Today, we are answering your questions from both emails and the speak pipe. We answer questions about saving for intermediate-term goals, institutional malpractice policies, how to safely invest in real estate, how to choose where to go for residency, and more.

 

How Much Should Location Matter When Choosing a Residency? 

“Hi, my name is Alex. I'm calling from the Southwest, a very affordable region. I'm a big fan of the podcast, so thank you for all the information you put out there. I'm a fourth-year medical student. I have a scholarship that paid for tuition, and I signed on to come back and work here for four years after all my training is done. I'll be graduating with about $50,000 in student loans. My husband and I are very established here. We bought a house back in 2019, and our kids stay with grandparents so we don't have any childcare expenses. If we move for residency, he would be unemployed. He does not work in medicine.

What advice do you have for choosing relocating for residency vs. staying and having all my education from one spot? Is it worth the financial strain and hustle if eventually we'd come back here anyway? Would it be detrimental to my negotiating power if my education is all from one place?”

I'm going to push back on this idea that your spouse is going to be unemployed. The unemployment rate in the country right now is around 3%. The likelihood that your spouse cannot get a job someplace where you're going to residency seems extremely low to me. I guess it's possible. I don't know what your spouse does. Maybe something's happened to them and they're not very employable for some reason, but chances are that unemployment is going to be pretty temporary. What I've found with a lot of people too—especially in this day and age of people working remotely—is a lot of the time if that company wants you, they don't care if you move. Like our tech guy, for example. Our tech guy here at The White Coat Investor used to live locally. Well, he moved away. We didn't fire him. He was working mostly from his own home anyway. Lots of jobs are like that, especially if you tell them it's highly likely you are coming back in a few years. Turnover is expensive. Nobody likes hiring and firing. A lot of employers, especially these days with unemployment so low, will bend over backward to keep you.

But to answer the question you actually did ask, I have three factors that I think are important when you're choosing your residency. The first one is people. I think this is probably the most important part of choosing a residency. You want to go somewhere that you fit in—that you like the attendings, the staff members, and the other residents. You want to feel like you fit in there. When I started interviewing for residencies, I had been married for four years. I interviewed at places where the academics were great, but all the residents after shifts went out clubbing. Well, I wasn't really into clubbing. Everybody was single and they were into clubbing and it just wasn't my thing. It wasn't a good fit. I was much better off being in Tucson with a bunch of people where half the residents were married and everybody was into outdoorsy kind of stuff. I just fit better there. I liked the faculty better and all those things. Fit is No. 1.

No. 2 is the quality of your training and the quality of your education. I think that really matters. If your local place is not that good of a residency, I think it's worth going somewhere else for sure. I think the quality of your training really matters. It's going to affect how good of a doc you are and the patient care you're going to give for the next two or three or four decades. I think it's worth going to get that.

Then, the third thing is location and having family support around, like in your situation where you have grandparents to watch kids, where your husband already has a job. That place where you're at now, assuming they have a residency program in your chosen specialty—which it sounds like they do—that's going to be pretty high on your list no matter how much you like the program in another state. This one's still going to be second or third, I'm sure. I think that's fine. I think location is a really important thing to consider. Part of that is the cost of living. Obviously, this location has a relatively low cost of living.

I think your fear is that somehow this is going to hurt your career by going to med school and residency in the same place and staying on there for faculty or going into the community in that area. There are some benefits to going somewhere else and seeing different ways that people do things and seeing different patient populations and not being “inbred” in your training. But you know what? There are other factors too. I wouldn't put that in my top three—that it has to be someplace different than where you did medical school. It's not nearly as important as the people and the quality of the training and the location. But if all else is equal, sure, go someplace else, get a different experience. I don't feel like that's so incredibly important that you have to do it. Now, that might not be the case. If you want a specific academic job and a specific specialty, maybe it's really important to have Yale or Harvard or who knows what behind your name to get the job you really want. But I think for most of us docs, that just isn't the most important thing.

It sounds like you want to stay there. I suspect you're going to rank that program really high, and I think that's probably appropriate. But don't be afraid to look around. You might find something you like even more and you're willing to sacrifice a little bit on the location if you get people you like even better or training that you think is a little bit better.

More information here:

Location Independence — What Can YOU Do with It?

From Fourth Year to the Real World

 

Saving Up for Intermediate-Term Goals 

“Hi Dr. Dahle, my name is Erica, I'm a pediatric hospitalist. I'm curious if you have any guidance for saving up for intermediate-term goals like seven or eight years away. I know that usually the stock market is recommended for anything at least 10 years away. And for short-term goals less than five years, usually a high yield savings, CD, or money market fund would be recommended. But between those two time periods, is a mixture of the two safe?”

The reason you don't get clear instructions on this from me or anybody else is it is incredibly controversial. There is no right answer here. Everybody disagrees. Clearly, if you need the money in a year, you should not be investing it in stocks and real estate. Even putting it in bonds is a pretty risky thing to do. You could have a year like 2022. Rates went up 4%, and bonds cratered. I think losses were up to like 15% in lots of very good bond funds when rates went up that high. For that really short time period of one, two, or three years, maybe stay in cash. The nice thing right now is you can make around 5% on your cash. There's no downside to being in cash these days. You're getting rewarded pretty well. That's even higher than the yield on bonds right now. I wouldn't feel bad about leaving money in cash for relatively short-term stuff.

When I'm saying stocks, I'm not saying go out and buy Amazon and Tesla. We're talking about broadly diversified low-cost index mutual funds or ETFs when we're talking about stocks. Money that goes into stocks is long-term money. How long is long-term? Well, that's hard to say. Some might say five years is enough. It's pretty rare for stocks to lose money over a five-year time period. It's not impossible. It's very rare to lose money with stocks over a 20-year time period, at least on a nominal basis. In fact, I'm not sure it's ever happened that people have lost nominal money on stocks over 20 years. They might've been outperformed by bonds or something else, but they haven't actually lost money in that time period. Certainly, money you don't need for 10-plus years, I would feel very safe investing that into stocks and real estate and those sorts of aggressive investments.

At five years, I think there's probably some room for people to say, “Hey, that's maybe not long enough for stocks and real estate, particularly anything that's illiquid.” At that point, maybe we're talking about a mix. Maybe some in cash, some in bonds, some in stocks. You're talking about seven-ish years. At seven-ish years out, I'm pretty comfortable with a pretty good chunk of it in stocks. It's possible you would've come out ahead in bonds or even in cash. That's always a risk with investing. Even in the long run, that's a risk. It's entirely possible, but for the rest of your life, bonds could outperform stocks. It's probably not the way to bet, but it's possible that it could happen.

However, there's another side to this. And that side is probably more important than whether you lose money or not. That is the consequence of not having your money at that time period. For example, let's say you're saving for college. A lot of people save for college and dial back the aggressiveness as that kid gets closer to 18 so that it's basically all in cash when they start college at 18. But the truth is, you don't spend all that money at 18. Some will be spent at 19, some at 20, some at 21. Maybe some of it doesn't get spent until dental school. Maybe some of it is left behind in that 529, and the beneficiary is changed to the grandkids. That money might not be needed for decades and yet you had it all sitting in cash. You have to keep in mind things like that. When will the money actually be spent?

If you need a home down payment on a specific date when you get out of the military and you're moving to a new place and you're going to buy a home, well, you can't take as much risk with that as you can with something where it really doesn't matter if you have the exact right amount of money or exactly when you have it. What would be an example of that? Maybe you're investing to buy a wake boat and it's really not a big deal if you buy it this year or next year. You can invest it more aggressively if it doesn't matter which year you actually cash out. If it's down the first year, well, you just give it another year, and it'll probably be better than it was the year before. No guarantee. It could be 2002 after 2000 and 2001, but chances are good, it'll be better. Things were down in 2022. 2023 was a great year. If you had had the flexibility to wait another year, you basically got all your money back that you lost in 2022.

Consider the consequences. How finite is that date that you actually need the money? How finite is the amount of money you need? The more flexible you can be and the further out in the future this goal is, the more aggressive you can be with it. I guess the bottom line is for a seven-year goal, I could go anywhere from a seven-year CD or a seven-year Treasury all the way to 100% stocks. No clear guidelines for you just based on the number of years.

