Today, we’re joined by Sean Mullaney, an author and CPA who presented at this year’s Bogleheads conference. We dive into smart ways to manage your taxes in retirement and explore the strategies that can make a meaningful difference over the long run. Sean walks us through when Roth conversions shine and when they don’t, and he talks about how tax, retirement, and estate planning all fit together. If you want to feel more prepared for the financial side of retirement, this is an episode you won’t want to miss.


Introducing the 5 Phases of Retirement 

Sean Mullaney explained that he divides retirement into five distinct phases for married couples, each shaped by different planning needs. The first phase runs from retirement through the year someone turns 65. The second phase covers what he calls the golden years, typically ages 66-69. The third phase begins at age 70 and continues until Required Minimum Distributions begin, which for many retirees born in 1960 or later means age 70-74. The fourth phase starts when RMDs begin and lasts until the first spouse dies. The fifth and final phase is widowhood—which often brings the widow’s tax trap since a surviving spouse files as a single taxpayer with potentially higher taxes. For single individuals, Phases 4 and 5 collapse into one stage beginning at the onset of RMDs.

Jim and Sean discussed whether early retirement should be treated as its own phase. Jim pointed out that ages 55 and 59 1/2 are important milestones because of rules around early withdrawal penalties. Sean agreed that these ages matter but argued they do not create a strict dividing line because modern planning strategies make it much easier to access funds before 59 1/2. The Internal Revenue Code imposes a 10% additional tax on early withdrawals from retirement accounts, yet there are many ways to avoid that penalty.

Sean highlighted the many tools available to early retirees. Some rely on taxable accounts first, which often produce income in a tax-efficient way because gains may fall into the 0% capital gains bracket. Others use 72T or substantially equal periodic payments. These have become much more flexible since a 2022 IRS change that allows retirees to use a 5% interest rate when calculating payments. This makes it easier for people in their 50s to generate the income they need without breaking the rules. Many retirees also have additional accounts—such as governmental 457 plans that do not have a 59 1/2 restriction, which further increases their flexibility.

Jim pointed out that many physicians and other high earners have multiple savings vehicles that allow them to retire earlier than expected. Between taxable accounts, 457 plans, and careful planning, the early withdrawal penalty is often more of a perceived problem than a real barrier. He noted that some people still delay retirement until they reach age 59 1/2, even though they often have enough resources to bridge the gap without paying penalties. Sean agreed that assets can become income very efficiently in the United States. He emphasized how incredibly tax-efficient taxable accounts can be for early retirees. Jim added that many diligent savers have built up substantial tax losses through years of tax-loss harvesting, which can offset gains for long periods during early retirement. They emphasized that early retirement is far more feasible than many people assume, provided that thoughtful planning is done ahead of time.

More information here:

Beating the 10% Early Withdrawal Penalty

Life in the 0% Long Term Capital Gains Bracket

Planning from Retirement Until Medicare 

In the years between retirement and Medicare eligibility, planning often centers on keeping ordinary income low. Sean explained that this helps open up more flexibility in several areas, including investment placement. Many retirees want bond exposure, but placing those bonds in traditional retirement accounts can prevent the yearly interest from showing up as ordinary income on a tax return. Lower income creates more room for strategic planning and helps retirees take advantage of opportunities that depend on Adjusted Gross Income.

Health insurance becomes a major factor during this period. Most retirees no longer have access to employer coverage, so the Affordable Care Act marketplace becomes the default option after any COBRA coverage ends. ACA premiums can look high at first glance, but the premium tax credit can reduce costs by thousands of dollars per year. To qualify, income must remain low, which is where taxable accounts shine. Spending from taxable investments often produces far less taxable income than the amount withdrawn because only the gains count toward AGI. This difference allows retirees to cover large living expenses while still appearing to have modest income for the purposes of subsidies.

Roth conversions are another tool often discussed in early retirement. Sean notes that conversions can be beneficial, but they are not always necessary. He cautioned against prioritizing them during years when a retiree is trying to qualify for premium tax credits, since conversions raise income and can eliminate access to subsidies. Many people are better off performing conversions later, particularly during the golden years after age 65. Still, for retirees who earn too much to receive ACA subsidies, conversions may make sense in the earlier years. Overall, the theme for this phase is to minimize ordinary income wherever possible to preserve flexibility and improve tax outcomes.

The Golden Years: Tax Planning and Roth Opportunities 

The golden years of retirement, which begin once someone is on Medicare but before Social Security and RMDs begin, offer a unique window for tax planning. Sean explained that these years are financially attractive because retirees are not juggling ACA premium tax credits, RMDs, or Social Security income. Those who delay Social Security often enjoy greater stability later in life because the benefit grows and becomes a larger guaranteed income stream in their 70s and 80s. During this period, a clean tax return makes strategic planning easier.

Sean described two major paths retirees may find themselves on when the golden years arrive. Some still have taxable accounts on which to live. This is ideal because the income generated from selling taxable investments often shows up as long term capital gains or qualified dividends, which fall into lower brackets. Retirees can then use their standard or itemized deductions, along with the additional senior deduction, to perform Roth conversions that may go through at a 0% federal rate. This can allow someone to live an affluent lifestyle while converting tens of thousands of dollars into Roth accounts each year without paying federal income tax.

Others may reach age 66 with their taxable accounts already spent down. Even in that case, living off traditional IRAs can still be surprisingly efficient. Sean shared an example of a couple spending $140,000 a year from traditional IRA distributions and still having an effective tax rate that is very low. Nearly a third of those distributions go through the tax return at a 0% rate because deductions offset a large portion of the withdrawals. He referred to this effect as a hidden Roth IRA inside the traditional IRA because so much of the distribution escapes federal taxation.

High net worth retirees face slightly different considerations. A couple with around $10 million in combined IRA and taxable assets may find it difficult to remain in the 0% capital gains bracket. For them, larger Roth conversions may make sense—to manage future RMDs and to reduce the tax burden on heirs who may be in very high tax brackets of their own. Sean noted that they may even choose to shift the IRA allocation toward bonds to slow its growth and keep RMDs manageable. For this group, spending down taxable accounts first is still helpful, and Roth conversions may serve intergenerational planning goals.

IRMAA enters the picture once ACA credits are no longer part of the planning equation. IRMAA is an income-related surcharge added to Medicare premiums, and while it can cost a few thousand dollars per year, Sean considers it a smaller issue than losing a premium tax credit during early retirement. IRMAA often matters most for widows because thresholds for single filers are much lower than for married couples. It generally affects people with relatively high income in retirement. Sean explained that IRMAA is a step function, not a gradual increase, so even a small Roth conversion can push a retiree into a higher bracket. Still, he believes that most retirees should focus on capturing premium tax credits earlier in retirement rather than worrying too much about potential IRMAA charges later.

Jim closed by clarifying that IRMAA is an extra charge on Medicare premiums for higher-income retirees. Many people do not realize Medicare comes with costs, and those with significant taxable income in retirement pay even more. Some retirees try to keep their income lower in an effort to keep IRMAA surcharges down, but Sean’s broader message is that IRMAA generally matters less than the much larger planning opportunities that arise earlier in retirement.

RMD Years, Early 70s, and Pre-RMD Years

In the next retirement phase, roughly ages 70 to the start of Required Minimum Distributions, the focus shifts to Social Security timing and how to use remaining assets. Jim noted that most experts recommend waiting until 70 to claim Social Security, especially for high earners, but only about 10% of people actually do so. Sean is a strong fan of delaying. He argued that if someone has meaningful assets in taxable accounts, those funds can support spending in the late 60s while the Social Security benefit grows. Delaying turns volatile portfolio assets into a larger, relatively stable income stream later in life and keeps the tax return “clean” in the 60s, which helps with earlier tax planning.

Sean also pointed out that many Americans simply cannot afford to delay. Median adult wealth in the United States is roughly a bit under $125,000, and even those above the median often do not have large portfolios. For people who truly need the money, claiming Social Security at 62 or full retirement age is perfectly reasonable, and they often will not owe much federal income tax anyway. His main message was that delaying is particularly attractive for affluent retirees who have other resources. For them, it rarely makes sense to turn on a stream of ordinary income they do not need when they could be spending down taxable accounts instead.

During the early 70s, other tools come into play. Qualified Charitable Distributions (QCDs) become available at age 70 1/2 from traditional and inherited IRAs, though not from 401(k) or 457 plans. For charitably inclined retirees, making gifts directly from an IRA allows them to support causes they care about while effectively stacking those gifts on top of a very high standard deduction and senior deduction. This creates a “synthetic” charitable deduction that can be extremely powerful. At the same time, Roth conversions become trickier. Once Social Security is turned on, it fills much of the low tax brackets, so any additional conversion income is more likely to be taxed. If a retiree is already living from traditional IRA withdrawals in their 70s, those withdrawals are naturally shrinking future RMDs, which reduces the need for aggressive conversions.

Jim and Sean emphasized that by the early to mid-70s, many people are past the prime Roth conversion window and should feel more comfortable spending. Sean joked that no one goes to the tropics for the first time in their 80s and questioned the point of scrimping only to reach 85 with $10 million that may never be fully enjoyed. He suggested that it is reasonable to prioritize more spending in the earlier parts of retirement. From a tax perspective, he prefers taking deductions during high earning years and then being fairly modest with Roth conversions. That might leave somewhat higher taxes later in life, but those higher taxes tend to appear only for people who are very financially successful, which is a good problem to have. For those with more modest success, later life taxes usually remain low.

When RMDs finally begin, often at age 75 for those born in 1960 or later, Sean argued that the landscape is far less scary than older commentary suggests. Several big changes have improved things. Two rounds of legislation have pushed out the starting age, eliminating four or five early RMDs that were the most likely to be paid. In 2022, the IRS also adopted a new life expectancy table that reduced each RMD by roughly 7%. On top of that, high standard deductions, senior deductions, and lower tax rates all work together to reduce the portion of each RMD that gets taxed at the highest marginal rates. For charitably minded retirees, QCDs remain a powerful tool because gifts from the IRA count toward the RMD and remove the highest taxed portion of those withdrawals from the return.

Finally, they addressed the so-called widow’s tax trap. After the first spouse dies, the survivor moves from Married Filing Jointly to single brackets, yet income often does not fall by half. Sean’s modeling shows that while taxes do rise, the impact is usually an inefficiency rather than a disaster. In one example, an 81-year-old widow with about $3.68 million in a traditional IRA has an RMD of around $189,000 and pays roughly $45,000 in federal tax, with only about $10,000 taxed above the 24% bracket. Even after IRMAA surcharges on Medicare, she still ends up with roughly $200,000 of after-tax cash flow. Sean noted she could reduce the inefficiency further with more QCDs, but even without them, her situation shows that tax-deferred accounts and RMDs often work out quite well. He said fear of RMDs is frequently fueled by attention-seeking messages and an overemphasis on Roth strategies, and he encouraged retirees to focus on real after-tax outcomes rather than headlines about large RMD amounts.

