Q&A – Gold Bullion, Subway Franchises, Taxes, and Divorce – Podcast #216

Transcription – WCI – 216

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 216 – Gold bullion and subway franchises.

Dr. Jim Dahle:

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Dr. Jim Dahle:
All right, thanks for what you do out there. We're recording this on June 1st, it's going to be published on June 24th. I guess we have a few trips this month we're planning around. That’s why we're recording so far ahead. Cindy and I got to record on the days that both of us are actually in town together, I guess.

Dr. Jim Dahle:
But, you, I suspect, are also having an eventful summer. Hopefully you're feeling a little more free and open being able to take a few more trips, see more people now that the pandemic is slowly abating. But if you're like me, you're still taking care of COVID patients. I admitted a COVID patient two shifts ago.

Dr. Jim Dahle:
I just saw a guy yesterday. It's interesting, I think he was in his thirties. I asked him, “Why didn't you get a vaccine?” And he said, “Well, I heard it could kill you”. I asked him, “Have you heard that the virus could kill you?” I mean, it's basically a thousand times more or less likely to die from the vaccine than it is from the virus, but that was just as not getting out there.

Dr. Jim Dahle:
And so, I think a lot of us are still taking care of quite a few COVID patients. Even if our COVID specific units have closed, our ICU is still having a few in there. So, thanks for what you've been doing during the pandemic and otherwise it's not easy work.

Dr. Jim Dahle:
All right. If you want to come speak at WCI con 22, I will pay you to do it. We actually pay our speakers unlike most academic conferences. I'll pay for you to come out, pay all your expenses and give you something for speaking. In addition to being able to come to the conference for free, which is going to be awesome in Phoenix. We're going to have a great time. It's Phoenix in February. I don't know where you live, but chances are the weather is not as nice there as it is in Phoenix in February. So come join us there.

Dr. Jim Dahle:
But if you want to come for free, you have to speak – whitecoatinvestor.com/speakerapp is how you apply. I think we're going to do three tracks again. We're going to have advanced basics as well as a wellness track. Those ones have to qualify for CME, right? Because everyone wants to come to this using their CME money, but you can apply to speak. And we like having new speakers of that conference every year and we'd love to meet you in person. So go ahead and apply for that if you would like. Otherwise, you can just come to WCI con. Registration is going to open I think in September.

Dr. Jim Dahle:
All right. Let's take some questions. The first one comes from an anonymous listener. Let's hear it.

Speaker:
Hi, Dr. Dahle and thank you for all that you do. Dr. Bernstein and others mentioned that it can be beneficial to have a small amount of your portfolio in precious metals over long periods of time, just because with the volatility you end up buying low and selling high a lot. But they always seem to say that they're not talking about bullion specifically. And talk more about, say gold mining stocks or something of that nature.

Speaker:
I was wondering if you could speak as to why trading in bullion is not advisable. Is it because the fees every time you buy and sell that you're paying to the trader are just too much? Is it because you're not getting any dividends that you might get by investing in a business of gold mining? I’d just appreciate your thoughts. Thank you.

Dr. Jim Dahle:
All right. I don't invest in gold bullion. Only gold I have is on my finger. Sure, it's highly valuable. It's valuable to me. I'm not sure how many other people it's valuable to. If you melted it down, it might only be worth a few hundred dollars. I don't know.

Dr. Jim Dahle:
But the reasons I don't invest in bullion are the same reasons I don't invest in Bitcoin or Ethereum or Dogecoin or whatever the newest cryptocurrency of the day is. Same reason I don't invest in yen or Canadian dollars or euros. Same reason I don't invest in commodities like oil.

Dr. Jim Dahle:
I prefer investments that have some sort of payment that they make, whether those are earnings in a stock, whether it pays it out as dividends or not, it's actually producing something. It's a viable going enterprise as a company or a fixed income investment that pays out interest or a real estate investment that pays out rents.

Dr. Jim Dahle:
And so, those are the investments I prefer. I like investments to outpace inflation since that is the greatest real risk to an investor over the long run. And so, I prefer investments that will provide a return above and beyond inflation. And that doesn't mean every single fixed income investment I ever have provides a yield to do that, especially in our low interest rate environment and now rising inflation. But that's kind of the goal for me. I don't want to include asset classes that don’t expect a significant return from.

Dr. Jim Dahle:
Now what's the return on gold? Well, 800 years ago, an ounce of gold bought a nice man suit. Today an ounce of gold buys a nice man suit. It basically has kept up with inflation with severe volatility over the years, but kept up with inflation, not outpacing it. And obviously there's costs of buying and selling and storing and insuring something like gold bullion. So, after you pay all those it's not even keeping up with inflation.

Dr. Jim Dahle:
So those are the main reasons I don't invest in it, but I don't think it's crazy to invest in it. You want to put 5% of your money into Bitcoin or gold or commodities or whatever, I don't think that's crazy. Go ahead and do it, knock yourself out. If you really think it's an attractive investment, you want to hedge against inflation or you just like it or whatever, that's fine to do. I'd discourage you from putting 50% of your money into it. I think that's a mistake, but if you want to put 5% of your money into something like that, knock yourself out. Go ahead.

