Trusts, Direct Indexing, and High Yield Savings Accounts

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 376.

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You can do this and The White Coat Investor can help.

Welcome back to the podcast, everybody. We're recording this in June, June 6th, actually. So a big delay between us recording this and you hearing it. I think it's scheduled to drop on July 18th.

One thing I ought to say at the beginning of this podcast, July 16th is my wedding anniversary. We were married 25 years ago. So we've been celebrating this week, our wedding anniversary. And 25 years is a long time, a quarter century. I'm grateful for Katie and for her putting up with me.

It's been a heck of a ride for the last 25 years. We got married when we were totally broke. We're in a totally different place financially now and hopefully helping you to get to a similar financial place that we've been able to enjoy the last few years.

But more important than that, we've raised four great kids, have a wonderful group of friends and family, and just really had a wonderful life together. Thank you, Katie, for being a wonderful wife. Happy anniversary. And for those of you out there celebrating anniversaries this summer, I hope you can say the same.

We've been playing a lot. If I'm recording something six weeks in advance, we've been doing lots of fun stuff. I think Katie's got three river trips planned between now and when this podcast drops. I have two river trips planned. These are week-long trips. And we've also got a week at Lake Powell. So we've been playing a lot in between this recording and when you hear it. I hope you're having a great summer as well.

But find that balance in your life. You don't live forever. You need to spend your money on some things that are going to bring enjoyment in your life. But you also got to keep your financial ducks in a row. You've got to save some. 20% is what I tell docs. 20% of your gross toward retirement. Everything else in addition to that. You got to take care of your debt. You got student loans and it needs to be forgiven. You need to get it paid off. Don't drag it out to mid-career. You'll regret having student loans at 45 or 50, I promise you.

You got to take care of your asset protection. You got to take care of your estate plan. You got to make sure you have a will in place. Make sure you have that insurance in place in case something terrible happens to you. Whether it's a lawsuit or disability or life insurance. But once you get that done, enjoy some money. This ride goes fast. And none of us are going to have a trailer. No trailer hitch on your hearse. When you leave, everything you've acquired during your life is going to stay right here without you. And so, make sure you're enjoying it as you go along. Enjoy the ride and find a balance in your life.

Okay, we've got lots of great questions from White Coat Investors. This is really your podcast. It's the White Coat Investor podcast. And you may not realize this. I get introduced all the time as the White Coat Investor. I am not the White Coat Investor. You are the White Coat Investor. The audience of the blog, of the podcast, that is the White Coat Investor. It's not me.

Thank you for what you do. Let's get into some of your questions and see if we can build some great content for this episode that you all will enjoy. The first question is on revocable trusts.

REVOCABLE TRUSTS

Speaker:
Hey, Dr. Dahle. I'm hoping you can clarify some of the nuances of naming a revocable trust as the beneficiary of retirement or IRA assets. I'm a little bit confused about how taxation works when those assets are passed to the trust and then distributed to non-spousal and non-minor people.

It's my understanding that they may end up paying more taxes if they receive the assets via the trust, rather than if I had just named those people as the beneficiary rather than the trust. Could you speak a little bit more to this? I really appreciate all you do for the White Coat community. Thanks.

Dr. Jim Dahle:
Okay. Let's remember about a revocable trust, what a revocable trust is. A revocable trust is almost nothing. You can take money out of a revocable trust, put it back into your personal accounts. You can put it in the revocable trust. You can move it back and forth every day, all week long, as much as you want. It provides zero asset protection. That's not really the point of a revocable trust. If you're trying to get yourself some asset protection, you're going to want an irrevocable trust, a trust that you can't just pull assets and money back out.

The point of a revocable trust is to avoid probate. This is to pass things like your cars, so they don't have to go through probate, those sorts of things, your checking accounts, maybe they are owned by a revocable trust, so that there's not a big probate hassle at the time of death. That's the whole point of a revocable trust.

But once you die, you can no longer revoke the trust. You're not around to do it. It's now an irrevocable trust with all the consequences of that. So, keep that in mind. It also so happens that when IRAs are inherited, that also occurs at the same time, the time you die.

For the most part, what people do is they do not name the trust as the beneficiary. They name the beneficiaries directly. The first beneficiary on all our IRA accounts and 401(k) accounts on the ones with my name on them, Katie's a beneficiary. On the ones that Katie's name is on, I'm a beneficiary. These are not in our trust. They're totally separate. That's what most people, I think, do.

Now, the secondary beneficiary for these accounts, if we both get wiped out at the same time, is our trust, but we're doing that not necessarily for some tax savings thing. We're doing that to control the money, because we don't want our kids to get a whole bunch of money before they're 40. And none of them are 40. At best, they're still two decades away from that. If something happens to us in the next 20 years, we don't want them to get the money directly.

We may change that later in life and give them that money directly. But right now, it's set to go into the trust. The trust can do what it can with it to try to stretch that out. My recollection is five years, don't quote me on it, that the trust can continue to use some tax protection there. Could be as much as 10 years. Nobody gets more than 10 years these days on inherited IRAs, but I think it's only five for trusts.

By doing this, by having this control, we're giving up some tax benefit that could potentially be used if we didn't do this. That's the way things work in finance. You can't always get all the tax benefits you want, and all the asset protection benefits you want, and all the estate planning benefits you want, and all the maximizing return benefits you want, the investment benefits, whatever. You can't always get it all. You have to make sacrifices. You have to not get something because something else is more important to you. That's the way it is for us with that.

You may or may not want to name your trust as a beneficiary. If you're okay with your kids inheriting the money, if you die today, and getting all that money in a lump sum coming to them, then you don't need to name a trust at all. If you still have young kids and you're not super comfortable with that, and when I say young, I'm talking 20s, because if they're minors still, there's a custodian to help manage this stuff. But if they're in their 20s and you're not comfortable with them getting the money yet, then you may want to name a trust instead of them directly. I hope that's helpful for you.

QUOTE OF THE DAY

The quote of the day today comes from Mellody Hobson, who said “The most powerful tool a woman can have is her financial independence.” Let's be honest, that might be the most powerful tool a man can have too, but it certainly gives options, particularly given the history of the world, that having a little bit of financial independence, a little bit of your own money, a little bit of your own ability to earn can make a big difference in the freedom in your life. Especially true for women, hopefully becoming less and less true in that regard as the years go by.

Okay, another estate planning question. Let's take a listen.

PROBATE, TRUSTS, AND STEP-UP IN BASIS

Speaker 2:
Hey, Jim. I had a question about probate and trusts. My dad has two houses. One is a main house, and the other is a summer vacation home. He put my name on both of them with the idea that when he dies, it would be easier for me to take control over them and rent them out or sell them if I want. I was under the idea that if he does that, then I don't get a step up in basis. If I were to sell them, I would end up having to pay capital gains tax on anything over $250,000 profit from what he paid for them originally, as opposed to if he put that in a trust, I would get a step up in basis.

I guess I'm also under the impression that the houses would go into probate for some amount of time, although I'm not super familiar with that process. Number one, is that the correct way of thinking about things? Would putting the properties into a trust be a better option? And if that is the case, could he still do that? Could he take my name off of the houses and still go ahead with that, even though my name has previously been listed as an owner? Any advice would be much appreciated. Thanks.

