What to Do If You Are Behind on Retirement Savings

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:
Welcome to the White Coat Investor podcast.

Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. That could end up saving you thousands of dollars, helping you get out of student debt sooner.

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All right, it's podcast time again. Let's do this. I'm so grateful for all of you out there. It is really important, the work you're doing. I had the opportunity to take a lot of trips in July, which is a lot of fun. A couple of family reunion and a family obligation kind of trip, we mixed in with some tourism and a fun trip.

But the bottom line is I took three, six or seven day trips during July. And so that meant the whole rest of my life was collapsed into the remaining week. And so the day off I had between these trips, I was working a shift. And then I had a whole bunch of shifts packed in the very end of the month, as well as for some reason, my August shifts were front loaded. And I ended up working six out of eight shifts, six out of eight days in the ER. And it was kind of funny because the people I work with, nurses, other doctors, they're like, it's like you're working full time again. And it was, I was there all the time that week.

And of course, that left limited time and energy and motivation to do so many of the other things in my life. Including working on WCI stuff. And I had stuff I had to get done that I was doing either when I got slow in the ER or after a shift or whatever.

But it caused me to appreciate what most of you out there are dealing with. Because most of you are working full time or full time plus. Plenty of you are working 50 or 60 hours a week. The residents and fellows out there might be working 80 or more if they're stretching the guidelines. And we forget how hard that is sometimes, those of us who don't regularly work that much.

And so I'm grateful for you. Thanks for what you're doing. It's important work. It was actually really gratifying for me to work that much. Sometimes when it's been a little while since I've been in there, I feel just slightly rusty. But the nice thing about doing six out of eight days, I didn't feel rusty at all.

And it's fun because it's something you feel like you're good at, you're competent at, you've done for a long time, you're making a real difference in people's lives. Whether you're suturing up some seven-year-old's finger laceration, you smashed it in a wagon accident. Whether you are cardioverting atrial fibrillation, whether you're intubating somebody who's respiratory failure, or whether you're just consoling somebody dealing with their chronic pain or loss of a family member or whatever it might be.

It is important work you guys do out there. And we don't forget it here at White Coat Investor. We're here to support you. We know some people when they become financially independent will leave medicine. And that's okay. We want you to spend your life doing what you're doing. Once you've paid off your student loans or paid off your obligation for your MD, PhD or HPSP or whatever, that's the only obligation you have to society. But it sure is wonderful to see so many of you giving for so long, longer than you need to for financial reasons.

I got an email this morning from a nurse practitioner who was upset that she wasn't working, able to continue working, kind of got pushed out of a job at 74. And it's wonderful to see people wanting to continue to make a contribution into their 60s and 70s. And that's wonderful.

We talk a lot about early retirement, and that's fine if that's what you want. But it would be wonderful if the life you're able to create for yourself allows you to travel as much as you want to recreate as much as you want, and yet still fit in some things that give you purpose in your life, both hedonia and eudaimonia.

All right. Those of you who are students and want to apply for the scholarship, the deadline is coming up. It's the end of this month, August 31st. If you don't submit your application for the scholarship, you will not win the scholarship. It's got to be submitted by the 31st of August. You do that at whitecoatinvestor.com/scholarship. We can still use a few judges. You can find them at whitecoatinvestor.com. We're grateful for the scholarship's platinum sponsors. Those include Matt Wiggins at DockInsure, Brian Martin at Taxstra, and Unchained, which offers some services for people who are into investing in Bitcoin.

CLARIFICATION REGARDING CONTRACT REVIEW

Dr. Jim Dahle:
All right, let's get into the content here. First, we're going to do clarification, additional information. I don't know if this is a correction, but we had an episode, episode 481, I think it was four episodes back by the time you're listening to this one, where we talked a little bit about the importance of contract review.

This is the highest bang for your buck out there when it comes to engaging the financial services industry to help you in your life. Get your contracts reviewed. Anytime you're signing a partnership contract, anytime you're signing an employment contract, make sure you understand every term in that contract. Make sure you're signing a fair offer.

Half of doctors are making less than the median doctor. You don't have to be one of them. It's just way easier to pay off debt and build wealth if you're being paid fairly. Basically, the email was saying, “Hey, I'm a CMO. One thing you should have pointed out, he says, is that you need to get it reviewed before you sign the offer letter or the letter of intent, not just the final contract. Don't sign anything until you are happy with the terms of the entire offer. It's much harder for you, even for the CMO to help you. He says, the CMO is generally on your side to identify or negotiate areas where there might be flexibility around terms like a signing bonus or relocation assistance.” He shared an example of a doc that could have easily gotten an extra $10,000 in signing bonus, but it was too late because the doc had already signed the offer letter.

Get it reviewed before even signing an offer letter. You can say things like, “That seems good, but I need to discuss with my legal counsel before I sign anything.” That's fine to do. People expect you to do that. That's normal in any sort of a contract negotiation. Take your time with those. Get them reviewed. Treat people the way you'd like to be treated when you're on both ends of that negotiation. There's no reason docs need to be signing terrible contracts and being taken advantage of.

He also wanted to mention, we talked in that episode about locum tenens. I said something to the effect that, “You know what? You can make a whole bunch more money if you're working locum tenens, plus you get a bunch of your living expenses paid for. In fact, some docs don't have a house and maybe not even a car, other than the one that the locums company is paying for because they go from locums job to locums job to locums job.”

He wanted to point out that that isn't very smart for a hospital to use locums long-term. I agree. I agree with that. That is dumb for health systems to pay too much for staffing due to their poor long-term planning. That doesn't mean they don't do it a lot though, both with nurses and with docs. Yes, it was more common during COVID, but it still goes on all the time where people just are not very farsighted when they're making their staffing decisions and how much they pay people. They lose people they've had for years and then they find they're scrambling for locums coverage for two or three or four or five years until they really get somebody permanent back in. Take care of the people you have so you don't have that problem.

