More Than Enough with Mike Piper

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 375 – More Than Enough with Mike Piper.

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QUOTE OF THE DAY

All right. Our quote of the day today comes from Sheryl Sandberg who said, “Don't wait for opportunity, create it. Make your own future.” I love that. So many of you are out there making your own futures, both financially and professionally. A lot of times that involves sacrifice and it involves putting other people ahead of you. And so thank you for doing that. If nobody told you thanks today, let me be the first.

Don't forget, in fact, I don't know if we've mentioned this on the podcast yet, this might be the first time we're mentioning it. I'm recording podcasts and not exactly in chronological order here. So this might be the first time you're hearing this, but we're trying to win the People's Choice Award for the best business and/or best educational podcast of the year. We need your help. We need you to help us reach more doctors and spread financial literacy.

It's a great and a free way to give back and support WCI. All you have to do is go to whitecoatinvestor.com/vote and nominate the WCI podcast. The more nominations we get, the more people we reach and the higher likelihood that we win. The nomination period goes through July 31st, but we appreciate you nominating us ASAP. I don't think I'm allowed to tell you to vote early and often, but I'm not sure they're tracking. So we appreciate all you can do.

And actually, the honest truth is I don't really care if we win this award or not, but I know that winning it will help to spread this message of financial literacy to others. Publicity for the podcast means helping more people, and that's the real reason why we're going through the trouble to do this. Again, whitecoatinvestor.com/vote and help us out there.

We have a great repeat guest on the podcast today. We've got Mike Piper today, as you saw in the title. Let's get into business because we've got some awesome stuff to talk about today.

INTERVIEW WITH MIKE PIPER

All right. We've got a special guest on the White Coat Investor podcast today. I'm here with Mike Piper. If you don't know who Mike Piper is, I'm very sorry. He has written a wonderful series of books. All of them are about 100 pages and relatively small books that you can get through on all kinds of different subjects.

He's also the founder of the Oblivious Investor. He was a major part of the inspiration to start White Coat Investor back in 2011. He's been a WCICON speaker several times. He also serves on the board of the Bogle Center. Mike, it's great to have you back on the podcast.

Mike Piper:
Thank you. I'm happy to be here.

JONATHAN CLEMENTS CANCER DIAGNOSIS AND HOW TO PREPARE FOR THOSE KINDS OF THINGS IN OUR OWN LIVES

Dr. Jim Dahle:
There's some sad news recently, Mike. One of the things that I read recently was a post that Jonathan Clements published recently talking about his recent surprise diagnosis of terminal cancer. He's only 61 years old and was recently diagnosed, went in for some dizziness, was presenting symptoms, and basically found brain metastases of a lung cancer.

This post, as you might expect from Jonathan, talked about what that means to him both personally and financially. You and Jonathan were both speakers at our original WCICON back in Park City in 2018. I know you know him well, but I'm curious your thoughts about Jonathan's work and what it's meant to you and to the online personal finance community.

Mike Piper:
Well, to the online personal finance community, I think it's clear. If you look at that article itself, you'll see hundreds of comments. If you look on the Boglehead's discussion about it, same thing all over social media. Everybody is just sharing how much of an impact that his work has had on them in terms of just great information over so many years, the actual direct financial impact.

To me, at least the way I feel, there's like a different set of feelings or I guess I'll say an additional set of feelings. This is as somebody whose career has been largely about writing. Me, that is, Jonathan is a role model for me, a direct personal role model. One of the people whose work has been just a level-headed, clear voice consistently for literally decades now, when so much of the other stuff that there is out there in this space, in this financial world, is just anything but level-headed and anything but clear. To have somebody like Jonathan, who you can rely on, has meant a lot.

Dr. Jim Dahle:
There's a lot of people that I'm jealous of. I'm jealous of you, Mike, because you always have all these details that I don't know. A lot of you out there on this podcast, when you have a complicated question, you send me an email and hopefully I can answer your questions. Well, guess where I go when I can't answer a question? I go to Mike. But Jonathan, as well as Morgan Housel, are two people that I am jealous of their ability to write. They are just good writers.

Mike Piper:
Yes. Absolutely.

Dr. Jim Dahle:
And every time I read their stuff, I'm like, “Ah, I wish I wrote that.”

Mike Piper:
Yep. Exactly that feeling.

Dr. Jim Dahle:
Just really talented. And it's just as fun to listen to them speak. Those of you who were in Park City, those of you who have watched those videos, we've used them from time to time in some of our online courses. He's just great to listen to. He's got a little bit of an accent. I think he spent some time in the UK for part of his life, and so he's got a little bit of an English accent. He's awesome to listen to, awesome to read. I sent him an email as soon as I read his article. And it's just wonderful. Even now, is he sitting there wallowing in pity? No, he's like, “How many people can I help with the time I have left?” What a great person.

Mike Piper:
Yeah, exactly.

Dr. Jim Dahle:
One of the things he mentioned in his blog post was about how he wasn't going to need very much of that money that he spent a lifetime accumulating through frugal living and sound financial decisions. Now, obviously, his wife, Elaine, is probably going to need a lot more of it than he will. But from a financial planning perspective, what should be the implications of this sort of sheer random bad luck on our own financial planning processes?

Mike Piper:
I think there's two ways to look at that question. Question number one is, how should we account for the possibility of these situations? And the answers to that are things like life insurance, when there's people who are financially dependent on you, disability insurance, when you yourself or anybody else is still dependent on your income from work, estate planning, and so on. Those are the answers there.

The other answer, I think, of course, is to find balance with regard to spending. Because so much of personal finance is about delaying gratification. But there's a degree, or there's a point at which it's too much. You're delaying gratification too much. The point isn't completely to sacrifice your current well-being solely to protect your future self. There's a balance there.

And then there's a completely separate question, which is, what are the financial planning implications when you actually get that news? What do you do then? And that's a whole different set of things. Because by that point, you hope you already have the appropriate insurance policies in place and so on.

But then it becomes about the immediate action steps that you can take to prepare your loved ones who are going to still be here after you're gone. And that looks like things like getting all of your information together to make sure they know where all of your accounts are, how to sign into them, just all of that, just nuts and bolts. If you're the one who's been steering the financial ship for the household for many years, you need to leave them the instruction manual so that they know how to do it. That's going to look different from one household to another, but those are the things to be working on.

Dr. Jim Dahle:
Yeah, it's interesting. Jonathan mentioned that he was spending a lot of time thinking about that, the transition. And he admitted, being a finance guy like so many of us are, that he's probably overdoing it. But the first point you make reminds me of a book that came out a few years ago, I think it was 2020, by Bill Perkins, Die With Zero: Getting All You Can From Your Money and Your Life. Have you read that book yet, Mike?

Mike Piper:
No, I haven't. But I've read Die Broke, Spend Till the End. I don't mean to make this a discredit to the book, having not read it. The idea of trying to use up, get maximal utility from your assets during your lifetime is not a new concept. That's a fundamental piece of economics, really.

Dr. Jim Dahle:
One of the wonderful things that he talks about in that book is seasons of your life. There are times when you can do certain things and can't do other things. That's been very inspiring to me. And one of the reasons that we went and did Half Dome last year is I'm like, “I may not be able to do this in my 50s or 60s. I've got to go get it done now.”

Mike Piper:
Yeah, absolutely.

