.com just to share some personal learning. Later, I moved it to my own domain. My basic formula is just I have a personal finance decision to make. Whatever that is, I figure out what's the best for me and then I share it. That's basically it. I always treat it as a hobby. I had a demanding job. I was already busy enough, I didn't want a second job.
Harry Sit:
I didn't really have any quota for how many numbers of posts I have to post per week or a monetary goal, how much I have to earn. So I just posted whenever I felt like, whenever I had a new thing in front of me. I freak it out, I write it and that's all. I also didn't really push hard on marketing, doing guest posts or doing social media. Again, all of those feel like more like work to me. I already have a job, I didn't want a second job.
Dr. Jim Dahle:
That's a great description of it. That is a fantastic description. It is work. Absolutely. The fun part is writing the post, isn't it?
Harry Sit:
It is. Also because I didn't treat it as a job, I didn't quit. So it's been around for 13 years. Unlike some other bloggers say, they didn't make enough money and it feels like just a drag. I'm just whatever interests me, I write about it. That's all.
Dr. Jim Dahle:
Now you did have some income from the blog over the years, I recall, but I think you recently dropped all of your blog's affiliate relationships and affiliate marketing. How come?
Harry Sit:
I dropped it because I read a blog post by Jonathan Clements. I think you had Jonathan Clements as a podcast guest.
Dr. Jim Dahle:
I remember the post you were talking about as well.
Harry Sit:
Yeah, yeah. He wrote a blog post after he learned someone that he knew, someone on the radio recommended investment program, and that investment program turned out to be a Ponzi scheme. That person on the radio didn't necessarily know it was a Ponzi scheme but the person promoted this program, because he was motivated by the affiliate commissions he was earning. Jonathan did some soul searching and decided that he wanted to be true to his readers, he wanted to be true to himself.
Harry Sit:
So that blog post resonated with me. I didn't want to have whoever read my stuff to have any doubt of my motives and I also didn't want to have some lure by the advertisers to make me write something that I didn't necessarily want to write for lack of money. Again, I didn't want to make it a second job so I might as well just write whenever I want, write whatever I want.
Dr. Jim Dahle:
You have no idea how attractive that sounds to me in those days when I don't feel like working on the White Coat Investor.
Harry Sit:
Exactly. Also, because I started my own service, if I'm going to sell, I'd rather sell my own service rather than sell for someone else.
Dr. Jim Dahle:
Yeah. We'll get into that a little bit later. But that's awesome. That's pretty exciting and it's fun. It feels very pure to be able to do that. It reminds me a little bit of Mike Piper. Basically, his only revenue off his blog is his books. In fact, when I tried to send him a copy of the White Coat Investor book for him to review, he said, “No, no. I don't want you to send me a copy. I will buy a copy.” Because he didn't want to feel obligated to write a nice review based on me having sent him even a book. I was very impressed with that.
Harry Sit:
Well, if I'm facing a choice of making $500,000 from the affiliate relationships versus facing a decision to make $3,000, that's a completely different story.
Dr. Jim Dahle:
Yeah. It might be the case. All right. You and I both wrote chapters in the Bogleheads' Guide to Retirement Planning, what made you decide to make that contribution and what did you like and dislike about the experience?
Harry Sit:
I found the Bogleheads in the early 2000s. I think it was 2002 or something when I was still on Morningstar. I like the group of people. Then when it moved to the current site in 2007, I moved as well. I was the number six register user on a new site. Over the years, I wrote 8 thousand posts. If you calculate it, it's like two posts per day for 365 days since 2007 until now. Even now, I'm still in the top 60 posters. I don't know how many numbers, 80,000 or something. I was invited to contribute to that book because of my participation in the group and also my background in employee benefits.
Harry Sit:
My chapter was on the defined benefit pension plans. I like the experience. I like the group participation model. I wish it continued after the book. For example, it could be a group blog. Imagine Bogleheads had a group blog and different contributors making blog posts and other people can subscribe to the group blog. That would be fantastic.
Dr. Jim Dahle:
That's pretty awesome. Even been the Bogleheads are even longer than I have. I remember the transition as well to the new forum. I mean, most of my listeners probably have no idea what we're talking about. But in 2007, Morningstar just started doing some wacky stuff on their forums and there's basically a whole rebellion. We all left en masse onto its own server that was put up by a couple of the Bogleheads. It sounds like you've been active there for a long time, I have as well. I don't know where I rank on the list of total posts made on there.