Dr. Jim Dahle:
Great question. I hear a lot of confusion in your voice and in what you're saying. Let's try to sort this out a little bit. Parents, stop doing this. This is a bad idea to put your kid's name on the title of your home. Do not do that. You think you're making things easier when you pass, and maybe you are, because if you put your kid's name on there, it won't go through probate. It just becomes theirs. When you die, it's now theirs. Right now, it's both of yours. When they die, it's just theirs. Nice work. You avoided probate.

But what did you give up to get that? You gave up the step-up in basis at death. Let's say you bought this house for $100,000. It's now worth a million dollars. If you just died and left this house to your kid in your will, it would be treated as though they bought the house for a million dollars. Now, they can sell it right after they inherit it for a million dollars, and that's all totally tax-free to them. No estate taxes, probably. Most people aren't rich enough to have to pay estate taxes. No income taxes. Awesome. Pretty cool deal. Step-up in basis at death. It's awesome.

You can screw that up in two ways. The first one is by putting their name on the title, which is what happened in this case. Dumb, dumb, dumb, dumb, dumb. Don't do that. It's not this particular person, this caller's fault. It sounds like the parent just did that without talking to them, without getting good advice. They just did it. They thought it was a good idea, and you know what? It's not a good idea.

The other way you lose that step-up in basis of death is putting it in a trust. You can put your house into an irrevocable trust, and it's no longer owned by you. It's owned by the trust. Well, the trust doesn't die. Because the trust didn't die, there's no step-up in basis at death.

When you're starting to mess around with this sort of heavy estate planning, trying to avoid estate taxes, and Katie and I have done this because we got an estate tax problem, you're giving up a lot of times some income tax in order to save estate taxes, because all the stuff that's in our trust is there's not going to be a step-up in basis at death.

We had to make the calculation that we thought the saved estate taxes was going to outweigh the benefit of income tax that our heirs would get. We ran the numbers and made a judgment call that it was. We also happened to get a few asset protection benefits for doing that sort of thing. But you've got to realize that there's consequences to doing these things, to giving your house away to a trust, to giving your house away to a kid. There are tax consequences, and you should get advice or at least know what the heck you're doing before you do this sort of thing.

Now, can this be reversed? I don't know. How long has it been? Maybe it can just be reversed. Maybe you can give your share of the house back to your parent. They probably didn't even file a gift tax because they didn't know enough to do it when they gave it to you. Now, you're gifting a whole bunch of money back to them to try to reverse it. Maybe you can give it back to them $18,000 at a time so that it doesn't happen. It's just a mess to have to deal with this afterward.

I think I would talk to an estate planning attorney before doing anything more at this point. I think there's been enough that's botched here, and you just need advice to do the best you can going forward from here.

It sounds like the parents got some money. They own two houses. They're presumably at least a millionaire. They can afford spending $5,000 or $10,000 or $15,000 with an estate planning attorney and getting a real estate plan. So, I'd recommend they go do that.

Hopefully, this can be reversed and get that step-up in basis of death and go for that. If nothing else, I'm sure it can be worked out that at least half of that house can still get the step-up in basis of death. You just got to mess with the titling a little bit and should be able to do that. But be careful what you do with titling. It matters, and it really can increase the tax bill.

One other thing I heard in there is you mentioned the $250,000 limit. What's the $250,000 thing? This is what you get when you sell your house while you're alive. Let's say you buy a house for $500,000. You sell it for a million dollars. Well, the first $250,000 in gain or $500,000 if you're married is tax-free. After that, you got to pay capital gains taxes on your own house. You sell it for a million dollars. You're not married. You got to pay capital gains on $250,000.

That's why elderly people maybe don't want to sell their houses. Instead of paying those capital gains, they can give their heirs the step-up in basis at death. But after you inherit it, it's got to be your primary residence for a couple of years before you can sell it and get that $250,000 exemption. You don't just automatically get it because you inherited the house. This is a benefit for your primary residence. If you're not living there, you don't get that benefit. It's not on everything that ever gets sold. You don't get this on investment property. You don't get it on second houses. You get it on your primary abode.

Okay. Next question. This one's from Bethany.

FUTURE VALUE CALCULATIONS

Bethany:
Hey, this is Bethany in Florida. Thanks for answering our many questions. I'm trying to do some future value calculations and I'm wondering what you think is a reasonable real return to use for these calculations. I'm looking at retirement in 20, 25 years and wondering, I know we can't predict the markets, but what do you think is a reasonable number to use for those calculations?

Dr. Jim Dahle:
Well, there's no right answer. I can give you my opinion. And what I use when I'm running my own numbers, what I use, for example, is in the Fire Your Financial Advisor course where I taught people how to do these calculations is 5% real, 5% after inflation. A typical inflation of 3%, that's like an 8% return nominally.

But when you're running numbers for a long ways out, like how much you need for retirement, you want to use real, after-inflation numbers. And I typically use 5% in my future value calculations.

Do you want to be conservative? You could use 4%. If you want to be aggressive and maybe you invest aggressively, maybe you bump that up to 6% or even 7%. If you look at the stock market return historically, it's been about 7% real over the decades. But most people don't have all their money in stocks. They have some money in bonds or some money in cash or some money in real estate or whatever. So they may use a number that's a little bit lower.

I think 5% is reasonable. But remember, it's just a guess. With all these calculations, you have to update them as you go along. As you get close to retirement, you have to run the numbers again and adjust as you go. If you don't have enough, you have to make adjustments. You have to spend less. You have to work longer. You have to save more. You have to invest in a different way, whatever. But I think 5% is a pretty good place to start in that calculation.

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All right. The next question is from Mark. He wants to talk about direct indexing.

DIRECT INDEXING VS. INDEX FUNDS

Mark:
Direct indexing is being offered at very low cost basis, something like 0.8 basis points at Fidelity and very similar rates at other institutions. It seems like direct indexing has some evidence to support its superiority over just index funds. Can you talk about this?

Dr. Jim Dahle:
Okay, good question. First of all, you say very low cost and then you say 0.8%. So I'm going to push back on that to start with. 0.8% is not very low cost. If I'm paying somebody 0.8%, I expect them to do all of my financial planning. I expect them to do all of my asset management, come by and walk the dog and mow the lawn.

0.8% of assets is a ton of money. On a million dollars, that's $8,000 a year. On $5 million, that's $40,000 a year. That's not insignificant. That's a ton of money. I'm not sure that's what they're charging. You might have misspoken. Let's see. Fidelity, direct indexing, fees. They've got a bunch of different ways they do it. Just searching for the fees. I'm into the small print now. I'm still trying to find the fees that they're charging to do this and they're not disclosing it upfront. That's a bad sign. Maybe it is 0.8%. I'm not sure what Fidelity is charging to do this. Try searching one more time, see if I can find it here. Nice to see what they're actually charging.

How much does direct indexing cost? Wealthfront's charging 25 basis points, 0.25. Schwab's charging 0.4%. Fidelity, it says undisclosed, but maybe somewhere between 0.5 and 1.5. They might be charging 0.8, which is ridiculous. No, I wouldn't pay 0.8 to do this. It's a lot.

Okay. What's direct indexing? Not everybody's convinced about this, but the majority of informed investors and advisors in the personal finance and investing world are very much aware of index fund investing and its benefits.

What do you get? You get guaranteed market matching returns. You have no manager risk, low costs, tax efficiency, long-term outperformance of the vast majority of active managers, easy portfolio construction, minimal hassle. It took decades, but you know what? Jack Bogle's cost matters hypothesis has won over most people. It's finally reached widespread acceptance. People believe in index funds now.