More information here:

7 Ways to Increase Your Savings Rate

Best Online Savings Accounts

 

To learn more about the following topics, read the WCI podcast transcript below: 

  • Institutional malpractice policies based on self-insurance
  • Real estate investing and how to do it wisely
  • Custodial Roth IRA
  • DAFs
  • Correction from 831(b) episode

 

Milestones to Millionaire

#151 — Family Doc Gets His 457(b) Plan Changed for the Better

This doc wanted to see big changes made to his 457(b) plan so he got involved with the committee and ultimately helped to make massive changes. He helped to get the 457(b) changed from a single distribution upon retirement or leaving the job to the option of distributions for up to 15 years. This is a HUGE and important change that will mean the difference of thousands and thousands of dollars for everyone who uses the plan. We hope you find this episode as inspiring as we did!

 

Finance 101: 457(b) Plans

457 plans come in two main types: governmental 457 plans and non-governmental 457 plans. Governmental 457 plans are preferred for several reasons. First, they provide additional protections for your money, and they are less likely to be impacted if your employer faces financial difficulties. When you leave your employer, you have the flexibility to roll the funds into an IRA or another retirement account, offering various distribution options.

Non-governmental 457 plans require more scrutiny. You want to be sure your employer is financially stable, evaluate the investment options, and consider the distribution choices carefully. Some non-governmental plans mandate a lump-sum withdrawal when leaving the employer, potentially resulting in significant taxable income. It's crucial to understand the distribution options and differences in each 457 plan.

Contribution limits for 457 plans can vary by age and employment type. For those under 50, the contribution limit is $23,000 in 2024 and for those over 50, the contribution limit is $30,500. Catch-up contributions are allowed for the last three years before retirement. Catch-up contribution rules can be complex and differ between governmental and non-governmental plans.

457 plans can offer Roth options, similar to 401(k) or 403(b) plans. Deciding between tax-deferred and tax-free Roth contributions depends on your income and retirement expectations. Super savers may benefit from Roth contributions if they anticipate being in a higher tax bracket during retirement. It's important to carefully assess your specific 457 plan's features and align your contributions and distributions with your financial goals.

 

To learn more about 457(b) plans, read the Milestones to Millionaire transcript below.

 


 

Cerebral Wealth Academy: As we kick off 2024, dive into Cerebral Wealth Academy—created by Alexis Gallati, founder of Cerebral Tax Advisors. With more than 20 years of experience helping doctors save more of their hard-earned money, Alexis recently launched “The Doctor’s 4-Week Guide to Smart Tax Planning,” an online course specifically designed for medical professionals with 1099 income. As a special New Year's treat, be among the first 20 to use the code WCITAX2024 for a $300 discount. Visit www.cerebralwealthacademy.com to start immediately implementing strategies that can save you thousands on taxes.

 

WCI Podcast Transcript

Transcription – WCI – 348
INTRODUCTION
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 348.

This podcast is sponsored by Cerebral Wealth Academy. As we kick off 2024, dive into Cerebral Wealth Academy, created by Alexis Galati, the founder of Cerebral Tax Advisors.

With more than 20 years of experience helping doctors save more of their hard-earned money, Alexis recently launched The Doctor's Four Week Guide to Smart Tax Plan, an online course specifically designed for medical professionals with 1099 income.

As a special New Year's treat, be among the first 20 to use the code WCITAX2024 for a $300 discount. Visit www.cerebralwealthacademy.com to start immediately implementing strategies that can save you thousands on taxes.

All right, welcome back to the podcast and thank you for what you do. Here we are. It's 2024. This is our first podcast that's going to drop in 2024. We're actually recording it before Christmas, but first podcast in 2024, New Year, new you. This is the year you get control of your finances. This is the year you start living the life you were made to live. Let's get the financial ducks in a row so you can quit worrying about them, so you can concentrate on being a better parent, a better partner, a better physician, provider, practitioner, attorney. Whatever you do, let's get it going. You spent too long not having things optimized in your life. Let's get them going so you can live the life that you were meant to live, the life that you deserve.

I've got a neighbor, a good friend who's taken a sabbatical this year and doing some awesome stuff. I'm still trying to talk him into doing a guest post on it after the year is up. And he'll be doing some locums as well.

He is a radiologist. He'll do a little bit of locums for some income during the year, but traveling with the family, world schooling the kids. He has just been planning it for the last year or two and they're kicking it off like in a couple of days and I'm so excited for them and for those of you doing similar things out there, because you got control of your lives, you got control of your finances and it's just opened up these incredible opportunities for you and your family and those you care about most and your practices or whatever. So, thanks for what you do. Take control this year and let's have a rising tide and lift all boats together.

 

CORRECTION: CHARITABLE CONTRIBUTION DEDUCTION ON TAXES

All right, we got to start today with some corrections. Some of them are a little ticky-tacky, but I think they're worth talking about. Okay, here's one of them that I just totally blew.

In the episode about DAFs, where I interviewed the Daffy CEO, I mentioned that there's a tax deduction, that you can deduct $250 or $300 or $500 or $600, whatever it was, without itemizing. That you can deduct charitable deductions up to a certain amount without itemizing. That was only in 2020 and 2021. You can't still do that. I'm sorry. Apparently I missed that. I itemize my taxes every year. I confessed I didn't pay much attention to it. That was wrong. That is no longer possible. So, if you don't itemize, you get nothing taxwise for your charitable contributions.

 

DAF QUESTION

All right, another one we got. This one came in by email on the same episode and said, “Hello Jim, I enjoy your work as usual. I just finished the Daffy podcast. One key risk with DAFs was not discussed at all, and I would've loved to have heard some response to how conflicts between the donor and the fund might be resolved. We live in a world where my idea of ESG and your idea of ESG, environmental social governance investing may be very different. One where Canada actually froze bank accounts when individuals gave to disfavored charities. Once the donor makes a donation, the funds now belong to the fund.

Ultimately, can't the fund block donations to its disfavored charities, even if in conflict with the donor's wishes? Doesn't this mean donors should pay special attention to the values of the DAF and or seek contractual assurances that the fund will distribute to all legal charities regardless of the fund's feelings towards those charities? Should a donor be concerned about what state the DAF is located in? What if California bans transactions to the NRA foundation? Now Alabama bans transactions to the council on Islamic relations by naming each some sort of terror group or supporter.

These questions are either a bit conspiratorial or easily predicted depending on one's current worldview, but it would not bet against this conflict being real in the future. It seems important to prioritize DAF values, donor agreements, and perhaps even location over fees, investment options, and app usability.”

Well, yeah, it does sound a little bit conspiratorial. I guess it's a possibility. I guess it's a real risk. If you donate your entire lives worth of charitable contributions to this DAF and then all of a sudden they're like, “Nope, you can't give to all the charities you love.” I just don't think this is very realistic. I've never heard of it happening before.

As near as I can tell, the only DAF I've ever used is Vanguard Charitable, but their screening process, as far as I can tell, is limited to just making sure the charity is actually registered with the IRS. I think that's it.

But here's the deal. What if this happens? What if you pick some little tiny startup DAF in California and for whatever reason you can no longer donate to the NRA? Although I don't think the NRA is actually a charity. Maybe they have a charity associated with them, but I actually don't think NRA donations are considered a charity.

At any rate, whatever, somebody you're not allowed to donate to. Well, almost surely they're not going to put Vanguard Charitable on the list. They're not going to put Fidelity Charitable on the list or Schwab Charitable on the list or Daffy on the list. So take it out of that DAF and make a grant to your Vanguard Charitable DAF and then you can donate to whatever politically unpopular charity you want to donate to.

I just don't think this is a very realistic concern. The more I think about it, the less I worry about it. It certainly would not be what I prioritize when choosing a DAF. I would prioritize fees and investment options if you're going to leave the money in there invested, usability, the app. Those sorts of things. Convenience with your brokerage account. That's a big thing with me because my brokerage is at Vanguard and so is my charitable account.

Lots of people don't like the Vanguard account just because of the high minimums. You got to put $25,000 in there to open it up. I think additional contributions have to be at least $5,000. Your grants have to be at least $500. A lot of people that's like, “I don't want to go that big.” So, they don't use Vanguard, they use Daffy or Fidelity or something else.