More information here:

8 Things You Must Know About Social Security

Social Security Is Not Going Away (But You Might Have to Adjust Your Plans)

Beyond RMDs

Sean began by pushing back on the idea that high earners should favor Roth accounts during their working years. He argued that most people pay more tax while they are working full time, since they spend their days trying to generate taxable income. In that environment, Roth 401(k) contributions or large taxable Roth conversions can mean paying tax at higher rates than they will face later. He prefers the rule of paying tax when you pay less tax, which often points toward traditional contributions during peak earning years. The big exception is an “income disruption year”—such as a sabbatical or grad school—when income drops and tools like the lifetime learning credit can make Roth conversions effectively tax-free.

He also noted that the tax landscape has shifted since 2017 in ways that favor retirees. Higher standard deductions, the senior deduction, and lower brackets all came through the One Big Beautiful Bill Act in 2025. These changes have repeatedly reduced taxes on retirees, even while commentators keep warning that taxes on retirement accounts are sure to rise. Sean said some of the enthusiasm for Roth strategies is driven by vague fear rather than numbers. Advisors and writers invoke IRMAA, RMDs, widowhood, and possible tax law changes without showing actual calculations—which taps into a natural human fear instinct and makes large traditional IRAs sound dangerous even when the data suggest retirees are often lightly taxed.

That same skepticism shows up in his view of the “Buy, Borrow and Die” strategy. Rather than borrowing against assets to avoid realizing gains, Sean asks first how bad the tax on those gains really is. He and his coauthor model a married couple, age 66, who realize $85,000 of long term capital gains and also do a $40,700 Roth conversion. Their AGI is about $141,700, yet their federal income tax is 0 because of the 0% long term capital gains bracket and available deductions. In a world where many retirees can live in that environment, he questioned why they would pay interest and fees to avoid taxes that may already be very low. For such borrowing strategies to make sense, he said someone usually needs to be very wealthy, because you start behind once you count the costs and complexity.

Sean explained that his book, Tax Planning to and Through Early Retirement, is aimed at people thinking seriously about retirement drawdown. That includes accumulators who want to understand future planning choices, as well as those in early or conventional retirement who are deciding how to tap their accounts. The book spends most of its energy on the drawdown phase, since that topic does not fit well into quick social media posts and needs careful, quantitative discussion. He closed with a broader critique of personal finance content. In his view, much of it boils down to the message “you are rich—start worrying.” He encouraged listeners to watch for fear-based framing, question articles that lean on anxiety instead of math, and remember that many retirees enjoy relatively low taxes and strong financial outcomes without extreme maneuvers.

To learn more from this conversation, read the WCI podcast transcript below.

Today’s episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that’s where SoFi can help. It has exclusive, low rates designed to help medical residents refinance student loans—and that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month* while you’re still in residency. And if you’re already out of residency, SoFi’s got you covered there, too.

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Milestones to Millionaire

#249 — Emergency Physician Becomes a Multimillionaire by Mid-Career

Today, we are talking with an emergency doc who has become a multimillionaire. We love this conversation because he has the most boring and consistent financial story. He didn't build a real estate empire or get lucky with crypto or some fancy investment. He just has a written financial plan that he has followed consistently. He built wealth the boring, old-fashioned way, with nothing fancy but lots of success. He feels strongly about spending on what you are passionate about and being cheap on the things you don't care about. He spends lavishly on travel and even has a language tutor. He currently speaks four languages, and he has been to 45 countries.

Finance 101: Real Estate Syndications

Real estate syndications allow investors to pool their money to buy large properties, like apartment complexes, that would be too expensive to purchase alone. A group of investors provides the capital and a professional manager handles buying the property, improving it, raising rents, and running operations. Investors typically receive quarterly distributions and, after a few years, the property is sold and profits are returned to the group.

Returns in syndications often follow a set structure. Investors usually receive their original principal back first, then a preferred return that might be around 6% or 8%. After that, any additional profits are split between the investors and the deal operator based on terms that vary by deal. While the return potential can be attractive, these investments are illiquid, and they rely heavily on the skill and judgment of the operator. Poor management, heavy leverage, or adjustable-rate loans can lead to capital calls where investors are asked to contribute more money.

Syndications also require high minimum investments, which makes diversification difficult unless someone already has a large portfolio. Many people instead choose to invest through private real estate funds, which offer exposure to multiple properties at once. This helps mitigate the risk of any one property underperforming. Even when a deal inside a fund goes poorly, a diversified fund can still deliver solid returns overall. Investors should be aware of the risks that come with leverage and illiquidity, but syndications or real estate funds can be an option for more experienced or financially established investors.

To learn more about real estate syndications, read the Milestones to Millionaire transcript below.


Sponsor: Mortar Group

WCI Podcast Transcript

Transcription – WCI – 446

INTRODUCTION

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 446 – Managing Taxes in Retirement with Sean Mullaney.

Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student loans quickly and getting your finances back on track isn't easy. But that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. That could end up saving you thousands of dollars, helping you get out of student debt sooner.

SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. And if you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com/whitecoatinvestor.

SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions apply. NMLS 696891.

All right, those of you watching on YouTube, you see me in uniform today. I am wearing a military uniform that I think this is only the second time I've put on in the last 15 years since I walked out of the Air Force.

I had to go to my daughter's Veterans Day event today. They sang a bunch of patriotic songs and recognized the veterans in the audience. Most years I go to that in a relatively well-to-do neighborhood in Utah there are very few other people that stand up. I've lived places like Virginia and Alaska where there are far more military members than where I live now. And often, I'm the only one standing or it's me and some 95-year-old guy standing across the way and that's it.

She asked me to wear my hat today. I said, I can do one better and I put on the full uniform. Then we had a WCI staff meeting right afterwards. I left it on and now we're recording a podcast and I've still got it on. That's why I'm wearing it. It's Veterans Day as we record this.

Thank you to those of you who are serving out there. Sometimes, the sacrifice is not somebody shooting at you. It's having a deployment hanging over your head that could drop at any minute and all the other sacrifices that we make while we're in the service. Thank you to those of you who have served, who are serving and particularly as docs out there. A lot of you as docs are literally getting paid a quarter as much as you could make in the private practice world while you're serving in the military. It's a real sacrifice. Thank you for being willing to serve on this Veterans Day.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
Now, I know when you're listening to this, it's not Veterans Day, but that's when we're recording. Our quote of the day today comes from John Maxwell, who said, “A leader is one who knows the way, goes the way, and shows the way.” I love it. It's a beautiful quote and one we should all strive to do as leaders in our organizations and in our families and lead by example. I can't believe how closely my kids watch what I do and compare it to what I say. It's pretty amazing.

Hey, I want to let you know about something that is going to be winding up here at the end of the year. If you've been waiting for the right time to add a rental property to your portfolio, this might be the time.

Every year around this time, savvy investors watch the builders. Why? Because experienced builders want to clear inventory before year end. That means price reductions, better terms, and incentives you don't see the rest of the year.

Right now, Southern Impression Homes is offering exactly that. They're making strategic price reductions on new constructions, single-family homes, and duplexes in strong Florida rental markets like Jacksonville, Palm Coast, and Southwest Florida.

These are build-to-rent properties designed for long-term cash flow. And many have already been leased to qualified tenants. This isn't a fund. This is a direct ownership. It's your home, your deed, your cash flow, your control. You decide when to finance, when to sell, and how to run the asset.

Don't wait on this if you're interested. All properties need to be closed by year end in order to receive the discounted pricing and financing incentives, including low financing with free property management. To learn more, reach out to the Southern Impressions Homes team at whitecoatinvestor.com/sihomes.

All right, we got a great interview today. We have got Sean Mullaney here. Let me get him on. You're going to enjoy this.

 

INTERVIEW WITH SEAN MULLANEY

Dr. Jim Dahle:
Our guest today on the White Coat Investor Podcast is Sean Mullaney, CPA. Sean's an advice-only financial planner, the president of Mullaney Financial and Tax, Inc., and he provides advice-only financial planning for a flat fee. He's also a co-author with Cody Garrett of the book Tax Planning to and Through Early Retirement. If you're watching this on YouTube, you can see me holding up the book right now.

Sean also writes a blog, fitaxguy.com. He's received an award I never received called the Plutus Award. I think I might have been in the running one year for it, but because of the intersection of tax planning and financial independence, he got recognized with one of those. Sean, welcome to the podcast.

Sean Mullaney:
Jim, thanks so much for having me. Looking forward to the conversation.

Dr. Jim Dahle:
Yeah, I think for the first time I just met you this last Bogleheads conference. Have we ever met before that day?

Sean Mullaney:
We may have met briefly. I think we met briefly at a previous Bogleheads conference. Other than that, yeah, for the first time real in person.

 

INTRODUCING THE FIVE PHASES OF RETIREMENT

Dr. Jim Dahle:
Sean and I were both speaking at the conference and it was a really fun experience to sit through his talk because he divided retirement into stages that I hadn't seen anybody else do before, which I thought was a pretty clever idea and really divided them into five or six stages to think about with regard to your financial issues that you face in retirement, particularly with respect to taxes. Sean, why don't we start with a nice in-depth discussion about these stages? Tell us how you define when one ends and when the next one begins and what the stages are. Why don't we start with that?

Sean Mullaney:
Yeah, for married people, I generally look at five phases of retirement and it's mostly based on the planning considerations of those five phases. First phase is retirement through the 65th birthday year. That's phase one.

Phase two, I refer to as the golden years. That's generally the 66th through 69th birthday years. About four years. Phase three is age 70 through the end of the delay of RMDs. This could be five years for those born in 1960 and later, essentially ages 70 through 74. Then we have this onset of RMDs. RMDs to the first death is the fourth phase. And then the widowhood is the fifth phase. We were in RMDs, first spouse dies, and now we're in the so-called widow's tax trap. We could talk about that more.

For married folks, I view it as five phases. If you're single, just collapse phases four and five together. So, RMDs begin, that's your fourth phase, and that's it. And I think as we talk through those five phases, we'll see that the planning considerations in each are different and really drives the planning in each of those five phases.

 

EARLY RETIREMENT AND ACCESS BEFORE 59 1/2

Dr. Jim Dahle:
Do you think it's worth splitting that first one into early retirement versus standard retirement? Because there are a few unique issues if you're retiring before the age 55 rule or the age 59 and a half rule takes effect. Is that worth considering that separately from the years from 59 and a half to 65?

