Today’s episode tackles a handful of questions that come up often for high-income professionals planning for the future. We dig into how to optimize your retirement accounts and take advantage of key tax benefits, explore how cash balance plans work inside a group practice, and look at whether a target date retirement fund ever makes sense in a taxable account. We also talk through what to do with your retirement savings over the next year if you won’t have access to workplace profit sharing until the end of 2026.
In This Show:
Optimizing Retirement Account and Tax Benefits
“Hello, Jim. This is Alejandro from Chicago. First of all, thank you so much for everything you do. After eight long years of residency and fellowship, I'm going to start my new attending job as cardiac and electrophysiology next year. And of course, the question is regarding how to optimize the retirement accounts or the tax benefits. Besides the IRA, the employee contribution for the 401(k) or 403(b), this institution does not offer a Mega Backdoor Roth.
I'm trying to look at other options to maximize retirement accounts. They offer a 457 plan. It's a non-governmental. So, my first question is, what should I look for? What are the things that I should consider before contributing to a 457, because I think you can put a big chunk there?
And also the other question is, what happens if I decided to do it, I make that account grow, and then later on, maybe I separate or not from that institution. My understanding is eventually that money gets available to you to move on or to move it around. The question is, can you then later somehow take a sabbatical year, half a year, with zero capital gains and do a Roth conversion of that money?”
The first step for any new physician is to maximize the standard foundational accounts. Those accounts are a Backdoor Roth IRA for oneself and one’s spouse, any employer match on workplace retirement plans, and an HSA if covered by a qualifying high deductible health plan. These accounts provide significant tax benefits; long-term tax-free or tax-protected growth; and, in the case of HSAs, the ability to invest funds that can eventually pay for health costs throughout life, including Medicare premiums.
From there, new attendings must fully understand their employer’s main retirement plan—which is usually a 401(k) or 403(b), including contribution limits, match structure, and the potential for employer profit-sharing. These plans allow combined employee and employer contributions up to roughly $70,000 per year [2025 — visit our annual numbers page to get the most up-to-date figures] and are both tax-advantaged and strongly asset-protected. Doctors should generally prioritize maxing out these plans after completing their Backdoor Roth IRAs and funding their HSAs. For many physicians, this alone is sufficient retirement saving, but for those who wish to save more, the next question becomes whether to use additional plans offered by the employer.
This is where Alejandro’s non-governmental 457(b) option comes in and where caution is important. Non-governmental 457(b) plans are not held in a secure trust the way 401(k)s and 403(b)s are. Instead, the money remains an asset of the employer, and it is exposed to the employer’s creditors. That means if the hospital system were ever to go bankrupt, the physician’s deferred compensation could be lost. Although actual instances are rare, one major hospital system (Steward) has left physicians facing that risk, demonstrating that the danger is more than theoretical. In addition, unlike a governmental 457(b), the money cannot simply be rolled into an IRA or a 401(k) when leaving the employer. You can only roll it into another non-governmental 457(b) that accepts transfers, which most employers do not.
Equally important are the distribution rules, which vary widely and often are unfavorable. Some plans require that all the 457(b) funds be paid out in the same year the physician separates from the employer. If a doctor has contributed for many years, this can create a massive taxable lump sum at the highest marginal tax rates. Other plans offer better options—such as spreading withdrawals over 5-10 years or allowing distributions at a chosen future age, which makes the plan far more usable, especially for early-retirement spending. Because 457(b) funds are not technically owned by the participant, they can be excellent early-retirement income if the distribution schedule is reasonable and the employer is financially stable. Evaluating investment options and fees is also essential before committing substantial savings to the plan.
Regarding Alejandro’s question about using a sabbatical year to perform Roth conversions on withdrawn 457(b) funds, the answer is yes but only if the plan’s distribution rules permit it. You cannot convert a non-governmental 457(b) directly into a Roth IRA. Instead, the plan must distribute the money to you as taxable income, and then, if it is a low-income year (such as during a sabbatical), you could choose to convert some or all of that distributed amount into a Roth IRA. Whether this is possible depends completely on the plan’s withdrawal structure. If the plan forces one-time lump sums or has no flexibility, the tax hit may be too large to make Roth conversions worthwhile.
In summary, new physicians should complete their Backdoor Roth IRAs, fund HSAs when eligible, and fully utilize their 401(k) or 403(b) before considering a non-governmental 457(b). A non-governmental 457(b) can be useful—but only after carefully evaluating employer financial stability, knowing the plan’s distribution schedule, understanding rollover limitations, and accepting the creditor-risk inherent to these plans. If all those factors align favorably, the plan can be a valuable additional tax-advantaged savings vehicle. If they do not, a taxable brokerage account may be the safer and more flexible alternative.
More information here:
Practical Considerations for Optimal Utilization of Non-Governmental 457(b)s
Comparing 14 Types of Retirement Accounts
Cash Balance Plans
“Hi, Dr. Dahle. This is Wayne. I am a radiologist in the Pacific Northwest. My private practice group is considering adopting a cash balance plan. The obvious pros of this are increased pre-tax savings. In my case, I could probably save up to $200,000 if I desire. However, because of wanting to be good stewards of the plan and so on, they are maintaining a very conservative investment strategy, no more than 30% equity.
My question is, do you think that this is a good idea? Or would I be better if I want to take a more aggressive investment approach to just do that in my taxable account? The third option is I could take the cash balance plan, but then skew my 401(k) much more aggressively to hopefully get the whole investment portfolio more in line with my desires, which is probably in the range of 70%-75% equity.”
Use the cash balance plan, accept the conservative investment strategy inside it, and then compensate by making the 401(k) more aggressive. Cash balance plans are structured to follow pension rules, which means they should not take on excessive investment risk. If they underperform the plan’s crediting rate, the employer must contribute extra money to make up the shortfall. For many doctors, this is stressful because they may not have the cash flow to make unexpected contributions during a bad market year.
Even during periods of unexpected income disruption, such as time away from work, contributions must still be made. If the plan performs worse than expected, those required contributions get even larger. On the other hand, if the plan performs too well and grows far above the allowed crediting rate, the owners may owe excise taxes unless that excess is corrected before the plan is eventually closed. These realities are why cash balance plans are usually invested conservatively.
The goal of a cash balance plan is not to chase high returns but to create a large pre-tax contribution opportunity that reduces taxes during peak earning years while providing asset protection and tax-protected growth. Many cash balance plans invest heavily in bonds or in a conservative mix, such as 40% stocks and 60% bonds. Wayne’s plan at 30% stock is well within common practice. The expected return is generally in the single digits, and that is acceptable because the main advantage is the tax break, not the chance of outperforming other accounts.
Cash balance plans are often closed every 5-10 years for IRS-compliant reasons, at which point the assets can be rolled into the 401(k). Many physicians participate in multiple versions of the plan over their careers as contribution limits change with age. Even smaller annual contributions provide meaningful tax savings. This emphasizes that the plan functions primarily as a tax strategy rather than a high-growth investing vehicle.
Given all this, the best approach is to treat the cash balance plan as the conservative portion of the overall portfolio and then take the desired equity risk in the 401(k). If Wayne shifts the 401(k) to a high-stock allocation, his combined portfolio can easily reach the 70% equity target he prefers. If that still does not get him to the right mix, he can supplement it with taxable account investing. Most likely, however, adjusting the 401(k) will be enough, and the cash balance plan will remain an excellent tool for large pre-tax savings.