LATE TO INVESTING: WHAT SHOULD YOU DO WITH YOUR SAVINGS?

Dr. Jim Dahle:
Okay, next topic, and this one actually comes off social media. Basically asked us, “Could you please make a video for us savers who are late to the party in terms of investing, but have savings and would like to invest today to retire in a couple of years? Thank you.”

Okay, this is a hard question because it's basically asking for a shortcut. If there were a shortcut that worked in a couple of years that would work for a 58-year-old who wants to retire at 60, the same shortcut would probably work for a 33-year-old who wants to retire at 35. And the math doesn't math.

Doesn't mean it's ever too late for you to make some changes in your financial life and how you live it that can impact how things go down the road, but time is your ally. And the less time you have, the less help you get in your retirement savings, the less of the work your money is going to do in building the nest egg you need to build, and the more work you're going to have to do as opposed to your money doing.

The whole idea of saving and investing is to let your money do more and more and more of the heavy lifting, and the sooner you start and the more you save early on, the more of the heavy lifting your money does, the more of your eventual nest egg that comes from compound interest.

And so, let's think about this. What can we do if we're late to the party? Well, late to the party usually means you spent too much money early on. Or maybe you weren't working for some reason, didn't earn much, but usually it's you spent too much money, and so you didn't save as much money as maybe you should have.

I generally recommend docs and other high-income professionals save about 20% of their gross income for retirement throughout their career. If you'll do that, you'll be able to maintain your standard of living in retirement after working a typical career, 25 or 30 years. That's just the way the numbers work out.

So if you only have a couple of years, what can you do? Well, you got to work within the parameters of how math works. Yes, you can take a little bit more risk, both market risk and leverage risk, but really what you need to do if you want more money in your retirement accounts is put more money in your retirement accounts. And the way you do that is you do that by spending less.

There are two benefits of spending less. You're burning the candle at both ends when you spend less. Not only do you have more money to save, but you need less money later to maintain that now lower expense lifestyle that you have. So, if you only got a couple of years until you want to retire, and you are not on track, if you do not have a nest egg that's there or nearly what it needs to be to support your lifestyle, I think the first thing you need to do is get on a written spending plan, a budget, you got to know where every dollar is going and decide, “Is it really going where I want it to go? Do I really want to pay for that shopping trip or that eating out? Or is this money going to be more useful as part of my nest egg supporting my savings for the next 30 years instead of the next two.”

Aggressively evaluate that budget. If the kids are now out of the house, out of college money's not going toward them, it can be redirected towards savings. Maybe you paid off the mortgage now, that money can now be redirected towards savings. Obviously, you're not going to be saving still for college. And you shouldn't be anyway, if you don't have adequate retirement savings.

When you're helping other people, you should be helping them from a position of strength. You got to put your own air mask on on the airplane before, your own oxygen mask on before you put your child's oxygen mask on. There's a reason for that. So, make sure you're saving enough.

The next thing you do is you look at the money you have saved and ask, “Is that working for me as well as it could?” That might mean getting some professional help with your plan and an even better step might be learning to be a competent DIY financial planner and investment manager.

The nice thing about that is you get to save the money that you would be paying a professional to help you. So, if you're paying somebody $7,000 or $10,000 or $12,000 to help you with your finances, well, that's $7,000 or $10,000 or $12,000 you could be putting into your nest egg, which would obviously help it to grow faster.

So, look at your investment costs. Are you investing as tax efficiently as you can? Are you using the retirement accounts that are available to you. Whether that's a backdoor Roth IRA, whether that's a 401(k) or 403(b) or 457 or whatever at work, are you using it? Or are you investing in a taxable account when you haven't even maxed out your retirement accounts? Are you making silly mistakes like that?

You should look at your asset allocation. How much of your money is in higher returning investments like stocks and real estate? How much of it is in lower returning investments, CDs and bonds and cash and whole life insurance?

Lots of people that save money, they just leave the money sitting in their checking account. Your checking account pays nothing. Maybe it pays something, but it rounds to nothing. At least get the money over into some sort of money market fund or high yield savings account that's paying you 3 or 4%. It's better than zero or 0.1%. Make sure your investments are optimized.

When you don't have enough money to reach your goals, optimizing becomes much more important. I rant all the time about these hyper-optimizers. They don't have to optimize as much as they're optimizing. It's okay to be a satisficer at a certain point. When you're 42 years old and you already have $4 million in your nest egg, you don't have to optimize every little thing in your financial life.

But guess what? If you're 58 and you only got $400,000, optimizing is pretty important for you. If you're spending anything like most doctors do. So you really need to dial in the details, really pay attention to your finances. The more you pay attention, the better you do. That which is measured improves.

You ought to think about the risk level you're taking. You know, not only do you need most of your assets, if you need your money to be growing, you need most of your assets in risky assets. You've got to start wondering if maybe you ought to be taking on some leverage risk as well.

Now, it has to be a reasonable amount of leverage risk. But if you've got a nest egg that's $300,000 and you're 58 years old and you figure you need $3 million to retire, well, maybe paying off your 3% mortgage isn't a great idea. Maybe you should be running some leverage risk there.

Maybe if you can get a really great deal on a margin loan, you ought to margin a little bit of your portfolio, not 50% of it, maybe 25% of it, something like that. If you've got some investment properties, maybe you ought to look at them and go, can this still be cash flow positive by pulling some of that home equity out and buying another property? Maybe a little more leverage risk would help you to reach your goals.

Those are some of the things to think about if you're starting late and you still want to retire soon, but don't really have enough and are not currently on track to actually reach your goals. You've got to change the goals. You've got to work a little bit longer. You got to save a little bit more money. You got to invest a little more aggressively. There's only so many ways you can change the math, but the math has to work out.

