How to Retire Well: Saving Enough and Finding Purpose

Transcription – WCI – 496

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:
Welcome back to the White Coat Investor podcast. We’re glad you’re here. There’s a lot of people working on this podcast. Wendel does the AV stuff. Megan is the producer. I do most of the hosting. We have some other hosts that help from time to time, and we have you. You’re an important part of the podcast. We’re glad you’re here. Without you, it’s not a very fun podcast. We don’t get your questions. There’s nobody listening. Nobody’s given us five-star reviews to help spread the word about it. You’re an important part of the podcast. Thanks for being here.

Full disclosure, what I’m about to say is a sponsored promotion for locumstory.com, but the weird thing here is there’s nothing they’re trying to sell you. Locumstory.com is simply a free, unbiased educational resource about locum tenants. It’s not an agency. They simply exist to answer your questions about the how-tos of locums on their website, podcasts, webinars, videos, and even have a locums 101 crash course.

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One of you leaked. You leaked the information I told you to keep secret. Now my daughter knows that I’ve been training for my half marathon. This race is in five days now from the time we are recording this. It’ll be all over by the time you hear this, but one of you leaked and I found out who it was. It was employee number one here at WCI.

My daughter doesn’t listen to this podcast. She pretended she did, but she doesn’t. She was just trying to cover for employee number one, who’s been with us now for 12 years, but I’m going to fire her over this. I want her to know that. I’m just kidding. She’s fine.

Actually, it’s too late for Whitney to bump up her training anyway. This morning was my last training run for this half marathon and I’m planning to smoke her. We’ll see how it goes. Actually, she’s not been able to train all that hard. What I’m really planning to do is smoke her husband, my son-in-law, who thinks that doing a bench press challenge is how you train for a half marathon. He might be 29 years younger than me, but I’m going to throttle him in five days because he cannot drag himself 13 miles on his pecs. Just want to point that out. Wish me luck.

Actually, I’m not maybe doing the best thing this week for my final preparation for this. I’m going canyoneering, going hiking, hauling around a bunch of stuff in my pack and spending eight or 10 hours a day hiking and negotiating down slot canyons. Hopefully, I’m still not too sore on Saturday to do this half marathon. It’s also supposed to be 40 degrees and raining at 6,000 feet when we start the half marathon at 08:00 o’clock in the morning. Hopefully, it goes okay, and I don’t get hypothermia. I’ll let you know next time I record.

I hope you guys have all been out there doing fun stuff and taking care of business, not only your career, your profession, taking care of patients or clients or whatever it is you do, but taking care of your finances too. Remember, this is an important part of your life. If you take care of it, especially if you take care of it early on, it will take care of you, and you will have those burnout-busting options that you want available to you at mid-career.

You don’t want to be working a gazillion shifts or taking a gazillion calls at 65 because you have to. If you want to, great. I understand it. I love practicing medicine. Sometimes I think I’m too busy to go in to practice medicine, but I love doing it. I love sitting with people and helping them on some of the worst days of their lives. It’s very rewarding. It gives me a lot of purpose in my life. I understand why some people would have a hard time imagining stopping practicing medicine while you still can.

Others of you are working so hard that you can’t wait to get out. Maybe get yourself in a financial position where you can cut back to full time, and you won’t be feeling quite so much burnout. We’d love to keep as many of you in medicine as we can for as long as we can, because we’re all going to need your expertise. We’re grateful to you for acquiring it.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from Fred Rogers, who said, “Often when you think you’re at the end of something, you’re at the beginning of something else.”

 

CORRECTIONS

Dr. Jim Dahle:
Okay, let’s do some corrections. The first one is more of a clarification. I know I’ve said this before on the podcast, but this listener felt like it needed to be emphasized again, so we will. He writes in saying, “I wanted to bring something up because I was under a major misconception about the wash sale rule and reviewing your old posts about tax loss harvesting. I don’t know that it is clear to other people.

That point is that when you harvest a tax loss but repurchase the same security, creating a wash sale, you can do that obviously before you sell it or after you sell it within 30 days. You only wash for the number of shares that you repurchase. Likewise, if you have bought X shares within 30 days prior, you only wash X shares.

This all stems from a situation where I thought I had destroyed a huge tax loss harvest by having purchased a small number of shares. Usually this happens from reinvesting dividends. Maybe others understand it better than I did. And for the wash sale shares, you benefit from an increase in the cost basis and the amount of the disallowed loss for the shares you repurchase. Basically, the wash sale isn’t so bad.”

That’s totally true. I agree. If I have not been clear on that in the past on this podcast, hopefully it’s clear now. Wash sales are bad, but they’re not that bad. I wanted to make sure we mentioned that and clarified that for anybody else who wasn’t aware of how wash sales work.

By the way, you can still basically do tax-loss harvesting on crypto assets without having to wait 30 days. Not only do they not tend to kick out any sort of dividends or interest or income you’ve got to pay taxes on, but you can tax-loss harvest them and buy the same investment back 10 seconds later, and there are no wash sales. They might be the most tax-efficient investment out there. I’m not sure that makes it a wise investment, but it is very tax efficient. You have to give them that.

The other correction is about tax liability on an LLC charging order. I have subsequently written a blog post about this. It’s going to be coming up, I don’t know, in a few months, but I thought we ought to get it out on the podcast in the meantime.

This is something I’ve been teaching for a while, and it’s not actually true. Consider this a correction, not only on the podcast, but a correction to a number of blog posts and a correction to a book, all of which we’re fixing as fast as we can.

All right, listen up. The claim that a creditor with a charging order against an LLC receives the tax bill is highly controversial. Apparently the charging order acts more like a lien than an assignment. Now we’ll include a couple of links in the show notes that explain this. And like I said, I’ve got a blog post coming up on it.

But basically, I’ve told people in the past that an LLC in a state where the creditor is limited to a charging order to try to get your assets out of the LLC, basically, you can send them the tax bill for income they never received. And that’s supposed to get them to be willing to settle, be more motivated to settle than they otherwise would be. Well, it doesn’t really work that way. It turns out if they never get the income, they are not going to get the tax bill.

Now you should still put toxic assets like a rental property in an LLC. It still works well against internal liability. And there’s still some benefit, especially for a multi-member LLC in a state that limits you to a charging order for external liability, but you can’t send them the tax bill, it turns out. That’s just not the way it works. And there’s a lot of articles out there saying you can, but I think these articles you read from reputable sources, and it just doesn’t make sense that you can do it.

So, I apologize to anybody I’ve misled in the last 15 years by suggesting that as a possible asset protection technique; it really is not. And there obviously are some state differences between how good an LLC is for external liability. There are a few states where even single-member LLCs are limited to a charging order, but most of the time it’s a multi-member LLC. And even in some states, even multi-member LLCs are not limited to a charging order. The creditor can actually force you to liquidate the LLC or pull assets out of the LLC to pay the creditor, but it’s still worth using. Even if all you got was the internal liability protection, it’s still worth using an LLC. They’re just not quite as good as maybe some of us thought they were before.

All right. Thank you for what you do out there. If nobody has told you thanks today for your hard work, for taking on risk, for getting up early, staying up late taking call, let me be the first. It’s often thankless work, and we’re glad you’re doing it. It’s important work. Thank you.

I was reading an article this last week. This one is in Kiplinger’s. It was titled, “Doing Everything Right in Retirement Is Not the Same as Doing the Right Things: Why Your Hobbies Aren’t Enough”. And I thought it was a really great article that made a lot of the points we’ve discussed on this blog before.

But I quote from the beginning of it: it says Katie retired at 67 after 30 years as a marketing executive. She had planned for it. In the final months of her career, she made a list of everything she had wanted to do, but never had time for. Painting, reading, travel, and long lunches with friends.

She retired in June and by September had done them all. By January, she was restless in a way she could not explain. She was not exactly bored. Her days were full. She painted three mornings a week, attended the book club twice a month, and had taken two trips she described as wonderful. She had the life most people picture for retirement. She also had a persistent low-grade sense that something was not adding up.

And I had a long discussion with a high school friend, a very successful high school friend last night, actually, before recording this. We must have talked for an hour or two about this. And we discussed the two concepts of hedonia and eudaimonia. Pleasure and purpose. And if you want to be happy in life, you’re going to need both of these things. It’s tricky to get the balance right, but it’s pretty easy to tell when the pendulum has swung too hard toward one or the other.

And it seems sometimes when our nose is really to the grindstone, we’re working really hard, that all we’d like to do is have a whole bunch of leisure time. But once you’ve had some leisure time, you realize, “Hmm, that’s not quite enough. Like Katie from this article saying something was missing. You’re restless.”