 

CORRECTION FROM 831(b) EPISODE

All right, another one. This is another correction, observation, et cetera. This one comes in about the 831(b) episode. This was an interview we did with someone that offers these captive insurance plans.

The email says, “I have been a long time follower of the blog. From the day I started medical school in 2013, you have incredible talent for writing and communicating. It's been fun to watch your blog grow throughout the years. Your effort along with many others, such as Mr. Money Mustache and the Bogleheads forum were the cornerstone of my financial education and certainly helped me to get off on the right path. Thank you. I peruse your work somewhat frequently and wanted to clarify something.” All right. Well, thanks for your kind words.

“Your podcast on 831(b) plans was extremely interesting. However, after looking into this a bit more, it appears that the discussion on fund growth was somewhat misleading. Contributions to the fund are not taxed or growth on the reserves do not grow tax free. In fact, they're actually taxed at C-Corp rates. In effect, you end up with the immediate deduction, a high debt drag on growth, but distributions at the capital gains rate. I'm not sure where that would make this fit in terms of an additional retirement vehicle, but overall, perhaps somewhat similar to a 401(k).

I found the concept of these plans particularly interesting as it seems a way I could insure against Medicare clawback risk for my ambulatory surgery center. Otherwise, it doesn't seem that there is any option available for this kind of situation.

Once again, thank you for what you do. I’m one year out of fellowship and still working on getting back to broke, but I built up enough that my student loans and half our starter house could be paid off entirely. Perhaps after the practice loan is paid off too, I would love to apply for the Milestones podcast. Take care and have a Merry Christmas.”

Well, that's a nice email. Yeah, you don't have to do all that before you come on the Milestones podcast. We'll celebrate anything. If you pay off your bike loan, we'll bring you on the podcast.

Here's the deal. Yeah, this is the way it works. Maybe we weren't very clear. And so, let's clarify how this works in the 831(b) plan. Essentially those assets are in the C-Corp. You got to form a C-Corp to do this thing. And so, gains on that income there, that does get taxed at those C-Corp rates until that gets distributed. So, you get an immediate deduction. When the money comes out, it comes out basically as dividends to you. Corporation dividends, qualified dividends. So they come out at dividend rates, but it's not quite like the way an IRA or a 401(k) would work where it grows in a tax protected way. There is some tax drag on it while it's in the plan. And we weren't very clear about that on the podcast. So for that, I apologize. That is the way it works.

Now does that make it less attractive to me than it was before? Not really because I understood that was the way it was before, but I'm probably not going to be doing that. I don't see a huge use for it for WCI. My financial life is complex enough as it is. I don't need a captive insurance plan to make it even more complicated.

 

SAVING UP FOR INTERMEDIATE TERM GOALS QUESTION

Okay, let's take a question now off the Speak Pipe. This one's from Erica. Thanks for doing a question. Those of you who want your questions on the podcast, want to get them answered, want to help support this community, go to whitecoatinvestor.com/speakpipe and you can record up to 90 seconds. You don't have to use all 90 seconds of a question and we'll try to get it answered on the podcast.

Erica:
Hi Dr. Dahle, my name is Erica, I'm a pediatric hospitalist. I'm curious if you have any guidance for saving up for intermediate term goals like seven or eight years away. I know that usually the stock market is recommended for anything at least 10 years away. And for short-term goals less than five years, usually a high yield savings, CD or money market fund would be recommended. But between those two time periods, is a mixture of the two safe? Thank you so much.

Dr. Jim Dahle:
Okay. Well, the reason you don't get clear instruction on this from me or anybody else is it is incredibly controversial. There is no right answer here. Everybody disagrees. Clearly, if you need the money in a year, you should not be investing it in stocks and real estate. Even putting it in bonds is a pretty risky thing to do. You could have a year like 2022. Rates went up 4%, bonds cratered. I think losses were up to like 15% in lots of very good bond funds when rates went up that high.

And so, for that really short time period, 1, 2, 3 years maybe, cash. The nice thing right now is you can make 5.3% on your cash. At least as I'm recording this, I think rates dropped a little bit recently, so it might be 5% next month when you hear this. But you can make 5% on cash, which is great. There's no downside to being in cash these days. You're getting rewarded pretty well. That's even higher in the yield on bonds right now. I wouldn't feel bad about leaving money in cash for relatively short term stuff.

As far as stocks go, and when I'm saying stocks, I'm not saying go about and buy Amazon and Tesla. We're talking about broadly diversified low cost index mutual fund or ETF when we're talking about stocks.

Money that goes into stocks really is long-term money. And how long is long-term? Well, that's hard to say. Some might say five years is enough. It's pretty rare for stocks to lose money over a five year time period. It's not impossible. It's very rare to lose money with stocks over a 20 year time period, at least on a nominal basis. In fact, I'm not sure it's ever happened that people have lost nominal money on stocks over 20 years. They might've been outperformed by bonds or something else, but they haven't actually lost money in that time period. Certainly money you don't need for 10 plus years, I would feel very safe investing that into stocks and real estate and those sorts of aggressive investments.

At five years, I think there's probably some room for people to say, “Hey, that's maybe not long enough for stocks and real estate, particularly anything that's illiquid.” And so, at that point, maybe we're talking about a mix. Maybe some in cash, some in bonds, some in stocks. That sort of a time period.

Now you're talking about seven-ish years. And so, that would put us somewhere in between five and 10, but at seven-ish years out, I'm pretty comfortable with a pretty good chunk of it in stocks. And it's possible you would've come out ahead in bonds or even in cash. That's always a risk with investing. Even in the long run, that's a risk. It's entirely possible, but for the rest of your life, bonds could outperform stocks. It's probably not the way to bet, but it's possible that it could happen.

However, there's another side to this. And that side is probably more important than whether you lose money or not. And that is the consequences of not having your money at that time period.

For example, let's say you're saving for college. And a lot of people save for college and dial back the aggressiveness as that kid gets closer to 18 so that it's basically all in cash when they start college at 18. But the truth is, you don't spend all that money at 18. Some will be spent at 19, some at 20, some at 21. Maybe some of it doesn't get spent until dental school. Maybe some of it is left behind in that 529 and the beneficiary is changed to the grandkids. That money might not be needed for decades and yet you had it all sitting in cash. So, you got to keep in mind things like that. When will the money actually be spent?

Now if you need a home down payment on a specific date, when you get out of the military and you're moving to a new place and you're going to buy a home, well, you can't take as much risk with that as you can with something where it really doesn't matter if you have the exact right amount of money or exactly when you have it. What would be an example of that? Maybe you're investing to buy a wake boat and it's really not a big deal if you buy it this year or next year.

Well, you can invest it more aggressively if it doesn't matter which year you actually cash out. If it's down the first year, well, you just give it another year and it'll probably be better than it was the year before. No guarantee. It could be 2002 after 2000 and 2001, but chances are good, it'll be better. Things were down in 2022. 2023, great year. If you had had the flexibility to wait another year, you basically got all your money back that you lost in 2022.

Consider the consequences. How finite is that date that you actually need the money? How finite is the amount of money you need? The more flexible you can be and the further out in the future this goal is the more aggressive you can be with it. I guess the bottom line is for a seven year goal, I could go anywhere from a seven year CD or a seven year treasury all the way to 100% stocks. No clear guidelines for you just based on the number of years.

All right. It's a new year. You're probably looking at the income you had last year wondering “How can I have a higher income?” Well, you can negotiate a higher rate of pay from your employer, maybe you can work a little bit harder, more shifts, more call, or maybe you can do something different.

Consider our survey companies that we've partnered with. And if you go to whitecoatinvestor.com/mdsurveys, you'll see the people that we've partnered with. These are people that basically want to pay you for your opinion. A lot of times you can affect the development of drugs or devices or those sorts of things that can make a difference in your practice.

But that additional income gives you an opportunity to get a solo 401(k) because you're now in business for yourself getting paid on a 1099. It's a side gig that has a super low barrier to entry and you get a special deal by going through the WCI links that you can't get by going directly to the company.