More information here:
Top 10 Cash Balance Plan Mistakes to Avoid
Target Retirement Fund in Taxable?
“Is investing in a target retirement fund in a taxable account ever a good idea? Is there a better alternative in case you don't want to spend too much time rebalancing your portfolio every year?”
Target retirement funds are an excellent tool for simplicity, especially in the early years of investing. During the initial phase of wealth building, savings rate matters more than the exact asset allocation, so a single fund solution is perfectly adequate. For residents or anyone whose only investment accounts are a Roth IRA or a small workplace plan, choosing a target retirement fund and moving forward is often the easiest and most effective choice.
The challenge arises when placing a target retirement fund in a taxable account. The first issue is asset location. Some assets are better held in tax-protected accounts, while others are better suited for taxable accounts. Bonds are usually more efficient inside a 401(k) or traditional IRA, while equities are typically more efficient in taxable accounts. A target retirement fund contains both stocks and bonds, which means the bond portion sits in a less optimal place and creates a small but persistent tax drag. The simplicity might still be worth it, but investors should understand the trade-off.
There is another risk. Fund companies can change the underlying structure of target retirement funds, and such changes can trigger large capital gains distributions. Vanguard did exactly this a few years ago. Investors who held these funds in IRAs or 401(k)s were unaffected, but investors who held them in taxable accounts were hit with large tax bills. Vanguard eventually compensated investors to some degree but not necessarily enough to make everyone whole. This type of event is unlikely but possible, and it should be considered before placing a target date fund in taxable.
Many sophisticated investors still favor simplicity. Our friend Mike Piper, known for his writing at Oblivious Investor, invests his entire portfolio in one balanced fund. That approach works for him because all of his investments are in tax-protected accounts. If he had a taxable account, he would likely use a slightly more complex structure to get asset location right.
By the time most physicians have a taxable account, they usually have several other accounts as well. These include Backdoor Roth IRAs, workplace retirement plans, a spouse’s accounts, an HSA, and more. Once that point is reached, it is often more effective to build an allocation using separate stock and bond funds rather than relying on the one-size-fits-all simplicity of a target retirement fund. This allows the investor to choose where each type of asset belongs and to keep the taxable account highly tax-efficient.
It is not inherently wrong to use a target retirement fund in a taxable account, and it is certainly better than many poor investment choices. However, it is usually not ideal once an investor reaches a more advanced stage with multiple account types. A custom asset allocation built with a few simple index funds can provide better tax efficiency while still remaining easy to manage.
To learn more from this episode, read the WCI podcast transcript below.
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Milestones to Millionaire
#251 — Dermatologist Hits $750,000 Net Worth Before Finishing Residency
Today, we are talking to a dermatology resident who has hit a $750,000 net worth before finishing training. He has been building wealth since high school, and he is off to an unbelievable start. This kind of saving and wealth growth will allow him to craft the career he wants as well as reduce the risk of burnout. He knows the impact of the time value of money, and he completed his MD/PhD program in only six years.
Finance 101: The Basics of Real Estate Investing
Real estate can play a helpful role in a portfolio, but it is not a requirement for financial success. Many investors build wealth with simple stock and bond portfolios, even using a single balanced mutual fund. Real estate is simply another asset class that offers unique tax benefits and tends to move differently than stocks, which can improve diversification. Whether you choose direct ownership, public REITs, or private real estate, the same principles that guide other investments still apply. You need to diversify, manage costs, and pay attention to taxes and account placement.
For those who enjoy hands-on involvement, direct real estate provides a high level of control and the chance to add value through improvements or efficient management. It can even be a path to early financial independence for motivated investors who buy and manage a small portfolio of rentals. Others prefer passive approaches. Publicly traded REIT index funds offer simple, low-cost diversification, while private real estate funds and syndications offer potential benefits like a liquidity premium or greater depreciation (though they usually require higher minimums and less liquidity). These private options tend to be better suited for investors who are already wealthy enough to diversify across properties and managers.
Regardless of the route you choose, it is essential to perform your own due diligence. Private investments vary widely in quality, leverage, and risk. Highly leveraged deals, especially those with variable-rate debt, can run into trouble quickly when interest rates rise. Investors should understand where they sit in the capital stack and consider starting with lower risk options before exploring more aggressive strategies. Real estate can be a viable pathway to building wealth, but it must fit thoughtfully into your overall plan and risk tolerance.
To learn more about the basics of real estate investing, read the Milestones to Millionaire transcript below.
WCI Podcast Transcript
INTRODUCTION
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
This is White Coat Investor podcast number 448, brought to you by Laurel Road for Doctors.
Laurel Road is committed to helping residents and physicians take control of their finances. That's why we've designed a personal loan for doctors with special repayment terms during training.
Get help consolidating high-interest credit card debt or fund the unexpected with one low monthly payment. Check your rate in minutes. Plus, White Coat Investors also get an additional rate discount when they apply through laurelroad.com/wci.
For terms and conditions, please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank N.A. Member FDIC.
All right, welcome back to the podcast. Thanks for what you do out there in White Coat Investor land. You probably have a hard job. That's why you get paid so much. That's why you make enough money that you have to listen to this podcast to help you stop doing dumb things with it. That's the whole point of what we're doing here.
I did a dumb thing with money just this morning. I bought another boat. Yeah, I know it's bad. It's bad. It's an addiction apparently. It's my third motorboat that I've bought over the years. It was much more expensive than my second motorboat, which was much more expensive than my first motorboat. That one was actually paid for mostly by the military. They pay you about a dollar a pound to move your stuff across the country.
The boat weighed about 3,000 pounds. I paid about $6,000 for it. Essentially, the military paid for half of my first boat, which was a nice little benefit there. Unfortunately, I have not been buying dramatically heavier boats each time. That weight ratio has not been helping me with subsequent purchases.
But the boat I bought in 2015 and used for 11 seasons is not as reliable as I would prefer for it to be. It spent about half the summer in the shop this year. I did not love that. I did not love having to wait to have it serviced. The primary motivation for getting another boat was actually to get more reliability. Now, new stuff generally is a little more reliable than old stuff. I do expect it to be less in the shop because of that.
But the dealership also offers a couple of other nice benefits. First is priority service while it's still on the warranty. It comes with a five-year warranty. You actually get priority on your service during those five years. I'm thrilled to have that. Hopefully, when something does break, it's not in the shop quite as long.
They also have a loaner boat program that they give you when you buy a new boat from them. If the boat is broken and you have a trip, you're going down to Lake Powell or whatever, they're going to give you another boat. I fully plan to take advantage of that program at some point in the next few years, which would be a very nice increase in reliability of my boat.
What I discovered though is boats have appreciated dramatically in the last 10 years. In fact, this boat that I've been beating up with canyoneers in it for the last 11 seasons is still worth over half of what I paid for, which is pretty amazing considering I've put really more than half the hours that any boat should really be expected to last.
I'm thrilled about that, but the fact that the new ones are so much more expensive means that's really not a dramatic discount on the price of a new one. But we can afford it, so I don't feel bad about something that's actually going to make our lives a little bit easier and spending money on it.
In fact, we were planning to pay cash for it. Of course, they offered a discount if we're willing to finance it. So, we got into the details with it. It was interesting. It was about a $7,000 discount if we were willing to finance it. We asked, “Well, how much do we have to finance?” Well, they came up with an amount, which was about a third of the price of the boat.