Both during your career, your official career, as well as in retirement, which is becoming an ever more squishy concept every year, you need both of these things. You need pleasure and you need purpose. You need hedonia and eudaimonia. As you think about your life, as you create this intentional life I hope you’re trying to create, carve in space for both of those things. There’s got to be some pleasure along the way, or it’s just not going to feel like a life worth living.

And likewise, there’s got to be some purpose in your life, or you’re going to feel, again, like you’re not making any sort of contribution to the world. And those of us who are high-income professionals, the reason you got here is because you’re a hard-charging person who wants to make a contribution and wants to make a difference. And you’re going to need something like that in retirement too.

Even once you stop getting paid, even once you stop going into the office or into the clinic or into the hospital or whatever every day, you’re still going to need something that creates purpose in your life. So, be thinking as you go along, not just about finances, not just about hitting your number, but about what that purpose looks like in retirement as well. And you might be surprised just how long you work and don’t retire because of that need for purpose in all of our lives.

 

SHOULD YOU SAVE 20% OF TAKE-HOME OR GROSS?

Dr. Jim Dahle:
All right, our next question comes in from Instagram, where they ask, “Do you recommend saving 20% of your take-home pay or 20% of gross? I go back and forth depending on how much I make that month.”

Okay, well, in general, that rule of thumb is of gross income. 20% of gross. That gets close for lots of docs, that’s close to 30% of your net pay. And that’s just for retirement. That’s not saving for your next truck or for your next property, your next property you’re going to use, your second home consumption property. It’s not saving for college. That’s all in addition to this.

And where does that come from? Well, if you run the numbers out on a typical career length and typical returns from a typical portfolio, that’s about what it takes to become financially independent 28 years after you start saving for retirement. A full career.

If you want to maintain your standard of living in retirement, and you’re going to work a full career, that’s about how much you need to be saving. And it’s not that there’s anything magic about 20%. Maybe 18% is enough. Maybe you need 22%, whatever.

The point is, it’s not 5%. 5% is not enough. You’ll see Dave Ramsey recommends 15% for retirement, but he’s also talking to people that make less money than you do. So social security is going to make up a greater chunk of their retirement income. And they started a lot earlier than you. They came out of college at 22, or they started working at 18. Not 30 or 35. And so they’ve got more years for compound interest to work. That’s why it’s 20% for you, not 15%. But yeah, that’s the recommendation. 20% of gross. Now, 20% of net is way better than nothing. It’s way better than 5%. But you might need to bump it up a little bit, depending on your goals.

Now, keep in mind, this is also a rule of thumb. It’s not some sort of fixed mandate from deity. What you really need to do is do some real financial planning and run the numbers for you. What you might find is for your financial goals, you might have to save 25 or 30 or 35 or 40%. Or maybe you’re fine with 12%.

But run the numbers for yourself. When you make your financial plan, you’ll figure out what it is. But if you can’t be bothered to make a written financial plan, like apparently half of White Coat Investors every time we do this survey, then this is a pretty good rule of thumb to substitute for it.

 

WHAT IF YOU STARTED SAVING LATE?

Dr. Jim Dahle:
Okay, our next question comes from the last online presentation we did. I’m not supposed to call them webinars anymore. But I guess it’s a webinar. And that question is, “Should a pediatrician who entered the field late save more than 20%? And where should you put that 20% savings after your IRAs are maxed out?”

Okay, well, let’s do the first one first. As I mentioned earlier with that question from Instagram, the truth is you have to do financial planning. You have to make a financial plan. If you’re not capable of doing that yourself, get some help. There’s some ways you can get help that isn’t paying thousands of dollars to a financial advisor.

If you are willing to pay thousands of dollars to a financial advisor, and many of you would come out ahead doing so, don’t get me wrong, this is a good idea for you to pay thousands of dollars to a financial advisor to get a financial plan in place.

The one we recommend at the top of the list is White Coat Planning. This is the financial advisory service we started a year ago. And we have eight or nine full planners ready to meet with you, ready to take an informational call from you and meet with you. So, you can go to whitecoatplanning.com and book that today if you want. They charge a fair price, they give good advice. They’re flat fee financial advisors, and they will help you put together a financial plan and help you know exactly how much you need to be saving and help you invest it and help make sure you got everything else taken care of.

If you don’t want to spend that, but you want a little bit of help, we’ve got some other options. You can just be a planning-only client and not pay them for investment management is one option. But other options are to take our Fire Your Financial Advisor online course. It’s way cheaper than hiring a financial advisor, and it’ll help you write a financial plan on your own. You have to take the course, you have to actually do some work on your own, and write the financial plan.

But the point is, we tried to cut a lot of time off that curve that the hardcore do-it-yourselfers do that hang out online on investing forums asking questions all day. We’ve tried to just get the high yield stuff, put it into your hands.

But the course takes about eight hours to work your way through, and you should probably do it with your partner or spouse, and it helps you come out of the course with a written financial plan. That’s an option.

Another option is to use some software. There’s a lot of software out there that can help you. One of our favorite softwares is one of our partners called Boldin. If you go to whitecoatinvestor.com/boldin, you can sign up for their software. There’s even a free version. You might want to pay up a little bit to get a few more features, but you can try it out for free, whitecoatinvestor.com/boldin, and help write your financial plan.

Or you can do what I did, read books, ask questions on internet forums, and after a few years, you may find your answer in a lot more questions than you’re asking. But however you do it, you need to put together a financial plan, actually run these numbers, become familiar with the idea of future value calculations, payment calculations, period calculations. If you can’t use a spreadsheet, you probably ought to get some help with your financial plan. If you can use a spreadsheet, learn how to do these functions. And what you’ll find out is you can figure out whether you need to save more than 20% to reach your retirement goals.

Obviously, the later you start this process, the more you have to save to get to the same place. So you talk about being a pediatrician who entered the field late. This really doesn’t have anything to do with being a pediatrician. It has to do with starting late. If you don’t start saving for retirement until you’re 40 or 45 or 50, yes, you have to save more to get to the same place at 55 or 60 or 65 as someone who started saving for retirement 30 years old. That’s just how compound interest works.

I guess the question is, well, how late did you start to whether you need to save more than 20%? If you started two years late, well, 20% is probably still good enough. Maybe bump it up to 21 or 22%. If you’re starting 15 years late, I had a classmate in my med school who’s in his mid 40s. You probably got to save a lot more than 20%.

The math’s got to math. There’s only so many factors that go into a future value calculation. What goes in there? Well, how much time you have for money to compound, how much you’re saving each year, and that’s under your control, how much you have now saved for retirement, how much you want later, i.e. how much you will spend in retirement. And your investment rate of return, which you have some control over, but not a lot of control. You can determine how much risk you’re going to take, but whether that risk shows up or not is not in your control. So you got to get a plan.

Okay, second question, where should you put that 20% savings after your IRAs are maxed out? When you’re saving for retirement, use your retirement accounts first. The first priority is getting your match. If your employer is offering a match in the 403(b) or the 401(k), that is your first priority for retirement savings. That’s free money. Maybe the match works, they give you 50% of your first 6% of your income that goes into the retirement account. So you put $18,000 in there, maybe they give you $9,000. Free money, part of your salary, not getting it is leaving your salary on the table, don’t do that.

Maxing out that account is an even better idea. If you’re under 50, I think it’s $24,500 this year, there’s an extra bonus amount of a few thousand dollars if you’re 50 plus. That tends to go up every year or two with inflation, max out that account. Maybe you’re at an academic center, they also offer a 401(a) and a 457(b). Max those out as well.

Do a backdoor Roth IRA each year. If you’re married, you can do one for your spouse, even if your spouse isn’t working. If your spouse is working, look at their retirement accounts, put money in there.

If you max all of those out and you’re still not at 20% of your gross income, guess what? You got to save in a taxable account. Now, there’s some beautiful things about a taxable account. One, you can put as much money in there as you want. You want to save $4 million this year for retirement? If you made $4 million, you can put it all in a taxable account.

It’s also super flexible, you can take it out at any time, spend it on anything you want, there’s no withdrawal penalties, you do have to pay taxes. If you have capital gains, you got to pay capital gains taxes, hopefully you own that investment for more than a year, so you pay lower long-term capital gains rates.

Hopefully you’re not churning the account so often that your dividends become unqualified, you’re getting qualified dividends which are taxed at a lower rate and you’re investing it tax efficiently. A muni bond fund, a total stock market index, a total international stock market index, equity, real estate, those sorts of things that are relatively tax efficient.