So keep messing with the variables and one of those future value calculations in a spreadsheet until the numbers work out, until they work to get you to accomplish your goals. Just blindly hoping it all works out is not a strategy. Actually do some financial planning, know where you're sitting, know what you can do, which levers you can move to adjust the math and do the best you can.

It also helps to have a little bit of perspective change. 40% of Americans are retired on nothing but social security. It can be done. I don't want that for any White Coat Investors. I think the average social security payment is only like $1,900 a month. It's not a lot of money. I want you to have more than that, but keep in mind that even if you build a half million or a million dollar nest egg, that's a lot more than average. The average 401(k) balance, even for somebody that's in or near retirement is only a very low six figure amount. It's not a lot of money.

Yeah, bear in mind some perspective, just because you go on the White Coat Investor subreddit or the White Coat Investor forum and you hear all these 40 somethings that have $6 million, doesn't mean that's normal. Some of that's people humble bragging. Some of those are just people that have been very fortunate and been paying attention to their finances for a long time.

But keep that in mind. It's a single-player game. It's just you against your goals. If you're married, you and your spouse against your goals, you don't have to beat anybody else. All you have to do is build the best life you can. And finances are a tool to do that.

Another thing to keep in mind too, is some of the solutions that work very well for people who retire with barely enough, you need to pay a lot of attention to. These are things like buying single premium immediate annuities. Instead of being able to withdraw 4% from your portfolio, maybe you can buy a SPIA at your age that pays 6% or 8%.

Obviously you get more spending money out of that approach, at least until inflation eventually catches up to that. And that takes a while, at least until inflation catches up to that, you've got more spending money than you would get from a straight 4% withdrawal.

Another thing people do sometimes is they build a TIPS ladder. What is a TIPS ladder? Well, TIPS is a type of bond, a type of US treasury bond. And a ladder means one of them matures every year. So maybe you're 58 when you start building this thing and you decide you're going to retire at 65. Well, you got one that matures at the year you turn 65. So you buy a seven-year TIPS. Now they don't sell seven-year TIPS at auction. You got to buy it off the secondary market using a brokerage at Schwab or Fidelity or Vanguard or whatever. And then you buy an eight-year one that matures the year you turn 66.

And this covers maybe all your spending, maybe just your essential spending, but it locks that in. And that not only reduces your sequence of returns risk, but it allows you to spend a little more freely with the rest of your portfolio, knowing you've locked in your essential expenses. And you can do that TIPS ladder, run it out for five years. You can run it out for 30 years.

But looking at SPIAs, looking at TIPS ladders, these are options that you can use when you barely have enough or even don't quite have enough to maximize what you can spend from your estate.

A SPIA is a single premium immediate annuity. It's basically a pension you buy from an insurance company. You give them say $100,000 and they pay you $600 a month every month for the rest of your life. It's not a bad deal. It gives you a guaranteed income. So if you're getting $1,800 or probably more if you're a doc, maybe in $3,000 a month from social security, and you spend $250,000 on SPIAs, and that's giving you another $1,400 a month. Well, now you're up to $4,400 a month. Maybe you buy a TIPS ladder that pays you out another, I don't know, $40,000 a year.

You put all this together and all of a sudden it's real income. It's real income that you can live off of. And now you don't have to worry so much about market performance because all of your essential spending is covered by social security, SPIA income, a TIPS ladder, et cetera. And then the niceties, if the market's doing well, maybe you get to go to Hawaii for a week, that sort of thing.

I hope that's helpful for those of you who feel like you're late to the party. Keep in mind that working longer is one of the best solutions. Working longer helps the math in so many ways. The longer you work, the shorter your retirement and the less time you need to support yourself with your nest eggs. The longer you work, the longer you can delay social security. The more you pay into social security, the more social security pays you. The longer you work before you buy a SPIA, the more the SPIA will pay you. The longer you work, the more you can save toward retirement. The longer you work, the more time your portfolio has for compound interest to work on it and grow.

Everything gets better with working longer. It's pretty amazing actually, how quickly you can go from having enough to having twice as much as enough in your portfolio. It's less than a decade to go from enough to twice enough with most typical savings rates, most typical rates of return. And so, you might be amazed; maybe you're 58 and you want to retire at 60, but guess what? Maybe that's not possible for you. Maybe you really need to work until 68, but then you have a very, very comfortable retirement after that. So that's an option as well. Okay. I think I covered the options there.

INTERVIEW WITH ZACH LEMASTER FROM RENT TO RETIREMENT

Dr. Jim Dahle:
I want to talk for a few minutes. I'm going to bring one of my sponsors on here. I want to talk for a few minutes about a solution I don't see used nearly as often as I think it should be. And that is the option to get out there and invest directly in real estate, in places where you don't live. So many of us live in places like Seattle or the Bay Area or San Diego or DC or Connecticut or Manhattan where buying investment property is just out of reach. Everything costs four or $5 million.

Well, there are places in the country where you don't have to do that. The problem is you can't drive by and check on them every afternoon or once a month or whatever. And so you need a solution. Most people refer to it as turnkey investing. And we've got a new sponsor that does turnkey investing I want to talk to you for a few minutes on the podcast today.

My guest today on the White Coat Investor podcast is Zach Lemaster. He is the founder and CEO of Rent to Retirement and one of this podcast sponsors. Thank you, Zach, for being here today.

Zach Lemaster:
Dr. Dahle, pleasure's all mine. Thanks for having me on.

Dr. Jim Dahle:
Let's talk a little bit about real estate investing in general. You use an acronym called IDEAL. You say real estate is the IDEAL investment because there's multiple different ways that you can make money in real estate. Can you go through that acronym and the different ways people make money in real estate?