I'm like, “Okay, well, we can finance that. How long do we have finance it for?” They said, “Well, you got to make seven payments.” I'm like, “Okay, well, how big can the first payment be?” It turns out you can pay almost all of it with the first payment. In reality, we're going to spend just a few hundred dollars in interest in order to get $7,000 off the boat.
I feel a little stupid doing it. We don't need that, but $6,500 was a little hard to turn down for putting some automatic payments for seven months. Despite the fact that I said I don't play games with little debts and little discounts so much, apparently, I'm playing another game with it. It should be fun to have a new boat come next season that is exactly decked out the way we want it to be.
If you bought anything stupid, don't beat yourself up about it. As long as you can afford to do it, it's fine. You can't take the money with you when you go. If something's going to bring more happiness into your life and you're on track to reach your financial goals despite buying it, go ahead and buy it. Don't feel guilty about doing so.
CLARIFICATION REGARDING PENSIONS
Dr. Jim Dahle:
We got to do a clarification. I'd call it a correction. It's not really a true correction. As the person who wrote in said, they said, “Nothing said on the podcast was incorrect. However, I found the statements regarding the risk of pensions to overstate the risk, especially as it was discussed alongside deferred compensation plans.”
This is written in by an actuary, by the way. Lots of very smart people listen to this podcast. When I screw things up, they're not afraid to write in and let me know about it. I actually do appreciate that because I don't want to put out bad information. I think it's helpful to you to hear from experts from time to time.
This is what he said. He said, “There was a comment about the Pension Benefit Guarantee Corporation insuring only a certain amount of a pension, which is true, but that amount is higher than most pension benefits. For 2026, the Pension Benefit Guarantee Corporation insures up to $93,000 in annual pension benefits for a single life age 65. Even conservative planners shouldn't want to cut the expected pension to below that amount. Additionally, the PBGC can pay above that amount if there are enough assets in the plan. I believe that's a judgment call by them.
One additional note is the type of employer matters and how secure to view the pension benefit. The federal government with its ability to print money is as secure as it gets from their single employers are the most secure as the benefit as the PBGC fund is currently overfunded for them. There's a surplus, $50 billion was the last number I saw.
After that, it will depend on your trust of the government for if municipal or multi-employer plans are more risky. I'd say municipal plans are the riskiest as they don't have the PBGC to back them.
The nice part is your pension plan is required to send you an annual funding notice each year that will include the funded percentage. This will let you know how concerned to be about your pension needing the PBGC to step in. It's not perfect, but general rules of thumb are if it's 80% plus funded, no problem. If it's 60-80%, you should have concern, but maybe not change your financial plans.
And if it's 60% or less funded, start to adjust how you are planning for your pension, meaning discount it when you think about what it's going to provide you during your retirement. Good advice. I appreciate you writing in. It's wonderful to have so many smart people listening to the podcast and helping us get it right.
Okay. Our first question from y'all comes from Alejandro on the Speak Pipe. By the way, if you want your questions on the podcast, put them on the Speak Pipe. Yes, we do email questions, but nobody wants to listen to me read your email. As long as you can ask the question in less than 90 seconds, put it on the Speak Pipe, go to whitecoatinvestor.com/speakpipe and record it. We can get your voice on the podcast. And it's always nice to hear from you all and try to answer your questions that way.
OPTIMIZING RETIREMENT ACCOUNT AND TAX BENEFITS
Dr. Jim Dahle:
This one comes in from Alejandro who did just that and wants to talk about optimizing his retirement accounts and tax benefits.
Alejandro:
Hello, Jim. This is Alejandro from Chicago. First of all, thank you so much for everything you do. After eight long years of residency and fellowship, I'm going to start my new attending job as Cardiac and Electrophysiology next year. And of course, the question is regarding how to optimize the retirement accounts or the tax benefits. Besides the IRA, the employee contribution for the 401(k) or 403(b), this institution does not offer a mega backdoor Roth.
I'm trying to look at other options to maximize retirement accounts. They offer a 457 plan. It's a non-governmental. So, my first question is, what should I look for? What are the things that I should consider before contributing to a 457? Also because I think you can put a big chunk there.
And also the other question is, I was thinking, what happens if I decided to do it, I make that account grow. And then later on, maybe I separate or not from that institution. My understanding is eventually that money gets available to you to move on or to move it around. The question is, can you then later somehow take a sabbatical year, half a year without zero capital gains and do a road conversion of that money?
Dr. Jim Dahle:
Okay, great question, Alejandro. Let's go over the basics of retirement accounts for new docs, starting jobs. First of all, there's the backdoor Roth IRA for you and your spouse. Typically doctors make too much money to make direct Roth IRA contributions. And they typically have some sort of a retirement plan available to them at work. So they can't deduct their traditional IRA contributions.
They do the backdoor Roth IRA process for themselves and if married for their spouse. So that's seven-ish thousand dollars, it varies each year. It's a thousand dollars more if you're 50 plus, but you can put some money in there and that's real money, especially when you double it with the spouse. That's often the first thing people invest in each year. Although the first thing is if you're offered a match by your employer, you ought to make sure you get that.
Another thing that's usually a pretty high priority for people is if their only health insurance plan is a high deductible health plan, they want to fund their HSA. And sometimes the employer will give you some money toward that. If you fund it through payroll, you can often save some payroll taxes on it, but you can just go to Fidelity or Lively or whatever and open up an HSA and write them a check, a transfer money from your bank account or whatever, and you can invest it.
HSAs can be invested for decades. Our HSA now is up over a quarter million dollars. It can be invested and it can grow and it can pay for all your healthcare for the rest of your life, including Medicare premiums. And so, it can be very useful that way. If you've got access to an HSA, you should definitely fund it. It doesn't necessarily mean you should take a plan that qualifies you for an HSA when another plan is a better deal for you. But if you do qualify for an HSA by virtue of your plan, please fund it. Please invest the money. Please pay attention to where it is. If you don't like the HSA that your employer is offering you, you can transfer the money out periodically to another one.
The next step is to figure out what your employer is offering you. Go into HR, ask for all the retirement plan documents for the plans that you're eligible for. Typically in most employers, that's going to be either a 401(k) or a 403(b). Now there's rules on these things and the amount you can contribute each year changes. Go to whitecoatinvestor.com/numbers to get the amounts for this year or next year, whenever you're listening to this podcast.
But in general, you can make an employee contribution, which is something like $24,000-ish dollars currently. That can be a tax deferred contribution. That can be a Roth contribution. It's either pre-tax or after-tax, it's your choice.
Then the employer can put in some additional money. This is usually referred to as a match. And often you have put some money in to get the match. Not always. Read the document, figure out how your match, if any, works.
Sometimes, like in my partnership, since I'm one of the owners, I'm allowed to self-match my money. You're allowed to put in a total of $70,000-ish. And again, this goes up each year with inflation. And that includes the employer and the employee contributions. If you're allowed to make those for yourself, put those in. This is a great place for money. Not only does it now give you a tax deduction if it's pre-tax, or it gives you tax-free gains forever if it's a Roth account, but that money grows in a tax-protected way. It grows faster than if you invest it in a non-qualified taxable brokerage account.
It's also asset-protected. If, heaven forbid, you get sued for a massive amount above policy limits and it's not reduced on appeal and you got to declare bankruptcy, you get a keep. In every state in this country, what's in the 401(k) and 403(b)?
