Investment Accounts

INTRODCUTION
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 320.

Today's episode is brought to us by SoFi, the folks who help you get your money right. They've got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans. That could end up saving you thousands of dollars.

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All right, welcome back to the White Coat Investor podcast, where we try to help you get a fair shake on Wall Street. Mostly, we're here to help you stop doing dumb stuff with your money. Doctors are notorious for being bad business people, for making bad investments.

There is a saying in the financial services industry that an investment is so bad you can only sell it to doctors. And I'm trying to stamp that out. Get rid of this financial illiteracy among doctors. We've been working out of here since May of 2011. Doing a podcast and a blog, video cast, online courses, books, however you like your information, we're trying to help you be financially literate so you can make smart decisions that allow your money to really demonstrate your values. Whether that's in how you earn and save and invest and spend and give that money.

All right. Well, I'm still here. As you may have heard, I went skydiving. This was for Whitney's 19th birthday. She wanted her parents to go skydiving with her. And I'll be honest, I do a lot of kind of risky sports, whether that's climbing or canyoneering or paddling or backcountry skiing, whatever. This was scary for me, this idea of jumping out of a perfectly good plane. But I did do it.

The nice thing about skydiving is you do it so high that it doesn't even seem real. The ground is so far away that it doesn't even seem all that real when you jump out of the plane. But I did jump out of the plane and for 50 seconds plummeted toward the ground. I think we covered 7,000 vertical feet or something. You were falling as fast as you go. Terminal velocity, right? It was pretty cool, I'm not going to lie.

That wasn't all that scary though. You know what was scary? It was once they opened the shoot and it took about 1,500 vertical feet for that shoot to open, I might add. And after that it was under the canopy for about 4,000 vertical feet. That part was a lot more scary for some reason. Maybe it's because the ground was a whole lot closer and we were moving around, but I thought that part was actually more scary than the free fall.

I don’t know if I'll do that again, although I keep joking with my family that I'm going to take up a wingsuit flying, you know those squirrel suits in the 80s so I can die a trauma death instead of drowning in my own secretions in some nursing home somewhere. But I guess you have to do 200 jumps before you can fly the squirrel suit. I don't know if I'm going to get to 200 jumps, but we'll see how that goes. Whitney had a fantastic time. She thought it was the greatest thing ever. Katie sure enjoyed it. I was just happy to see both of their shoots open, to be honest with you.

But since I'm still here, I guess we'll record some podcasts. In fact, I think we're recording a whole bunch of podcasts this week. 10 or 12 podcasts or something, we're going to record this week because I'm still off having fun. It's that time of year when I pretend I'm retired, despite the fact I'm not retired. So, that means when I'm not on trips, I got to do a lot of work, squishing in shifts, recording podcasts, writing stuff, going to meetings, that sort of stuff.

So, this week's lots of work but that's okay because on Friday or Saturday, rather this week, we're recording this in June by the way, we're recording this on the 8th of June. And the Saturday I'm headed to Idaho. I’m going to go float the Middle Fork of The Salmon, which is a pretty coveted permit to get. I didn't get the permit, but I got an invite. I'm looking forward to running the Sweet Rapids in that wilderness up there.

But in the meantime, enough about me. Let's talk about you and your questions. This show is driven by you. It's driven by what you want to talk about finance-wise for the most part. And so, we're going to be taking your financial questions.

If you'd like to leave your financial questions for us, it's not a live show obviously. We're not quite popular enough to just have you all calling in. So, we have you leave it on the Speak Pipe. Go to whitecoatinvestor.com/speakpipe and just record a question. We'll bring it on, we'll try to answer it and every now and then, you guys are really good. You stump the chump, but we'll see how it is today. Here's the first question.

SEP 401(k) QUESTION

Speaker:
Hi Jim. Thanks for that you do. I’m not going to give you my name due to the nature of the question, but can I use monies earned from a lawsuit that'll come to me as 1099 MIS-C and put 20% of that in my SEP 401(k)? Pretty obscure, thank you.

Dr. Jim Dahle:
Okay. Actually, not all that hard of a question. Here's the deal. Yes, you're going to be taxed on this. It's going to be treated as ordinary income and you're going to receive a 1099 MIS-C for it. However, what this is not is earned income. And in order to contribute or to use to add up toward the income that you do the calculations for contributions on, to a retirement account, you have to have earned income.

Now, people can get earned income on a 1099 but this income is not earned income. You can also get non earned income on a 1099. For example, if you invested in a private REIT for instance, they would send you a 1099 at the end of the year. That's not earned income. You can't use that to contribute to retirement accounts. And it's the same way with this sort of a settlement. Sorry, you cannot do that.

By the way, a lot of those settlements that are for medical expenses and that sort of a thing are kind of considered reimbursements I think. I'm not sure all of that is taxable. So, it's really truly just paying for stuff that you had to pay for. I don't know if that's necessarily taxable. You don't get double taxed as a general rule in our tax code.