But it’s fine to use a taxable account. Most of our retirement savings is in a taxable account, it’s usually a function of income. If you make a lot of money, you’re probably saving a lot of it in a taxable account, but it’s very flexible, obviously you can get to it before age 55 or 59 and a half when you can get into those IRAs penalty-free.

And so, it’s really useful for that as well, but that’s where it goes, it goes in your taxable account. And if you’re into real estate investing, that’s also a taxable investing. You go buy another rental property or whatever. Or private passive real estate investments like lots of our advertisers, lots of different ways to invest in real estate, but that’s what we’re talking about. Once you’ve maxed out those retirement accounts, you just start investing in taxable accounts. Don’t be afraid of it, it’s not that hard. Yes, there’s some taxes associated with it, but don’t let the tax tail wag the investment dog.

 

WHEN DO YOU NEED TO START MAXING OUT RETIREMENT ACCOUNTS?

Dr. Jim Dahle:
Our next question comes in from Reddit. “I have been sufficiently scared straight about the importance of thinking about retirement now, but am I really supposed to be maxing out my retirement accounts now as a resident? If not, when do I start?”

Okay, here’s what I tell residents, most residents. Military residents, you are an exemption from this advice. You actually do need to be saving a significant amount of money for retirement in residency for two reasons. One, you’re getting paid more as a resident. So, you can save more for retirement as a resident. And number two, you’re not going to get paid that much as an attendee. And so, you need to get started a little bit earlier.

But for other residents, saving for retirement during residency is just a nice habit to get into. It’s not critical. I’d love for you to be putting some money into Roth accounts, maybe your Roth 403(b) or 401(k), especially if there’s a match being offered by your employer. If there’s not a match, your Roth IRA, maybe a spousal Roth IRA.

Keep in mind if you’re going to be attending this year, you might want to do it via the backdoor process. An indirect contribution to a Roth IRA, because your income by the end of the year might be over the limit. Or if you’re playing games with your student loans and filing your taxes, married filing separately, you need to do it via the backdoor or indirect process.

But Roth IRAs are a great place to invest, even if you’re only putting a few thousand in there. The habit matters more than the amount of money you’re putting in there. The idea is not to get rich as a resident. The idea is to hit the ground running in the most important year of your financial life. Your first year as an attendee.

I want you to have a written plan of where those first 12 attending paychecks are going to go. How much is going to go towards student loans? How much toward beefing up your emergency fund? How much to replacing your beater? How much to go into retirement accounts? Whatever. If you will do that, you will be amazed how much more successful you will be than most of your colleagues when it comes to your finances.

So, no, you don’t have to max out your retirement accounts as a resident. We barely maxed out IRAs, and it was easier to max them out back then than it is now. In fact, I think our third year, when Katie was a stay-at-home mom, we actually borrowed on a 0% credit card to max out our Roth IRAs. You don’t have to do that. I don’t know what we were doing, in retrospect, playing those sorts of games, trying to be a hyper-optimizer, was kind of stupid. But we had a 15-month 0% credit card deal, so we used it and maxed out our Roth IRAs that year as well.

You can do those sorts of things, but don’t feel like you have to. You’re not trying to get rich as a resident. The most important thing you can do financially as a resident is finish residency.

This weird financial life we have as doctors only works if there’s a high income at the end. You have to get through med school. You have to match. You have to get into residency. You have to get that high-paying job at the end and stick with it for a few years for this to work out. To be borrowing $200,000 and $300,000 and $400,000 for this career, you’ve got to get to the end of the career, or at least into the career, for it to work out. So, that’s the most important thing.

And then when I start thinking about financial priorities for a resident, it’s things like getting disability insurance in place, getting term life insurance in place if appropriate, getting an appropriate student loan plan, becoming financially literate so you can hit the ground running as an attending. Those are the priorities as a resident. And it’s great if you can put $5,000 or $10,000 away for retirement as a resident. Awesome. Great job. Give yourself a pat on the back. But don’t feel like you’ve got to leave residency with a net worth of a quarter million dollars or you weren’t financially successful. If you finished residency, you are financially successful. Good job. Well done.

So, don’t put too much pressure on yourself. Feel free to live a little and make sure you’re not in some house where you’ve got cockroaches crawling over your face while you’re sleeping or driving a $400 car. It’s okay to spend a little bit of money in residency. You don’t make that much. I think residents right now are making $60,000 or $65,000 or $70,000 or $75,000 a year. It’s almost the average household income in America. I think that’s $83,000 right now.

You ought to be able to have a reasonable financial life. It’s hopefully not going to look anything like what you can do once you’ve grown into your attending income after your live like a resident period. But the point is, you don’t have to save half your income, maxing out a $24,500 403(b) and two backdoor Roth IRAs. That’s like a 50% savings rate for a resident. You don’t have to do that to be financially successful.

 

DO YOU KEEP SAVING IN RETIREMENT ACCOUNTS AFTER REACHING FI?

Dr. Jim Dahle:
Our next question comes in off YouTube, and it’s a personal question. I don’t know why people are fascinated by my personal finances. As the years go by, due to the success of White Coat Investor and the fact that we’re still working after financial independence, my financial situation looks less and less like that of a typical doctor every year. But I’ll try to answer your personal questions as best I can. We stopped publishing what we’re making at WCI as well as our net worth a few years ago when we started worrying about our kids being kidnapped. But I’ll answer your questions as best I can in the spirit of trying to be as transparent as safely possible.

But this question is, “Why are you still putting money into your retirement accounts if you reached FI a few years ago?”

Well, it’s a good question. Well, here’s the alternative to putting money into retirement accounts. And most of the money we save each year is actually going into a taxable account because we max out the retirement accounts in January or February or whatever early in the year.

So, here are the alternatives. One is to quit working. Well, do you like this podcast or not? If you like it, I guess I’d better keep doing it or find somebody else to do it. But every time we do that, we get a few people going, “We liked you doing it.” So here I am working. If you want me to stop working, I’ll quit working. But I enjoy it. It gives me some purpose in my life. I like writing blog posts a little bit better than I like recording podcasts. Make fewer mistakes and have to do fewer clarifications. That’s part of it. But mostly I’ve always viewed myself as a writer, not a podcaster. So that’s part of it.

Part of it is we don’t spend all the money we make. In fact, we only spend a pretty small percentage of it. So, that leaves a couple of options. One, we can just give it all away as we make it. And we have thought about that. You can only deduct something like 50%, I think, if you’re giving cash. I know it’s 30% if you’re donating appreciated securities, which is generally how we give to charity.

We tend to give to non-charitable causes each year as well. But that keeps us from donating all of it. We could still. We just wouldn’t get the benefit, the tax benefit of doing so. And you shouldn’t let the tax tail wag your financial life. But we’ve never given all of our income away in any of the years we’ve had. I think we’ve given as much as a third of it away in a year. But never more than about that.

But we could give everything we make away, I guess. And then we wouldn’t be saving anything in a retirement account. But if you’re not going to spend it and you’re not going to give it, well, you might as well save it for the future. And if you’re going to save it for the future, would you rather save it in a tax-protected, asset-protected account? Or one that’s not tax-protected and not asset-protected? Well, obviously the former. Those are our retirement accounts.

So, what are our retirement accounts? Well, we work here at the White Coat Investor, which has the world’s best 401(k). It’s very deliberate. But we max that out. Katie and I both put the maximum amount of money in there. I think it’s $72,000 this year. I’m 50 plus. I guess I can put a little more. But I use my catch-up contribution in my partnership 401(k).

I put as much in there as they’ll let me. I don’t work enough clinically to make enough to actually be able to max that one out. It doesn’t allow a mega backdoor Roth IRA contribution like the White Coat Investor 401(k) does. But I put a fair amount of money in that. And then we have a defined benefit or cash balance plan in the partnership. And I put a whole bunch of money in that. About 80% of my clinical income goes into retirement accounts. I’m allowed to do that because I am not a highly compensated employee there. I don’t work enough. I only have six day shifts a month there, and it doesn’t pay that much.

So, that’s what we do for retirement accounts. I guess we also have our backdoor Roth IRAs. We still do that every year. We have an HSA. We max that out every January. That’s it. Those are all our retirement accounts. So if we want to invest any more than that for the future, it has to go in a taxable account. And so that’s where it goes.

We’re not only putting money into retirement accounts every year. We’re putting money into a taxable account. Honestly, it’s probably all going to charity eventually. Maybe we should just give it to charity as we go along. We’re getting better and better at doing that every year.