Dr. Jim Dahle:
And I like that idea that if you don't read to your kids when they're eight years old, they're not going to be interested in you reading books to them at 16. And so you've got to put the right activities into the right seasons of your life. I love that piece of the book. But his audience is a lot of people like White Coat Investors, not people that are broke, but people that are going to end up with lots of money and are probably sacrificing too much. And he's trying to encourage them to spend some of that money along the way in ways that are going to make you happier.

Mike Piper:
Yeah, absolutely. I remember reading your article about this, the seasons concept. I think it's great.

SERVING ON THE JOHN C. BOGLE CENTER FOR FINANCIAL LITERACY BOARD

Dr. Jim Dahle:
Yeah. Now you've been serving on the board for the John C. Bogle Center, the Center for Financial Literacy. Is that what the full title of it is?

Mike Piper:
Yeah. The John C. Bogle Center for Financial Literacy is the full name of it.

Dr. Jim Dahle:
Yeah, for several years now. What do you like best about it? And what are the greatest hassles of that volunteer position?

Mike Piper:
What I like best about it is two separate things. Number one is obviously this is just a thing that I care about. We're doing work that I care about. That's why I chose this line of work for myself. The other thing is, it's just fun to get to work and interact with the people who to me are my career heroes and so on. Christine Benz, Bill Bernstein, and so on. That's been really neat to get to work very closely with them.

Hassles? I wouldn't really describe too much as a hassle. I would say the biggest thing, if anything, is simply the nature of an organization where everybody is a volunteer. There's nobody whose full-time job it is, or even half-time, 20 hours a week job it is to run this thing. So we're all trying to do the things that need to be done in addition to our regular jobs and family life and so on and so forth. And so that's an ongoing challenge.

Dr. Jim Dahle:
Yeah. If it were a business, there is no way that business would choose to pay Christine Benz or Mike Piper to do some of the tasks that you guys do, which some would be considered low-level tasks in a business that you'd give to an entry-level person. And yet, it's you guys taking care of it a lot of times. So let me thank you from the rest of us Bogleheads that benefit from your work for all the sacrifice and time that you put into that, running a great conference and the other activities of the Center. So thank you, Mike, for doing that.

Mike Piper:
You're welcome.

SOCIAL SECURITY – MISTAKES AND MISCONCEPTIONS

Dr. Jim Dahle:
All right. Let's talk a little bit about Social Security. You've written books about Social Security. You've developed Open Social Security, an online program. People look to you as an expert on Social Security. What are the biggest mistakes and misconceptions out there about Social Security?

Mike Piper:
Biggest misconception to me, and I know you've written about this repeatedly also, and every expert in the field basically talks about this, is the idea that Social Security is going to disappear when it's not. That's just a fundamental misunderstanding of the situation. People hear Social Security's running out of money, Social Security's going broke, etc. And what's being discussed there is the trust fund. There's a Social Security trust fund that has built up money over a period of many years, because for many years, the program took in more money every year than it spent, so it accumulated a pile of assets.

And now, because baby boomers are largely collecting Social Security and no longer paying into it, now the program's paying out more than it's taking in. And so that trust fund is being depleted, and it is projected to be depleted completely in 10-ish years. The projections vary a little bit from one year to the next, as they redo the math.

But that doesn't mean the program goes away. Because there's still tax revenue that comes in every single year. All the Social Security tax that we pay or self-employment tax that self-employed people pay, and that's projected to pay for about three-quarters of the promised benefits.

Even if Congress did absolutely nothing, which hopefully, is not the outcome here, but even if absolutely nothing were done, the program would still be able to pay about three-quarters of the promised benefits. And of course, that's a significant cut if that's actually what happened. Anybody who's living on that income would certainly notice it, but there's a world of difference between a 25% reduction and the program disappearing.

Dr. Jim Dahle:
Yeah, it's interesting. I don't know if people are trying to score political points by pointing that out, or if our elected officials are literally that ignorant about how the program works, but I hear that a lot. It's running out of money, it's bankrupt, and it's a terrible program. And yet, I can't think of a more popular government program than Social Security. It's basically political suicide to advocate for getting rid of it.

Mike Piper:
Another thing you'll see sometimes is people, this is less frequent, but it's another political talking point that you'll hear some people use is that, oh, the Social Security Trust Fund isn't real to begin with. It's just filled with IOUs, which is true. It's filled with IOUs. They're IOUs that pay interest, and they're backed by the federal government. And there's a name for that. We call them treasury bonds, and they're the safest financial asset that there is. So yes, that's not a reason you need to be afraid.

Dr. Jim Dahle:
There have been put out four or five, six different ways that Social Security can be fixed, whether that might be increasing Social Security taxes, increasing the income wage limit on what's paid on Social Security, making Social Security benefits less generous, or not having them indexed as well to inflation, or raising the benefit ages. Of all these fixes from a non-political perspective, which ones do you think make most sense?

Mike Piper:
I would have a hard time seeing a world in which it's anything other than all of the above. A little bit of everything, frankly, is what seems to make most sense to me. Doing it entirely with one of those, adjusting one of those levers far enough to reach the goal means adjusting that lever a pretty good way. And so I think it's going to be a sum-of-everything solution.

Dr. Jim Dahle:
Yeah, I would expect to see some sort of combination. I mean, I expect something's going to be done in the next 10 years, at the last minute, probably, when they're forced to do it. But I think it is going to be more than one thing, and everyone's going to complain about whatever it is that's going to hurt them.

If you're earning, you're going to complain about having to pay on more of your wages, or having a higher tax rate. If you're receiving, you're going to complain about benefits being cut, or the age going up, or whatever. But when everybody's unhappy, it means you probably did it right.

Mike Piper:
Yep, yeah. This is definitely going to be a compromise sort of thing. Or, I guess I shouldn't say definitely, because Congress has a way of surprising me. But that definitely seems like the outcome that I would bet on.

Dr. Jim Dahle:
Yeah, I've definitely been surprised in a lot of ways by some of the things the government's done. But any other mistakes or misconceptions out there about social security you think are worth talking about?

Mike Piper:
Sure. The biggest mistake that I see in terms of dollar amount, so the most critically bad mistake, is for surviving spouses. I see this a lot. There used to be a strategy for married couples where upon reaching full retirement age, one person could collect a spousal benefit while they let their own retirement benefit grow until 70. And that got eliminated several years ago.

But a lot of people don't know that an analogous strategy still exists for surviving spouses. A surviving spouse can start their survivor's benefit at age 60 while they let their own retirement benefit grow until 70. So they can collect 10 years, up to 10 years anyway, depending on the age at which they become a surviving spouse of that one benefit while they let the other keep growing. Or they can start their retirement benefit as early as possible at 62. The survivor benefit backs out at full retirement age.

And so many people, I see this all the time, they just didn't know. So they didn't file for that benefit. And no one's going to call you and tell you that you should do it. So it's often literally tens of thousands of dollars per year for several years. And that's a big mistake. And there's no upside. You don't get anything in exchange. It's just money that you missed out on. And I still see that happening all the time, unfortunately.

Dr. Jim Dahle:
And there's no way to go back and get it?

Mike Piper:
Not usually. Sometimes there's a six-month retroactive application possibility. But if we're talking several years of missed benefits, you don't get the whole amount back.