Okay, next question. This one's about accounts for kids.

UTMA ACCOUNT QUESTION

Steve:
Hi Jim, this is Steve from Texas. My wife's parents recently opened UTMA accounts for each of our teenage sons. I was curious what tax implications there are as these accounts grow, both for my in-laws for the boys and for us both now and when they turn 18. Thanks so much for all you do.

Dr. Jim Dahle:
Okay, very interesting question. Obviously, it's good to know what the implications are before these accounts get opened, but hopefully the owners of the account or the custodians of the account are aware of that.

UTMA, Uniform Transfer to Minors Account or UGMA, Uniform Gift to Minors Account depends on what state you're in. They work almost entirely exactly the same. Think of this as a taxable account for your kid. And the nice thing about your kid is they usually don't have all that much earned income, don't have much income at all.

And so, the money from this investment account is generally taxed at a very low rate, much lower than your rate. For example, if you're in the top bracket, you could be paying 37% federal or even if you got qualified dividend rates or long-term capital gains rates on those investments, you might be paying as much as 23.8% once you include the PPACA taxes. But for the kid, that's usually not the case because they usually don't have any other income.

So, the nice thing about that is that you can have quite a bit of income and have it be taxed at a very low rate. In fact, I think it's the first $1,200 or something, and don't quote me on this, it goes up slightly each year, but about the first $1,200 of income in that account. Whether it's interest, capital gains, dividends, the first $1,200 is essentially taxed at 0%. This assumes there's not some other investment this kid owns.

And then the next $1,200 is taxed at their tax bracket, which is generally 10%. So that's very good, a very nice rate. And in fact, if it's long-term capital gains or qualified dividends, it's probably 0% still. So, that's great.

What you need to be aware of though is the kiddie tax. And the kiddie tax is essentially this rule that says you can't put all this money into a UGMA or UTMA account just to get out of paying taxes. So, once this account has enough money in it that there's more income than that $2,400-ish a year, it gets taxed at the custodian's tax rate. I'm pretty sure it's custodian's tax rate.

And so, in your case where it is another family member opening this account for them, I believe it's at their tax rate, not the parents' rate. Now in most cases it's the parent opening this thing for those guys. So, it's the same thing. This is actually the first time I've actually thought about the custodian being somebody other than the parent. And I'm not sure anybody even addresses this online, but I think it's the custodian. It's a custodial account and so that's a cool thing.

That's nice of them to do. Be sure to thank them for that. But for the most part, these are accounts for relatively small amount of money. If you're putting more than say $100,000 into a UTMA account total, you're probably doing it wrong. It's fine if you want to get it out of your estate, it now belongs to the kid.

And of course, when they reach the age that your state specifies, which is usually age 21, they can use that money to do anything they want with. You no longer have control over it at that point. But for the most part, if you're looking for a tax benefit by doing this, that kind of goes away after $100,000-ish in the account. Even if you are investing very tax efficiently, that's still going to hit the max of income that's going to be taxable in there.

Okay, I hope that's helpful. And then of course, when they sell it as adults they're paying at their capital gains rate. So, this is where I put my kids' twenties fund. Theoretically they don't have much income in their twenties, they'll be able to get it out at a pretty low tax rate, maybe even 0%.

QUOTE OF THE DAY

Okay, let's do our quote of the day today. This one comes from Ralph Waldo Emerson who said “The desire of gold is not for gold, it's for the means of freedom and benefit.” Unless you're Scrooge McDuck, I guess, then you really want the gold to swim through.

401(a) VERSUS PENSION PLAN QUESTION

Okay, next question. This one's about 401(a) versus a pension plan.

Peter:
Hi Jim, this is Peter from upstate New York. My wife is a neonatologist and I'm a medical physicist in radiation oncology. We're both mid-thirties and each make about $200,000 – $225,000 a year. I'll be starting a new job with New York State Hospital system and I'm torn about which benefits option is select since they cannot be changed during any period of employment.

My options are either a defined benefit pension plan or a 401(a) program. For the pension plan, I'll be vested after five years and if I stay with the hospital system for five to 20 years, I receive 1.75% of my final average salary times the number of years that I worked. Employee contributions are 6% of my gross salary. It's great because this is guaranteed income for life, assuming New York state doesn't collapse, but I can't touch it without losing value until age 63. I also can't pass it on and it's not portable.

For the 401(a), I'll be vested after one year and the hospital system will contribute 8% of my gross salary for the first seven years of service and 10% of gross salary thereafter. I'll also be maxing out the 403(b) offered by the employer.

I ran the numbers in Excel and if I can get a 6% CGR in the 401(a) with 4% withdrawal rate, it would mathematically make more sense to take the 401(a) option. I suppose this is why they say financial planning isn't just an exercise in mathematics. What are your thoughts on choosing one versus the other? Thank you so much.