Match those things out. You've done your backdoor Roth IRAs. You've done your HSA. You've got maybe as much as $70,000 in your 401(k) or 403(b), plus whatever your spouse might be able to put into their 401(k) or 403(b). And now you start looking at other options if you want to save more for retirement. Maybe that's plenty for you. Maybe you don't need or want to save any more for retirement. But if you do, you might look at some of these other plans that your employer might offer you.
In your case, Alejandro, there is a non-governmental, also known as a tax-exempt, 457 plan. This is not the same as a governmental 457. It is dramatically worse for several reasons. One, the money is not held in trust, meaning it's not held in a separate account like your 401(k) would be or your 403(b) would be. And it's subject to your employer's creditors.
While it's not subject to your creditors, it gives you some asset protection there, it is subject to your employer's creditors. So if your employer has to declare bankruptcy, there is a theoretical risk that you could lose the money. Now, there is a hospital corporation by the name of Stewart, they used to own my hospital, that it looks like some doctors that worked for them and funded a non-governmental 457 through them might be losing some or all of the money they had in that plan.
So, it doesn't feel so theoretical to them anymore. I'm not aware of any other instances when doctors have lost 457 money, but it is a risk. If your employer doesn't look so financially stable, don't put a lot of money into their 457. Maybe don't put any in there. I know at least one doc that has written me that regretted putting money into his 457 plan, not because he lost any of it. In the end, he got it all, but he said the hassle of worrying about it, laying awake at night, worrying about losing whatever it was, a couple of hundred thousand dollars that he had in the 457 was enough that he wished he'd never used it at all.
So, keep that in mind. Certainly if you have any doubts about it or you're worried about it, maybe you don't fund it to the max every year, maybe just fund it for a year or two, whatever. But that's a serious risk with a non-governmental 457.
The other big problem with a non-governmental 457 is you can't just roll it into an IRA when you separate or into another 403(b) or a 401(k) or whatever. You can only roll it into another non-governmental 457 plan if that plan accepts it. And your new job, if you have one, probably isn't going to offer one or it might not accept it or whatever.
You're kind of stuck with the money in that 457 until you take it out, pay taxes on it, if due because these can be Roth 457s as well. But you're stuck with it. So you better make sure the distribution options are something you're okay with. Because a lot of them are not, a lot of them are terrible.
For example, a common one is that you got to take all the money out in the year you separate from the employer and pay taxes on it. Imagine you're putting in 24-ish thousand dollars into this thing every year and it's growing for like 10 years. Now you got, I don't know, $400,000 or $500,000 in there. And now you change jobs. Now you got to pay taxes on that $400,000 or $500,000, probably all in the highest tax bracket, all at once. Not awesome, right? Not great distribution option.
On the other hand, if it lets you take it out over 10 years, starting at an age you're allowed to name, maybe that's not such a bad deal. 457 money, especially non-governmental 457 money, because it's not technically your money yet, is probably the best money to spend in early retirement.
If you can start spending it in your 50s or at least by your late 50s or early 60s when you retire, that's probably a great distribution option. If you don't have to take it out all at once, that's a great distribution option. Just make sure you're okay with the distribution options for whatever amount of money you're likely to put in there and what it's likely to grow to.
You also need to make sure the fees are okay and the investment options are reasonable before using a non-governmental 457. Whether you use that or not, if you want to save even more money for retirement, your last option is a taxable account. There's no limit on how much money you can invest in a taxable account. For many investors, including me, my largest investing account is a taxable account. You just pay taxes on it.
Usually you get a little better tax rates. You pay qualified dividend tax rates, you pay long-term capital gains tax rates, and that's assuming you can't offset those gains with losses from tax loss harvesting as you go along. You can do all kinds of cool tricks like donating appreciated shares you've owned for at least a year instead of cash when you give to charity. You're continually increasing the basis in your portfolio, you're flushing those capital gains out of your portfolio, making it more tax efficient, and of course anything you don't sell before you die gets a step up in basis at death, which helps decrease income taxes for your heirs. That's a good thing.
Taxable accounts aren't all bad. They are more accessible to creditors if you get sued about policy limits. They do grow slower because you have to pay taxes on them as they grow, but there's a lot of ways you can invest tax efficiently and make it really not too bad at all.
Your other question, Alejandro, was whether you should do Roth conversions. Well, Roth conversions are a good idea in years in which you have lower income. Now for most people that's early retirement years. They're retired, they're not yet taking social security, those are pretty good years for Roth conversions. If you go back to fellowship or you take a sabbatical, that's a pretty good year for a Roth conversion.
But for the most part in your peak earnings years, you got to think long and hard before making a Roth contribution or conversion. It's often the wrong move. That pre-tax money does have its benefits, but you just got to run the numbers and make estimates of what your future tax rates are going to be if you're going to be the one spending that money or the future tax rates of whoever is likely to be spending that money.
But in general, you want to be doing your backdoor Roth IRAs. You want to be doing your HSA. You want to be maxing out your 401(k) or 403(b) with a profit sharing plan. Take a look at other plans being offered by your employer. It might be a 457. It might be some sort of cash balance plan. Take a look at them, understand how they work, decide how much of them you want to use. And then you can always invest an unlimited amount in a taxable account. I hope that answers your question, Alejandro. A great question. Let's move on to what's next.
Oh, I was supposed to tell you about our Black Friday sale. It ends tomorrow. If you're listening to this the day the podcast drops or hopefully by the day after it drops, you can get 20% off. All our books, all our courses through tomorrow, we'll even give you $200 off WCICON.
You should totally come to that, by the way. It's going to be awesome. We're down in Las Vegas, but not on the Strip. Close to the Strip if you want to go there, but not on the Strip. And if you use this code at checkout for THANKS20, you can get either $200 off WCICON, or you can get 20% off all our books and courses through tomorrow. Happy Black Friday.
Okay, the next question off the Speak Pipe is about cash balance plans.
CASH BALANCE PLANS
Wayne:
Hi, Dr. Dahle. This is Wayne. I am a radiologist in the Pacific Northwest. My private practice group is considering adopting a cash balance plan. The obvious pros of this are increased pre-tax savings. In my case, I could probably save up to $200,000 if I desire. However, because of wanting to be good stewards of the plan and so on, they are maintaining a very conservative investment strategy, no more than 30% equity.
My question is, do you think that this is a good idea? Or would I be better if I want to take a more aggressive investment approach to just do that in my taxable account? The third option is I could take the cash balance plan, but then skew my 401(k) much more aggressively to hopefully get the whole investment portfolio more in line with my desires, which is probably in the range of 70 to 75% equity. Thanks very much for any advice you can provide.
Dr. Jim Dahle:
Okay, great question. I choose option three. It's just a great option. Let's talk about this for a minute though. They're probably doing the right thing managing this cash balance plan. You generally don't want to take too much risk in it. If you take too much risk and it really underperforms the crediting rate for the year, remember this cash balance plan is another 401(k) masquerading as a pension, but it has to look like a pension to the IRS. It's got to play by pension rules.
If it underperforms the crediting rate, the employer, which is probably you, has got to put more money in there. It's not necessarily a bad thing. You get an additional tax deduction for more money you put in there, but that's a problem for lots of doctors. They just don't have the cash flow to do it. And you really do have to do it.
When I fell off the mountain last year, remember, and I wasn't working for a few months, I still had to put money into the cash balance plan. I still had to cut checks from other savings that I had to fund the cash balance plan. They're not kidding when they say you got to make the payments. Keep that in mind. If it underperforms, you got to make even larger payments.
