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Long Term Care Insurance – Podcast #66

Podcast #66 Show Notes: Long Term Care Insurance

I discuss all kinds of insurances in this episode, long term care, cancer supplemental, and disability insurance. Along with answering listener questions about getting out of debt, loaded mutual funds, and what to do when someone gives you individual stocks. You can listen to the podcast here or it is available via the traditional podcast outlets, ITunesOvercastAcast, Stitcher, Google Play.  Or ask Alexa to play it for you. Enjoy!

Podcast # 66 Sponsor

set for life insurance

[00:00:20] This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President, Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients and shop around to find the best products available at the best rate.  For more information, visit Set For Life Insurance.

Quote of the Day

[00:03:28] “But say you want to earn a 10% annual return over the next 50 years. Does this reward come free? Of course not. Why would the world give you something amazing for free? ….there’s a price that has to be paid…volatility and uncertainty.” -Morgan Housel

Intro

[00:01:03] Thank you for all that you do in your job. Thank you for sharing the WCI message with your colleagues. Thank you to all of you that have joined the White Coat Investor Facebook Group .

[00:02:52] If you still have student loans, I have people thanking me all the time for talking them into refinancing their student loans. If you have loans and you are not going for a forgiveness program like public service loan forgiveness you ought to give serious consideration to refinancing your loans and doing it sooner rather than later.

Q&A from Readers and Listeners

  1. [00:03:45] “I see a lot of information on various kinds of insurances. But I was wondering if you have reviewed and written on long term care insurance for physicians. When is it too early to buy into long term care insurance? What are the products and pitfalls out there?”
  2. [00:09:26] “What are your thoughts on cancer supplemental insurance in addition to a high deductible health savings account plan?”
  3. [00:11:58] “I’d love to hear a podcast covering tax loss harvesting and tax gain harvesting sometime in the future.”
  4. [00:16:33] “Prior to leaving where I did my residency I found a financial adviser with a well-known insurance company. They’re recommended by another physician friend. I’m a little hesitant to work with anybody who works with an insurance company though. They want to put my money in a mutual fund. There will be a one time expense of one point five percent of money invested and an annual expense of zero point four six percent per year. As I have no basis for comparison I do not know if this is a good price or a good mutual fund to invest. Any help would be appreciated. Also please let me know if you have a financial adviser that you trust that you can refer me to.
  5. [00:21:51] “My wife and I have accounts from previous jobs. We are going to roll them over to a traditional IRA that I already have money in. I know I won’t be able to take advantage of the backdoor Roth IRA. But for three years I should be able to max out direct Roth IRA due to our lower income. After three years I’ll open an individual 401k with Fidelity and roll over all this traditional IRA money to 401K. Would you suggest doing this?”
    WCI scholarship MR Insurance
  6. [00:24:16] “During residency I met an agent from a well-known insurance company. I signed up for three thousand dollars in disability insurance, the max I could get as a resident making sixty thousand dollars a year. At the end of residency he told me I needed a new policy. So I did the labs again and got a new policy for another 3500 dollars. That was four years ago. I’ve been working through your online course for the past few months trying to get everything set insurance wise. I was diagnosed with a chronic inner ear disease, 2.5 years ago. I signed up with MassMutual. I bought a policy but my inner ear disease is of course exempt. While trying to save money, I called the first insurance company to have them adjust the payments to yearly from monthly and found out that I actually have two policies with them the whole time and have been paying for them at the same time. I thought the new plan replaced the old one.  So now I think I’m over insured and don’t qualify for this much disability insurance. I essentially told MassMutual I had less coverage than I really had. My fear is if I try to collect and they catch the error they will not pay out the full amount. So do I keep the old policies since they were in effect before my diagnosis? Or should I just up the MassMutual to the max and drop the other policies even though they’re weaker? Another option would be to keep both companies plans and lower down to what I actually qualify for with MassMutual or just keep them all and up the amount using a future benefit option of the original policy?”
  7. [00:28:04] “My wife’s a med student. I’m an intern with an extremely fortunate situation. We don’t have any debt and she’s inheriting a bunch of money through an irrevocable trust. We’re going to use some of that towards our Roth IRAs and max out our 403B and the rest will be invested in taxable account split between index funds and a money market fund for shorter term stuff but there’s also about 350,000 dollars tied up in 10 individual stocks. Do you have suggestions on how to handle these assets?”
  8. [00:31:11] “I’m 24 years old working full time. I made some dumb decisions in undergraduate and I left undergraduate with eight thousand bucks in credit card debt. I now work for a very prestigious private university I’m putting 5 percent of my monthly paycheck into fidelity 4O3b and have a thousand bucks in a 401k and another thousand emergency funds. The interest on my credit card is 20 percent. I’m working on consolidate and refinancing my debt to a lower interest rate using the credit union I bank with. They have offered an interest rate around 10 percent and I’m working an additional job to bring in more money to help pay this off.  I know the conventional wisdom that we should start saving for retirement as early as possible but I get the nagging feeling that it may be more prudent for me to forgo saving in exchange for paying off this debt more aggressively. What are your thoughts?”
  9. [00:33:24] “During the fear of the expiration of the 10 million estate gift, I gave to each of my three children two million in individual stocks. Now they are worth three million each. They each hold about 40 stocks ranging from Microsoft to GE, some winners and losers along the way. They don’t want to manage these and were considering selling all to go to total stock market fund. However they would lose at least 20 percent of the value on the sale because of gains and they are 24 percent long term capital gain rate. They are now investing all the dividends in the total stock market fund. You have an opinion whether to buy or whether to hold or sell?”