Dr. Jim Dahle:
Chances are, even if you lost 5% of your portfolio, you would still be perfectly fine financially. And it's not going to have such a huge impact on your portfolio that is going to sink if it doesn't do very well.

Dr. Jim Dahle:
The reason Bill Bernstein doesn't like gold bullion in particular is because of that return issue. He prefers if you're going to allocate some money to precious metals, that you put it into precious metal mining stocks. Because if you look at the return of these stocks, these companies that produce profits, they are higher than inflation over the long run.

Dr. Jim Dahle:
Now it's still impacted when there's a rush to gold and an economic downturn, or when there's inflation fears, those gold mining stocks obviously go up in value significantly. And so, you still get some of that benefit that you're looking for when you buy gold but without having to ensure the gold number one, or go through the trouble of buying it off a late-night infomercial or a gold trader or wherever else, people go to buy gold bullion, but you still get the benefit of that flight to gold in bad times.

Dr. Jim Dahle:
But he's quick to point out that this is something that you really have to hold for a long run, because you might own it for 30 years and really only enjoy owning it for about 3 of those 30 years. The rest of the time, you're just staring at it, wondering why it's doing so crummy. And that's kind of if you look at its performance, it has awesome performance for a very small period at the time. And the rest of the time is kind of ho-hum lots of volatility and not awesome performance.

Dr. Jim Dahle:
The last few years have been pretty good for gold though. So, make sure you're not just chasing performance when you're adding this to your account. It might be 30 years before you see another period of awesome gold returns. I hope that's helpful to you.

Dr. Jim Dahle:
Let's take our next question. This one comes in about solo 401(k)s.

Speaker 2:
Hi, Dr. Dahle. I have been listening to your podcast and I've really learned a lot. I have a quick question related to solo 401(k). I'm a 100% W2 physician with some side income from consulting around $3,000 per year at the most. I rolled over my old jobs and my 401(k) into a traditional IRA without knowing about the pro-rata role for the backdoor Roth. So, then I opened a solo 401(k) with Fidelity, got an EIN in 2018, emptied out the traditional IRA into it as I had the side income doing some consulting, second opinions and some surveys which I barely got about $25 to be saved for the retirement. But the real purpose was so that I would have $0 in the traditional IRA according to the prorate rule.

Speaker 2:
However, when I started a new job two years ago, I was advised on the White Coat Investor, your forum by other members that if my side income did not pick up, the IRS could consider it as a hobby. And I would be penalized for having a solo 401(k). So, I should close it by moving the money to the new job’s 401(k). So, I did that. However, I hate the offerings in the 401(k) that I am in now, and I want to take control.

Dr. Jim Dahle:
All right. Well, I got a minute and a half of that. Unfortunately, SpeakPipe really does shut off at a minute and a half. You've got to get your questions in before then, but I think what I'm hearing here is somebody who's kind of bummed with the move they made a couple of years ago due to what somebody on the forum told them.

Dr. Jim Dahle:
This is a bit of a gray area. There are some people that are worried you got to have a real business going in order to have a solo 401(k) or the IRS is going to come after you. I think that's a little bit overblown. I think they have much better things to do with their very limited time.

Dr. Jim Dahle:
That said, you're making $3,000 a year. That's a totally viable business. There's nothing wrong with that business. This is not flaky whatsoever. You're doing second opinions. You're taking some surveys. You're doing some other work. You make $3,000 a year. That's a business. It’s fine to have a solo 401(k) for that business.

Dr. Jim Dahle:
So, if you don't like what you have, and they'll actually let you take money back out of that 401(k) at your main gig, which they may not, sure, open up a solo 401(k) and roll the money back in there. But I suspect now that it's in there, you may not be able to roll it out until you separate from your employer. But certainly, the nice thing about you getting that money out of a traditional IRA into a 401(k) is now you can do a backdoor Roth IRA every year. So, I think it was worth the hassle to roll it into a solo 401(k) to start with.

Dr. Jim Dahle:
I think maybe people made you panic a little bit about moving that money into your regular 401(k). I don't know that I would have necessarily done that, but it's not like TIAA-CREF are the worst possible funds you can invest in. They're generally considered one of the good guys.

Dr. Jim Dahle:
So, use the best funds in the 401(k), build around that. Use your backdoor Roth IRA, and any other investing accounts you might have to round out your asset allocation and you'll likely be fine going forward. I hope that's helpful. I'm not sure exactly what your question was, but I hope I answered it.

Dr. Jim Dahle:
All right. Our next question comes in from Patrick about UGMA accounts.

Patrick:
Hi, Dr. Dahle, this is Patrick from Hawaii. I have a question regarding UGMA accounts. I have three accounts that I set up for my children and we're teaching them about money and investing and it's working out pretty good.

Patrick:
However, I have a question about how the UGMA accounts are taxed. I understand that there's a limit of the first $1,100 is completely tax free on any gains in the UGMA account. And then the second $1,100 is taxed at a child's rate, which I think should be tax free as long as my kids don't have any other sources of income.

Patrick:
So, is there any reason that I wouldn't want to do a tax gain harvesting strategy each and every year, especially while the accounts are small and below that threshold limit of gains such that I can just each year increase their relative cost basis? Thank you.