Sean Mullaney:
Jim, you make a great point. 59 and a half is a big marker, and it's based on the Internal Revenue Code. There's the 10%. The code calls it an additional tax. Colloquially, we all refer to it as a penalty. If you're going to be under 59 and a half and you're going to take from these traditional retirement accounts, you're generally going to be subject to an early withdrawal penalty.

The book has an entire chapter on that penalty. What we generally find is there's so many good planning alternatives that get around that penalty that it's not that much of a gateway in terms of being able to retire. Generally speaking, in the book and sort of our perspective in terms of planning, we wouldn't say, “Oh, that 59 and a half before and after is this major thing.” Yes, it's a consideration. And yes, you could split it between pre-59 and a half, post-59 and a half.

But in today's environment, the planning options are so good, whether it's just spending down the taxable accounts first, whether it's a 72T payment plan, which isn't that bad. It's gotten a lot better over the past four years. I wouldn't necessarily break it down, but it's a very valid consideration, Jim. And one could reasonably say, okay, before 59 and a half, the plan is A, B, and C. After 59 and a half to 65, it becomes D, E, and F. That absolutely is a possibility.

Dr. Jim Dahle:
And you're right. There are a gazillion loopholes to that 10% penalty for early withdrawal from IRAs. One of which is just leaving it in the 401(k) until you're 59 and a half. Because once you separate from the employer, if you're 55, no penalty. You can take it out of that IRA. The 72T or the SEPP, Substantially Equal Periodic Payment Plan, essentially early retirement's an exception to the 59 and a half rule.

But for lots of docs, lots of our audience, and our audience is probably 75% docs and 25% other high-income professionals or business owners, they've usually got something else if they saved well enough to be able to retire that early. They've got a 457 plan, which doesn't have a 59 and a half rule. They've got a taxable account. They've got something they can tap before age 55 or 59 and a half.

I think you're right. I think it's dramatically overblown for most people that they can mostly ignore it if there's a good enough saver to be able to retire by those early ages in your 50s. But it is a consideration for lots of people. And I'm surprised how many people actually delay their retirement until they're eligible to do that. It might be almost as many people as delay it until they feel like they can't retire until there's social security that they can take.

Sean Mullaney:
Yeah, and I think there was a big change that happened in 2022 on these SEPP, the 72T payments that a lot of folks have missed. It used to be that you had to use a prevailing market interest rate, generally speaking, to do a 72T payment plan. And that left you at risk. If your 401(k) or IRA wasn't big enough, you couldn't generate enough of a 72T payment to essentially fund your retirement. IRS came out in early 2022 and said, “Okay, what we're going to do is we're going to say you can always use 5%.” And that has a very nifty effect of saying, if you're in your 50s, you can generally access at least 6%. And most early retirees are not going to want to access as much as 6%. That very much paved the way for a lot of early retirees to be able to rely on the 72T.

And you're right. If you have a governmental 457(b), excellent alternative. Rule 55 in 401(k) plans can be an excellent alternative. And then my favorite is the taxable accounts. If you've got those big taxable accounts, we can talk about them more. But essentially, you're recovering basis that reduces your taxable income. And you're probably going to have a lot of that income hit the 0% long-term capital gains bracket. There's so many good paths before 59 and a half. In the book, we talk about assets become income very efficiently in the United States.

Dr. Jim Dahle:
Amen to that. Isn't that the truth?

Sean Mullaney:
Yeah, that is particularly true for our early retirees in the vast majority of cases.

Dr. Jim Dahle:
Yeah, for sure. That's an excellent perspective and something to keep in mind. A lot of people just feel like they got to build this income-producing portfolio and money is so fungible.

The other thing you can do if you've got a substantial taxable account, even if you're not in the 0% bracket, if you've been tax loss harvesting along the way, you might have hundreds of thousands of dollars in tax losses that you can use to offset all those gains for a number of years in the early years of retirement.

 

PLANNING FROM RETIREMENT UNTIL MEDICARE

Dr. Jim Dahle:
Okay, let's talk about this period. Basically, from whenever you retire until really you become Medicare eligible. That's the event at 65. What are the considerations there? We've got to be thinking about subsidies for the Affordable Care Act type plans. We've got to be thinking about Roth conversions. What else do you think about planning-wise in that first period?

Sean Mullaney:
Well, as a general theme, I like to say, let's keep our ordinary income low. That's going to help with whatever sort of planning we're doing. For example, we could think about, hey, we may want to have bond holdings in our retirement. That's a very common investment objective. Well, where we want to hold those bonds? Maybe in our traditional retirement accounts, not in our taxable accounts, so that ordinary income, 3%, 4%, 5% yield doesn't hit our tax return every year, and that can open us up for some good planning.

You mentioned premium tax credit. That's a big one for a lot of folks these days, where we're going to be early retired. We don't have employer-provided insurance in retirement. By the way, that still exists. That absolutely still exists. But most Americans do not have access to former employer medical insurance in retirement.

The ACA after maybe 18 months of COBRA, or maybe not even after COBRA, becomes the natural alternative. Those have very high rack rates. You look at the premiums, they look scary, but they can become a lot less scary with the premium tax credit. That thing could be worth thousands of dollars every year in the early part of retirement.

The way we generally optimize for that is keeping our income low. That's where taxable accounts are great, because we spend $100,000 from our taxable accounts. So we sell $100,000 of ABC mutual fund. Well, what's our taxable income? It's not $100,000. It's $100,000 less our basis, which could be $30,000, $40,000, $50,000, $60,000. And so, our taxable income to the adjusted gross income to the IRS for this premium tax credit looks a lot lower than our living expenses. That's a big one.

Now, we could think about Roth conversions. Now, Roth conversions are a very legitimate tactic in retirement. But are they necessary? For most Americans, they're not going to be necessary. They may be beneficial. And I think too often in personal finance, we conflate beneficial or potentially beneficial with necessary.

And I do think we need to be a little careful. If we're going to be on a premium tax credit, we're going to be on an ACA plan, and we're going to be able to get our income low enough to qualify for a premium tax credit. Why blow that with a Roth conversion when we have plenty of after we turned 65 to manage for that. And there are other tactics that might be available. We might want to just do our Roth conversions during the golden years.

I think in these years, if we're going to be on an ACA medical insurance plan, I think we're going to want to try to optimize for that premium tax credit. Now, there are going to be some people who can't. And at that point, you might want to reassess the Roth conversion. I think it might make more sense, might be more beneficial.

Those are some of the planning considerations during that first part of retirement. And generally speaking, whatever we can do to keep our ordinary income low, especially our uncontrolled ordinary income, that's probably going to be beneficial.

 

THE GOLDEN YEARS: TAX PLANNING AND ROTH OPPORTUNITIES

Dr. Jim Dahle:
Yeah, we're going to get to Roth conversions in depth today. So let's move on to the next stage, though. You call them the golden years. You've now qualified for Medicare. Maybe you haven't taken Social Security yet. If you're delaying that till 70, there's no RMDs due. You're hopefully still in pretty good health. These are classic go-go years during retirement. Why do you call them the golden years and how are they golden financially?

Sean Mullaney:
The world is our oyster when it comes to tax planning in our golden years. These are the years you just went off the list. We don't have to manage for premium tax credit. We're not worried about RMDs. They're not required and we don't have to take Social Security.

And by the way, if we delay claiming Social Security, this is very personal, but generally speaking, we get some benefits from that. We get less volatility in our 70s and 80s because we've increased our annual Social Security check in our 70s and 80s. So that's good. We get a longevity benefit and we keep that tax return clean of uncontrolled ordinary income. That Social Security, up to 85% of it can be taxed and can diminish our tax planning opportunities.

In these golden years, I sort of view it two ways. One way is we get to our golden years and we still have a bunch of taxable accounts left to spend. Excellent. Great outcome. We just live off these taxable accounts. They generate capital gains, long-term or qualified dividend income. Great. Well, that leaves the high standard deduction plus the new senior deduction as this gateway, this window through which to do Roth conversions.

In the book, we call that a tailored taxable Roth conversion where we measure for two things. We keep our taxable income below the 0% long-term capital gains rate 2026. That's $98,900 for a married filing joint couple, by the way. That's a very interesting number. And then we do the Roth conversions up to the level to keep our ordinary income. That's everything but the cap gains and the qualified dividends below the available deductions. Think about our itemized or standard deductions plus the senior deduction. That number could be something like $47,500, even potentially higher for itemizing.

We could do Roth conversions in that window, live off the taxable accounts. And we trip some cap gain income, but we keep that in the 0% bracket hopefully. And we could do Roth conversions up to the top of those available deductions. Those could go off at 0% federally.

We might be living an affluent life and get $40,000 Roth conversions done in those golden years and pay no federal income tax. That is a very possible outcome if we're living off taxable accounts.

Well, you say, well, wait a minute. There are going to be some Americans who get to the age 66 and have exhausted the taxable accounts in the first part of the early retirement. Okay, no problem. Just start living off our traditional IRAs. We don't have to worry about that 59 and a half, 10% penalty thing.

All right, we're just living off our traditional retirement accounts. Isn't this terrible? That thing's infested with taxes. Well, wait a minute. What about that senior deduction? What about the standard deduction or maybe even itemized deductions? In the book, we do an analysis of a married couple living off $140,000 of traditional IRA distributions, which most financial planners will say is the worst possible outcome ever.

And we find their effective rate is incredibly low. We find that almost a third of their distributions that they're living off of go off at a 0% rate. Think about that for a second. You can live off six figures of an IRA allegedly infested with taxes and about 30, 31% of it goes off tax-free. I refer to that as the “hidden” Roth IRA. That's a Roth IRA that lives inside a traditional IRA because it's a retirement account distribution that is 0% federal tax. I thought that was a Roth IRA. Well, no, it's not a Roth IRA. It comes from a traditional IRA, but it's a hidden Roth IRA that lurks inside your traditional IRA.

So, you have these two different paths. Live off taxable accounts. Great. Do some Roth conversions. They may go off tax-free or, okay, no, we exhausted those taxable accounts. Then we enrolled in Medicare and now we just live off the traditional IRA and we find that that's actually relatively lightly taxed, even into six figures, which is very powerful for retirees.

Dr. Jim Dahle:
A couple of topics I want to chat a little more about during this phase. The first one is what you say works very well for most retirees. And even most pretty financially successful retirees. It's not necessarily the case for someone who built a $5 million IRA and a $5 million taxable account.

When you start getting into those sorts of levels of wealth, it gets a little tough to get down into the 0% bracket. And you're thinking about doing Roth conversions and you're thinking about huge Roth conversions, doing a million dollar Roth conversion, not a $40,000 Roth conversion. How would your advice for this stage for somebody that's a particularly well-to-do retiree change?