Dr. Jim Dahle:
All right. Well, first of all, thanks for what you do. Thank you everybody for what you do. But those of you who are willing to live in states like New York and California, you deserve a particular thank you for being there and being willing to take care of people there despite how you're taxed for being there. Taxes are going to be pretty bad in some of those states. Cost of living can also be quite high, so thanks for serving people there. Whatever reason you're there, whether it's family or you grew up there, or just a good job or whatever, thanks.

What should you do? Well, you have correctly identified the fact that the state has had very smart actuaries look at this and essentially make these two options equivalent. These are about the same thing. Once the state adjusts for the risk it's taking and the money it's paying out, these are not all that different. This is about what it would cost to buy a pension.

So, if you really want a pension, here's a chance to buy a pension. There's lots of great things about a pension. A pension is a way to make sure you're going to spend your money. If it's hard, if you're the type of person that has a hard time spending your money, a pension's good that way. It's like buying a single premium immediate annuity from an insurance company. It gives you permission to spend because you know you're going to get another payment next month.

And so, that's cool. Even if markets do terribly, you put that risk essentially on New York state. And so, lots of people like pensions, lots of people bemoan the fact that there are no longer very many pensions out there. Here's your chance to actually have one. I'm not going to have a pension and you got a chance to have one. So, if you want a pension, go get a pension.

That said, I would be very comfortable taking the other option. A 401(a) what most people end up doing with that money when they leave the employers, it ends up in their tax deferred account. Usually in traditional IRA is where that money ends up eventually. You could do Roth conversions on it down the road, but it sounds like you're getting a big fat match in it, which is awesome but that's just the money they were going to put toward the pension anyway. It's actuarially probably the same for them.

And most of the time when you actually get into crunching the numbers, you'll see that 6% figure that you calculated pop up a lot. And that's where the actuaries think they're about equal options.

And so, if you're the kind of person that likes to be in control of their money, I think this is a good option. Especially if you're thinking maybe an early retirement, then it can be a good option to have a little more control of your money rather than having to wait until age 63 or whenever they'll start paying this to you.

The fact that you listen to the White Coat Investor podcast tells me that I probably don't have to worry about you not knowing how to manage money. That's the big risk of somebody taking 401(a) or a 401(k) instead of a pension. There's all these people out there who are financially illiterate. You give them a big lump sum of money and worst case scenario, they take it out at age 52 and just buy a big truck with it or they burned through it in the first three or four years of retirement. But I think you're probably financially literate enough given you've already run these numbers that you're not going to do that.

So, I don't think that risk exists for you. I don't think there's a behavioral reason that you should feel like you need to take a pension, unless you really want one. Otherwise, I think you're probably going to be better off taking that 401(a). I hope that helps.

ROTH MONEY AND THE SECURE ACT 2.0 QUESTION

All right, let's talk about the Secure Act 2.0. We've talked about it a number of times on this podcast. Let's do a question about it.

Bradley:
Hey Jim, thanks for all you do. I'm Bradley from South Georgia. I traditionally have contributed to my traditional 401(k) through my employer and max that out. But with the new Secure 2.0 changes contributing to a Roth 401(k), now the employer match is also Roth money. Does that change our perspective during our peak earning years? And will that Roth match be untaxed money now and untaxed money in the future? Thank you Jim.

Dr. Jim Dahle:
Okay, here's the deal with Secure Act 2.0. It made lots of huge changes and if you've never heard about this, I just got an email or saw it on the forum or something from someone who's been around a long time who totally missed this news about Secure Act 2.0.

This thing was passed right at the end of December last year. So, if you were out of the country or something and you missed a bunch of White Coat Investor posts or whatever and you've never heard of Secure Act 2.0, you need to go back and do some review.

And the best place to do that is just on the blog, whitecoatinvestor.com/secure-act-2-0 is the actual URL. If you search Secure Act 2.0 in our search bar, it'll come right up. I go through everything that changed with the Secure Act 2.0.

One of those things of course is this 401(k) match. It basically gives employers the opportunity to do the match in Roth dollars. The employer can put the match now into the Roth sub-account of the 401(k) and that's immediately. Even this year, your employer could be doing this in a 401(k), 403(b), 457(b). It's all allowed. Whether your employer will actually do it is a completely different question.

This is an option for the employer. So, don't be surprised if you go talk to HR, they don't even know about this or that they haven't decided that the plan is going to allow it. So, that's the first thing to check on. Is this even an option? If it is an option and they're willing to do either one, well, then you got to decide what you want. It may be that they aren't going to give you the option.

And it's like anything else. When you don't have the option, you take what you have. Like most high earners have a 401(k) at work and they can't do a traditional IRA. They can't get a deduction for that. So they do the backdoor Roth IRA, it's not an option. They just do backdoor Roth IRA.

Other people have a 401(k) that doesn't allow for Roth contributions. Well, that's an easy decision. You just do the tax deferred contributions because it's your only option. Only when you have the option of doing both, you actually have to worry about that. Is this actually a big decision for you to make? So if it is then you got to start thinking because this is complicated.