Now it's super true that they prefer some specialties over others. Emergency docs are not their favorites. A lot of times you can still do surveys for them, but they love you if you're an oncologist, a neurologist, a rheumatologist, a cardiologist, a gastroenterologist, a pulmonologist. The connection seems to be people who prescribe expensive medications. But if you're in those specialties, this can be really lucrative. Neurologist and WCI columnist Rikki Racela made $30,000 in a year just taking these surveys on his free time. Whether you're sitting on a bus or waiting for your next patient to come in or whatever, you'd be surprised how much free time you have when you can use it in five and 10 minute chunks to do these surveys.

Again, that link is whitecoatinvestor.com/mdsurveys. Note that the link is not whitecoatinvestor.com/survey. That takes you to our annual survey, which we want you to fill out too. And in fact, if you fill that out, you'll be entered for the opportunity to win WCI swag and you'll probably have an even bigger effect on what happens here at WCI. But if you want to take the surveys you get paid for, that's white coat investor.com/mdsurveys.

 

INSTITUTIONAL MALPRACTICE POLICIES BASED ON SELF-INSURANCE QUESTION

All right, the next person on the Speak Pipe is well-known to long-term listeners. He used to be Tim from San Francisco, he's now Tim from Salt Lake City and he has a bad habit of asking me questions I don't know the answer to. So, let's see if this is another one of those.

Tim:
Hi Jim, it's Tim in Salt Lake City. I just finished your asset protection book. Thank you so much for writing that. I'm definitely going to look into the domestic asset protection trust possibility for covering home equity. That sounds potentially useful in Utah.

I'm calling to ask about institutional malpractice policies that are based on self-insurance. I work at the University of Utah and like many institutions is self-insured. I have a little certificate proof of coverage which says the University, its officers and employees, its entities and employees of the state of Utah are self-insured in the respect to any claim or professional liability.

But interestingly down below it says, limits. Each occurrence $1 million, aggregate $3 million. And then it says, note in addition, the University carries an excess insurance policy with a commercial insurance underwriter.

I have two questions. One is, why are there limits if it's self-insured? And the second question is, what's up with this excess insurance policy? And does working at a self-insured institution like the University or the state significantly impact the probability of an over policy limit lawsuit? Thank you so much.

Dr. Jim Dahle:
All right, good to hear from you Tim. Great questions. Hopefully I can say something intelligent on them. Thanks for buying the book. For those of you out there who don't know about this book, the White Coat Investors Guide to Asset Protection. If you're worried about losing everything in a lawsuit, you need to read this book.

It's written aimed primarily at docs, physicians, dentists, people likely to get sued by their patients. But it's really for everybody. Everybody who's worried about losing money in lawsuits. And common lawsuits include like auto claims. Your 16-year-old kid runs into somebody and now they're disabled. If that person makes a lot of money, that could be a really big claim.

The book talks about those sorts of things as well and what can be done to help not lose everything in the event that happens. I don't want to try to scare you into buying this book because the message of the book, a great deal of it, is reassurance. But it's worth reading. It's not the first financial book you should read, but I put a lot of effort into it.

About half the book is a reference. It's basically a list of the state asset protection laws that are relevant in your state or states where you do business or own property or whatever. Tim learned from the book that you can use a domestic asset protection trust here in Utah. We don't have the best asset protection laws possible out there, but we have a few cool ones and one of which is that we can use these asset protection trusts. My house sits in a domestic asset protection trust and helps protect it from creditors in the event of some crazy above policy limits lawsuit.

All right. Tim, you got to quit worrying about your malpractice insurance. You've got excellent malpractice insurance. Not quite as good probably as when I was in the military. When I was in the military, basically the military just backstops it unlimited. I was never going to lose personal assets to a lawsuit while I was in the military. In fact, I may have not even been reported to the board or to the database.

It's like a totally separate question in the military, whether you get reported to the database. Your case goes to the panel and they decide even if there's a payout on it, you don't automatically get reported. They have to decide whether you actually screwed up. And so, the military's pretty awesome.

Your situation is not quite that good, but it's awfully good. What they're saying is that I am your insurance company as a Utah taxpayer. I got your back, man. If you get sued for screwing up, I'm going to cover you, me and my other 4 million Utah taxpayers. But we're only going to cover you up to a million dollars.

If for some reason this goes above a million dollars, you're not going to go to the taxpayer, you're going to this other company that the university has hired to provide some excess coverage. I don't know what company that is. I don't know what that policy looks like. You could probably get a copy of it if you really wanted it, but I'm guessing that probably covers the next $4 million, maybe the next $9 million in claims.

And then after that, well, who are they going to go after? I don't know, maybe they don't go after anybody. That's what happens most of the time. But I suppose it's possible they could go after the state some more and I as a taxpayer could be on the hook again for a bunch more money.

But it's also possible they could go after you and not just as an Utah taxpayer, but personally. If you had $100 million dollars judgment that wasn't reduced on appeal and the Utah taxpayer chips in a million and this excess policy chips in $4 million, well you still owe $95 million. You're going to have to declare bankruptcy. In Utah, you get to keep your retirement accounts, you get to keep your whole life insurance, your annuities, $40,000 of your home equity, everything in your domestic asset protection trust and anything that's protected in some other way. You declare bankruptcy and the debt goes away. That's the way it would work.

I think in your case more likely they're going to take that million dollars they can get from you. Maybe if there's this excess policy, they get a little bit more and then they're probably going after the deep pockets, which is the taxpayer. They're going to try to sue the University, in essence the state, to try to get any more money out of the situation.

Yeah, you're in a pretty good situation. That's a lot more coverage than most docs in Utah have. Most of us in the private world have $1 million, $3 million coverage and you've got $1 million plus something else. You already got way more coverage than anybody else has. I would sleep better at night knowing that.

 

QUOTE OF THE DAY

All right. Our quote of the day comes from Larry Swedroe who says, ““Anyone who says active managers can win should wear a t-shirt that says ‘I can't add’.”

It's really not about the efficient markets hypothesis. It's about the cost matters hypothesis. And the reason why active management cannot win on average is because the active managers are the market. They cannot on average beat the market.

On average, they will trail the market by the amount of their expenses. It turns out it's pretty hard to be an active manager, not because it's hard to beat the market. A lot of them can beat the market. They just can't beat it well enough to overcome the costs of doing so.

And it's not that nobody has any talent out there, it's that there's so many talented people out there that it makes the market very efficient. Not the way I'd bet for sure. If you're choosing a mutual fund or an ETF, 90% of the time in the long run you're going to be better off just buying something that matches the market than something that's trying to beat the market.

 

REAL ESTATE INVESTMENT QUESTION

All right, our next question on the Speak Pipe is about real estate investment. Let's take a listen.

Speaker:
Thanks for all you've done to help educate us in our financial journey. I'm wondering if you could speak some to the PEAK Housing REIT collapse. We had invested in this REIT a while back and now I am just wanting to know what we need to learn from this experience. Are there things that we should have looked at that we didn't see? Lessons that we can learn so that we don't end up invested in another one of these real estate deals that goes south?

I know there's always that risk when we were investing, but I just want to learn what we can from this experience. It seems like there was a lot of high leverage that was going on and that the investors didn't really have the first position on this REIT. And so, where we should have learned that, how we should have known it and how we can make sure we don't end up in this situation again.

Dr. Jim Dahle:
All right, let's talk about real estate in general. Let's talk about this particular investment specifically. Many real estate gurus have gone bankrupt over the years and I talked a little bit about this in my most recent real estate newsletter last month. If you're on a real estate newsletter, you get these, you've probably already read this, this message will be a bit of a repeat for you. If you don't get that, you can sign up at whitecoatinvestor.com/newsletter and you can get this newsletter, you can get the regular monthly newsletter, you can sign up for getting blog posts in your email, whatever you want. It's your choice what you get. You can stop anytime, it's totally free, whatever.

But anyway, many real estate gurus have gone bankrupt over the years. And sometimes it feels like half the authors of real estate investing books have lost it all at some point in their careers.

The story is almost always the same. Too much leverage. By leverage I mean debt. People learn about leverage and they get really excited about what it can do to help them achieve financial freedom relatively quickly. They say the more leverage, the better. Other people's money.

