Podcast #47 Show Notes: Staying the Course, Stock Purchase Plans, and TSP Loans
Listeners and readers send me in a lot of questions. In this episode I address specific questions about staying the course in your investing plan, what to do when stock purchase plans are part of your salary, and TSP loans or other ways to provide a down payment for your home purchase. You can listen to the podcast here or it is available via the traditional podcast outlets, ITunes, Overcast, Stitcher, Google Play. Or watch the video here or on YouTube. Enjoy!
Podcast # 47 Sponsor
[00:00:19] This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President, Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients and shop around to find the best products available at the best rate. Because of the volume and exceptional reputation of Set for Life Insurance as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies (saving women significantly), priority underwriting handling and on some occasions exceptions in the underwriting process. For more information, visit Set for Life Insurance.
Quote of the Day
[00:03:15] “Money often costs too much.” – Ralph Waldo Emerson
[00:01:31] As physician, we help people every single day. Sometimes we cure them. Sometimes we don't. But we can always make their lives a little bit better and provide a little bit of value to them. Don't kid yourself that there is not an emotional toll that takes on you as you take care of these people. You are not invincible either. And that's why it's so important for you to have both disability and life insurance if anyone is depending on you. In fact some docs who weren't able to come to White Coat Investor Conference because bad things happened to them like family members who died or they were diagnosed with an illness or became disabled in between the time they signed up for the conference and when the conference was, so it is important to realize that none of us are immortal and these bad things can happen to us. Insure against the financial catastrophes and enjoy every minute of your lives.
[00:02:41] We are going to have the videos for the conference available soon. It will be an online course kind of like the Fire your Financial Adviser course. It will be less expensive but perhaps a little bit less polished. You will get a chance to see all the fantastic speakers that came to the conference. Basically we are recording their talks and you'll be able to watch them online. We'll also provide a copy of their slides for those who weren't able to attend the Physician Wellness and Financial Literacy conference in Park City.
[00:04:31] We are grateful for the feedback we receive especially polite but negative feedback. I wanted to talk about some of the feedback, specific to the podcast, we have gotten this year and our plans to address it.
- [00:04:43] Feedback about the podcast we had with Jordan Goodman on the show a few episodes back. I wrote a post with my thoughts on one product that he was pushing, mortgage acceleration, that you can find here.
- [00:07:32] Feedback about Episode 42, entitled Buying One Property a Year, which is a common strategy among real estate investors.
Q&A from Readers and Listeners
- [00:13:35] Do you purposely keep some cash on the sidelines so that when a buy opportunity comes along you have some money ready.
- [00:15:30] I have the option to participate up to 10 percent of my income in employee stock purchase plan to buy stock at a 15 percent discount every six months. My question is should we be investing in the stock purchase plan? And if so, should we be selling immediately or waiting until the long term capital gains rates apply?
- [00:18:40] Should I be using Roth IRA savings from my former career to pay for medical school?
- [00:20:29] Should we take a TSP loan out in order to buy a house. Is it always generally a bad idea?
[00:00:00] 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.
[00:00:19] Welcome back to the podcast. This is episode number 47. This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President James K. Fleischner CLU, ChFC, LUTCF, in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability, and long term care insurance. They work on the client's behalf to shop around to find the more suitable products at the most cost effective rate. Set for life as first and foremost a client centric company. They listen carefully to the needs of clients and shop around to find the best products available at the best rate. For more information visit W. W. W. set for life insurance. com
[00:01:01] Thank you for what you do. Cancer sucks. You know I just saw a gentleman in the E.R. this week who was mostly anxious about his recent pancreatic cancer diagnosis. I sat down and talked to him what he was most worried about was that he was going to die. Well the truth of the matter is he probably is going to die. I mean none of us get out of here alive but he's probably going to die sooner rather than later. Based on this diagnosis and you know pancreatic cancer is a nasty one there's no doubt about it.