Dr. Jim Dahle:
Let's see, it looks like I've got 14,000 posts on there, which puts me, shoot, I think I'm still in the top 20. I remember at one point, I was in the top 10. That was about the time I decided to start the White Coat Investor. I just decided that I was spending so much time online that I couldn't really justify taking it away unless I was actually building something on my own. That was part of the desire to go out and start the White Coat Investor as I recall. You've ever been banned by the Bogleheads?
Harry Sit:
No.
Dr. Jim Dahle:
I think I've been banned once or twice, usually for about a week. I think I was talking to Rick Ferri about this one. I think he's been banned several times as well. What happens is he end up slipping and something gets into your post that's interpreted as being promotional, and they end up banning you for a few days.
Harry Sit:
Yeah. I think Bogleheads, they can be a little too strict sometimes. They have a great group of people. I think, as a group, they would have much greater impact if it's organized better. That's just my personal opinion.
Dr. Jim Dahle:
Yeah. It's a monstrously huge group of people but that's part of what makes it fun. The moderation hands may be a little bit heavy, but as your beats having to be way too light, you see most places on the internet, you can't even have a conversation that isn't about the president without within two or three posts, it seems like. So it's nice to have at least someplace where people treat each other a little bit nicer. Now, your book, Explore Tips, is one of the most niche books out there. Why is your only book about tips?
Harry Sit:
It's my only book because I just didn't have time to write a book. Again, I was busy working. I didn't really have a lot of time. It came out when I was buying tips. Tips is a very unique investment instrument in that it offers the inflation protection and there's nothing else that does that. It fit my MO. I was buying tips, I figured it out, I share it. So it came out as basically a gathering of my blog posts. I just organized it into a book. But now that I'm self-employed, I'm writing a new book. Hopefully, by the time that I go to your conference, I would have my second book ready.
Dr. Jim Dahle:
That's exciting. Well, can you tell us what the subject is?
Harry Sit:
I haven't decided on the title yet. But tentatively, I'm going to call it My Financial Toolbox. Basically, I wanted to go through everything that I have in my financial toolbox. Tell people what it is, why I chose this particular tool, and hopefully that's helpful to the readers.
Dr. Jim Dahle:
Awesome. Let's talk about another project you've been working on the last little bit called Advice Only Financial. Can you tell us what it does and why you started it?
Harry Sit:
Sure. I started it two years ago when my air conditioning broke. It was in the summer. When the room temperature reached my setting, I heard outside the window, the engine outside was still running. When I turned it off at the thermostat, it was still running. So basically, unless I turn it off at the panel, it would run 24/7. I'm not a handy person so I was trying to find the HVAC repair person to help me fix it. Texted a bunch of people, they were all very busy. One of them came back to me and just heard of the symptom and then told me, “Hey, you just bang on the box.” Okay. I went out, I banged on the box, it fixed it.
Harry Sit:
Then I reflected up upon it. I wrote a blog post. I said, “The same thing is happening in financial advice. The really important thing is the advice. Once you know the advice, doing it, it becomes very trivial.” To me, it will be silly to have that HVAC person come in and drive over and then just bang on the box and then leave. After I wrote the blog post, readers immediately come back to me and say, “Hey, that's all good in theory. Tell me where I can find a financial advisor just who wants to give me a financial advice. Everybody I see either wants to sell me something or wants to manage my assets.”
Harry Sit:
Okay. Then just a light bulb came up and then I said, “Okay, I'll be the scout. I'll find the person who will give you advice, that will manage your assets.” I set up a service. I just on a whim decided I would charge $200 to find three candidates for people. Just like finding home repair people, you want to get three quotes. So I said, “I would find three candidates for you and then you decide who you work with and be happy.” I put out a blurb at the end of my blog post. The people read my blog, see the little blurb that I offer this service. So that's what it does.
Dr. Jim Dahle:
How many people have you helped find advisors since you started that service?
Harry Sit:
It's been about two years and three months, I guess. Total I would say between 200 and 250.
Dr. Jim Dahle:
Okay. Let's talk about the advice only criteria. Because you set up some pretty strict criteria for an advisor to qualify as being advice only. Can you go through what those are?
