Podcast #149 Show Notes: Should I Time the Market?

Should you try to time the market? No! Why? Because it is very hard to do well over the long term and it introduces significant transaction costs to the equation. Beginner investors have trouble staying the course in market downturns but I’ve noticed that what I call intermediate investors, people who have learned a thing or two about investing, become fearful at market highs and want to sell when the market is at new highs.

What they don’t realize is that the market is usually at new highs because it is usually going up. You are much better off setting a static asset allocation of a reasonable mix of stocks, bonds and or real estate and rebalancing back to it each year. That way you hold your risk constant, and when the inevitable downturn comes, because it’s going to come, you can simply rebalance back to your percentages. That forces you to sell high and buy low because you’re selling what did well in the recent past and buying what did poorly in the recent past to get back to your planned asset allocation.

If you look back at market history, you will see that on average, we see a market correction, a drop of 10% or more in the stock market, about once a year. So if you’re investing career is 60 years, 30 years while you’re working, 30 years in retirement, you’re going to see about 60 10% drops in the market. So this is not something that’s unusual or something that’s rare. This is something you should be planning for. We talk more about timing the market in this episode as well as answer listener questions.

 

This episode is brought to you by 37th Parallel Properties. There is a substantial body of evidence supporting commercial real estate investing. Through the years, as I gained a deeper understanding of the asset class, I added more and more to my portfolio. But, unless you want to manage it yourself, the real trick is to find a trusted investment sponsor. As one of the good guys in the industry, 37th Parallel Properties is a partner I trust. They’ve been around for more than ten years and still maintain a 100% profitable track record with clear reporting, and excellent educational content. Many of my readers have invested with 37th Parallel, and so have I. I’ve been happy with my investment and they now have a diversified multifamily fund available. So if you’d like to check them out, hop on over to 37th Parallel Properties.

Quote of the Day

Our quote of the day today comes from Phil DeMuth, Ph.D. who said,

“If you manage your own money, you are potentially vulnerable to every crackpot investing idea that comes along. It only takes one.”

That is the truth.

Should I Time the Market?

A listener asked,

“I had a question in regards to my 401(k). It’s doing really well this year, and that is due to the current stock market trend. However, there’s been some guesses that the stock market might take a downturn in the future, possibly a few weeks, months, or maybe even a year or two from now. Would you recommend doing something like switching from 100% stocks, which is currently what I have in my 401(k) to 100% bonds or a higher percentage of bonds?

I am still about 20 years away from the traditional retirement. My plan would be to switch over to 100% bonds in order to ensure safety and avoid market downturn and then switch back to stocks once the market starts trending upward again. What do you think about that plan?”

A lot of investors are worried about the stock market. This listener is basically asking, should I time the market? The answer is no. The reason you should not time the market is because it is incredibly difficult to do well over the long term. It also introduces significant transaction costs and in a taxable account, tax cost to the equation. So not only do you have to be able to time the market well enough to beat the market, but you also have to do it well enough to overcome the cost of doing so in the long run. It is very difficult to do. I would not advise trying it.

Beginning investors have trouble staying the course in a market downturn, when the market tanks and stocks falls 20-40% and they bail out at the bottom and end up buying high and selling low.  I’ve noticed a similar problem among what I call intermediate investors. People who’ve learned a thing or two about investing and instead of becoming fearful at market bottoms, they now become fearful at market tops, and so they want to sell when the market is at new highs. What they don’t realize is that the market is usually at new highs because it is usually going up. So any concerns you have now about the market being at a high, I assure you that people have had that concern for pretty much the last 10 years and yet going to bonds at any point in that time period would have been the wrong move.

Now one of these days it will have been the right move just before a big bear market happens again, but that is so difficult to tell in advance, that it is really not worth trying. You are much better off setting a static asset allocation of a reasonable mix of stocks, bonds and or real estate and rebalancing back to it each year. That way you hold your risk constant, and when the inevitable downturn comes, because it’s going to come, you can simply rebalance back to your percentages. That forces you to sell high and buy low because you’re selling what did well in the recent past and buying what did poorly in the recent past to get back to your planned asset allocation.

Just get a good longterm plan in place.  If you look back at market history, you will see that on average, we see a market correction, a drop of 10% or more in the stock market about once a year on average. So if you’re investing career is 60 years, 30 years while you’re working, 30 years in retirement, you’re going to see about 60 10% drops in the market.

So this is not something that’s unusual or something that’s rare. This is something you should be planning for. This just happens. This is what stocks do, and you should bake into your plan that you’re not going to sell when they go down. If anything, you’re going to buy more. Likewise, with a bear market, a bear market is often defined as a 20% plus drop in stocks.

And how often does that happen? Well, on average, it happens about every three years. And so how many of those are you going to go through in a 60 year investing career? You’re going to go through about 20 of them. It should not be unusual. You should not feel like something weird is going on when the stock market drops. It just does this from time to time. It did this in 2000; it did this in 2008; it did this in 2011; it even did this in December of 2018. You might not have remembered it because it only lasted a couple of weeks, but these stock market drops do happen from time-to-time. They’re not a reason to panic and they’re not really a great opportunity to try to time the market because they are so hard to forecast when they’re going to happen, how severe they’re going to be or how long they’re going to last.

You’re far better off just having a know nothing static portfolio that you rebalance periodically. Take advantage of every asset class having its day in the sun.

Reader and Listener Q&As

Hiring Family as Employees

“I’m currently employed, but I’m changing my structure this year to become an S Corp. A unique question I’d like to get your thoughts on. After I graduated, I was fortunate enough to get my parents to take over my student loans. They originally paid $145,000 and I pay them back every month, $1,500 interest-free. Awesome deal I know. At the present time I still owe about $100,000 to them. As an S Corp, I was wondering if it will be advantageous for me, without being worse for them, if I found a way to technically hire them as a W-2 employee to pay them back. I’d love to hear your thoughts on it.”

I love hearing these schemes because I’m amazed at all the different ways doctors can come up with to somehow save money on interest or taxes or whatever. The short answer on this one is, no, this is a bad idea. Here’s the way to think about it.

First of all, it’s illegal to technically hire somebody. You either hire somebody, and they do real work for you and you fill out all the appropriate paperwork or you don’t.
There is none of this technical hire stuff. You don’t technically hire your parents. You don’t technically hire your kids. You don’t technically hire your spouse. You cannot just make stuff up and start moving around money on your spreadsheet without actually having someone doing a real job that you’re paying them a reasonable amount of money to do.

Also, your parents have done you this huge favor. They have taken over your loan, so you have 0% loans instead of 7% loans. That was really nice of them. Now, technically, they have to charge you a market interest rate to loan you money. But they can forgive the interest to you as a gift each year, that’s legit with the IRS, you’re still supposed to have a promissory note written up. But, for the most part, people do this all the time, and that’s okay. But it’s interesting here that you want them to do real work to earn their own money back when they loaned it to you interest-free. You also have to pay payroll taxes, social security and Medicare tax on these loan repayments you’re giving them, so not only do they end up paying more in taxes, but they have to work for their money. It’s just a bad idea all around.

Then, of course, there’s also the fact that this is a family loan. A lot of ways the worst loan in the world is the one from the person who sits across the table from you at Thanksgiving. In some ways, the meal tastes differently when you owe someone at the table money. I think those are loans that are worth prioritizing, despite their low-interest rate, I would pay them off relatively early, and I doubt you’ll regret it even with that, obviously, fantastic interest rate.

Starting a Business

A listener with a product idea they want to monetize asked about advice on how to get started. Here are the top five things to do when starting a business.

  1. Write a business plan.
  2. Decide on a corporate structure.
  3. File any required paperwork. That probably means getting an EIN, Employer Identification Number, from the IRS, registering with your state and maybe even getting a city business license.
  4. Figure out a marketing plan. Get a website up and then have a marketing plan above and beyond the website.
  5. Hire help as needed.

Businesses get started every day in this country. Obviously, lots of small businesses fail so make sure your runway is long enough that you can actually get the plane off the ground before you run out of cash. If you’re cash flowing from your earnings as a physician, that’s one way to make for a very long runway. If you can bootstrap the business that makes for a very long runway, but when you’re taking on investor money or when you’re borrowing money, that runway gets shorter and shorter, so be careful with those sources of funds.

Bond Tents

“I was wondering if you could give your thoughts on the idea of a bond tent in which the allocation of bonds is increased prior to retirement and then steadily decreased.”

A bond tent is an idea that has become popularized most recently by some studies done by the retirement researchers pushing for a higher stock to bond ratio later in retirement. The idea being that inflation becomes more of a risk and you need your assets to keep up with inflation late in retirement. So that means that instead of doing what everyone was doing beforehand, which was just decreasing your stock to bond ratio throughout your career and throughout your retirement, at a certain point, you kind of rack the risk back up, maybe five or 10 years into retirement. So you’re taking on more risk.

So that period of time around the retirement date, maybe five years before and five years after is when your sequence of returns risk is higher. That risk that even though you have adequate average returns throughout retirement to support your withdrawals, your crummy returns come first. That’s a serious risk. And so for those five years before retirement and those five years after retirement, you have the least amount of volatility in your portfolio, the lowest stock to bond ratio of your entire life, and they call that a bond tent. The idea behind that is if sequence of returns risk shows up, if you retire right into 2008, or right into 2000, or right into the stagflation of the 70s, those sorts of time periods, that you are protected from that volatility of your portfolio and that you can manage your sequence of returns risk.

That is the idea of a bond tent. I think there’s a lot of wisdom there. Certainly, I don’t think you should be really ratcheting up the risk as you come into retirement. That’s probably not a great idea. Whether you want to ratchet it up later in retirement, I’ll leave up to you. Honestly, a lot of people get really fixated on these safe withdrawal rate studies.

But what real live people do is start out withdrawing something around 4% of their portfolio, and then they adjust as they go. If sequence of returns are bad in the beginning of your retirement, you tighten your belt a little bit; you spend a little bit less money. If returns are good you’re going to be fine. If you don’t have a nasty bear market in the first five or 10 years of your retirement, you’re probably going to be just fine, and you can spend not only 4% without having to worry, but maybe five or six or even 7% and so keep that in mind. Adjusting as you go is the way to go in retirement.