For most people in their peak earnings years, the rule of thumb is tax deferred. Any other year that's not your peak earnings year, the rule of thumb is Roth contributions matches everything, conversions, everything. But there's lots of exceptions to those general rules of thumb.

One of those exceptions is if you're a super saver. If you're just going to be in a way higher tax bracket for whatever reason in retirement because you're going to have a huge military pension or because you own 25 doors worth of rental properties or just because you save gazillions of dollars every year, you may be better off doing Roth now. That's entirely possible even though you're in your peak earnings years. So, keep that in mind. I hope that's helpful and answers your question.

SOLO 401(k) QUESTION

All right, next question is about a solo 401(k). When you go take a real job with a real employer. Let's listen to that.

John:
Hey Dr. Dahle, this is John from the Midwest. I recently left my independent contractor job where I had a solo 401(k) and switched to a W2 job. My question is what and when do I need to do something with my solo 401(k)? Can I just leave it there or do I have to shut it down and roll it over into my new employee sponsored 403(b)? Thanks for the advice.

Dr. Jim Dahle:
Okay, here's the deal. You think of this as having left a 1099 job and gone to a W2 job. That's not the right way to conceptualize what you have done. What you have done is you happen to own a business. When you are getting paid on a 1099 you own a business and maybe it's an LLC or a partnership or a corporation, but most of the time it's a sole proprietorship, but it's a business.

Last year you had a whole bunch of income in that business. This year you didn't have very much income because you spent all your time working this W2 job, but you're still in business. The business didn't go away. And because the business didn't go away, the solo 401(k) doesn't have to go away. That retirement plan is tied to the business.

So, I presume you're like most people that have a solo or individual 401(k) and you like it. It probably has very low costs and has great investments that you've selected and probably has some cool options that you like about the 401(k) and you really don't want to get rid of it and you don't want to roll it into some crappy 403(b) at your new employer and pay some AUM fee to some crappy advisor associated with it and have to invest in some high ER crappy fund inside the 403(b). And so, you'd rather leave your money with the solo 401(k).

Why don't you just keep that business open? And who knows, maybe later this year you'll do a few days, you get paid on a 1099 for next year you will or the year after that. The IRS does not specify that your business goes away after a certain number of years. It's a bit of a gray area.

Now if you never have any more 1099 income ever again, the whole rest of your life, maybe you ought to get rid of that solo 401(k) at some point. But the IRS is not going to come knocking going “Hey you didn't make any 1099 money this year. What are you doing with that 401(k)?” They don't care. So, just leave the money in the 401(k).

What you probably don't want to do if you're like most docs is roll it out to an IRA because that's going to screw up your pro rata calculation if you're doing a backdoor Roth IRA every year.

The other nice thing about keeping a solo 401(k) is when you leave this W2 job, you can roll that 403(b) money in there and that's usually a pretty good option. Again, still preserves the opportunity to do a backdoor Roth IRA. So yeah, hopefully that's helpful. There's no rush to do this. If you do decide to close the business and you do it in a year or two, that's fine. It's not like you just stop getting 1099s and you have to have the business closed in 30 days or something. There's no rule like that.

All right, for those of you who are still in medical school, we want to give you some cash, cash money. This is what we call the WCI scholarship and it is one way in which we give back to the community by directly reducing their indebtedness from medical school. We call it the White Coat Investor scholarship.

It's competitive. Hundreds of people apply for it every year. You can apply as well at whitecoatinvestor.com/scholarship. The applications will be accepted through the end of August.

There's basically two categories you can apply in. The second one, the financial one usually has fewer applications in it, so you may want to take a closer look at that as you apply. It may be a little bit less competitive than the inspiring story category, which is always very inspiring, but can be somewhat competitive.

I haven't looked at the latest numbers, but typically the checks we're sending out to the 10 winners for this are in the $6,000 or $7,000 range and it's just a check you get and you can use it for whatever you want.

We did implement a new rule this year. If you're already on a full ride scholarship, you can't win anymore. We want this to be spread around a little bit and not necessarily just go to those who are already coming through for free. But otherwise it's the same scholarship we've been running for years and years and years.

The White Coat Investor staff, we are not the judges. The judges are you guys, the White Coat Investors. And so, if you'd like to be a judge, please apply. You can do that by emailing [email protected] and just put “Volunteer judge” in the title. You can't be a student, you can't be a resident. But otherwise, whatever profession you're in or if you're a retiree, you can be a judge. So, please apply. We need dozens of judges to read through these hundreds of applications and decide who's going to get the cash.

All right, let's take a question about a backdoor Roth IRA. We never hear very many of these. Actually we do, but most of the time we're here in between January and April. So, here we are in June with a backdoor Roth IRA question. That's actually a little unusual.