[00:01:31] I've got a brother in law a brother in law who's at a young age and is you know dealing with this as well it turns out his cancer is inoperable it's just wrapped around some blood vessels and they're really not going be able to do much about it. And these are the people that we help every single day. Sometimes we cure them sometimes we don't. But we can always make their lives a little bit better and provide a little bit of value to them. Don't kid yourself that there's not the emotional toll that that takes on you as you take care of these people. You're not invincible either. And that's why it's so important for you to have both disability and life insurance if anybody else is depending on you.
[00:02:08] In fact I think there were even some docs who weren't able to come to White coat Investor Conference because bad things that happened to them, family members had died and they had to go to the funeral. Other docs were diagnosed with an illness or became disabled in between the time they signed up for the conference and when the conference was so it's important to realize that none of us are immortal and these bad things can happen to us. Insure against the financial catastrophes and enjoy every minute of your lives.
[00:02:41] Speaking of the conference we're going to have the videos for the conference available here. More details can be found on the Web site. But it will be an online course kind of like the Fire your Financial Adviser course We talked about a few episodes ago.
[00:02:53] It'll be less expensive but perhaps a little bit less polished but you'll get a chance to see all the fantastic speakers that came to the conference. Basically we're recording their talks and you'll be able to watch them online. We'll also provide a copy of their slides for those who weren't able to attend the physician wellness and financial literacy conference in Park City.
[00:03:15] Our quote of the day today comes from Ralph Waldo Emerson who said money often costs too much. I like that quote because it really has two meanings. It means not only is interest rate sometimes too high that actually using money cost too much and you're better off saving up and using your own money rather than borrowing it. But also that money has a cost in that you have to trade some of your life energy or time in order to get it.
[00:03:43] So those are you watching this on the video and those of you listen to the podcast may not know we make videos but most of these where I don't have a guess were actually recording part or all of the episode and putting it up on YouTube. But the YouTube video is really more of a the making of this podcast episode than it is the actual podcast episode. It's not as polished. We don't do nearly as much editing on it as we do on the podcast episode. So that's kind of fun for some people to watch. Others might find it a little bit distracting to see me sitting here in a T-shirt in my basement making a podcast. But you should be aware that Cindy and Katie did make me go comb my hair in-between the last podcast that we recorded and this one is actually being on video. So I did dress up a little bit for you even if I haven't shaved today.
[00:04:31] We're grateful for the feedback you see especially polite but negative feedback. I wanted to talk about some of the feedback we've gotten this year and our plans to address it. We're talking about feedback specific to the podcast.
[00:04:43] First we got a lot of feedback about the podcast we had with Jordan Goodman on the show a few episodes back. A lot of listeners didn't like his more sales approach to life and podcasts and particularly as mention of affiliate deals. Frankly we didn't like it that much either. And after recording the interview we even thought about not running it but I'm glad we did because we got ten times more feedback about that episode than we have about any other in any other episode that we've done. There were over 50 comments on the show notes themselves about it and certainly a lot of interest in the topics that were discussed. There is so much interest in one of the products that he was pushing, mortgage acceleration, that I did a blog post about it a few weeks later. So if you want my take on it you can get it on the blog there. Basically the mortgage acceleration does work but not nearly as well as he may sound on the podcast episode and it comes at the risk of swapping money in your bank account for all equity line of credit.
[00:05:37] People also take issues with Jordan's description of hard money loans as safe. Well I agree with people who criticize that while I do invest in hard money loans mostly through some Crowdfunders but also in some funds. I don't consider it all that safe of money. You simply don't get money that yields 8 or 10 percent These days that is safe money. If you safe money, Go buy some treasuries. I've got safe money in my portfolio in the form of tips fund as well as the TSPG fund it's very safe. Hard money loans are not that safe.
[00:06:08] At any rate some listeners don't like that we put guests like that on. Some listeners don't like that we put any guests on at all. Some people want me to be more confrontational with the guests during the podcast. And some listeners just said add a little segment to the end of the podcast with your thoughts. Especially if the topic is controversial. And then of course lots of people just enjoy the discussion.