Zach Lemaster:
Yeah, absolutely. As you mentioned, it is an acronym. We refer to it as the IDEAL investment, which is broken down. I is income. That's your cash flow. That's what most people pay attention to immediately. But there are plenty of other ways you're building wealth that compounds year over year when you're holding long term real estate. So I is your income, your cash flow.

D is depreciation and tax benefits. As you own real estate, there's a ton of tax benefits. Depreciation is only one of those that you get to utilize to create a greater return and keep more of your hard earned money.

E is equity build up as a tenant is paying the loan down for you. A is appreciation, which also builds equity. But home prices always go up over time, regardless of short term fluctuations. So you're also building wealth just through the house appreciating.

And then L is leverage, which I think is the most unique thing for real estate investing, because you can partner with a bank to bring in the majority of the money to buy a house that you have 100% control over, 100% of the income, 100% of the tax benefits where you're having someone else pay off that loan for you, which would be the tenant. Leverage is just a way you can exponentially increase your returns, especially over the long term. Those are all ways that using the ideal formula that we apply here at Rent to Retirement to build significant amounts of wealth over time.

Dr. Jim Dahle:
Now, Rent to Retirement helps people who are interested in buying a turnkey property. Can you explain what that means and who turnkey investing would be right for?

Zach Lemaster:
Certainly. And so, our objective at Rent to Retirement, Jim, is to make the best deals across the country available to everyone, where our team handles everything for you. And this doesn't mean it's 100% passive, but it's about as passive as it gets in the actual property ownership.

Our investors come in, this goes into the question of who's this right for? They're either someone who's a busy professional, I think this is really applicable to your community. I have a background as an optometrist, my wife and I both do as a captain in the Air Force, because I was an HPSP scholarship.

I know how grueling the healthcare profession can be. I also know how advantageous real estate investing can be. And so, how do we create scenarios where we can participate in real estate, but not have to actively manage those properties.

If you're a busy professional, I think turnkey is a great way to limit your risk and your time involved, but still get access to the best deals across the country. If you're someone who your local market is expensive, or inaccessible, or just doesn't make sense, or if you already invested locally, and it's about time to diversify, because you probably should, turnkey is a great way to easily diversify and scale your portfolio, across different markets across the country that likely offer better returns and meet your goals.

Someone who is a brand new investor and wants to limit their risk, or wants to learn the ropes, where they're not making the same mistakes that could set them back years or potentially decades doing it all on their own. That's another person.

If you're someone who earns high income, and you need an easy way to offset your tax liability using the creative ways that real estate can offer potentially tens of thousands of dollars or hundreds of thousands of dollars as many of our high paid professionals achieve buying real estate to offset their taxes.

But turnkey, the first thing we do is we identify markets that meet our criteria. We want areas that have fundamental strong supply and demand metrics, areas that are going to have diversity of income or diversity of industries, low taxes, landlord friendly legislation, all these areas that are important for us to ensure that we can invest in those areas to maximize returns and create a sustainable portfolio.

Our team builds new construction houses in those areas, leases and manages those properties in these growth markets. We're turning over a package investment to our investor, where you get the access to own in these attractive markets, but not have to participate in the day to day management, and be a very active investor.

And then the last thing we do to make it turnkeys, we help you build out an investment strategy and plan if you're looking to invest out of state, it's hard to say, “Okay, where is the right investment, or the right location to start? If I want to start investing, what type of tax structure or LLC structure do I need in place?”

We guide you through that entire process to match the markets and properties that fit your goals to help reach your financial goals. So, that's what I would classify as a long winded answer, Jim, but that's what I classify as turnkey for us.

Dr. Jim Dahle:
Now, Rent to Retirement has been around for 10 years, you've helped over 5000 investors buy rental properties and become direct real estate investors. What's unique about Rent to Retirement? And why should somebody come to your company instead of another turnkey company out there? What sort of deal structure incentives do you offer? And what are you guys really good at?

Zach Lemaster:
Yeah, thank you for that. As you mentioned, we've been in business now at this point, just over a decade and we've been around. And you guys did your diligence on us as well extensively before allowing us to even partner with you guys. We are a reputable company, I think we're the largest turnkey provider and operator today that has a very good reputation. As I mentioned, I have a background in healthcare and the Air Force as well. I think that's applicable to your audience. So I understand what high paid professionals are looking for to serve that community the best.

The biggest thing for us, in addition to offering just the turnkey asset, which I just explained, is the fact that we're diversified across multiple different markets, we work in 18 different markets. So it's not just “Hey, we have one or two markets where one size fits all.”

We are looking at the most opportunistic markets, establishing teams and systems in there to make the best opportunities available to our community, and make sure we're matching the right market with the investor.

But beyond that, what I think is extremely unique and exciting to all investors is we offer deal structures, incentives, no one else does in the industry. And this is where you can buy properties tens of thousands of dollars below market value or get that as tangible cash back. That really allows you to make a unique deal structure possible today that you will not find anywhere else.

For example, and just to be specific, our goal Rent to Retirement because we are builders, we're building many houses, we also have partnerships with the nation's largest builders that have inventory all across the country, where we are buying those in bulk, and passing those wholesale discounts on to our investor community.

And so, that's really the true benefit or financially in participating in our community is getting access to those wholesale type of deals, which is significant. We make institutional type of buying opportunities available to the individual investor for real estate.

To use a numeric example, to understand this better, let's say you buy a $300,000 new construction house through our community in the southeast. And let's say that house has a 10% Rent to Retirement incentive. This is the discount we're passing on to the investor. We don't charge our investors anything, we make our money through building and selling houses, we spend as much time with you as we need to help you map out a strategy.