The other downside of taking lots of risks is if this thing does really, really well and you're way above the possible crediting rate, you actually end up paying an excise tax if that hasn't been made up for by the time you close the plan.
In general, the right answer is take your risk in the 401(k) or 403(b) or whatever, not in the cash balance plan. Invest the cash balance plan relatively conservatively. I think ours is 40-60. Yours is 30-70. That's probably in the right place. Some people put them all in bonds. The return you're looking for in these cash balance plans is primarily in the single digits. You're doing it for the tax break and the asset protection and the tax-protected growth later, not necessarily because the investments are expected to blow everything else out of the water. That's just not the way they work.
Keep in mind, cash balance plans are usually not left open forever. It's an extra 401(k) masquerading as a pension. What you tend to do is every five to 10 years or so, you find an IRS-approved reason to close the plan and you roll all the assets into your 401(k).
We've done this now three times in my partnership in the 15 years we've been in it. We're on cash balance plan number three that I've participated in. I think now I'm allowed to put quite a bit more in it. I don't make that much anymore in the partnership. I'm only practicing part-time. I think I'm putting $60,000 a year in it. I think the most somebody can put into this particular plan is $120,000. Previously, I was limited to significantly less than that. You can often put a lot of money in there. When it's a pre-tax contribution, that can really reduce your tax bill during your peak earnings years. It's mostly a tax play rather than an investing play.
In general, it's worth using, yes, but what you do is you at least first adjust your 401(k). Take the risk in the 401(k). If you know that 70% of this cash balance plan is going to be in bonds, well, maybe your 401(k) is 100% stock. The overall asset allocation is what matters. That's fine. If you really can't get to the asset allocation you're looking for, that stock bond mix you're looking for just by doing that, then maybe you don't put as much money into the cash balance plan as somebody goes into your taxable account as invested in stocks there.
Either approach is probably fine. It sounds like you've got a substantial 401(k). You can probably, at least for a few years, just make the adjustment in there and get to where you want to be.
All right. Let's talk about target retirement funds.
TARGET RETIREMENT FUND IN TAXABLE?
Speaker:
Is investing in a target retirement fund in a taxable account ever a good idea? Is there a better alternative in case you don't want to spend too much time rebalancing your portfolio every year?
Dr. Jim Dahle:
Okay. Good question. As a general rule, I am a fan of target retirement funds. I think if I had it all to do over again, that's probably all I'd use, at least for the first $100,000 or something that I invested. Your asset allocation just doesn't matter that much in the beginning years when you're investing. It's all about your income and how much of it you're saving and putting in those accounts.
If you really want more money in your retirement accounts, the secret is to put more money in your retirement accounts. Of course, when we first start investing, we get all excited about our asset allocation and investments because they're sexy and we make our portfolios all way too complicated. In reality, it's probably fine to use a target retirement fund.
Certainly, if you are a resident, your only investment is your Roth IRA, or maybe there's a little money in the 401(k) at the university hospital or whatever, that's fine. Just choose the target retirement fund in each one and move on with life. Worry about it again when you become an attendant.
But there are a few issues with putting a target retirement fund in a taxable account. The first one is an asset location issue. For most people, they're actually a little better off by putting some types of assets in some types of accounts and other types of assets and other types of accounts.
Often, at typical interest rates, that means putting your bonds in a tax-protected account. Maybe your bonds go in your 401(k) and stocks go in a taxable account. If all you're using is a target retirement fund, you've got a little bit of a tax inefficiency there. Now, maybe it's outweighed by the fact that this is a simpler solution for you and you can spend less time managing your investments or less money paying somebody else to do it. It might be worth it, even with that tax inefficiency.
There is another issue, and Vanguard is guilty of it. I wrote a blog post about this debacle they had a few years ago. Basically, they upgraded their target retirement funds, what their target retirement funds were investing in, and that resulted in a massive capital gains distribution to people who own these accounts.
No big deal if you own the account in a traditional IRA or if you owned it in a 401(k) or something. No big deal. But if you owned it in a taxable account, you got this massive capital gains distribution. Now, Vanguard, I think eventually, has had to pay some sort of a penalty, which was distributed to the investors, but I don't know that it made them whole. That's another risk of why you might not want to use one of those accounts in a taxable account.
But I'm a big fan of simple solutions. You know who else is? Mike Piper, the blogs of the Oblivious Investor. He's spoken at multiple WCCONs. He's speaking this year in March. You should totally come just to hear Mike speak. It's totally worth it.
But he uses one fund and he has for, I don't know, 10 or 15 years. All of his investments are in one fund. It's the Life Strategy Moderate Income Fund. It's a Vanguard fund. It's a fund of funds. It's a balanced fund. It's literally one investment. It's all he owns.
Mike is one of the most sophisticated investors I know, but he recognizes what really matters in investing, which is how much you make, how much you put in there, that you have a reasonable plan and that you stick with it. And a life strategy, moderate growth, I think it's called a moderate growth fund, is reasonable. That's literally all he does.
But he does admit all of his retirement assets are in tax-protected accounts. He does not have a taxable account. And I suspect if he did, maybe he'd opt for a little more complexity to try to get his asset location just right.
Is it ever a good idea? It's really simple, but I think by the time you're a typical doctor with a taxable account, you've now got backdoor Roth IRAs. You've now probably got a 403(b) and a 457 or something at your employer. Your spouse has got some retirement accounts. Maybe you've got an HSA in the mix and you've got a taxable account. It's probably time to roll your own fund selection, your own asset allocation, rather than just opting for the ultra-simple target retirement solution.
Could you still do it? You could. It would be simple, especially if those funds are available in every type of account you have, but you've still got that risk of Vanguard or whoever's running that target retirement fund giving you some crazy capital gains distribution you may not like.
I suppose that risk does exist with other types of funds as well, but it seems a little higher with the target retirement fund, especially since it has happened in the past. Not a great idea, not a fan of target retirement funds in a taxable account, but it's not crazy. You could do much worse things investing-wise.
QUOTE OF THE DAY
Dr. Jim Dahle:
Our quote of the day today comes from Jonathan Swift, who said, “A wise person should have money in their head, but not in their heart.” I love it.
Okay, next question. Also off the Speak Pipe. This one comes from Emily. Let's take a listen.
RETIREMENT SAVINGS BEFORE YOU HAVE ACCESS TO WORKPLACE PROFIT SHARING
Emily:
Hi, this is Emily from the Northeast. My question is, what should I do about retirement savings over the next year when I don't have access to my workplace profit-based sharing until the end of 2026?
For context, I'm a dental provider, W-2 worker, fairly new attending. I just paid off about $100,000 in student loans and we're working on paying off my husband's last $20,000 in student loans. No other debt. I have an old 403(b) with $115,000. My husband has a 401(k) with $145,000 and we both have Roth IRAs of about $50,000 each.
I don't have access to an HSA, unfortunately. My plan is backdoor Roth IRA for both of us, max out my husband's 401(k), but I don't see any other options for myself besides a taxable brokerage account. Any advice is appreciated. Thank you so much.
Dr. Jim Dahle:
Emily, it's a great question. I think you just need me to say it's okay to invest in taxable because you clearly have an understanding of the issues involved here. Typically when people are in this situation, they're starting their first job, they're usually relatively young. Sometimes it's later in their career when they change jobs, but they're not eligible for the 401(k) or whatever, or maybe they're not making enough money to really make contributions to a retirement account. It's fine. Putting this off for six months or a year is not the end of the world.