[00:06:30] Who knew podcasting could be so hard right. Seriously sometimes you feel like you can't win. You guys like Guests what I've got to get the right ones and I've got to make sure that they say the right things on the podcast. So the truth is you just can't please everybody. And we're going to try to continue to bring you a high quality content and spend time on topics that we think are interesting that we think are important for you to know about but also just some stuff that's fun sometimes.
[00:06:57] I actually like the idea put in a little editorial comment at the end. Like I do on a blog post for instance on the guest post I often do that. And so we did that with the controversial topic merger arbitrage that we did a few episodes later.
[00:07:12] Now we've already recorded that but you haven't actually listened to it at the time I'm doing this and I suspect we're going to get some negative feedback about that one as well. You probably also noticed that I've been a little bit more confrontational with guests lately and tried to ask him the difficult questions. But like with everything we do we're just making this up as we go along and learning along the way.
[00:07:32] More recently I got some valuable feedback about Episode 42. That was the one that was entitled one property per year which is a common strategy among real estate investors. Most interesting part about this feedback was that it came from a real estate investor. But I'm going to read some of the e-mail. I should note that the e-mail was very polite and filled with praise for what we do here at the White Coat investor. But I've got most of that stuff out just because I want to focus on the negative part of it because honestly negative feedbacks most useful kind.
[00:08:01] The e-mail said this last podcast email diverged about as far as I've ever noticed in white coat investor land from paying down debt and prudent investing. I think getting mortgages on rentals to the point of seeking alternate financing is exactly how Dave Ramsey went bankrupt. This is beyond simply more risky it's not something that great majority of docs in our country need to learn more about. Least not the ones we know. We are very committed to a rental property portfolio and that's been a bit atypical so we'd love a detailed discussion from others who do this.
[00:08:28] But since we are a young couple we only just bought our first property because we know to go slow and stay debt averse is to be wise. It's the only way to get rental returns without huge risk. We need encouragement to do this in a debt friendly way not another typical real estate lecture. We're not legalistic about debt but we don't want to read just another physician path to quick money blog. This last episode felt so dissonant with your other teaching That it was enough to make me reconsider sharing the podcast with others in the future especially since the whole point of doing so is usually to prevent friends from making unwise Doctor-esk purchases or financial plans.
[00:09:01] Discussing different viewpoints is valuable. One of the reasons we trust you so much is that we are if you refuse to let your readers ignore safety, humility, or moral considerations. WCI to us means restrained and realistic advice. I do not want my young doc friends to hear this podcast or even think about buying a house a year because it might be quicker. I'm trying to help them avoid financial danger. You've always run a tight ship. My family truly appreciates selectivity you've used and what you endorse even if just by dissemination just don't let the personal finance and behavioral restraint posts/podcasts get pushed out by new fancy ways for docs to invest we are to get that from everyone else We know.
[00:09:34] That is great feedback. That's the kind of stuff that is super valuable but I also thought there are two issues related to it that were worth addressing on the show. The first is specific to real estate investing.
[00:09:44] I'm fine with real estate being part of your portfolio. Even a large part of your portfolio. I like the idea of one property per year it's kind of catchy but the listener is exactly right. You can't let a catchy goal cause you to make bad decisions particularly when leverage is involved. If you're going to buy properties each of them needs to make sense. I also think each of them needs to be cash flow positive which usually means putting down 25 to 33 percent just to be cash flow even when you take into consideration the transaction costs and all the other costs of ownership above and beyond the mortgage payment. I'm not talking about the rent beating out the mortgage.
[00:10:22] Apparently I didn't convey that very well in the original podcast. So my apologies for that. I think that it's okay to use leverage when investing in real estate but it needs to be a reasonable amount. Nobody ever went bankrupt without borrowing money.
[00:10:33] The second issue from that feedback that I think is worth addressing is more general. I write the blog and do the podcast with more than one audience in mind. I try to dress the investing novice but I also try to mix in some advanced topics for the hobbyists and everybody in between. Maybe I'm trying to do a little too much but I enjoy getting around the weed sometimes. And like with anything Pick what you find useful. Do more research on the stuff that you just heard about and leave the rest.