But let's say that $300,000 house has a 10% incentive, that's $30,000 that you have as the investor that you can take as a price reduction to come into immediate equity, you can get that as cash back at closing. So that could cover half or potentially more of your down payment, which skyrockets your ROI, potentially allows you to buy more real estate with the same amount of capital. It allows you to buy your interest rate down significantly. We have people buying their rates down into the threes to maximize cashflow.

Right now, on 30-year fixed loans, we'll probably never see those type of rates again, or a combination of the above. And so, the rent-to-retirement incentive structure is something that's unique that I think really helps investors make unique creative deals and achieve higher returns than they could on their own. And it's significant. We also have unique lenders that can offer things like as little as 5% down loan options.

Think about this. If you use, and this isn't right for everyone, but I'm just planting seeds of what's possible and important to understand. If you bought a property at 5% down and you had a new construction house that's giving you 10% back on that, now you're into a house for zero money down, or you even get paid to own that asset.

There's unique structures like that that we make available to our community, as well as handling all the operations for you and helping you map out a strategy and a plan long-term to help you optimize your real estate portfolio.

Dr. Jim Dahle:
All right, Zach, there may be some listeners out there interested in getting in touch with you and learning some more about this. They can go to whitecoatinvestor.com/turnkey or whitecoatinvestor.com/renttoretirement. There's also a number they can text to get some more information. Can you share that with us?

Zach Lemaster:
Yeah, absolutely. They can text REI to 33777. Again, that's REI, like Real Estate Investing, to 33777. And that will set you up to connect with our team. The first step in this process is connecting with one of our investment strategists. Again, we don't charge investors anything at any point in time.

Our goal is to help you map out an investment strategy to answer all your questions and help educate you on some of the best markets to invest in, some of these creative financing options we talked about, some of the unique tax structures that could save you a significant amount of money in taxes, which is a huge benefit for real estate investors. And so, our goal is to add value and help you advance your investing goals regardless of if you're investing with us or not.

Dr. Jim Dahle:
Thank you so much, Zach, for your time today.

Zach Lemaster:
Thank you.

Dr. Jim Dahle:
Okay, I hope you enjoyed that. I hope that's helpful to those of you who may have some interest in direct real estate investing outside of the area you live. You can even do it where you live too, I suppose, but typically people are looking for turnkey investments that are not in their local area. I want to talk for a few minutes about tax loss harvesting. Let's take a question off the Speak Pipe to start with.

LONG SHORT TAX LOSS HARVESTING

Speaker:
Hi, Dr. Dahle. Thanks for everything you do. I have a quick question about long shorts tax loss harvesting. I have had money in a direct indexing account for years and have a lot of accumulated gains. At this point, it doesn't make sense to keep paying for the separately managed account as I'm no longer getting any tax loss harvesting through that account.

I guess one option is long short direct indexing, I believe it's called, and whether or not that's worthwhile. I'm sure it makes things more complicated and has some significant fees, but would the tax savings be worth it? Not sure if you have any experience with this or thoughts on that. Thanks so much for your help. Bye.

Dr. Jim Dahle:
Okay. There's a lot of things to talk about in this question. The first one is tax loss harvesting. For those of you who don't know what tax loss harvesting is, the idea behind tax loss harvesting is that without substantially changing your portfolio, you acquire some tax losses that are beneficial when you file taxes, that lower your tax bill.

An example of this would be that you have bought a total stock market index fund, and then there's a nasty bear market. The value of the purchase you made a few months ago is now down 35%. Maybe you put $10,000 in there, and now it's worth $6,500. It's a terrible bear market. There's awful news on CNBC. Things look really bad. Everyone's talking about, “I can't believe I ever invested any money in stocks.”

So, what do you do? Well, you log into your brokerage account, and you swap that total stock market fund for another total stock market ETF from another company, or for a 500 index fund, basically a similar, but not, in the words of the IRS, substantially identical investment.

So, you're swapping from a total stock market fund to a 500 index fund. The correlation between the two is like 0.99. They're almost the same thing as far as they perform, because most of a total stock market fund is in the 500 biggest stocks in the index. That's like 80% of a total stock market fund is just an S&P 500 fund.

They perform pretty similarly. You've swapped them, and now you booked that $3,500 loss. And what can you use it for? Well, every year, you can use $3,000 of that loss against your ordinary income. So in this case, you can use $3,000 of that $3,500 loss against your ordinary income. You don't pay taxes on that $3,000 you earned. Maybe if your marginal tax rate's 33%, maybe you save $1,000 off your taxes. Cool. And you get to carry that $500 over to the next year.

But you can use an unlimited amount of these losses against capital gains. They're capital losses, so you can use them against capital gains. And so, if you had to sell something in your portfolio to rebalance, or because you realized it was a really crappy investment, but it's still at a gain, then you can offset those gains with these losses as well. If you have to sell a practice, if you have to sell your home, and it's appreciated more than $250,000 or $500,000 if you're married, you can use those losses to offset the sale of your home. If you have a small business that you sell, you can use these losses to offset that small business. This is what tax loss harvesting is. And this is why savvy people do tax loss harvesting.

Now, if all your investments are inside Roth IRAs and inside 401(k)s, you can't tax loss harvest. You only do this in a taxable account. It's not a reason to invest in a taxable instead of your 401(k), but hopefully you're saving enough that you can max out those retirement accounts and still invest something in a taxable account. If you can't though, don't worry about it. You don't have to know what tax loss harvesting is unless you're investing in a taxable account.

But the thing to think about this is, “Do you really have a use for more losses?” For example, I have been tax loss harvesting the whole time we've had a taxable account. I don't know how long we've had a taxable account. We had one for a while and we actually ended up liquidating entirely. And then we started again a few years later, but I've had a taxable account for, I don't know, something like 12 or 13 years, something like that.