BACKDOOR ROTH IRA QUESTION

Stephanie:
Hey, White Coat Investor. My name is Stephanie and my question like most is regarding the backdoor Roth IRA. I recently got married in November. Prior to getting married, my husband was eligible to make direct Roth IRA contributions because he was within the income limit. I however, was not so I was doing backdoor Roths.

Now that we are married and filing joint, we combined over the income limit to make direct contributions. So we will both be doing backdoor. My question is do I make the $6,500 backdoor contribution for me in my account and he makes the $6,500 contribution for him and his account, or can I make a total of $13,000 in my account? $6,500 for me, $6,500 for him. What is the easiest way to do a backdoor Roth contribution if you're doing one for yourself as well as your spouse? Thank you and I look forward to hearing from you soon. Bye.

Dr. Jim Dahle:
Okay, the first thing I think you said it was last year that he did that and you got married last year. So, this is 2022. And I might be reading too much into this, but I'm assuming you're filing jointly or you filed jointly for 2022. It usually saves some money if you file married filing jointly. Maybe not in your case if you're both working, but if you did then he needs to recharacterize that contribution to a traditional IRA contribution. There's a time limit on that, so make sure you look into that and recharacterize this contribution, then reconvert it to a Roth. If you didn't do that, then don't worry about that.

Going forward, what you need to understand is what IRA stands for. And what IRA stands for is Individual Retirement Arrangement. It's not account despite what most people think. Individual retirement arrangement and the key word there is individual.

These are not joint accounts, it's not like a joint taxable investing account. It's not like a joint bank account. Retirement accounts are always individual. They only have one person's name on them. Even if you have a solo 401(k) with you and your spouse, you each have your own individual sub-accounts within that 401(k). Just like multiple employees at a company have their own individual sub-accounts.

So, what does that mean? That means you can't make the contribution for him into your account. Now, spousal IRAs mean that you can make contributions from your income to your spouse's IRA, but you can't do it into your IRA. You have to do it into their IRA. And so, I hope that clarifies that. Right now, the contribution limit for those under 50 is $6,500. So you would put $6,500 into your traditional IRA, you or he could put $6,500 into his traditional IRA and then you would convert yours to your Roth IRA and he would convert his to his Roth IRA. I hope that makes sense.

All right, enough of your questions for today. And you guys got to send us some more if you want longer podcasts. That's okay. I got a dentist appointment later today, so I got to wrap up recording sooner rather than later. I don't mind that we don't have a whole bunch more questions today. So this episode might be a little shorter than some. That's okay.

SPONSOR

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And it sounds like federal student loans are coming out of the 0% term coming up probably last day of August. So, if you've got loans that are above what you can refinance them to and you're not going for PSLF, you don't need the IDR program protections, it's time to refinance. So, look into that, see if you can knock off a half point or 1% or 1.5% off your federal student loans and get a little better rate. So a little more money goes toward principal than interest.

Unfortunately, rates have gone up a lot in the last year. Those who refinanced a year ago, they're planning to hold onto their loans for a while, might be feeling pretty good about that. The rest of you can feel good about the fact that you got the whole 0% time period and the benefits of that.

All right. Thanks for those of you leaving us a five star review and telling your friends about the podcast. This one comes in from Hari who said, “Five stars. A must for any medical professional. I discovered the White Coat Investor toward the fifth year of my training and although it’s been only four years since then, but it’s been life-changing.” Thanks for that kind review. I appreciate that.

Don't forget the scholarship, whitecoatinvestor.com/scholarship. You have until the end of August to apply. Otherwise, keep your head up, shoulders back, you've got this. We can help. See you next time on the White Coat Investor 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.

DISCLAIMER
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 123 – Sports medicine doc becomes a millionaire.

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All right, welcome back to the Milestones podcast. This is where we celebrate your financial accomplishments and use them to inspire others to do the same. We have a great guest on today. It’s actually a repeat guest, but as you listen to him, you'll realize this is somebody that's got it figured out and he's going to be hitting a lot of milestones in his life. And so, I think it's fun to catch him early in his career and see these early ones and just dream about where this could take him and what can be accomplished.

So, let's get him on the line. Stay tuned afterward. We're going to be talking a little bit about the 4% rule or the 4% guideline, whatever you want to call it, and really getting into the basics and the nitty gritty behind that.

GUEST INTERVIEW
Our guest today on the Milestones podcast is a repeat guest. This is Dan from Ohio. Welcome back to the podcast, Dan.

Dan:
Thank you for having me. I love to be here.

Dr. Jim Dahle:
Yeah, we celebrated you paying off your student loans way back in episode 60. Here we are in episode 123 and you have become a millionaire. Congratulations.

Dan:
I appreciate it very much again. Again, I appreciate you and your help in that journey.

Dr. Jim Dahle:
Yeah, this is a cool milestone because it still means something to people. Now, obviously a million dollars now is not what it was 10 years ago and certainly not a hundred years ago, but it's still a big chunk of money and it's probably as milestones go, I think the one people think about the most. Was this a big goal for you to become a millionaire at some point or just something that happened?