[00:10:59] Just because we take little side trips out into the weeds doesn't mean that I don't endorse the main highway nor that I think that it's mandatory to get out into the weeds. The basic wealth building plan that I've been preaching for years works, it works well. Is it possible Do things a little bit differently? Absolutely. Might you come out ahead For doing so? You might you might also come out behind. So be careful when you leave the main highway and what is that highway for physician?
[00:11:24] The highway has become a great doctor. Manage your debts appropriately. Live like a resident, get your student loans paid off within two to five years after residency. Put 20 percent of your gross income toward retirement. Understand and use your available retirement accounts and invest in a low cost broadly diversified portfolio mostly composed of index funds. Using a written plan that you follow through thick and thin. That's the highway and honestly there's no reason every physician in America can't follow that highway and become wealthy.
[00:11:54] But I think you guys are smart enough to remember that that's the highway even if I don't boil it down to seven baby steps that I repeat Like their dogma ten times every episode until you can't forget. Ala – Dave Ramsey but based on the feedback I'm not mention them quite often enough so I'm going to try to do so a little bit better.
[00:12:13] We've got some great questions to do today. I love getting your questions because it helps me stay in touch with what you guys are worried about and thinking about, it makes coming up with enough material for a podcast very easy.
[00:12:23] You can send me questions via Facebook or Twitter or via e-mail or even through comments or posts on the blogs or the forums on the Web site. If you ask that question privately I keep you anonymous even if it means changing some of the details. If you ask it publicly on social media I assume I have permission to share your name and all the gory details.
[00:12:44] Here's an email exchange I had recently with a reader. He sent me an email in October of 2017 asking if I was planning on selling some during this big 25 percent uptime are still holding on for the long run. That's it. That was the entire email. So I emailed them back. I said selling some what. Everything I own is up, my income, my business, my house, my real estate, my stocks, my bonds, interest rates on my cash, etcetera. So no I plan to stay the course with my plan that seems to work pretty well.
[00:13:14] I Didn't hear back from him until February 2017 when he sends me a two word e-mail, “bummer week.” I think this was right after the stock market correction when it dropped 9 or 10 percent. So I responded to him, “bought a bunch more just like I do every month. Got a discount on it compared to last month. Over the years it works out well.”.
[00:13:35] It's interesting to get these short e-mails from people I'm not really sure where they're coming from or what they're asking sometimes. But he responded with another question that I thought was worth discussing today on the show. Do you purposely keep some cash on the sidelines so that when a buy opportunity comes along you have some money ready.
[00:13:52] Or do you sell some bonds shares when you see a great opportunity despite the fact that this would throw off your percentage in stocks versus percentage in bonds. I usually just invest money as I make it but maybe it would be worth keeping some on the sidelines for big drops. That seems like it would be more a timing strategy however.
[00:14:07] Well I agree with the emailer. That does sound like a tightening strategy. I don't purposely keep a portion of cash sitting around in my portfolio hoping that some great opportunity comes along. I invest money when I make it. And I know there's going to be more money coming in next week next month for me to invest and I'll decide how to invest that money. Some months that goes into my Roth IRA my wife's Roth IRA and our HSA other months it goes into the 401k, some months our money goes into our cash balance plan through my partnership, other months we put money into the 529. Other months we buy real estate or buy mutual funds inside our taxable account. It just depends on the month but I'm not holding on to you know hundreds of thousands of dollars wondering if some great deal on a real estate property is going to drop into my lap. I figure if I get a great deal drops into my lap I can use the money I'm going to invest that money to buy. So no I don't keep cash on the sidelines.
[00:15:05] The problem with doing that is there's a fair amount of cash drag from doing that when you've got a chunk of your portfolio sitting there only earning 1 percent. That's going to drag down the overall returns of your portfolio probably more than make up for anything you could have made by being ready for this great opportunity that Maybe you would come by. what I've found is these types of opportunities usually give you a few weeks or a few months to get the money together.