Dr. Jim Dahle:
Yeah. And you can go either way. You can let the survivor benefit grow or you can let your own benefit grow. It's your choice?

Mike Piper:
Right, exactly. And usually, it makes sense to figure out which of the two benefits would become largest if you let it max out and go ahead and let that one max out and file for the other one as early as you can. It's usually the rough draft idea.

Dr. Jim Dahle:
Now, you, like me, have generally promoted the idea of delaying social security most of the time for most people. Age 70 for most people is how the numbers tend to work out. Yet when you look at the statistics, 27% of people take it as soon as they can get it at age 62 and less than 20% take it at age 67 or later right now. It's basically the best deal out there on a pension or a single premium needed annuity that one can buy. Why are so many people making suboptimal decisions about when they take social security?

Mike Piper:
I think first I would step back and say that it's not necessarily a suboptimal decision, especially for anybody who is in the circumstance of simply needing the money right now. Well, then they need the money right now. And so that's an unfortunately large portion of people who didn't mean to retire necessarily, but maybe they were doing some sort of manual labor and they just can't keep doing it. So they're already retired by the time they hit 62 and the assets are limited. And so we're just looking at a “We need the money” situation. So it's not a mistake for some people.

But I will also probably agree with you that yes, far too many people file for their social security benefit earlier than they really should. And I think there's a couple of things going on there. Number one is a lot of people have weird ideas about their life expectancy. You'll often see people on Boglehead's forum or anywhere, anytime there's a discussion about social security and you've got some knowledgeable person writing an article about it.

And then if you look at the comments section, good luck. You're going to see somebody say, “Oh, gosh, I'd have to live till age 80 to break even.” And if you're already 62, have you looked at life expectancy statistics? You're probably going to live past age 80. And so, it's just the funny thing. I think people just literally don't recognize what their life expectancy is. The exact math, of course, depends on which data source you're looking at. But yeah, people think they're not going to live as long as they're actually expected to.

Another reason I think people file earlier than they probably should is they just get the risk point of view backwards. And what I mean by that is that you'll often hear people say things like, they feel like, “What if I decide to wait and then I die early and I won't have gotten anything out of the system?” And they feel like that's the risky situation. That's the thing they want to avoid.

But in retirement planning, the risky situation is actually not the case in which you die early. If you retire at a given age and then die within the next few years, it's really unlikely that you ran out of money during your retirement. The scary scenarios financially are the ones where you retire at 60 and live to 100. And you had to pay for 40 years of living expenses without any earned income. That's the financially scary scenario.

And it's in those scenarios that delaying Social Security works out well. So delaying Social Security, it's important to understand that reduces your financial risk. And a lot of people just simply have that idea completely backwards in their head.

Dr. Jim Dahle:
It's interesting to think of it that way. Sometimes I run into someone who feels like, “Oh, no, you got to take it at 62 because I'm going to out-invest Social Security. I'm going to have such good returns that I want to get the money as soon as I can so I can start investing it. And I'll be ahead at age 70 by doing that.” What's your response to that argument?

Mike Piper:
There's a small subset of people for whom that makes sense. And specifically, that makes sense for the people whose portfolio is already 100% stocks, and they're looking to crank the risk level up even further. If your portfolio has any fixed income in it, then what it actually makes sense to do is spend down that fixed income to delay Social Security. Leave your stock holdings alone, but spend down the fixed income. So we're swapping your bonds for more Social Security.

You still have just as much stocks as you had before, and they're still going to earn the same returns that they had before, but you now have less bonds and more Social Security. And that is generally an advantageous trade-off. And the only time that the stocks to Social Security comparison makes sense is when there simply isn't any fixed income available. There isn't any to spend down.

Dr. Jim Dahle:
Even then, you've still got to adjust for risk.

Mike Piper:
Oh, absolutely. Yeah.

Dr. Jim Dahle:
Social Security delay is guaranteed, and it's not a bad return.

Mike Piper:
No, yeah. The expected return is not bad at all.

Dr. Jim Dahle:
Is it possible to out-invest it? Yes. But once you adjust for risk, it just seems really hard for me to justify that sort of a decision.

Mike Piper:
Right. And especially the fact that the asset that you're getting when you delay Social Security, there's nothing else like that that you can buy. You can't buy an inflation-adjusted lifetime annuity anymore. You used to be able to, but I think 2019 was the year that the last insurance company offering those stopped offering them. This is the only way to get this sort of thing, income that lasts your lifetime, and it's adjusted for inflation. This is the only opportunity that you have to buy it for most people. There's a chance that you also have a defined benefit pension that works similarly, but that's a limited group of people.

MORE THAN ENOUGH – MIKE PIPER’S BOOK

Dr. Jim Dahle:
Yeah. Let's change subjects now from Social Security and talk a little bit about your latest book. At least I think it's still your latest book. You haven't written one in the last few months, have you?

Mike Piper:
No.

Dr. Jim Dahle:
We're talking about More Than Enough here.

Mike Piper:
Yeah, that's still my latest.

Dr. Jim Dahle:
Yeah. It's subtitled A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need. And Katie and I are six years out from FI now and still working, so this kind of financial book is exactly the kind we're likely to read. But I'm curious what your motivation was for writing it.

Mike Piper:
The motivation for that book was, frankly, it took me a long time before working in this retirement planning field before I realized that this thing I kept seeing is not a fluke. It's actually the expected outcome where a person at some point has what they would describe as enough. They have enough to retire. And then 10 years later or a little bit into retirement, they realize they no longer have enough. They clearly have more than enough. They're not going to spend on their assets during their lifetime.

And the reason that this is the expected outcome is that all of the retirement planning that we do, everything you read talks about a safe spending rate. Maybe it's 4%, maybe it's 3%. There's a ton of argument about exactly the right number. But if we ignore that for the moment and just recognize that it's probably a pretty low percentage of the portfolio, the reason it has to be a low percentage of the portfolio is that you have to basically prepare yourself to be unlucky. You might have bad investment returns. Just like we talked about a little bit ago, you might live to a very advanced stage. You might have huge medical costs or long-term care costs that last for many years.

You have to spend at a rate that's low enough that you'll still be okay if all of those things happen, if all of those things go wrong. But for most people, all of those things don't go wrong. Probably don't get super unlucky in several different ways. And so given that, when you have what was enough to cover all of those risks, and then those risks don't show up, it's just naturally, eventually more than enough later. And so, normal people run into that circumstance, and there isn't much information about what to do when you realize that that's the situation you're in.

RETIREMENT STRATEGIES

Dr. Jim Dahle:
Well, now, there's at least some information. You just got to pick up Mike's book, More Than Enough. It'll teach you all about it. You mentioned in the book, and you've mentioned in blog posts for years, that there's no perfect retirement spending strategy. It reminds me of what you've taught about the fact that there's no perfect portfolio or perfect asset allocation. How can somebody identify a good or reasonable or good enough retirement spending strategy?

Mike Piper:
Sure. With retirement spending strategies, there's basically three decisions that we have to make. Number one is how much to spend to begin with. Number two is how are we going to adjust that amount over time. And number three is the tax side of things. So, specifically, which dollars are we going to spend every year?

The tax side of things is complicated, I'll say, but there is a right answer. Once you've done the research, you can understand that this is what I should do. There's not a lot of room for opinion there, I'll say. We could save that discussion for another time.