But we’ve got some dreams of maybe starting a foundation and those sorts of things that will last long after we’re gone. And we’re still kind of ironing out the plans on how to do that.

The interesting financial dilemma, as long as we’re going to talk about my personal financial life, our interesting financial dilemma is we now have enough money to live on the rest of our lives. That happened years ago. We have enough money that we’re comfortable. We’ll have enough not only to do that, but to leave as much to our kids as we dare leave them. So essentially everything else we make goes to charity going forward.

And that’s an interesting dilemma because the best way to maximize how you give to charity is to get it into a vehicle where it’s growing tax-free as soon as possible. And so, we’ve been debating how much goes into donor advised funds, how much goes into charitable foundation. What is the role of a charitable trust. Like a CRUT, a Charitable Remainder Uni Trust. These are the things we’re wrestling with this year is what vehicle we can use to put money into these sort of charitable investments where it’ll grow a little bit faster because it’s not being taxed as it goes along. And we’re in a high tax bracket, obviously. So, it’s highly taxed as it grows, if it’s not invested just as tax efficiently as we can.

But that’s kind of what our dilemma is. You want to keep control of your assets like the White Coat Investor. And so, you’re a little hesitant to put it into a donor advised fund. Where it can be sold off to anybody as soon as it goes into that fund. But you also want it growing in a tax-protected way as soon as possible. So, that’s the kind of dilemmas we’re wrestling with in our financial life. Thank you for asking.

 

IS LEGACY IMPORTANT IN RETIREMENT?

Dr. Jim Dahle:
Okay, our next question comes off YouTube. When high-earning professionals finally transition to retirement, how much of a role do you think their established reputation and legacy play in finding purpose outside of work?

Well, I think it depends on the doc. Or it depends on the high-earning professional. I was talking to somebody whose father was a cardiologist and retired recently and was really bummed because when he retired, they took his badge away. So, he couldn’t go see his friends at the hospital. He couldn’t get in, couldn’t get into the doctor’s lounge and say hi to people and those sorts of things.

And so, it does have a bigger role in some people’s lives than others. But there are a lot more ways to find purpose. And don’t get me wrong. I think purpose is actually really, really important in retirement. You’re trying to get this balance between purpose and pleasure. Because I tell you what, if all you do is go to the golf course every day, after a while, going to the golf course feels like work.

I think you need some sort of balance there between pleasure and purpose. If you think you’re going to be happy in a retirement where there’s nothing but play, you’re probably mistaken. You need some sort of purpose. But purpose doesn’t have to be work. It doesn’t have to be paid. It doesn’t have to look like your profession or your career. It can be an encore career.

Maybe it’s being a rafting guide. Maybe it’s being a tour guide at a ski resort. I don’t know what it is for you, but you’ve got to find some sort of purpose. Maybe it’s donating time to charity. Maybe it’s working in your church. Maybe it’s raising grandkids. I don’t know. Whatever it is that helps you find purpose. Maybe it’s coaching.

If you look at people that talk about purpose in the second half of life, it’s often more mentoring and coaching kind of opportunities than it is doing kind of opportunities. So, I do think purpose is really important in retirement. But do you need your reputation for that? Well, I guess if your purpose is some sort of medical thing, like lots of people stay in medicine until 65 and 70 and 75, etc. And then they transition to faculty emeritus.

And that’s kind of how they find purpose. They’re still doing grand rounds and still teaching residency. And obviously your established reputation matters when that’s the way you’re finding purpose. But if your method of finding purpose is going and being a rafting guide, well, I don’t think your established reputation as a doctor matters one bit to that.

And I think part of this is a little bit of a divorce. You from your career. And like any divorce, it’s painful. It’s emotionally painful to separate and recognize that’s not part of your life anymore.

I think the easiest way to do it is to do it gradually. And I’ve had this opportunity, thanks to the demands of White Coat Investor. I’ve had to cut back on my clinical work over the last decade now. It’s been, I think, a decade since I cut back to three-quarter time and dropped my night shifts. And then a couple of years after that, I think I went to half-time. And a couple of years after that, I went to 0.4 FTEs. And that’s where I’ve been for about the last six years or so.

And I tell you what, it’s way easier if you do it gradually. I hear a lot of retirees saying things like, I’m so busy. I don’t know how I ever had time to work before. And I feel like that sometimes. Sometimes when it’s time for me to go on and work a shift, I’m like, I can’t work a shift. I got too much to do today. I have so much else going on in my life.

And so, I think if you can cut back gradually, you gradually fill the rest of your life, both with purposeful activities and activities that are pleasure activities. And I think it’s a much easier transition than if you go cold turkey, from working 60 hours a week one week to working none the next week.

Because what I think those folks do is they have a lot of pent-up demand. They go do these trips they haven’t been able to do, and so the next three or four months, they’re doing all this traveling and they’re doing all this fun stuff they’ve been putting off. And then three or four or five or six months later, like, “Oh, now what? I’ve kind of done that extended vacation. I’ve done some slow travel. And now I need a little more purpose in life.”

I think it’s good if you can gradually transition into retirement. I know that’s harder when you own your practice. I know that’s harder in a lot of specialties. It’s typically harder if you’re in a surgical specialty or some sort of specialty with long-term continuity with the patients than if you’re in emergency medicine or anesthesia or radiology, where you’re working shift work. I know it’s harder, but it’s not impossible.

 

SPONSOR

Dr. Jim Dahle:
One of the ways that a lot of these docs have done it is through Locum’s work. Our sponsor for this episode is locumstory.com. Go check it out. See how some people use Locum. Some people use it at the beginning of their career while they’re trying to figure out what kind of a job they want. But some people use it at the end of their career. They sell their practice at age 55 and they start doing locum’s. And the beautiful thing about Locum’s is you can tailor it down. Maybe you work for a month every three months. Maybe you work for a week every month. Maybe you take six months off, then you work the next six months straight.

You can do it your way. You get to define when you work. And trust me, there’s plenty of docs out there that would love to take two weeks off or three weeks off or six weeks off or do a paternity or maternity leave for three months. They need somebody to cover their clinic. They need someone to cover what they would be doing as a partner or whatever. So, they would love to have a brand new doc that just sold their practice, who’s up to date on everything and willing to work really hard for three months. They’d love to have you fill those roles.

And so, I think that’s one way that you can still gradually transition into it, even if you’ve been a practice owner up to this point, even if you’re a surgical specialist or whatever. So, keep in mind, if you’re a little bit creative, you still can cut back gradually. And I think that helps a lot with finding purpose as you move into retirement.

The non-financial planning, in a lot of ways, is far more important and far harder than the financial planning. It just isn’t that hard to come up with a solution, a sequence of returns risk, and you only have to do it once. You don’t need six solutions to it. You need one solution to it. And frankly, a 4% safe withdrawal rate is a solution to sequence of returns risk. You don’t need that solution, plus cutting back on that rate, plus a TIPS ladder, plus buying some SPIAs. You don’t need all these different solutions. You only need one solution for sequence of returns risk.

The financial aspect of planning for retirement is a little more complicated than accumulating money for retirement, but it’s not that complicated. The harder part is figuring out what you’re going to do with the rest of your life.

So, welcome to the existential crisis that many of us are in. You guys are trying to provoke it by asking questions like, “Why are you still saving money for retirement if you’re already FI?” Well, that just makes me wonder, “Why am I working at all?” So thanks a lot for that. But it’s great to hear from you. And without you, as I said at the beginning, it’s not much of a podcast. So thank you for these great questions. They do help us to help you. And that’s really the whole point here.

Locumstory.com is a free, unbiased, educational resource about locum tenants. It’s not a staffing agency. They help answer your questions about the how-tos of locum tenants work on their website, podcast, webinars, videos, and even have a Locums 101 crash course.

Locumstory.com is where you should go to find out if locums make sense for you and your career goals. Locumstory is unique because it’s more of a peer-to-peer platform with real physicians sharing their experiences and stories, both the good and bad, about working locum tenants. Hence the name Locumstory. See for yourself on their self-service platform with no obligation.

I want to thank those of you who have been leaving reviews for this podcast. They really do help spread the word. A recent one came in that said, “A must for physicians. Excellent podcast series that provides great guidance to physicians, but it’s not strictly for doctors either. A lot of other high-income professionals can follow Dr. Dahle’s advice and benefit from it.” Five stars. Thank you so much for leaving that.