Ending

[00:36:11] Join the White Coat Investor Facebook Group today if you haven’t already. Lots of great discussions going on over there.

Full Transcription

[00:00:00] This is the white coat investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here’s your host Dr. Jim Dahle.

 

[00:00:20] Welcome to Whitecoat investor podcast number 66. Long term care insurance. This episode is sponsored by set for life insurance. Set for life insurance was founded by President Jamie K. Fleischer ClU, CHFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost effective rate. Set for life is first and foremost a client centric company. They listen carefully to the needs of clients and shop around to find the best products available at the best rate. For more information visit set for life insurance at WWW set for life insurance dot com.

 

[00:01:03] Thank you so much for what you do. I know as an emergency physician I see a lot of patients in the emergency department on the worst day of their life. Everybody’s got an E.R. story and they remember every detail of their visit. And although we’re often times not saving a life and not even making some groundbreaking diagnosis, it’s nice to be able to reach out and touch somebody on that day that they will remember. You know if you think about all the days of your life that people remember, you know talk to your uncles or your grandparents and they can recount every detail of their visit to the hospital or the doctors, the things that were good and things that were bad. And that’s really where you get a chance to make a difference in their lives so I know what feels like a mundane day to day work sometimes but give yourself a pat on the back for all the hard work that you’re doing there. I know you’re not actually at work. Listen to this podcast I hope. Most of the time people aren’t listening here while they’re seeing patients but instead you’re commuting on your way into work or maybe on the way home after a hard day or maybe working out and doing something for yourself in that way. And I just want you to know that I appreciate what you’re doing and a lot of your patients do too even though sometimes they don’t express it.

 

[00:02:09] Thank you also For those of you who have been sharing the white coat Investor message. I know a lot of you spend a lot of time helping your trainees and your colleagues and your peers to get a handle on their finances and I appreciate those who passed along the book or passed along the web side or the podcast to try to get this information into the hands of others.

 

[00:02:30] I also want to say thanks to those who have joined the Facebook group. This is new this week or not this week this month. It’s been about two and a half weeks since we opened it up and we’ve already got over 3500 members of that group. So if you’re not a member there you’re missing out on tons of great discussions. Really a lot of great material there for those who like to follow along on social media and prefer to learn in that format.

 

[00:02:52] Also if you still have student loans I have people thanking me all the time. Thank you so much for talking me into refinancing my student loans. If you got loans and you’re not going for forgiveness program like public service loan forgiveness you ought to give serious consideration to refinancing your loans and doing it sooner rather than later. Knocking 3 percent off a two or three hundred thousand dollar loan Could you save you six to nine thousand dollars a year multiplied by how many years you’ve got those loans. And so do that today if you know you’re not going to be refinancing. Don’t put it off any longer if you’ve been considering doing that.

 

[00:03:28] Our quote of the day today comes from Morgan Housel who says, but say you want to earn a 10 percent annual return over the next 50 years. Does this reward come free? Of course not. Why would the world give you something amazing for free? There’s a price that has to be paid. Volatility and uncertainty.

 

[00:03:45] All right let’s get to some questions we’re going to some questions from readers and the first one is on long term care insurance. This reader writes in and says I see a lot of information on various kinds of insurances et cetera. But I was wondering if you have reviewed and written on long term care insurance for physicians. I’ve seen people in their 70s and 80s regret not having a policy and losing a ton of their assets when they have to move into assisted living or nursing facilities to care for them on a daily basis. When is it too early to buy into long term care insurance? What are the products and pitfalls out there? I’ve seen people who have the insurance but it pays for so little or has so many disqualifications that it is not worth all the premiums paid for several years by these folks. I’ve seen physicians who have saved wisely and live frugal lives go bankrupt when they’ve had to use all their assets to care for spouses or themselves at the end of life, having to go on Medicaid and live in substandard living conditions. Lifespans have expanded so tremendously and seen people across the age of 100 is not uncommon these days. The oldest person I know is 108 years old presently. I’m curious to see more research on long term care insurance products geared toward physicians and high net worth individuals in your blog.