The problem with leverage is that it works both ways. Just like you can double your money by putting 20% down and having a property appreciated by 20%, you can lose your entire investment by putting 20% down and having the property drop in value by 20%.

In fact, if you're investing directly in real estate, not in a syndication, not in the fund, it's possible to lose more than your entire investment. Imagine putting 20% down and then having the property value drop by 50%. You're still going to owe the entire mortgage. The bank is not going to take less. You can lose more than 100% of your investment in leveraged investments.

Now, time heals most wounds in real estate. However, for time a.k.a. appreciation of the property value, to heal your wounds i.e. drop in value or unexpected expenses, you have to actually stay in the game. And the way to stay in the real estate game is to have positive cash flow.

The way to have positive cash flow is to put down more money, reducing the largest expense of real estate investing i.e. the mortgage payment. It would be extremely rare to have negative cash flow on a paid off rental property. Even if your property drops in value, you can just hold onto it until it goes back up in value. So long as you can still pay that mortgage payment and other expenses, either from cash flow on the property or some other source of income. However, even a doctor's income can only carry so many properties that create negative cash flow.

One benefit of being a passive real estate investor i.e. a limited partner in a syndication or a fund of syndications is that your loss is limited to your entire investment. However, you still have your entire investment at risk. And sometimes the equity in a leveraged property goes to zero and the equity investors are wiped out. Although rare, sometimes those higher in the capital stack i.e. those with preferred equity or the debt investors lose principle too.

If that property is the only holding of a syndication, the equity investors lose all their money. If that property is one of a dozen in a real estate fund, the result is much less catastrophic but there's still a loss of value. And if an entire portfolio or a fund is over leveraged or poorly managed, it can all be lost.

On two separate occasions, I've lost most or all of the principle in a passive real estate investment and I know some White Coat Investors have invested alongside me in both of those investments. It absolutely does happen and it hurts. It hurts both psychologically and financially.

Financially, obviously, it hurts because you lost some money. Psychologically you beat yourself up because you ask yourself, “Well, why didn't I look at this more closely? Surely if I would've thought more about this or if I would've dived deeper or asked better questions, I would've figured this out in advance.” That's not always the case. Due diligence is important, but diversification also helps protect you from what you can't know.

While neither one of these partnerships in which I've lost money is completely wrapped up, there are some preliminary lessons that can already be drawn. The first episode was a result of fraud. Basically the sponsor a.k.a. the operator or the manager of the syndication violated the terms of the partnership and used the value of the apartment building owned by the partnership as collateral for a separate loan.

Then he defaulted on that loan. And so, the sponsor ended up going bankrupt and being criminally prosecuted. But the investors, including me, really didn't have any financial recourse. There was nowhere to go. And while the platform I bought the syndication through formed another partnership with some additional equity to try to save the deal, their current best estimate is still that I'll lose 100% of my equity in the deal. And I think that's probably going to wrap up at some point in 2024. And when it's all wrapped up, I'll do a blog post about the specifics in it.

The second occasion is the one referred to by this Speak Pipe. This was a REIT that sponsored the White Coat Investor for a year or two up until the beginning of 2023. And while the company has been very transparent about what's going on, that doesn't really do much for the disappointed investors facing serious loss of capital, including me.

One of them complained to me by email, “I'll lose a lot of money on this investment. Of course, I knew that I could suffer up to 100% loss, but I viewed it as a distant possibility as I did when I underwent hernia surgery. The operative consent form mentioned the possibility of death, but I trusted the surgeon to keep that probability minimal. It is one thing to invest in crypto which has no intrinsic value, just what people believe it is worth. This investment was in houses which have intrinsic value. If they're not giving the houses away for free, then how is it possible for investors to have 100% loss?”

Well, as I explained above, it is possible and actually not even that hard to lose 100% of your investment due to leverage. This REIT is currently estimating a loss of 75% to 100% of the capital from the investment.

So, what happened? Well, really it's the same old story. There wasn't enough cash flow to service the debt. The capital stack started with debt. One problem for the REIT was that some of the debt was variable, not fixed, and as interest rates went up in 2021 and 2022 about 4%, that dramatically increased the cost of the debt.

Now, after the debt in the capital stack, there was some preferred equity. However, the managers of the REIT gave the holders of the preferred equity a call option. And as rates rose, surprise surprise, they exercised the option.

And the other issue with this particular REIT was there was a fair number of assets in the REIT that were build to rent homes that were not yet cash flowing assets. That further strained the available cash flow, the cash flow coming in to the REIT was being used to pay off this now increased interest rate. It was being used to cover the expenses of these build-to-rent homes that weren't yet cash flow positive. And then of course, these holders of the preferred equity said, we want our money. And so, they got to start prioritizing the payment of that principle back.

The bottom line was that the REIT could no longer cover its operating costs from cash flow, much less service that debt and give the preferred equity holders the money back as quickly as they wanted. So, it began to sell the assets. In this case, in this particular REIT, those are single family homes. It's been trying to sell assets to raise cash.

And as you know, when you're desperate to sell, you don't get very good prices on what you're selling. And that's been the case so far as the REIT tries to sell homes quickly enough to stay in business, make the now increased debt payments and keep the preferred equity wolf away from the door.

And this hasn't all wrapped up yet and probably won't for another year, but it appears that the debt holders are probably going to get their money back. The preferred equity holders are probably going to get most or all of their money back and the equity holders like me are going to lose most or even all of their money.

Lessons to learn from this debacle. Well, let's split them up. First there's lessons to learn if you're a direct real estate investor or a fund manager or a syndicator. And then there's some lessons to learn if you're a passive real estate investor, a limited partner in a deal like this.

Let's do the first ones for those who are direct or fund managers. Number one, use less leverage. The way to be cash flow positive is to use less leverage. Yes, it lowers your returns, but it also lowers your risk. So, instead of only putting 20% down or 25% down, maybe you put 33% down or 40% down. It just improves your cash flow, reduces your risk. And if you can't stay in the game, you're going to lose the game.

Second lesson is if you're going to use variable rate debt, make sure that you can afford the worst case scenario. I'm not actually against variable rate debt. But a lot of commercial properties not only have a variable rate, but you got to refinance it every few years. Every three or four or five years you got to refinance it. That’s not the same as having a 30 year fixed rate mortgage. It's dramatically more risky. And so, you should get a significantly lower interest rate for taking on that interest rate risk yourself. But you got to be able to handle that risk. If you can't self-insure that interest rate risk, you need to pay somebody else to run it for you.

And finally, don't give call options to debt or preferred equity holders. Raise more equity, put more down, and have less leverage instead. That was certainly a major issue with this particular REIT and its current problems.

All right, lessons for passive real estate investors like I was in this deal. The number one lesson is diversify, diversify, diversify. What protects you from what you don't know, from what you can't know? Diversification. I invest money in stocks, I invest money in bonds, I invest money in real estate. When I invest in real estate, I spread it all over the place. If one of these deals goes bad, it really doesn't affect my financial life all that much.

That can be hard to do if there are high minimum investments in these deals, and there often are. For this particular deal, I think it was $25,000, but lots of deals are $100,000. I've been in deals that had a $250,000 minimum. You better have a lot of money if you're going to be able to diversify if you got to put $250,000 into every deal.

A fund is going to be more diversified of course than an individual syndication is. But diversification between fund managers is still important and that's part of the reason why there's this accredited investor rule. You have to be an accredited investor to invest in private investments.

And the idea behind being an accredited investor is twofold. One, that you can evaluate the deal on your own without the assistance of a financial advisor or accountant or attorney. And two, you can afford to lose all the money in the deal without really affecting your financial life in any significant way. And if those aren't true, you really shouldn't be investing in these sorts of deals.

The actual requirement to be an accredited investor is purely financial, though. If you've made a couple hundred thousand dollars each of the last two years or $300,000 together with your spouse, or if you have a million dollars in investible assets, you're an accredited investor and you can invest in these things. I actually recommend you double those numbers and use both of them so you have an income of at least $400,000 and investible assets of at least $2 million. I just fail to see how you can really diversify these investments if you don't have that sort of change around.