Dan:
At some point I would like to retire, so I think it was meant to happen along the way, but I would not say it was a grand goal for me.

Dr. Jim Dahle:
Yeah, it's just kind of something along the way to reaching your real financial goals. All right, remind us what you do for a living, how far you are out of training?

Dan:
I'm a family physician and I'm about a little under four years out training right now.

Dr. Jim Dahle:
Four years out as a family doc and you're already a millionaire. Tell us how you did that.

Dan:
Yeah. I did a sports medicine fellowship and I do a little bit of cash pay regenerative medicine with that and my wife is a neonatal nurse practitioner. So, we still have dual income, which is very helpful.

Dr. Jim Dahle:
Okay. Approximately what's your household income been the last four years?

Dan:
Last four years probably on average $350,000. Last year was our highest earning year and we're probably a little under $500,000 between the two of us.

Dr. Jim Dahle:
Okay. And four years ago did you have a negative net worth?

Dan:
Yes, we were right around net neutral, so we still had significant student loans, but between retirement accounts, I think we were right around broke when I finished fellowship.

Dr. Jim Dahle:
Okay. This is cool because if I do the math right, approximately $350,000 a year, you add that up, $350,000 times four works out to be $1.4 million and you've still got a million of it left, basically. So, that's a pretty awesome ratio to think about there. And part of that's obviously the money did some of the lifting too. But it's pretty cool to think about what percentage of the money you've earned, you still actually have.

And for people late in retirement, often they have more money than they ever earned if they've been saving and investing well. But even early in your career you've still got a pretty awesome ratio. So, what do you and your wife do that allowed you to use so much of your income to build wealth?

Dan:
We live well below our means, obviously. And what I said last time is we used the template from the Tale of 4 Physicians and we kind of followed the most frugal lifestyle on there and we never really upgraded the lifestyle or found a reason to do so. So, we're pretty content living at the lifestyle we have. We're expecting our second kid and the first kid raised our household budget a little bit just to get childcare. I kind of expect the same thing, but from our lifestyles we never really increased.

Dr. Jim Dahle:
So, you basically earn like high income professionals while living like an average American. Is that fair to say?

Dan:
That is very accurate. Middle class life.

Dr. Jim Dahle:
So, why are you doing this? Tell us your “why.” Why it's important to you to be building wealth this quickly.

Dan:
There's actually a little bit of a spiritual component to that. A net worth, I view it as essentially how much you've given to society versus consumed. Ultimately what I want to do with wealth is just continue to give back to others in the community. And I think if you have the resources, you can do that. I have another philosophy about being “antifragile.” And I think that being in good health and in good financial health, makes you pretty resilient to anything that can come up in life. And then when you see someone who's in need, you have the capacity to give to them.

So, taking care of the household finances or own health and our family is number one, but if someone in our community needs something, we also have the surplus to give in their time of need.

Dr. Jim Dahle:
Yeah, I absolutely agree that it's easier to help others from a position of strength. I've met a lot of very charitable people that are relatively poor. They give a lot way more than you would expect given how much they make and how much they have. But there's a limit to how much they can help somebody and you can just help a lot more when you've really taken care of business financially. So, that's pretty cool. I like that. Thanks for sharing that.

All right, let's divide up your net worth. What's it divided up into? How much is in Bitcoin? How much is in Ethereum? What’s your net worth divided up into?

Dan:
I still have $1,000 left in Bitcoin and $200 in Ethereum.

Dr. Jim Dahle:
There you go. Alright.

Dan:
I put $100 into there, but $50,000 in cash, $100,000 in investments. $50,000 in a TSB account, about $450,000 in a 401(k)s, $150,000 in taxable. $100,000 in a Roth IRA and about $50,000 into another IRA. $200,000 in equity and $100,000 into a couple different real estate syndicates. I still have about $90,000 left on the house.

Dr. Jim Dahle:
Okay. So, pretty broadly diversified mix of investments. All right. Do you expect that mix to change going forward as you continue to build wealth?

Dan:
I would like to. One of your mile sayings on the 14 milestones is “Be done saving if you want to work until age 65.” And we actually hit that right around the same time we became millionaires. And now I talked to my uncle who was into financial planning and he said look at other ways to use your money. So, I would like to actually buy a gym, and combine it with a practice that I'm going to. I'm actually converting from an employed status to direct primary care practice and include in that subscription fee people just get free gym membership. So, it's a good way for people to be able to improve their health.

Dr. Jim Dahle:
Yeah, the fun thing about building wealth is it allows you to do things like that. It opens up opportunities. Whether they are career opportunities, whether this ends up being super profitable for you or not, it's a contribution you can make to your practice, to your community and that's pretty awesome.

All right. Well, what's been your attitude toward debt? We obviously had you on paying off student loans relatively early in your career, but what role has debt played in you building wealth?