 

[00:04:47] Well that was a pretty good introduction to long term care insurance actually. This person has already kind of seen both sides of the picture. I’m surprised to see the person writing in saying they’ve seen physicians who saved wisely and live frugal lives that then went bankrupt from a long term care issue. I mean that’s pretty impressive. If you’ve been a physician and you’ve been frugal and saved a ton and then went bankrupt on that? I mean a typical physician has been frugal and done a good job is retiring with multiple millions of dollars. Two million three million maybe five million. And to spend all that a long term care implies either a very expensive long term care facility or a very long period of time. For instance in my area I actually went out and priced well long term care costs in this area. You know full service in the nice nursing home in the nice part of town. And it was sixty or seventy thousand dollars a year.

 

[00:05:43] Now I know that’s more expensive in other parts of the country and less expensive in some parts of the country but I’d encourage you if this is something you really worry about to call them up. Call up the place you’d think you’d be in or you’d put your spouse into and ask them what it costs. Just give yourself some sense of what it costs and then compare that to your nest egg.

 

[00:06:03] And if it’s some tiny percentage of your nest egg quite worrying about this subject. I think most physicians who live frugally save wisely and invest in a competent manner can afford to self insure long term care issues. You know this is one of those categories where it’s the people in the middle that need long term care insurance. If you’ve got a five figure portfolio you’re probably not going to want to spend a bunch of money on long term care insurance because the truth is if something happens you can spend your way down to Medicaid levels relatively rapidly and is not going to dramatically change your standard of living even that of your spouse that you’re leaving behind if your portfolio is that small. Likewise if you have a multimillion dollar portfolio. I mean even if you’re spending a hundred thousand dollars a year on long term care and your spouse is in there for five or 10 years before passing on you’re still not going to go bankrupt. There is going to be plenty of money left over for you to live on the rest of your life after that episode. Not to mention for single people this isn’t even that big of a deal right. If you are totally out of it in a memory care facility and you run out of assets because you spent them down and end up on a Medicaid list they usually don’t even have you move out of the facility. And so I don’t think that that is quite as big a deal as when there’s somebody you’re leaving behind that has to live on what you don’t spend. But it’s really those people that are married that are in the middle. The ones who have 300 400 500 thousand dollar portfolios maybe even up to a million or a little more. Those people are the ones that need to worry about that portfolio being devastated by one of the spouses going into a nursing home for a decade. And in those cases I think the purchase can be justified.

 

[00:07:45] The difficulty is that long term care is one of those products that really isn’t ready for prime time. They’re not that good. The ones they sold a few years ago they were selling too cheap and so they ended up doing one of two things just going out of business in which case those who bought their long term care policy are 50 or 60 and are now 70 or 80 and no one’s going to sell them one. And they’re just hosed in that way. Or sometimes what happened is they had to jack up the premiums so much that is no longer really an affordable product. And so a lot of people kind of got hosed that way. They thought they’re going to have this coverage are going to pay for for the rest of life after making 15 years of premiums are basically no longer have coverage. So they paid for it when they really didn’t need it. And once they get to the age where they’re far more likely to use it they don’t actually have it anymore. And so it’s a difficult market to get into. I think the best thing for most of those in the sound of my voice on this podcast is try to try to get yourself into a position Where you don’t need it.

 

[00:08:46] I think that’s a great place to be. And not only does it provide you early financial independence and all the other benefits of being relatively wealthy but it allows you to save these premiums that other people are going to have to pay because they weren’t as good at saving and earning as you were. So it’s unfortunate that it’s not a great kind of insurance. And I’d love for you to be able to avoid buying it if you can. But if you need it there are some options out there. I’m not an expert on long term care insurance but our sponsor for this episode Jamie Fleischer at set for life insurance does happen to be an expert at it. So if you think this is something that you might need I would give her a call and talk to her about it and see what she recommends.

 

[00:09:26] OK. Let’s talk a little bit about another kind of insurance. My next question that came in from a reader what are your thoughts on cancer supplemental insurance in addition to high deductible health savings account plan. I’m looking at a cancer supplemental plan by Allstate. I live in the south. I deal with a lot of cancer in my practice. I see cancer in so many young women. I’ve got two young daughters myself. We have term life insurance, car, home, and umbrella insurance, have no debt a paid for house and are working on saving for retirement. Amid five figure portfolio already in college 529 as well.