But the other two questions, how much should I spend and how should I adjust that, there isn't a right answer. There's a range that's reasonable. So you always hear the safer withdrawal rate discussions, and 4% is obviously the classic number. Some people say that's too high. Some people say you can get away with something that's higher. But somewhere in that ballpark makes sense for any portion of the portfolio that you want to last for three decades or more.

And I add that caveat because the thing that often makes a lot of sense is to take a chunk of the portfolio and carve it out and put it in something like a CD ladder or a TIPS ladder and intentionally spend it all the way to zero in the early years. Basically, people call it a social security bridge.

The idea is you're spending down this money to allow you to delay social security safely. And we're not planning on that part of the portfolio lasting for 30 years. We're intentionally spending it to zero. So of course, it's going to have a much higher spending rate, maybe 20% per year for five years. But for the part of the portfolio that's supposed to last your whole life, we need a low percentage. And that is the thing where one person's opinion is going to be different than another person's and that's okay.

And then the question of how to adjust the spending amount over time is also the sort of thing where two reasonable people will just come to a different decision. Because you can take the classic 4% rule strategy where you just bump up the dollar amount every year in keeping with inflation, regardless of what the portfolio is doing. Or at the other end of the spectrum, you can take the 4% every year where you do 4% of the portfolio. So if the portfolio went up a whole bunch last year, you're spending a bunch more this year. If the portfolio went down, you're spending less.

And when you adjust spending based on the portfolio's performance, that has a very real advantage of reducing the likelihood that you'll outspend your savings during your lifetime. Because you're cutting spending anytime the portfolio does poorly. And so that's making things safer. But of course, that's hard. Cutting spending by 20% or 30% in a given year if the market falls by half, that's hard for most people.

And so, if your household could do that, and you're okay with signing up for that possibility, then a plan like that makes sense. For a lot of people, a plan like that isn't going to make sense. And because you don't have that flexibility, you're not willing to cut spending if things go poorly, well, then you have to start with a lower spending rate to begin with. And so, there's a range of decisions here that are reasonable.

Dr. Jim Dahle:
What about those people who say, “I'm not touching the principle, I'm only going to spend the income?” Do you think that's reasonable?

Mike Piper:
If it is, it's only reasonable by coincidence. Because maybe the yield on your bonds and the yield on your dividends happens to work out to a spending rate that's reasonable. That's not always the case. And I'm really not a fan of that strategy, frankly, because it's the total return that matters. You can spend increases in stock prices, you can sell your stocks, that's the thing that you have the choice of doing. And similarly, the idea of just spending income, then that would lead a person to say, “Oh, gosh, I'm just going to buy the highest dividend-yielding stocks and the highest-yielding bonds, and then I'll get to spend a bunch more.”

Well, what you just did is increase the risk of your portfolio by buying the riskiest bonds that there are, and increase your spending rate at the same time. That's probably not a great strategy. Yeah, the idea of basing spending on the actual income from the portfolio is usually not a great idea, in my opinion.

INHERITANCE FOR KIDS

Dr. Jim Dahle:
Okay. If this stuff doesn't show up, you don't get terrible returns, you don't live forever, you don't have these terrible, massive medical expenses not covered by insurance, you get all this money that's left over, and you have to figure out where it's going to go. It seems like the default for people is just splitting it up equally between the kids. Can you talk a little bit about the benefits and the problems with that approach?

Mike Piper:
Yeah, that is overwhelmingly the default. You open an IRA somewhere, you fill out the beneficiary designation form. If you've got three kids, most people do one-third to each kid. That's straightforward. If you don't want to put a lot of deep thought into it at that moment, that's almost certainly the answer. You leave it to your spouse first, usually, and then the contingent beneficiaries are your kids anyway, if you're married and you have kids.

But the advantage of doing that is simply that it's easy, straightforward, it's easy to understand. The disadvantage, I would simply say, is that it's not necessarily in keeping with what you actually want if you give yourself time to think about it. And if you take all the time to reflect upon the decision, and that is what you want to do, great, do that.

But I see this a lot where people initially selected that, and then the more they think about it, the more they realize there is actually this charity or that charity, or maybe this other family member or somebody or some entity to whom they would like to leave some portion of their assets. I see that a lot once people take a little bit of time to think about it.

And if you are going to leave some portion of your assets to charity, well, then there's a very specific subset of your assets that makes sense to leave to charity. And that's tax-deferred assets, because if you leave a traditional IRA to a human being, they're going to have to pay tax on it. If you leave a traditional IRA to a nonprofit, they do not have to pay tax on it. And so if you're going to leave some assets to a nonprofit, those are the best assets to leave to a nonprofit.

And so, it makes sense to do a little bit of this planning, just back up and take some time to think about it. Do you want to leave some assets to charity? And then if so, make a careful decision as to which ones.

Similarly, if you talk to your kids, and it turns out they would probably give a portion of their inheritance from you to charity. Well, then it makes sense to just cut out that step and just leave that portion to that charity anyway. Because again, if you leave it to your kids, they're going to have to pay tax on it, and they can only then donate the amount that's left. Whereas you could have instead just directly left that portion to whatever the charity is, and then the charity would get more money.

It's worth taking some time to reflect on it on your own, with your partner, talk about it with your kids, and figure out what everybody really wants. Because depending on the answers to that, it might make sense to do something different than just splitting it up evenly among the kids.

Dr. Jim Dahle:
What are your thoughts about not splitting it evenly among the kids? Giving more to a kid whose behavior you like better, or giving more to a kid who wasn't as financially successful, or those sorts of approaches?

Mike Piper:
Yeah, there's a lot of cases where that makes sense. This is, again, another thing where two reasonable people will come to very different conclusions about what makes sense. In one of my family entities, I guess let's say, one of the siblings is disabled. When the parent of that sibling died, they left a larger portion to that disabled sibling. All of the other siblings totally understood. No one was angry about that. It just made more sense. That person needed more help. That's one obvious case.

Another case could simply be… There's a bunch of reasons. One thing that some people will do is, oh, I gave some financial assistance during my lifetime to child A, and I didn't give any financial assistance, or not as much, because it's hard to get through parenthood without giving any financial assistance. But you gave less, let's say, to child B and C. You adjust the inheritance in some way to account for that, or not. Whatever you want to do can make sense.

Now, of course, it's also worth noting that what feels fair to you might not be what feels fair to all of the kids. So it can be hard. But yeah, equally to every child is not always the right decision.

Dr. Jim Dahle:
It's interesting that we've noticed that even within our own family. Sometimes, for example, one child has more children than the other child. You've got to, as a grandparent, decide, are you going to split it evenly between your kids or evenly between your grandkids? Both are fair.

Mike Piper:
Absolutely. They both make perfect sense.

Dr. Jim Dahle:
But fair is in the eye of the beholder.

Mike Piper:
Yeah, right.

TALK TO YOUR FAMILY ABOUT THEIR INHERITANCE BEFORE YOU PASS

Dr. Jim Dahle:
You're a big advocate, though, for talking to them beforehand about their inheritance, so it's not a surprise when the will is opened. Why, when, and how do you talk to your children about their inheritance?