Dan:
I struggle with that. I tend to be very debt averse, so I've tried paying off almost all of it as quickly as possible. I consider just paying off the rest of our house too and being a debt free millionaire at that point. I just find it gives you more options and I very much value choice and freedom.

Do I think that's the fastest way to maximize wealth? Absolutely not. I think there is value in debt and leverage, but traditionally I just have not pursued options that were high on debt. I know people can do it well. My brother's gotten into short term real estate rentals and he's done very well with that. But for me, I just found I'm happier when I don't feel obligated to anyone else.

Dr. Jim Dahle:
Yeah. You know what I tend to find? It’s the people who build wealth, the people who save money also tend to be the people who pay down debt. And so, I think it's actually relatively rare to find somebody that's wealthy that's also really highly leveraged. I think it doesn't happen as often as some of those real estate books out there might have you believe.

All right, how much of this came from family money? Did you get your parents help pay for your school? Did you get some big inheritance or is this all just money you carved out of your earnings?

Dan:
They did help pay for some of my undergrad. I got a ton of scholarships for that. And the rest of it has all been from us. We've never gotten an inheritance, no tuition assistance beyond the undergrad phase of life and what my wife and I earned.

Dr. Jim Dahle:
Would you say your attitudes toward money, your philosophy, was this influenced by your upbringing in some way, either positively or negatively? How you were raised affect how you manage your money?

Dan:
Very much so. I started working as a paper boy when I was 12 years old and I learned the value of a paycheck. It gives you the ability to spend money on what you want. My dad is an outpatient internal medicine doctor and he never really valued financial education or personal finance. And where he was in private practice, I really saw him struggle with the business decisions more than the medicine decisions.

And so, that's what pushed me to get my MBA when I was in residency. At that time I got the tuition benefit and was paid for by the university I was at. And that helped me very much in my career early on. I realized quickly MBA does not teach you personal finance and so your website's been integral into getting that information. And then I like structure, so I read at least book a quarter on personal finance just to look at additional ways to grow and learn from a personal finance standpoint.

Dr. Jim Dahle:
Okay. We got to step back on this. You got an MBA during residency?

Dan:
Yes.

Dr. Jim Dahle:
Tell us about that.

Dan:
There was a working professionals program at Ohio State where I did my residency. They essentially paid for all the tuition. So, two nights a week I was going to nighttime classes with other professionals locally. Took a gap year when I was in fellowship training and then came back and completed it my first year as an attending.

So it was very valuable. Tim Ferris, who's another blogger, always talks about you want to try to be an expert in at least two different fields and then you're going to be hireable in any setting. So I kind of took that to heart and used it to just diversify my knowledge base and I learned from that. I loved continued learning and I've done a couple other online fellowships every single year and it just makes you more hireable and valuable to patients.

Dr. Jim Dahle:
Have you started thinking about estate planning at all? This is a ways out for you, but you're almost surely going to have an estate tax problem. Have you given much thought to that down the road or that's a few years away before you really get too crazy putting something to take care of that into place?

Dan:
I'm actually getting deployed again this summer. And one of my buddies, the last time I got mobilized, the JAG attorney that was there as a reservist was in estate planning attorney before he shipped out. So, I'm hopeful that I get the same opportunity and I get it done for free just before I move. But if that doesn't happen, yeah, we need to meet with an attorney when we get back.

Dr. Jim Dahle:
Your net worth is obviously still a long ways away from the estate tax exemption limit. But when I see somebody building wealth so quickly, so early in their career, you can kind of see what's happening. You've obviously become not only financially literate on the personal finance side, but on the business side. I just see the pattern in what's going to happen here. You're going to do very well in your life. You're going to be able to help out a lot of people and you're probably going to continue building wealth throughout your life.

Congratulations to you. I think your story will be very inspiring to other people that listen to this podcast just to see what's possible out there. And so, I thank you for coming on and congratulations to you on what you've done.

Dan:
Thank you again to you and your staff. You mean a lot to a lot of physicians and you bring a lot of joy. So, thank you again.

Dr. Jim Dahle:
It's our pleasure.

FINANCE 101: 4% RULE

All right. I hope you enjoyed that repeat guest on the podcast. There's a lot to learn there. He's done some cool stuff and I think he's going to do even more cool stuff as he goes forward. It's amazing what flexibility and financial freedom can allow you to do with your career.

All right, I promised you at the beginning we're going to talk about the 4% rule. What is the 4% rule? Well, back in the 1990s, financial advisors were telling their clients that if your portfolio makes 8% a year, you can take 8% out.

The problem with that is that if people got what's called a bad sequence of returns, even if they had 8% average returns throughout their retirement, if the bad years came first, if this sequence of returns risk showed up, they ran out of money. So, despite the portfolio making 8% a year, they ran out of money. Because they were having bad returns, the portfolio is losing money and they were taking money out at the same time and they ended up a bust in retirement.

Some researchers started thinking about this and they're like, “Well, we got to be able to account for bad sequences of returns. So obviously, we have to withdraw less than the portfolio is returning on average in order to make sure our money lasts throughout retirement.”