 

[00:10:03] I mean cancer supplemental insurance. What does this pay for? It pays for cancer. Well what other kind of insurance do you have that pays for cancer? Well have you become disabled from cancer. You have disability insurance. If you die from cancer. You have life insurance. If you get sick from cancer. You have health insurance. So I’m not really seen where cancer fits in there. It’s like extra insurance that gives you extra money or extra benefits when you get cancer. Now maybe I’m wrong about this but kind of the impression I’m getting from the Health Insurance Marketplace is if you get diagnosed with cancer you’re probably going to pay the max out of pocket that year on your health insurance. Just count on that. There’s probably going to be a hospitalization at some point, a ED visit or two, some imaging some chemo. You know you’re going to get your max out of pocket whatever that is on your health insurance and maybe next year too. But that should only be a few thousand dollars maybe ten or fifteen thousand dollars at the most. That should be a cost that a typical physician listening to this podcast should be able to pay out of their emergency fund. And if this causes them to be disabled they should be able to tap their disability insurance. And if heaven forbid they die they should be able to you know their heirs should be able to count on that life insurance. And so no I think this is one of those insurances that his best avoided. I look at it like iPhone insurance you know or accidental death and disability insurance. Well if you have life insurance you have disability insurance if you have health insurance it covers you no matter what happens to you. You know no matter how you died whether it is an accident whether it’s cancer you don’t need a separate insurance policy for every disease out there. I mean what comes up next. Lupus insurance?! It just gets silly after a while. So no I’m not a big fan of cancer supplemental insurance. I think it’s a product designed to be sold to people who are made afraid by the salesman rather than something that’s actually gone out and sought for and bought.

 

[00:11:58] OK here’s another one that came in. I’d love to hear a podcast covering tax loss harvesting and tax gain harvesting sometime in the future.

 

[00:12:06] Okay well I mentioned in my recent post on the on the blog if you haven’t seen it on tax loss harvesting it ran in mid July. A really good post actually walks you through the process of tax loss harvesting. I just wanted to touch today on the podcast for a few minutes. This concept of tax gain harvesting. Now if you’ll recall a tax loss harvesting is when you exchange an investment that you own, that has a loss it’s worth less than you paid for it, for a very similar investment which will act about like the one you own. So you’re not selling low. You’re just exchanging it for a different one and by virtue of doing that you booked that loss you realize that loss and you can now use it on your taxes. You can use it to offset any of your long term or short term capital gains that your mutual funds have distributed to you or from anything else you’ve sold and you can offset up to 3000 dollars of your ordinary income per year. If you don’t use up all the loss in one year it can be carried forward to future years. OK so that’s tax loss harvesting. Doctors do that all the time if you have an investment in a taxable account that has a loss in it. You should be doing this.

 

[00:13:24] Tax gain on the other hand is a method to reduce your taxes in the future by increasing the basis of the investment. The basis is what you paid for it. So whenever you sell an investment in a taxable account not in a retirement account like a 401k or a Roth IRA. But in a regular brokerage non qualified taxable account, anytime you buy or sell it. You’ve got to pay taxes on any gains you have but that gain is determined by taking the value of it when you sell it. And subtracting out the basis or what you paid for it. So the concept of tax gain harvesting is the process whereby you increase the basis of the investment without having to pay much in taxes and hopefully nothing in taxes at all. And so there are some situations in your life when you can do this. One for example is when you’re in a low tax bracket. You know if you’re in medical school or residency you ought to update the basis on all of your investments because you’re below the income limit where you actually have to pay anything for your capital gains. Likewise if you invest in accounts for your kids you can tax gain harvest those and keep them from having to pay interest on or not interest Capital gains taxes on those investments when they’re sold later. So is this concept of selling something and buying it again just to update the basis. And yes that’s a taxable event. But in certain tax brackets and certain tax situations there’s no tax due. And so that’s what tax gain harvesting is.

 

[00:14:55] Not something I’m able to do given my current tax bracket. But I could certainly do it for some of my kids accounts and probably ought to look into that.

 

[00:15:04] Also another thing that came out of that same e-mail this doc that had written and asked about this was under the misunderstanding that the capital gains tax brackets are separate from the ordinary income tax brackets. For instance he thought that he and his spouse could get you know seventy seven thousand dollars or whatever it is in capital gains tax free each year. And that’s not the way it works. The way it works You have that much in taxable income from any source that knocks you out of that zero percent capital gains bracket.

 

[00:15:39] So And so you don’t get a bunch of free capital gains every year when you’re working full time as a physician. That’s just not the way it works unfortunately. I think that probably once I told him that he wasn’t quite so interested in tax gain harvesting but unfortunately that’s the way the laws are written.