Student Loan Management

“I’m a fourth-year medical student, who recently got engaged to another fourth-year medical student. We’re both going into primary care specialties in a high cost of living area.  Most of my loans are family loans while my partner’s loans are all federal. I have three main concerns. Which income-based repayment plan should we use during residency. How might this change while we are single versus when we are married? Number two, my partner would be much more likely to go for Public Service Loan Forgiveness than me given our differing federal loan burdens. We want to leave the option open for both of us. If we both want to work for 501(c)(3)s, is it wise for both one or neither of us to go for public service loan forgiveness. Number three, we do plan to pay for advice about this at some point before residency starts, since it seems pretty complicated, what other things should we ask about to prepare us for success with our student loan management?”

What IDR should they use and does that change once they get married? Well, it really depends. There are lots of ways to do this. Obviously, if she is on family loans, then no IDR plan is going to work there, those are only for federal loans.

You are on federal loans, and so the IDR comes down to what your plans are. If you want to keep Public Service Loan Forgiveness on the table, then you’re going to want to be paying the minimum that you can in an IDR program, and that means Pay As You Earn program or the Revised Pay As You Earn program are going to be your best bets to keep those payments low.

As a general rule, REPAYE is better because you get your interests subsidized, so your effective interest rate is a little bit lower than it otherwise would be. The exception to that is when you have two earners in the family, and you’re trying to keep that taxable income as low as you can.

A trick some people use in that situation is that they stay in PAYE and file married filing separately because you can’t do married filing separately, or at least it does you no good, if you’re in REPAYE. When one of you is going for Public Service Loan Forgiveness, and you’re trying to keep the other’s income out of the equation, sometimes you do PAYE plus married filing separately.

But if you’re both going to work for 501(c)(3)s, I don’t see any reason why you both would go for Public Service Loan Forgiveness. Her loans are mostly family loans anyway, so there’s not a lot of benefits there. But if you want to, you can go into REPAYE for both of you and work toward Public Service Loan Forgiveness.

The questions to ask when you seek advice are

  1. Which IDR plan should we be in? That might change year to year.
  2. Which retirement accounts should we use, Roth or tax-deferred.
  3. How should we file our taxes?
  4. When our plans change, should we stick with the IDR program?

Those are the main questions to get answered in that consultation. The more complicated your situation, the more likely you are to benefit from advice, particularly when you have two people earning and one or more of you are going for Public Service Loan Forgiveness. It’s almost surely worth paying a few hundred dollars and getting some top quality student loan advice.

Mega Backdoor Roth IRA

“I have a question regarding savings accounts. My employer currently has a 401 (k), and I’m verifying whether or not they allow for after-tax contributions and in-service distributions. And I’m hoping to contribute the additional 38,000 to a Mega Backdoor Roth IRA. The question is my employer is also looking to start a 403(b) and a 457, how will the activation of those two accounts affect my ability to contribute to a Mega Backdoor Roth IRA? Further, I have 1099 income as I do some locum tenens and consulting work on the side, and my 1099 income is roughly $15,000 to $20,000 a year. I do have an individual 401 (k) that I started for this year. How can I optimize my savings into my individual 401 (k) with all these other factors from my W-2 employment?”

I’m not entirely certain what’s going on here, whether we are adding a 403(b) and a 457 on top of a 401(k). I have actually heard of a few employers that offer both a 401(k) and a 403(b) which is really unusual. Typically, however, people have one or the other. Of course, the 457 contribution limit is totally separate from the 401(k), 403(b) contribution limit. However, unless the 403(b) also has a Mega Backdoor Roth IRA option and they don’t call it that. What they call it is basically two features. One of which is it allows after-tax, not Roth, but after-tax contributions and it allows in-service withdrawals or in-plan Roth conversions. If it has both of those factors, then it’s a Mega Backdoor Roth allowing 401 (K) or 403(b). So it really just comes down to whether the new plan will still allow that thing or not.

Bear in mind that due to a weird rule with 403(b)s, the 403(b) contribution does count toward your 57,000 limit with your individual 401(k), despite the fact that it’s a totally separate employer. So the way to optimize those savings for the most part, what most people use their employee contribution of $19,500 a year in their employer’s 401(k).

That allows them to get the match from the employer. Then they just use employer contributions in their individual 401(k), which is basically 20% of your net income. Or if you’re an S Corp, 25% of your net salary. It really works out to be about the same number, just whether you include the contribution itself into the denominator or not.

The way to optimize your savings is to max out the 457(b) limit. The 403(b) and the individual 401(k), of course, share a limit essentially due to that weird 403(b) rule. With the old 401(k) it would have been two totally separate, $57,000 limits between the employee and employer contributions.

Group Disability Insurance Policies

“If someone has a personal and work disability policy with own speciality coverage, adding up to your current salary, would they both payout? For instance, say they’re both for 5,000 a month, and you make 10,000 a month, would you get the sum 10,000 if a disability occurred or would only one of them payout because the maximum amount for each is 5,000?”

f you have both Group disability insurance and individual disability income insurance, they will both generally payout, but you have to read the fine print, particularly with group disability insurance policies. Sometimes they are written such that, you only get the amount from the policy above and beyond what other disability policies are paying you. So the devil’s really in the details here.

With individual policies that you buy from a good independent insurance agent like those we recommend and from the top-notch big five or six companies, this is not an issue. Even though you’re getting money from another disability insurance policy, you’re still going to get that full payout. It is the group policies you have to be really careful about.

Predictability of the Real Estate Market

Is real estate predictable? Can you time the real estate market?

There is no correlation between appreciation in the last few years and future appreciation. That said, all real estate is local. And location, location, and location are the top three rules in real estate. Some locations are obviously better than others. Some places are not going to get better. They have problems, and those problems are not going to be solved in the next five years. And you can assume that if returns had been crummy there in the past, they’re probably going to continue to be crummy.

But it really comes from getting more information about the area than just knowing what the appreciation was the last few years. If someone had followed that rule, I mean, imagine being in Phoenix or Las Vegas in 2003 to 2006, and you assume because you had awesome appreciation during those years that it’s going to be great in the next few years and then you lose 75% or 80% of the value of your property.

The second question, however, is more complex. Can you time the real estate market? Well, the thing about real estate is it is much less liquid, and there’s a lot of people that are buying it for purposes that have nothing to do with investment. So there are some factors that probably make it due to its illiquidity, due to its lower efficiency. And due to the fact that there’s a lot of people in the market who are not professional investors that can make it kind of weird and probably do make it a little bit easier to time the market.

For instance, when I was buying a townhome back in 2006, we knew the market was pretty high. We knew that there was a very good chance that the market could go down and as a result of that we bought a place that was much less expensive than we could afford because we thought there was a pretty good chance we could lose value on it, and we want to make sure if it did drop in value that we didn’t lose that much money.

Now obviously that was a good decision to make, especially since we couldn’t even sell the place four years later. But I think it is a little bit easier to time the real estate market than it is to time the stock market. That said, it’s not an easy task by any means.

However, with real estate, if you are willing to hold it longterm, they say time heals all wounds, and as debt is paid down on the property, as long as it’s cash flowing and you’re not having to feed the beast, it generally will come back and will appreciate. If you can hold it for 10 or 15 or 20 years, even if you don’t buy it at a great time, you’re still probably going to make out okay. But honestly, that’s the same for the stock market. There’s no difference. Time heals all wounds.

So for the long term investor, the right time to invest is yesterday and the second-best time is probably today and time in the market matters a lot more than timing the market. But if I had to guess which one was easier to time, I would definitely say the real estate market is.

 

Socially Responsible Investing

I brought on Johanna Fox Turner of Fox Wealth Management to answer a couple of listener questions with me. A listener asked about social responsible investing and hot to vet companies, mutual funds, index funds, etc. This listener is also a Muslim and wants to be cognizant of where their money goes. There are specific rules on interest accumulation, amount of debt a company holds, dealings or involvement with gambling or alcohol and all sorts that determine its suitability for the Muslim investor.
They wanted to know if we had specific guidelines on the types of investments they can make.

Johanna said,

“I personally don’t believe that activism and investing are a very good combination. So every once in a while we will have a client that asks about socially responsible funds and I will just tell them to Google it because we have tried to do this on our own in the past and it always seems like something objectionable creeps into the fund. And so what I recommend is that they donate time and money to those efforts and then try to find funds that are least objectionable but invest for growth in the future.

Now, the second part, the Sharia compliant investing. A long, long time ago when we were choosing funds actively we found Saturna funds, that is a family of funds that includes Amana mutual funds which are Sharia-compliant. When we first started using these funds for clients, I did not know anything about them being Sharia-compliant. And then that was kind of an added bonus later. But it’s a really good fund company. So I’d suggest trying that first.”

I feel the same way as Johanna. Socially responsible investing, and its newest version ESG Investing, like the old SRI funds always seemed to underperform. It was kind of the classic active management thing. So it was always, well how much of your return are you willing to give up in order to be socially responsible? And do you even agree with what the fund manager thinks is socially responsible? Because a lot of it just kind of gets into politics. You end up with a fund that’s pro-gun or a fund that’s anti-gun or a fund that’s pro-military or anti-military or whatever. And maybe you’re into brewing your own beer and the fund is anti-alcohol.

But the newest ones, this ESG, where they throw in the governance factor at the end, the returns don’t seem to be bad. In fact, if anything, they seem to be just as good, maybe even slightly better, which has caused me to spend a little bit more time looking at them. I’m not sure I have a great recommendation for where to send someone because it still feels all like active management to me, but they’re starting to come out with some ETFs and some indexes of ESG factors so at least I feel like if people are really into this, they’re not totally doing their portfolio this disservice anymore, but I’m not sure I have a great recommendations for where to go.

I think Ishares has an ETF out that’s based on some ESG. At least it’s low cost and broadly diversified. I can’t say whether it agrees with what your definition of ESG or SRI is, but at least it’s an option.