Dr. Jim Dahle:
Okay. It sounds like you have a pretty good understanding of it, Patrick. I'm not sure what I can add to it other than confirming that what you understand is correct. A child's unearned income, the first $1,100 is not taxed. The next $1,100 is taxed at their tax rate. So, assuming they don't have a whole bunch of earned income, they should still be in the 0% capital gains bracket.

Dr. Jim Dahle:
At that point, the kiddie tax kicks in. If there's more than $2,200 a year in income, not return, not increased, not account value, but $2,200 in income in that UGMA account then taxes are paid on that at the adult’s tax rate.

Dr. Jim Dahle:
So yes, that gives you $2,200 a year in which you can do whatever you want with it, right? You can have a really high-income investment. You can have a tax gain harvesting where you sell something with a gain in order to update the basis and update the basis.

Dr. Jim Dahle:
But keep in mind, most people that get a UGMA account, at least the purpose why my kids have them is to spend money in their twenties. And so, I fully expect when they spend that money, they're probably going to be in the 0% capital gains bracket without any tax gain harvesting along the way.

Dr. Jim Dahle:
But if you want to tax gain harvest, and it's not costing you anything to do it, sure, do it as you go along. Just keep in mind as those accounts get bigger, it will be harder and harder to do that. For example, if the yield on a total stock market index fund is 2% and you've got $100,000 in there, that's going to get you pretty close to your $2,200 a year in income that's tax-free. There's not much room there to do tax gain harvesting.

Dr. Jim Dahle:
But if you have a $10,000 account and it's only kicking out $200 a year in income, well sure you can do a lot of tax gain harvesting on that account. So, it just really depends on the size of the account, how much tax gain harvesting you can do without paying any taxes on it. A lot of people don't want to get into the weeds that much in their investments, but it doesn't sound like you're very scared of getting out in the weeds. So, knock yourself out and do some tax gain harvesting.

Dr. Jim Dahle:
All right, the next question comes from Dean about withholding taxes in retirement.

Dean:
Hello Jim, this is Dean from the Upper Midwest. I have a simple question about withholding taxes in retirement. I may be about 10 years or so away from retirement. Ever since I was 16 years old and got my first job at a local pizza place, I have earned W2 income. I have always filled out the W4 for withholdings and adjusted them accordingly.

Dean:
Now, when I retire, I will still have sources of income such as capital gains, dividends, plus I will be likely doing some Roth conversions for a tax deferred account, a cash balance plan that will become a traditional IRA. This is the minimize the RMD at 72.

Dean:
So, my question is how does withholdings logistically work upon retirement when I no longer have a W4? I don't want a penalty come tax time because I haven't paid anything. Thank you so much.

Dr. Jim Dahle:
All right, Dean. Good question. I think your repeat callers as I recall, but welcome back to the podcast. Here's the deal. This is really obvious for those of us who've been self-employed for a long time. Each year, you have to get into the safe Harbor or you owe penalties. In addition to whatever taxes are owed, you have to pay the taxes no matter what. But if you don't get into the safe Harbor, then you have to pay penalties too.

Dr. Jim Dahle:
So, what's the safe Harbor? Well, the safe Harbor might be that you owe less than a thousand dollars in taxes. If that's the case, you're good. If you got to within a thousand dollars of what you owed, you paid $6,000 owed $6,900, then you're good. Even though you underpaid your taxes during the year, you're okay because you're in the safe Harbor. You still have to pay those taxes that are due, that extra $900, but you don't have to pay any penalties.

Dr. Jim Dahle:
Another safe Harbor is having paid either 90% of what's due if you're a low earner or a 100% of what's due. If you paid everything that's due for the year, you're in the safe Harbor and you don't have to pay any extra. Or you can pay 100% if you're a low earner or 110% if you're a higher of what you owed last year, and that gets you into the safe Harbor.

Dr. Jim Dahle:
So, if your income doubles this year, you can dramatically underpay your taxes this year and settle up with the IRS on April 15th and still not pay any penalties. You still have to pay all the taxes due, but you don't have to pay any penalties. And so, the goal for those of us who have to manage this crazy process throughout the year, because we're self-employed, is to get into that safe Harbor.

Dr. Jim Dahle:
And the ways you get in there are you have money withheld by your employer. All of that counts, no matter when in the year it was counted. Even if it's withheld on December 28th, it counts just like every other dollar that's withheld during the year. You can also have it withheld by somebody like Vanguard when you do a Roth conversion or when you do a RMD withdrawal or something like that. And that goes into that same withholding pot of money.

Dr. Jim Dahle:
The other thing you can do, if that's not enough to meet the taxes you have to pay is you can pay quarterly estimated taxes. And those of us who are self-employed, we write a check every quarter. It's due on April 15th, it's due on June 15th, it's due on September 15th and it's due on January 15th for each of the quarters respectively.

Dr. Jim Dahle:
Yes, I know those dates are not each three months apart. It causes me incredible cash flow issues this time of year, every year, because I only have two months of income and yet I got to somehow pay three months of taxes in June, but such is life, right? You get four months to make the last one. You get two months to make the second one. You get three months for the other ones. It's kind of weird, but that's the way it works.