Mike Piper:
Why? The answer to that question, to me, is simply that these are people you love. Otherwise, you wouldn't be leaving them any assets, presumably. And as people you love, you surely care about their well-being, and their well-being is improved by having this information. That's the long and short of it. They can plan better if they have this information. Even if you're not giving them this money right now, just giving them better information so they can do their own personal planning more effectively improves their well-being. And so, to me, that's the reason. That's why you talk about it.

As far as when to talk about it, I would generally say, as soon as you think they're old enough, mature enough to handle the information. It doesn't necessarily make sense with your 6, 8, and 10-year-old to show them the balance sheet and every single piece of information in there. Or maybe it does, depending on the kids in question. So that's a very personal thing, of course, because different people have different levels of maturity and that's entirely up to the family.

Dr. Jim Dahle:
And how do you have that conversation?

Mike Piper:
I think there's a lot of ways to do it. Again, you know your own children best, so make any adjustments that you feel are needed based on their personalities. But in my opinion, an easy way to launch the conversation is simply to refer to somebody else.

I don't know about you, but the thing that I think exists in many families is there's some family unit where the inheritance did not go well, by which I mean some fights were started. And if there is someone like that in the extended family, you can reference that. You could say, “Hey, remember when Uncle so-and-so died and then all of your cousins ended up, now these two people don't speak or whatever? I don't want that to happen with you and your siblings. So that's why I want to talk about this now.”

That's a way to bring it up. Or if you just need some other way to bring it up, you could just mention some other celebrity. There's always some celebrity who died and then the estate planning attorneys are talking about whatever they can get out of that. Just there's easy ways to bring it up.

And then in my opinion, again, the whole idea here is that their well-being is improved by having information. Once you feel that they are mature enough to handle the information, I think full disclosure is entirely reasonable. Just simply say that this is what our portfolio looks like. This is our balance sheet.

And of course, we don't know how long we'll live or what investment returns we'll get, and what it will look like when we ultimately pass away. But this is where things stand right now. And you are currently slated to get whatever percentage of it and it'll be whatever it turns out to be. But that's full disclosure. You've told them everything that you can tell them.

And what I have heard from people who have done that is that simply the act of doing it feels good. It feels good to just be just out there with the information, to let them know. And similarly, overwhelmingly, what I hear from the kids is just this huge relief because sometimes parents think, “Oh, gosh, if I give this information to my kids, then suddenly they're going to be counting on an inheritance.”

What I think they're often missing there is that if you've been financially successful in your life, your kids are probably already expecting an inheritance of some sort. Even if you'd never talk about it, they just have no idea what number to be using. And so, they're already assuming that there's going to be one unless you've told them otherwise. It's not like that's going to change by talking about it. Now they just have the information and can plan better.

Dr. Jim Dahle:
Yeah. Well, what if they don't want to meet with you? What if they don't want to talk about it? I remember reading a forum post to somebody that was trying to call a family meeting, couldn't get his kids all together. What do you do in those sorts of situations?

Mike Piper:
I remember reading that one too. That's the only time I've ever heard of that happening, honestly. Someone who said, “Hey, I want to talk about the estate plan and your potential inheritances”, and the kids just blew them off. I haven't heard of that happening before. I don't have a great answer there.

Dr. Jim Dahle:
Yeah. My recollection of that situation is the parent was trying to pass on some complicated portfolio of rental properties or something. There was a lot of work coming with this inheritance too. I suspect that may have contributed to the issue.

The truth is, if you're a finance person, if you're into this stuff, your kids are almost surely less into it than you are. And you ought to think about keeping your inheritance as simple as you possibly can for them, or at least making it something that can be rapidly simplified after your death, thanks to a step up in basis of death.

There's a lot of people's kids who cannot handle a portfolio of 18 rental properties given to them. There's going to be a lot of loss when that sort of an inheritance is given, just because they're not interested in managing it, don't have the skills to manage it, and they're going to end up fire selling the properties.

Mike Piper:
Yeah, absolutely. You shouldn't necessarily assume that your kids plan on managing the same portfolio that you've been managing.

SPENDING – INTENTIONAL SPENDING, GIVING, AND THERAPY

Dr. Jim Dahle:
Absolutely. Let's talk about spending. It's hard for lots of wealthy people to spend. I've written lots of blog posts over the years, probably for the last 10 years, I've been trying to teach myself how to spend better. In your book, you talk about three approaches, intentional spending, giving, and actually therapy. Can you talk about some success stories and maybe even some failures of people dealing with this issue?

Mike Piper:
Yeah, I'm always a little bit leery to give actual personal stories, because I also know that the people who share those stories with me listen to podcasts that I'm on. I don't usually ask for permission. Even if I leave out names, people still feel a little bit, I know from past experience that people can sometimes feel a little bit weird when they hear their story told. So, I'm going to give some observations of things that I see.

What I see a lot is people who recognize that they have some emotional challenge with spending, but they don't necessarily even know why. Sometimes it's simply because they don't know. They truly don't know whether they can afford to bump up their spending somewhat.

In cases like that, I think it makes a lot of sense to meet with a financial professional, have them do the math for you. I can tell you from lots of experiences with clients, I've had clients in tears of relief when they got the news like, yes, you definitely can afford to retire, or yeah, it's totally fine to bump up your spending by 20% or whatever, because they wanted to and were just truly scared. Meeting with a financial professional can make a lot of sense if you truly don't know whether you can increase the spending.

I also see lots of people who do know. They're entirely aware from an intellectual point of view that, “Yes, I can afford to bump up the spending somewhat, but it still is hard.” In that case, I would ask, “Well, you don't have to bump up the spending. Are there things you actually wish you were spending on, but you can't bring yourself to do it or not? Because if not, well, then you don't have to bump up the spending. That's fine. You can just give more away, donations or giving gifts to kids or other loved ones now or later.”

Any of those is fine. You don't have to bump up your spending, but for people who recognize that financially they could, want to spend more, both of those conditions, but still can't bring themselves to do it. And that's a surprisingly large group of people. In that case, I think it's worth trying to dig into where these feelings are coming from. What's making it hard?

Because for some people, it could be that growing up, maybe their household finances were super precarious. Mom and dad had a really hard time paying all the bills every month, and that was apparent. Or maybe it was your early adulthood financial situation was super precarious, and that made a huge impact on you.

You're in a situation, let's say, where you've realized that you couldn't pay for an emergency expense. But then eventually, you had a small emergency fund. You had a $1,000, $2,000, $3,000 emergency fund, and you realized you were safer. That pile of money made you safer, and you recognized that. Then that $3,000 emergency fund became a $20,000 emergency fund, and some savings in a Roth IRA, and some savings in a 401(k), and you felt even safer, because you were safer.

But eventually, what can happen is that this idea that bigger pile of money equals safer, equals security, that can be a thing that just gets linked in your head. But that's an emotional link. Eventually, financially, that might not necessarily be the case anymore. You might very well be in a place where the financial security is there. You can spend down some assets. But the only problem is that emotionally and mentally, those two things are linked. The pile of money is the feeling of security. Spending from it is directly attacking that feeling of security. That's really hard to do.

But in a case like that, the thing that's going on here, it's not something that's going on in the portfolio, it's not something going on in your balance sheet. It's something that's going on inside you. The solution is probably not a change to the balance sheet or a change to the portfolio. This is a thing that's going on inside you. The solution is probably something about addressing what's going on inside you.