[00:15:30] Here's another question that comes from a doctor who's married to another earner. She says my spouse works a nonmedical job at a Fortune 500 company. He has the option to participate up to 10 percent of his income in employee stock purchase plan to buy stock at a 15 percent discount every six months. There's no limit to how much you can sell or win. The stock purchase price is the lower of the first or last day of the six month purchase period. So the minimum discount is 15 percent and the stock is doing well closer to 20 percent. We're doing well financially thanks for the info on this site and your affiliates. She gives a shout out to Physician on Fire. We've lived like a med student for all four years of residency and this year fully paid off my loans. That's awesome. We have rented the same house all through residency and drive the same old cars now that we're debt free. We've been focusing on funding his 401k, my 4O3b and our Roth IRAs. We are currently saving about 12 percent of our total income. So my question is this Should we be investing in the stock purchase plan?
[00:16:28] I've been reading Bogle heads and many are advocating for investing as much as you can and selling immediately and taking the 15 percent gain just knowing you'll be paying taxes on the sale. We're doing well but if we bought as much of this as we could it might mean we couldn't max out our retirement accounts. Should we be taking advantage of this? And if so should we be selling immediately or waiting until the long term capital gains rates apply?
[00:16:55] So I told her that I thought either approach was fine. I love the idea of getting stock at a discount especially when they just sell it right away. I mean that's basically kind of like a 401k match. It's free money it is part of your salary. If they're going to let you buy stock for 15 percent less than the stock is worth you can turn around and sell it. And that's just like a bonus part of your salary. And so be sure to take that. In fact I'd take as much as I could even if it meant not quite maxing out a retirement account. But the way I look at it is you're going to be selling that periodically. And so really you're only missing out a few months or a year of a 401k contribution. This isn't an ongoing thing because you just use the money that you put into that account that you put into the stock purchase plan to use to max out the 401k later. I mean you're not going to hold all of this stock forever. You don't want to hold on to your own company's stock especially. But really any individual stock any longer than you have to. So if they're going to give it to you and you can sell it immediately that's a great way to get your money.
[00:17:58] Now there's a little bit of risk involved in holding it for a year if you hold it for a year however you get to pay taxes on the gain at the lower capital gains rate. The long term capital gains rate which might be 15 or at most twenty three point eight percent. And so that can be a pretty attractive proposition too. So how do you decide whether to sell immediately or whether to hold it for a year. Well if there is a tiny part of my portfolio I'd probably hold it for a year and then sell it and take advantage of that lower tax rate. If it was a big chunk of my portfolio or if I needed the money to max out my 401k that year I'd probably sell immediately and use it for that and just pay the taxes on it and be careful not letting the tax tail wag the investment dog.
[00:18:40] Here's another question from somebody about to go into medical school a nontraditional student says there aren't many financial resources available for medical students in their mid to late 30s. I have a Very specific question, Should I be using Roth IRA savings from my former career to pay for medical school? Seems to me that possibly eight to 12 percent return from the stock market doesn't necessarily beat a guarantee 7 percent loan interest payment. Thanks for your podcast and your help.
[00:19:06] Well boy 7 percent pretty attractive guaranteed return. That's why I'm a big fan of using the resources you have to avoid taking out medical school loans in the first place. But I feel a little bit different about retirement accounts.
[00:19:21] I don't like the idea of raiding retirement accounts for things other than retirement even though you can get the money out penalty free and tax free for things like an education and you can take out up to ten thousand dollars a year in earnings in order to buy a house For instance up to ten thousand dollars of earnings to buy your first house. But I generally recommend against it if you have a taxable account. I'm all for liquidating that and using it to pay for medical school. But I think I probably wouldn't touch the retirement accounts I'd let those ride now. I think over the years you'll probably be glad you did that. Obviously no guarantee in the next year that you're going to be 7 percent or even in the long term really there's no guarantee. But I think that's a pretty good bet. And the idea of having that money and preserving that Roth space for future investments as well as providing future asset protection is valuable enough that I probably wouldn't rate it just to pay for medical school. But would it be wrong to do so. No different strokes for different folks that would be fine if that's what you really want to do if you're particularly debt averse. But I think in my case I wouldn't trade a Roth IRA to pay for medical school.