Harry Sit:
Just what the name suggests, advice only. Just the advisor would give advice and only the advice. The advisor has to be a registered investment advisor. Being a registered investment advisor means that the advisor files some paperwork with the state regulators. The advisor would not sell any product and take any commission. The advisor must also not manage any assets. That means no asset under management fees. On a personal level, the advisor needs to have some credentials. They can be a CFP, a certified financial planner, a CFA, a Chartered Financial Analyst, or a CPA.
Dr. Jim Dahle:
That's it? That's all the criteria?
Harry Sit:
Yeah. Basically, the advisor would give advice and only advise. Nothing else.
Dr. Jim Dahle:
What about people who want ongoing investment management services? Do you help them, too?
Harry Sit:
Just as my air conditioning experience suggests, I would say most people can follow instructions if it's specific enough. You have doctors as your listeners. It's like going to a doctor, having the doctor write a prescription, and then you just take the pills. The doctor will tell you, “Take this pill three times a day after meals. Take this pill only once a day in the morning.” You don't necessarily have to know why you're taking those pills in that frequency, either before meals or after meals and so on, but you're still able to take the pills.
Harry Sit:
As an alternative, you can check into a facility and then have the nurse bring the pills to you at the right time. But you know, having the nurse bring the pills to you is really expensive. If some people can really be bothered to log into their account at all, I'd say they don't need my service. Finding advisors who manage assets is really not a problem. More pressing problem to me is finding advisors who only give advice but don't manage assets.
Dr. Jim Dahle:
Let's talk about the feedback you're getting from both sides of this transaction you're setting up. What do the clients that you're hooking up with these advisors say? What's the feedback you're getting from them about your service?
Harry Sit:
They're saying that they're saving a lot of money. They're getting advice and when the advice is specific enough, they're able to follow it. So they all like it. Well, I guess it's also selection bias in that they came to me because they wanted to operate under this model. Over time, people work and they have their 401(k), they already have some experience of logging into their accounts and doing some work there. To them, logging into their accounts and then doing some transaction is really not the problem. Knowing what to do is really the problem. So they really like this model.
Dr. Jim Dahle:
None of them are coming back and saying, “You know, what? I really need an asset manager too, and this didn't cut it.” Nobody's told you that?
Harry Sit:
Some people said they talked to the advisor, the advisor told them they're not adding much value, and they just can continue on what they're currently doing. Some people actually didn't spend any money after they find the candidates. I don't recall anybody actually going into an advisor who does the actual management for them.
Dr. Jim Dahle:
What feedback are you getting from the advisors? Are these good clients that they're glad to have and glad to serve and they're able to build a going concern using clients like this? Or are they just saying, you know, “There's not enough of these folks, for me to have a viable practice.”
Harry Sit:
I'm not converting advisors. I only find advisors who already work under this model so that's already what they do. They are already only giving advice and they themselves chose not to manage assets. Having clients who also don't want assets managed is really not a problem for them. I operate a very strict rule. I don't find hybrid advisors in that advisors would manage assets with some and then give advice to some other clients. I only find advisors who purely do advice. They already chose that model. They like it themselves, for whatever reasons, so I'm not making them make any changes.
Dr. Jim Dahle:
Okay. How hard is it for you to find these advisors? Are you trying to find them somebody local or are these primarily people that will work with them via teleconference or phone or email?
Harry Sit:
I would say both. It depends on geography. I give people three choices so my clients can choose they only want local candidates. And if I don't find local candidates, I just refund them their money. I charge $200 to find three candidates. If I only find one, I refund them two thirds of the fee. If I found two, I refund them one third of the fee. The clients can also choose prefer local in that I would first give priority to local candidates, if I don't find enough local candidates and then I go to remote candidates. Then finally, some people, they don't care. They're comfortable enough with working on the phone or on the internet, video conferencing then I just choose whatever candidate is in the country.
Dr. Jim Dahle:
Have you thought about just automating all this and just putting it on a web page to where there's no actual ongoing effort from you to do this going forward? I mean, once you find these advisors that you trust and you feel like it's good to refer people to, the only connection seems to be geography, right?
Harry Sit:
Geography and also specialization. Some advisors work with younger clients, some advisors work better for older clients, some advisors don't work anything on tax planning, some advisors would have a good emphasis on tax planning and so on. I still see it as a personal service. Also, I made the investment to find all these advisors. Just from selfish reasons, I'm not giving it away. Also, from the advisor's point of view, they're not joining a network so to speak, I don't charge the advisors any money. Also, they want to have some control over what clients that they take. Every time I have a client, I actually go to the candidates and ask them, “What is your workload now? Do you still want to take this client?” I give a blurb of what the clients told me, what they're looking for and the advisors can accept or decline.