And in that time, as we've invested and tax loss harvested in time, there's a nasty bear market like 2020. March, 2020, the COVID thing, the market dropped crazy. And while I didn't perfectly time that market with regards to our monthly investments that month, I didn't time it almost perfectly with regards to tax loss harvesting. And I harvested a whole bunch of losses in 2020. Harvested a bunch of losses in 2022 as well.

And so we're actually carrying around like seven figures of losses. They're all very temporary. It came back within a few months in the new investment that I swapped into, but I have these losses. And so, if all I was using them for was $3,000 a year against my ordinary income, I could live to be like 400 years old or something and have enough losses to offset that $3,000 per year. And so, I don't need to do anything special to get more losses, if that's the only use for the losses that I have.

Now, in my case, I own a small business that has a basis of about zero that maybe someday I'll sell. And so there's a good chance I could use more losses. So, I continue to tax loss harvest when it's convenient and I'm able to.

But if you are in a situation where you could really use more losses, where they would really help your taxes so much that you're willing to deal with some more complexity and you're willing to pay some additional fees and costs and perhaps deal with the possibility of not tracking the index as well as you would like, you might want to look into direct indexing. The price on this has come down quite a bit. You really shouldn't be paying more than about 9 or 10 basis points for this service. If you're paying somebody 70 or 80 or 90 basis points for direct indexing, you're paying too much. You're not going to get that much of a benefit out of it.

And what they do with direct indexing is instead of doing this tax loss harvesting at the fund level, they're doing it at the individual investment level. Instead of buying an S&P 500 index fund and swapping it for a total stock market fund, they literally buy all 500 stocks in the S&P 500. And you're now running your own mutual fund.

The benefit there, of course, is that in any given year, some of those stocks go down. So there's always opportunities to tax loss harvest, money you've invested relatively recently, even if the market's done nothing but go up. And so, you generally get more losses than you would get just from tax loss harvesting at the fund level.

Now, these are heavily front-loaded. You get most of them in the first year or two or three, and then it kind of goes down from there. And by the time you've been in this investment for five or 10 years, unless you're adding new money, there's no more new losses. That's just the way it works because the market generally goes up over time and everything's got a gain. Once you have gains on stuff, if it never falls back below your original basis, what you paid for the shares, there's no additional loss that you can use for additional tax loss harvesting.

So, that's direct indexing. You might be interested in direct indexing. Well, the financial services industry needs to sell more stuff. And so, they're always coming out with new things to sell you so they can make more money. And they've said, “Well, maybe there's some people out there who really want losses that will implement a way for them to get even more than they can get with direct indexing. We're going to implement a long-short strategy for them. Not in a fund, because funds can't pass along losses to you, but individually with their individual securities.”

So they're buying some long. That's the equivalent of just buying shares. You're buying shares of Amazon or Walmart or whatever. You're just buying shares. That's long. Short means you're selling them short. You're basically betting on the market falling for those shares. Yeah, you're betting against them doing well. So if the market goes up, you're going to get some losses in your shorts. If the market goes down, you're going to get some losses in your longs. So, no matter what the market does, you're going to get some losses. And you get more losses with a long-short strategy than you do with a simple direct indexing strategy that is all long.

So, what's the downside? That sounds great. The downside is it's that much harder for this fund you've created to actually track the index. Your fees are probably higher. And you've got some additional complexity in your life. Now, whether it's worth it to you or not, depends on how useful those losses are to you. If these are just theoretically, you like accumulating losses because you like seeing the number on your spreadsheet get higher, fine. You can do that with your money, but you certainly don't have to.

But if you're no kidding, four years from now, you know you're selling your practice and it's appreciated $3 million and you know you're going to use these losses and you're going to need to get them relatively quickly, well, maybe it makes sense for you to look at a long-short solution.

But before you do direct indexing, or especially long-short direct indexing, you got to recognize that this is a long-term decision. It's a little bit like getting married. It's a little bit like buying whole life insurance. These are whole life kind of things. You got to hold on to them for your whole life. It's a little bit like getting into direct real estate investing. If you don't hold on to direct real estate your whole life and you got to sell it, well, all the depreciation gets recaptured and you got to pay capital gains taxes. The most tax efficient way to do that, of course, is just hold on to it your whole life.

Well, it's kind of the same way with direct indexing. If you want to get out of what you've been doing, it's going to cost you some money and it's going to cost you some hassle. And the longer you've been doing it, the more hassle it's going to be and the more it's going to cost you. Because, yeah, you accumulate all these losses, but that's pretty heavily front-loaded. You got all your losses in three or four or five years or whatever. And now you still own all those individual shares. Maybe you still own some of them short if you're doing long-short direct indexing and you got to unwind that. This is not something you do for just two years. Because you've got to unwind it.

And how do you unwind it? Well, you give all the losses back that you gained. You're now acquiring capital gains by selling these things. Yeah, it's like any legacy investment. You can use it for your charitable donations. You can give it to your kids if they're in a lower tax bracket. If you have some losses, you can use those to offset some of the gains. You can build your portfolio around it as best you can.

But the bottom line is you're now sitting here with a portfolio with hundreds of stocks in it. And even if you sell all of them, except the biggest gainers, you've probably still got 25 or 30 stocks in there and you've got this complexity you got to deal with the rest of your life.

So, be really sure that this is something you want to do before you go crazy trying to get more tax losses. Certainly every doc out there is not going to have a use for endless tax losses. And when you die, those tax losses just go away. Nobody inherits those. So if you're not going to use them during your life, don't bother.

There's also some suggestion out there that maybe these direct indexing providers, and it's probably even harder if you're using a long short strategy, are having trouble tracking the index well. They say, “Well, we're just as likely to outperform it as underperform it.” I think the jury's still out on that question.