Sean Mullaney:
Yes, if we're talking eight figures, which is a very narrow slice of the pie when we think about the American retiree, but it certainly is out there. Then the advice does tend to shift and change a little bit. I still love living off those taxable accounts first for a number of reasons. Heck, creditor protection could be a reason to do that. Although everybody should be thinking about personal liability, umbrella insurance, but that's a different conversation.

That person might very well want to do more Roth conversions for a couple of reasons. One, $5 million, very high traditional IRA, that could keep growing. And so, if that keeps growing, then the widow could even get to 35%. Although you still got to run the numbers because you got to remember these tax brackets all do index for inflation.

And that's a person who, by the way, if they want to be relatively conservative with their portfolio allocation and they got to do them, I'm not going to give them investment advice on the White Coat Investor podcast, but they might want to have a $5 million traditional IRA that's almost all bonds or largely bonds. And that would be a way to keep those future RMDs lighter.

They also want to think about the kids. People who have $10 million in retirement often tend to have wealthier or higher income kids, and their Roth conversion could make a lot more sense. That's a couple that has met their sufficiency. They've got $10 million, great. They have a lot more runway to be thinking about their kids' financial futures.

I would argue most retired Americans don't have the wealth to be all that concerned about their kids' speculative tax liabilities, but your $10 million couple, they absolutely do. And if they want to prioritize, “Hey, you know what? We're going to do 24 cents on the dollar, maybe even 32 cents on the dollar Roth conversions because the kid is a Fortune 500 executive and will pay 35 cents on the dollar, 37 cents on the dollar.” Fine, go for it and have some intergenerational tax savings. I'm all for that.

That couple definitely needs to think more about it. I still like that couple spending down the taxable accounts first, though, because that tends to be a way of reducing the taxes on those taxable accounts in most cases and deferring as long as possible on the traditional accounts with maybe combining some Roth conversions prior to RMD age.

Dr. Jim Dahle:
The other topic I think we ought to hit in this stage is IRMAA. And the way I think about IRMAA, I think about as soon as the ACA credit issue goes away, you got to start dealing with IRMAA. Do you want to talk a little bit about IRMAA, whether it's a bigger deal or a smaller deal than the ACA credit and how that fits into this stage?

Sean Mullaney:
I tend to think IRMAA is a smaller deal than the premium tax credit. One, the premium tax credit hits sooner. Two, it hits larger. Premium tax credit could be thousands of dollars. IRMAA can be thousands of dollars, but it also tends to be thousands of dollars that are less important.

What I mean by that is IRMAA can be a touchdown the IRS scores later in life, but it tends to be a garbage time touchdown. It tends to occur to those who very much can bear it versus if we lose a $9,000 premium tax credit because of a Roth conversion, well, that can be harmful versus maybe we have $3,000, $4,000, $6,000 of IRMAA later in life.

IRMAA also tends to boil down to about a 1% to 3% surcharge when we actually boil it down. And so, it rarely has that much impact on lived experience, meaning it tends to be a nuisance tax. It tends to hit the widow a lot more than the married couple. If I'm looking at 2025 brackets for IRMAA, IRMAA does not hit until your adjusted gross income is about $212,000. For a lot of very affluent retired married couples, it's going to be hard to hit that $212,000 of taxable income in retirement. Some will, and then, all right, you pay a little IRMAA.

Where IRMAA bites a lot more is $106,000. That's the 2025 threshold for a single person. IRMAA is a lot more likely to bite in our widowhood than it is during our married years. But that said, if we're showing $106,000 or more, we tend to be a pretty financially successful widow.

I think where IRMAA tends to be more relevant is very marginal decisions. If we're thinking about a Roth conversion and if we're 63 or older, pull out the IRMAA brackets. And you say, “Oh, you know what? This Roth conversion of $10,000 would just pump me into the next IRMAA bracket.” IRMAA is not a smooth percentage function. It's a step function from fifth grade math. You can have a Roth conversion that's a dollar too much and can trip you into a new IRMAA bracket.

But I would argue that most retirees should prioritize premium tax credit over IRMAA because the one-year impact can be a lot more on the premium tax credit. And I also like reducing early retirement expenses because I'm not one who spends a lot of time up at night worried about sequester return risk. But to the extent you think that is a valid planning consideration and certainly has validity, no doubt. Gun to my head, I would rather have some IRMAA surcharges later in retirement than lose out on thousands of dollars of premium tax credits earlier in retirement.

Dr. Jim Dahle:
Yeah, to improve your sequester returns risk. Okay, maybe we should have explained this at the beginning in case that whole discussion just went over people's heads. IRMAA is income-related monthly adjustment amount. What it is, it's like an extra tax or a surcharge on your Medicare payments. A lot of you may not even realize Medicare isn't free, but particularly if you have a high taxable income in retirement, it's particularly not free. You got to pay this extra surcharge known as IRMAA. Some people try to plan their taxable income during retirement so it is lower, so they don't pay as much in this IRMAA surcharge for their Medicare.

 

EARLY 70’S AND PRE-RMD YEARS

Dr. Jim Dahle:
Okay, let's move on to the next phase. The next phase, you define the 70 until people start taking RMDs. For most people my age or younger, that's 75. We're talking the first half of your 70s. This might still be go-go years. If you're a healthy retiree, it might be moving into the slow-go years if maybe you're not so healthy. But presumably starts with you taking your social security at age 70 until the time you got to first start taking RMDs.

Now I find it interesting when I look at the statistics, despite the fact that just about every personal finance expert guru, whatever out there thinks, at least for the high earner, wait until 70 to take your social security is a pretty darn good idea. The actual statistics say only about 10% of people wait until 70. Can you give us a little bit of your thoughts on when to take social security, maybe why so few people wait until 70?

Sean Mullaney:
I tend to really like delay, delay, delay. Why? Because it keeps our income tax return clean in our 60s to help with some golden age planning. And I look and I say, well, wait a minute. Let's say you had a million dollars in a taxable brokerage. You're 67. You're thinking about claiming because that's my full retirement age. I say, well, wait a minute. You got a million dollars. How much are you spending? You have a million dollars. You could fund your lifestyle at 67, 68, 69, 70. And you spend that down. And by delaying, you build up your future annual payments.

That has longevity benefits. It also means we spend down volatile assets in our 60s in our portfolio to build up a relatively non-volatile asset, our annual social security claiming, our benefits annually from social security. I really like this idea of delaying social security, especially for the higher earning spouse in a married couple to age 70.

Now, Jim, you asked a really good question, though. Why don't more people delay to age 70? And I think some of it comes back to where Americans stand. Now, UBS, a big bank, they have a global wealth report every year. Look, I'm not back validating this thing, but I think directionally, it's probably correct. They claim that median adult wealth in the United States in the year 2024 was just a hair shy of $125,000. That's the median, 50% below, 50% above. Even above, that's $200,000 or $300,000.

Sadly, many Americans, for all this stress we hear in the personal finance commentary about IRMAA and, boy, taxes are going to get you in retirement, isn't the real problem when we think about the population sufficiency. And I get that that $125,000 figure is not age adjusted. So, presumably, retirees are going to have higher amounts of financial wealth or wealth in general. But still, if you need your social security, claim it.

And by the way, if you really need your social security at 62, 63, the odds are you're not going to have much in the way of tax problems at all. You may not even pay any federal income tax if you're in a situation where you're not working anymore, and financially, you need to rely on your social security check.

I think, though, for the affluent, it just makes so much sense. If we have these other financial assets, why are we diminishing the annual social security check? Now, some people will say breakeven and that, and that has some validity. But if you live longer, then breakeven might have been to wait to 70. And by the way, why are you taking an asset that you don't need that creates this leaky, inefficient, ordinary income in our mid to late 60s where we can spend down taxable accounts and really have some good results there?

I'm a big fan, generally speaking. I'm not here to say this is a silver bullet issue. Reasonable people can differ on this. But the more I look at tax planning and the more I look at lowering volatility in our 70s and 80s, I tend to like delaying social security.

Dr. Jim Dahle:
All right. What other issues should people be thinking about in the early 70s? Obviously, QCDs kick in there somewhere. But what else?

Sean Mullaney:
Yes. At age 70 and a half, qualified charitable distributions kick in. And if you're terribly inclined, this is the way to go. Find the older spouse or if it's a single person, just the single person and start making your charitable contributions from the traditional IRA. Oddly, it's not available from 401(k)s or 457s, other qualified plans.

It's available from traditional IRAs at 70 and a half. If you're terribly inclined, make those contributions from your own traditional IRA or your own inherited IRA. If you're the beneficiary at 70 and a half for yourself, you can start doing QCDs from an inherited traditional IRA as well.

And that is a way of synthetically marrying the high standard deduction. We live in an era of a very high standard deduction plus the senior deduction. You can marry those two with essentially a synthetic deduction for charitable contributions. Very, very, very powerful planning. That's one big consideration.

The other consideration is Roth conversions. And to my mind, now Roth conversions become more challenging in this phase. Why? Because at Social Security, we can't delay it any further. That's now filling up our standard deduction 10% bracket, maybe even into the 12% bracket. And so, now if we're going to do Roth conversions, they're going to start attracting more tax. Not that we can't do them, but I will say it becomes a lot less desirable.

We've been assuming you're living, say, on taxable accounts. Well, what if in your early to mid-70s, you're just living on your traditional IRA? Okay, great. I question why we would be doing Roth conversions then. Because your living expenses at that point are mitigating and reducing those future RMDs.

I'm not so sure you need a second tactic to mitigate future RMDs, which is a lot of what we're trying to get at with these Roth conversions. Look, if you could do a Roth conversion tax-free, you don't even have to worry about the RMDs. Just do it if it's federal tax-free, which in our golden years, many Americans can do.

But if we're in our 70s, and we can't do a tax-free Roth conversion, but we're already living off these traditional IRAs, why are we in such a hurry to add more taxable income? We're already paying tax on Social Security, on traditional IRA distributions.

And by living off these traditional IRAs in our 70s, we're already reducing to the extent one thinks RMDs are a problem. Okay, fine. But you're already getting at that problem by just living your life and paying for NFL Sunday ticket and upgrading to business class or economy comfort or whatever. And your airfare, great. You're reducing the potential that these RMDs might be harmful from a tax perspective.

Dr. Jim Dahle:
Okay, what else in that time period, 70 to 75? Anything else? Obviously, if you're going to give to charity in retirement, the very best way is via QCD. There's no doubt about that. And you're running out of probably, once you start taking Social Security, you're mostly past the Roth conversion years. At this point, are you just trying to use your money to buy as much happiness as you can?

Sean Mullaney:
Yeah, yeah. I think we've got the three big tactics covered, Social Security, QCDs, and Roth conversions. But I'll sort of add two additional thoughts here. One is, you make a great point around happiness. I have this little colloquial saying. Nobody goes to the tropics for the first time in their 80s. I'm not saying everybody needs to go to the tropics.