Buy Ins for Practices

“My wife is an emergency room physician and in a pre partnership track. She’s about a year and a half in and in a  year or two they have the opportunity to buy-in to the practice. My understanding is that the buy-in will be close to $700,000 and she would then receive closer to 100% of her productivity instead of; I think she’s at 80 currently. This seems pretty high for my perspective for a buy-in and the only thing they do, they won’t finance it either, but they will co-sign a loan for the 700,000 which doesn’t really do much for me, so probably still be 5%-6% interest rate loan of $700,000. I wondered if you had any thoughts on kind of comparable ER buy-ins.”

What would Johanna tell this doctor if she came into her office asking about this?

“I would first ask if she went into this with her eyes open. Did she know that big buy-in was going to be there and did she know what the expectation was to go from 80% 100% of the productivity? I’ve never heard of a buy-in like this in an emergency group. So typically when we see the buy-in and group, it’s a group that has thought of equipment or a lot of capital, and they’re getting something in exchange, it’s not just buy-in for the good will. And an emergency room, I don’t really understand the concept of a lot of Goodwill with an ER group. So I would say think pretty hard about this, and they won’t finance a loan, they will co-sign it. But another question I would ask is, what do you get out of it? Say you decided to leave the group in few years, it’s just not working out well for you. You really want to have it documented and your purchase agreement that you get your 700,000 back or if you don’t that they have a firm calculation of what you can get back. Or say you pass away, what does your spouse inherit? Do they get that investment back? That’s the other component I think is are you just throwing in $700,000 down a hole just for the benefit of getting extra 20% productivity or are you investing like you would say a mutual fund or a stock and it’s expected to grow or at least you can get your money back.”

Yes, this is insanity. The typical buy-in for an emergency physician group is a sweat equity buy-in. Your work for less money for one to three years. That’s a typical buy-in.
The longest one I know of was five years, and you got paid a little bit more each year for those five years, but that was like the best group in the country. You just made bank like crazy after that. So people were willing to do a five-year sweat equity buy-in. I’ve never even heard of a financial buy-in into an emergency medicine group anywhere. But 700,000 just seems egregious. I mean, unless you’re getting a piece of property with it, I cannot imagine what that is buying.

For example, with my buy-out I only expect to walk away with the 30,000, 40,000, 50,000 something like that. There’s not hundreds of thousands of dollars slopping around in an emergency medicine group like that. So I have no idea why the buy-in would be so big. And that would be my first question is what am I actually buying into? And it sounds like what you’re doing is just buying your job and giving those who had it before you a big bunch of cash is what it sounds like to me.

So I’m not sure I would become a partner in this group to start with just because if that’s the way they treat their new hires, well that’s the way you’re going to have to turn around and treat your new hires, which isn’t going to feel very good.

But aside from that, there’s a massive risk in emergency medicine as in any similar groups of the contract just going away. I mean, a contract management group could come in and swipe this up and then what do you get for your 700,000? Nothing. If there’s nothing, there’s no equipment; there’s no property. It just seems like a massive risk to me. I’m not sure I’d join the group at all, and I’d certainly tried to negotiate that price way down to what would be the equivalent of sweat equity.

If I had to think about what the equivalent buy-in would be per sweat equity, for our group over a couple of years, maybe it’d be a couple of $100,000 worth of sweat equity, but certainly not 700,000; that just seems like a massive difference.

Estimated Tax Payments

“I’m a fellow graduating this June. I have a little dilemma with my estimated tax payments for 2020. I do a little moonlighting on the side and last year performed a big Roth conversion, so my AGI is a little over 150,000. I filled out my 2019 taxes with TurboTax and the software wants me to make $6,000 estimated tax payments each quarter so I can stay in the safe harbor. Unfortunately, I don’t think I can make these payments because I won’t be moonlighting that much this year and I spent most of my cash paying the taxes on last year’s rollover. The 90% safe harbor rule based on my 2020 taxes may not help either since I’ll be working my first attending job started in July and we’ll have a higher tax liability for 2020 compared to 2019. What do you think is my best way to approach this? I’ll be paid as a partner for my attending job, and I’ll probably own my partnership interest as an S Corp. Can I just not make any estimated tax payments at all and just make large withholding tax elections when I’m an attending later in the year or is there still a penalty associated with paying most of my taxes in the last half of the year?”

As a CPA and a financial advisor this question is great for Johanna. She said,

“Just because the software says you need to do it doesn’t mean that you need to do it because you have to have a little human intuition and input into calculating what you need to make for estimates. That said, there’s nothing wrong with using the software and coming up with that answer as long as you understand that it’s not exactly correct. And it sounds like the person who emailed you has a pretty good handle on the safe harbor rules.

So in this case, yes, I would say, first of all, you’re going to be able to annualize because he’s not going to have a lot of income in the beginning of the year. So those estimates probably won’t be due, especially with that huge Roth conversion.

Secondly, yes, he or she can pay taxes through withholding at the end of the year. I’m just going to say when they become an employee as an S corporation, but my third point would be, are you sure you want to be an S corporation to be part of this partnership?

I think that might take a little more work, thought and consideration. Now they are an S corporation. Yes, they can withhold taxes, and if they withhold any taxes they owe on the last paycheck of the year is going to be treated as spread equally throughout the year. But if they aren’t an S corporation, then they can make estimated payments at the end of the year when they’re making all that income.”

 

Excellent answer. I’m not sure I can add anything much to that. I think it’s difficult for people with changing income to figure out how to do their estimated tax payments. Because the tech software does assume that basically, next year is going to be exactly the same as this year. There are lots of ways into the safe harbor. I think the key is just choose the easiest one for you. If someone has falling income, it’s probably easiest for them to pay 100% of taxes due than it is 110% of last year’s taxes. That, of course, requires you to actually know what your taxes are going to be that year.

But what does Johanna think about that? I don’t want to call it a loophole, but this idea that you can just withhold all your money in December and basically avoid making estimated tax payments.

“Well, it is a loophole, but another thing you have to consider is that if you are withholding everything, you’d have to have a paycheck and you’re going to have Medicare taxes, already going to max out social security almost certainly, but you’re going to have those Medicare taxes. Whereas if you make estimated payments just through distributions in the S corp, we’re still assuming this is an S corp, of course. Then you’re not going to have that Medicare tax penalty associated.

And people really seem to be afraid of tax penalties, and I don’t always understand it. I think it’s that fear of the boogie man, IRS. Quite frankly, a lot of times you’re going to get a penalty that’s going to be a lot less than it would have cost you to pay the Medicare taxes or to borrow from Peter to pay Paul and get that money in on time just because you’re afraid of what the IRS might penalize you.”

That is a good point. The other thing I think people don’t get is, yes, the paperwork’s easier if all your quarterly estimated are exactly the same amount of money and that’s what I try to do each year, but they do allow you to pay as you owe the money. As the money comes due. Meaning if you make all your money in the last half of the year, your estimated tax payments can be much higher in the last half of the year and that’s okay. You won’t owe any penalty for that. Of course, the opposite is not okay; you can’t make all your money in the beginning of the year and pay all your taxes at the end unless it’s withheld from paychecks. Johanna said,

“So for our clients, if they happen to end up with a penalty and it’s less than $100, we just erase it. So if you’re doing your return yourself and you end up with a penalty of $51, I would just override it to zero. We have never had the IRS come back on us or our clients saying, “Hey, you didn’t pay this small penalty. In some States it’s the same, you won’t have to pay the penalty.”

Ending

Thanks for Johanna for coming on the podcast. Remember to stay the course. Follow your written financial plan. Don’t try to time the market.

Full Transcription

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 149, Should I Time The Market? This episode is brought to you by 37th Parallel Properties. There’s a substantial body of evidence supporting commercial real estate investing. Through the years, I gained a deeper understanding of the asset class. I added more to my portfolio. But unless you want to manage it yourself, the real trick is to find a trusted real estate sponsor.

Dr. Jim Dahle:
As one of the good guys in the industry, 37th Parallel Properties is a partner I trust they’ve been around for more than 10 years and still maintain 100% profitable track record with clear reporting and excellent educational content. Many of my readers have invested with 37th Parallel, and so have I. I’ve been happy with my investment. They now have a diversified multifamily fund available. So if you’d like, check them out. Hop on over to 37thparallel.com/wci.

Dr. Jim Dahle:
Our quote of the day today comes from Phil DeMuth, Ph.D. Who said, “If you manage your own money, you are potentially vulnerable to every crackpot investing idea that comes along. It only takes one.” And that is the truth and, in fact, the day you are listening to this podcast, some White Coat investors are listening to Phil down at WCICON20. As this goes live, we are down there having a great time with 800 of our best friends. Hopefully, everything’s going great. Obviously, we’re recording this in advance. But, if you’re down there, that’s great. We’re having a fun time with you. I’m sure if you’re not; hopefully, you can make it next time. We’re talking about moving those to once a year going forward. Be a little bit of a rush to get the next one ready, but certainly, people are enjoying them, and I think they’re doing a lot of good.

Dr. Jim Dahle:
Speaking of people who are doing a lot of good, thank you for what you do in your practice. Sometimes medicine is a difficult job. It is always a job that can be heartbreaking, and we see a lot of sick and injured people and don’t necessarily get paid as much as people that have put in just as much time and effort in us in different fields.
Dr. Jim Dahle:
I saw a study recently that compared a tech background to a management background or a finance background to a law background into a medicine background, and after 10 years in the field and or still in education, obviously, medicine was coming out dead last in that comparison. In the long run, I think they don’t end up completely dead last but certainly still in the bottom half of the pile.

Dr. Jim Dahle:
If you had put as much money as you put into medicine, into something else and as much time and effort and skill and intelligence as you have, chances are you would be making more money. And so thanks for sacrificing some of that in order to do some good for our society.
Dr. Jim Dahle:
All right. If you have not been onto our social platforms, I would encourage you to check them out. We have three forums, three places you can discuss with other White Coat Investors, whatever your financial concerns may be, whether you’re asking questions or answering other people’s questions. If you like the Reddit format, we have a Subreddit, r/whitecoatinvestor. If you like a forum, we have a White Coat Investor forum. We got a whitecoatinvestor.com/forum. It’ll take you right to our forum there, totally anonymous.