Recognize that you are less likely to build an index fund that tracks the index well yourself or with the aid of somebody else helping you direct indexing than Vanguard is. Vanguard's very good at it. They've been doing it for 50 years now. And they can track the index very, very well at very low cost. Investing is basically free these days because of how well they can do that. And you and your direct indexing provider are probably not quite as good at doing that as Vanguard is.

So, keep that in mind as you make a decision about whether long short direct indexing is the right move for you. It probably is for some White Coat Investors. I think it probably is not for most White Coat Investors. I hope that's helpful.

All right, we got another question about tax loss harvesting. I bet I've already answered it in that long rant, but let's find out.

ARE ALL-IN-ONE ETFS A GOOD CHOICE FOR A TAXABLE ACCOUNT?

Speaker 2:
Hi, Jim, thanks for all you do for the White Coat Investor community. My wife and I will be investing more towards our taxable account now that we are getting full advantage of our tax advantage accounts. And in the name of simplicity, we are leaning towards a single fund solution with a tax loss harvesting partner. We are considering using AVGE, the Avantis All Equity ETF, and EFAW, Dimensional Global Equity ETF.

They're very comparable in terms of our desired asset allocation. They both include an allocation towards REITs, which I know are not very tax efficient. However, they were both, I believe, under 2% of the total allocation. I just wanted to get your thoughts on using these fund-to-funds in a taxable account to keep things as simple as possible. Thank you.

Dr. Jim Dahle:
Okay, good question. You've got some conflicting goals here. And we all have these same conflicting goals. You want to have great returns and you want to pay as little in taxes as you can, but you also want your life to be as simple as possible. And so, you're trying to figure this out.

In general, you want to look at all of your accounts for money that is going toward your retirement, your long-term serious money as one big account, whether it's Roth IRA, whether it's your 401(k), your 403(b), your 457(b), your taxable account, whatever, it's one big account. And you manage the portfolio as one big account and you manage your asset allocation across those accounts. You don't necessarily have a separate asset allocation in your taxable account versus what you have in your Roth IRA.

For example, if our account's now mostly taxable, so we have most of our asset classes that we invest in a taxable account and very few asset classes in our 401(k)s and our Roth IRAs. I think we've got some REITs and a little bit of small value left there and some tips left there and some real estate debt funds in our retirement accounts. That's it, everything else is in taxable.

And so, you're managing it all across those and trying to be as tax efficient as you can. So, it sounds like you might be just thinking about a separate allocation in your taxable account. I would caution you against doing that. I would look at all of the asset classes you've chosen, including your portfolio, and then decide which should be moved to taxable first.

And the answer that lots of people come up with when they try to answer that question is they move their US total stock market index fund in there first. It's very, very tax efficient. It's relatively low yield. It's all stocks. And so, you don't pay a lot of taxes on that in the taxable account.

The second one that often gets moved is something like a total international stock market account. Also pretty tax efficient. You get some tax credit that's available for the taxes that were paid in other countries, but it's higher yielding than the total US stock market.

Then you might look at some bonds, and if you're like most White Coat Investors in a relatively high bracket, you're probably talking about muni bonds, at least for the bonds you hold in your taxable account. So you're looking at everything you want to own, which ones are best in the taxable account. Equity real estate. If you own a private real estate fund or a syndication or some direct property, that's the sort of stuff that's generally not held inside retirement accounts either. Not only because it's a pain to put them in there, but because it's pretty tax efficient due to depreciation offsetting a lot of the income.

That's the way I want you to think about your accounts as you manage them. So knowing that, you start asking, “Well, does this total world equity investment make sense for me?” I don't know what else is in your portfolio. You didn't mention your asset allocation. You didn't mention what your accounts are, and it's hard to do this without that information.

But if you're not investing in this sort of a thing already in your Roth IRA, in your 401(k), I don't know why you want to do it in your taxable account. The idea isn't to get a new asset allocation in your taxable account, just because you're starting that. It's to continue your asset allocation and include the taxable account in your asset allocation.

I think it's fine to use these all world equity funds that have low costs and are managed well. We're talking things like Vanguard is VT, is the ETF, and it's basically a combination of the total stock market index and the total international stock market index.

There is a downside to using that in a taxable account in that it's mostly US stocks. And so, I don't think you get this credit that you get for investing international stocks in a taxable account, this foreign tax credit, because it's more US stocks. That has to be a majority of international stocks for the fund to be able to give you that credit. So that would be one downside of using this all in one kind of solution.

The other problem, of course, is if you have the exact same fund in your Roth IRA and your 401(k), and now in your taxable account, well, now you got to be a little bit careful when you buy and sell it when you're tax loss harvesting, you want to avoid wash sales. And technically wash sales only apply to IRAs, they don't apply to 401(k)s, but you got to understand the wash sale rules.

The bottom line is tax loss harvesting is not really something that people do who are looking for maximum simplicity. If your goal is simplicity, if your goal is automating your investments, you're probably not tax loss harvesting. Tax loss harvesting is something that optimizers do, not satisficers. It's a little bit of a disconnect for you to go, “I want an all in one solution, but I want a tax loss harvest.” That's kind of a disconnect. If you really want a little more complexity in hopes of eking out better after tax returns maybe you got to manage a portfolio with multiple funds. Instead of looking for all in one solutions.

I don't have anything against Dimensional, I don't have anything against Avantis, I use both of those funds, I happen to only use the small value ones. I don't use them for the total stock market kind of approach. An argument can be made for them. The expense is a little higher than what you'd get at Vanguard or iShares or something like that.

But maybe they're adding a little more value with the tweaks they're making. I never thought they were adding enough to justify paying an advisor just for access to them. But now that Avantis has come out and now that DFA has had to keep up with them by coming out with ETFs as well and you can invest in these things without an advisor I think you can make a pretty good case for them sometimes.