Dr. Jim Dahle:
So, if you are not having enough withheld in retirement by having Vanguard or whoever withhold your money from RMDs, then make quarterly estimated payments. So, if you make a big Roth conversion in the fourth quarter, send in a fourth quarter estimated quarterly payment. And as long as you're doing it, more or less as you go along, because it's a pay as you go tax system with the feds, not necessarily all the states, but with the feds it's pay as you go, then you're okay.

Dr. Jim Dahle:
It's easier sometimes to just pay equal amounts each quarter, and then the IRS doesn't even bat an eye and it saves you one form at tax time rather than having to show that your payments actually line up with when you earned your money. But in general, that's the process. If you're not having enough withheld, you just make quarterly estimated tax payments, no big deal. Although it can be complicated at times. So maybe it is a big deal.

Dr. Jim Dahle:
But I hope that's helpful to you. I can see why that would be a mystery if all you've ever done is had your employers withhold it. But once you've been self-employed for a while, which is really what a retiree is, it's not that complicated.

Dr. Jim Dahle:
All right, the next question comes from Matt. Let's take a listen.

Matt:
How should we invest money that we don't want locked up in a retirement account or after maxing out tax advantage contributions? Should we use an individual taxable brokerage account? Should we form an LLC or some kind of entity to have a taxable brokerage account within or managed by?

Dr. Jim Dahle:
Good question, Matt. This is one of those questions that you're going to look back on in a year from now and wonder that there was a time you didn't know the answer to this question. Basically, yeah, you open up a brokerage account. That's it. You go to Vanguard and buy a mutual fund or you go to Fidelity and you buy some ETFs. That's how it works. Or you go and you buy an investment property or you buy a syndication.

Dr. Jim Dahle:
Now, sometimes it makes sense for an investment to be inside an LLC. For example, nearly every real estate syndication or fund out there is set up as an LLC and that's to reduce your liability so you can't lose anything more than your investment. That sounds bad right? To lose your entire investment, but it could be worse. You could lose more than your investment. So, the LLC protects you from that.

Dr. Jim Dahle:
But in general, if you're just buying ETFs and mutual funds, stocks and bonds, those sorts of investments, you don't need an LLC and you can just open a brokerage account. Now there's some asset protection things you can do. For example, if you're married, you're in tenants by the entirety state, you can title that account tenants by the entirety.

Dr. Jim Dahle:
But just putting it inside an LLC that you're the sole owner probably isn't going to do much asset protection wise. It probably isn't going to do much estate planning wise. It certainly isn't going to change anything tax wise. It's not going to improve your investment return. Really an LLC is supposed to be a business and your brokerage account really isn't a business.

Dr. Jim Dahle:
So, I wouldn't go put in an LLC. I would just open up the brokerage account and start investing. And that's perfectly fine. Obviously, you invest according to your written investing plan. You want to look at all your investments that are aimed at retirement. Even if they're not in a retirement account, all of your investments aimed at retirement as one big asset allocation. One plan should govern them all.

Dr. Jim Dahle:
Now, if that money going into the taxable account is not for retirement, you might want a different asset allocation on that and invest it a little bit differently. For example, if it's money that you're going to need in a year to buy a house with, you probably don't want to put it all into stocks. You probably want it in something very safe, like a money market fund or a short-term bond fund. Something like that.

Dr. Jim Dahle:
If it's money you don't need for four or five years until you want to buy your dream car or something, maybe you invest it a little more aggressively than that, but you're not investing in it as aggressively as perhaps the retirement money you're not going to need for 30 years. I hope that's helpful to you.

Dr. Jim Dahle:
The next question comes from Justin. Let's take a listen.

Justin:
I opened a rollover IRA in 2021 and maxed it out for 2020 and 2021. I also rolled over assets I had from a traditional 403(b) into that rollover IRA. And this was all for this year. I actually did my first backdoor conversion this year in 2021. I converted all of the money, 2020s, 2021s and all of those other assets I had that were pre tax. I understand I'm going to have to pay tax on that.

Justin:
However, what I wanted to know is did I have to fill out form 8606 for 2020, even though I technically did not do any backdoor for 2020? Also, what will my 8606 form look like when I'm filing for 2021? Because I did convert all of those other growing assets into my Roth. Thank you so much.

Dr. Jim Dahle:
Okay. It sounds to me that you know what you're doing, so you're not going to get prorated on any of this because everything you put in there, you converted. So, no big deal. Yes, you'll owe taxes on anything that came out of that retirement account, on your 2021 tax bill. Yes, you have to file an 8606 for 2020. All it is going to document is the traditional IRA contribution for 2020.

Dr. Jim Dahle:
So, that is relatively easy and straightforward to fill out. If you put it in, in 2021, you put it on line 1, your basis on line 20, line three is again your contribution, presumably 6,000. And since you did that after the first of the year, you put in 6,000 on that line as well. And that's about all that ends up getting filled out on this form. In fact, I don't even think you have to fill out line 4. You basically go down to line 14 and that's all you fill out on part one.