Lesson two, after diversification, which is the most important one to take from this sort of an incident. Invest at the minimum amount until you know a sponsor well and have evidence that they manage their business well. The shorter their track record, the less you should be willing to invest.

In this case, the minimum investment was $25,000. If that is what you limited your investment to, that's all you're going to lose. If you invested $250,000, that's the most you can lose. So, until you know somebody well, and in my experience that takes years, maybe don't invest more than the minimum. Maybe it's the second deal that you invest more into with this particular sponsor.

Okay, number three. Understand where you are at in the capital stack. The Speak Pipe question asked about the investors weren't first in line. Well, no, you're not first in line if you're the equity investor. The first in line is the mortgage holder, the debt investors.

If some property falls in value by 40%, the equity investors are probably wiped out in most cases if that property has to be sold at that time. In fact, if it drops 40 or 50%, if there's another level of mezzanine debt or a preferred equity level, they're probably wiped out too because first in line is the debt holders. That's why debt investing is less risky than equity investing.

As a general rule, you're going to make less money, too, investing in the debt, but you definitely have less risk. Understand where you're at in the capital stack. If you're an equity investor, you're in the riskiest position. If things go well, you're going to make the most money of anybody else, but if they don't go well, you're most likely to be wiped out.

And fourth is understand the leverage used by the syndicator or fund manager. How much leverage are they using? How much of it is variable? Is there preferred equity or mezzanine debt too? Does anyone have a call option that they could exercise that could give you problems?

Those are the sorts of questions you want to ask when you're getting into these investments. Once you're in them, some of them provide some liquidity, but most of them you're in them for five or 10 years. You're locked in, you're along for the ride. After the initial due diligence period, yes, you're collecting mailbox money, but no, there's nothing you can do when things are going bad. You're just along for the ride and that might be a few years before you find out what your overall return was.

The bottom line is real estate investments can and do go to zero. That's one reason why private real estate investors generally must be accredited investors. If both of those accredited investors requirements don't apply to you, if you can't evaluate these on your own without the assistance of others, or if you can't lose all of your money going into the investment, no matter how much FOMO you feel looking at projected or even actual returns or how much you want to feel sophisticated or that you're playing with the big boys, these are not for you.

Risk is real. Investing is much more about risk control than it is about returns. I hope that's helpful. And obviously lots of us make mistakes in investing. Don't beat yourself up about it, learn from it, move forward and hopefully this deal gets turned around. They're certainly working very hard trying to do it and hopefully they can get some or even a good chunk of our equity back out of the deal. But I've certainly braced myself for 100% loss of equity in that deal.

 

CUSTODIAL ROTH IRA QUESTION

All right, the next question comes in by email. This one is a question about custodial Roth IRA. “Quick question I feel like I should know but cannot find the answer. When contributing to a child's custodial Roth IRA and the child has earned income less than the maximum contribution allowed, is the actual amount to be deposited equal to the gross or net pay for that year? I’m trying to be precise while showing my kids these steps.”

All right. It's gross, but obviously a normal person without a parent to help couldn't contribute that because, well, that money went to the tax man. But the IRS doesn't care about that point. The requirement is you can't contribute more than you made. So, if you made $4,000, you can contribute $4,000. The IRS doesn't care if you pay your taxes from some other savings you have or if somebody else pays them for you or whatever. So, it's gross.

 

HOW MUCH SHOULD LOCATION MATTER WHEN CHOOSING A RESIDENCY QUESTION

All right. Question off the Speak Pipe from Alex.

Alex:

Hi, my name is Alex. I'm calling from the Southwest, a very affordable region. I'm a big fan of the podcast, so thank you for all the information you put out there. I'm a fourth year medical student. I have a scholarship that paid for tuition and I signed on to come back and work here for four years after all my training is done. I'll be graduating with about $50,000 in student loans. My husband and I are very established here. We bought a house back in 2019 and our kids stay with grandparents so we don't have any childcare expenses. If we move for residency, he would be unemployed. He does not work in medicine.

What advice do you have for choosing relocating for residency versus staying and having all my education from one spot? Is it worth the financial strain and hustle if eventually we'd come back here anyways? Would it be detrimental to my negotiating power if my education is all from one place? Thank you for everything. Bye-Bye.

Dr. Jim Dahle:
Great question. First of all, I'm going to push back on this idea that your spouse is going to be unemployed. The unemployment rate in the country right now is like 3%. The likelihood that your spouse cannot get a job someplace where you're going to residency seems extremely low to me. I guess it's possible. I don't know what your spouse does. Maybe something's happened to them, they're not very employable for some reason, but chances are that unemployment is going to be pretty temporary.

What I've found with a lot of people too, especially in this day and age of people working remotely, a lot of times if that company wants you so bad, they don't care if you move. Like our tech guy. Our tech guy here at White Coat Investor used to live locally. Well, he moved away. We didn't fire him. He was working mostly from his own home anyway.

Lots of jobs are like that, that you can keep the same job even though you move away. Especially if you tell them it's highly likely I'm coming back in a few years, then they may bend over backwards. Because turnover is expensive. Nobody likes hiring and firing. It's expensive and you got to pay recruiters and you don't have somebody for a few months. A lot of employers, especially these days with unemployment so low, will bend over backwards to keep you. I'm going to push back on that point.

But to answer the question you actually did ask, I got three factors that I think are important when you're choosing your residency. The first one is people. I think this is probably the most important part of choosing a residency. You want to go somewhere that you fit in, that you like the attendings, the staff members, that you like the other residents, that you fit in there.

I went to some residencies and I had been married at this point for four years and interviewed there and it was a great residency. The academics were great, but all the residents after shifts, they went out clubbing. Well, I wasn't really into clubbing. Everybody was single and they were into clubbing and it just wasn't my thing. It wasn't a good fit. I was much better off being in Tucson with a bunch of people where half the residents were married and everybody was into outdoorsy kind of stuff. I just fit better there. And I like the faculty better and all those things. So, fit is number one.

Number two is the quality of your training and the quality of your education. I think that really matters. If your local place is not that good of a residency, I think it's worth going somewhere else for sure. Because I think the quality of your training really matters. It's going to affect how good of a doc you are and the patient care you're going to give for the next two or three or four decades. And I think it's worth going to get that.

And then the third thing is location. Location is important. Having family support around, like in your situation where you got grandparents to watch kids, where your husband already has a job. That place where you're at now, assuming they have a residency program in your chosen specialty, which it sounds like they do, that's going to be pretty high on your list no matter how much you like the program in another state. This one's still going to be second or third, I'm sure. And so, I think that's fine. I think location is a really important thing to consider. And part of that is cost of living. Obviously, this location is relatively low cost of living.

I think your fear is that somehow this is going to hurt your career by going to med school and residency in the same place and staying on there for faculty or going into the community in that area. And there are some benefits to going somewhere else and seeing different ways that people do things and seeing different patient populations and not being “inbred” in your training.

But you know what? There's other factors too. I wouldn't put that in my top three. That has to be someplace different than where you did medical school. It's not nearly as important as the people and the quality of the training and the location. But if all else is equal, sure, go someplace else, get a different experience. But I don't feel like that's so incredibly important that you have to do it.

Now, that might not be the case. If you want a specific academic job and a specific specialty, maybe it's really important to have Yale or Harvard or who knows what behind your name to get the job you really want. But I think for most of us docs, that just isn't the most important thing.

It sounds like you want to stay there. I suspect you're going to rank that program really high and I think that's probably appropriate. But don't be afraid to look around. You might find something you like even more and you're willing to sacrifice a little bit on the location if you get people you like even better or training that you think is a little bit better.

 

SPONSOR

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Thanks for those of you who are leaving us five star reviews, for those of you who are telling your friends about the podcast or the blog or the books. We had a recent review from Titanic Rage, great name by the way, who said, “Wish I’d found this sooner. Cannot recommend highly enough. This podcast provides accurate, relevant information in an accessible way. It has saved me thousands already, and will save me so much more throughout my investing life.” Five stars. Thanks for the kind review.

All right. For those of you out there in WCI land, thank you so much for being with us. It's now 2024. I started doing this White Coat Investor thing in 2011. What's that work out? 13 years I've been doing this. That's the majority of my career. It's been an awesome journey. We really appreciate you having you with us.