But in an attempt to overcome some of the problems with indexing, and there are a few problems with it, in an attempt to overcome some of those and provide even more benefits, some people have taken to an approach that's called direct indexing. What is that?

Direct indexing is simply buying all of the stocks yourself instead of paying a mutual fund to do it. Instead of owning VTI, you now own a thousand shares. Maybe you don't need a thousand to get the benefits, maybe you can do it with 100 or 200, but obviously, this dramatically increases the complexity of your portfolio. Why in the world would you want to do that? What's the problem with just using an index fund?

Well, the main one, and the main one why direct indexing exists is that mutual funds don't pass through tax losses. So, if your mutual fund sells shares at a loss, you don't get that loss passed through to you on a 1099. It's just gone. And so, the idea is if you own the shares directly, you can take the loss. And this is one of the downsides of the way regulations and tax laws have been written about mutual funds. So, if you own the shares directly, you could take that loss.

Now, obviously, if you have a loss on the fund, this is tax loss harvesting. If you have a loss on the fund, you can sell it, buy something similar, claim that loss, use it on your taxes. But you can't get the losses passed through from the individual securities, which is a real bummer, because you certainly get the capital gains passed through. And that's really just a downside of the structure of mutual funds and why it's so important to have low turnover in those funds.

Again, another downside with an index fund is they have some expenses. Now, they're practically free these days. There's even some free ones at Fidelity. You go to Vanguard, Schwab, iShares, State Street, you're typically paying for a good broad-based index fund, three, four, five, six, maybe 10 basis points. That's basically free. But there is an expense there. Five basis points is five basis points. And if you multiply five basis points by $10 million, it's not an insignificant sum of money. It's not truly free, but it's pretty darn close.

But you get to save those expenses by direct indexing. If somehow your expenses from direct indexing can be lower than that. But I don't see how that's really going to be possible, no matter how it's done.

Mutual funds also offer less control and autonomy. When you buy an index fund, you get all the stocks. Maybe you don't want all the stocks. Maybe you're into environment social governance tilts. You want an ESG tilt to your portfolio, or you want to avoid stocks that are not halal or whatever. Maybe you just don't want to support gun manufacturers. Well, you have that control if you're buying the shares yourself. You don't have that control if you buy VTI.

There's a few index funds out there that struggle with tracking error or manager error. They're just not that good at indexing. And so, that could be an issue if you're using an index fund for that. I think that's a pretty weak argument, given that the big places that do index funds and have most of the index fund money don't have an issue with this.

You also don't get invited to shareholder meetings. If your VTI owns Exxon, you don't get an invitation to the Exxon meeting every year. If you want to go to the Exxon meeting, you got to own the shares directly. I guess that's a downside to investing in index funds.

Well, I don't find any of those to be a big deal, except maybe the pass through the tax losses thing. But honestly, you get so many tax losses from just tax loss harvesting your ETFs and mutual funds that I don't think this is an issue. I don't think it's worth it, even if you have millions and millions of dollars to be directing next year. Because there's problems with direct indexing. It's not a magical solution. If it were, we'd all be doing it. The fact that we're not doing it should tell you something.

It's just become more popular recently because there's been some changes made in the industry that decrease some of its downsides. It hasn't eliminated them. They're still significant, but they're not as bad as they used to be. Basically, there's some startup companies that figured out how to automate many of the processes. And these companies were recently snapped up by the Wall Street giants, like Fidelity and Schwab. That's why you're hearing about this idea now.

The first issue with direct indexing is cost. One of the benefits of mutual fund, economies of scale. Thousands, millions of investors banding together to share the costs of running the fund. It's like you get cheaper prices at Costco than you do at your local grocery store. Same thing, economy of scale. Imagine if you're trying to pay commissions on 4,000 stocks that you're buying and selling in a fund. That adds up in a hurry.

So, what's changed now? Well, there's brokerages that don't charge commissions for stock trades. Making 8,000 trades now maybe isn't that bad because you don't have to pay for trades at Vanguard and Fidelity and Schwab. So, it's a little bit less costly than it used to be. But if you want them to do it for you, which you probably do because this would be a huge hassle and your time has value, I’d tell you what the cost were. 25 basis points, 40 basis points, that's not insignificant. 40 basis points times $5 million, what does that add up to? That's $20,000 a year.

How much do you think those losses you're going to get from direct indexing are really going to be worth to you? Probably not that much if you're like most people. You can only use $3,000 a year against your regular income and the rest can only be used against capital gains that you may have. And if you're using index funds, you probably don't have that many capital gains.

Okay. Another problem with direct indexing is just hassle. I don't find it all that fun to manage a five or 10 index fund portfolio. I can't imagine a portfolio with thousands of individual stocks and bonds. That means you're going to pay somebody else and you're going to pay 25 or 40 or 80 basis points to do that.

Okay. Another problem ends up being fractional shares. If you don't have a lot of money, you may end up having to buy and sell like a 10th of a share or a half a share of a stock to match your index. And that's not very practical. It's actually possible these days, but not very practical.

But I think the main issue with direct indexing is this temptation to lose the main benefit of indexing. What's the main benefit? They say, “Well, if I do direct indexing, I can leave Exxon out and I don't have to support these evil oil companies, or I can leave out Smith & Wesson or whatever. Leave out, JP Reynolds, the tobacco company.” Whatever you want to leave out.

Well, you leave out too many of those things and now you're running an active fund. You've now lost the advantage of an index fund, which is that by owning everything, you get the market return. Well, you take too much out of there. You don't get the market return. You may get a return that's significantly worse.

So, where can you go to get direct indexing? Morgan Stanley is doing it. They bought Parametric. BlackRock is doing it. They bought Aperio. JP Morgan bought Open Invest. They're doing it.

Vanguard bought Just Invest with this direct investing company known as Kaleidoscope. I think it's a value add for advisors only there. Fidelity is doing it. Schwab is doing it. Lots of places that you can do it. For the most part, it's the cost of hiring an advisor. If you want to hire somebody to manage your money, you can get that for 25, 35, 40, 50 basis points, and that's what you're going to pay for direct indexing.

I don't think this is something that most people ought to be doing. I kind of like the idea. I get it, but I don't think it's worth paying much for. If you could get it for five or 10 basis points, it's probably worth it. When you start talking about paying 25 and 40 and 80 basis points to get it, I'm not sure you're getting that much of a benefit from it.

It’d be a nice value add if an advisor is giving it to you anyway for no additional cost, but I don't think this is something that most White Coat Investors ought to be chasing after. I don't think it makes sense at all with a five or six figure portfolio. I'm not sure it even makes sense with a seven figure portfolio, but if you want to look into it, it's not like it's a scam. I'm not sure you're getting your money's worth out of it.

All right, the next question is from Steve, who wants to know where to put his money.

WHERE TO PUT EXTRA CASH

Steve:
Hi, Dr. Dahle. I'm a surgery resident, four years into seven year training in my early thirties. I'm married with no kids, live in a mid-cost of living city. We bought a house in 2021 and have a 2.75% mortgage. We paid off all our student loans in the first three years of my residency.

I'm a W2 as a resident, and my wife has a few different 1099 jobs. I make about $5,000 every four weeks after deductions. My wife makes about $8,000 to $10,000 a month. We're both frugal and save a minimum of $5,000 to $8,000 a month. We maxed out our Roth IRAs. As of this past weekend, we have about $150,000 in savings. Roughly 60% in index mutual funds, 17% in bonds, and 23% in cash and high yield savings accounts and CD.