But essentially, why are we scrimping and saving to have $10 million at age 85? Guess what? You're probably not going to be able to use most of it. I think prioritizing a little spending at the first part, or the earlier parts of retirement is not necessarily a bad thing.

And then the second thing to think about is, yes, we're now at a phase, unless we're $15 million couple, or $10 million couple, it's just a little more difficult to be as aggressive from a tax position. We can do these QCDs. We could think about Roth conversions, but they're probably not going to be so great. And the Social Security is now coming in. So, we don't have as good of a window to be doing this tax planning.

But I'll also say, the approach I tend to favor is take our deductions during our high earning years, be very moderate and very conservative and modest with our Roth conversions in the early part of retirement. But then that does leave us open to potentially higher taxes in the later part of retirement.

But I would argue that if you're facing higher taxes in the later part of retirement, it almost certainly comes with a great coincident effect, which is very high financial success. For those who are only moderately financially successful, they tend to have very low taxes in the later part of retirement.

Essentially, we could think about our lives and shifting tax burden within our lives, it tends to be that the later part of our lives tend to be a good time to have tax burden, because either we're only moderately successful or less, and then we don't pay that much in tax, or we're very successful, and we have some inefficiencies in our tax perspective, but we also have high financial success, a great outcome, or we're in long term care, and oftentimes 92.5% of our expenses are deductible under the medical deduction rule. So, that's a good time to actually use an IRA, pay for long term care, and we probably can deduct most of that anyway.

 

RMD YEARS AND THE WIDOW’S TAX TRAP

Dr. Jim Dahle:
Yeah, good perspective. All right, let's move into the next phase. This one begins when you start taking RMDs, for some people, for most of us is probably going to be 75, you're not anywhere close to retirement yet, until the first spouse dies. Tell us about that time period and what people ought to be thinking about and planning for.

Sean Mullaney:
I think there's a lot of fear about that time period, but I want to orient the listener a little history. If you were listening to a personal finance podcast way back in early 2017, eight, nine years ago, you were going to hear RMDs are a bad thing. Well, I think you have to update and reassess your thinking on occasion. And we have to ask ourselves, “Has the RMD landscape changed at all in the last decade?”

Okay, well, I would argue it has changed in three big ways. The first one is the delay in the onset of RMDs. There've been two different tax law changes, Secure Act and Secure 2.0, that said, you don't start these RMDs at age 70 and a half. No, no, no. In today's environment, if you're born in 1960 or later, you start them at age 75. That means four or five RMDs were scrapped. And oh, by the way, by definition, they were the four or five RMDs that were the most likely to occur. That's a big change and it makes RMDs a lot less scared.

The second thing that happened that got very little commentary is the IRS changed the table. Starting in 2022, the RMD table that uses life expectancy to determine how much you're supposed to take out, the life expectancy went up, which had the effect of roughly speaking, each RMD got reduced by about 7%, give or take. And that's a big change to the RMD rules.

And then the third one is the new lower tax rates and the higher standard deduction. The higher standard deduction first came in late 2017, just got permanently extended in 2025. That's a big change because a higher standard deduction is a tax cut on the highest tax RMD. It drags everything down through the brackets. What it's really doing is, it's reducing the amount of the RMD subject to the highest bracket. And oh, by the way, all those brackets got cut first temporarily in 2017 and now permanently.

I think there's a lot of misperception and outdated thinking when it comes to just how harmful these RMDs are. Now in this time, there is not as much good planning that can be done other than the QCDs. Keep doing those because those, by the way, count against the RMD. If your RMD is $70,000 this year, but you want to give $1,000 a month to your church, well, your taxable RMD, if you do a QCD, the $12,000 goes from the IRA to the church. And then all you have to do is take $58,000 more from your traditional IRA. That's the end of it. That's very powerful because we just cut out the highest tax part of that RMD. The $12,000 is not taxed. Very good for the charitably inclined.

Now, some people want to do Roth conversions when they're taking RMDs. I question that because you're already reducing that traditional retirement account. By the way, this year's RMD is a little self-correcting because it helps reduce next year's RMD because it's less balanced to be computed into next year's RMD.

But Roth conversions, if you want to do a Roth conversion, when you're subject to an RMD, you got to be aware of two rules. They sort of make sense, but there are traps for the unwary. First rule is the first dollar to come out of a retirement account is deemed to be the RMD. The second rule is an RMD cannot be Roth converted. I don't write the rules. It sort of makes sense by the way, but I don't write the rules. I just talk about the rules.

What that means is if you want to do a Roth conversion and you're subject to an RMD, you got to clear the RMD first. It could be an actual distribution or distributions, or it could be a QCD or QCDs or any combination thereof. Once the RMD has been fully cleared, then and only then should you do your Roth conversion.

It's not like with the backdoor Roth IRA during the working years, a lot of folks get up on New Year's Day and they're not interested in the Rose Bowl. No, they're interested in going on their brokerage account, put the $7,000, $7,500, whatever the new number is for 2026. We don't actually have that yet as of this recording, but they put their money in the traditional IRA on New Year's Day. Perfectly fine to do that for the backdoor Roth IRA, even though you haven't earned a penny yet, just the way the rules work.

But if you're subject to an RMD, don't get up on New Year's Day and do a Roth conversion, because now you've just Roth converted an RMD, you've created an excess contribution to a Roth IRA, subject to a 6% penalty unless you do some remedial action. Not the end of the world, but why even open that door? I think in these years, the taxation tends not to be as bad as people worry about because of the very high standard deduction, the new senior deduction, the better tax brackets, and you have that QCD tool that's still available that I think can still be very helpful.

Dr. Jim Dahle:
All right, it's time to talk about the widow tax trap, which is the primary planning consideration when we move into this fifth of your phases, when you move into widowhood, the first death of one of the two spouses. Obviously, sometimes it's widowerhood, but more commonly, widowhood, because women tend to marry younger than men marry, and women tend to live longer. You put those two together, and it's almost always widowhood, sometimes quite a lengthy period, too. So, let's talk about the planning in the widowhood phase.

Sean Mullaney:
Yes. Jim, you're absolutely right that taxes tend to go up when we're a widow or widower, because after the year of death, we're going to be on the single brackets, and our income does not usually go down by half. We lose the lower Social Security check if we're that. We still have all those retirement accounts. Now, if it's a younger widow, then the factor might get a little more generous, but we're still going to have relatively high income and the worst brackets.

But what tends to happen is the bite is not as dangerous as the bark might indicate, meaning we still do okay from a tax perspective. Now, yes, our taxes tend to go up, and what I've found is the IRS tends to now score some garbage time touchdowns. I did an analysis recently where I said, well, what if we have an 81-year-old widow with $3.68 million in a traditional IRA? Just how bad is it?

I find that that widow at 81 years old has about $10,000 or so of the RMD taxed in the 32% bracket. And you say, boy, that doesn't sound so good, but you got to remember two different things. One is the arc of their tax planning life. Say they got married at 30 and they deduct in the 401(k)s at 24% or more, and then they get to retirement, they're married, the RMDs come out at 12% and 22%. They still win that. Some of those RMDs, they win 12 cents on the dollar. That's pretty good when you're going against the IRS. And now we get her as an 81-year-old widow. And yes, she has about $189,000, I believe, of an RMD, of which $10,000 is subject to a tax rate above 24%.

That's an inefficiency. That's not much of a trap. I know we sometimes use that term, but it's really the widow's tax inefficiency, not a trap. And by the way, my widow with a $3.68 million traditional IRA, she has after-tax cash flow of, by my estimate, about $200,000. We sort of lost the forest to the trees. Yes, she is paying higher taxes, but she's got $200,000 of after-tax cash flow. Using a traditional 401(k) seemed to really work out for her. She has this tax inefficiency most Americans would gladly sign up for. She's doing great in her retirement, $200,000 of after-tax cash flow.

Now, I will say that widow is going to have IRMAA. So in two years, the way that IRMAA works is it's a two-year delay. So they say, what's my Medicare premiums this year, including this IRMAA, to determine that they look at your tax return from two years ago, because they know that's probably going to be filed at this point. They've got your AGI from two years ago. They apply it against these brackets. And my estimation is that widow in about two years is going to pay $6,000 in IRMAA. Well, remember, she had $200,000 of after-tax cash flow. She can easily afford it.

Now, in theory, she could have done some more Roth conversions. But all right, she's got these minor tax inefficiencies that those Roth conversions could have helped with. And again, if she's worth $10 million, different conversation. But if she's more the mass affluent, the widow's tax trap is really a few minor tax inefficiencies where the IRS scores some garbage time touchdowns against her.

And then obviously, at this point, she would only be doing Roth conversions if it's for the next generation. It's not going to be for her. And the QCD remains a powerful planning tool, even in her case. In my little analysis with the $3.68 million traditional IRA, I just assume a $1,000 cash contribution, not a QCD to charity, and that's it.

But she could do a lot better with the QCD planning. If she did $1,000 a month, she would eliminate that 32% tax inefficiency entirely. And all her RMDs would go at 24% or less, meaning she and her husband, even in the widow's tax trap, would still be winning. Just shows you how powerful that QCD planning can be later in one's life. But she doesn't even have to do it. And she's still doing pretty well.

Dr. Jim Dahle:
Yeah. It's interesting out there. You would think RMDs are the devil. If you read the vast majority of books or articles or blogs out there, there's just this huge fear of RMDs. Apparently, it's not a problem for us to have a higher taxable income during our earnings years. That's not a bad thing. We get excited when we get a raise. We get excited when we get a bonus. But heaven forbid you have some huge RMD because you did such an awesome job saving for retirement. Now it's a terrible thing to have all this income. Why is there such a fear of RMDs in particular, where no one seems to hate having a high income prior to retirement?

Sean Mullaney:
Well, some of it, Jim, is motivation drives reason. If I'm an advisor, by the way, I’m an advisor, but put me to the side for a second. If I'm an advisor and I'm motivated by what? Relevance. And so, if I'm putting out a message, “Hey, these RMDs aren't all that bad. Maybe you want to do some mitigation tactics, asset location, QCDs, modest Roth conversions.” That message doesn't exactly shout from the heavens and is less likely to grab attention and relevance. So, there's a lot of motivation around relevance. And if we're saying, “Hey, you could have this huge RMD.”

The other thing I find people focus on is the amount of the RMD. And I say, that's irrelevant. I don't care if that's a billion dollar RMD or a $20 RMD. I care about the taxes we pay and their impact. Meaning, in my little widow example, she's 81 years old. She pays about $45,000 or $46,000 in total federal income tax for the year. Well, okay. That's no big deal. It's not all that relevant to her because her after tax cashflow is still $200,000. And if we even just break it down in a spreadsheet, she's got these minor tax inefficiencies. Not that we're supposed to be winning the spreadsheet. We're really supposed to be planning for lived experience, not a spreadsheet, different conversation.