Keep in mind, especially when we're young attendings, we have a lot of really great uses for money. Maybe you have some credit cards to pay off, or you got an auto loan to pay off, or you've got a beater you need to replace, or you've got some student loans to pay off, or you owe some money to your parents.
All of that is a great thing to do this year, while you're waiting until you're eligible for your retirement accounts. So you can just take advantage of some of the other uses for money that you might have. Maybe you want to get your kid's college savings started so you can open a 529, or there's lots of uses for money. Maybe you're saving up a house down payment. I don't know.
Look at all that stuff first. Then of course, you can look at what is an option for you. If you have earned income, you can make a contribution to an IRA. Now, typically for most White Coat Investors, that's a backdoor Roth IRA process you're going through to make a Roth IRA contribution. So make sure you do that.
But if that's all you have available to you and your spouse is already maxing out their available accounts, and you're sure that you want to invest this money for retirement, well, the only thing left is taxable.
There's not some magic retirement account out there we haven't told you about. Well, there might be one. If you have some self-employment income, you can go open an individual 401(k). This is another great benefit of being self-employed. You don't have to wait until the employer lets you use their retirement account. You can just open your own. But if you are an employee, that's not an option. You have to wait until they let you into their retirement account, or you just invest in taxable.
Now, investing in taxable is not the end of the world. Most of my money is invested in a taxable account. You can invest very tax efficiently. You can tax loss harvest. We've saved up lots and lots of tax losses over the years. Any capital gains distribution I might get or choose to take, I don't have to pay taxes on. Very tax efficient. You can flush out the appreciated gains by giving it charity. You can give them to people in a lower tax bracket and they can sell them maybe at 0%.
Lots of things you can do that are cool with the taxable account, but it's better to invest in retirement accounts for retirement anyway, all else being equal. But I think in your case, Emily, it sounds like you want to save more for retirement. And if you filled up everything available to you, it's time to invest in taxable. Don't beat yourself up about it.
SPONSOR
Dr. Jim Dahle:
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DISCLAIMER
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
Milestones to Millionaire Transcript
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 251 – Dermatologist hits $750,000 net worth before finishing residency.
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You can empower yourself as a DIYer, take control of all the variables that impact your wealth, retirement timing, and long-term financial security. There's all kinds of new enhancement they have on it. They've got a custom withdrawal order. They've got a redesigned overview page and enhanced Roth conversion modeling. That's a popular feature. They can do some customization of the rates a little bit better for setting those rates for inflation and appreciation returns. And they've got some updated long-term care assumptions built in there now as well.
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All right, we've got a great interview today. It's an unusual person to be celebrating this milestone with, but it's a milestone we've done many times, just not usually with a resident. Let's take a listen to it. Stick around afterward. We're going to talk for a few minutes about some basics in real estate investing, and my take on real estate investing.
INTERVIEW
Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is Garrett. Garrett, welcome to the podcast.
Garrett:
Great to see you in person. It's fun to chat like this after listening to all the podcasts.
Dr. Jim Dahle:
Yeah it's interesting. I ask most guests before they come on, “Have you listened to some of these before? Do you know what you're in for?” And the vast majority of them say, “Yeah, I've pretty much listened to all of them.” So that's actually not unusual for our guests at all. It is not a requirement though. Those of you thinking about applying, you're not required to listen to the other 250 of these before applying to come on yourself.
Garrett, tell us where you are in the country, where you are in your career, and what you do for a living.
Garrett:
Yeah, I'm a PGY-4 in dermatology. I'm out on the West Coast in a very high cost of living city. Just finishing up my fourth year of residency, which is now in a research track. It's about 80% research time, 20% clinic. Seeing patients half a day a week and going to grand rounds, that kind of thing.
Dr. Jim Dahle:
Very cool. Okay, now we're celebrating a milestone that we celebrate all the time, but not with residents. That's the impressive thing about this. So, tell us what we're celebrating today.
Garrett:
Yeah, I'm just about closing in on $750,000 net worth at this point.
Dr. Jim Dahle:
Three quarters of a million dollars in residency. This is sort of unusual.
Garrett:
Yeah, it's kind of funny to think about. I've really started to track it more and following this. It's kind of fun to see.
Dr. Jim Dahle:
Yeah, most people in residency have a negative net worth. They're still working on the back to broke milestone, not the millionaire milestone like you're maybe currently working on. Part of this deals with your method of paying for school. So, tell us how you pay for school.
Garrett:
Yeah, ultimately went to MD-PhD out back east at Johns Hopkins. That really was kind of the impetus to start this all and had a small stipend. When I started, it was under $30,000 a year. By the time I finished, it was about $35,000. But not having to pay for medical school was a big part of this.
Dr. Jim Dahle:
Yeah, you never had the big negative net worth.
Garrett:
And the other big advantage I had too was I was able to get through the program pretty quickly. I finished my MD-PhD in six years, which I think really set me up well to catapult through these milestones as opposed to spending more time in graduate school.
Dr. Jim Dahle:
Yeah, that's a ridiculously short period of time for an MD and a PhD. How did you get out in six years?
Garrett:
I think it was a lot of things. I think a lot of it was just advocating for myself. I had a good project where I had a good publication and also it was COVID time. So it was really hard to get into the lab, but I could get back into the clinic. And just advocating for myself.
You come to a lot of this point, and I help a lot of MD-PhDs that are younger than me navigate these transitions. And I think a lot of it's, you could graduate this year or the next year. And I think advocating for yourself makes a big difference. Because when you added up the lost income, the time value of money and everything else that goes into it, and the flexibility it gives you later in your career when you want to have kids and a family and everything else is huge in a research career.
Dr. Jim Dahle:
Okay, so that's part of it. You didn't go negative like most medical students do. And you only really lost two years in a contract program kind of situation. But that doesn't explain $750,000 as a resident. I think for that explanation, we got to start talking about your paper route.
Garrett:
Yeah, I started a paper route on my 12th birthday. I was delivering papers and actually made pretty good money. I made $200 a month and my parents had me put over 50% of that into a bank account. And then I was really lucky to have a grandfather who was really good at introducing me to time value of money and compound interest and all that kind of stuff and actually convinced me to take that money along with money I made working at a burger joint and a grocery store and a few other places and actually opened an IRA when I was in high school, which if you think about the years that I was invested did pretty well, even just putting it into QQQ as the only thing I invested in.
Dr. Jim Dahle:
That worked out well, didn't it?
Garrett:
Yeah, that helped a lot. That's probably 20% of where I'm at today.
Dr. Jim Dahle:
Okay, before you went away to college, how much money do you think you put into a Roth IRA?
Garrett:
I probably had about $15,000 in by the end of high school.
Dr. Jim Dahle:
Okay, and that's been essentially in tech stocks.
Garrett:
Yeah, QQQ and Berkshire Hathaway was all it was in back then. I didn't know a lot.
Dr. Jim Dahle:
That did just fine. And so, that's a significant chunk of the $750,000, but it's certainly not all. So, let's talk about some things you've done to earn money along the way and how much of it you've invested. And tell us about your financial literacy journey, not what your grandparent knew, but what you learned and how you learned that.