My main concern is that I have too high of a proportion in cash and bonds and would like to find a better use for roughly $60,000. Should I max out my 403(b) this year and try to cap tax savings? I could also open a solo 401(k) for my wife to save us on taxes.

Alternatively, I've considered getting into real estate and have been educating myself recently through the BiggerPockets podcast and various books. I'm considering no investing as a potential method without worrying about being on landlord, but could also see myself purchasing a rental property if the right opportunity came up. How would recommend that we use the $60,000. I'm aware this is a good problem to have as a resident and owe much of it to your work. Thank you very much, Dr. Dahle. I look forward to hearing what you recommend.

Dr. Jim Dahle:
First of all, you're crushing it. So you need to be aware of that. You're doing absolutely fantastic financially. Paying off your student loans during training, got all this extra money piled up. You don't even know what to do with it. You're doing all this good stuff. You're doing awesome. It doesn't really matter what I tell you. You're going to be financially successful in life.

The first thing I feel like I need to tell you is that you ought to spend some of this money. Go find something that's going to make you happy and buy it. Maybe it's a little travel. Maybe it's something for the house. Maybe it's a car that needs to be replaced, whatever. Go spend some money. It's okay to spend money. We can't take it with you when you go. You got your ducks in a row, you're doing great.

Now, as far as having too much in cash and bonds, well, you need an emergency fund. Most people consider that three to six months’ worth of expenses. So make sure you have that in cash. That's totally reasonable to have in cash. Even if you don't have that much money, almost or all of it can be in cash because you need an emergency fund. So, that's okay, don't feel bad about having cash when it's money you're going to need to either spend soon or it's emergency fund.

You sound like you're not entirely happy with your asset allocation, with your investment mix, with your investing plan, but you don't mention if you actually have one. You feel like you're not being aggressive enough. You need more stocks, you need more real estate, but I'm not sure you have a plan at all. So get a plan in place.

You sound to me like the person who's capable of writing your own financial plan. For other people out there who don't feel capable of doing that, you can use our Fire Your Financial Advisor course. It's way cheaper than a financial advisor, or you can hire a fee-only planner to help you write a financial plan. You can even hire them or somebody else to implement it for you if you want, but I think everybody ought to have a written financial plan.

First, get a written financial plan. Maybe it says you're going to become this real estate guru and build this empire of investment properties. Maybe it says you're going to use retirement accounts and invest in index funds in those retirement accounts, some combination of the two, whatever. But get a plan in place.

Now, I like the idea of using your retirement accounts. It sounds like you're not maxing out retirement accounts. That your wife can open up a solo 401(k) that she hasn't done yet. So I would definitely recommend doing that. You can find places that can help you with that under the Recommended tab at whitecoatinvestor.com.

It sounds like you've got a 403(b) available to you. You may want to look at that. I think probably the Roth version, if they offer that, is probably what you're going to end up wanting to use because I suspect you're going to be making a lot more money soon. So, look into your Roth 403(b). That'd be a great place to invest some of the money.

And if you want to get into real estate investing, as a general rule, I recommend you do this after training. I think when you're really busy in training may not be the best time, but I can't talk some people out of it. If you're that into this stuff, go ahead and get started. Maybe your wife can do the lion's share of the work while you're still training. I don't know. But it's okay to invest some of your money into real estate.

We have lots of money in real estate. We invest in real estate. We've done a little bit of direct real estate investing. I even managed a syndication for a while. And we have lots of money passively invested in real estate, which is also a reasonable way to do it.

I don't know that you guys quite make enough to qualify to invest in a lot of these syndications. I'm not sure you qualify as accredited investors. You're probably not at that stage yet, but perhaps somewhere down the line, you can do that if you don't want to be a direct real estate investor. Obviously, you don't have to be an accredited investor to be a direct real estate investor.

But you've just got things going everywhere and you can't figure out what you want to do. So you need to get it down on paper what you're going to do. If you want to build a real estate empire, it's a totally reasonable thing to do. I think you're probably more than capable of doing it given what you told us in that short Speak Pipe, but I would do it very intentionally. And you have a written plan that says how you're going to do it. So I think some financial planning is in order. If you feel capable of doing that yourself, I think that's fine.

But there's lots of things you can do at this point. And my opinion of what's going to be best for you is probably not as useful as your opinion of what's best for you. So you get together with your wife, write a financial plan, figure out what's going to go into the retirement accounts, what's going to go toward real estate, what's going to go toward other investments, what's going to be spent, what's going to go to paying down any sort of debt you might have. And get that all written down, not only for now, but for when you become an attending. Follow the plan, you'll be amazed. In a few years, you'll be a millionaire, multimillionaire, financially independent. You guys are well on your way. You're doing awesome. I’m not surprised to see you being super successful a few years from now.

Okay, the next question is going to be about some safer investments.

HOW TO DO A BOND LADDER

Speaker 3:
How do high yield savings accounts and CDs correlate with bond rates historically? I'm asking this question because it seems like I know how to do a CD ladder, but the interest rate changes frequently. And if I wanted to do a bond ladder, I was curious how to do that. It seems like if I go into Vanguard to purchase bonds, I can buy the index of certain bond funds. But if I wanted to do a ladder, I would not know how to do that. Thanks for the information.

Dr. Jim Dahle:
What can I say about this? How do they correlate? Well, they fluctuate. Sometimes CDs pay a higher yield than bonds do. Sometimes bonds pay a higher yield than CDs do. You can buy individual bonds just like you can buy individual CDs. If you want to build a ladder of bonds, all that ladder is is like a one-year CD, a two-year CD, a three-year CD, a four-year CD, and a five-year CD. That's a CD ladder.

You can do that with bonds. You can have a 30-year treasury bond ladder. You can buy a 30-year, a 29-year, a 28-year, a 27-year, a 26-year. You can assemble it over time by buying them at auction from Treasury Direct, or you can go to Vanguard or Fidelity at their bond desk, and you can just buy individual bonds. A treasury bond that's been around for a year, it was a 30-year bond originally, it's now a 29-year bond. And you could assemble a bond ladder if you wanted to with that. You don't have to buy any mutual funds. You don't have to buy these bond index funds. You don't have to do that. If you want to roll your own, you can do that.

Now, there are times when a high-yield savings account, a.k.a. cash, similarly to a money market fund, will pay more than a CD or a bond does. And it's called an inverted yield curve. In general, the longer your money's tied up, the higher yield you get. So, a five-year CD pays more than a one-year CD. A 10-year CD pays more than a five-year CD. A 30-year bond pays more than a 10-year bond.

But for the last year or two, we've been dealing with an inverted yield curve where you can actually make more on cash. And what that's basically saying is the market thinks the rates are going to come down, the short-term rates are going to come down. They haven't yet. I think a lot of people have been surprised by that, but they haven't yet. And so, you can get like 5.25% still on cash, whether that's from a high-yield savings account or a money market account.

If you'd like to build a CD ladder, you can do that at banks, or you can buy them through a brokerage. If you want to build a bond ladder, you can buy those through a brokerage or directly at Treasury Direct, although it would probably take longer that way.

But you may just want to leave your money in cash. I'm not sure exactly how this all works together with your financial plan. You sound very young to me. So it's interesting to hear you talking about wanting to build ladders, because these are typically built by people approaching retirement, or in retirement. But you can do it anytime during your investing career, if you like, and don't want to just deal with the simplicity of using a bond fund and letting somebody else run the ladder for you, essentially.