Dr. Jim Dahle:
So, your 2020 8606 is going to be really simple. I suspect you're asking the question because you didn't file it though. So now you ought to do a 1040X. Nothing has to go on there, except the part three. You write a paragraph explanation of why you're sending it in and a new form 8606 to explain what you did. So, I would do that for 2020, just amend your taxes, no big deal.

Dr. Jim Dahle:
For 2021, your 8606 is going to be a lot more complicated. Not only will it also document a contribution for 2021, but it's going to document all the conversions you did. Okay, no big deal. You just add them all up 6,000 for 2020 6,000 for 2021, whatever the total amount you rolled over there was all of that, gets added up and that's what you converted.

Dr. Jim Dahle:
So, every time the form asks you if you did a Roth conversion, put it here, you put it on that line. So that's line 8, that's line 16 and you just calculate the taxable amount. That's what the forms for it helps you calculate how much that conversion is going to be taxable for you. So, no big deal. And then of course going forward, presumably you'll do the contribution and conversion during the calendar year and your 8606 will be a whole lot more straightforward. I hope that's helpful.

Dr. Jim Dahle:
Let's take our next question from Jennifer about subway franchises.

Jennifer:
Hi, Dr. Dahle. Thanks for your podcast. I enjoy listening and I am a pediatrician in Ohio who has some questions about retirement accounts. I currently have a generous 401(k) in profit-sharing programs through my place of work. And I'm fully maxing that out, along with maxing out a backdoor Roth for myself and my husband.

Jennifer:
However, my husband does not have any retirement accounts whatsoever. He is an entrepreneur that owns multiple franchise locations. We have about 10 franchise locations within the Subway network right now. And our plan had been as part of our retirement that when he's ready to retire, we would basically sell all of those, take that lump sum check and count that basically as what would have been a big lump sum retirement account for him and use that to kind of live off of the interest from in our retirement years.

Jennifer:
I know this is not necessarily a taxed advantaged way to save, but I wanted to hear your thoughts on that. And if that seems reasonable, considering the loans on the stores are getting paid down by the stores, versus if there is a better way to do it because he could not afford to have retirement plans funded for his employees, which we thought was going to be required of him if he started his own retirement plan.

Dr. Jim Dahle:
All right, this is a great question, Jennifer. I really liked this one, eat fresh, right? 10 subway franchises. I have no idea what that's worth, what it could sell for and what kind of income it puts out. But each individual franchise is a business. Some are probably better than others. The better you run it, the better it is, the more it's worth, the more you can sell it for and so forth.

Dr. Jim Dahle:
An interesting story about subway franchises is that 50 years ago, apparently, according to this article on the web, Dr. Peter Buck gave a college freshman to the founder of Subway. This is Fred DeLuca. The idea to open a subway sandwich shop as a way to help pay tuition. He had a couple of attempts that didn't work out who was called Pete Submarines after Dr. Buck is what he called it.

Dr. Jim Dahle:
But the name had to change because it didn't translate well over radio advertising. But the doc gave Fred $1,000. And that did pay off. The two of them owned and operated 16 sandwich shops and its birthplace of Connecticut under a name called Doctors Associates, Inc. And that was from the idea that DeLuca hoped to earn enough money in the business to become a doctor himself. So cool, little medicine subway tie in there.

Dr. Jim Dahle:
But according to this article, Subway franchises are actually some of the best franchises out there. So, this may be an awesome investment for you. Is it okay to not have a retirement account? Well, yes, because he's absolutely right. He can't open a retirement account for himself without providing one for his employees. And if that is just cost prohibitive and the people working at Subway don't value a retirement account, as much as they would hire wages, then it's probably a non-starter for him to have a retirement account for that business.

Dr. Jim Dahle:
So, two things he can do to provide for his retirement. One is to sell them, pay any capital gains taxes due and invest that money in a different way and use those investments to live off of. The income from those investments or selling those investments from time to time and live off it.

Dr. Jim Dahle:
The other thing you could do is sell a franchise every year or two and live off those proceeds for the next year or two and keep the other franchises, right? So, you go from 10 to 9 to 8 to 7 to 6, right? And you're just selling one of these, every couple of years. Now, obviously you're not going to want to be working in them when you're 85 years old, hopefully you're not doing too much work now.

Dr. Jim Dahle:
But that's part of being a business person. It’s actually extracting yourself from the business. That's what makes the business model valuable to sell to someone else. If you're just selling somebody a job, that's not very valuable. You've actually got to be able to take yourself out of the business and have it generate money without you.

Dr. Jim Dahle:
The other option, assuming you can do that, you can hire managers and extract yourself from the business. You can just take the income from the Subway franchises and live off that, especially if there's some debt associated with it now, and you pay off that debt over the next few years. And so, you're getting a lot more cash flow up from it. Maybe you don't have to sell the Subways at all. You can just live off the income from the Subways. And the nice thing about that, at least under current laws, when you leave those Subways to your heirs, they get a step up in basis and nobody pays capital gains taxes on the gains from that business.