 

[00:15:54] OK. Another listener writes in, Says I’m a 31 year old single no kids just finished residency. I know nothing about personal finance and I’m having trouble finding a good financial adviser I can trust. Unfortunately I broke one of your first rules and moved to the Bay Area of California sorry. Well that’s not my rule to don’t move to the Bay Area. I’m surprised when people do it I’m not going to lie but I know that there’s some cool things about that and some people are willing to make the financial sacrifices it takes to live in the Bay Area.

 

[00:16:24] The good news is I’m renting and have a roommate keep rent down. That doesn’t surprise me even as an attending physician that you’ve got a roommate in order to meet expenses in the Bay Area.

 

[00:16:33] All right let’s get into the question. Prior to leaving where I did my residency I found a financial adviser with a well-known insurance company I’m not going to mention on this podcast not only because I don’t want to give them any additional publicity but because I don’t want them to sue me from what I’m going to say about them. They’re recommended by another physician friend. I’m a little hesitant to work with anybody who works with an insurance company though. Well that’s probably a good thing to be a little hesitant about especially if they call themselves a financial adviser.

 

[00:17:01] Now don’t get me wrong selling insurance is a noble profession. You’re selling people disability insurance. Term life insurance, health insurance. You know these insurances that people need. That is a good thing you’re doing. You are helping people out and really making a difference. Now if you’re selling them cancer supplementary insurance or some people who don’t not need long term care insurance or selling whole life insurance. I have a different problem with it.

 

[00:17:27] So far I’ve been approved for supplemental own occupation surgery specific disability insurance with Ameritas. Okay that’s probably fine.

 

[00:17:35] I’ll also be getting the group disability coverage with my new work, that will probably be fine as well, while in residency I save some money in my 401k they have now recommended I transition this money into a traditional IRA and then shortly after a Roth IRA while still in a lower tax bracket. That’s probably a good idea.

 

[00:17:51] The year you leave your training is a great year to do Roth conversions because you’ve got half a year of residence or fellow income and half a year of attending income. So in general you’re in a lower tax bracket than you will be in during your peak earnings years. So it’s a good year for Roth conversion. Better yet to contribute to a ROTH 4O3b or 401k all the way through residency then convert converted all the year you leave. But if you don’t have an option then that’s sometimes how you have to do it. You don’t have to move into a traditional IRA anymore though you can just move it straight to a Roth IRA Out of that 401k when you leave residency.

 

[00:18:24] And then here we get into the meat of the question, here’s where I’m not sure exactly what to do. They want to put this money in a mutual fund PLSAX. I’m not sure which one that is but he describes it, which invests primarily in the S&P 500. So sounds like an S&P 500 index fund. There will be a one time expense of one point five percent of money invested and an annual expense of zero point four six percent per year. As I have no basis for comparison I do not know if this is a good price or a good mutual fund to invest. Any help would be appreciated. Also please let me know if you have a financial adviser that you trust can refer me to.

 

[00:19:01] OK. Well that one point five percent of money invested is what is known as a load. This is a commission you pay to the person who is selling you This mutual fund for their advice. The problem is you’re now paying somebody for advice who’s giving you crap advice. They’re telling you to buy a loaded mutual fund which you don’t have to buy because there is lots of mutual funds out there that are no load mutual funds including most of the good index funds. The other problem with this particular mutual fund is it has an expense ratio of zero point four six percent per year which is approximately ten times as high as the Vanguard S&P 500 index fund. So if you really want S&P 500 index fund, which isn’t my favorite mutual fund, but if that’s what you want there’s no reason to pay zero point for 6 percent per year much less pay a one point five percent load to get it. You can just go to Vanguard open up an account and buy the Vanguard S&P 500 index fund for point 04 percent per year. So this person is getting bad advice. Obviously they’ve mistaken a commissioned salesman for a financial adviser. Very unfortunate but at least they have figured it out early on in their career.

 

[00:20:17] As far as the S&P 500 Index Fund I kind of prefer a total stock market index fund because instead of only getting 500 stocks you get about 4000 stocks and so there’s a few other minor advantages of a total stock market fund over an S&P 500 fund. But honestly they’re both very very good mutual funds.

 

[00:20:36] The other question that they were asking was if you know a financial adviser you can trust and can refer me to. I actually get asked about this a lot. And that’s why I put together a page on the website under the recommendations tab at the top for financial advisers and on that list you will find a list of people I recommend if you want to hire a financial advisor. These are all fee only fiduciary financial advisers and anybody that’s signed up with me in the last few years to be listed there has an application there that shows the questions I asked them and how they answered them. You can look through and decide in which those advisers is the best fit for you. It does turn into a kind of a fit thing depending on what services you’re looking for and and where they live and just somebody seems to mesh well with you. So I’d recommend going through a few of those and choosing an advisor. There’s not a bad one on the list. Some are cheaper than others. And if you’re really focused on those fees you can see those fees and those applications and see exactly what you’ll be paying for each of these advisers. But I can tell you this everybody on that list is 100 times better than whoever’s tell them this person to go invest in an S&P 500 index fund with a load and expense ratio a point 4 6 per year. That’s just basically financial malpractice in my view.