Thanks, by the way, for those of you out there. We've done surveys. Most of you are commuting, as you listen to this. Some of you are walking the dog, some of you are working out, some are doing chores around the house, but mostly you're commuting. You're on your way to work. Maybe you're on your way home. Maybe you had a bad shift. I lost a patient the other day, somebody that came in dead and stayed dead, but a young person, that had been talking to the medics. And it's always shocking. It's rough. I was talking to my friend, the pediatrician, and he's like, “Boy, when one of our patients dies, it's like the worst day of the year.” Well, that's true because it's a two-year-old or a four-year-old or a two-month-old. But even people in their 30s, 40s, 50s, 60s, they don't expect to die. It can be a rough day.

So, if you're coming home from a bad day, let me be one to say thanks for what you're doing, for what you signed up for, what you've committed to. It's not easy. It's the reason they pay you a lot to do it is because it took a long time to learn how to do it and because it's not easy work and there's lots of liability there. So thanks for what you do out there.

All right, let's take another question about real estate investing.

DR. DAHLE’S THOUGHTS ON REAL ESTATE BEFORE WCI BECAME A BUSINESS

Ed:
Jim, this is Ed from Michigan. In some of your older podcasts and blog posts, you have briefly mentioned that if it were not for the WCI blog, in the early days, you'd considered investing more heavily into real estate, potentially the beginning of your own real estate empire.

I was hoping you might elaborate on your thoughts back in the day. What kind of real estate were you considering seriously investing in? Were you planning on purely being an investor or would you have had an operator role? You still considered major real estate investing despite your experiences in becoming an accidental landlord. How were you planning on structuring your real estate business in those early days? Thanks for all that you do. My family and my wake boat thank you.

Dr. Jim Dahle:
You can't just drop that comment and not tell me what the wake boat is. Come on. Wake surfing is a lot of fun. It is not the least expensive hobby in the world. So you must be reasonably financially successful if you can afford to do it. So, congratulations to you on that.

This is all hypothetical. Because obviously this is a life pathway we did not go down. But it's true. This was an alternate plan for us. If the White Coat Investor was not working out, on a financial basis, we did have a plan to build a direct real estate investing empire. Primarily multifamily and single family homes. That was the plan. But we didn't get very far down that.

This is very different from being an accidental landlord. We were an accidental landlord. That house we bought in 2006, we couldn't sell in 2010 when I got out of the military. Nobody would buy it for anything other than a price at which it would be a screaming deal as an investment. So, we kept it. Kept it for another five years.

Still sold it at a loss compared to what we paid for it in 2006. But at least we had a renter in there for a few years and paid the mortgage down dramatically. But when all was said and done, we claimed a pretty good loss on our taxes for that investment property.

It was not a fun situation. It was in another state. It was not bought as an investment to start with. The numbers really didn't work all that great at the price we paid for it. And overall, not fun.

But what would I have done if I was building one? Well, first of all, I would have built it here. Here in Utah, rather than in Virginia where that property was. It would be properties that I could drive by and look at. Salt Lake has been a pretty good real estate market for the entire time we've been here. It's gone from being a relatively low cost of living area to a mid to high cost of living area.

Serious tailwind here. I think we would have done very well as direct real estate investors over that time period. But we would have been probably starting out managing them ourselves. As volume grew, we would have been hiring out more and more and more until at this point, 15 years later, we'd probably have just about everything hired out.

How many doors would we have in our management now? I don't know, 20, 30, something like that probably. But this is a viable pathway to wealth. It takes some work. There's some risk, particularly leverage risk. But it would have worked. We could have built wealth in this way. I would have continued to max out retirement accounts, invested that money in index funds as I did. Maybe I wouldn't have built the taxable account. All that money maybe would have been going into real estate properties.

But this is a pathway to wealth. The problem is I was busy. I was busy doing White Coat Investor. How many jobs do you need? I was working full time in the emergency department. 15 shifts a month, rotating shifts, nights, weekends, evenings, holidays. And I was basically working another full-time job doing the White Coat Investor. This is probably the first four, five, six years we're talking about of the White Coat Investor's life. Even for a couple of years after that, I was doing three quarters time at the emergency department. So no, I'm not going to do a real estate empire in addition to that. I want to invest my money passively and my time actively.

But that's what I would have done. It's not a complicated formula. People have done this for centuries. It's real estate investing. You buy the property, you rent it out. You collect the rents, you pay all your expenses. You keep the cash afterward. The property appreciates. If you got a loan on it, you're paying down the mortgage. You get a few tax benefits.

It's not complicated. There's nothing complicated about real estate investing. It takes some work, and there's some risk there. You may not be as diversified as you could be with other investments. You have always got the risk of having tenants living in your investment. You've got the possibility that the values go down. You've got the possibility that your leverage situation changes. Maybe you're on variable interest rate loans and rates go through the roof like they have lately. There's lots of risks there, but those risks can be managed in a reasonable way.

If this is something somebody wants to do and wants to put the work in to do, we have a course that teaches you how to do this. It's called the No Hype Real Estate Investing course, and it'll teach you how to do this stuff. It's not that complicated, but it's also not required.

Most doctors, if they just go to work, work their shifts, see their patients, run their clinic, do their operations, whatever, they carve out 20% of their gross income. They invest it intelligently into index funds, in retirement accounts where possible, in a taxable account when not, they're going to retire as financially independent multimillionaires.

You do not have to invest in real estate in order to be successful in life. But can it work a little bit faster? Sure, especially with leverage. Maybe you can get to financial independence in 10 years instead of 15 years. That's the sort of thing we're talking about.

So, if you want to do this, go do it. Knock yourself out, have fun. Does it work? Yes, it works. Can you get burned? Absolutely. Will it be a lot of work? Absolutely, it will be a lot of work. You'll learn some, and some people really love it. They love the deal-making. They love owning something tangible they can drive by and show to their friends. If that's you, well, go build yourself a real estate empire.

I'm probably not doing it going forward. All our real estate now is invested passively. We don't need to do this to reach our financial goals, and since it's a lot of work, why would we if we don't need to? That's kind of where we're at today.

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You can do this and The White Coat Investor can help.

All right, I mentioned the credit cards earlier. That link again, whitecoatinvestor.com/creditcards. Check it out if you need a credit card with good rewards or whatever.

Thanks for those of you leaving us a five-star review, telling your friends about the podcast. A recent one came in from Sherry, who said, “High-quality listening enjoyment. Jim and Ramit, two of my favorite podcasters and teachers. I smiled with joy when I saw this episode come up. You two are so smart, pragmatic, and entertaining. Love you both.”

I think she's talking about the episode we did, I don't know, it was last year or two years ago. Last year, I guess, was with Ramit Sethi. And it was a fun episode to do. He's become even more famous since then. He had a little Netflix special. So it was fun to have him on the podcast. But we appreciate that five-star review.

All right, to those of you out there who are wondering if you can do this yourself, you can do this yourself. You don't have to do it yourself. Now, you've got the entire White Coat Investor community to help you. You've got professionals that will give you good advice and good service at a fair price. Not free, but at a fair price.

Now, whether that's studentloanadvice.com, whether it's our recommended advisor list or recommended insurance agents, people that can help you set up a customized solo 401(k). We got people that can help you make a little bit more money with surveys. We got all these recommended resources for you.