That's why I feel like a broken record sometimes, because people always ask me about this after I wrote about it. Yes, therapy. What you're experiencing is anxiety. This is probably not a perfect analogy, but anxiety is to therapists what strep throat is to pediatricians. Yes, they can help you with that. That's what they deal with all the time.

I think that's a tool that not enough people are taking advantage of in a financial context. I'll also add, there's another thing that I'm sure I had seen a bunch of cases of it, but I only more recently started to realize that this is what's going on, is that sometimes it's actually a mortality fear.

Because for so many years, we save and we save and we save. Saving essentially means denying yourself, denying your current self some spending. There's something that you wish you could spend money on. You would like to do this, but you're going to choose not to, to take care of your future self. You do that and you do that and you do that. You save and you save and you save to take care of future you.

Eventually, the time comes where the future is here. You are now that future you. That's you now. That's you today. To crank up the spending, not just crank up the spending, but usually, it's specifically starting to spend down principle. That's the thing that triggers it for so many people, is to acknowledge that fact, that now's the time. We're there. That's to admit that it's the next stage of your life. I think that for a lot of people, that itself is hard and that's what's actually going on. Again, that's a thing that's going on inside you. A change to the asset allocation is not the solution to this situation.

Dr. Jim Dahle:
That's great advice, Mike. I appreciate the therapy for me, personally, because that's exactly it. It is in you. It's not the portfolio. I think you're absolutely right there. There are dozens of questions I'd love to chat with you about, but obviously, a podcast should only really be a certain length. Let's limit just one or two more here.

DONOR ADVISED FUNDS

Let's talk for a minute about donor-advised funds. I've become a bigger and bigger fan of donor-advised funds or DAFs over the years. Do you think Congress is going to nerf them in some way in the future, such as requiring a 5% distribution each year from them or limiting how much time the assets can sit in a DAF?

Mike Piper:
This is another one, just like Social Security, where, gosh, I don't know. I really don't know. That would not surprise me if some additional limitations were put in place. Certainly, the whole idea is that this is money that's ultimately going to a charity, and donor-advised funds are, from a tax perspective, they are charities.

Clearly, the point of the donor-advised fund ultimately is to just distribute all of the money. The donor-advised fund itself is not out feeding the homeless or doing anything of that nature. It would not surprise me if that were a thing that happens at some point, not getting rid of the idea of donor-advised funds at all, but just like you said, saying, “Okay, let's make sure that the money isn't in there indefinitely, because the ultimate point is that we want to encourage people to donate to charity because of the things that charities do.” And the things that charities do is spend the money in ways that are valuable to society, not hold a portfolio of assets and just let it sit there forever.

Dr. Jim Dahle:
Sit there and grow and grow and grow. It's interesting because a private charitable foundation is required to make a distribution every year. For whatever reason, when DAFs were created, that rule was not put in place, which is a little bit surprising in retrospect to think about it.

In fact, there's some other issues with private foundations that make them significantly less attractive, even for people that have quite a bit of money they want to leave to charity, compared to a DAF, to the point where lots of people just use a DAF.

Mike Piper:
As they exist today, they're a great tool. They simplify things. They make it easier to donate appreciated stock. I know you've written about this also, that if you want to donate to some small local nonprofit, they probably are not set up to take your shares of Vanguard Total Stock Market ETF. They don't have a way to do that. You donate it to the donor-advised fund, and then they send the money, and they make things simple.

Dr. Jim Dahle:
Sure, as simple as, come tax time, you have one donation instead of 50 to keep track of. My favorite feature is actually the anonymity of it.

Mike Piper:
Yeah, you get to stay off the mailing lists.

Dr. Jim Dahle:
Yeah, no more charity porn in my mailbox every day. I definitely appreciate that. All right, Mike, if they want to learn more about you, what is the best place to do that?

WHERE TO LEARN MORE FROM MIKE

Mike Piper:
Just like you mentioned, my blog, obliviousinvestor.com, that's got the overwhelming majority of my writing. I've written several books, just like you mentioned. The Open Social Security Calculator is free. It's open source, so it's not a black box. You can dig in and see the math if you're interested, see how it's actually doing the math. Those are the places where they can find my work, basically.

Dr. Jim Dahle:
Awesome. You're going to be at the Bogleheads conference this fall again?

Mike Piper:
Yes, absolutely.

Dr. Jim Dahle:
All right. I'll see you there. I'm only going to be there the first day, but it'll be great to see you again there in person. Mike, as always, thank you for what you're doing. Thank you for coming on the podcast today.

Mike Piper:
Thank you.

Dr. Jim Dahle:
All right. I hope you enjoyed that podcast. I always love having Mike on here. I love talking to Mike. Not only is he brilliant, but he's totally humble. What I really appreciate about him, you'll notice he talks slower than I do and thinks about every word that comes out of his mouth. I love the precision he has when he's talking about things. You know that he means every word that he says. I appreciate all the work that he's done for the personal finance and investing community.

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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 178 – Pilot Pays Off Flight School Loans.

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We got a great episode today. Stick around after the interview, we're going to talk a little bit about dumb things that you hear about buying homes.

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is a repeat guest. Welcome back to the show, Sam.

Sam:
Thanks for having me again.

Dr. Jim Dahle:
Your initial episode on this was number 79. This is 178. This is about two years ago, we had you on the show before. Your milestone then was getting back to broke. This time, we're going to be talking about a different milestone. Let's start out. Why don't you remind people what you do for a living, what part of the country you live in, and let's tell them what your milestone is.

Sam:
Sure. I live in the eastern part of the United States. I'm a little bit outside of DC. I work in Boston, so I'm commuting up there. I'm an airline pilot. I now work for a major airline. The last time I talked to you, I got hired on it as a regional, but I've now moved to the major airlines. We are celebrating being totally out of debt, actually, but specifically paying off my flight loans.

Dr. Jim Dahle:
Very cool. Very cool. Take me back. How far are you out of your flight school?

Sam:
I'm out of flight school now about four and a half years.

Dr. Jim Dahle:
Four and a half years out of flight school. Approximately, what was the cost of flight school? Not the amount you borrowed for it, but the cost.

Sam:
The cost was about $80,000.

Dr. Jim Dahle:
About $80,000. How much of that did you borrow?

Sam:
100%.

Dr. Jim Dahle:
All of it was student loans, $80,000. Where'd you go to get them? These are federal student loans or what?

Sam:
No, you cannot get student loans if it's just for flight school. Now, if you go to get a four-year degree alongside it, you can take student loans, but just for the flight time, that is not eligible. My loans came from a personal loan from my parents, and then they subsequently took out a home equity line of credit on their home.

Dr. Jim Dahle:
Wow. That was kind of them.

Sam:
Very.

Dr. Jim Dahle:
What was the plan if something happened to you? They were just going to eat it?

Sam:
I don't think there really was a plan, and so that would have been the plan. They just would have had to have eaten it.

Dr. Jim Dahle:
Yeah. Okay. Well, good that you paid them back. As you probably know, Thanksgiving dinner doesn't taste the same when you owe money to somebody else at the table.

Sam:
It sure doesn't.

Dr. Jim Dahle:
Yeah. Okay. Did they charge you interest on any of it?

Sam:
They did not. Maybe they should have, but no. It was a 0% loan as far as the amount that I personally owed them. The HELOC, of course, did have an interest rate, and that started it really low, 2.5%, 3%, and then it got all the way up to about 8% to 8.5%. That's what really kicked me into gear with wanting to get it paid off.