 

[00:21:51] OK next question. I’m an intern. My wife and I have accounts from previous jobs. 401k it sounds like with some quarterly fees if we leave the money there. So we’re going to roll them over to a traditional IRA that I already have Fifty thousand dollars in. I’ll put in an additional 46000 for mine and 36000 from my spouse and index funds. I know I won’t be able to take benefit of the backdoor Roth IRA. But for three years I should be able to max out direct Roth IRA due to our lower income. That’s true. When you’re in residency you usually don’t have to do a backdoor Roth IRA. You can just contribute directly. After three years and I’m hospitalists I’ll open an individual for 401k with fidelity and roll over all this traditional IRA money to 401K. Would you suggest doing this.

 

[00:22:39] Yeah that sounds like a reasonable plan.

 

[00:22:43] You avoid the fees from the old 401k by doing that. You get your choice of investments in the IRA in the meantime and you can subsequently then roll that into an individual 401k when you leave residency. Of course that means you have to have some self employment income when you open that individual 401K. But that’s not too hard to do. There’s lots of independent contract positions out there for a hospitalist. However it may be worthwhile if you’re in residency and in these low income years to convert some of that to a Roth IRA. I mean honestly this docs an intern now this should have been done in medical school. That’s a great time to do Roth conversions if you’ve got some old 401k sitting around. I mean you probably could convert that whole thing for no tax cost whatsoever in medical school. So I would do that as soon as you could hopefully before the end of this year when you’ve only got six months of intern income. But certainly you’ll want to get that money out of a traditional IRA by the time you start to do back a Roth IRA. Otherwise it’s going to screw you up from the pro-rata calculation and if you listen to this and you have no idea what a pro-rata calculation is you need to come on over to the White coat investor website and just search on it for backdoor Roth IRA. I’ve got plenty of tutorials that will walk you through it. Not only what the pro-rata calculation is but we’ll fill out the tax forms for you. But if you want to get started doing backdoor Roth IRAs you need to know what that is. Basically you just need to get rid of all your traditional IRA money, sep IRA money, and simple IRA money before you start to backkdoor Roth IRAs.

 

[00:24:16] This one comes in from an endodontist. I have a problem I think during residency I met an agent from a well-known insurance company, the same one mentioned earlier in this podcast. I signed up for three thousand dollars in disability insurance the max I could get as a resident making sixty thousand dollars a year. At the end of residency he told me I needed a new policy. So I did the labs again and got a new policy for another 3500 dollars. Well that was four years ago. I’ve been working through your online course for the past few months trying to get everything set insurance wise. I was diagnosed with a chronic inner ear disease, 2.5 years ago. I signed up with MassMutual after my insurance agent shot me around with the big five. I bought this policy for the maximum seven thousand five hundred fifty dollars that would allow my income taken to affect my current policy of 3500 the menieres disease was of course exempted. While trying to save money, I called the first insurance company was having them adjust the payments to yearly from monthly and found out that I actually have two policies with them the whole time and have been paying for them at the same time.

 

[00:25:21] I thought the new plan replace the old one I can’t believe I didn’t catch this earlier. So now I think I’m over insured and don’t qualify for this much disability insurance. I essentially told MassMutual I had less coverage than I really had existing. My fear is if I try to collect and they catch the error they will not pay out the full amount. So do I keep the old policies since they were in effect before my diagnosis? Or should I just up the MassMutual to the max and drop the other policies even though they’re weaker? Another option would be to keep both companies plans and lower down to what I actually qualify for with MassMutual or just keep them all and up the amount using a future benefit option of the original policy.

 

[00:26:00] OK so this doc has a policy that is not a true own occupation policy but he got it before he was diagnosed with menieres disease which at times I suppose if it was severe could be really disabling. And so the question is does he now switch to what is almost surely a more expensive policy. Or does he stick with the original policy.

 

[00:26:24] Well you know I like to have the best policy you can get. But that also means a policy that covers the stuff you’ve already been diagnosed with. If you’ve got a policy that covers something you know you have. I certainly wouldn’t recommend you dump that and switch to a different policy that won’t cover that disease. Seems pretty foolish so I keep the old policy and if you need additional coverage add it on either to the old policy with a future purchase option or just with a new policy. The issue in this case comes into the fact that not only is a new policy a little more expensive almost surely just because it’s bought years after the first one but it’s also a better policy.