If you haven't come by the website, whitecoatinvestor.com, and thumbed through the recommended tabs, you're really missing out on a great opportunity. The likelihood of you not needing somebody on that list at some point during your career is very low.

These are people that White Coat Investors are continually vetting. If we're getting complaints about people, they come off the list. And so, they're good people. They're the good guys in the industry.

It helps support the site when you go through our links to go to them and use their services. But we appreciate that, and they're here to help you. Really, we're trying to connect you with the good guys in the industry, run the bad guys out of the industry, help you be successful, help you have that life that you deserve.

Thanks for listening to the podcast. We'll see you next time. Keep your head up and shoulders back.

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.

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 179 – Internist Receives PSLF.

This podcast is sponsored by Bob Bhayani at Protuity, formerly DrDisabilityQuotes.com. He's an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or just need to get this critical insurance in place, contact Bob at whitecoatinvestor.com/drdisabilityquotes today. You can also email [email protected] or you can call (973) 771-9100.

Okay, I want to talk about a couple of things before we get to our interview today. You may recall episode 168. We had a guest who mentioned a Harvard Law School course that she took on negotiating. We had some listeners that reached out wanting that information. So we reached out to Jane. She sent us some information on it.

If you go to this link, whitecoatinvestor.com/harvard, you'll be able to get to the free resources provided there. And she says “Harvard Law School's program on negotiation provides free resources as well as seminars and a course on negotiating. I recommend starting with the free resources and videos they have at the link and then consider which of the seminars you want to build with from there.” So cool resource there. Check it out.

Also, I wanted to go over one other thing. We had a podcast recently. It was probably actually on the White Coat Investor podcast where we talked about this, not necessarily the Milestones podcast. But we were talking about HSAs and the fact that when you have non-dependent adult children still on your plan, your children can make a family contribution to their own HSA.

Well, there's another cool thing that can be done here. If you have a domestic partner you're not married to, but is covered by the same high deductible health plan from your work, you can each have a separate HSA. And because it's a family plan, they can make a family contribution, even though you're single and no kids. Wild, right?

The caveat with that is you can't use your HSA money to pay for your domestic partner. It’s health care expenses, right? Since you're not married. So something to keep in mind, you can make some additional HSA contributions if you were in that situation. Yet another form of marriage penalty, I suppose.

By the way, we have a chance to win the People's Choice Award for the best business and or best educational podcast of the year. But we need your help. We need you to help us reach more doctors and spread financial literacy. This is a great and free way to give back and support WCI.

To be honest, I don't care if we win this award. But I know that winning things like this helps spread the word and spreading the word I do care about because I know there's a lot of people out there that have never heard of the White Coat Investor that this message can really help. All you need to do is go to the whitecoatinvestor.com/vote link and nominate the WCI podcast. The more nominations we get, the more people we reach, the higher likelihood that we win and can reach even more people.

That nomination period runs from now until July 31st. I think there's a vote after that if we are nominated and you'll be able to use the same link to go there and vote. But we'll mention it again on the podcast if we do win or at least if we are nominated.

Okay, let's get into our interview. But I want you to stick around after the interview. We're going to talk for a little bit today about what med students should do today about student loans. This is not necessarily what I've recommended for years. It's not what you might have read in some of my books. It's kind of different. Things have changed and my recommendations have changed. And so, I feel an obligation to get that information out there. So stick around afterward.

INTERVIEW

Dr. Jim Dahle:
My guest today on the Milestones Millionaire podcast is Earl. Earl, welcome to the podcast.

Earl:
Thank you, Jim. Thanks for having me.

Dr. Jim Dahle:
Tell us what you do for a living, what part of the country you do it in, and how far you are out of training.

Earl:
Yeah, I'm an internal medicine specialist in Atlanta, and I finished residency training in 2016.

Dr. Jim Dahle:
Okay. Hospitalist, clinic, both?

Earl:
Just a clinic. I don't work in the hospital anymore. I've done it in the past, but I'm strictly primary care.

Dr. Jim Dahle:
Okay. And tell us what milestone we're celebrating today.

Earl:
I have successfully had my student loans completely discharged to the Public Service Loan Forgiveness Program as of March of this year.

Dr. Jim Dahle:
Pretty awesome. How much was eventually forgiven?

Earl:
Approximately, with interest in principle, $301,577.

Dr. Jim Dahle:
But who's counting, right?

Earl:
Right.

Dr. Jim Dahle:
How much did you borrow initially for med school?

Earl:
Oh, for med school, I know where I went to medical school, it was private. That was at least $80,000 a year, at least. But of course, I also took out some student loans when I did undergrad, which was also private. So that's where that total comes from.

I also had some scholarship incentives that I took advantage of when I went to medical school that tied me back to the state of Georgia, my home state, to practice in primary care. That offset the cost a little bit but I didn't come from a family that was independently wealthy. So I did have to take a hefty amount of loans out for both my undergraduate as well as medical school educations.

Dr. Jim Dahle:
Did you have anything saved up before med school? Or did your parents help out or anything? Or was it pretty much you borrowed the whole thing other than what you got for scholarships?

Earl:
I would say that the latter, I pretty much borrowed the whole thing. My mother would help out where she could. And different family members where they could, church members. I grew up in the Baptist church in my hometown. But mostly loans, mostly loans and scholarships. But I still had a hefty amount I had to borrow to make ends meet while I was going through training.

Dr. Jim Dahle:
Nobody gave you tens of thousands?

Earl:
No, no, that never happened. Not even once.

Dr. Jim Dahle:
Yeah. How much did you owe when you came out of med school? Do you remember?

Earl:
I don't remember the exact number. I remember being floored by the amount. Obviously, you know that you're borrowing. But I don't even remember the exact number. I remember it was at that time somewhere in the $250,000 range. But obviously it grew over the years before. I never really paid in residency just because I couldn't afford to, even though it would have been offset, I just couldn't afford to pay with the cost of living where I trained. I trained in New England and the rents were high and I just had enough money to, at the time, pay my living expenses, my basic living expenses.

Dr. Jim Dahle:
Did you go into deferment or forbearance or were you in an income driven repayment program?

Earl:
Yeah, during residency, I was in forbearance at the time. I just could not afford to pay. Not even the amount of the small amount of interest. I just did not have enough money to pay for that.

Dr. Jim Dahle:
Yeah. So when did you start making payments? As an attendee?

Earl:
Yeah, that's when I first started. When I finished residency is when I started making payments, yes.

Dr. Jim Dahle:
And of course, at least the first year or so, the payments were based on your resident income, so that helped a little bit, I'm sure.

Earl:
Yeah, it was, yeah.

Dr. Jim Dahle:
And then, of course, you got three and a half years of student loan holiday in there somewhere.

Earl:
Right, exactly.

Dr. Jim Dahle:
I'm sure that helped a little bit, but it sounds like you made substantial payments toward this loan. Do you have any idea how much you paid toward it over those 10 years?

Earl:
Yeah, I think initially the amount that I started paying a month was about, I think, like $2,300 after I got the benefit from residency. But once I recertified my income and reported that to the Department of Education, it jumped up quite a bit, to about $2,300 a month. I paid it for as long as I had to, and then I learned about some additional options like income-driven repayment, and it significantly decreased after that.

Dr. Jim Dahle:
Okay, all right. Wow. So, when did you first hear about public service loan forgiveness? Do you remember?