This podcast is about you. You know about the Speak Pipe. Leave us questions, we'll answer them. Shoot us emails, tell us what you like, what you don't like. Answer the survey every year. It really does get used and it's fun. We publish some of the data, not your individual data, but in aggregate data to show you what White Coat investors are making and what they have and what they do with their student loans and all kinds of fun stuff like that.

But we appreciate you. We're glad you're here. You're why we're here. There's 18 of us right now working at White Coat Investor, and every one of us is focused on helping you get a fair shake on Wall Street, and helping you to be successful in your life, helping you to find the wellness you deserve, helping you to become financially literate and financially disciplined. We really do care about you, and we're thankful you're listening to the podcast. We'll see you next week.

 

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

 

Milestones to Millionaire Transcript

Transcription – MtoM – 151
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 151 – Family Doc changes its 457 plan.

As a White Coat Investor, you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we put together a list of recommendations for companies that pay you to take surveys.

If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money, start a solo 401(k) and use your medical knowledge to impact new products.

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All right, we've got kind of a unique milestone we're bringing on today, but I think it's a pretty significant difference because it's going to make a difference in this doc's financial situation of several hundred thousand dollars, but it is also has the potential to make that difference in the lives of hundreds of this doc's colleagues. Stick around afterward, we're going to talk a little bit about 457 plans.

 

INTERVIEW

We have a wonderful guest on the Milestones to Millionaire podcast today. He's going to remain anonymous, although I suspect some of his friends and family may recognize his voice when they listen to this podcast. But welcome to the podcast.

Speaker:
Hey, it's a pleasure to be here, Jim. I just want to start by saying I appreciate everything you've done for us, and I hate to sound redundant with all the guests that come on here, but really, you were instrumental in regards to financial awakening and fortunately hit the ground running straight out of residency. So, seven years into practice and essentially killing it because of you.

Dr. Jim Dahle:
Yeah. Awesome. You were doing great. We talked before we started recording, and you've hit a lot of milestones already just in the first seven years out, so you're doing great.

But it's not just me here anymore obviously, there's 16 of us working here at the White Coat Investor trying to get this message out, get docs financially literate, and try to get everybody inspired and accomplishing their own financial milestones. Tell us what you do for a living and what part of the country you're in.

Speaker:
I'm in the Central United States. I don’t know if you call it South Central or Midwest, there's kind of confusion as to where we live, as to what geographic area we actually are in. But I live in the Central US and I'm seven years out of training, entering my seventh year practice.

Dr. Jim Dahle:
And you're doing family medicine?

Speaker:
Yes, sir. I'm a family practice physician. Not really full scope. I don't do obstetrics and I don't do kiddos just because essentially in the geographic era we are, there's a heavy saturation of pediatricians and I found that most families want to go to a pediatrician, and as such, my skillset sort of diminished and it was a lot more to keep up with vaccines and stocking those in our office, et cetera.

I made a joint decision in conjunction with my partners and medical assistant that it would make most sense to actually give up that section of practice, which was very small to begin with. But do intra office procedures, whether it be skin cancers removals or biopsies or intra-articular joint injections. Really enjoy mixing things up in regards to primary care, not just seeing diabetics all day.

Dr. Jim Dahle:
Yeah. It sounds like a great practice. Well, let's talk about what you've accomplished. It's a little bit of a unique milestone. We've had one previously that was somewhat similar, but this is a major accomplishment. So, tell us what you've done.

Speaker:
Essentially, I've been at this group for seven years fresh out of training, and even coming out of training, I was already listening to your podcasts and not so much the podcasts at that point in time because I think it was still starting to grow. But I was actually reading the website and coming out of training I told my wife we needed to start allocating money to retirement because we really didn't have anything at that point in time.

We are a not-for-profit hospital, one of the largest in the country that's independent and debt-free, which we're kind of a unicorn. We do very well financially. We're very financially stable. We have in excess of 500 days of cash on hand for operating expenses. With that, I felt good about investing in the 457, but at the same time, we didn't have good distribution options. We had great options within the accounts. We worked through Fidelity as far as our broker and had a full lineup of low cost index funds to choose from.

Also, like I talked about, we were very financially stable. I had no reservations about utilizing the account, with the exception of the distribution really was a one-time payout, a time of severance from the company.

Dr. Jim Dahle:
Like the worst possible distribution option. That was the only option in your 457?

Speaker:
Yeah.

Dr. Jim Dahle:
Let's see if we can make things as terrible as we can. Who designs these things? It's terrible.

Speaker:
I don't know. Initially, when I first brought this up, I was involved to some extent in regards to leadership and chaired a committee or two, and got to know some of the people who made decisions and just kind of kept raising my hand and kept poking the bear, so to speak. They were very receptive, but early on they said that what I was asking wasn't possible. They said that it was not allowed.

And I actually shot you an email saying so much that my company had told me, “Hey, this actually isn't legal, what you're talking about.” And you responded back that's BS in so many words. You said they're not telling you the truth. And sure enough, I was able to raise my hand enough times to actually get on the retirement committee as the first physician voice amongst six other voting members. And we got the 457 change for a lump sum distribution to a payout that you can extend variable to your decision. You're able to rework it twice over the course of the payout, but you can extend it all the way up to 15 years if you want to. So, huge win for physicians.

Dr. Jim Dahle:
Sweet. So, you turned it from being unusable to being another great retirement option.

Speaker:
Yeah, it's huge. And I was talking to one of our senior leaders who used to sit on our main physician executive committee where we kind of troubleshoot problems with the system amongst the CEO, CFO, et cetera. He was an outgoing obstetrician and he'd been here for 30 years and his 457, I'm sure was massive. And he retired before I got this done, but I told him that I was working on it and he said if you can do this for future doctors, that's a huge win. It's not going to affect me, but if you can get this done, this will mean hundreds of thousands of dollars to other doctors.

And like you said, as far as your staff, it wasn't just me. Our retirement committee was very engaged. Our CFO, I got her ear and made a chance to talk to her as well as our CEO. There's been some changes since he's come here from his previous institution where we historically had the same CEO for over a decade. Just an incredibly stable company. I love, love working here. I drank the Kool-Aid. But our new CEO, there were some changes. And with that I set a huge win for physicians at a meeting, where there was about 20 of us would be to make this change. And he said that's something that's easy. We should be able to do that within the next calendar year. And sure enough, it got done.

Dr. Jim Dahle:
Yeah, pretty awesome. Has anybody thanked you? Has anybody noticed? Any of the other docs?

Speaker:
The people who have drank the White Coat Investor Kool-Aid, the people who are financially savvy know what this means. And yes, several doctors have reached out, and that's pretty rewarding. We did a leadership class within our group of about 20 doctors over the course of the last six months. It was really positive experience getting to know one another.

And I was actually on a Zoom call when I got word that this was coming out. We had in-person meetings and then remote meetings. But in one of the remote meetings, I got an email when this came down the pike, that it was getting approved, and I was grinning ear to ear on a conference call with about 20 other physician leaders. And people said, “Hey, I see you smiling there on your screen. What's going on?” And I alluded to what was happening and they were all pretty thrilled. Some people still hadn't elected to opt into this just because of that really crappy distribution. But I think more and more people are utilizing it now.

Dr. Jim Dahle:
Yeah. Compounded over time, this sort of a thing, the ability to use a 457 instead of investing in taxable, the ability to not end up getting a whole bunch of that withdrawal taxed in the highest tax bracket, it really is worth several hundred thousand dollars. This is like you just gave everybody an extra year or two of pay, basically.

Speaker:
I hope they see it that way, and I hope they realize that I poked the bear and made my voice heard and everybody was receptive, but I have no doubt that I was a main driver of this happening. I really believe that.

Dr. Jim Dahle:
So, how'd you get on the retirement committee?

Speaker:
Essentially, like I said, I raised my hand at enough committee meetings. Really how I got into leadership was about six years ago, there was a strategy planning session amongst FM and IM physicians and it was with our old CEO there. And essentially they were talking about strengths and weaknesses, opportunities, et cetera, essentially doing a SWOT analysis.