Dr. Jim Dahle:
So, those are some thoughts on it. Certainly, this decision to not have a retirement account is very reasonable. A lot of dentists actually do the exact same thing because they don't want to put a bunch of matches into their employee's retirement accounts. And they don't want to pay the expenses of keeping a 401(k) in place. And so, they just don't, they invest in taxable and that's how they invest for retirement. And that's perfectly fine.

Dr. Jim Dahle:
Naturally your husband can also take some of those earnings he has now, assuming you're not spending them all. And you can put that money into a taxable account. Just because you can't invest in a retirement account, it doesn't mean you can't invest it for retirement, of course.

Dr. Jim Dahle:
Okay. Our next question comes from Brian.

Brian:
Dr. Dahle, thank you so much for all you do. I was hoping you could weigh in on the debate over domestic versus international stock allocation. Specifically, how did you come to your chosen percent allocations to the general categories of US versus foreign equities?

Brian:
It appears from your 2012 and 2017 WCI portfolio posts that you've chosen a 2:1 domestic to international stock portfolio or 66% us to 33% international. I spent hours reading various arguments over the need or lack thereof for international stocks exposure. It appears the range for international percent goes anywhere from 0% of the market weight. In the end, the debate on this topic will likely continue on, but I thought it would be helpful to get your thoughts. Thanks again.

Dr. Jim Dahle:
All right. I think you've correctly identified the issue and the range of what people say out there. Some people say you don't need any international equity at all. Others say it should be market weight, which these days I think is less than 50% given how well the US has done. But it wasn't that long ago that something like a market weight was 55% or 60% international. And I suspect in the future at once more will be a majority international if you want it to be market weight.

Dr. Jim Dahle:
I would say there is a range inside of that, that is reasonable. And I think a reasonable range is 20% to 50% of equity. So, if you've got 60% of your portfolio in stocks, then perhaps anywhere from 12% to 30% of your portfolio is in international stocks and that's probably a reasonable range.

Dr. Jim Dahle:
Now mine is one third international, two-thirds domestic. It's been that way for a long time. The reason I made it that way originally is because it seemed reasonable to me. I didn't want market weight because I knew I was most likely to retire in the United States and be spending dollars. And so, I wanted to overweight the United States a little bit.

Dr. Jim Dahle:
I also liked the United States for a lot of other reasons. I think it's a great place to have a business. I think it is particularly good compared to a lot of countries as far as how it is regulated. So, I think there's some really good arguments to overweight the US for a US investor. But at the same time, I wanted the diversification available from investing internationally.

Dr. Jim Dahle:
And so, I ended up with two thirds US, one third international. It's about right in the middle of that range of what I said was reasonable. It's about right in the middle of that range of what you've heard of what people actually do. But there's no magic to one third international. Certainly, there's no argument I can make that 33% is better than 28%, is better than 38%.

Dr. Jim Dahle:
The key though is to recognize that there will be times when the US outperforms international and there will be times when international outperforms the US. And so, I think the most important thing is that you pick a percentage and you stick with it recognizing that each of these asset classes is going to have its day in the sun. Over the long run returns are probably going to be pretty similar, but you want to own both of them and rebalance periodically to take advantage of the fact that from time to time, one will outperform the other.

Dr. Jim Dahle:
Over the years, there has been an increasing correlation between US stocks and international stocks, but I don't think it's increased so much that there's no value at all to international stocks. I think you can still make a very good case to have some international stocks in your portfolio.

Dr. Jim Dahle:
But how much you hold is really up to you. I identified what I thought was the reasonable range, 20% to 50% of equity. And so, pick a number in there, stick with it in the long run and I'll bet you'll be glad you did.

Dr. Jim Dahle:
The next question comes from Aaron about student loans and how much to take out if you think you're going for PSLF.

Aaron:
Hi, Dr. Dahle. I appreciate your podcast. I just have a question. If I'm a health care student on HPSP military scholarship, and my school allows me to take out as many direct and grad plus loans as I'd like, and I'm already committing four years to public service and the idea of staying in the military or finding another public service job to hit the 10 years is a possibility.

Aaron:
What would hold me back from maximizing my student loan disbursements so that I'm maxing my return on investment by doing public service loan forgiveness? I know this question rubs people wrong because there's an ethical dilemma here as far as a student loan forgiveness and cheating or playing the system to your benefit. Anyways, I just love to hear what you think about that. Thanks.

Dr. Jim Dahle:
Let's talk about this situation in general, and then talk about your situation specifically. Number one, I don't like this. I don't like that people even think about this. This is what we call a moral hazard. Not because we're talking about moral and immoral, but the term refers to incentives. It's an economics term and it refers to incentives. When people are incentivized to do something they otherwise not.

Dr. Jim Dahle:
For example, if you think you're going to get your student loans forgiven, you're incentivized to take out more student loans than you need than you would otherwise take out if you were not expecting them to be forgiven. And that's a moral hazard. It's a side effect of poorly written policy, really.

Dr. Jim Dahle:
And so, I hate the fact that people are even thinking about this, but people are thinking about it all the time. I hear this question very often of whether you should borrow more and spend more or invest more with the money than you otherwise would take out.

Dr. Jim Dahle:
And my general answer to that is no. The main reason why is because things change, right? A certain percentage of medical students every year don't match for instance and then they can't get a PSLF qualifying job for instance, or you end up changing your mind and you don't want to be an academic or you find a really great job or you marry somebody and they want to live in their hometown, there's no PSLF qualifying jobs there.