Dr. Jim Dahle:
You're like an old-fashioned matchmaker.
Harry Sit:
Yeah, I would say, or a headhunter. I'd say when companies put out a job description to hire candidates, I would find the candidates to fill that job. So I'm just working on reverse. Clients post a description for the advisors they are looking for, I go to the advisors and ask, “Hey, are you up for this?”
Dr. Jim Dahle:
It's also interesting in that you are charging the client and not the advisor, which is very different from most things like this in the industry.
Harry Sit:
Yes. There's several networks that work on this. They are operating on the advertising model. Other advisors would list and then pay a fee or either as a monthly fee or as a per referral fee. Again, I wanted to be true to myself and true to my clients. I'd said the advisors can take any commissions so it will be ironic for me to take commissions for referring advisors.
Dr. Jim Dahle:
Interesting. Okay. Let's talk a little bit about some personal finance stuff. You have an uncommonly in-depth understanding of the tax code and particularly retirement accounts. Why do so many people, including advisors, have trouble understanding how these accounts work?
Harry Sit:
Well, I don't blame them. We should admit that they are complex. We have 401(k), 403(b), 457. You have traditional, and you have Roth, you have SEP, you have simple. They all have different rules on who's eligible, what the contribution limits are, what the distribution rules are. I mean, it is complex. People have trouble understanding because they weren't forced to learn them as I was forced to learn them because that was my job. Also, because they didn't choose to learn them. I mean, rules are complex, but the rules are not necessarily complex to me than say, the football rules or basketball rules. I don't know those rules myself. So I don't blame people for not knowing retirement plan rules.
Dr. Jim Dahle:
I guess it's no different than knowing that pass interference is 15 yards, you know, or from the spot of the foul, et cetera in the first down, right? That's no different than learning the retirement contribution limits, is it?
Harry Sit:
I have no idea about those rules.
Dr. Jim Dahle:
I've also noticed a lot of people have trouble understanding the difference between accounts and the investments in those accounts. Why do you suppose that is?
Harry Sit:
That's a puzzle to me as well. To me, the distinction is very clear. An account is like a box, and the investments are the stuff in the box. That's basically, if you explain like that, I think people should understand. I don't know why people get confused on that. If I must say, I probably should say just people are not paying enough attention. Their life is busy. They're just not as interested or didn't have the need to pay attention.
Dr. Jim Dahle:
One of my favorite posts of yours is the case against the Roth 401(k). Can you explain what the case is and why it needed to be made when you wrote that blog post?
Harry Sit:
The case against the Roth 401(k) basically says, by default, most people should just use the traditional 401(k) as opposed to the Roth 401(k). If you really use Roth 401(k), it would be an exception. The primary reason is basically our progressive tax brackets. If you picture a five-gallon bucket from Home Depot with different markings on the rims of the bucket for the different tax brackets, say zero, that's your standard deduction and then a 10%, a 12%, a 22%, and 24% and so on, you fill that bucket with income. Your income would get into the bucket.
Harry Sit:
When you're making a traditional 401(k) contribution, you're scooping up the water from the top. So your contribution, you get a deduction at the highest tax bracket. When you're taking a withdrawal when you retire, you have a nearly empty bucket. You're pouring income into it, your income first falls at the bottom, at zero, and then it fills into 10%, 12%, and so on. Your withdrawals are not being taxed at the same rate as your contribution when you were working. So that's why the traditional 401(k) would work for most people.
Harry Sit:
Then there are some minor considerations like state income taxes. I worked in California. California had very high state income taxes. But California had good jobs. We had good salaries in California. But after we retire, we don't necessarily have to stay in California forever, we can choose to go to another state that has lower taxes. So the taxes that you saved during your working years, it's just pure saving when you move to Florida or Texas that has no state income tax.
Harry Sit:
Then you get into some other complexities. People don't necessarily work in all years. You may have some breaks in your retirement, you can have one spouse becoming a stay-at-home parent and then your tax bracket withdraw, you can go to graduate school and so on, you're income may have some years of unemployment. So all those years can become good opportunities for Roth conversion. Again, you're taking the deduction at the highest tax bracket and then either taking withdrawals or doing a Roth conversion at a lower tax bracket.
