Podcast #63 Show Notes: Hate Mail and a Disclosure
For every piece of hate mail I receive in my inbox, I get several dozen thank you emails from doctors who say I have helped them dramatically in their financial lives. But remember this podcast is for your entertainment and for your general education, not personalized financial advice to you. Now with that disclosure out of the way I answer more listener questions today concerning student loans, disability insurance, getting rid of variable annuities, accountants vs. financial advisors, backdoor Roth IRAs, and delayed tax filing practices. You can listen to the podcast here or it is available via the traditional podcast outlets, ITunes, Overcast, Stitcher, Google Play. Or watch the video on YouTube. Or ask Alexa to play it for you. Enjoy!
Podcast # 63 Sponsor
[00:00:20] This episode is brought to you by 37th Parallel Properties. As you know, I’m primarily an index mutual fund guy. But there’s a strong body of evidence supporting alternative investments – especially commercial multifamily investments. They can provide non-correlated equity growth and tax-advantaged income. Full disclosure, I’ve just started investing with 37th Parallel. But, several members of White Coat Investor have invested with them and all seem to be happy with their results and reporting. With over $300M in profitable multifamily transactions, they’ve made the Inc. 5000 list of fastest growing companies the past two years and are on pace to do it again this year.
One thing I really like is that 37th Parallel educates their investors. You can learn more about them and get a very informative introduction to how commercial multifamily investing works via their special report Evidence Based Investing. Check out 37parallel.com/ebi.
Quote of the Day
[00:01:20] “Use only that which works, and take it from any place you can find it.” -Bruce Lee
[00:03:00] I'm a doctor. I'm licensed to practice medicine and I'm licensed to drive. And both of those only in Utah. So if you are somewhere besides Utah, I'm not licensed to do anything for you. Remember this podcast is for your entertainment and for your general education, not personalized financial advice to you. That should not be something that I need to say to someone who listens to podcasts but maybe it is.
Q&A from Readers and Listeners
- [00:04:55] “I'm attending an expensive medical school and anticipated a principal debt load of three hundred ten thousand dollars. Over the years from working, I've accumulated about fifteen thousand dollars of savings. I'm also receiving an inheritance from my grandparents who passed away of twenty five thousand dollars. Once I become an attending, my plan is to live off 60 to 70 thousand dollars and throw the rest of my salary at loans until I'm debt free. This would take anywhere between three to seven years depending on which specialty I go into. Essentially my thought is should I be minimizing my student loan debt with this money? Seems fruitless to me because I'm assuming it would only save me 5 months off payments.”
- [00:10:25] “I was wondering if you have written or would write a blog about the differences – pros/cons of a financial adviser versus an accountant.”
- [00:12:30] This one is not so much a question as a tip from a reader that I thought was good enough to bring on air and talk about. He used delayed tax filing practices to enable himself to max out his tax advantaged accounts.”
- [00:17:59] “I just left my first employer at the end of last year and they are now rolling over my 401k account. I'm thinking of doing a full Roth conversion on the entire amount after rolling it over into my IRA. I also want to do a backdoor roth IRA this year. Is this possible and not pay additional tax on the back door Fifty five hundred?”
- [00:19:40] “My dad bought a variable annuity 10 years ago worth $182,000. It was sold to him by a particularly crooked financial adviser. I was reading your recent post on how to extricate yourself from the annuity and it said if the value is close to the basis to invest the money into an index fund. Sorry how do you calculate this? What exactly does that mean?”
- [00:21:50] “I'm a practicing Emergency Physician who's currently just about seven years out of residency. I have a hospital disability policy that covers 60 percent of my base pay. And I also have my own personal policy. I exercised a writer on my policy and they are now offering me more. My question is at what point is there too much disability insurance or is there no such thing?”
[00:00:00] 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.