But yeah, I think there is this issue around RMDs. It's so bad to be taxed later in retirement because that helps advisors gain relevance. But when we break it down, it tends not to be all that bad. And like I was saying earlier, a lot of advisors are still singing from the 2017 song sheet.

Well, have you thought about these changes to the tax rules for RMDs? Those changes keep getting us keep moving us to an environment where RMDs are lighter and lighter and lighter and lighter taxed. And that's part of the reason I'm not all that worried about future tax law changes. That's a whole other conversation. But part of it is they've cut taxes so much that even if they start increasing taxes on RMDs, it's not going to be all that bad because they've cut them so much over the last few years.

Dr. Jim Dahle:
It's the Roth lobby. There's a Roth lobby out there.

Sean Mullaney:
Yes.

Dr. Jim Dahle:
And let me give listeners an example. You live this example, so you know this. We just got back from the Bogleheads conference a few weeks before we recorded this. Ed Slott came to speak at the Bogleheads conference. He spoke before you. And Ed is a big fan of Roth contributions, of Roth conversions. He's a very dynamic, powerful speaker, gives a great talk, had the audience riveted, and did not say anything inaccurate whatsoever.

But the tone was that Roth is good, tax deferred is bad. That was the tone. That was the takeaway that anybody who wasn't really keen in on all the details of what he said would probably walk away from that talk with, is I should do more Roth conversions.

And then your talk came a little later in the conference. And I thought it was really good to have both talks there because the vibe people took away from your talk was just the opposite, that tax deferred has some pretty awesome benefits too, and that you got to balance these things out, that Roth isn't always the right answer.

So, help a listener decide when is it not better to do a Roth conversion? When is it not better to do a Roth contribution? How should they be thinking about this? How can they take an appropriately balanced approach?

 

BEYOND RMDs

Sean Mullaney:
Well, let's start with our accumulation years. I struggle to say we should be doing taxable Roth conversions or Roth 401(k) contributions at work during our accumulation years, particularly our higher accumulation years. Now, maybe we do a sabbatical for a year when you grad school or med school or something like that. I call that an income disruption year. Absolutely. At that point, pull out a spreadsheet, think about a Roth conversion. You might be able to do it against like the lifetime learning credit if you're in grad school. You absolutely could do a tax-free Roth conversion. Could be a really good opportunity.

But outside of that in the book, we say pay tax when you pay less tax. And it turns out that when you go to work for a W-2 income, you tend to pay more tax because you're trying to generate more taxable income. We sort of lost that in this discussion. We have these inchoate fears of taxes and retirement, but we don't step back and say, “Well, wait a minute, when am I going to pay more taxes? When I get up, at 09:00 A.M., I'm somewhere trying to generate taxable income, or later in life when I get up and I do some gardening and the honey-do list and those sorts of things where I'm not trying to generate taxable income.”

It turns out we tend to pay more taxes when we're working. So, why is that such a good time to pay tax, which is essentially a Roth 401(k) contribution or a taxable Roth conversion? That's one thing to think about.

Two is this issue I brought up about the differences in the tax landscape from 2017 to 2026, and a lot of advisors have not put this all together, that “Wait a minute, the tax laws have changed. I need to change my approach.” So, that's another one.

And then the third thing is the inchoate fear, the inchoate nature of this. If I'm trying to say, “Hey, this is scary in retirement”, well, what do I do? I say IRMAA. I say RMDs. I say widow's tax trap. I see tax law changes, but I don't have any numbers. But it's just this sort of inchoate fear that part of the reason we're all here is because our ancestors had some fear instinct to some degree. They didn't just randomly go off cliffs or randomly walk into the lion's den. They had some fear instinct. And sometimes maybe some of this rhetoric appeals to that, which is something we have innately. And we say, “Oh, don't go near high traditional IRAs in retirement.”

But then when we start bringing the quantitative analysis, we find, wait a minute, these retirees tend to be lightly taxed. It's just the way it is. And by the way, that's beneficial to a very important group of people, the politicians. The retirees tend to vote at higher rates, and the politicians just don't have much incentive to tax them very highly.

But this is one of the things I've seen. Commentators for the last decade have been saying taxes are going up on retirees, taxes are going up on retirees. But yet time after time after time, taxes tend to go down on retirees. We saw that in a big way in 2025 with the One Big Beautiful Bill. You like it, you don't like it. Well, up the standard deduction, lower the marginal tax brackets and the new senior deduction. It was a big time for retirees. The retirees were a big winner in the 2025 One Big Beautiful Bill Act.

Yeah, I just think that it's time to reassess the desirability of large Roth conversions. I'm not saying we can never do Roth conversions, or they couldn't have some benefits. But to say that they're needed for most Americans, I think is going a step too far.

Dr. Jim Dahle:
Let's change subjects a little bit. Let's talk about a strategy that is often referred to as “Buy, Borrow and Die” where essentially a retiree, particularly a late retiree, rather than realizing a bunch of capital gains and paying taxes on those, instead opts to borrow against their assets. Whether that's their home, whether that's an investment property, whether that's their taxable portfolio, whatever that asset might be, and pay interest instead of capital gains taxes, leaving the asset to their heirs to benefit from the step up and basis of death. When is it appropriate to consider this? Is there an interest rate threshold? Is there a health and life expectancy threshold? When might one consider this tactic instead?

Sean Mullaney:
Jim, I think we should step back. What is “Buy, Borrow and Die?” It's essentially a tactic to reduce the taxes on capital gains and other income generated inside taxable accounts.

Well, just how bad are the taxes on taxable accounts? In our book, Cody and I have an example of a married couple, 66 years old. They live on sales of mutual funds and fully taxable. And we say they have $85,000 of long-term capital gains. We don't give how much they're living on. It might be stuff that went to the moon.

They're only living on $100,000, but it could be stuff that maybe only had modest growth. So they could be living on $200,000. Who knows exactly? But they're living on six figures and they report $85,000 of long-term capital gains, all taxable. Then we add a $40,700 Roth conversion. So, their AGI I believe it's something like $141,700 in retirement with a $40,700 Roth conversion, $85,000 long-term capital gains.

How much federal income tax did they pay? The answer is zero. So that's illustrative that the taxes on these long-term capital gains and even some qualified dividends and little non-qualified dividends, a little interest in that example, might not be all that impactful.

So, why am I calling up the bank to borrow against my assets and pay interest expense, by the way, to avoid federal income taxes? That's basically what you're doing. You're saying, “I don't want to sell this stuff because it'll trip income taxes.” Well, for many affluent retirees, it won't trip federal income taxes the way our system is structured today. The 0% long-term capital gains bracket is so impactful that these strategies, it could even be indexed universal life. That's another play where we're saying, “Oh, you invest in a tax-free account.”

Well, okay, but your mutual funds might be tax-free the way the 0% long-term capital gains bracket works. Even affluent retirees might not face that much taxes. You asked about a threshold. I would say wealth is a threshold, not interest rates.

If they get rid of the 0% long-term capital gains bracket, which I don't think they're going to do anytime soon, and other countries have a version of that, by the way, and the US is not all that remarkable in that regard, you need to be very wealthy to be considered, in my opinion, just my opinion, one guy's opinion, not advice for you, your situation, but my opinion is if you're looking to avoid the taxes on taxable accounts, particularly in early retirement, but even later in retirement, you're going to need to be very, very wealthy because you got to remember, anytime you do one of those strategies, you start on the negative.

It's like starting the football season 0 and 4 because you're paying them maybe fees and certainly interest. So, you're starting with a losing record, your tax alpha there, your tax savings has to be so good that it's got to overcome those fees and the interest to even make it worth it, plus your hassle and plus the complexity that that might add to your life.

But we live in an environment where retirees often can pay very little in tax. We question the book tax gain harvesting a little bit. If you're sitting on tech company stock and you need to diversify, great, do some tax gain harvesting for it all day. Maybe even if you're incurring 15% long-term cap gains on that, great, we want to get to a better investment perspective.

But there's going to be a lot of retirees, why are you doing tax gain harvesting on diversified holdings when you may never pay tax on that anyway? You may just spend it down, spend the early part of your retirement only in the 0% long-term cap gains bracket. And you've got to remember too, it's $98,900 in 2026, but then you've got to add to that number the standard deduction and maybe the senior deduction as well.

So, in today's environment, these strategies that say, “Well, you could be tax-free”, it's like, well, wait a minute, as a retiree, not as a W-2, not as a doc working at a hospital, you're going to pay some taxes, hate to break it to you, but as a retiree, boy, oh boy, you may not be paying all that much in taxes on these “taxable” accounts.

Dr. Jim Dahle:
All right. The book is Tax Planning to and Through Early Retirement. Who should buy this book and who shouldn't buy this book, Sean? Who's this written for?

Sean Mullaney:
I like to joke, we wrote a niche book for everyone. It's anybody who is considering an early retirement, which we define as any time prior to the first of the month, you turn age 65, which happens to be the day you enroll in Medicare. So, it's got a lot of good stuff for accumulators.

Where we really focus though is on the drawdown because that's the area that in our opinion, it's not gotten enough quantitative analysis and sort of peeling back the onion, giving you real actionable education and tips around what drawdown could look like, should look like, our favorite approaches.

For anyone who is in the early retirement or even in a conventional retirement, thinking about their drawdown strategy, it's for them as well. I will say this, I recently got an email from a member of the public with some praise and some constructive criticism of the book and I appreciated that. But the correspondent was in their 80s and I was like, “Boy, that's not really who we wrote this book for.” I would say it's for those thinking about accumulation, even early, by the way, you could benefit, I think, from the insights we share in the book.

Accumulators and those in the beginning to mid part of a retirement, particularly in early retirement, but even in a more conventional retirement scenario as well, and especially those with questions on drawdown. Because drawdown does not lend itself as easily to the Instagram reel or the TikTok reel or whatever it is. Drawdown requires a little more nuance, a little more discussion. And so, having a book that's over 300 pages is a better forum, I think, for drawdown than some of the other personal finance content that is out there.

Dr. Jim Dahle:
Very nice. All right. Well, our time is short, but you've got access to, I don't know, 30,000, 40,000 White Coat Investors listening to this podcast. What have we not talked about with regards to tax planning, financial planning, retirement that you think they ought to hear?

Sean Mullaney:
That is a great question, Jim. I think fear. We've talked about fear in a roundabout way, but I worry that too much, and by the way, this is not the White Coat Investor podcast. You are a notable exception to what I'm about to say. I worry that in American personal finance, too much of our content boils down to five words. You are rich – start worrying.