Dr. Jim Dahle:
I appreciate your comments about California. I published a guest post from you a year or two ago about how people can still do it okay in California. I know I've written a bunch of times about the difficulty doctors have in building wealth while living in California. But I appreciate you providing another perspective on that with that guest post.
Harry Sit:
Yes. I would say California really made us because it had good jobs. It's probably not necessarily the same case for doctors. But for us, non-doctors, you see, good jobs are highly correlated with higher taxes and the higher cost of living. But if you're living paycheck to paycheck, you don't necessarily get ahead. But if you're a good saver, the higher salaries really make your higher savings work, and then you can accumulate your assets and then go elsewhere later on.
Dr. Jim Dahle:
I saw a recent post on your site. Maybe it wasn't recent. Maybe it's been a while actually. But you agree with me that most TSP or Thrift Savings Plan users should be using a Roth TSP despite the case against the Roth 401(k). Why do you think so?
Harry Sit:
Pension. People who use TSP are federal employees, either as civilian employees or military personnel, they would have a pension. Again, going back to that empty bucket, they don't have an empty bucket, they have the bucket already filled with pension. When they pour income into it, the 401(k) withdrawals are taxed at a higher bracket than people who have an empty bucket. Also, people working for the federal government, either civilian or military, they tend to have lower salary than what their salary would be in the private sector. Again, they're having a lower tax bracket so the tax savings from traditional 401(k) is lower than otherwise.
Dr. Jim Dahle:
It's even more so for the military folks because such a significant portion of their income is not taxed at all. It's basic allowance for housing, the basic allowance for subsistence and when they get deployed to a war zone, even their basic pay is tax-free. It can really make a lot of sense to use the Roth TSP account while you're on active duty as well. Now, you write a post or posts each year, usually in late summer and into the fall projecting next year's tax brackets and retirement account contribution limits. First, why do you do this? And second, how do you do this before the IRS makes the announcement?
Harry Sit:
Why I do this? Because it came out when I was doing some advanced planning. I was planning ahead, I was trying to figure it out as more like an intellectual challenge. Then after I wrote the post and I find that … Some other people also tell me that they find it helpful as well. I started with 401(k) contribution limits, and then people were asking me about, “What about IRA? What about HSA? What about this? What about that?” So over time, I tracked all those contribution limits. These things came in at different years. So usually they would say, “Okay, we're doing 401(k) contributions, we're starting this year. It should be say, $10,000.”
Harry Sit:
Then the contribution limit should adjust for inflation but then they specify how it should adjust for inflation. So different things came in at different times. They would have a different base here and a base amount, and then they pick inflation index to adjust. Then they pick different time periods. It could be a Q3 CPI over Q3 CPI or September to August average and so on. Then they have different rounding. Different limits can be … Some limits are rounded down. Some limits are rounded to a nearest threshold and so on. You just have to track them each one individually, figuring out what is the base here, what is the index that's used, what is the time period, how's the rounding, and so on. I basically track it for fun.
Dr. Jim Dahle:
That's pretty awesome. It's always fun to see that. You know, there's always a rash of blog posts on the internet when they actually come out. Then I look back and your post came out two months before that predicting exactly what they were. It's always a fun feature, I think, of your blog. Now you buy your own personal health insurance on the ACA exchange these days. Can you explain what you've learned from that experience?
Harry Sit:
Oh boy, do I have three hours?
Dr. Jim Dahle:
Why don't we keep them short?
Harry Sit:
Okay. I would say the first thing that jumped into my mind is that you have two people in two different worlds under the ACA. You can either have the premium subsidy or you don't have the premium subsidy. I mean, the subsidy itself is substantial, at least to me. It's worth $10,000 a year to me. Then you're also you have different treatments when it comes to premium increases. When you have the subsidy, you are asked to pay a certain set percentage of your income. Whatever the actual premium comes out to be, you're still paying that percentage of your income.
Harry Sit:
If you don't have the subsidy, you're in the wild, wild west. Whatever the premium come out to be, you pay that premium. All the future premium increases, you're fully exposed to that premium increases if you don't have the subsidy. That's the first thing is, if at all possible, try to get into the world of getting the premium subsidy not necessarily for the premium itself, but maybe more so for the insulation against future increases.