Garrett:
Yeah, I had really great parents as well that taught me a lot. I remember when I was about nine or 10 years old they let me budget the entire family vacation and they still yell at me because I apparently in the Dairy Queen told them we couldn't afford ice cream because it wasn't in the budget. They still give me grief about that to this day. But I think that was a lot of it of living like a resident.
But also during medical school, I wasn't making a ton of money between $30,000 and 35,000. My wife was making between $40,000 and $50,000. But we were able to live in a very low cost of living city. We were in Baltimore. We were able to take advantage of some programs with Johns Hopkins where you could buy a house in the neighborhood and they'd help you with down payment. We got $35,000. If you were to live in a house for five years they would forgive that loan. So that helped out a lot.
And I worked a ton. I was on the neighborhood board and did a ton of work making my neighborhood better. So by the time we sold our house we made a pretty good amount of money on that too. I think really picking an affordable city and being able to buy a house as opposed to renting all those years and making that reasonable was a big chunk of things as well.
Dr. Jim Dahle:
Yeah, there was another side hustle in there too. Something about admissions consulting or something?
Garrett:
Yeah, I did some medical school admissions consulting which I think is a great option for medical students and residents. The main qualification to be able to do it is just telling them where you got into medical school and where you go to medical school. That's really all the parents want to hear.
But a lot of editing essays, a lot of mock interviews, things like that. And I think it actually was good for me as well. It really honed my writing, made me better for residency applications as well as the interview process. Helped out a lot as well.
Dr. Jim Dahle:
You're kind of a scrapper. You just scrap this all together. A little bit here, a little bit there, a little bit here, one here, one here, one here. And all of a sudden you add it all up. It's a huge win. You've done pretty awesome. What's your wife's career?
Garrett:
She works in university higher administration, fundraising, event planning, that kind of thing.
Dr. Jim Dahle:
But a five-figure job it sounds like.
Garrett:
Yeah, she's just gotten to six figures now being on the West Coast where salaries are dramatically higher. The same job here makes double what she made in Baltimore.
Dr. Jim Dahle:
Yeah, certainly a contribution though. It sounds like you've been together through this whole process.
Garrett:
Yes.
Dr. Jim Dahle:
That's part of it, but still pretty awesome, pretty awesome. Okay, what advice do you have for other people that listen to that and they're like, “Holy smokes, I'm in the same place as him and I'm minus $400,000?” What advice do you have for those people that want to get to where you are?
Garrett:
Yeah, I think the things that I wrote into being interested in coming on this podcast was one, all the conversations I had with other MD-PhDs of “When do you graduate?” But this also applies to people that are going through medical school of “Should I pursue an MPH? Should I pursue a research year?”
I think really like weighing it out, is the time value of losing a year of attendinghood versus the benefit of residency and everything else, is that worth it? I think making those decisions in a way that takes the finances into account I think is important. It's not to say don't do it, but it's important to weigh that as well.
I think also just when you're thinking about medical school decisions, thinking about where might make sense financially. We made probably $250,000 difference of going to Johns Hopkins versus other options I had on the West Coast or Upper Northeast or similar situated programs to Hopkins, but would have made a dramatic difference in our overall financial picture without being able to buy a house. And our mortgage was $1,000 a month. You can't get that in very many places in the United States.
Dr. Jim Dahle:
You're relatively young. You didn't waste any time here for all you've accomplished. An MD, a PhD. How many years did you spend in college?
Garrett:
Just four years.
Dr. Jim Dahle:
Four years in college. Durham's still a four-year residency, right?
Garrett:
Yes.
Dr. Jim Dahle:
And you're here in your early 30s and pretty much just about done and already building wealth. Your case for not wasting time, you've demonstrated pretty well. There's no lost years there. There's no multiple gap year kind of situation. You put every year to work and made it earn its pay.
Garrett:
Yeah, and I think it really gives me a lot of freedom. I think you hear a lot about FIRE on this podcast, but especially if you're pursuing a research career, you have to make a huge sacrifice doing research in dermatology is nowhere near as lucrative as doing just straight clinics.
Having that flexibility with having built up an amount of net worth really allows me to continue to pursue the research I want to pursue and go to a higher cost of living city and do a lot of these things that I think would be a lot more challenging when you want to have kids and do all the other things that life throws at you.
Dr. Jim Dahle:
Yeah, for sure. That flexibility is aided by not only what you've acquired, but by your level of financial literacy and discipline. Because that's number one, how you acquired this, but number two, what will allow you to pivot and make changes in your life that allow you to do what you want to do with your life so that money becomes a tool rather than an end, much less a stress in your life. That's pretty awesome.
All right, there are people out there considering MD-PhDs. What advice do you have for them as they make that decision?
Garrett:
Really thinking about how long the program really is, I think this is a point of advice I give to a lot of people is you have to think not just for the 22 year old self that's applying to MD-PhD, but I'm about as fast of a track as you can possibly be. And I'm still probably three or four years away from really having a big NIH funded lab. At the very quickest, it's the next 15 years of your life.
So, what do you want to do? Do you want to own a house? Do you want to have kids? Do you want to have a partner? All those things I think really play into it. And I think people too often think of, “What do I want when I'm 22?” rather than “What am I potentially going to want when I'm 35 and doing the same thing?”
Dr. Jim Dahle:
Yeah, it's pretty awesome amount of planning that you've done not only with your finances, but with your life and just figuring out your career. Super helpful. I don't know that most of us have quite as much vision of our future as you do. And that clearly enables you to put yourself on a path to get to that vision once you know exactly what it is that you want. Well, what's next for you? What's the next goal you're working on?
Garrett:
Yeah, really right now, just trying to start up my own research lab. I'm working both at two big institutions here on the West Coast starting a research lab working on the microbiome. So, it's applying for NIH grants. It's now actually starting as an attending, which will be nice for my income as well. I won't be working full time as an attending, but really trying to take that research lab to the next level and ultimately run an NIH funded lab is the goal, assuming the NIH funding still exists in a few years.
Dr. Jim Dahle:
Well, there is some stress about that right now for sure. I have a partner who just finished a fellowship with the CDC and he paints a pretty dire situation there for sure. And I'm sure that's carrying forward through other government agencies as well.
But thanks for what you're doing. It's important work. It's remarkable work. You've done a fantastic job setting yourself up so you can do that work without financial distractions that so many docs have. So, congratulations to you and thank you so much for coming on the podcast to share your success with others.
Garrett:
Yeah, thank you so much for the podcast. It's been a great step along the way. I've listened to it many miles while running.
Dr. Jim Dahle:
All right, hope you enjoyed that interview. Obviously Garrett's killing it. Most people at his stage of career do not have the wealth he's already built up, which gives him options, options already as he's coming out of training. He can design his career the way he wants. This is going to lead to less burnout and it's just pretty awesome to see what he's put together.
FINANCE 101: BASICS OF REAL ESTATE INVESTING
Dr. Jim Dahle:
Now, I promised you at the beginning, we're going to talk a little bit about real estate and I've written lots of stuff on real estate in the past, but we also have a number of real estate partners, advertisers, sponsors, whatever you want to call them, people who we help raise money for their real estate investments.
And as a result of that, there's lots of marketing that goes out on their behalf, whether you're attached to our real estate opportunities list or not. That's where most of the marketing is, but you hear about it on the podcast and you see it on the blog and forums, et cetera, et cetera. But I think it's important that you hear directly from me, my take on real estate. With no marketing here, let's talk just for a minute about real estate.