[00:00:20] Welcome to White Coat investor podcast number 63 titled hate mail and a disclosure. This episode is brought to you by 37 parallel properties. As you know I'm primarily an index fund guy but there's a strong body of evidence supporting alternative investments especially commercial multifamily investments. They can provide uncorrelated equity growth and tax advantaged income. Full disclosure I've just started investing with 37 parallel but several members of the white coat investor community have invested with them and also be happy with the results of reporting. With over 300 million in profitable multifamily transactions they've made the INC 5000 list of fastest growing companies the last two years and are on pace to do it again this year. One thing I really like is that 37 parallel educates their investors. You can learn more about them and get a very informative introduction to how commercial multifamily investing works via their special report evidence based investing. Check out 37 parallel dot com slash EBI that's 37 parallel dot com slash EBI.
[00:01:20] Our quote of the day today comes from Bruce Lee who said Use Only that which works and take it from any place you can find it.
[00:01:27] I kind of wish the person who sent me this e-mail would have understood that quote and read that prior to firing this off you know here at the White coat investor, I get hate mail every now and then a lot of times is left as comments on the blog often from people who sell things like whole life insurance and loaded mutual funds and annuities but sometimes they just send me an email and I think it helps them feel better sometimes. But I got this email recently from a financial adviser who said I was recently approached by someone who is a resident about this blog. I got fired up about this blog. My Husband is a doctor and I over have over ten plus years of various firms in the financial services industry and I've been certified as a CFA and a CFP and most recently as a retirement specialist with one of the largest firms in the country. Your advice is reckless, very reckless. Giving blanket advice on something because you think you know it all is completely and utterly appalling. You have no business giving advice like this without the proper education. You are the exact person that keeps me up at night. Stick to your day job and stop this blog. What worked for you doesn't work for everyone. Frankly you need the whole financial picture to make a sound financial recommendation. This is disgusting.
[00:02:35] You know what it sounds like to me is that this particular adviser just lost some clients because they read something on the white coat investor and realized that didn't gel with what their adviser was telling them. So at any rate let's do a disclaimer here which I don't think I've done nearly as often on the podcast as I do on the website. I'm not a financial adviser. If this is news to you you probably need to pay a little more attention to what you're listening to.
[00:03:00] I'm a doctor. I'm licensed to practice medicine and I'm licensed to drive. And both of those Only in Utah. So if you're somewhere besides Utah I'm not licensed to do anything for you. So this entire podcast is for your entertainment and for your general education only if you're considering something I'm telling you here is a personalized formal financial advice you're probably making a mistake and you're probably an idiot. OK. This is a podcast. Ten thousand people listen to it. All right. This is not personalized financial advice to you. That should not be something that I need to say to someone who listens to podcasts but apparently maybe it is.
[00:03:41] So if you hear something that you think would be useful for you and it sounds fishy it sounds odd you didn't realize it had something new to you. Look it up. Check it with some other reputable sources. Check it out on the IRS dot gov. Check it out with your own adviser. Hey these are things that you should do some more research into and that you should have a conversation with your adviser about rather than you know pretending I'm your financial adviser because I'm definitely not. And anybody who sends me an e-mail gets back a disclosure that says hey I'm not a financial adviser. I'm not an accountan, attorney so double check anything I tell you. That said I you myself more as a teacher and in that respect I've helped tens of thousands maybe hundreds of thousands of doctors with their finances.
[00:04:27] And for every piece of hate mail I get my e-mail box I get several dozen pieces of thank yous from doctors who say I have helped them dramatically in their financial lives saved them thousands of dollars, and really helped them to become financially successful and financially independent et cetera. So as Bruce Lee said Use Only that which works and take it from any place that you can find it, even if it's a blog run by some stupid doctor in Utah.
[00:04:55] All right let's get some questions from readers and see if we can help people that actually need some help. I'm attending an expensive medical school will have an anticipated principal debt load of three hundred ten thousand dollars. Over the years from working in low cost of living, I've accumulated about fifteen thousand dollars of savings. I'm also receiving an inheritance from my grandparents who passed away long ago and it is twenty five thousand dollars. I'll get this money in November this year and am entering my second year medical school. Regardless of my specialty once I become an attending, My plan is to live off 60 to 70 thousand dollars depending on if I have a family and throw the rest of my salary at loans until I'm debt free. This would take anywhere between three to seven years depending on which specialty I go into. Essentially my thoughts are this minimizing my student loan debt by 30 thousand dollars, because I'd still want a cushion of savings, Seems fruitless to me because I'm assuming it would take me, It would save me 5 months on payments. Let's assume a hundred eighty thousand dollars take home 70000 to live off of 9000 per month to loans.