Dr. Jim Dahle:
Who knows what's going to happen 10 or 15 years from now when it comes time to really make your decisions about what job you take and how much you want to work? Maybe you want to stay home with the kids. I have no idea. And the problem is this decision you've made as an MS1 in how much loans you've taken out has taken away your freedom 15 years from now and how you live your life.

Dr. Jim Dahle:
And so, I, as a general, think this is a bad idea, even though you can run the numbers and show that it's a good idea, right? That it all works out, it's great. That you should borrow as much as you can and get it all forgiven. I just don't think it's a good idea.

Dr. Jim Dahle:
The other problem you run into is you run into a moral and legal issue here with regards to student loans. When you take out a student loan, you sign a master promissory note. And let me read you a section from the master promissory note for the William D. Ford federal direct loan program for direct subsidized loans and direct unsubsidized loans. Basically, the federal loans you took out for medical school.

Dr. Jim Dahle:
If you go down to the section under borrower requests, certifications, authorizations, and understandings that you sign your name to at the bottom of the form, you will read this paragraph. “Under penalty of perjury, I certify that I will use the loan money I receive only to pay for my authorized educational expenses for attendance at the school that determined I was eligible to receive the loan. And I will immediately repay any loan money that is not used for that purpose”.

Dr. Jim Dahle:
So, can you take student loan money and invest it? No, not legally. You just signed under penalty of perjury that you would not do that. It's against the contract. And so, I recommend people don't do that because it's illegal. Now, are they going to find out? Probably not. I don't know how they're going to find out, but that doesn't mean it's not illegal.

Dr. Jim Dahle:
Now let's talk about your situation in particular. You're there under HPSP scholarship, meaning the military is paying every dime of your educational expenses. They're paying all the tuition, all the fees, all the equipment, any required equipment or books is paid for. I was on a HPSP scholarship. I know how it works. They bought me a stethoscope and they bought me an otoscope and an ophthalmoscope. Anything the school would say it was required, they bought for me. And I got every dime out of them that they were on contract to give me.

Dr. Jim Dahle:
But you know what? They got every bit of time out of me that I contracted to give them. It was a mutual, whatever you want to call it, relationship. Whether you want to call it a predatory relationship or whether you want to call it a business relationship, we certainly got everything out of each other that we could possibly get out of each other.

Dr. Jim Dahle:
The issue I would have is signing a promissory note that says I'm going to use loan money to pay for my authorized educational expenses when somebody else is paying for my educational authorized expenses. It seems really hard for me to get a bunch of money from the military and also be certified that I need this money to go to school.

Dr. Jim Dahle:
I don’t know, I'm having a hard time feeling good about signing that note for that purpose, even though your scheme would seem that it would work out fine, right? Because you go to a military residency for three or four or five years, right? And then you owe them four years. Maybe you stay another year after that. And all those student loans are forgiven. Maybe you come out $300,000, $400,000 ahead.

Dr. Jim Dahle:
But basically, you've got to lie to do it. So, I'm going to recommend against doing that. And the truth is there's some risks there. If something happens in your life and such that you can't serve in the military, or you just want to get out at all costs and you don't want to finish the time required to serve in the military and get PSLF, who knows? I just wouldn't do it.

Dr. Jim Dahle:
I understand why you're thinking about it. I understand what the numbers would look like if you ran them, but I think it's a bad idea for you to do. So, I'm going to recommend against that.

Dr. Jim Dahle:
Thank you, however, for your service. Enjoy your time as a military doc. Enjoy the fact that they're going to pay you a couple of grand a month in living expenses and invest some of that money as you go along, take advantage of the fact that the residencies generally pay you more, that you get a great 401(k) with the military TSP. It even has a match now and a Roth option that didn't have when I was in.

Dr. Jim Dahle:
Enjoy that special experience that it is serving your country. Special good and special bad at times, but definitely special. And the further away you get from it, you forget more of the bad and you remember the good. So, thank you for your service and, and good luck with medical school.

Dr. Jim Dahle:
All right, our next question comes in from email. “As a non-married established mid-career physician woman in a relationship with a man who makes considerably less, I would love a podcast on prenup versus trust and things physician women should do to protect assets, but also that is fair to all parties. I see a lot of female colleagues on Facebook paying a lot if the marriage doesn't work out. I would also love a podcast on how couples with income disparity split expenses”.

Dr. Jim Dahle:
There's not a lot here that's woman's specific. This works pretty much both ways. If you are marrying somebody after you're already established in your career or after you already have a significant amount of assets or after you already have kids, a prenup is a very, very good idea.

Dr. Jim Dahle:
Now, if you're getting married at 20 and neither one of you have anything, and you go through college and medical school and residency together maybe a prenup is not as required. I don't know what it would say anyway. Once you accumulate all of that together, it's going to be hard to have anything fair that doesn't split your money as well.

Dr. Jim Dahle:
Now, fair is very interesting to use that word. And the truth is that fair means different things to different people. Your state has already determined what is fair when a couple divorces and you can go look it up and see what they think fair is. And how much alimony is paid, depends on how long you were together and the income disparity and how much child support is paid is also determined by the state.