[00:20:29] Here's another question from a couple that is active duty and interested in buying a house. So the question is really about whether they should take a TSP loan out in order to buy a house. They ask is it always generally a bad idea?
[00:20:45] Well generally it's bad idea to take out any kind of 401k or TSP loan. But I don't know that it's always a bad idea. So let's talk about this this couple's 15 years into their military service. One I'm a civilian government employee and the other one's active duty. They're maxing out their TSPs and their Roth IRAs for the last couple of years. Around age 40 and try and decide how they want to get a downpayment. They understand how the TSP loans work which is actually a pretty good loan. I mean you don't get the returns on that money while you have borrowed out of the 401k. But you also are paying a pretty low rate on the TSP. I think it's around two point seven right now and that loan which is a pretty attractive rate obviously. So I told them Well it's always generally a bad idea but that doesn't mean it's always the worst option. And actually 401k and therefore thrift savings plan or TSP loans became more attractive with the recent tax law changes. And the reason why you have more time to pay them back after you separate from your employer instead of having to have it paid back within 60 days of being fired. You've now got until the next October really of the next year. And so I think that's makes him a little less risky than they used to be but Still not a great idea.
[00:22:03] The truth of the matter is this couples really weighing six different ideas. And I think it's important to list those out and actually consider well which ones the best idea for us which ones the worst idea. For example they could borrow from the thrift savings plan for their downpayment. They could take money out of their Roth IRAs for a downpayment. Remember you can take out ten thousand dollars of earnings and you can take out your Roth IRA contributions at any time without having to pay any any penalty for doing that. The third option is to buy a home without a down payment using a doctor loan they could buy a home without a down payment using a VA loan. They could wait to buy the home until they were able to save up 20 percent down payment and use a conventional loan. And then of course the other option that they didn't even mention is they could avoid buying a home at all. In general I think buying a home on active duty is a bad idea. It's kind of like buying a home in residency. I recommend you don't buy a home until your professional situation and your personal situation your social situation are stable and when you're in the military by definition your professional situation is not stable. You're going to move every three or four years it's practically guaranteed not to mention you may be deployed in all kinds of things can happen. So I think it's perfectly fine for somebody in the military to go through their whole career just renting you know investing plenty of money on the side. And when you get out and settle down a little bit then to buy a home. I think that's perfectly fine. And just like residents often have this burning desire to buy a home So do a lot of military folks and I think when they really run the numbers on it they realize maybe that wasn't such a smart move.
[00:23:41] But given those options that I listed out for this couple you know I think maybe not buying the home is probably the best one but if they're set on buying it I think probably the best move is to buy it with the doctor loan rather than borrowing against their retirement accounts or taking money out of their Roth IRA. I think the doctor was probably a better use of their money. But after that of the options you know if they're going to buy a home and they don't want to do a doctor loan borrowing against the TSP is probably the next best choice. I mean interest rate is low. You got time to pay it back if you get fired. And worst case scenario even if you don't pay it back was just treated as a withdrawal and you have to pay the taxes and interest on it. But I told them good luck with their decision. But obviously that's a pretty personal decision for everybody. But I think I would probably not be raiding retirement accounts just to make a down payment.
[00:24:33] All right that's it for this week. I'd like to think this episode sponsors Set for life insurance because of the volume and exceptional reputation of set for life insurance as well as the relationships they've developed over the years. Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies, which save women significantly on their disability insurance, priority underwriting handling and on some occasions exceptions in the underwriting process. For more information visit W. W. W. set for life insurance dot com.
[00:25:05] Head up shoulders back. You got this and we can help. Be sure to sign up for the free monthly newsletter. Not only does that give you a free monthly newsletter but it also gives you the 12 email financial boot camp email course which has gotten some fantastic reviews from those who have taken it. See you next time.