[00:05:53] The difference between with interest added and worst case compounding interest during residency 450000 loans versus 400000 loans. On the other hand I could use this 40000 and allow it to grow until I'm an attending and potentially have a good chunk of change to do with what I please especially if I invested appropriately which could come in handy and be more valuable to me later in life. Basically I'm not sure putting 30 thousand dollars into my student loans now is worth saving in a mere five months of payments later as an attending plus minus a few months especially with the potential to grow over a 10 year investment period if I play my cards right. If it helps For context I'm planning on going into surgery specifically neurosurgery at this time although we will see how the cards fall of course. Perhaps assume an anticipated salary of three hundred thousand which is what I did above.
[00:06:36] Okay. There are so many problems in this email that I can't get to them all all at once so we're going to take them one at a time. First of all this assumption that a neurosurgeon makes 300 thousand dollars. I think this med student needs to go talk to some neurosurgeons and actually talk to them about their finances. That would be an extremely low salary for a neurosurgeon.
[00:06:56] Second of all this doc or this med student is assuming that your take home on a three hundred thousand dollar salary would be one hundred eighty thousand dollars that's an incredibly high tax rate. I don't think you can get that as a single person in California. But that's assuming you're putting nothing into a tax deferred account. You're not paying anything in mortgage interest et cetera.
[00:07:17] That would be a ridiculously high tax rate. So let's be realistic about how much we're paid in taxes here. For a typical attending a typical effective tax rate is usually in the 20 to 25 percent range and if you're a good saver and have lots of tax deferred accounts available to you get it below the 15 percent range for an effective tax rate is not unusual.
[00:07:40] But the thing I don't like the most about this e-mail is this whole pissing in the ocean effect. Right. When you're a medical student and you're signing up for this monopoly money every semester it feels like taking out a little bit less or you know paying a little bit toward your loans are in residency that sort of thing is just pissing in the ocean. It just doesn't make any difference whatsoever so why bother at all. But that mindset is exactly what gets docs in trouble. And if you're wondering how people end up with these 600 700 800 thousand dollars in student loans it's that mindset. What's another 20000 when I already owe Six hundred thousand. Right. I'm just going to buy this car on credit. You know what's another ten thousand when you know I already owe a quarter million dollars so I'm going to Europe on credit cards you know and that kind of mindset is what keeps docs from ever really obtaining wealth.
[00:08:28] But at the core of this question it breaks to the down to the payback debt or invest Question. Which is the eternal question that every doc has until they're completely debt free. You know can I out earn whatever I'm paying in interest. And that's what this med student is asking you know.
[00:08:44] But the problem is this mindset of I think I can now earn what I'm paid in student loans is a little bit more difficult than it sounds. For instance typical student loans about 6 percent right now and there are no guaranteed 6 percent investments out there. So if you want a guaranteed investment you maybe can get 2 percent maybe 3 percent if you type your money for a long time but you're not going to get 6 percent. So that means you have to take some risk. So now you're looking at a guaranteed 6 percent or a risky maybe seven eight nine 10 percent and that I think is a pretty significant gamble one that if I had the choice I would take the guaranteed 6 percent rather than the potential 8 percent. And so I think it's not a great idea to take this money and invest it in hopes that you're going to outperform what you'd get from just paying off student loans or not taking out student loans in the first place. The other thing this doc talks about the student talks about is that there's no difference between 450000 dollars in loans and 400000 loans. And let me assure you, having talked to many docs that have 450,000 and 400000 dollar loans, there is a difference. Fifty thousand dollars is fifty thousand dollars. And to make that much money post-tax and carved out of your lifestyle is not easy. It requires some serious sacrifice. So to discount that because the only money you've ever seen in your life is monopoly money I think is a huge mistake for medical students to do.
[00:10:12] You know the difference of keeping your loans 30000 or 50000 dollars low lower is huge getting out of debt sooner is huge. And so don't don't assume this money doesn't matter. On the other end of the training pipeline.