Dr. Jim Dahle:
If you just like Facebook groups, we’ve got a very large Facebook group. It’s about 40,000 people, and you can sign up for that at facebook.com/whitecoatinvestors. And so I’ll be sure to check those out if you’re interested in interacting with other White Coat Investors and getting your questions answered.
Dr. Jim Dahle:
Let’s take a question off the SpeakPipe. This one comes from Pam and is the question for which I have titled this episode.

Pam:
Hi Dr. Dahle. Thank you for everything you do. Your blog and podcasts have been instrumental to me in regards to helping with my financial literacy, and I really thank you for it. I had a question in regards to my 401(k). It’s doing really well this year, and that is due to the current stock market trend. However, there’s been some guesses that the stock market might take a downturn in the future, possibly a few weeks, months, or maybe even a year or two from now. Would you recommend doing something like switching from 100% stocks, which is currently what I have in my 401(k) to 100% bonds or a higher percentage of bonds?
Pam:
I am still about 20 years away from the traditional retirement. My plan would be to switch over to 100% bonds in order to ensure safety and bride out market downturn and then switchbacks to stocks once the market starts trending upward again. What do you think about that plan? Thanks so much.
Dr. Jim Dahle:
Okay, so Pam, like a lot of investors, is worried about the stock market, worried about going down and asking, “Should I switch from 100% stocks to 100% bonds? Or at least a higher percentage of bonds and then switch back to stocks when the market’s going to go back up?” This basically asking, should I time the market? And the reason you should not time the market is, it is incredibly difficult to do well over the long term. Plus it introduces significant transaction and in a taxable account tax cost to the equation.
Dr. Jim Dahle:
So not only do you have to be able to time the market well enough to beat the market, but you also have to do it well enough to overcome the cost of doing so and the long run. It turns out that’s very, very difficult to do. And so I would not advise trying it.
Dr. Jim Dahle:
You know what’s interesting though is I’ve noticed a trend, the beginning investors, they have trouble staying the course in market downturns, meaning the market tanks, stock market falls 20%, 30%, 40% and they bail out at the bottom and ended up buying high and selling low.
Dr. Jim Dahle:
But I’ve noticed a similar problem among what I call intermediate investors. People who’ve learned a thing or two about investing and instead of becoming fearful at market bottoms, they now become fearful at market tops, and so they want to sell when the market is at new highs. What they don’t realize is that the market is usually at new highs because it is usually going up. And so any concerns you have now about the market being at a high, I assure you that people have had for pretty much the last 10 years and yet going to bonds at any point in that time period would have been the wrong move.
Dr. Jim Dahle:
Now one of these days it will have been the right move just before a big bear market happens again, but the truth is that’s so difficult to tell in advance. That is really not worth trying. You are much better off setting a static asset allocation of a reasonable mix of stocks, bonds and or real estate and rebalancing back to it each year.
Dr. Jim Dahle:
That way you hold your risk constant, and when the inevitable downturn comes because it’s going to come, you can simply rebalance back to your percentages. And what that does is, it forces you to sell high and buy low because you’re selling what did well in the recent past and buying what did poorly in the recent past to get back to your plan percentages your planned asset allocation. And that is the recommendation I have for you, Pam, with regards to this question of whether you should try to time the market.
Dr. Jim Dahle:
Don’t do it; just get a good longterm plan in place. Because here’s the way to think about it, right? If you look back at market history, you will see that on average, we see a market correction, a drop of 10% or more in the stock market about once a year on average. So if you’re investing career is 60 years, 30 years while you’re working, 30 years in retirement, you’re going to see about 60 10% drops in the market.
Dr. Jim Dahle:
So this is not something that’s unusual or something that’s rare. This is something you should be planning for. This just happens. This is what stocks do, and you should bake that into your plan that you’re not going to sell when they go down. If anything, you’re going to buy more. Likewise, with a bear market, a bear market is often defined as a 20% plus drop in stocks.
Dr. Jim Dahle:
And how often does that happen? Well, on average, it happens about every three years. And so how many of those are you going to go through in a 60 year investing career? You’re going to go through about 20 of them. It should not be unusual. You should not feel like something weird is going on when the stock market drops. It just does this from time to time. It did this in 2000; it did this in 2008; it did this in 2011; it even did this in December of 2018. You might not have remembered it because it only lasted a couple of weeks, but these stock market drops do happen from time-to-time. They’re not a reason to panic, and they’re not really a great opportunity to try to time the market because there are so hard to forecast when they’re going to happen, how severe they’re going to be or how long they’re going to last.
Dr. Jim Dahle:
You’re far better off just having a know nothing static portfolio that you rebalance periodically. And take advantage of every asset class having its day in the sun.
Dr. Jim Dahle:
All right. Are you interested in telemedicine? We have a telemedicine course on offer through one of our partners. You can find that at whitecoatinvestor.com/telemedicine you can see all of our online courses at whitecoatinvestor.com/online courses.