Fortunately, the White Coat Investor is a notable exception. The White Coat Investor podcast does not boil down to you are rich – start worrying. But I think that's a helpful lens. The next time you hear or you read an article about personal finance, ask yourself, “Does this article boil down to you are rich – start worrying? And if it does, I think you need to question that article and the insights and the conclusions in that article.

Just a thought for the folks. I think there's too much fear. This book definitely addresses that, but beyond even just drawdown strategies and taxes and retirement, too often personal finance content is fear-driven. And I think we need to step back from that.

Dr. Jim Dahle:
All right. Well, thank you. Sean Mullaney, CPA. Thank you for speaking at the conference. Speakers don't get paid at that conference, for those who aren't aware. Thank you for writing the book and thanks for what you do and for coming on this podcast to share some of your insights with our audience.

Sean Mullaney:
Jim, it was an honor and a privilege. I very much appreciate your time and this conversation.

Dr. Jim Dahle:
Okay. I hope that was helpful. I wanted to bring Sean on not only because he's an expert on this topic, but he's very good at boiling it down and explaining it. And so, I was thrilled to listen to his talk at the conference. I was thrilled to have him on the podcast today. I think you got a sense for what I took away from his talk at the conference. This division of the retirement years into five or six periods and what to think about during each of those periods.

And so, I hope you can apply some of that, not only in your planning before retirement, but particularly in the early years of retirement and do the right things at the right times and maybe not from a culture of fear and worry about RMDs and the tax man coming to take everything you've worked so hard for.

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Okay, thank you, those of you leaving us podcast reviews. I know it sounds weird when you listen to podcasts and all the podcasters ask you to do this, but the reason why is the algorithms. They help people find the podcast if you get good reviews, they actually help spread the message of financial literacy and discipline to people who may not yet be White Coat Investors, but should be White Coat Investors.

A recent one came in and said, “Thank you. I'm so grateful for all this podcast has taught me. I've been listening since I was in residency about five years ago and the impact WCI and Dr. Dahle have made on my personal financial life has been profound. Thank you for all you've done for my family and I.” Five stars. Thank you for that review. It's a really nice thing to say, but most importantly, you're going to help the next generation to find the same great stuff that you found here.

All right, that's it for the podcast, a little longer than most of ours, but I think it was worth it. We really got into the details, got into the weeds a little bit today, but it was really useful content I think. Maybe even worth listening to twice.

Keep your head up, your shoulders back. You've got this. All of us here in the White Coat Investor community are here to help. We'll see you next time on the White Coat Investor podcast.

 

DISCLAIMER

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

Milestones to Millionaire Transcript

Transcription – MtoM – 249

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 249 – Emergency physician becomes multi-millionaire by mid-career and finds a silver sword.

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All right, welcome back to the podcast. I just got back from a canyoneering trip. I try to do a couple of those a year, and it's always a lot of fun. This one was great. I got to take Michelle, who is my sister, but also many of you may know because she's represented us on social media for years now. So, if you've met her at the conference or if you've interacted with her on social media, you know who she is.

Took her along for her first kind of high-level canyoneering trip. Mind-blown, of course, when you realize these sorts of places exist in the world, but on our first day, we got into a pretty technical canyon that was in what we call hard mode, which usually means the amount of water in the canyon is not very high. It makes some of the challenges we deal with even more challenging.

This is not a published canyon. It's a canyon that's maybe only been done about four or five times, and it was my third time doing it. So I've been on most of the trips that anybody's been through this canyon, but we got toward the end part of it after a long day because it would take us much longer than we expected. We're getting close to dusk, and we didn't have nearly as many headlamps among the group as we should have, and we found that one of the things that helped us get through faster in prior times was not there, which was a log that stretched across this silo, essentially, a big deep pothole that we needed to cross to continue to go down the canyon.

And so, as we slowly worked our way across, there were some of our more talented members climbing across and everybody else being shoveled across with ropes and assistance, and then we got to the final pothole in the canyon, which has to be jumped by both the first and the last person, and then we found ourselves arranging an anchor to rappel out of this canyon, which has no fixed anchors whatsoever, in order to get us all out.

And by the last time the last three of us were rappelling out of there, it was basically dark, and we were rappelling on an anchor we had constructed there, and discovered after we all hit the ground that we could not pull the anchor, so we ended up leaving a bunch of gear in the canyon and having to come back and rescue it later in the week. But a fun adventure, always a good time, we had beautiful weather, a good group of people, and really a lot of fun.

Now we're back at work, so it's hard to get as excited about work as I was about my canyoneering trip last week, but we do have a lot of cool stuff coming up here. For example, our sponsor for this episode was a real estate firm, and if you're curious about real estate but not sure if it's the right move for you, join me on Thursday, November 20th at 06:00 P.M. Mountain for a live session where I'm going to walk through what physicians need to know before investing in real estate.

We're going to talk about the reasons real estate can fast-track your path to wealth, we're going to talk about the massive tax advantages that most doctors don't take full advantage of, we'll talk about the different types of real estate investments and how to choose the right fit for you, we're going to talk about how to avoid common mistakes that derail returns, and we're going to give you some tools to evaluate real estate opportunities.

Whether you're looking for passive income or diversification or a more hands-on approach to investing, this session will help you decide your next steps. Plus, I'll stick around and answer any of your real estate questions afterwards. Register at whitecoatinvestor.com/rei. And three people who join live are going to get our No Hype Real Estate Investing course. That's a $2,199 value, totally for free. So, register now, whitecoatinvestor.com/rei.

All right, we got a great interview today. We have somebody who didn't do anything special with real estate, in fact, didn't do anything special at all, just did the regular old stuff we talk about here on the podcast all the time. And amazingly, it worked very well. So, let's get him on. We're going to do that interview, and then I'm going to talk just for a few minutes about real estate syndications and what they are and help you understand how they work.

 

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Mario. Mario, welcome to the podcast.

Mario:
Thank you.

Dr. Jim Dahle:
Can you introduce yourself to the audience? Tell them what you do for a living, how far you are out of training, what part of the country you're in?

Mario:
I'm an emergency physician, and I am about 13 years out of training. After residency, I came and worked at the same Level 2 Trauma Center the whole time. I do a few extra shifts in the PZR and then some of the surrounding smaller ER standalones. And my wife is a part-time school nurse, which is not a get-rich-quick scheme, but just to get out of the house and have some social life and keep up her skills as a nurse.

We live in the Great Plains area in a midsize city that is a bit boring, but we spend a lot of our time traveling to more beautiful areas. But we have enough here. We have an airport and a major university, and we're very comfortable here.

Dr. Jim Dahle:
And tell us what milestone we're celebrating with you today.

Mario:
I recently just crossed into $2 million of net worth.

Dr. Jim Dahle:
Wow. You're a multi-millionaire.

Mario:
That's right.

Dr. Jim Dahle:
That's pretty awesome. How long has it been since you became a millionaire? Do you know?

Mario:
We got the first million about three years ago.

Dr. Jim Dahle:
Okay. So, the first million took you 40 years. The second one took you three years. That's pretty typical. Yeah, pretty awesome. Okay. Well, tell us the story, tell us your financial journey from the time you came out of medical school until you became a multi-millionaire.

Mario:
Okay. I signed my first contract, and I was making what I thought was good money back then. Just worked the shifts. I was ready to go with a plan in place. I just paid into my 401(k). We set up Roth IRAs, and then I've just paid into them as much as the government will allow.

I was very blessed that within my first few months here, a young man came up to me at church and introduced himself and said, “I'm a PhD in financial planning. And I was wondering if I could be your financial planner and do basically my thesis on you.” And he spent hours with us, just walked us through the basics and how to set up bills and walked us through all the different funds that we wanted to invest in at Vanguard.

And so, every month, we transfer a certain amount of money into the 401(k)s, the Roth IRAs or 529s. We just do simple dollar-cost averaging and use a four-fund portfolio of American stocks, about 40%. And then we have about 30% in international stocks, 15% in bonds, and 15% in the REIT. And that will slowly get more conservative as I get older. I started off with just 10% bonds. I decided to use the Vanguard 2045 target date fund as kind of a benchmark. That doesn't include REIT, so we take 15% out of the stock portfolio of that and add in the REIT on the side, mainly in the Roth IRA.

Dr. Jim Dahle:
Basically, you just did what we've been saying to do here at White Coat Investor for the last 15 years. You made a bunch of money, you saved a big chunk of it, you stuck it in boring old index fund investments, in retirement accounts when you could and now 13 years out of training, you're a multimillionaire.

Mario:
Yes.

Dr. Jim Dahle:
Pretty awesome. It's amazing how well it works. It seems like it should be more complicated than that.

Mario:
I don't know. I don't do anything fancy. There's no leverage, no direct real estate, no syndications, no crypto. It's simple, boring, and incredibly effective.

Dr. Jim Dahle:
Yeah. And the fun part about it is that's all going to double, even if you add nothing else to it. It's going to double every seven to 10 years going forward from here. So, that's pretty cool.

All right. Well, there are people out there who are like you were 13 years ago, 16 years ago. They're coming out of medical school. They owe student loans. They don't really know much about finances. They're not even sure who they can trust if they needed advice. They want to be like you. What would you recommend they do?

Mario:
I would recommend to the residents out there, especially the residents that have families, just to tread water during residency. If you're married to the hospital CEO or if you have a six-figure side gig, then you should do all the attending stuff. But when you have dependents, I actually would recommend spending what money you would on index funds and instead on your family. And have a good plan set up so that when you do graduate, you can jump right in with the plan.

But I fear there's a lot of residents who have FOMO that almost feel like failures because they're not putting $3,000 a month into their retirement funds. They just don't have the money for it. I would plead with you, please do not make your kids eat ramen so that you can buy a share of VTI.

Dr. Jim Dahle:
What if your kids really like ramen and beg for it? Is that a problem? Because my kids have a real ramen addiction.

Mario:
Well, you might need a psych referral. You'll save a lot of money that way. And as a kid, my brother and I played a lot of video games, and back then the games weren't very complicated. We would just walk back and forth on the screen for three hours, just fighting the same enemies over and over again to build up enough gold so we could go buy the silver sword or the next weapon so that then we could be able to beat the boss.

And that's how I feel about going to work. We're just seeing the chest pain, abdominal pain, ultramental status fever, walking back and forth. And so you got to go spend your money. I had one friend that played that same game as I did that would amass a huge amount of resources, but he didn't like to spend it. And I never understood that.

That's my next pair of is to go find your silver sword, go spend your money, find something that you enjoy. As a resident, it's not a huge amount of money. If we were just to do the math, let's say a resident was able to scrounge up like $2,000, $3,000 a year from eating ramen. And then they put it in a VTI and a Roth IRA. On the day they graduate residency, how much in earnings would they have? Maybe $2,000. And I can make that in one day as an attending. Whereas all that money that you put into the Roth that you could have spent on your family.