[00:10:25] OK. Next question I was wondering if you have written or would write a blog about the differences and pros cons of a financial adviser versus an accountant. Well the training is different for these two professions for an accountant for instance they typically get a degree in accounting and oftentimes go on and become a CPA or certified public accountant. And what that represents is a significant amount of education and a significant amount of expertise and especially if they go on and get a personal financial specialist designation which is like a CFP in addition to their CPA. Then I think they're pretty good adviser to have. Not only can they give you good tax advice which is what most CPA specialize in but then they can also give you good financial planning and investment management advice. So I think that's a pretty good route for someone to take the wants to be an adviser.
[00:11:20] The word financial adviser of course has very little meaning. I mean you can become a financial adviser in a week just by taking a few relatively easy exams and going out and selling products for one of the big brokerage houses. I mean those people call themselves financial advisers. So I think we have to distinguish between the commission salesman with zero training and education and you know a really good financial adviser who has got appropriate designations that you know is doing things the right way and minimizing their conflicts of interest and those sorts of things.
[00:11:54] But the main difference between a good financial adviser and a good accountant is that the accountant focuses more on tax, both tax preparationm hopefully tax strategizing, whereas the financial adviser tends to focus more on financial planning and investment management. Now it's possible you need all of those services and they can't get them all from the same person. You may have to hire both a financial adviser and an accountant or you may decide that you're going to do some of that work yourself. Maybe you'll do your own tax prep, maybe you'll do your own investment management. It just depends whatever you're comfortable doing yourself then do yourself and hire the rest out.
[00:12:30] OK this one isn't so much a question as a tip from a reader that I thought was good enough to bring on air and talk about. He says I want to thank you for all your advice over the years I've been an active reader since my last year residency. I'm an emergency Doc practice on the West Coast. With your guidance I've paid off a hundred fifty thousand dollars in student loans and 13000 car loans while Maxing out my solo 401k, HSA, wife's 401k, two backdoor Roth IRAS in two years since I graduated residency.
[00:12:56] Guess what it really does work folks if you apply these principles you can go from a very negative net worth to all of a sudden being relatively wealthy just by following the advice you find on this podcast and the blog. He says I think the big driver was renting, twenty four hundred dollars a month instead of buying five thousand a month with no downpayment for a house in Seattle.
[00:13:18] We now have 150000 dollars saved in tax advantaged accounts. The decreased financial burden has allowed me to enjoy my job more by avoiding the parts I didn't like. No more nights, I give away shifts when I want to plan trips etc. By not buying We've also kept the flexibility to move again if needed. Take a year off for travel, take extra time off if we have a baby etc.
[00:13:38] I wanted to share some may benefit some of your listeners finishing residency as a sole proprietor I used delayed tax filing practices to enable myself to max out my tax advantaged accounts. I want you to listen closely here because I think this is an important technique. It's one that my wife and I certainly did to a certain extent when we came out of residency and I think most smart docs do to some extent as well. I've seen some people get very extreme about it and manage to pay off their substantial student loans by Christmas. Using a similar technique I'll talk about them in a minute. But this doc says In my first tax year as an attending only made ninety thousand in the four months that I worked I needed most of that money to cover expenses associated with moving, security deposit, higher rent, a new licensing business costs. By filing for a tax extension. I was able to delay contributing to my 2016 Solo 401k until October of 2017. I also delayed contributing into 2016 Roth IRA and HSA until just before April 2017.
[00:14:39] I repeated this practice in 2017 and continue in so far in 2018 I plan to finally catch up this year and fund all my 2018 tax advantaged accounts this year and maybe even open up a taxable account. I had a savvy tax accountant who charged me a flat fee around 500 bucks to do my taxes. Answer questions on deductions, including himself, helped file the extensions and set up my business practice. Delaying tax filing filing is a great tool for the new sole proprietor 10 9 9 employee which allows them to not miss out on tax deferred accounts early in their career. This creates opportunity for compounding interest start early in your career. The biggest con is that if a catastrophe strikes you may not be able to fund the account. In this case you would owe back taxes on the amount you do not contribute. There is some increased psychological pressure and stress knowing that you have to contribute for multiple years and that may not be right for everyone. It helped me to visualize the person that I owed this money to as being myself.