Earl:
Yeah. I never learned about it in medical school. Nobody ever told us that, and for a long time I was angry about that because I've felt like, at the time, our financial aid department should have at least shared information about the program with us. But, of course, it was a friend of mine who trained at the same medical school who followed me to the same residency program, and he was the first one to tell me about it.

I had known about programs like the National Health Service Corps and state-specific incentive programs to return to practicing underserved in the rural community, which I told others about, and I took advantage of myself, but I didn't know a whole lot about public service loan forgiveness until he came to the same residency program and he said, “You should apply for this, you should consider this.” And I'm like, “Okay.” And this was way back in, I would say, probably 2014, 2015, and that's when I consolidated at the time and then started seriously thinking about the public service loan forgiveness program when I finished residency.

Dr. Jim Dahle:
Did you deliberately take a job at a 501(c)(3) when you left residency, or is that just fortuitous?

Earl:
I have been very intentional about that. I will tell you it significantly limited my job opportunities, but I did. I was very intentional about making sure when I chose a job after residency that it had 501(c)(3) certification. And that, I can tell you, my wife helped me really understand this once my student loans were forgiven. She's like, “You don't have that stricture anymore on you.” And it took a long time for me, probably the last several months to really grapple with the fact that, “Oh, I don't have that prison, if you will, to deal with anymore. I can stretch out and look at even for-profit opportunities if I want to in the future.”

I happen to be very happy where I am now, which still happens to be a 501(c)(3), and helped me get over the hump of qualifying for public service loan forgiveness. But if in the future I wanted to make a career change, I don't have to worry about that anymore, which is very, very liberating.

Dr. Jim Dahle:
You don't necessarily feel like you've been in prison, but you feel like you've got some golden handcuffs, or you've had golden handcuffs, and now you've got them off, huh?

Earl:
Exactly. Obviously, you stated that much more eloquently than I could have. Yeah, absolutely, absolutely.

Dr. Jim Dahle:
I was waiting for you to tell me you hated your job, and now you're leaving it. But you're not saying that, so I don't think you can quite call it prison, or you'd already be out of there. I tell you what, the first day, I was eligible to get out of the military, and I even saved up a month worth of leave over the four years I was out of there.

Earl:
Oh, wow. Yeah, I've heard that before.

Dr. Jim Dahle:
Yeah, it must not have been too bad for you. I was definitely ready to get out when I was done paying my debt to the military. But I know that's how it can feel sometimes, having that limitation on where you can live, and what you can do, and what your job looks like.

Okay, well, there's a lot of people out there, not as much anymore as there used to be, but a lot of people that didn't really believe public service loan forgiveness was going to take place. You had people like Dave Ramsey running around, quoting inaccurate statistics, saying only 1% of people are getting it. Did you ever lose faith that you were going to receive public service loan forgiveness along the way?

Earl:
Not really, no. I know I've heard a lot of the naysayers say that it was not going to be a program that was going to last, or the government wouldn't be able to afford it. But I never listened to that. I continued to charge for it. What helped me, it was one of the benefits, but honestly, when we went into the administrative forbearance during COVID, that helped me a lot.

Also, working in a rural community with the 501(c)(3), I've changed jobs a couple of times, but also working in that environment, that qualified. Like I said, I was very intentional about the types of jobs that I chose, so it would qualify for that.

And then I got some sort of benefit where some of my residency, around the time the Biden administration made changes to the program, they went back and they started to count even the forbearance that I was in during residency.

Dr. Jim Dahle:
Oh, so you did get credit for residency.

Earl:
Right, right. Even though I didn't pay during that time, I did get credit through their revamping of the program. That helped.

Dr. Jim Dahle:
Yeah, that makes sense, because you came out of residency in 2016, and you've already got forgiveness eight years later. That makes sense. Everything that could have helped you went your way here.

Earl:
It did.

Dr. Jim Dahle:
I don't want to say you're lucky, but you got credit for payments you didn't make. You chose the wrong thing, frankly, in residency. You should have been making IDR payments of a couple hundred bucks or whatever. And that didn't hurt you. And then you scored with three and a half years as an attending of the student loan holiday. Did you ever just feel like you had a four leaf clover in your pocket?

Earl:
Well, I look at myself as having been blessed. I've always tried to be a good steward of my money and try to set myself up. I'm a classic aquarium, so I'm someone who always is futuristic and thinking forward. From the very beginning, I've tried to make sure I learn about investments. That's one of the reasons I followed your podcast and the work that you've done and have encouraged others to do the same. But I didn't even set my own individual family up. My wife, who also is financially savvy, and that helps in the household.

But I can tell you, everything that could have gone good for me went good. And I'm very grateful for it. And we look back now on the COVID pandemic as a very ill-fated and ignominious time in world history. But when you talk to people, when we talk to patients every day, a few people will say, “I did get some good things that came out of that.” We hate to say that almost. But having had the loans that administrative forbearance time count, because I was worried about that, just like everybody else, that helped a lot.

And in our health system at the time, I'm a part of a large comprehensive health system in the state, we even experienced some changes in terms of how we would compensate. And so, I had to make some cuts on some discretionary things that I was afforded, some of the luxuries in life. And I did that for the time that I had to.

But I've always known how to survive. I grew up in an inner city community with a single mother. I learned early how to cut costs if need be, but also how to be the early bird that catches the worm in terms of preparing for my financial future.

Public service loan forgiveness, that was non-negotiable for me. I recognized early that I had to get these loans forgiven as a part of setting myself up to achieve my financial goals. And I've been very fortunate that everything has essentially fallen into place, and some stuff that I even didn't really plan to get that just happened, just because of whatever administration was in place at the time.

And advocacy by a variety of different student groups, young professional groups, people who are just working to eliminate student loan debt. And I followed them and learned about what they were doing and advocated for that, for myself and others going through the same thing.

Dr. Jim Dahle:
Yeah. The idea behind public service loan forgiveness is to get people to do work they wouldn't otherwise do. To go to rural communities, to work for 501(c)(3)s or government employers, despite the fact that there might be more hassle there or lower pay there because of this benefit. And it sounds like you did have a few sacrifices in that department along the way. I don't know that all docs that get PSLF feel that way, but it certainly sounds like there was a cost to you to go for public service loan forgiveness as far as career and income and those sorts of things.

Earl:
Yeah, I would say so. Everybody knows stretching all the way back to college, just because of my experience. I went to a health science engineering magnet high school in my hometown, and I got a chance even before going to college to spend time in the medical community shadowing.

I always knew I wanted to be a cardiologist, but I had to make some sacrifices in terms of my career goals, just the way things were structured around residency and having to come back to the state to practice rural medicine and primary care. I couldn't go into fellowship because the state-specific program that sponsored some of my medical education would not allow me to. That was a significant sacrifice.

And for a period of time, I lamented that, but then I found significant happiness in doing primary care and hospital medicine and seeing some of the cardiovascular diseases that I learned about and studied about early on and taking care of patients with those conditions, partnering with my cardiology colleagues, many of whom are close friends. I look back on it as learning opportunities.

I had some health issues in residency, and so I don't think I really wanted to do any more training after that in retrospect. I just wanted to go in and practice. I've done some professional stuff since, like one-year professional fellowships, but nothing ACG and GME related that would qualify for those criteria.

Dr. Jim Dahle:
No thoughts about going back to fellowship now, huh?