Dr. Jim Dahle:
Our next email comes from an optometrist in California. And this came in a few weeks ago. The email, says, “I’m currently employed, but I’m changing most structured this year to become an S Corp. A unique question I’d like to get your thoughts on. After I graduated, I was fortunate enough to get my parents to take over my student loans. They originally paid $145,000 and I pay them back every month, $1,500 interest-free. Awesome deal I know at the present time I still owe about $100,000 to them. As an S Corp, I was wondering if it will be advantageous for me without being worse for them if I found a way to technically hire them as a W-2 employee to pay them back. I’d love to hear your thoughts on it.
Dr. Jim Dahle:
I love hearing these schemes because I’m amazed at all the different ways doctors can come up with schemes to somehow save money or save interest or save taxes or whatever. The short answer on this one is, “No, this is a bad idea.” Here’s the way to think about it.
Dr. Jim Dahle:
First of all, it’s illegal to technically hire somebody. You either hire somebody, and they do real work for you and you fill out, what is it? I 99I(4), whatever it is, the form that tells him that they’re not an illegal immigrant. You get to check their ID. You have them fill out a W-4, you do payroll, you send them W-2 and W-3 at the end of the year. You either do all that, and they really have a job and do real work, or you don’t.
Dr. Jim Dahle:
There’s none of this technical hire crap. You don’t technically hire your parents. You don’t technically hire your kids. You don’t technically hire your spouse. You cannot just make stuff up and start moving around money on your spreadsheet without actually having somebody doing a real job that you’re paying them a reasonable amount of money to do. So that’s the first thought on this.
Dr. Jim Dahle:
Here’s the second thought, right? Your parents have done you this huge favour. They have taken over your loan, so you have 0% loans instead of 7% loans. That was really nice of them. Now, technically, they have to charge you a market interest rate to loan you money. But if the way these usually work is they forgive the interest to you as a gift each year, and that’s okay, that’s legit with the IRS, you’re still supposed to have a promissory note written up.
Dr. Jim Dahle:
But, for the most part, people do this all the time, and that’s okay. But it’s interesting here that you want them to do real work to earn their own money back when they loaned it to you interest-free. I mean, do you hate these people or what? That’s the way it sounds like is that you’re really trying to really hose them, because that’s what’s happening.
Dr. Jim Dahle:
And, then of course, there’s also the fact that this is a family loan. And a lot of ways the worst loan in the world is the one that the person who sits across the table from you at Thanksgiving. In some ways, the meal tastes differently when you owe someone at the table money.
Dr. Jim Dahle:
So I think those are loans that are worth prioritizing, despite their low-interest rate, I would pay them off relatively early, and I doubt you’ll regret it even with that, obviously, fantastic interest rate.
Dr. Jim Dahle:
Now here’s another reason why it’s a bad idea, right? Here’s another reason. So let’s say you hire them instead. They’re doing real work for you, right? They’re having to earn their own money back, but here’s the worst part about it. Now you’ve got to pay payroll taxes, social security and Medicare tax on these loan repayments you’re giving them, so not only do they end up paying more in taxes, but they have to work for their money. It’s just a bad idea all around. This is not a good idea.
Dr. Jim Dahle:
Do you need a checking account that actually pays interest? Check out our partner at whitecoatinvestor.com/sofimoney, and you can actually make money in a checking account, which most of our checking accounts are not paying us any significant amount of interest.
Dr. Jim Dahle:
Our next question comes off the SpeakPipe.
Speaker 3:
My wife and I are both physicians. We have an idea and we want to monetize it. The product is a bundle of objects that we would like to sell to people. We have no experience with entrepreneurship or starting a business, and we have led very traditional paths to our current W-2 employed clinical positions.
Speaker 3:
As the first step, I Googled how to start a business. As expected, I quickly became overwhelmed with the number of resources available. I had difficulty deciphered what was good advice and what was bogus. In addition, my wife has a junior faculty appointment at a large academic institution as a clinical educator and receives a portion of her income through the University Medical School. While you will not be using any university resources, we are planning to use our medical knowledge and expertise to develop, promote, and market the product.
Speaker 3:
We do not want the university claiming any part of the intellectual property. Could you provide some advice on where we should start? Perhaps in the form of a top-five list of things to do first. Also, are there any books or educational resources you recommend in this situation? Thanks again for all that you do.
Dr. Jim Dahle:
All right, so how do you start a business selling a bundle of goods, and how is that going to affect an academic contract? Well, lots to talk about on this topic. First, let’s go through the top five things to do. And maybe talk about some educational resources.
Dr. Jim Dahle:
The first thing is to write a business plan. All right? Planning, planning, planning, planning. It really matters. It’s required if you need to borrow money or if you want to get any sort of investors, but it’s a good idea for everybody. Even if you’re funding everything yourself or just bootstrapping it. What is the business? How will it make money? Whom will we sell to? What will expenses be? What is the end goal? You need to plan all that out in advance. The less you plan, the less likely you are to have success.
Dr. Jim Dahle:
Step two. The side on a corporate structure. It’s easiest to do things as a sole proprietorship. In this case, in your name rather than your wife’s name, to minimize the risk of any sort of intellectual property issues with your wife’s employer. And then I would go read her contract. So you know exactly what it says and doesn’t say about outside work and intellectual property.
Dr. Jim Dahle:
If there’s any liability involved in the business, I would form an LLC, particularly a multi-member LLC. Maybe between you and your spouse, assuming you can iron out any intellectual property issues. It’s honestly pretty cheap and easy. In California, it’s kind of expensive, but I think it’s like 800 bucks a year for an LLC.
Dr. Jim Dahle:
In Utah, it’s very cheap. I think it’s 70 bucks to set up and 20 bucks a year. It really is very, very inexpensive to form that LLC structure. If you have employees, you’re going to need to follow all applicable law with regards to them, but a sole proprietorship is awfully easy tax-wise. All your expenses and all your income goes on a schedule C, and you basically pay taxes only on the profits.
Dr. Jim Dahle:
All right, step three. File any required paperwork. That probably means getting an EIN, Employer Identification Number from the IRS, registering with your state and maybe even getting a city business license. A lot of businesses are accepted, but if you’re selling out of your home or having meetings in your home, you’re probably going to need to have a city business license as well.
Dr. Jim Dahle:
Step four, figure out a marketing plan. Lots of people come up with awesome products, and that doesn’t do anybody any good if nobody knows about it. If you don’t have any way to market things, you’re just going to be hosed.
Dr. Jim Dahle:
Step one for that is to get a website. Do you do business with anybody that doesn’t have a website? It doesn’t seem weird when they don’t have a website or if their websites look like it was built in the 1990s? Website’s pretty cheap and easy to do. You can usually figure it out how to do it yourself or hire it out pretty cheaply. So get a website up and then have a marketing plan above and beyond the website. I mean, people are going to judge you based on the quality and presence of a website, so you might as well make it look good.
Dr. Jim Dahle:
And then step five is hire help as needed. One of the first things people often need as an accountant, then they may need an attorney. They may need a payroll service. They may have mentioned the need some employees. So I’d put that in as step five. If you need a resource, nolo.com has lots of great material. It’s in the library; it’s on their website. But honestly, pretty much every entrepreneur learns this all the same way, the same hard way by just doing it one step at a time.
Dr. Jim Dahle:
Once you’ve set up payroll, it doesn’t seem that complicated, but the first time you do it, it seems incredibly complicated. Don’t worry too much about screwing something up. Most mistakes can be fixed without too much hassle. One of the exceptions with that is with the IRS. Well, I find they’re actually fairly lenient with individuals and your tax return mistakes, they are not nearly as lenient with a business. They really expect you to know your stuff.
Dr. Jim Dahle:
So if you’re filing a corporate tax return that sort of thing, make sure you dot your I’s and cross your T’s. But yeah, I definitely would go over my contract. Maybe go over it with an attorney to make sure that whatever you do with the business, you’re not going to have to give some of that to the university, but otherwise, businesses get started every day in this country. Obviously, lots of small businesses fail and so make sure your runway is long enough that you can actually get the plane off the ground before you run out of cash.
Dr. Jim Dahle:
If you’re cash flowing from your earnings as a physician, that’s one way to make for a very long runway. If you can bootstrap the business that makes for a very long runway, but when you’re taking on investor money or when you’re borrowing money, that runway gets shorter and shorter, so be careful with those sources of funds.
Dr. Jim Dahle:
All right, our next SpeakPipe question comes from Casey. Before we get into that, if you need a self-directed IRA or Solo 401(k), check out Rocket Dollar at whitecoatinvestor.com/rocketdollar. Now, Casey’s question.
Casey:
Hi Jim. My name is Casey, and I’m a periodontist in the Air Force. I was wondering if you could give your thoughts on the of a bond tent in which the allocation of bonds is increased prior to retirement and then steadily decreased. Thank you.
Dr. Jim Dahle:
Okay. A bond tent, if you don’t know what a bond tent is, this is an idea that’s become popularized most recently by some studies done by the retirement researchers like Wade D. Pfau, Michael Kitces, these folks who are pushing for a higher stock to bond ratio later in retirement.
Dr. Jim Dahle:
The idea being that inflation becomes more of a risk and you need your assets to keep up with inflation late in retirement. So what that means is that instead of doing what everyone was doing beforehand, which was just decreasing your stock to bond ratio throughout your career and throughout your retirement, at a certain point, you kind of rack the risk back up, maybe five or 10 years into retirement. So you’re taking on more risk.
Dr. Jim Dahle:
So that period of time around the retirement date, maybe five years before and five years after is when your sequence of returns risk is higher. That risk that even though you have adequate average returns throughout retirement to support your withdrawals, your crummy returns come first. That’s a serious risk. And so for those five years before retirement and those five years after retirement, you have the least amount of volatility in your portfolio, the lowest stock to bond ratio of your entire life, and they call that a bond tent. And the idea behind that is, well, if sequence of returns risk shows up, if you retire right into 2008, or right into 2000, or right into the stagflation of the 70s, those sorts of time periods that you are protected from that volatility of your portfolio and that you can manage your sequence of returns risk.
Dr. Jim Dahle:
That’s the idea of a bond tent. I think there’s a lot of wisdom there. Certainly, I don’t think you should be really ratcheting up the risk as you come into retirement. That’s probably not a great idea. Whether you want to ratchet it up later in retirement, I’ll leave up to you. Honestly, a lot of people get really fixated on these safe withdrawal rate studies.
Dr. Jim Dahle:
Well, the truth of the matter is, what real live people do is they start out withdrawing something around 4% of their portfolio, and then they adjust as they go. If sequence of returns are bad in the beginning of your retirement, you tighten your belt a little bit; you spend a little bit less money.
Dr. Jim Dahle:
If returns are good, well shoot, you’re going to make it. If you don’t have a nasty bear market in the first five or 10 years or your retirement, you’re probably going to be just fine, and you can spend not only 4% without having to worry, but maybe five or six or even 7% and so keep that in mind. That adjusting as you go is the way to go in retirement.
Dr. Jim Dahle:
All right. Our next question is also coming off the SpeakPipe.
Speaker 5:
I’m a fourth-year medical student, who recently got engaged to another fourth-year medical student. We’re both going into primary care specialties in a high cost of living area. The debt to income ratio for each of us individually is about 1:3:1 they’ll most of my loans are family loans while my partner’s loans are all federal. I have three main concerns. No one, which income-based repayment plan should be used during residency. How might this change while we are single versus when we are married?
Speaker 5:
Number two, my partner would be much more likely to go for Public Service Loan Forgiveness than me given our differing federal loan burdens. Well, we want to leave the option open for both of us. There’s something we both want to work for 501(c)(3)s, is it wise for both one or neither of us to go for public service loan forgiveness.
Speaker 5:
Number three, we do plan to pay for advice about this at some point before residency starts, since it seems pretty complicated, what other things should we ask about to prepare us for success with our student loan management? Thank you for the excellent financial education work you’ve done so far.
Dr. Jim Dahle:
Okay. We got a couple of fourth-year medical students marrying each other. She has most of the family loans. What IDR should we use and does that change once we get married? Well, it really depends. There are lots of ways to do this. Obviously, if she is on family loans, then no IDR plan is going to work there, right? Those are only for federal loans.
Dr. Jim Dahle:
You are on federal loans, and so the IDR comes down to what your plans are. If you want to keep Public Service Loan Forgiveness on the table, then you’re going to want to be paying the minimum that you can in an idea or program, and that means Pay As You Earn program or the repaye Revised Pay As You Earn program are going to be your best beds to keep those payments low.
Dr. Jim Dahle:
As a general rule, repay is better because you get your interests subsidized so your effective interest rate is a little bit lower than it otherwise would be. The exception to that is when you have two earners in the family, and you’re trying to keep that taxable income as low as you can.
Dr. Jim Dahle:
And so a trick some people use in that situation is that they stay in pay and file married filing separately because you can’t do married filing separately, or at least it does you no good if you’re in repay. And so when one of you is going for Public Service Loan Forgiveness, and you’re trying to keep the other’s income out of the equation, sometimes you do pay plus married filing separately.
Dr. Jim Dahle:
But if you’re both going to work for 501(c)(3)s, I don’t see any reason why you both would go for Public Service Loan Forgiveness. Her loans are mostly family loans anyway, so there’s not a lot of benefits there. But if you want to, I guess, you can, you can just go into repay for both of you and work toward Public Service Loan Forgiveness.
Dr. Jim Dahle:
But the questions to ask when you seek advice and we have a great place that you can seek advice. If you go onto the recommended tab on the whitecoatinvestor.com site, you can go down to recommended student loan advisors, but the main questions to ask are, which IDR plans should we be in? And that might change year to year, which retirement accounts should we use, Roth or tax-deferred, and how should we file your taxes?
Dr. Jim Dahle:
And then of course when enough plans change to refinance or should we stick with the IDR program? Those are the main questions to get answered in that consultation. And the more complicated your situation, the more likely you are to benefit from advice, particularly when you have two people earning and one or more of you are going from Public Service Loan Forgiveness. It’s almost surely worth paying a few hundred dollars and getting some top quality student loan advice from those folks.
Dr. Jim Dahle:
All right, let’s talk about Mega Backdoor Roth IRA. Here’s the SpeakPipe question from Sammy.
Sammy:
Dear Dr. Dahle, thank you for everything you do. I have a question regarding savings accounts. My employer currently has a 401 (k), and I’m verifying whether or not they allow for after-tax contributions and in-service distributions. And I’m hoping to contribute the additional 38,000 to a Mega Backdoor Roth IRA. The question is my employer is also looking to start a 403(b) and a 457, how will the activation of those two accounts affect my ability to contribute to a Mega Backdoor Roth IRA.
Sammy:
Further, I have 1099 income as I do some locum tenens and consulting work on the side, and my 1099 income is roughly $15,000 to $20,000 a year. I do have an individual 401 (k) that I started for this year. How can I optimize my savings into my individual 401 (k) with all these other factors from my W-2 employment?
Sammy:
Again, thank you very much. I’ve learned so much from you and your podcasts and your books, and I recommend you highly to all my colleagues and residents. Thank you.
Dr. Jim Dahle:
Okay, so Sam has got an employer, the 401 (k) adding a 403(b) and a 457 how’s that going to affect my ability to use a Mega Backdoor Roth IRA? Well, I’m not entirely certain what’s going on here, whether we are adding a 403(b) and a 457 on top of a 401(k). I have actually heard of a few employers that offer both a 401(k) and a 403(b) which is really unusual.
Dr. Jim Dahle:
Typically, however, people have one or the other. Of course, the 457 contribution limit is totally separate from the 401(k), 403(b) contribution limit. However, unless the 403(b) also has a Mega Backdoor Roth IRA option and they don’t call it that. What they call it is basically two features. One of which is it allows after-tax, not Roth, but after-tax contributions and it allows in-service withdrawals or in-plan Roth conversions.
Dr. Jim Dahle:
If it has both of those factors, then it’s a Mega Backdoor Roth allowing 401 (K) or 403(b). So it really just comes down to whether the new plan will still allow that thing or not.
Dr. Jim Dahle:
Sammy also says, “I have a 1099 income too. How can I optimize my savings into my individual 401(k) with all of these other options my W-2 income?”
Dr. Jim Dahle:
Well, bear in mind that due to a weird rule with 403(b)s, the 403(b) contribution does count toward your 57,000 limit with your individual 401(k), despite the fact that it’s a totally separate employer. So the way to optimize those savings for the most part, what most people do is they use their employee contribution than $19,500 a year in their employer’s 401(k).
Dr. Jim Dahle:
And that allows them to get the match from the employer. And then they just use employer contributions in their individual 401(k), which is basically 20% of your net income there. Or if you’re an S Corp, 25% of your net salary. It really works out to be about the same number, just whether you include the contribution itself into the denominator or not.
Dr. Jim Dahle:
And so the way to optimize your savings is to maximal out the 457(b) limit is totally separate. The 403(b) and the individual 401(k), of course, share a limit essentially due to that weird 403(b) rule. With the old 401(k) it would have been two totally separate, $57,000 limits between the employee and employer contributions.
Dr. Jim Dahle:
All right. Next question off to SpeakPipe. Let’s take a listen.
Speaker 7:
This question is about disability insurance. If someone has a personal and work disability policy with own speciality coverage, adding up to your current salary, would they both payout? For instance, say they’re both for 5,000 a month, and you make 10,000 a month, would you get the sum 10,000 if a disability occurred or would only one of them payout because the maximum amount for each is 5,000? If they both payout, I don’t see any benefit from increasing the personal one. Am I missing something?
Dr. Jim Dahle:
Okay. If you have both Group disability insurance and individual disability income insurance, they will both generally payout, but you have to read the fine print, particularly with group disability insurance policies. Sometimes they are written such that, you only get the amount from the policy above and beyond what other disability policies are paying you. So the devil’s really in the details here.
Dr. Jim Dahle:
With individual policies that you buy from a good independent insurance agent like those we recommend and from the top-notch big five or six companies, this is not an issue. Even though you’re getting money from another disability insurance policy, you’re still going to get that full payout, is the group policies you got to be really careful about. And if you need some help with that or if you just still need disability insurance, call up one of our recommended agents. You can also check out whitecoatinvestor.com/drdisability.
Dr. Jim Dahle:
All right, let’s take another question from guess who’s back. It’s Tim in San Francisco who’s been on the podcast before. Let’s take a listen to his question.
Tim:
Hi Jim, this is Tim in San Francisco. I am convinced that it is not possible to get a useful amount of certainty about the behaviour of stock indexes over periods of three years. On your recommendation, I’ve been listening to Dave Ramsey though, and when Mr. Ramsey provides people advice about whether to buy a home or not, he says to look at how long houses have been on the market and their average appreciation rate over the last three to five years. Use that as a way to predict the future appreciation of houses of that type in a certain area.
Tim:
So my question is, is real estate predictable? Can you time that real estate market? Thanks.
Dr. Jim Dahle:
Okay, two questions here. Let’s take the second one first. Is Dave Ramsey, right that you can predict future real estate appreciation by using appreciation in the last three to five years? Absolutely not. There is no correlation between appreciation in the last few years and future appreciation. That said, all real estate is local. And location, location, and location are the top three rules in real estate.
Dr. Jim Dahle:
Some locations are obviously better than others. Some places are not going to get better. They have problems, and those problems are not going to be solved in the next five years. And you can assume that if returns had been crummy there in the past, they’re probably going to continue to be crummy.
Dr. Jim Dahle:
But it really comes from getting more information about the area than just knowing what the appreciation was the last few years. But if somebody had followed that rule, I mean, imagine being in Phoenix or Las Vegas in 2003 to 2006, and you assume because you had awesome appreciation during those years that it’s going to be great in the next few years and then you lose 75% or 80% of the value of your property. I mean, obviously, that rule of thumb is no bueno]. So no.
Dr. Jim Dahle:
The second question, however, is more complex. Can you time the real estate market? Well, the thing about real estate is as much less liquid, and there’s a lot of people that are buying it for purposes that have nothing to do with investment. And so there are some factors that probably make it due to its illiquidity due to its lower efficiency. And due to the fact that there’s a lot of people in the market who are not professional investors that can make it kind of weird and probably do make it a little bit easier to time the market.
Dr. Jim Dahle:
For instance, when I was buying a townhome back in 2006, we knew the market was pretty high. We knew that there was a very good chance that the market could go down and as a result of that we bought a place that was much less expensive than we could afford because we thought there was a pretty good chance we could lose value on it, and we want to make sure if it did drop in value that we didn’t lose that much money.
Dr. Jim Dahle:
Now obviously that was a good decision to make, especially since we couldn’t even sell the place four years later. But I think it is a little bit easier to time the real estate market than it is to time the stock market. That said, it’s not an easy task by any means.
Dr. Jim Dahle:
However, with real estate, if you are willing to hold it longterm, they say time heals all wounds, and as debt is paid down on the property, as long as it’s cash flow and you’re not having to feed the beast, it generally will come back and we’ll appreciate. If you can hold it for 10 or 15 or 20 years, even if you don’t buy it at a great time, you’re still probably going to make out okay.
Dr. Jim Dahle:
But honestly, that’s the same for the stock market. There’s no different; time heals all wounds.
Dr. Jim Dahle:
So the longterm investor, the right time to invest is yesterday and the second-best time is probably today and time in the market matters a lot more than timing the market. But if I had to guess which one was easier to time, I would definitely say the real estate market is.
Dr. Jim Dahle:
All right, we’ve got a special guest on here. We have Johanna Fox Turner’s CPA, CFP, RLP. She’s the founder of two companies, Fox & Company CPAs and Fox & Company Wealth Management. Both are flat fee companies that we’ve worked with as partners for years here at the White Coat Investor. She helps people with their year-round planning, with their investment management and with their tax services and actually is getting quite used to working with White Coat Investors. 90% of their business is virtual. And all of it, you’re working with a fiduciary.
Dr. Jim Dahle:
So she’s spent 36 years advising businesses and high net worth clients on wealth protection, financial planning, tax strategies, estate planning, business operations and succession planning. She’s located in Kentucky. But as I mentioned, she’ll work with you all over the country. You can get more information from her by emailing [email protected] M-G-M-T as management.com or calling (270) 247-0555 also just go into their website FoxWealthMgmt.com is also a great way to get more information about the company.
Dr. Jim Dahle:
Johanna, welcome to The White Coat Investor podcast
Johanna:
Hi Jim.
Dr. Jim Dahle:
So tell us why you decided to become a financial advisor all those years ago.
Johanna:
Well, this could be a very long story, but I won’t go through all of it. In the early 2000, of course, I’ve had my CPA firm a lot longer than I had in the financial planning firm, but I just got fed up with the advice that our CPA clients were getting. And it’s just typical for a CPA client to ask their CPA, who should I go to for investment management? And I didn’t like what they were coming back with. So I just thought, “I think I’ll try this myself.”