All right. We have come to the end of the podcast. We love it when you send us questions. Yes, we scour social media, the forums, the subreddit for your questions, but the easiest way, if you really want your question on the podcast, is to leave a Speak Pipe. Go to whitecoatinvestor.com/speakpipe to do so.

All right. It’s been a lot of fun. Thank you for being part of this. We’ll see you next time on the White Coat Investor podcast. Until then, keep your head up and your shoulders back. You’ve got this. We’re here to help.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 299

INTRODUCTION

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

Dr. Jim Dahle:
Welcome to the Milestones to Millionaire podcast. We’re thrilled that you’re here. We’re thankful you’re part of the podcast. If you have not yet been part of the podcast, go to whitecoatinvestor.com/milestones and apply to celebrate your milestone, whatever it might be. I don’t care if it’s getting back to broke or if it’s saving up $1,000 emergency fund or if it’s becoming a decamillionaire, we’ll celebrate it with you and use it to inspire other White Coat Investors to do the same.

Ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here’s a better question. What if you could buy brand new construction homes 10% below market value in the best markets across the country without making real estate your second job?

That’s exactly what Rent to Retirement does. They’re a full service turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of their down payment back at closing, plus interest rates as low as 3.75%. Get more information at whitecoatinvestor.com/renttoretirement.

We are excited to launch two new things. Number one, a new book, The White Coat Investor’s Guide for Residence is now available to purchase on Amazon or the White Coat Investor store. And number two, we’re trying to give the book away for free to as many PGY1s as possible through our Champion Program.

The financial habits and education built during residency determine how well professionals handle the most important financial transition of their career, the jump to an attending paycheck. The right information at the right moment can be worth millions of dollars over the course of a career. We’re on a mission to make sure residents have it. And we hope you can help. Learn more and apply to be a champion at whitecoatinvestor.com/residentchampion.

Our guest today is a pediatrician, which is pretty awesome, who has accomplished a significant net worth milestone. Let’s get him on the line and have a chat.

 

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones Millionaire podcast is Andrew. Andrew, welcome to the podcast.

Andrew:
Thanks for having me.

Dr. Jim Dahle:
All right, tell us a little bit about you, what part of the country you’re in, how far you are out of training, what you do for a living, et cetera.

Andrew:
Yeah, I live in the Midwest and I’m a private practice general pediatrician. I finished residency in 2018, so I have been out in the workforce for eight years now.

Dr. Jim Dahle:
Congratulations, that’s awesome. Tell us what we’re celebrating today.

Andrew:
We are celebrating the fact that my wife and I are millionaires now.

Dr. Jim Dahle:
Millionaires, pretty awesome. Did you ever think you’d be a millionaire?

Andrew:
Certainly not this fast, if I’m being honest with you. I went to medical school, not to become a doctor, but to become a pediatrician. And I knew I wanted to work with kids. And as you know, pediatricians notoriously is not the highest paid specialty. And so I thought I’d get there one day, but certainly not this fast.

Dr. Jim Dahle:
Very cool, very cool. Okay, tell us the story. Tell us when you kind of became financially literate, when you developed any sort of a plan to do this and how the two of you implemented it and got to where you are today.

Andrew:
Yeah, it is an interesting story. I actually had what I thought was a financial advisor in residency that was recommended by a friend.

Dr. Jim Dahle:
This sounds very familiar.

Andrew:
Yes, yes. We use that individual throughout residency. And then I’m gone with this. Then came the whole life insurance pitch. And that person said something very interesting at the end of that pitch and said, “Hey whatever you do, don’t go home and Google these policies.” And for all the whole life insurance brokers that listen to your podcasts, a piece of advice, don’t tell that to highly educated doctors and other professionals. Immediately I went home and Googled it and I actually stumbled across your website and it was your article on whole life insurance.

And so, that got me asking questions. I had a friend that worked in finance and that actually used to sell insurance products. And so, I FaceTimed with him and I said, hey, this is the pitch. This is how much they want me to contribute. Here’s what they claim will be the payout. And I’m going to edit his response for a PG-13 audience. He said, “Freaking run.” And so, we did.

We fired that financial advisor and then actually switched over to assets under management advisor for a brief time. And they were great. They had us in good shape but actually it wasn’t until a resident at the time, usually it’s the other way around, the attending teaching the residents but we take residents in my office and a resident at the time that now works for us. So, I’ve got to give him a shout out. He was actually the one that introduced me again to White Coat Investor. And then that’s when we became financially literate and we were able to let go of our second financial advisor and we’ve been doing things on our own now for six years or so.

Dr. Jim Dahle:
Very cool. Okay, is your wife working?

Andrew:
Yes, my brilliant and beautiful wife is a public educator and we have three boys.

Dr. Jim Dahle:
Okay, what is your income looked like over the last six or eight years between the two of you?

Andrew:
Sure. When I first started, we were probably together in the low $200,000s before I was on the partnership track and then once I became partner, my income certainly went up and last year we were right around a combined $500,000.

Dr. Jim Dahle:
Very cool. Tell us about your net worth. What’s your net worth today? What’s it composed of? What are the assets? What are the debts, et cetera?

Andrew:
Okay. Yeah, we are right at about actually $1.4 million now and we’ve got $900,000 of that in our retirement accounts. We’ve got access to two 401(k)s and my wife has access to a 457. We’ve got about $90,000 in cash as part of our emergency fund and saving up for a little home project. We’ve got about $40,000 in 529s for our three boys. Got a small amount in taxable brokerage, about $15,000 and then we’ve got quite a bit of home equity, about $340,000 in home equity.

Dr. Jim Dahle:
Okay, very cool. And what do you drive? What do the two of you drive?

Andrew:
Oh, you’ll be proud of us. We pay cash for gently used non-luxury SUVs. I love my Honda and for a while I was driving a Honda with cloth seats and I can assure you I was the only cloth seats in the doctor’s parking garage at our medical office building but I did upgrade once we had our third to a bigger SUV and went ahead and majorly splurged on a Honda that had leather seats.

Dr. Jim Dahle:
Going all out now.

Andrew:
That’s right.

Dr. Jim Dahle:
Would you say you ever had what we call around here a live like a resident period? And if so, how long did it last and how did you decide to end it?

Andrew:
Yeah, I think it was maybe live more like a rich fellow period. We certainly didn’t like to restrict ourselves too much. Matter of fact, one of my favorite things that my wife and I ever did was right after residency before I started my job, we put a two week vacation to New Zealand on a credit card. That’s still to this day probably the most incredible trip that we’ve ever done. And we had a plan to quickly pay it off and knew that bigger paychecks were not far away.

But yeah, we lived pretty tighter in the first two to three years. And honestly COVID kind of helped that because one of the things that we spend most of our money on is travel and we weren’t doing much traveling during that time, especially with our first son being born four months before the pandemic. So yeah, we were pretty tight for about the first three years and loosened the strings quite a bit after that.

Dr. Jim Dahle:
There are a bunch of people out there in relatively high cost of living areas. You mentioned you’re in the Midwest. I’m assuming not such a high cost of living area. Can you talk for a little bit about whether you consider going to any high cost of living areas, whether it was a financial component in your decision to stay there and how it does help you to build wealth?

Andrew:
Yeah. That’s a great question. I was born and raised in the Midwest. I stayed here for medical school, stayed here for residency. Really, I guess lucky in that sense that there was no desire to leave for the coasts. We enjoyed visiting them, but certainly we’re very comfortable with our Midwestern life.

Dr. Jim Dahle:
How’d you pay for school?

Andrew:
My parents were very kind and they helped me pay for all of my undergraduate education. And I’m very thankful for that. But medical school was all on me. I took out loans. I think I probably took out $190,000, $200,000 worth of medical school loans. And then by the time I finally got around to start paying for those, and we were probably looking at $240,000 for me. And my wife had about $20,000 herself because she went back to school and got her graduate degree.

Dr. Jim Dahle:
And how’d you pay those off? Or have you paid them off?

Andrew:
Yes. Yeah, our only debt is our house. Once I started following you and your thing was always try to pay off those loans within five years, I made it by two months. So I paid them off in May a few years back. And we honestly, just anytime I would get a bonus, working in a private practice, it’s kind of an eat what you kill model. And if you work really hard, then you can make a little bit more money. And so when those bonus checks would filter through, we’d take a small chunk and do something fun with it. But a vast majority of it went to paying down those student loans.

Dr. Jim Dahle:
Now they say the first million is the hardest and you haven’t finished the second million yet, but what’s your sense? You think that’s true that the second million is going to come a whole lot faster than the first million?