Dr. Jim Dahle:
Yeah. What a lot of people may not realize listening to this podcast is a pilot income is very different from a doctor income. Most doctors, I wouldn't say most doctors, but many doctors, like emergency docs coming out of residency, within a couple of years, you're basically at peak earnings, and often you end up earning less as your career goes on because you work fewer shifts, you work fewer night shifts, holidays, et cetera.

For pilots, that's not the case. They tend to start very low, and then they can actually have a very good income. This is why, I guess, one reason why you got to kick all the pilots out at 65 is they're making all kinds of money at 65. They are making doctor-like money by the time they're getting toward the end of their careers, but that's not the case in the beginning. Tell us about your income progression over the last four and a half years.

Sam:
Yeah. It's been pretty wild slings. The first year was $28,000, and that was pretty tough to live on, but did it and still saved a lot of money during that time. The next year was $92,000, and then went back down to $80,000 when I took a first officer job at the regional airline. Last year, first officer at a major airline, I made $138,000, and then this year I'm on track for about $225,000.

Dr. Jim Dahle:
Okay. That's pretty awesome. That's faster than I would have expected it to be.

Sam:
It's faster than historically.

Dr. Jim Dahle:
Yeah. What were the first couple jobs? Tell me about those. These are some you're flying puddle jumpers, or what are you doing?

Sam:
Yeah. It was a nine-seat twin-engine piston aircraft, and it was essential air service money, so whether passengers were on the planes or not, the company would get paid, and so our paychecks kept coming in. This was during COVID, so that was very helpful.

Then I moved to a 76-seater jet that was flying regionally, and that was just what you would normally expect, major hub to smaller city. Then now I fly for a major airline, mostly just flight from major hub to major hub.

Dr. Jim Dahle:
But $225,000 five years out is pretty awesome.

Sam:
It is. I'm still picking up a lot of extra trips for it, so that's not really a base pay. That's what I'm just deciding to get for myself.

Dr. Jim Dahle:
You're working hard.

Sam:
Yeah.

Dr. Jim Dahle:
You're working hard. Okay. All right. That probably explains some of it, but there's a lesson there too, right? Hustle is worth something no matter what field you're in.

Okay. Tell us about the debt. Obviously, your income going up made it much easier to pay off this debt. It's hard to pay off $80,000 making $28,000. It's much easier when you're making $225,000. So you had student loans. What other debts did you pay off?

Sam:
It was just those. I didn't have any sort of college loans from college. I got scholarships, and then my parents paid, I think, maybe $7,000 or $8,000 that was leftover towards that, so I didn't have any school loan. I paid for my car in cash, so no auto loan. No mortgage. I've never owned a home. I've always rented. So it was just the flight loans that were paid off.

Dr. Jim Dahle:
You’re totally debt-free. Nothing.

Sam:
Yeah. I'm totally debt-free now.

Dr. Jim Dahle:
That's pretty cool. Given that that's probably fairly important to you, given how quickly in life you did that, how did it feel to have to take out debt in the first place? How much did that bother you?

Sam:
It did bother me. The desire to become a pilot overrode my desire to be always debt-free, and I was really wanting to hurry and pay it off. On the last podcast, last time I was on here, I told you about a conversation my dad and I had. He said, “Listen, I know you're starting from zero with your retirement accounts, and I know you have very aggressive plans, so do that. We're in a good enough financial position where we don't have to have the money immediately, but once you're able to max out your retirement accounts, then we'll come up with a plan for you to pay us back.” I said, “Okay”, and that's exactly what I did.

By the end of year two, I think I had enough money where I was maxing everything out. I said, “I'm going to throw everything else at you, dad.” He said, “Okay.” Then I just started making $3,000, $4,000 payments a month to him, and it bothered me so much having the debt. I actually had money in a brokerage account, and I took about $17,000 of that and threw it at him. Then it was gone in very short order after that.

Dr. Jim Dahle:
What did they say when you paid them back?

Sam:
I remember pretty much every paycheck I would call him, and he would say, “Is it payday?” I said, “Yes.” He said, “All right.” I'd click send, and he'd get the money the next day. When I called him that day, he, of course, knew that it was the last payment I was ever going to make. We just celebrated together on the phone.

Later on, I visited them, and we went out to eat. I could really sense his pride in me, and I felt a ton of pride in myself for completing it. Like you said, now there's no friction between the two of us. Not that there really ever was, but now there's really nothing. I can sit at the Thanksgiving table when I come home to visit them, and everything tastes great.

Dr. Jim Dahle:
I bet he is really proud. There's a lot of parents that loan money to their kids that don't get paid back.

Sam:
I'm sure.

Dr. Jim Dahle:
It happens all the time. This whole time, you've been investing, it sounds like.

Sam:
Yeah.

Dr. Jim Dahle:
You clearly got on board with this stuff early on. You were on the podcast two years ago, and you're only a couple of years out of flight school. You're in your 20s, I assume. Those who are on YouTube are probably going to concur with that. You got this great start in life. Approximately, what's your net worth now?

Sam:
My net worth is about $275,000 now.

Dr. Jim Dahle:
$275,000, still in your 20s. All the doctors out there are totally jealous. They get to the end of their 20s, and they've got this negative net worth still. Well done.

Sam:
I do have to correct you a little bit. Unfortunately, I'm in my mid-30s.

Dr. Jim Dahle:
Really?

Sam:
You look young. Not too far from the 20s, but I had a whole other life before I discovered financial independence.

Dr. Jim Dahle:
Very cool. What did you do before flying?

Sam:
I was an engineer before. I was an industrial engineer. Unfortunately, I didn't save anything. I spent whatever came in. I was married. I just had this whole other life. Then, everything unfortunately fell apart. I found myself at 28, 29, being single again. I was actually a stay-at-home dad after being married, and we had a daughter. It felt like I got hit by a bus on Tuesday. Just everything changed in my life, and I just had to figure it out. I'm thankful that I had the education about financial literacy at that time to at least put me back on the right path.

Dr. Jim Dahle:
Very cool. Not that you had to go through that, but that you've done so well coming out of it. Congratulations to you. That's pretty awesome.

Sam:
Thank you.

Dr. Jim Dahle:
What advice do you have for somebody else that's got student loans of some kind, whether they're flight school loans or med school loans or whatever? What advice do you have for them for getting it paid off?

Sam:
The last time I mentioned that I think having a good ground game was the most important to me and just having a job for every dollar, even before it comes in, making sure that you're educated on how you're going to deploy those dollars and then having the discipline to actually follow through with that. This time, I'm going to say living like a resident is incredibly powerful and really, honestly, living like a med student.

I've spent less than $20,000 a year for the last four and a half years. I have not necessarily deprived myself of things, but I have been very, very intentional about how I spend my money. Now, I'm just getting to the point where I'm going to allow a little lifestyle creep to come into my life. I feel like this is how it should be done. If you're really focused on keeping transportation, living, food costs as low as possible, you can build wealth very, very fast.

Dr. Jim Dahle:
Yeah, for sure. You're a great example of that. You were living just a few years ago on $28,000 and now you're making over $200,000. It's exactly a live like a resident kind of scenario. But good on you for recognizing that it's not supposed to go forever. Some people are like, “Oh, the White Coat Investor says I can never spend any money.” No, that is not what we say. We say just front load your financial life. Give it a few extra years and then go enjoy some of your money. You still got to save for retirement, but enjoy it.