 

[00:27:04] So he is weighing a less good definition of disability but will cover the disease he has against a better disease definition of disease or definition of disability rather that doesn’t cover the disease he has now been diagnosed with. So I think I’d probably lean toward keeping the older policy as much as you could maybe add in the new policy for a little different coverage but certainly not dumping the old policy. That’s something you’re going to want to hold onto. And the it’s kind of sad that he didn’t realize he had twice as much coverage as he had during those years. But that’s what happens most of the time as the insurance agent calls you back in when you become an attending and doubles your policy which is a good thing. You need more insurance as an attendee and you actually needed that insurance as a resident you just couldn’t afford it and you didn’t qualify for it. So that’s not necessarily a bad thing that you got more coverage and if you had become disability in those first few years as intending if you’d become disabled you would have appreciated it.

 

[00:28:04] OK. Next question is how to manage some gifted individual stocks. My wife’s a med student. I’m an intern or an extremely fortunate situation we don’t have any debt and she’s inheriting a bunch of money through an irrevocable trust. We’re going to use some of that put toward a Roth IRAs and max out our 403 B and the rest will be invested in taxable account split between index funds and a money market fund for shorter term stuff but there’s also about 350000 dollars tied up in 10 individual stocks. He gives me the ticker names only one of which I recognize. Well maybe two.

 

[00:28:40] Do you have suggestions on how to handle these assets. My first instinct is to liquidate and reinvest them according to our own plan. This would allow us take advantage of lower taxes on long term capital gains as only making around 28 thousand dollars gross this year. So we have a lot of room below the seventy seven thousand dollar mark as a married couple. Then we’d be able to put the money into an asset allocation portfolio mix so we feel comfortable with unlike betting on a few individual stocks. However I must admit that I look through the stock histories and see that some of them seem to be in a nadir of sorts with the biggest offender in terms of weight of investment being G.E. that has 22000 dollars in capital losses. With that in mind part of me wonders if it would be a bad idea to sell low on some of these stocks and if there are some that would be worth holding on to longer but in selling low I wonder what the tax loss harvesting implications would be something I don’t feel confident on because I’ve never done it.

 

[00:29:31] Okay that’s a great question. Congratulations on your success and good fortune. Basically what they’re trying to decide what to do with these individual stocks. Well I’m not a big fan of individual stock investing so unless you are trapped by huge capital gains if you sell them I’m generally in favor of getting rid of them. This couple is almost surely not trapped in that situation. Number one he’s talking about losses. And number two they just inherited them.

 

[00:29:57] So when you inherit something like this you get a step up in basis. Basically you get the basis you know what you paid for it is what it was worth on the date the person died that left him to you. And so chances are that it hasn’t run up all that much since they died a few months ago. And you can sell it for very little gain. And really it basically comes to you tax free. So this probably isn’t a concern for them.

 

[00:30:21] But even if it were if you have losses there’s no reason ever hold an investment with a loss in your taxable account. You might as well sell it and buy something similar or in this case sell and move the money into a Total Stock Market Index Fund. And so you want to do that with all your losses and you can use some of those losses to offset some of the gains if you want to sell some of the winners as well. It’s really not until you’re in a situation where you’re trapped by these really huge capital gains and you’re in a high income bracket. They might want to hold onto those stocks for the rest of your life to avoid those gains.

 

[00:30:52] But in this situation they’re in a low bracket. They’re in the 0 percent capital gains bracket. So they might as well take advantage and sell some of those even if there’s some gains involved. But I suspect that there really aren’t any gains involved for this couple.

 

[00:31:05] All right here’s another one from a podcast listener I’ve been listening in for the last six months appreciate what I’ve learned so far.

 

[00:31:11] I’m 24 years old working full time On a bachelor’s degree. About a year into my first job I realized I want to become a doc and decided to turn to school. I made some dumb decisions and undergraduate and I left undergraduate with eight thousand bucks in credit card debt. I now work for a very prestigious private university I’m putting 5 percent of my monthly paycheck into fidelity 4O3b and have a thousand bucks in a 401k and another thousand emergency funds. After I complete a full year working my current job I’ll be enrolled in the university’s pension plan. The interest on my credit card is 20 percent. I’m working on consolidate and refinancing my debt to a lower interest rate using the credit union I bank with. They have offered an interest rate around 10 percent and I’m working an additional job to bring in more money to help pay this off. Anyway. I know the conventional wisdom we should start saving for retirement as early as possible but I get the nagging feeling that it may be more prudent for me to forgo saving in exchange for paying off this debt more aggressively. What are your thoughts?