Dr. Jim Dahle:
Certainly, something a lot of early retirees are using to help fund their healthcare in retirement and between the time they retire in the time they start being eligible for Medicare, it seems like a lot of the fire folks are taking advantage of that these days.
Harry Sit:
Yes. That comes into the second thing I was going to mention. People retire early thinking that, “This is the time to do Roth conversion because I'm going to have very low taxes.” But the subsidy itself conserve as a tax surcharge income. Because the subsidy is calculated as a percentage of your income, your income will determine the percentage of medical premium that you pay under this subsidy calculation formula. So as you increase your income toward the cut off, you're actually getting a 10% or 15% surcharge on the additional income. So people's plan for additional Roth conversion gets bound by the subsidy scheme as well.
Dr. Jim Dahle:
Yeah. Certainly, those things have to be planned for because they work against each other, don't they?
Harry Sit:
They do.
Dr. Jim Dahle:
Now, what are the most common mistakes you see your readers making and asking you about?
Harry Sit:
Most of the readers come to me via the search engine. Also, because I write a lot about taxes, so most of the mistakes or things that they write me about are about tripping up some tax rules. First of all, tax rules are complex, as we mentioned before, and also they get some misinformation from customer service or either from their company or from brokerage firms or sometimes even from their CPAs. Then they acted upon some misinformation before knowing the rules. So that's usually what they write me about.
Dr. Jim Dahle:
Your readers CPAs can't seem to figure out how to fill out Form 8606 either, huh?
Harry Sit:
I guess, that's just not something that they pay attention to.
Dr. Jim Dahle:
Yeah. I'm amazed how many accountants I've seen screw up that tax form. Now, you guys became financially independent in your 40s. Most doctors don't even become financially independent in their 50s despite much higher incomes. Why do you think that is?
Harry Sit:
I have a different take on financial independence. I don't see being financially independent as necessarily as superior to not being financially independent. I see it as a basic choice in lifestyle. Everybody can become financially independent just by choosing a less expensive lifestyle. The lifestyle that people choose is really a personal choice. People are living under different lifestyles, from very low to very high. However little money you have, you can always be financially independent. If you're willing to live on say $20,000 a year or $30,000 a year.
Harry Sit:
If somebody says that they wanted to have a more expensive lifestyle and then they're willing to work for it, I don't see anything wrong with it. So my being financially independent versus some doctors being not financially independent, I see those are just different life choices. As long as it's deliberate. If they're okay with it, I'm okay with it.
Dr. Jim Dahle:
I think that's a great way to put it. The problem is I keep running into people who think they're going to be okay with it when they're in their 30s, and it turns out, they aren't okay with it when they're in their 50s. Do you think that happens very often to people and is there anything they can do to prevent that minor catastrophe from happening?
Harry Sit:
Well, obviously saving and investing give you choices. So if you saved up money, and then you originally planned just to work and then support your lifestyle, and later on, you have a physician burnout, and then at least having some savings and investment give you some choices. In this regard, I see doctors actually are better off than other people in other professions. At least you have the choice to work part-time versus … Like my job, I didn't have that choice to work part-time. It's a teamwork. So if I only show up three times a week, it just doesn't work. I'm out of the loop and I don't know how I should work.
Dr. Jim Dahle:
Yeah. For sure. It definitely varies by specialty a bit, too. In something like anesthesia or radiology or emergency medicine or hospitalist medicine, it's pretty easy to do shift work and cut back to half time. It's not so easy if you're on your own surgical practice, of course. That becomes a lot more difficult to cut back. Not impossible, but definitely more difficult in some specialties. Now, speaking of doctors, you'll be given a keynote speech at the physician wellness and financial literacy conference in March. What should attendees expect to hear from you and what are you most looking forward to about the conference?
Harry Sit:
The topic I chose for the speech is how to lower your taxes legally. Taxes are always of great interest and maybe of mystery to many people. Taxes are seen as being complex or have some secret means of lowering taxes if only you know the right people. Or some people might say, “I want to avoid taxes at all costs.” I want to demystify some of it. I want to highlight some of the broad principles. If you take a step back and then look at those broad principles, they're not that mysterious and they're not that complex.
Dr. Jim Dahle:
Awesome. We're really looking forward to seeing you there. I think that's going to be a lot of fun. You might be surprised just how many fans you meet personally there. It's the experience I found going to these live conferences is there's all these people that have been reading your stuff for years and know you well, that you don't know from Adam, you know, they just come walking up to you and start talking to you. Hopefully, that'll be a lot of fun for you as well.