And at that point in time, I raised my hand to say, “Hey, we have this great thing that's retirement. We have an exceptional match here. Like I said, it's a unicorn when it comes to both the viability of the system as well as the retirement plan.” With that, I raised my hand in front of the CEO and said, “Hey, we really need to focus on this during recruiting.”

And coincidentally, the next week they were having a leadership retreat. And I surely wasn't supposed to be invited, but I got an invitation to go to a weekend with 50 other doctors within the 400 to 500 doctor group that we're as far as talking about opportunities for the system. That was my first recognition of things that you taught me and some of the things that I was able to verbalize that other people hadn't thought about.

And so, with that, just kept raising my hand, eventually became a part-time medical director here where I oversee family medicine and internal medicine and pediatrics and kind of help out troubleshooting, being that bridge between administration and frontline physicians in the field. I still practice three and a half days a week, but have a day dedicated to administration.

And then from there, I got to know the CFO and said, “Hey, I'm really passionate about personal finance and there's some changes that I'd like to make, and if you're willing, I'd like to consider joining your committee.” And they were nice enough. It had to be voted on by the six other members on the committee. And I didn't realize the formality of it, but I guess when you're talking about a hospital of this size and the retirement plans totaling several hundred million dollars between the 457 and the 403(b) it wasn't just a yes. But fortunately, they were nice enough to take me on and have been there since.

Dr. Jim Dahle:
And you're the only doctor on this committee?

Speaker:
I'm the only doctor on the committee. Yeah.

Dr. Jim Dahle:
Wow.

Speaker:
I very much enjoy it and feel blessed to be a part of it. I guess I didn't understand how much went into the retirement decisions and I'm glad to know that there is due diligence when you talk about plans that have several hundred million dollars invested in them. We had the representatives from Fidelity up recently for a committee meeting as well as an outside council who came in and ran through the options that we have available and the funds that are embedded in our plan by default.

Speaker:
They do have the option where you can actually establish a brokerage link account where you can go and say that you understand the risk and you can go after anything you want, whether it be Tesla or Amazon, et cetera. But the default options are pretty great. But just knowing that they have that oversight, it was cool to see. Just making sure that doctors don't get in over their heads or choose something that's unethical or it might not be in their best long-term interest.

Dr. Jim Dahle:
Yeah. Awesome. Well, thank you so much for being a physician leader, first of all. And second of all, for going after something that was pretty low hanging fruit, yes, but incredibly valuable to your colleagues. This is great what you've done, and I hope you'll inspire others to do the same so every White Coat Investor all over the country will have the best possible retirement account options to use.

Speaker:
Yeah. I'd just say if you see something that's amiss within your account or you feel like you're maybe not being taken care of as best as you could be, I know you said recently maybe that plan manager is best friends with the CEO, so maybe tread lightly to start until you fill out the waters. But yeah, I'd encourage you to talk to people who make decisions, get an ear with your director or your chief medical officer just because it's all about relationships. You need to know who's making the decisions and how you can get a chance to talk in their ear and let them know what you think is best, and more importantly, why you think it's best.

Dr. Jim Dahle:
Yeah. Awesome. Well, thanks so much for what you've done and what you continue to do for your colleagues.

Speaker:
Yeah. Thank you. This has been a blast and I appreciate again all that you have done. And all my friends who are physicians, I think pretty much all of them are listening to you nowadays. I try to preach this with any young doctors who come through our system and I try to ask them if they're a White Coat Investor or not. And then even during interviews, I'll go so far as to bring up a retirement and tell them why they should work here.

Dr. Jim Dahle:
Awesome. Well, thanks again.

Speaker:
Yeah, no problem. Have a great day.

Dr. Jim Dahle:
All right, I love that interview. I love seeing somebody go out there and make a change that makes a meaningful difference in their colleagues' lives. This is huge. There's a bunch of people who weren't using this 457 plan because the distribution options stunk and now they can.

The difference is that this money now can compound in a tax protected way, whereas before they would've had to invest in a taxable account. And so, the returns are going to be higher. Whatever that works out to be, whatever that tax protection is worth, 1%, 1.5% a year, whatever. But if you put that out over the next 30 or 40 years, that makes a huge difference.

Plus, instead of having to get a whole bunch of that money taxed in the highest tax bracket when you take it out, now it can be spread out over up to 15 years and you can now have it taxed maybe at 32% or 24% instead of at 37%. And of course, that's also going to add up to several hundred thousand dollars. And so, this is really pretty cool what he has accomplished.

 

FINANCE 101: 457(B) PLANS

As I promised at the beginning of the episode, we need to talk a little bit about 457 plans. There are two main kinds of 457 plans. There are governmental 457 plans and there are non-governmental 457 plans. The best kind are actually the governmental ones. That's not necessarily the case with everything in life. The government doesn't necessarily do everything better than private industry. But in this case, a governmental 457 is way better.

And the reason why is you get not only some additional protections typically. The employer is much less likely to go under because remember 457 money is deferred compensation. It's money that you've earned, but hasn't yet been paid to you. But it's subject to your employer's creditors. And so, if your employer is a state, they're unlikely to go under. If your employer is the federal government, they're unlikely to go under.

But the main reason why these governmental 457 plans are better is that when you leave the employer, you can just roll it into an IRA or another 401(k) or whatever. You can do a Roth conversion, put it in a Roth IRA. You have all these great distribution options.

When it's a non-governmental 457 plan, not only do you have to make sure the employer is financially stable and you have to make sure the investments are reasonable and the fees aren't too much, but you need to make sure the distribution options are acceptable to you. Because some plans are like the way this docs plan was where you got to take all the money out in the year you leave. That's a terrible option, especially if you're leaving at mid-career. You decide to separate from this employer, you're 45 or you're 50 or whatever, and now all of a sudden you've got an extra $800,000 in taxable income that most of which is going to be taxed at 37%. That's no bueno.

So, check on those options, make sure they're acceptable to you. And sometimes it can be taken out over five years or 10 years or 15 years or you can annuitize it but you just want to know what the options are. And every 457 plan is different. You need to look into that and make sure there's an acceptable option there for you in the plan. And if there isn't, one thing you can do obviously is get on the retirement committee and lobby for some changes.

But in general, people who have 457 plans also have a 403(b) plan and they have totally separate contribution limits. The typical contribution limit for a 457(b) plan is the same as the employee contribution for a 403(b) or a 401(k) if you're under 50. For 2023, that's $22,500. By the time you're listening to this, it's going to be 2024. I can't even remember what it's going to be in 2024, we'll pull it up here. 2024 it's projected to be $23,000. It's going up from $22,500 to $23,000.

There are also catch-up contributions for 457 plans. They work a little bit differently than the catch-ups in 401(k)s and even 403(b)s. And so, it's important that you understand how those work too. For example, with the 457 plan you've got to read the plan document again because everything can be a little bit different. But the IRS allows a governmental 457(b) plan to do the same 50 plus catch-up, $7,500 catch-up contribution exactly like 401(k)s and 403(b)s.

But it allows governmental and non-governmental 457 plans to have special catch-up contributions in the last three years before retirement age, where you can either double your contributions, for 2024 that'd be $46,000, or make up for any years that you didn't put in the maximum contribution. But it's whichever of those two is less. Kind of a complicated catch-up contribution thing that happens with 457. Read that plan document, understand how it works. If you qualify for those catch-up contributions, you may want to take advantage of that.

457s can also have Roth options. Same decision you have to make with a 401(k) or 403(b) as to whether you do tax deferred contributions or tax-free Roth contributions. The general rule, of course, is during your peak earnings years, you want to do tax deferred contributions. And in anything other than a peak earnings year, you tend to want to do tax free or Roth contributions. But there are exceptions to that. And the primary one being if you're a super saver then you're going to be in a higher bracket in retirement than you are now.

 

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All right, this has been the Milestones to Millionaire podcast. If you'd like to be a guest on it, you can sign up whitecoatinvestor.com/milestones. We'll celebrate any milestone with you, and use it to inspire your colleagues, your peers, your trainees to reach the same place and to accomplish their own milestones.

Keep your head up and shoulders back. You can do this. We can help. We'll see you next time on the Milestones to Millionaire podcast.

 

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