[00:15:31] So what's he talking about here. Well you don't actually have to file your tax forms on April 15th. You can file an extension and that allows you to file them in October instead of April. Now the rules for a lot of retirement accounts allow you to contribute until the day you file your taxes for the previous year. But if you don't have the money in April you still want to contribute for the previous year. You can file in October that gives you four more months to come up with the money. And if you're living like a resident you can come up with that money in the next few months and be able to max out those accounts.
[00:16:07] So what's typical, and this is what my wife and I did, is when you come out of residency. You have so many needs for your cash. I mean you may want to come up with a house down payment, you've got to get your emergency fund bigger, maybe some credit cards or car loans. You got to pay your parents back or something like that. You want to max out these retirement accounts, you've got student loans to pay off. You have way more need for cash than you have cash. And what this allows you to do is to not miss out on that opportunity to have tax advantage space in those retirement accounts by delaying when you contribute. The easiest one to delay is your Roth IRA. You know if you come out of residency in July you have until April the next year to put that Roth IRA money in. And so that gives you a lot of months to come up with that fifty five hundred dollars for you and fifty five hundred dollars for your spouse. You can also you know back date for 401K contributions and HSA et cetera. And a lot of weight just by understanding the contribution deadlines. And so that allows you to use the money you're making in July and August and September to pay off debt or to save up a down payment, Those kinds of things, while still being able to get that money into the retirement accounts. Sure the money doesn't start compound until you actually put it in but you haven't lost that tax advantaged, an asset protected space forever.
[00:17:25] And so you know what typically happens over the first few years you're gradually moving that date up maybe the first year out of residency you do it in October of the next year then April of the next year and then maybe by December of the year and eventually you get to the point where Katie and I are at in our lives where we're maxing them out in January and February and March of the actual tax year that we're contributing for. You know. And so you gradually move it up month by month as the years go by until you're getting that advantage right from the beginning of the tax year.
[00:17:59] OK. Next question, I have a question regarding my 401 k And IRA. I just left my first employer at the end of last year and they're now rolling over my 401k account about 120000 because I believe I'll be at my lowest tax rate this year due to trump tax reform. I'm thinking of doing a full Roth conversion on the entire amount after rolling and my IRA. Also want to do a backdoor Roth This year. Is this possible and not pay additional tax on the back door Fifty five hundred? My goal is to have as much roth money as possible in retirement.
[00:18:27] Well I'm not going to talk about the wisdom of that goal. That may or may not be a very good goal. As a general rule you want to have a mix of a tax free and tax deferred and taxable assets when you get into retirement. But you want to get those tax free assets without having to contribute or convert tax deferred assets during your peak earnings years when you're at these high tax brackets.
[00:18:51] So it doesn't always make sense to do Roth conversions when you're attending physician working full time but I'm just going to let that slide. And if the goal here is to get as much roth money as possible in retirement. Yeah this is a great way to do it. It's called a Roth conversion. You've got 120000 dollars in your old 401k. You can put that in a Roth IRA. You just owe taxes on a hundred twenty thousand dollars of extra income this year. Certainly you can do that. No that's not going to affect your back to a Roth IRA because on December 31 of this year you do the conversion. You're not going to have anything in a traditional, Sep or simple IRA. And so that's not going to cause any problem with your back to a Roth IRA that's still basically going to be a tax free contribution. You just have to do it in two steps instead of one because you make too much money.
[00:19:40] Next question. My dad bought a variable annuity 10 years ago worth 180 two thousand dollars. He was sold to him by a particularly crooked financial adviser. I was reading your recent post on how to extricate yourself from the annuity and it said the value is close to the basis to invest the money into an index fund. Sorry how do you calculate this? What exactly does that mean? Sorry I'm an investing newbie.