Harry Sit:
I look forward to that.
Dr. Jim Dahle:
Now, what are your financial pet peeves? What do people screw up that just drives you nuts?
Harry Sit:
Not necessarily people screwing up. My pet peeves are really financial service salespeople taking advantage of other people for their lack of knowledge and for their trust. Like you, I guess, you fired up because you were taken advantage of and you didn't want the people who wear the white coat being taken advantage of.
Dr. Jim Dahle:
Yeah. Certainly, that was a huge motivation for me to become financially literate eventually. Also, you know, that is the primary mission of the White Coat Investor, is to help those who wear the white coat and get a fair shake on Wall Street. What are your plans going forward?
Harry Sit:
Just continue as is now. I enjoy the flexibility of being self-employed. I choose what I work on, when I work on, and how much I work on. Even with my advice-only clients, I have basically a queue. People would enter into that queue and I take clients off the list whenever I feel like I needed some work. If I'm busy doing something else, they stay on the queue. For the most part, they're okay with it and it suits me very well. I'm getting paid well, I also help others so it feels really good.
Dr. Jim Dahle:
Awesome. Anything else you'd like to tell the 30,000 high income earners that will listen to this podcast?
Harry Sit:
I would say what you know is really a choice. As we mentioned before, you can choose to know the football rules or you can choose to know the retirement plan rules. So as a listener to the White Coat Investor Podcast, you guys already took that step. You already indicated that you wanted to know more about this stuff so that's great. Also, having a high income gives you a good shot at financial success. I mean, the income really provides the source of saving and investing. Without the income, it would be much more difficult.
Harry Sit:
Because of that, you guys don't really have to push and try to make a killing. Just staying on the mainstream and taking the low hanging fruit already will ensure that you have financial success. Coupled with your initiative to become educated and listen to the podcast, read the WCI blogs and participate in the forums, that will all help. As you say, just charge on.
Dr. Jim Dahle:
Awesome. Thank you so much. Thank you for your book. Thank you for your blog. Thank you for coming out to speak at the White Coat Investor Conference. Thanks for coming on this podcast. Especially thanks for the encouragement for me to get the White Coat Investor started so many years ago.
Harry Sit:
Thank you for having me. Thank you for inviting me to the WCI Conference next year. I look forward to meeting you in person, finally.
Dr. Jim Dahle:
Awesome. All right. That was a great interview. I love that guy. You know, although Cindy and I were talking in between the time we finished the interview, and when I started recording this, that he makes me feel like such a sellout. Because he is willing to do this stuff for basically nothing. I mean, if you do the math on his little side gig, he's got to go in here or he charges $200 and he's helped a couple hundred people over a couple years. Well, that's 100 people a year times $200, that's 20 grand. For a guy with his expertise and his work to be doing it for that is basically a charitable mission. It's pretty awesome to watch what he's doing. I'd love to see people who start competing with him and have that service more widely available.
Dr. Jim Dahle:
As he mentioned, he has a waiting list. I talked with him after we stopped recording, that waiting list is a couple of weeks long right now, when we're recording this in the holiday season, when people really aren't thinking about finances. By the time you guys hear this in February I'm sure his waitlist is going to be significantly longer and putting them on the podcast probably isn't going to help that. But it's really pretty incredible what he's done with his life and his commitment to eliminating bias and eliminating conflicts of interest and really just helping out his fellow man. He's truly a good person. So I'm looking to hearing more from him at the White Coat Investor Conference.
Dr. Jim Dahle:
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Dr. Jim Dahle:
All right, if you haven't checked out our communities on the White Coat Investor Forum, the White Coat Investor's private Facebook group and the White Coat Investor subreddit, be sure to do that. It's a great place to get some help. If you just need to ask some questions, you want a multitude of opinions from people that are like you, people that are often down the road from you, sometimes, especially on the White Coat Investor Forum, professionals who are just helping you without charging you, those are great opportunities. Great places to interact with others and be inspired and informed about financial stuff. Thanks for leaving us a five star review. Thanks for telling your friends about this podcast. Head up, shoulders back. You've got this and we can help. We'll see you next week on the White Coat Investor Podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney, or financial advisor. So this podcast is for your entertainment and information only. It should not be considered official personalized financial advice.