 

[00:32:10] Yes yes a thousand times yes. When you have debt at 20 percent that is your best investment. Paying off a debt of 20 percent is essentially a guaranteed investment return of 20 percent. there are no ifs ands and buts. You cannot find a guaranteed investment paying anywhere near 20 percent. You have to take a substantial amount of risk in order to get investment return of 20 percent. Even that is not guaranteed. That’s the risk. And so any time you’ve got something like that. Boy I would liquidate everything I had. I would sell everything I add that I don’t need. I would work an extra job to pay that off. And I certainly wouldn’t be saving money toward retirement when I have that sort of a debt.

 

[00:32:55] That stuff just needs to be paid off. Hopefully you haven’t gotten into that situation but if you have and be a major priority maybe just maybe you can justify putting enough in your 401k to get your employer match but maybe not even that at 20 percent. I mean 20 percent is really a terrible terrible interest rate. You want that working in your favor not against you. I mean at 20 percent your debt is doubling every three and a half years. And that’s not something you need in your life.

 

[00:33:24] All right next question during the fear of the expiration of the 10 million estate gift I give to each of my three children two million in individual stocks, Boy I got the wrong father, by way of a discount of partnership. Now they are worth three million each. They each hold about 40 stocks ranging from Microsoft to GE some winners and losers along the way. They don’t want to manage these and were considering selling all to go to total stock market fund. However they’d lose least 20 percent of the value on the sale because of gains and they’re 24 percent long term capital gain rate. They’re now investing all the dividends in the total stock market fund. You have an opinion whether to buy or whether to hold or sell? I’m 70 and probably won’t be able to give investing advice in 10 years. Well I hope that’s not true. But I guess it could be. Dementia is a terrible disease. We never really know whether we’re going to get it or not.

 

[00:34:11] At any rate this is a really nice thing that this person has done for their kids that’s a lot of a lot of money in a pretty serious inheritance. So the question is What do you do with these? Well he’s talking about there being some losers in there. There’s no reason to hold on to losers. So you’re losers and invest that money into the total stock market index fund. Then you can take all the accumulated losses from that and sell enough of the winners that the losses offset the gains. No reason not to do that as well. They’ve already done something smart in that they’re not reinvesting the dividends and capital gains distributions there or I guess no capital gains distributions with individual stocks but the dividends into the stock market mutual fund. But you know at a certain point you’ve got ask yourself Would I rather pay the taxes and have a more diversified portfolio?

 

[00:35:00] Or would I rather have a more diverse. Or would I rather have a less diversified portfolio build around it with my other holdings and not pay those taxes? And that’s an individual decision. Again if you have some huge gain with a huge tax bill that’s going to kill you or you don’t have the money to pay the taxes well you probably got a hold on to them just build your portfolio around those legacy stocks. Also a great thing you can do with them if you give any money to charity is given those appreciated stocks instead of cash. It’s a great use of appreciated shares but in general you don’t want to let the tax tail wag the investment dog. And so in most situations I think it makes sense to liquidate even if it costs you a few bucks in taxes and get into your ideal portfolio.

 

[00:35:42] All right. I’d like to think this episode sponsor set for life insurance. Because of the volume and exceptional reputation of set for life insurance as well as the relationships they have developed over the years, set for life Clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies, saving women significantly, priority underwriting handling, and On some occasions exceptions in the underwriting process. For more information visit W WW dot set for life insurance dotcom.

 

[00:36:11] Head up shoulders back. You’ve got this we can help. Please make sure you’re following us on Twitter and on Facebook. Join the facebook group. It’s a private group of white coat investors and we’ll see you next time right here on the podcast. Thanks for listening.

 

[00:36:26] My dad, your host, Dr. Dahle is a practicing emergency physician, blogger, author, and podcasters. He is not a licensed accountant, attorney, or financial adviser. So this purchase is for your entertainment, information only, and should not be considered official personalized financial advice.

 

 

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4 comments

    1 Arthur |

    Regarding the question at [00:28:40], it’s my understanding that you may not get a step-up in basis on stocks inherited through an irrevocable trust — they retain the basis from when they were put in the trust. I have a relative in a similar situation who is trapped in individual stocks, some with a basis from the 1950’s. If this wrong, please give me a reference so my cousin can diversify.

    The White Coat Investor |

    I think that is correct.

    2 Peter Steinberg |

    Here is a good article from Michael Kitces on the benefits of tax loss harvesting. Lots of graphs and assumptions, but interesting. Long story short: the benefit exists, but is small; however, if you have a change of tax brackets coming or shift from short to long term gains, the effects are on steroids.

    https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting/

    The White Coat Investor |

    The biggest benefit is if you can TLH and then never take the gains by donating them to charity or leaving them to heirs.

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