Dr. Jim Dahle:
And so, if you don't agree that the state's laws are fair and you both don't agree to it, then you can sign a prenup that says something else will happen in the event that you get divorced.

Dr. Jim Dahle:
And the other thing you can do of course, is you can put a bunch of money into a trust that's for your benefit or somebody else's benefit such that if there's a divorce that spouse can't get it. Now, this happens a lot with wealthy parents who maybe don't like the person their child is marrying and so, they put it in a trust that the new spouse will have no access to in the event of divorce.

Dr. Jim Dahle:
I don't see it quite as often with people getting married, but I suppose you could do it as well. I think it's far more common just to get a prenup in that situation. But certainly, you can talk with an attorney about both of those options and their pluses and minuses.

Dr. Jim Dahle:
The downside of the trust of course, is the expense of the trust and the limitations that the trust may have on you, especially if it is a revocable trust and the court can just force you to pull the money out of it. So, it's got to be an irrevocable trust, which means now that you don't necessarily have full control over the money. So, it's probably pretty well protected from your now ex-spouse, but you also gave up some significant control, took on some additional hassle and expense to form it.

Dr. Jim Dahle:
The prenup I suspect is significantly cheaper. A postnup is also an option, but again, you're still in the situation where you have to agree with your spouse on what it's going to say. If they don't sign it, it's useless. Right?

Dr. Jim Dahle:
So, I hope that's helpful to you. Obviously, physicians get divorced as well. The rate of divorce is much lower than it is for the general population. Instead of being about 50%, it's about 25%. And in fact, if it's a two-physician couple, it's only about 10% or so. And so, we actually do better than our reputation, but there's still obviously lots of docs getting divorced out there. And almost all of them wish they'd had a prenup of some kind.

Dr. Jim Dahle:
But I don't know that that's necessarily different for women than it is for men. I see lots of men who have gotten divorced complaining about the exact same thing and having to make huge alimony payments, so on and so forth.

Dr. Jim Dahle:
It's really interesting. If you want to have an interesting conversation with your spouse, especially if you got married relatively young, like I did, it's interesting to talk to them about what something might look like, like alimony and how the assets would be split up in the event you did get divorced.

Dr. Jim Dahle:
What you think is fair is probably very different from what they think is fair. Good way to start a fight that way too, by the way. But you might think this is really straightforward and different people have very different opinions on it. And that's why the state and the courts decide so many of these cases.

Dr. Jim Dahle:
A podcast on how couples with income disparity split expenses. I don't even like the premise of this question. And I'll tell you why. Because once you're married, I think you ought to combine all your finances. Until you get married, I think you ought to keep them all separate. I don't think you should pay off your fiancé’s student loans or make their car payment or anything like that. I think you have to have separate finances until you get married.

Dr. Jim Dahle:
But once you get married, I would combine everything. All your income is no longer “his” income and “her” income or “her” income and “her” income. It is all “our” income. All of your assets are “our” assets. All of your liabilities are our liabilities, our debts, our accounts.

Dr. Jim Dahle:
And I think couples that do this are far more successful than those that try to keep separate checking accounts and try to keep separate investments and try to keep their financial life separate. I think that's just asking for trouble. It's just so much stress on a marriage already without that additional financial stress of trying to keep things separate.

Dr. Jim Dahle:
Now, the only reason people keep things separate aside from the fact that maybe they're not truly committed to the relationship is because they want to have their money, that they don't have to account to the other person for. And I think a better solution to deal with that is to simply give allowances. They don't even have to be equal allowances if you don't want them to be, but to give allowances. And this is a sum of money each month that you don't have to account to the other spouse for it.

Dr. Jim Dahle:
You can spend it on whatever you like. You want to put it on baseball cards? You can do that. You want to spend it on pedicures? That's fine. You want to spend it on rafting equipment? You can do that. If you want to eat out with it, you can do that. And if you want to buy shoes with it, you can do that. But it's money you don't have to account to your spouse for.

Dr. Jim Dahle:
And we did that from very early on in our marriage. I think it might've been $20 a month in the very beginning, but it was something we could spend without having to account to the other person. We actually dropped that out of our budget a couple of years ago and basically just buy whatever we want at this point. But it really served the purpose for a number of years in our marriage. And there were things that it was nice to be able to buy without having to justify. So, that's what I would recommend to you. I hope that's helpful.

Dr. Jim Dahle:
Remember that we are recruiting conference speakers at whitecoatinvestor.com/speakerapp through June 30th.

Dr. Jim Dahle:
Thanks to those of you who have left us a five-star review and told your friends about the podcast. The most recent one comes in from Quill, who said, “Every medical student, resident and attending physician should listen to this podcast. Timeless advice on personal finance. And I’m not just saying this to win a free Yeti Tumbler”.

Dr. Jim Dahle:
I think maybe you are at least partially saying that to win a free Yeti tumbler, but we did get a whole bunch of five-star reviews when we also included those people in a drawing for Yeti tumblers. How about that?

Dr. Jim Dahle:

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Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.