Johanna:
And I was totally green, did not know what I was talking about, and I think I didn’t even know what financial planning was. So, fortunately, I’m a quick learner and once I completed my CFP was able to learn a lot more about financial planning itself and realize that we want it to be a fiduciary flat fee firm.
Dr. Jim Dahle:
Awesome. So what would you say is most unique about your company compared to your colleagues and peers and competitors?
Johanna:
One thing would be that none of us are married to doctors. None of us are the children of doctors. None of us have doctor kids, and some people might think this is a disadvantage. But for us it means that we have had to learn everything about doctors on the ground starting from zero. And it’s been a really good experience for us.
Dr. Jim Dahle:
And what’s the fee structure for your advisory company and why did you choose that one?
Johanna:
Well, we went flat fee almost 20 years ago in the CPA firm, and our clients really seem to like that because it gave them full access to us year-round and I’ve never had to worry about getting an extra bill. So when we started with the financial planning and investment management, I must say we began as AUM that’s all we knew. And then I got to know your website and UM and realize that probably wasn’t the way to go. So we restructured to be flat fee here and it was a hit.
Dr. Jim Dahle:
Awesome. So let’s get into some questions from readers here. We’re going to play our first one here. Let’s go ahead and play that now.
Speaker 10:
Hi Dr. Dahle. Thanks for all you do. I’ve been following like white coat investors since about 2013 or 2014 while in med school. And have benefited a lot from your advice. My question is a general one about socially responsible investing, and if you have any advice on how to go about this for people who are interested, is there a resource available for good information on how to vet companies, mutual funds, index funds, et cetera?
Speaker 10:
More specific to me, my husband and I are Muslim and both physicians. He is a resident and I am my first year attending and while we are interested in investing we want to be cognizant of where our money goes. There are specific rules on interest accumulation, amount of debt a company holds, dealings or involvement with gambling or alcohol and all sorts that determine its suitability for the Muslim investor.
Speaker 10:
Do you have any advice for people like us who have more specific guidelines on the types of investments we can or want to make?
Dr. Jim Dahle:
All right, so it sounds like they’re mostly asking for a good resource to vet socially responsible funds. You want to take a stab at that one, Johanna?
Johanna:
Yes, I don’t think I’m going to give a very satisfactory answer to the first part because I personally don’t believe that activism and investing are a very good combination. So every once in a while we will have a client that asks about socially responsible funds and I will just tell them to Google because we have tried to do this on our own in the past and it always seems like something objectionable creeps into the fund. And so what I recommend is that they donate time and money to those efforts and then try to find funds that are least objectionable but invest for growth in the future.
Johanna:
Now, the second part, the d Compliant Investment. Long, long ago when we were choosing funds actively and found Saturna funds and that’s a family of funds that a huge part of it, the Amana mutual funds are Sharia-compliant. When we first started using these funds for clients, I did not know anything about them being Sharia-compliant. And then that was kind of an added bonus later. But it’s a really good fund company. So I’d suggest trying that first.
Dr. Jim Dahle:
I’ve heard of another fund company and I don’t know it very well. I think it’s called Azzad Funds, which is also offers Sharia-compliant mutual funds.
Johanna:
Yeah, I know there are a few out there. We just had really good fortune with the Amana firms. So good place to start.
Dr. Jim Dahle:
Yeah, I kind of feel the same way you do about socially responsible investing, and its newest Virgin ESG Investing. It seemed like the old SRI funds always seemed to underperform. It was kind of the classic active management thing. So it was always, well how much of your return are you willing to give up in order to be socially responsible? And do you even agree with what the fund manager thinks is socially responsible? Because a lot of it just kind of gets into politics. You end up with a fund that’s pro-gun or a fund that’s anti-gun or a fund that’s pro-military or if on this anti-military or whatever. And maybe you’re into brewing your own beer and the fund is anti-alcohol.
Dr. Jim Dahle:
But the newest ones, this ESG, where they throw in the governance factor at the end, the returns don’t seem to be bad. In fact, if anything, they seem to be just as good, maybe even slightly better, which has caused me to spend a little bit more time looking at them. I’m not sure I have a great recommendation for where to send somebody because it still feels all like active management to me, but they’re starting to come out with some ETFs and some indexes of ESG factors and so at least I feel like if people are really into this, they’re not totally doing their portfolio with disservice anymore, but I’m not sure I’ve got great recommendations for where to go.
Dr. Jim Dahle:
I think Ishares has an ETF out that’s based on some ESG stuff. At least it’s low cost and broadly diversified. I can’t say whether it agrees with what your definition of ESG or SRI is, but at least it’s an option.
Dr. Jim Dahle:
All right. Let’s go on to the next question. Let’s listen to this one.
Speaker 11:
Hi, Dr. Dahle. My wife is an emergency room physician and in a pre partnership track. She’s about a year and a half in and a year or two they have the opportunity to buy-in to the practice. My understanding is that the buy-in will be close to $700,000 and she would then receive closer to 100% of her productivity instead of; I think she’s at 80 currently.
Speaker 11:
This seems pretty high for my perspective for a buy-in and the only thing they do, they won’t finance it either, but they will co-sign a loan for the 700,000 which doesn’t really do much for me, so probably still be 5% 6% interest rate loan of $700,000. I wondered if you had any thoughts on kind of comparable ER buy-ins. I’ll appreciate your input.
Dr. Jim Dahle:
Okay. This one’s an emergency doc. Big buy-in. I was kind of surprised to hear about that. What would you tell this doc if she came into your office asking about this?
Johanna:
I would first ask if she went into this with her eyes open. Did she know that big buy-in was going to be there and did she know what the expectation was to go from 80% 100% of the productivity? I’ve never heard of a buyer like this in an emergency group.
Johanna:
So typically when we see the buy-in and group, it’s a group that has thought of equipment or a lot of capital, and they’re getting something in exchange, it’s not just buy-in for the good will. And an emergency room I don’t really understand concept of a lot of Goodwill with an ER group.
Johanna:
So I would say think pretty hard about this, and they won’t finance a loan, they will co-sign it. But another question I would ask is, what do you get out of it? Say you decided to leave the group in few years, it’s just not working out well for you.
Johanna:
You really want to have it documented and your purchase agreement that you get your 700,000 back or if you don’t that they have affirm calculation of what you can get back. Or say you pass away, what does your spouse inherit? Do they get that investment back?
Johanna:
That’s the other component I think is are you just throwing in 700,000 down a hole just for the benefit of getting extra 20% productivity or are you investing like you would say a mutual fund or a stock and it’s expected to grow or at least you can get your money back.
Dr. Jim Dahle:
Yeah, I mean I kind of wanted you to say at first, but this is insanity. This is insanity based $700,000 for an emergency medicine buy-in. It’s just crazy. The typical buy-in for an emergency physician group is a sweat equity buy-in. Your work for less money for one to three years. That’s a typical buy-in.
Dr. Jim Dahle:
The longest one I know of was five years, and you got paid a little bit more each year for those five years, but that was like the best group in the country. Right? You just made bank like crazy after that. And so people were willing to do a five-year sweat equity buy-in. I’ve never even heard of a financial buy-in into an emergency medicine group anywhere. But 700,000 just seems egregious. I mean, unless you’re getting a piece of property with it, I cannot imagine what that is buying.
Dr. Jim Dahle:
For example, my buy-out is basically receivables; at the time I leave is all it is. I only expect to walk away with the 30,000, 40,000, 50,000 something like that. There’s not hundreds of thousands of dollars slopping around in an emergency medicine group like that. So I have no idea why the buy-in would be so big. And that would be my first question is what am I actually buying into? And it sounds like what you’re doing is just buying your job and giving those who had it before you a big bunch of cash is what it sounds like to me.
Dr. Jim Dahle:
So I’m not sure I would become a partner in this group to start with just because if that’s the way they treat their new hires, well that’s the way you’re going to have to turn around and treat your new hires, which isn’t going to feel very good.
Dr. Jim Dahle:
But aside from that, there’s a massive risk in emergency medicine in any similar groups of the contract just going away, right? I mean, a contract management group could come in and swipe this up and then what do you get for your 700,000? Nothing. If there’s nothing, there’s no equipment; there’s no property, there’s… I don’t know. It just seems like a massive risk to me. I’m not sure I’ll joined the group at all, and I’d certainly tried to negotiate that price way down to what would be the equivalent of sweat equity.
Dr. Jim Dahle:
If I had to think about what the equivalent buy-in would be per sweat equity, for our group over a couple of years, maybe it’d be a couple of $100,000 worth of sweat equity, but certainly not 700,000 that just seems like a massive difference. I don’t know. I got that question, and I thought maybe this doc fallen into somebody trying to take advantage of her.
Johanna:
You now think.
Dr. Jim Dahle:
I don’t know what to make of them of co-signing the loan. I mean, does that mean you can walk away, and they’re stuck with it? I mean, what does that mean exactly to have them co-sign the loan for something they’re selling to you? I don’t know that. I thought that was pretty odd too, but maybe I just don’t have all the details on it.
Dr. Jim Dahle:
All right, so our next question, this one came in by email, and I’ll read this one says, “I’m a fellow graduating this June. I have a little dilemma with my estimated tax payments for 2020. I do a little moonlighting on the side and last year performed a big Roth conversion, so my AGI is a little over 150,000. I filled out my 2019 taxes with TurboTax and the software wants me to make $6,000 estimated tax payments each quarter so I can stay in the safe harbour. Unfortunately, I don’t think I can make these payments because I won’t be moonlighting that much this year and I spent most of my cash paying the taxes on last year’s rollover. The 90% safe harbour rule based on my 2020 taxes may not help either since I’ll be working my first attending job started in July and we’ll have a higher tax liability for 2020 compared to 2019.
Dr. Jim Dahle:
What do you think is my best way to approach this? I’ll be paid as a partner for my attending job, and I’ll probably own my partnership interest as an S Corp. Can I just not make any estimated tax payments at all and just make large withholding tax elections when I’m an attending later in the year or is there still a penalty associated with paying most of my taxes in the last half of the year?”
Dr. Jim Dahle:
That sounds like it’s right up your ballpark, Johanna. What would you tell this doc?
Johanna:
I would say first of all, just because the software says you need to do it doesn’t mean that you need to do it because you have to have a little human intuition and input into calculating what you need to make for estimates. That said, there’s nothing wrong with using the software and coming up with that answer as long as you understand that it’s not exactly correct. And it sounds like the person who emailed you has a pretty good handle on the safe harbour rules.
Johanna:
So in this case, yes, I would say, first of all, you’re going to be able to annualize because he’s not going to have a lot of income in the beginning of the year. So those estimates probably won’t be due, especially with that huge Roth conversion.
Johanna:
Secondly, yes, he or she can pay taxes through withholding at the end of the year. I’m just going to say when they become an employee as an S corporation, but my third point would be, are you sure you want to be an S corporation to be part of this partnership?
Johanna:
And I think that might take a little more work thought and consideration. Now they are an S corporation. Yes, they can withhold taxes, and if they withhold any taxes they owe on the last paycheck of the year is going to be treated as spread equally throughout the year. But if they aren’t an S corporation, then they can make estimated payments at the end of the year when they’re making all that income.
Dr. Jim Dahle:
Excellent answer. I’m not sure I can add anything much to that. I think it’s difficult for people with changing income to figure out how to do their estimated tax payments. Because the tech software does assume that basically, next year is going to be exactly the same as this year.
Dr. Jim Dahle:
There’s lots of ways into the safe harbour. I think the key is just choose the easiest one for you. In my case, especially the last few years as my income has been rising and the easiest one is 110% of last year’s taxes. Now I know I’m going to have a big tax bill due in April, but that’s okay. I stayed in the safe harbour. I won’t owe any penalties or interest. I’ll just have to pay that big tax bill due in April. So I save up toward that.
Dr. Jim Dahle:
And if somebody has falling income, it’s probably easiest for them to pay 100% of taxes due than it is 110% of last year’s taxes. That, of course, requires you to actually know what your taxes are going to be that year, of course.
Dr. Jim Dahle:
But what do you think about that? I don’t want to call it a loophole, but this idea that you can just withhold all your money in December and basically avoid making estimated tax payments.
Johanna:
Well, it is a loophole, but another thing you have to consider is that if you are withholding everything, you’d have to have a paycheck and you’re going to have Medicare taxes, already going to max out social security almost certainly, but you’re going to have those Medicare taxes. Whereas if you make estimated payments just through distributions in the S corp, we’re still assuming this is an S corp, of course. Then you’re not going to have that Medicare tax penalty associated.
Johanna:
And people really seem to be afraid of tax penalties, and I don’t always understand it. I think it’s that fear of the boogie man, IRS. Quite frankly, a lot of times you’re going to get a penalty that’s going to be a lot less than it would have cost you to pay the Medicare taxes or to borrow from Peter to pay Paul and get that money in on time just because you’re afraid of what the IRS might penalize you.
Dr. Jim Dahle:
Yeah, that’s a good point. The other thing I think people don’t get is, yes, the paperwork’s easier if all your quarterly estimated are exactly the same amount of money and that’s what I try to do each year, but they do allow you to pay as you owe the money. As the money comes due. Meaning if you make all your money in the last half of the year, your estimated tax payments can be much higher in the last half of the year and that’s okay. You won’t owe any penalty for that. And there’s a… I can’t remember what the tax form is. You probably have it on the tip of your tongue of what the tax form is you fill out to show what your income was in each quarter and how much tax is due in that quarter and determine whether you owe a penalty that year or not.
Johanna:
Yes, it’s has been 40ES form
Dr. Jim Dahle:
That’s it. Exactly. And a lot of people just don’t realize that, that’s okay to do. And, of course, that the opposite is not okay that you can’t make all your money in the beginning of the year and pay all your taxes at the end unless it’s withheld from paychecks.
Johanna:
Could I make one more small point?
Dr. Jim Dahle:
Absolutely.
Johanna:
So for our clients, if they happen to end up with a penalty and it’s less than $100, we just erase it. So if you’re doing your return yourself and you end up with a penalty of $51, I would just override it to zero. We have never had the IRS come back on us or our clients saying, “Hey, you didn’t pay this small penalty.”
Dr. Jim Dahle:
Interesting.
Johanna:
In some States the same, you won’t have to pay the penalty.
Dr. Jim Dahle:
Interesting. They just don’t seem to care about a two-figure penalty. Huh?
Johanna:
So far.
Dr. Jim Dahle:
Interesting. So thank you so much for coming on the podcast. For those who want to learn more about Johanna, obviously, you can do that at FoxWealthMgmt.com, but she is also one of our moderators on the White Coat Investor forum. So come by the forum, and you can talk to Johanna and ask your questions, and I don’t know that she has lots of time during tax season to answer your questions, but she seems to be on there quite frequently anyway.
Dr. Jim Dahle:
Unfortunately, you’re not going to get to meet her at the White Coat Investor conference. She’s just too busy this spring to make it. We were going to have her on a panel there for financial advisors, but unfortunately, she’s not going to make it, and I’m sure it’ll still be a great panel. We got a lot of great people on it, but we’re going to miss you at the conference, Johanna.
Johanna:
Thank you.
Dr. Jim Dahle:
And thanks for coming on the podcast today.
Johanna:
I appreciate it.
Dr. Jim Dahle:
Okay, let’s take a question from the SpeakPipe.
Zach:
Hey, Dr. Dahle, this is Zach in Chicago. I had a question regarding health savings accounts. I know you’ve talked a lot in the past about the benefits of using an HSA. My question is more about what kind of system you’re using to keep track of your family’s medical expenses over the years. If for example, 20 years from now, you have to prove that your reimbursements were qualified medical expenses that weren’t covered by another source. How do you plan on doing this? Are you scanning invoices or explanations of benefits every year? Are you waiting until retirement to start withdrawing funds? Do you think reimbursing yourself a large amount in the future would increase the chance of an audit? And would this affect how much you’re withdrawing at any one time?
Zach:
I’ve been maxing out my HSA since getting out of fellowship, and I know that it’s likely my employer and my health insurer will change over the years.
Zach:
Just trying to get the right system in place now and hopefully, you say myself some headaches down the road. Thanks for everything you do.
Dr. Jim Dahle:
Okay. So basically here they’re asking what system do you use to keep track of your family’s medical expenses for HSA purposes?
Dr. Jim Dahle:
Well, you caught me with my pants down here. I don’t have a great system. I have a folder, and I’ve been throwing receipts in the folder and every year I try to get myself to go through that folder, scan in receipts, keep a running total of the amount that we could take out of our HSA today tax-free. But honestly, I haven’t done it. It’s still sitting in a folder, so I guess that’s my system. My system is throwing the receipts in a folder, and I’m not even sure. We’re really good right now at throwing the receipts in there.
Dr. Jim Dahle:
Katie’s tracking the spending right now for the last six-plus months or so. She’s been doing that, so I’m not even sure we’re getting all the receipts in there right now, but I’ll bet out of our $100,000 HSA, we probably got $20,000 worth of receipts, money we could take out totally tax-free right now.
Dr. Jim Dahle:
So I think it is worth keeping track of that stuff. I think there are some good systems. I think there are some good automated systems coming online with some of these companies. I think Fidelity, we have an HSA with may even have a system where you can scan your receipts in and keep track of them as you go along, but I know a lot of these companies are putting in technological solutions like that for you.
Dr. Jim Dahle:
But the bottom line is if you’re going to use this strategy where you hold onto your HSA money for years and years and years to keep it growing tax-free and then plan to pull the money out using old receipts. You need a system to keep track of the old receipts and you probably ought to have a system better than our system.
Dr. Jim Dahle:
These easier way to do it is just spend from it as you go and whatever you don’t spend in any given year leave in there to invest. They’re both perfectly fine strategies if you’re, let’s keep it simple kind of person, just spend from it as you go along.
Dr. Jim Dahle:
The key, of course, is if you want to spend that money on healthcare at some point, whether you do it now or later, it’s better to spend a later but far better to spend it on healthcare now than to spend it on a sailboat later. So this is not money that you want to leave to your heirs. This is money that you want to spend on healthcare during your lifetime.
Dr. Jim Dahle:
All right. Our next SpeakPipe question comes from Bob.
Bob:
Hi Jim, this is Bob from Pennsylvania. Just want to thank you for all your hard work and things you’ve done at the white coat investor. My question is a brief one in that I have fair amount of assets through Vanguard, the lion’s share of which is in textbook count and recently the advisor that I’m working with there instructed to me that they are going to be changing over from traditional index funds to exchange-traded funds. And I just wonder your thoughts on the pros and cons of that for both me as an investor and also for Vanguard as a corporation.
Bob:
Again, thank you for what you do and thanks for taking my question.
Dr. Jim Dahle:
Okay. Lots of people get confused about ETFs versus Traditional Mutual Funds. For Bob, he’s got most of his assets in a taxable account of Vanguard, and they want to change them over from index funds to ETFs. Fine. It’s the same fund. It doesn’t really matter if they want to do that. That’s great.
Dr. Jim Dahle:
In a taxable account, as a general rule outside of Vanguard, ETFs are slightly more tax-efficient than Traditional Index Mutual Funds. And the reason why is because basically, they can shed off their appreciated shares to these people who put the ETF shares together. And so that makes them a little bit more tax efficient.
Dr. Jim Dahle:
At Vanguard because they’re both share classes of the same mutual fund, both share classes are essentially equally tax efficient. The ETFs, of course, you can trade during the day. The Traditional Mutual Funds are handy for those of us who don’t want to be on during the day and making trades. There’s no really any huge pros and cons here. I’m not sure why Vanguard’s making a big push for it, but either way is probably fine.
Dr. Jim Dahle:
Listen, are you sick of steel and stuff from the hospital to make up your suture kit at home? You don’t have to do that anymore. There is a doc who’s put together suture kits for you, and we’ll sell them to you at the discount of the price. You could buy them from the people selling the individual parts. You can get more details on that at whitecoatinvestor.com/suture.
Dr. Jim Dahle:
All right. Our next question comes via email, “Do you happen to know if there’s any insurance that can be purchased to cover the difference in loss of income while on deployment?”
Dr. Jim Dahle:
Nope. Sorry. This is one of the sacrifices you make when you choose to serve our country. All those people will say, “Thanks for your service.,” this is the kind of stuff they’re talking about. Because when you get deployed, whether you’re a reservist or you’re guardsman, or even if you’re active duty and just can no longer Moonlight, you do make less money.
Dr. Jim Dahle:
There are a few things to help you when you get deployed. A lot less of your money is taxable, so that helps. You can put some money into the TSP tax-exempt money can go into the TSP. You can also use the savings deposit program, which gives you a guaranteed 10% return and up to $10,000.
Dr. Jim Dahle:
So there’s a lot of cool things about being deployed, even get a little extra paycheck if you’re a going into a war zone. But for most doctors, your pay probably goes down when you get deployed, at least if you’re moonlighting. And I thank you for your service, but there’s not really any insurance you can buy against that. But if there were deployment insurance, I think that’d be great.
Dr. Jim Dahle:
One thing I suppose you can buy if you a practice and you got a bunch of employees that are depending on you, maybe you can get some business interruption insurance. But I would bet if you dig deep into those contracts that a deployment is going to be excluded from that or that they won’t sell a policy to somebody who potentially could be deployed. But I guess that might be one possibility. I wouldn’t count on it though.
Dr. Jim Dahle:
Well I hope you enjoyed that episode. We enjoyed making it. I like answering your questions. If you’d like your question answered on The White Coat Investor podcast, just leave it on our SpeakPipe at whitecoatinvestor.com/speakpipe.
Dr. Jim Dahle:
This episode is brought to you by 37th Parallel Properties. There’s a substantial body of evidence supporting commercial real estate investing through the years as I gain a deeper understanding of the asset class, I’ve added this to my portfolio. But unless you want to manage real estate yourself, the real trick is to find a trusted investment sponsor as one of the good guys in the industry, 37th Parallel Properties as a partner I trust. They’ve been around for more than 10 years and still maintain 100% profitable track record with clear reporting and excellent educational content.
Dr. Jim Dahle:
Many of my readers have invested with 37th Parallel and so have I, but not only in syndication I have down in Texas, but also in their new diversified multifamily fund that they have available right now.
Dr. Jim Dahle:
So if you’d like to check them out, hop on over to 37thparallel.com/wci. Come visit us on our forums, The White Coat Investor forum on The Main White Coat Investor site, The White Coat Investors Facebook group, or The White Coat Investors subreddit. We’d love to chat with you, answer your questions, and heaven knows that there are plenty of other White Coat Investors out there that need your help answering their questions, especially in the Facebook group.
Dr. Jim Dahle:
Thank you for leaving us a five-star review. Thanks for telling your friends about the podcast. It really does help to spread the word, spread this important message to your colleagues and peers. Keep your head up your 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 practising emergency physician, blogger, author, and podcaster. He is 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.