What's your next financial goal that we're going to hear from you on this podcast?

Sam:
I think it's probably going to be about half a million maybe in a couple of years. A non-financial goal I'm looking forward to is actually living by myself. I have not lived by myself yet. I've always had roommates to keep those living costs low. That's going to be some of the lifestyle creep that I have is looking to have a little bit more privacy and a little bit more freedom.

Dr. Jim Dahle:
I think you're going to enjoy that. Pretty awesome. Well, congratulations to you and thank you for coming on the Milestones podcast to share that with others.

Sam:
Thank you.

Dr. Jim Dahle:
I hope you enjoyed that podcast interview. It's always good to have repeat customers on here. Repeat visitors, repeat whatever you want to call them, guests, I guess, because you get to see people's progression. You can go back, read the first episode, look at all the progress that's made since then. Two years, he's gone from a net worth of zero to a net worth of, what did you say, $275,000. In two years, that's great. If you stay on that trajectory, it doesn't take that long to get to financial independence.

The first $100,000 is the hardest. The first million is the hardest because so much of it is brute force saving. But after that, your money's working as hard as you are. You get to a certain point where your money's contributing more to your accounts every year than you are. It's pretty awesome to see compound interest working that way.

FINANCE 101: DUMB THINGS PEOPLE SAY ABOUT BUYING A HOUSE

Well, I promised you at the top of the hour, top of the podcast, that we would talk a little bit about dumb things people say about home buying. There's a few of these out there that I think are worth talking about. Here's one.

“My mortgage is cheaper than rent.” This is what people use to justify buying a home, which makes no sense whatsoever. You got to remember that a mortgage is the minimum amount that you're going to spend on housing every month. Rent is the maximum amount that you're going to spend on housing every month.

There are a lot of expenses associated with owning a home beyond a mortgage. The mortgage includes the principal and interest. There is also insurance. There are property taxes. Now, those are sometimes included in your mortgage payment that goes out once a month because your lender is doing an escrow account for you and paying those bills for you. They are additional expenses.

But beyond that, there's other things you have to do. When you buy a house, often you have a yard for the first time. You got to buy the stuff to take care of that yard. You have a driveway for the first time. Guess what? Now, you need a shovel or worse, a snowblower if you live in Minnesota or Wisconsin or something. You've got to maintain the home. There's utilities. There is upgrades. You got to replace flooring every now and then. Guess what? Roofing is expensive and it doesn't last forever. There are all these other costs associated with homeownership.

For example, I saw on the White Coat Investor subreddit the other day, somebody posted this. “To all the people buying houses because your mortgage is cheaper than renting your area, don't forget about Murphy's Law. I'm having to pay $7,000 for a new AC unit just a couple of days before residency starts. I've owned the place since MS2, so I'll still do well on it and don't regret it. Just an important perspective to keep in mind.”

Yeah, $7,000. How many months of rent does that cover? It covers a lot. That's maybe three months of rent. Keep that in mind that just having the mortgage be less than rent is not a reason to buy a home. It takes a much more in-depth analysis when you're making this decision than that.

Another thing you hear out there is “Throwing money away.” I think this is silly because you're never throwing money away when you're spending it on housing. You write a rent payment. You're not throwing the money away. You're exchanging it to have a roof over your head for a month. If you go on vacation, you're not throwing the money away. You're using it to pay for an airline ticket and some nights in a hotel and some meals and some entertainment. You're not throwing the money away. That's just silly to say that renting is throwing money away and a mortgage isn't.

Related to that is another thing people say. They say that a big chunk of this monthly payment you're making, this mortgage payment is going toward principal, that you're actually, it's like savings. It's like you're getting the money back. You're not losing the money.

Well, you got to look at the amortization schedule. Particularly with a little bit higher interest rates people are dealing with today, you might be surprised how little of that payment is going toward principal.

For example, let's run out a mortgage. It's a 7%, which is what a lot of people are getting right now. Let's say it's a $200,000 mortgage. Your monthly payment is $1,330.61. This obviously doesn't include insurance or property taxes. That stuff's all throwing money away just as much as paying rent is. That's your payment, just over $1,300 a month.

How much of that $1,300 a month is going toward principal? Well, the first month is $164. That's how much went to principal. All the rest of that is going toward interest. If interest is throwing money away, I guess it's deductible, but maybe you can adjust it for taxes if you're able to deduct it. But for the most part, you're throwing away $1,200 in order to save $164. That doesn't make any sense.

You get to the end of the year and basically on that $200,000 7% mortgage, $2,000 has gone toward your principal. Let's say you stay in that home for three years. After three years, you have put a total of $6,546 toward principal. Imagine this is a three-year residency. You've put $6,500 toward principal. That's it.

What are the transaction costs? Well, this home is probably a $200,000, $250,000 home. The transaction costs are about 15% of that. The transaction costs are $40,000. All you paid down on the principal is $6,500. It's going to have to appreciate quite a bit for you just to break even in that sort of a time period.

Anyway, don't listen to these dumb things people say about home buying. Your mortgage being cheaper than rent is not a reason to buy a home. The fact that renting is throwing money away is not a reason to buy a home when it's otherwise inappropriate.

It's not a big chunk of your payments that are going into your pocket. Most of it is going for mortgage interest and property taxes and insurance and other things that are throwing your money away. Keep that in mind.

That said, I'm a big fan of ownership. I think people ought to own their homes most of the time for the big chunk of their life. The reason why is that it pays you these “dividends” of saved rent. You don't have to pay rent when you own the home. When we own our home, we no longer have a mortgage on it, but whether we have the mortgage or not, we still get that same saved rent dividend.

The thing about rent that's really bad in the long term is it goes up. This is one cool thing about at least the principal and interest payment on a fixed interest rate mortgage. That payment doesn't go up over time. The property taxes and the insurance does, and so that escrow money does go up over time, but the principal and interest doesn't. Assuming you didn't do some variable rate loan or took out a HELOC or whatever, using your home as an ATM, it goes down.

That's not the case when you're a renter. In the first two or three years, that doesn't matter much, but if you're renting for 15 or 20 years, that's a pretty significant difference in your housing costs. I'm a big fan of ownership. I want you to own a home for the long term. I don't want you buying a home the second you get to a new city, you're not even sure if you like the job. I don't want you owning a home when you're in a three-year residency.

Yes, the last few years, appreciation has been so high that a lot of people have still come out ahead, but you can't bet that way. Most of the time, that does not work out. You got about a 50-50 shot at five years. If you're in a five-year residency, maybe it's worth the gamble, but there's so many other hassles of owning a home during residency. I don't even know that I'd do it then. I certainly wouldn't go back and buy a home in med school or residency, what I know now. You'll have plenty of time to build home equity as an attending physician or other professional, you don't have to rush it.

SPONSOR

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All right, I hope you enjoyed this episode of Milestones to Millionaire podcast. Come back next week, we'll have another great episode for you. Until then, keep your head up, shoulders back, you can do this. The whole White Coat Investor community is here to help you, whether you're a doctor or a pilot or something else. So stick around and we'll do all we can for you. See you next time.

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.