How much less do we have to withdraw in order to make sure that happens? So they thought, “Well, let's design a study and let's try to figure this out. Let's go back and look at all the past returns we have in any sort of reliable database of stocks and bonds.” And so, they looked for databases and they said, “Well, the most reliable one we have goes back to 1927.” That's not all that much time. That's not even a hundred years. So we'll use rolling 30 year periods. Starting in 1927 through 1957, 1928 through 1958.

And they looked at all of these rolling 30 year time periods and imagined that a retiree that retired in that year started withdrawing money from the account, adjusting upward each year for inflation. They said, “Well, let's start at 3%. They'll take out 3% of the account and 4% and 5% and 6, 7, 8, 9, 10, 11, 12.”

And what is the likelihood that they run out of money historically if they did this? And so, this study is famously known as the Trinity Study because it was done at Trinity University down in Texas. And if you haven't looked at the money shot from this study ever in your life, I put it in all kinds of blog posts and presentations. But the money shot is table two and it's labeled Retirement Portfolio Success Rates by withdrawal rate, portfolio composition and payout period in which withdrawals are adjusted for inflation.

And if you spend some time with that, you will quickly realize where the 4% rule comes from. For example, if you look up in a portfolio there's 50% stocks and 50% bonds over a 30 year time period. Historically, and this is updated, I think they updated it in 2009, so this is updated since they did the original study. But historically, if you took out 3% of that portfolio a year and adjusted upward for inflation, none of the portfolios ran out of money. There was no rolling 30 year time period in which you ran out of money.

Same deal, 50% stocks, 50% bonds. If you took out 4% of the portfolio, you ran out of money just 4% of the time, 4% of those rolling 30 year scenarios. However, if you bump it up to 5%, you ran out of money a third of the time. If you bump it up to 6%, you ran out of money half the time. If you bump it up to 7%, you ran out of money 80% of the time. And if you bump it up to 8%, what financial advisors were telling people they could do in the 90s, you ran out of money over 90% of the time. That's where the 4% rule comes from. 4% rule, 4% guideline, whatever.

Now, keep in mind this takes into account a lot of very terrible economic situations. The Great Depression is included in this data. World War II is included in this data. The Korean War is included in this data. The stagflation of the 70s, Vietnam, 9/11. That terrible day in 1987 when the market lost whatever it was, 27% of its value. The dot-com crash, the 2008 global financial crisis, this is all included in the data. And even so 4% works essentially all of the time. So, that's where the 4% rule comes from.

And the cool thing about it is you can reverse engineer it. If you know you can take out about 4% of your portfolio, you know that you need about 25 times what you spend in order to retire. So, if you're spending $100,000 a year, you need $2.5 million. If you're spending $200,000 a year, you need $5 million. And so, you can reverse engineer and figure out how much you need to retire.

Now is this method the recommended method for how you should spend your money in retirement? No. No. I know basically nobody doing this that takes out 4%, adjusts it up for inflation each year and takes out 4% plus whatever inflation was the year. Nobody does that. Everybody adjusts as they go. If sequence of return risk shows up, you tighten the belt a little bit. Most of the time it doesn't show up. And so, you can spend a little bit more or you end up leaving more for your heirs behind than you thought.

On average, somebody who did this, who took out 4% and adjusted up each year for inflation leaves behind 2.7 times what they retire with on average after 30 years. If you die sooner, you leave behind even more. So, most of the time you end up with far more money than you need.

So if this bad sequence doesn't show up in the first five or 10 years of your retirement, you can loosen the purse strings and start spending more. And if it does, then you've got to tighten your belt a little bit and realize you're one of those situations that really can only spend about 4%. Some people think because yields have come down, because maybe future stock returns won't be as high, that 3% is the new 4%. Or some people get insane and start talking about 2%, 2.5%. But the truth is, even if you want to be really conservative, you dial it back to 3.75 or 3.5 to start with and then adjust as you go. That's going to be plenty.

But if you'd never heard about the 4% rule, that's basically what it is. And the cool thing about it is that gives you a number for retirement. Retirement is not an age. It's a number, it's an amount of assets. It's 25 times what you are spending or want to spend in retirement. And you can hit that when you're 35 or 40 or 45 or 50 or 55 or 80.

Just because the government says you can't have Social Security until you're 62, doesn't mean you got to wait until you're 62 to retire. Or just because they say you can't have your full Social Security benefit until you're 70, you don't have to wait until 70 to retire.

When you have enough money, you can retire if you want to. Otherwise you can just enjoy the benefits of being financially independent and still working like I am. And it provides a lot of freedom in your life. It's very nice. Trust me, medicine is a lot more fun to practice when you don't need to practice it.

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All right, thanks for listening the podcast. If you want to get on it, whitecoatinvestor.com/milestones. Till next time, keep your head up, shoulders back, you've got this and we can help.

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.