Real estate investing is totally optional. That's the first point I want to get across to you. You do not have to have a rental property to be financially successful. You do not have to invest with a specific real estate investment trust, mutual fund or ETF to be successful. You do not need private, passive real estate investments like some of the syndications and funds that invest with us to be successful.
It is possible to be successful with nothing more than a single fund of fund mutual funds. Mike Piper is one of my great friends, this is a very sophisticated, financially sophisticated guy. His entire portfolio is one mutual fund. It's the Vanguard Moderate Life Strategy Fund. That's it. That's what all his money is. He's a real fan of simplicity and you can keep it that simple and be fine. You do not have to invest in real estate.
I invest in stocks and bonds and real estate. I see those as kind of the three big investment asset classes and that's what I invest in. I think there's some real benefits to real estate, things like some unique tax advantages, but mostly it's a case of another asset class that has relatively low correlation with stocks, but has similar returns to stocks. This is a good thing when you're building a portfolio to have high returning assets that have low correlation with each other. This is a principle of portfolio construction that makes sense.
But when you go to invest in real estate, all the investment principles that matter with stocks and bonds still matter with real estate. You got to diversify, you got to watch your fees, you got to watch your tax efficiency, take advantage of retirement accounts to put investments in as they're available. There's a lot more to it than just going out and buying the house down the street or just going out and buying some syndication that somebody is trying to push on you.
There's more to it than just buying some. Sometimes people need to get over the hurdle and just get involved and it does help you to learn more as you get involved, but keep in mind, it's got to make sense as part of your portfolio as well.
It's totally optional, but it is a viable pathway to wealth. In fact, I'm still convinced the fastest way out of medicine, if you're like, “Wow, I'm in this, I'm 35 years old, I'm two years out of residency and I hate this. I want out as fast as possible.” I think the fastest way out is to live like a resident. So you have some capital and then take that capital and invest it into a small portfolio of short-term rentals. Talking about buying five to 10 short-term rental doors, whether in your city or another city or whatever, probably managing themselves, managing them yourself for a while, but eventually you should be able to hire management.
I think if you do that with a reasonable amount of leverage, that's probably the fastest way out of medicine. I think five years is totally reasonable. That you can get out of medicine, be financially independent and do whatever it is you actually want to do with your life.
Now, most of us went into medicine because we want to be in medicine and we don't have to hit financial independence within five years to do this, but be aware that sort of a pathway is available and it's a viable pathway to wealth. And you don't have to do short-term rentals. You can do longer-term rentals. You can add it to a portfolio of stocks and bonds, like I have. There's a lot of different ways to invest in real estate.
Now, if you want to invest directly, that's totally reasonable. It has some aspects of a second job for sure. You got to pick the property and sometimes you do the upgrades and the management yourself and those sorts of things, but you get to control everything and you get to add value sometimes.
If you spend Saturday over there knocking out a wall, well, you just added value to your portfolio and this is something you're not going to be able to do with your index funds. You're not going to go knock a wall out at Apple and increase the value of Apple, but you can do that with direct real estate investing. Some people really like that level of control.
Others of us, we prefer to invest our time actively and our money passively. And so we're looking on the passive spectrum. So if you want to invest passively, you've got another decision to make. One, you can invest on the public side. That usually means buying real estate investment trusts on the stock market. And you don't have to buy them individually, just like you buy an index fund for all the stocks, you can buy an index fund for all the REITs.
Vanguard has one that we've been using for years. The ticker for the ETF version is VNQ. It's very low cost. It's very widely diversified. And that can be the way you invest in real estate passively.
If you want to step from the publicly traded side to the private side, there are some advantages to doing that as well. There's potential to earn a liquidity premium. There is a likelihood of being able to invest in smaller properties than you're going to get in those big publicly traded REITs. They're just too big to be dealing with relatively small apartment complexes or other sorts of investments like that. And so, it gives you the opportunity to invest in kind of different assets than you would be able to via the publicly traded REITs.
They generally are formed as partnerships. They're often not liquid. Sometimes your money's tied up for several years. They're often formed as partnerships which pass through depreciation to you. And that's really valuable for some people. Sometimes you can use that to offset massive amounts of other real estate income. And so, that equity real estate income is coming to you essentially tax-free, done well.
Now, it's not quite as good as if you own all the properties yourself and you never sell one of them. You just depreciate them and depreciate them and depreciate them and exchange them and depreciate them and depreciate them and exchange them and depreciate them and eventually die. And your kids get to step up in basis of death. But it's still pretty good to get depreciation to offset all of those, all that real estate income that you have.
But if you're going to invest in these passive private real estate investments, you've got a little bit of a barrier. And the barrier is typically the minimum investment amount. Because these are not insignificant, especially if you're going with somebody that's been around for a while. It's not unusual to see those be $100,000, for instance. And that's just hard to come up with early in your career and still have a diversified portfolio.
For the most part, these sorts of investments are for people who are already wealthy. You're already a millionaire or a multimillionaire. And then you've got enough that you can diversify a real estate portfolio that's composed of these private passive investments like syndications or funds.
If you're not yet wealthy, it's a lot harder to diversify that. Either end up with a non-diversified portfolio for a few years, or you just wait a few years or stick with some publicly traded investments or direct real estate properties that you buy yourself.
But down the road, the passive private option becomes a little bit more of an option. You just need to diversify between different investments and properties and managers and so forth.
That's the message I wanted to get through to you people about real estate. And I worry sometimes that that gets lost in the marketing and advertisements that you get via White Coat Investor from some of our sponsors. I try to repeat it frequently and pound on it in our real estate course. For those who've taken our No Hype Real Estate Investing course, I pound on this point.
And of course, we work hard to try to limit our advertisers to people who are experienced fund operators rather than some fly-by-night syndicator doing their first syndication that's dramatically over leveraged. We're finding the best people we can who are interested in advertising to you, who are raising capital from you, but that's not a perfect process.
That cannot replace your due diligence, your vetting. You still got to do that. You're still responsible for it. People have lost money in investments that they first heard about at White Coat Investor. These people are paying us to introduce you to them. There's not some sort of guarantee that comes because you heard about them at White Coat Investor that you're guaranteed to make money on them or you're guaranteed super high returns or anything like that. That doesn't work.
Even some of them that we've advertised here that I've invested in have lost money. It does happen. There's risk that comes when you try to have high returns and sometimes that risk shows up.
I think a lot of people in real estate investing really felt that risk show up in 2022 when interest rates went up 4% in a year. That's a very bad thing, especially if you have variable interest rate debt on a highly leveraged real estate property.
And so, you hear about people getting capital calls or having to come up with other solutions to deal with their real estate investment that's in trouble. Well, that's why, because it was over leveraged and too much of the debt was variable rate. People took on a lot of risk and the risk showed up.
There are less risky ways to invest though. You don't have to go with a fund that's highly leveraged. You can go with a fund that's more focused on income and you can go with a fund that's not even on the equity side, it's on the debt side. Those are the people who get paid first when things go bad. There are lots of investments where the equity investors have been totally wiped out and the debt investors not only got all their principal back but all their expected interest back.
There are different places to invest in the capital stack when it comes to real estate investing. So when you go to make your first real estate investing, don't pick the riskiest way to invest. Why don't you invest your first few investments into some of the less risky ways to invest in real estate, less leverage, a better place in the capital stack and so on and so forth. I hope that's helpful to you as you think about how you want to add real estate to your portfolio if you want to add real estate to your portfolio.
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