And that's what I would encourage you to do. Don't try and hoard that when you're not making very much. Go on vacation, send your kids to summer camp or swimming lessons, take your spouse out to dinner a little more often. But don't make your family suffer just so that you can have a few more index funds when you're only making $50,000 a year, especially since you're going to be making much more than that in the coming years.

Dr. Jim Dahle:
The time to get rich, the time to build wealth is as you become an attendee. And it sounds like you planned for that. You had a written plan as I so often recommend as you come out for your first 12 paychecks or whatever. What did your plan look like when you became an attendee?

Mario:
I had it ready to go to plug into what was offered at work to make full advantage of that, to start my own and my spouse Roth IRA. I actually would almost think about in residency, you don't have the money to do that. But it's kind of like a fantasy football team that you want to have your fantasy financial life. And if I did have $10,000, what would I do with it? If I had $100,000, what would I do with it?

And I just had set up how much I was going to put into the loans each month. We went into attending hood in a rented duplex. And we slowly got everything plugged in, paid off a lot of debt and promises that I had accrued in residency. Not credit card debt, but probably the biggest mistake I've ever made financially was buying a house in residency. And that was in the teeth of the Great Recession. And then after residency, I had to sell that house from a different time zone. It finally sold in October of that year. And I had to bring $15,000 to sell the house, despite all that I paid into it in the prior years.

Dr. Jim Dahle:
I tell people about this all the time. Nobody believes me the last five years because housing prices have gone through the roof. But certainly historically, there are many time periods where that happens.

Mario:
That definitely happened to me. Please do not make that same mistake that I made. It's just fine to rent.

Dr. Jim Dahle:
Okay, give us a sense for what your incomes look like over the last 13 years since you came out and what your savings rates look like over that time period.

Mario:
I've made between $400,000 and $500,000 a year. Our pre-tax savings is in the range of 15% to 20%. Right now, I think I checked on that. We have about $1,000,000 in the 401(k) and the 457(b). We have $200,000 in our Roth IRAs, $200,000 in the taxable account, and about $600,000 in home equity.

Dr. Jim Dahle:
Okay, so you said $15,000 to $20,000 just in pre-tax accounts. How much total have you been putting away toward building wealth since you became an attendant? Are we talking 30%? 35%?

Mario:
No, no. Really, it's only been about 20% just of the pre-tax amount that I would have been paid.

Dr. Jim Dahle:
Okay, out of your pre-tax amount. I see what you're saying. So you came out of residency. You still had a negative net worth at that point. You had a family. You started making what doctors make and you put 20% of it away. You invested it in some reasonable way and at mid-career, you're already a multi-millionaire. You're like the poster child for White Coat Investors. This is basically what we're trying to get all doctors across the country to do. And you've shown that not only is it possible, it wasn't even that complicated.

Mario:
No, it was really easy. Just set it up and don't do anything rash when the market goes down. Be generous to yourself and to your family and don't make big strides in purchases that you're not going to enjoy doing. But I really would recommend everybody go find their silver sword and enjoy it. Spend lavishly on those things that you really love and don't waste money on things that you don't care about.

Dr. Jim Dahle:
Yeah, you can have an awful lot of fun with 80% of a physician income, can't you?

Mario:
Yeah.

Dr. Jim Dahle:
Yeah, pretty awesome. All right, well, what's next for you? What's your next financial role you're working on?

Mario:
I don't like the idea of retiring early. I love the idea of financial independence, but I just want to kind of asymptote off in my career and slowly over the next 20 years, just go down in shifts. I already live like I'm retired. I spend about $100,000 a year on traveling and language study. That's my passion. I guess my silver sword. And I've been to 45 countries, 25 states, 25 national parks. I speak four languages. I hire private tutors to tutor me in the languages I'm studying. And that's my passion. I'll often be up at 03:00 in the morning researching a trip I don't plan on taking for five years, kind of like you and your canyoneering and river rafting. And so, what's next is just to keep exploring the world, keep learning and broadening those horizons.

Dr. Jim Dahle:
Well, we do have one thing in common. My country count is also at 45. I'm about 10 countries behind my wife though. And she's about 10 countries behind her parents. So I think it's a genetic thing or something on that side. My daughter, I think is already up to 25 countries.

Travel's a lot of fun. I hope everybody gets a chance to do as much of it as they like. And what they may find is they may find like me that it's okay. I like going to a couple of foreign trips a year. Or you may find you're more like my wife and you could go every month. So, it just depends, but you don't know until you try it. A lot of people put it off until it's too late. And if you wait until you're 65 to start traveling, you might not get to all the places you want to see.

Mario:
And that is a warning I would have. My father and my wife's father both died young in their 30s and 40s. They had elaborate plans for their retirement that they never got to. Those dreams never came true. And I feel like there's going to be a lot of White Coat Investors that are a little too stingy, that don't spend their money and that die with $100 million in the bank. So, don't have those regrets. Enjoy your money for whatever your passion is.

My brother loves baseball cards. His baseball cards are worth way more than my house. Other people would just want to give to charity or pursue those passions they might have developed at a young life, going to concerts, exercising, or whatever it is, canyoneering. I would say definitely don't cheap out on those things. Cheap out on everything else. If you don't really care about your car, drive a 20 year old car, but take care of your health and your passions and your family, and you won't regret it.

Dr. Jim Dahle:
Yeah. Awesome advice. Well, I appreciate you not only finding your silver sword, but coming here to tell us about it and to show that what we talk about so much really works. If you just apply it, be patient for a few years, it really does work. And you've shown that. So, thank you so much for being willing to come on and inspire others to do what you've done.

Mario:
You're welcome. Thank you for all the help that you've given to everybody. I teach a lot of PA students. I let them read your book, my copy of it. All our scribes, I give your student book to, to go through it. I let them write in the margin, their name. I have the whole list of names that have gotten their feet wet with these principles. And it is so very important.

Dr. Jim Dahle:
Awesome. Well, thank you for doing that and appreciate everything you've done to help the next generation.

Mario:
You're welcome. Thank you for having me.

Dr. Jim Dahle:
Okay. I hope you enjoyed that interview. I love the fact that there's nothing special here. He didn't have a paper route that he started a Roth IRA in his teens to do this. He didn't have to start his own veterinary practice to do it. There's no big inheritance or he didn't get lucky in crypto or something.

And he didn't even get started all that much as a resident. He just hit the ground running in the most important year of your financial life, your first year of attending hood. And he had a written plan and he followed it. He spent 20% each year toward retirement. And he spent the rest on whatever he loves, which in his case happens to be travel.

And it worked. He's mid-career, he's a multimillionaire. And by the time he retires after a great career working no more shifts than he wants to, he's going to be a pentamillionaire or more. And it's just going to be awesome.

That's what we're talking about. That's the pathway ahead of you. If you take care of your money and you have this high income that you have, if you're listening to this podcast or soon will have it works out very, very well. So, congratulations to Mario and congratulations to each of you, no matter where you are at on this pathway. Whether you're still at that stage in medical school or you owe $300,000 in student loans, or whether you are a decamillionaire retiree and living the good life and trying to figure out who to leave your money to, we're happy to have you here. We're glad you're in our community.

 

FINANCE 101: REAL ESTATE SYNDICATIONS

Dr. Jim Dahle:
I promised you at the top of the podcast, we're going to talk not about more canyoneering, although I'd like to do that. We're going to talk a little bit more about real estate syndications.

So, what is a syndication? It sounds like some criminal enterprise or something, but what it typically is, it's an apartment building. It's an apartment complex maybe. And you can't afford the whole stupid thing yourself. So you go into it with a bunch of other investors. Maybe it's 99 other investors. So there's 100 of you that bought this thing and you hire a manager to manage it. And they go out and they buy the property and they maybe fix it up some, and they raise the rents on people and they try to run it well.

And three or four or five years later, they sell the property. In the meantime, they've been sending you a distribution every quarter. And three or four or five years later, they sell the property and send you your principal back, hopefully with some gains. That's what a syndication is.

They usually split up the money. Typically you'll get all your principal back first. That's the first priority. And then you'll get a preferred return. That might be 6% or 8%, but basically you get that before you start splitting any additional returns with the operator or the manager, the general partner, if you will. You're the limited partner, you're the investor.

And so, above and beyond whatever the preferred return is of 6% or 8%, you split returns in some way. Maybe that's an 80-20 split, or maybe it's a 50-50 split. Just depends on the individual syndication deal. But that's what a syndication is.

The downside of investing in syndications, aside from the fact that it's an illiquid investment for like five years, is some syndicators aren't that experienced. They're not that experienced. Maybe they use a little bit too much leverage. Maybe they use adjustable rate leverage and 2022 happens. And all of a sudden they're like, we need more money to operate this place so we can get it to where we can sell it. And they start doing capital calls to you. Those are some of the downsides.

The other downsides is the minimum investment tends to be high. It might be $50,000 or $100,000 or even more. And so, in order to diversify a portfolio of syndications like this, you got to be fairly wealthy. Let's say you want at least five of them maybe. Well, if they're $100,000 apiece, that's $500,000. And if you're only putting 25% of your portfolio into real estate, well, you got to now have a $2 million portfolio before you can really diversify these investments.

These maybe aren't the investments to use your first year out of residency. But if this is something you're interested in doing, it is something you can do down the road. One of the easiest ways to do it is to use a fund. This is mostly what we invest in when it comes to private real estate. For your $100,000, instead of getting one apartment building, you get 15 of them. Or parts of 15 of them.

And so you got quite a bit more diversification there. If one of them goes bad, the manager can mail in the keys and that has happened. And one of the funds I own, I can mail in the keys and you still get a reasonable return. That fund, I think, had 10 or 12 properties in it. They mailed in the keys on one of them. We still made 10% a year on the investment. So it wasn't some terrible catastrophic outcome. But be aware that that sort of thing is a risk when you're using leverage to invest. I hope that's helpful.

 

SPONSOR

Dr. Jim Dahle:
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With over $300 million in assets under management and over 30 investments since inception, their fully integrated firm model allows Mortar to maximize efficiency and value across their investments in these niche markets.

Mortar leverages over two decades of experience in architecture development and asset management in their projects to build value and minimize risk for investors. Invest in tax efficient, high return, risk adjusted strategies with Mortar Group at whitecoatinvestor.com/mortar.

All right, I hope you're enjoying the podcast. Without you, it's not much of a podcast. So thank you for listening. Thank you also for being willing to come on as our guest. The person we're featuring to inspire others that day. If you'd like to apply to do that, go to whitecoatinvestor.com/milestones.
Dr. Jim Dahle:
Keep your head up, shoulders back. We'll see you next time on the podcast.

 

DISCLAIMER

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