[00:20:01] OK. Basis is what you paid for something. So if you bought a mutual fund for ten thousand dollars and you later sell it for fifteen thousand dollars you only owe tax on the five thousand dollars of gain because your basis is ten thousand dollars. When it comes to a whole life insurance policy your basis is the sum of all the premiums you've paid for that insurance. When it comes to an annuity like this Docs father has it's the sum of all the payments you've made into it. So this doc has been paying on what's probably a crummy annuity given it is a crooked financial adviser that sold it to him. He had been paying on that for 10 years so maybe if he's paying five thousand dollars a year for 10 years maybe he's paid in 50000 dollars over ten years and maybe it's worth fifty five thousand dollars. So his basis is 50000. It's worth 55000 if he cashes it out and puts it into an index fund. He's got to pay taxes on that Five thousand dollars above and beyond the bases. That's the way tax basis works.
[00:21:00] It's possible sometimes to have your basis be higher than the value of the investment. And with a lot of investments it's a good idea to sell them at that point. That's called tax loss harvesting. And then you can take that loss and use it to offset any long term capital gains you may have any dividends you may have and up to three thousand dollars a year of your ordinary income. And so that can make a lot of sense when you have a loss. But it gets a little bit tricky when you're trying to when you have an insurance policy or an annuity for a loss.
[00:21:31] Those are a little bit harder to get any sort of a tax loss out of. What people usually end up doing is leaving it in a variable annuity or rolling it into a good variable annuity with low costs letting it grow back to the basis at which point they surrender it moved on to another investment tax free.
[00:21:50] Next question I'm a practicing Emergency Physician who's currently just about seven years out of residency. I have a hospital disability policy that covers 60 percent of my base pay comes out about fifteen thousand dollars a month before tax. And I also have my own personal policy with guardian that is currently seventy five hundred dollars a month in tax free benefit. I exercised a writer on my policy and they're now offering me six thousand seven hundred thirty per month more. My question is At what point is there too much disability insurance or is there no such thing? My total premium would be somewhere around six hundred fifty dollars a month for disability in total should I exercise this option?
[00:22:26] Well you know people will sell you a lot more insurance than you need. You really only want to insure against a financial catastrophe. Now disability is one of those financial catastrophes at least until you become financially independent. And so you probably ought to have disability insurance. But the question is how much is enough. Well you want enough disability insurance to cover your living expenses and to save for retirement. So how much is too much. It depends on what you're spending and how much you need to save for retirement if you're spending ten thousand dollars a month, Well you better have at least 10000 dollars a month in disability and if you also figure out you need to put another two or three or four thousand dollars a month toward retirement in order to not be living not just Social Security when you get to age 65 or 67 and that disability insurance policy quits paying, then you better get enough insurance to cover that as well.
[00:23:17] So that would argue for something in the 13 14 15 thousand dollar a month range for that particular doc. But everybody's going to be different. If you're super frugal and you only spend you know four or five thousand dollars a month and you go on to save another three or four thousand dollars for retirement then maybe you only need seven or eight thousand dollars in disability insurance if you're married to another doc and your plan in the event of your disability is just to live off your spouse's income and maybe you don't need disability insurance at all. So how much is too much is really an individual question. But those are the factors to consider.
[00:23:51] In this case an emergency physician which is probably making you know something on the order of 25 or 30 thousand dollars a month. You know we're talking now about this doc having nearly 30000 dollars in disability insurance. Most of it probably coming tax free. That sounds like probably too much Quite honestly. I'm not sure this doc needs that much. I certainly have never carried that much disability insurance and this year probably will be cancelling the policies I have. We're just getting too close to financial independence and especially given that that wouldn't cover much of the income coming from white coat investor. So it just doesn't really make sense for us much longer to have disability insurance. We'll probably be cancelling our policy later this year.
[00:24:37] All right. This episode was sponsored by thirty seventh parallel properties commercial multifamily investments can provide non correlated equity growth and tax advantaged income. I have one investment with 37 parallel but I'm on their principles for several years and several members of the white coat investor community have invested with them and are happy with their returns and reporting. You can learn more about 37 parallel and get a very informative introduction to how commercial multifamily investing works via their special report evidence based investing. Check out 37 parallel dot com slash EBI For more information.
[00:25:10] Also be sure to check out the white coat investor forum if you haven't lately. Lots of active threads there and you can learn a lot while helping others. Head up shoulders back. You've got this. We're here to help you. See you next time on the white coat investor podcast.