Andrew:
I think so. My crystal ball is just as cloudy as yours is, but depending on what the markets do over the next few years. We’re certainly kind of already almost halfway through the second million. And so, I think in a few years, I think that’s a very real possibility and certainly would come faster than the seven, eight years it took for the first million.

Dr. Jim Dahle:
Okay, there’s somebody out there sitting in your shoes. Maybe they’re coming out of residency. They owe $250,000 in student loans and their net worth is minus $250,000. They want to be like you in six or eight years. What advice do you have for them?

Andrew:
Yeah, I think even if you’re a resident right now, it’s work your tail off in residency. You want that program director to be able to give you high remarks when offices, other hospitals call and ask for a reference. And that can certainly help you get a job that you feel like would be the best fit for you. And so, I would just say work really hard in that regard. And then the most important thing that I can’t stress enough is to have a plan. And I was fortunate. I probably refinanced my student loans five times before we finally paid them off. And with one of them, I got access to your fire financial advisor course. And we took that and we have a written financial plan and that has simplified things for us in the biggest way.

At the very top of that plan is our goals. And it talks about how we want to save for retirement. It also talks about how we want to purposely spend our money and how we’re comfortable spending money in certain areas and certainly less comfortable spending money in other areas.

And so, I think if you have those goals, if you have that plan, that really helps you kind of pay yourself first. And then when you get to a point where you’ve paid off your student loans, you’re really ramped up your savings, you really can just spend the rest. And that certainly has helped me because, at one point my wife would probably have said I was cheap. I like the word frugal better, but I am certainly working on that and gotten a whole lot better now that I know that the plan that we have written out will help us achieve our final goals and is doing a great job of doing that up to this point.

Dr. Jim Dahle:
Yeah, that’s an awesome point that a financial plan not only helps you to save, it helps you to spend too. And I think it doesn’t get enough credit for that. Well, congratulations, you guys are absolutely crushing it. You should be very proud of what you’ve accomplished. Thank you for being a doctor. Thank you for being a pediatrician. Thank you for being a White Coat Investor. And today, thank you for coming on the podcast and inspiring others to accomplish what you’ve accomplished. We appreciate you so much.

Andrew:
Yes, and my wife and I definitely appreciate you. We wouldn’t be in the position that we are in now without you. We may have a whole life insurance policy right now that wouldn’t be worth a whole lot. And so, to be sitting here with a $1.4 million net worth, my wife and I really appreciate you. And I know you’ve got a big staff now, all the staff that’s in the background is doing a whole lot of hard work as well.

Dr. Jim Dahle:
You’re right about that, that’s for sure.

All right, great interview. I love the lessons about planning. It’s amazing what you can accomplish without a plan and frightening how difficult it is to deal with all this, to become successful without having any sort of a plan. Whether you get a plan by hiring a competent financial advisor, whether you get a plan by taking our Fire Your Financial Advisor course, whether you get a plan just by DIYing it, running it by people on the Facebook group and the subreddit and the White Coat Investor Forum and those sorts of places, you need a plan. And writing it down is a good idea.

The reason why I think it’s so important that it be written and not just living up in your head is twofold. Number one, when the excrement hits the ventilatory system, you can go back and look at the plan and remind yourself of what you’re going to do and why. And number two, as you write it down, it exposes the gaps in your knowledge to you and you can go back and fill in those gaps. And I think that’s a useful exercise because it forces you to actually recognize what you know, what you don’t know, what you have planned out, what you don’t have planned out, and then you end up with a much more comprehensive, a much more complete plan.

 

FINANCIAL BOOT CAMP: ESTATE PLANNING

Dr. Jim Dahle:
Estate planning is a critical part of your financial plan. There are three main purposes to estate planning. The first one is to make sure your stuff and especially your minor children go where you want them to in case something happens to you. So it directs where your assets go and most importantly, designates somebody to be the caregiver, to be the guardian for your child. You may want somebody separate managing the money on behalf of your child. Some people like to have some checks and balances in the system, but it’s certainly convenient for that guardian to also have access to the money they need to help take care of your child.

Frankly, that’s the most important aspect of the estate planning and lasts until your youngest child turns 18. That is generally done with a will. The second purpose of estate planning is to avoid or minimize the painful, expensive, hassle, public process of probate.

Probate is basically when a court looks at a will and figures out where everything’s supposed to go. And by not having things that are in the will because they’re transferred by some other mechanism, you can minimize the expense and the time and the hassle and the publicness of probate. You might do that with beneficiary designations for your life insurance policies or for your annuities or for your retirement accounts. And then they pass completely outside of probate.

Likewise, anything you own in common with somebody else just becomes theirs when you die and thus passes outside of probate. Be careful, you might lose what’s called the step-up in basis of death and give them higher income taxes by doing that, but it doesn’t keep it outside the probate process.

Another common way that people keep assets outside of probate is to use a revocable trust. And this is a trust that you can put stuff in and take out at any time while you’re alive. But when you’re dead, anything that’s inside that trust is passed outside of probate.

The third purpose of estate planning is just to minimize the taxes associated with your death. And those can be federal estate taxes, they can be state estate taxes, they can be state inheritance taxes, they can also be income taxes.

Now, the vast majority of Americans don’t have any taxes due as a result of their death, thanks to living in a state without an estate tax or an inheritance tax, or being below the minimum exempted amount from those taxes. The federal exemption is also quite large, it’s $15 million, $30 million if you’re married, and indexed to inflation, so it goes up in future years from that amount.

And so, most people just aren’t wealthy enough that they owe any estate taxes, they owe no death taxes whatsoever. They should still pay attention to some of the income taxes associated with that last year of life and those sorts of things, but for the most part, everything you own directly gets a step-up in basis of death. It’s as though your heirs bought them on the day you died at that price, and so if they sell them immediately, they don’t owe any income taxes on them anyway.

And so, most people don’t need to worry that much about death taxes, but if you are wealthy enough to have an estate tax problem, I congratulate you. $30 million plus for a married couple is no small amount of assets that you acquired during your life, you should be congratulated on that.

Recognize that amount is much smaller in some states. For example, in Oregon, it’s only $1 million, and then you got to start paying estate taxes above that. And in some states, the estate tax can be pretty onerous. In Washington, the top estate tax bracket, it doesn’t start at $1 million, it starts at about $9 million, is 35%. But you add that on to the federal estate tax, 40% and 75% of everything a very wealthy person owns in Washington State is going to the tax man, rather than going to the people or the organizations they would rather see them go to.

Obviously, in that sort of situation, doing some estate planning, preferably earlier in life when you can make a bigger difference, is very worthwhile to prevent that from happening.

In general, people think of estate planning, they think of documents. Now, really what estate planning is, is the decisions behind the documents, right? Who’s going to care for your children? Where do you want your assets to go? If you’re leaving money to your kids, when do you want them to get it? And under what circumstances and how much? If you’re leaving money to charity, which charities? And when do you want to give it and in what form? These sorts of decisions are the hard part.

But generally you do walk away with some documents as well. Typically a will, maybe a revocable trust, maybe an irrevocable trust or two, often some documents like a durable power of attorney. And this can be useful both in the event of your death as well as in the event of your disability for somebody to manage your financial affairs.

People also often throw in some healthcare documents. These are under the broad umbrella term of a healthcare directive, and maybe it’s a living will that actually says what you would want done in the event that you’re incapacitated. Do you want to be on a ventilator for how long and for what conditions? Do you want CPR done on you? Those sorts of things. You might also designate a healthcare power of attorney, somebody to make decisions for you in the event that you’re incapacitated.

Those of us who work in healthcare know that it doesn’t usually come down to requesting the documents and pouring over the documents when making medical decisions. For the most part, if we can’t talk to you, we talk to the people that seem to care about you the most, whether that’s a spouse or your children or somebody else and ask them what you would want.

So, make sure when you create these sorts of documents and make the decisions about what you would want done in your later years of life, that you share those decisions with those you care about. That’s probably even more important than creating the document. I’ve seen family members be pretty uncomfortable making those decisions because they don’t know what you want. When you’ve actually told them what you want, the decision-making is much easier for them at a very hard moment in their lives. So, please do share those with others.

A lot of people ask, “Do you need a trust or is a will enough?” Well, there are two types of trust. There’s revocable trust and irrevocable trust. Irrevocable trust for the most part are about avoiding state taxes and maybe some asset protection benefits. Revocable trusts are mostly about avoiding probate. If you don’t have any of those issues, you don’t need a trust at all. And in some states, probate just isn’t that painful or expensive. And so, maybe it’s no big deal to run your estate through the probate process. Maybe it’s not worth spending the money and the time to create a trust upfront.