Earl:
No, no, no. Look, I tell people all the time, “Would you be happy having the one BMW and the house?” I've learned from you. I got to be careful what I say here. I tell them, “Would you be happy having the one BMW and the house down the street in the same neighborhood on the lake, or do you have to be right on the lake and have the three BMWs and just work hard and never be home?”

I'm comfortable having the one BMW and the house down the street from the cardiologist. I don't have to be the cardiologist. I'm just as happy. I feel like we've learned to do very well with the income that we have and be good stewards of it, not just because that's our last name. So I'm very fortunate.

Dr. Jim Dahle:
Now, if you were made dictator, you are Congress and you are president, what changes, if any, would you make to the PSLF program?

Earl:
I think that's a great question. I've never gotten that question before, but I do think it's significantly politicized more than it should be. And I would really try to sit people down at the table who are willing to come to the table. If they don't have a chair, they can bring a folding chair, as the late Shirley Chisholm would say.

I think what's missing sometimes in the politicization of the issue is that whether you're independent, whether you're a Democrat, whether you're Republican or no Republican at all, student loan indebtedness impacts just about everybody. And it significantly limits people's ability to achieve financial goals relatively early in life that can set them up for a pretty healthy and optimal financial future.

If I were to change something, and a lot of doctors have said this, even taking care of patients with Medicaid should allow people to qualify for public service loan forgiveness, just the repercussions of seeing those types of patients and working in those sorts of environments. But I would make it easier to qualify. I think the Biden administration has started to do some of that, but we still have a long ways to go.

I'm just one who believes that if you pay a debt to society by devoting your life to working in any sort of public service, you should be rewarded for that. On the flip side, people say, if you take out these loans, you should pay them back. But what they don't understand is that people take loans out who may not all be afforded the opportunity to become physicians and make such a high income.

Making it easier, educating people more about it, I don't think that's done well enough. People hear about it a lot now, but I would be very intentional about encouraging underrepresented in medicine minorities to take advantage of this program. I've spoken about that. I've gone back to my medical school and taught about when I was in rural care, taking care of patients in that environment, but also some of the financial implications that could be beneficial to working in that environment, either for a period of time or for the duration of someone's career in our profession.

Just more education, just trying to politicize the issue less and trying to make it easier and advocating for that for more of us, even outside of irrespective of specialty, to qualify for it. I think those are some of the ways that I would try and improve. But I think the Biden administration is doing some of that now from what I see.

Dr. Jim Dahle:
All right. Well, congratulations, Earl. Thanks for what you've done for your communities and for going to med school and residency. And congratulations to you on getting your student loans forgiven.

Earl:
Thank you, Jim. It's been a labor of love to practice medicine. And this has been a great financial milestone that I've been able to achieve with my family and the help of so many. I appreciate you. Thank you.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. It's always good to see docs getting PSLF. I think something close to 50% of docs are now going for PSLF. Those who come out with loans. If you talk to med students, it's even more of them.

FINANCE 101: MONEY AND MED SCHOOL

But let's talk about money in med school. I get people asking me now. They come, them or their family. They've got $100,000, $50,000, $150,000, whatever to use to pay for med school. They're like, “Should I use it or should I borrow?” And it used to be, I would tell them, “Well, use your money first.” So you can delay how long it is until you take out interest charging loans so that you can delay that moment and borrow less total and just be smart financially.

Well, the federal government has made a few changes over the years that have made the student loan programs, the federal student loan programs so generous. I don't think that's actually good advice anymore. And it pains me to say this because I hate it that this is true, but I think it is true.

I think the right thing to do if you have cash and you're going into medical school is to hold onto the cash and borrow the cost of your education. Now don't borrow more than you can use for the education. This isn't necessarily an excuse to spend more money, but I think you're probably better off leaving your money invested in borrowing. And even though student loans right now are pretty high, they're 8% or 9% starting this 2024, 2025 year, I think you're better off holding onto the money.

I'll tell you why. First, this didn't used to be this way, but this is the way it is now. You basically don't have to take out private loans for medical school. You can just borrow federal loans. After a while, they're plus loans. They're not the regular loans, so you pay a little more interest, you pay 1% more in interest, but basically they can all be federal. You don't have to take out private loans anymore.

And all your federal loans, of course, are going to qualify for the income driven repayment programs and for the forgiveness programs, which have been made so generous. I don't want to make a political statement about this, but there's obviously some politics behind this. But they're so generous now, it's kind of silly to pay for your own school or at least remove the option, have somebody else pay for your school.

SAVE is very generous now. While your loans do grow during medical school, they don't grow in residency. Because you get into the SAVE IDR program and whatever you have to pay, you have to pay $100, $200, $400 a month, whatever it is. And all other interest is waived. So they don't grow. There will be no bigger when you finish residency than when you start.

And you get to use your fourth year income to set how much those payments are, which is going to be like zero if you're like most people. And so, your payments are going to be zero. And that year of zero payments counts toward public service loan forgiveness. Then you get a couple more payments that are based on that year's worth of payments based on your intern income for six months of your internship, which isn't that much. So your payments will still be small.

Then you got a few years of payments based on your resident income, including a couple of years, one or two years while you're an attendee. And then the remainder, you make attending level payments, but still those are pretty low with SAVE. And then you can qualify for public service loan forgiveness.

I don't know what the percentage of physician jobs is that qualify for public service loan forgiveness, but given that 78% of docs now are employees, and a lot of those are employees of government entities, state universities or nonprofits that they're going to qualify for forgiveness. And so, if you can qualify forgiveness, that's going to work out better than paying off your student loans every time.

The beautiful thing about not using your cash and taking out the loans is you have optionality. You've got options. You can turn around and change your mind at any time and take that $150,000 or whatever you had. Hopefully it's significantly more now since you've left it invested through med school and maybe residency, maybe it's twice that much now. And you can pay off your student loans.

The only downside is you've lost whatever interest accrued while you're in med school, none accrues in residency. And so, the downside is pretty minimal. The upside can be huge. And so I think it's just the right thing to do. Despite the fees on taking out student loans, despite the interest that accrues during school, I think it's the right thing to do.

I hate that that's true. I think the programs are probably a little too generous in that respect and that there's no disincentive to do that to just borrow, borrow, borrow. In fact, a lot of people, I don't think this is the right thing to do, but a lot of people are borrowing more money than they really need for med school because they think it's going to be forgiven.

Now you could get burned on that, right? Not everybody matches, not everybody can get a job that qualifies for public service loan forgiveness. So don't get too carried away with this. But given the generosity in the current state of the program, you can't help but think if someone else is going to pay for school, why should you be paying for it?

Okay, enough on that. When things change, our opinion may change on how that can be managed, but it's pretty generous right now and you might as well take advantage of it. Hate the game, not the player.

SPONSOR

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You can contact Bob at whitecoatinvestor.com/drdisabilityquotes or you can email him at [email protected] or you can call him (973) 771-9100. Get your disability insurance in place. Please, please, please. Unless you're already financially independent.

Well, that's it. We're at the end of the episode. I hope you guys are doing great. I see this is going to run July 15th. I'm on another river as you read this. Hopefully I'm having fun doing that. And shoot, tomorrow will be my anniversary as you're listening to this. And we have got a heck of a celebration plan. I won't tell you what it is just in case Katie listens to this podcast the day before our anniversary but I'll tell you all about it next week maybe.

You guys have a good time. Thanks for what you're doing. You guys are awesome. We're grateful to have you here as listeners. Keep your head up, shoulders back. You've got this. And the whole White Coat Investor community is here to help you. See you next time.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.