In other situations, it’s clearly well worth creating a trust and passing as much through the trust as you can, rather than via a will and the probate process. But it’s a discussion that’s well worth having with an estate planning attorney in your state. For most White Coat Investors that are going to acquire substantial assets during their life and probably die as a multimillionaire, it’s worth spending a few thousand dollars talking to a specialist in this, an estate planning attorney in your state, because these laws are all state-specific and really coming up with a plan that you are comfortable with.

More and more these days, you can get a will and even some basic trust online. And maybe an attorney looks over it at some point, but I don’t think it’s the same as sitting down across the table from somebody who really does this day in and day out and feel like you have somebody in your corner that’s really made sure you’ve dotted all the I’s and crossed all the T’s in this process.

I mentioned earlier, beneficiary designations. Very important. It’s a good way to pass assets outside of probate. And for the most part, you don’t want assets like life insurance policies and the proceeds of them or retirement accounts coming to your state at death. You want them going to your beneficiaries, but you want them to be the right beneficiaries. Maybe the beneficiary is a trust, maybe it’s your spouse, but if something happens in your life, your spouse dies, you get divorced, you get remarried, you get married for the first time, you probably want to look at all your beneficiary designations to make sure your money is still going where you want them to go.

Okay, there are a fair number of advanced estate planning techniques out there. Most of them are sold at least partially for asset protection reasons. And the truth is that most good asset protection plans were put together for another reason, usually a business reason or an estate planning reason, not just to avoid paying your creditors in the event you get a judgment against you.

But it’s worth considering all those considerations as you go along. But we’re talking about things like family limited liability companies, family limited partnerships, a lot of types of irrevocable trust, particularly domestic asset protection trust. And so, you start mixing your asset protection plan and your estate plan together.

Is that worthwhile? It probably is for some people, especially when you have a lot of assets that aren’t protected by some other mechanism in your state. Typically your retirement accounts are all protected and that tends to be the lion’s share of assets for most wealthy positions.

But if you’ve got a lot of money that’s outside of retirement accounts that isn’t protected by some other law in your state, it’s probably worth thinking about some of these techniques. Just recognize that there is a fair amount of uncertainty as to whether they will work for the asset protection reasons and that it’s all governed by state law. So, it varies by state as well. And very little of it is free. Sometimes the cost is really kind of exorbitant for the amount of benefit you’re likely to get from it since most people never get into an above policy limits judgment situation.

The estate plan is well worth doing. The most important aspects of course is making sure your minor children are taken care of and making sure your money’s going in the right way in the right time to those that you care about most. But there’s a little more nuance to it and avoiding probate and reducing your taxes along the way.

 

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Keep your head up, keep your shoulders back. You’ve got this, we’re here to help. We’ll see you next time on the Milestones to Millionaire podcast.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

This is the White Coat Investor Podcast Financial Bootcamp, your fast track to financial success.

Dr. Tyler Scott:
Hello, everyone. My name is Tyler Scott, and I’m here today from White Coat Planning to talk about safe withdrawal rates and the 4% rule.

Everyone at some point asks themselves the question: How much money do I need to retire? Or a different version of that same question: How much of my nest egg can I actually spend each year without running out of money before I die? The most common answer you’ll hear to that second question is 4%.

Today we’re going to talk about where that number came from, what it is really designed to do, why some smart people think it’s too high, and why for a lot of retirees it may actually be too low.

So, what does the term safe withdrawal rate even mean? A safe withdrawal rate is the percentage of your portfolio you can take out in your first year of retirement, then keep taking out every year after that, adjusted for inflation, without running out of money over your retirement.

Here’s how the 4% rule works. Say you retire with $2 million. 4% of that is $80,000. So that’s what you withdraw in year one. In year two, you do not recalculate 4% of whatever the portfolio is now worth. Instead, you take out last year’s $80,000 and bump it up by inflation. If inflation was 3%, you take out $82,400, and you keep doing that every year, whether the market went up or down.

Flip that around, and you get a handy planning shortcut. You can withdraw 4% of your portfolio. Well, that means you need 25 times your annual withdrawals saved up in order to retire. So, if you want to pull out $100,000 a year from your portfolio, you need about $2.5 million.

So, if someone asked me in an elevator, how much do I need to retire? I would say about 25 times what you’ll be pulling from your portfolio each year, taxes included. That taxes included part trips people up sometimes. The withdrawal has to cover everything, not just groceries and travel, but also income taxes on the withdrawal and any investment fees.

The good news is that the 4% only has to cover what your portfolio pays for. If you have Social Security or a pension that covers part of your bills, your 4% just needs to cover the remainder. Keep all that in mind because we’ll come back to it.

Well, where did this 4% number even come from? The 4% rule traces back to a financial planner named Bill Bengen. In 1994, he published a paper in the Journal of Financial Planning asking a simple question: If a retiree had started withdrawals in any year going back to 1926, what’s the highest starting withdrawal rate that would have lasted at least 30 years, no matter which year they retired?

He used a simple portfolio: half S&P 500 stocks and half intermediate-term Treasury bonds, and he ran it through actual historical returns and inflation. The worst starting year in his data was a retiree who retired in 1966. That person could have withdrawn about 4.15% and made it 30 years. Round that down, and you get the 4% rule. Bengen later started calling this worst-case number the SAFEMAX, the maximum rate that was safe in every historical period.

Now, here’s the part that surprises a lot of people: the worst year to retire was not 1929, right before the Great Depression. It was the mid-1960s. Why? During the Great Depression, prices actually fell. Inflation was negative, so a retiree’s inflation-adjusted withdrawals were shrinking right when the portfolio was getting hammered.

The 1966 retiree faced the opposite problem: over a decade of mediocre real returns combined with high inflation in the 1970s, which forced their withdrawals higher every single year while the portfolio was struggling. Crashes hurt, but a crash with high inflation early in retirement is the real killer.

Four years after Bengen’s paper, three professors at Trinity University in Texas published what’s now called the Trinity Study. They looked at overlapping historical periods from 1926 through 1995, tested a range of withdrawal rates and stock-bond mixes, and reported the success rate for each combination, meaning the percentage of historical periods where the money survived.

A 4% inflation-adjusted withdrawal from a 50/50 portfolio lasted 30 years about 95% of the time. With 75% stocks, it was about 98% of the time. Notice that’s not 100%. Even in the Trinity data, there were a few periods where 4% ran out.

Their numbers differ a little bit from Bengen’s, mostly because they used long-term corporate bonds instead of intermediate-term Treasury bonds, which is a good reminder that these results depend on exactly what happens to be in your portfolio. So Bengen gave us the 4% number, and the Trinity Study helped make it famous.

I want to be clear that by historical standards, 4% is a pretty conservative withdrawal rate. To understand why, you have to understand what it’s protecting you from. It’s protecting you from a concept called sequence of returns risk.

Sequence of returns risk is exactly what it sounds like. It’s the risk that comes from a specific order of market returns that you happen to get, and it’s most dangerous in a window right around your retirement date, the last few years before you retire and the first several years after retirement.

Imagine two retirees who get the exact same average return over 30 years. During those 30 years, there are, of course, some really good years, some really bad years, and some ho-hum years. And both these people end up with a 6% average return.

The only difference between these two retirees is the actual order or sequence of when the good years and bad years showed up. One person gets the bad years first; the other gets the bad years later, and they end up in wildly different financial positions.

Here’s something interesting: if neither of them were taking money out, the order wouldn’t matter at all. Same returns in a different order, same ending balance. It’s the withdrawals that make the order matter, and here’s why.

Say you retire with a million dollars and plan to take out 4%, which is $40,000. In your first year, the market drops 30%. Your portfolio is now $700,000, and you still pull out your $40,000, leaving you with $660,000. That same $40,000 is now about 6% of what’s left in your portfolio.

You sold investments at low prices to pay your bills, so you have fewer shares around to benefit when the market finally recovers. Get that same bad year 20 years into retirement when you’ve had two decades of growth behind you, and it barely matters at all.

The years right before retirement matter too. Say the market drops 30% the year before you plan to retire. Now you have to choose: you can work longer, you can plan to spend less than you wanted to, or you can retire on schedule with a smaller nest egg, which means the same spending is now a higher withdrawal rate. That’s why the years on both sides of your retirement date deserve the most caution.

And that’s kind of the whole ball game. The 4% rule isn’t built around average returns. It’s built to survive the worst sequence of returns in U.S. history. That’s why I like to think of the 4% rule as sequence of returns insurance.

In Bengen’s research, sticking to 4% with a balanced portfolio would have gotten you through 30 years, even if you retired right into the worst sequence we’ve ever seen. It’s not a guarantee since nobody’s backing this policy, but it held up through the worst we’ve seen in the last century.

So, if the 4% rule is an insurance policy, that raises the question: What are the premiums? How much do I have to pay to insure against the possibility of an awful sequence of returns?

Well, the premium is the extra years you have to work in order to save 25 times your annual withdrawals instead of, say, 20 times. For someone who wants to pull out $150,000 a year from their portfolio, that’s the difference between a $3 million portfolio and a $3.75 million portfolio.

Or if you’ve already retired, the premiums are the money you didn’t spend in your healthiest years because you took out only 4% instead of 5% or 5.5%.

Here’s the twist: unlike real insurance, if the disaster never shows up, you don’t lose the premium. It’s still sitting in your portfolio. You just may not be the one who gets to spend it. Maybe your heirs will.

For a lot of people, that’s worth it to protect against the rare but serious consequences of bad sequence of returns. For others, it’s too steep a price to pay. So, is that premium too high or too low? It depends on who you are, and here’s the case each way.

Let’s talk about some arguments for going lower than 4%. There are plenty of smart people out there that think 4% is too aggressive, and here are some of the main reasons.

First, your retirement might be longer than 30 years. Bengen and the Trinity Study both used a 30-year retirement. That makes sense for someone retiring at 65, but a lot of physicians in this audience are thinking about retiring at 50 or 55, which could mean a 40- or 50-year retirement.

Other people say, in the age of AI, we’re going to eradicate or meaningfully mitigate many of the diseases that kill us, and our life expectancy in the decades ahead is going to be much longer. The point is, the longer the money has to last, the lower the safe withdrawal rate. For retirements that long, research tends to land closer to a 3.5% withdrawal rate instead of 4%.

The second reason is that future stock market returns might be lower than past returns. The 4% rule is built on U.S. history, and the U.S. has had one of the best-performing stock markets in the world during the 20th century. That’s not guaranteed to repeat.

Researcher Wade Pfau looked at 17 developed countries and found that even with generous assumptions, 4% would have been safe in only four of those countries. Morningstar, which uses forward-looking estimates rather than just history, currently puts its starting safe withdrawal rate at 3.9% for someone retiring in 2026.

Valuations also matter. When stocks start retirement very expensive relative to their earnings, future returns over the next decades have historically tended to be lower. That’s exactly the decade that matters most for sequence risk.

Third, taxes and fees have to come out of that 4%. Remember, the 4% has to cover everything. If most of your money is in a traditional 401(k) or IRA, a $100,000 withdrawal is not $100,000 of spending. Part of it goes to the IRS. So higher tax rates in the future mostly reduce how much of your withdrawal you actually get to spend, and nobody knows what tax rates will look like 20 years from now. Many people believe they will be higher.

Fees work the same way. Bengen’s original research assumed zero investment fees. Whatever you pay in fees comes straight out of what you get to spend.

Fourth, one big expense can completely blow up your plan. Long-term care is the classic example. Morningstar found that adding a long-term care shock to the plan dropped the starting withdrawal rate from 3.9% to 3.5%.

And fifth, 4% in the worst case ends with zero. Now, some people want to die with zero, but if you want to be certain that you’re going to leave money to your kids or to a charity, even in a bad sequence of returns, you need to spend less than a rate designed to drain the portfolio if the worst case occurs.

Okay, so now let’s flip it. Let’s talk about the arguments for going higher than 4%, because there are also some good reasons that 4% may be too low for a lot of listeners.

First, your retirement might be shorter. If you’re retiring at 70 instead of 55, you probably don’t need a 30-year retirement timeline. And if you’re 88, 4% is completely silly. The IRS itself makes you withdraw about 7.3% from your IRA at that age through required minimum distributions.

One caution, though, if you’re married, plan for the longer-lived spouse. For a 65-year-old couple, the odds that at least one of you makes it to 95 are roughly one in five, and higher for healthy, high-income folks like many in our audience.

Okay, the second reason to go higher than 4% is most retirees don’t spend the same inflation-adjusted amount every year until they die. Research has found that inflation-adjusted spending tends to fall about 1% a year on average during retirement.

People spend more in the early go-go years when they’re traveling and active, then spend less as they slow down in the slow-go years, and there tends to be an uptick near the end for healthcare costs. This concept is called the retirement spending smile.

It’s real, but be careful not to overstate it. When Michael Kitces modeled these declining spending patterns, the safe withdrawal rate went up by somewhere between about 0.3 and 0.75 percentage points. So helpful, but not a license to double your spending.

The third reason for a higher withdrawal rate would be a more diversified portfolio. Bengen’s original portfolio was just U.S. stocks and intermediate Treasuries. In his recent book, he updated his 4% rule and expanded it to seven asset classes, adding small-cap, mid-cap, micro-cap, and international stocks, plus Treasury bills. And his new worst-case number rose to 4.7% with just that diversified portfolio.

The fourth reason is that your portfolio probably is not your only income. As I said earlier, Social Security, a pension, rental income all reduce the amount the portfolio has to carry. And in these studies, failure means the portfolio hits zero, not that you had zero income. Social Security and these other income streams keep paying even if your portfolio ran out.

And fifth, the big one, the 4% rule assumes that you never adjust. It assumes you’ll just keep marching your spending up with inflation every year while the market is crashing around you. Real people don’t do that. They skip a vacation, they delay a car purchase, they skip the inflation raise for that year. And Morningstar found that retirees willing to use flexible spending strategies could start with a withdrawal rate as high as 5.5%.

Okay, so if you take one thing from this episode, make it this: the 4% rule was designed to survive the very worst 30-year stretch in U.S. history. That’s what it’s for, and the vast majority of the time, that worst-case scenario does not show up.

Michael Kitces ran the 4% rule through historical data going all the way back to the 1870s with a 60/40 stock-to-bond portfolio. In the large majority of those periods, retirees finished 30 years with more money than they started with. In over two-thirds of them, they finished with more than double. The median retiree finished with almost three times the starting balance.

Those are nominal dollars, not adjusted for inflation. But the point still stands: most people that follow the 4% rule die with a pile of money they could have enjoyed. In other words, most people paid the insurance premium and never needed the policy.

Here’s the catch, and it’s a big one. Nobody knows. Nobody tells you in advance what kind of retirement you’re going to get. The person who retired in 1966 didn’t know that the ’70s were coming. The stock market was near an all-time high. The economy looked great. The bad sequence of returns did not announce itself in advance.

So the goal isn’t to bet that you’re one of the lucky majority. The goal is to build a plan that lets you spend like you’re in the lucky majority while giving yourself an escape hatch if you’re not.

In practice, that looks like this: start with a reasonable withdrawal rate for your situation. That might be 4%. It might be a bit less if you’re retiring early, or it might be a bit more if you’re older or you have a lot of flexible spending.

Then decide in advance what you’re going to do if the market drops hard in the first few years, like trimming your discretionary spending or skipping the inflation-adjusted raises until the portfolio recovers. And decide in advance what you’ll do if things go well, which is give yourself a raise and permission to spend more.

Financial planners like me call this concept guardrails, and that is my favorite withdrawal strategy, to put in probability-based guardrails that allow your spending to go up or down based on what actually happens.

So, to go back to our insurance analogy, guardrails are like raising your deductible. You pay a lower premium up front, meaning you get to spend more from day one in exchange for agreeing to absorb some of the pain yourself if the bad sequences show up. You don’t need a perfect formula. You just need a plan that you’ll actually follow.

So to recap, safe withdrawal rate is how much you can take from your portfolio each year, adjusted for inflation, without running out of money. The 4% rule comes from Bill Bengen’s worst-case historical analysis and was popularized by the Trinity Study. It works like insurance against bad sequence of returns, and the premium is real.

Reasons to go lower include a long retirement, lower future returns, taxes and fees, big expenses like long-term care, and wanting to leave a legacy. Reasons to go higher include a shorter retirement, declining spending as you age, better diversification in the portfolio, other sources of income, and above all, a willingness to adjust.

4% is not some law of nature. It’s just a starting point built for the worst case. Most retirees won’t face the worst case. They just need a plan for what to do if those unfortunate sequences of returns do show up.

Thanks for listening, and have a wonderful day.

 

DISCLAIMER

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.