I think it's fine to use those if you want. And I think they're good tax loss harvesting partners. The whole approach doesn't quite match up to me when I hear what you're doing. It's a disconnect between trying to be simple and trying to optimize things.

That said, when you do start investing in a taxable account, I think it's a very good idea for tax loss harvesting purposes for you to have two partners. In our case for our total stock market fund allocation, we have VTI, the Vanguard Total Stock Market Index Fund and we have ITOC, which is a BlackRock or iShares Total Stock Market Index Fund. They're both ETFs, of course, but they're funds. And then we swap back and forth between them.

When I first buy it, I usually buy the Vanguard Fund. If it falls in value in the next few months or next few years after I buy it, then I swap it to the ITOT, to the iShares Fund and book that loss. And so, we hold two of every asset class we have in taxable, we have two holdings. And we don't tax loss harvest more frequently than about every 60 days.

That prevents two things. One, it keeps us from having a wash sale for swapping things out in less than 30 days. And two, it keeps any of the dividends from becoming unqualified dividends. If you own something for less than 60 days around the ex-div date, it becomes unqualified. That dividend does and you got to pay ordinary income tax rates on it instead of the lower qualified dividend tax rates.

And so, tax loss harvesting at the fund level more frequently than every 60 days, it can be done. You just got to watch out for those two rules. It's easier to just not do it any more frequently than every 60 days. And frankly, I really only tax loss harvest every couple of years when the market drops a lot. Because if you're doing it every time you can, you end up with four or five tax loss harvesting partners and then you've got 20 funds in your taxable account.

So, that's the way I've chosen to parse out the simplicity versus optimizing debate that every investor has. Could you do what you're doing? Would it be crazy? No, but it doesn't seem ideal to me. I hope that's helpful to you. I'm not going to make any further comments about those two funds you've chosen. I don't think they're unreasonable investments but I'm not going to tell you those are necessarily going to be better than what you can get from Vanguard or iShares or Fidelity or Schwab or whatever. Certainly an argument can be made.

And when we're talking about all these things together, there's lots of things I got to talk about to give regular podcast listeners the background they need to understand what you're asking and how I'm answering it. So, I hope that's helpful to you. I would make a few tweaks to your plan rather than implementing exactly as you're describing.

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from Dave Ramsey who said, “Unless you control your money, making more won't help. You'll just have bigger payments.” And I can tell you after talking to thousands and thousands of doctors over the years, that is true. There's plenty of doctors out there living paycheck to paycheck.

A really interesting study done last year by one of the big banks, big investing banks that basically showed that the amount of people that are not living paycheck to paycheck goes up as income goes up until you get to about $300,000. Then all of a sudden, the number of people living paycheck to paycheck increases, which was shocking when I saw this information, but it went from about 16% to those making between $200,000 and $300,000 to 40% of those making $300,000 plus. And I'm sure some of them didn't exactly understand the question being asked, which is not shocking, I suppose, that there are high earners who aren't really financially literate.

But even so, the fact that it went up is really concerning. And I think there are a lot of high earners that just think they can out-earn their spending problems. And you can't. I promise you, you can spend everything you're earning and build no wealth despite having a high income.

That's kind of the whole point of the White Coat Investor, is to help you be successful. You're already set up for success. You're 90% of the way there now that you already have a high income. All you got to do is hand the ball to the best running back in the NFL and have him walk two yards across the goal line, score your touchdown, and you're going to be financially independent and have a wonderful retirement as a financially independent multimillionaire.

You really don't have to do anything complex. You don't have to do long, short, direct indexing to get additional tax losses. You don't have to get out there into multiple DFA and Avantis and multiple fund companies in order to be successful. You have to do the basics right. You have to put something like 20% of your gross income away toward retirement. You got to watch your taxes. You got to watch your expenses. You got to stay the course with your plan throughout the years. You have to have some sort of a reasonable investing plan. You have to fund it adequately.

And if you can do that, you're going to retire as a financially independent multimillionaire and you're going to have a wonderful financial life both before and after retirement. If you can't do that, it doesn't matter what else you do. It doesn't matter how well you tax loss harvest. It doesn't matter how well you pick cryptocurrencies unless you totally get lucky on a huge gamble. It doesn't matter if you can't do the basics right.

So, make sure you're getting paid adequately for your job, save 20% plus of it for retirement, invest it in some reasonable way, stick with the plan long-term and you'll be shocked how much money you have after two or three decades.

SPONSOR

Dr. Jim Dahle:
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Thanks again to our platinum scholarship sponsors. That's Matt Wiggins at DockInsure, Brian Martin at Taxstra and Unchain. And those of you who still want to apply for that scholarship, you still can through August 31st, whitecoatinvestor.com/scholarship. We need more judges. Please, all you got to read is like 10 of these thousand word essays from these students who want to win the White Coat Investor Scholarship and tell us which ones you like. That's literally all you have to do to be a judge. No, it's not paid, but you get to feel good about making a contribution to the community.

Email [email protected], put “Judge” in the title, and we'll enlist you to help read these essays during September. If nothing else, it's going to rebuild your faith in society because there's some awesome people applying for the scholarship every year.

All right, thanks for those of you who tell your friends about this podcast. It really does help. That is the main way in which we spread the word about the White Coat Investor message. So, thank you for doing that. But if I could ask you for one other thing, it would be leave a five-star review of this podcast.

We've got a recent one that said, this is from slowbutsteady101, who said, “Gratitude. My favorite part of this podcast is when you, Dr. Dahle, thank the medical providers for what we do. It warms my heart every time I hear the words. While we are financially blessed, success in this career requires deep personal sacrifice. This podcast provides honest and excellent information and has become my trusted financial advisor.” Five stars. Well, thank you very much, not only for that review, but for what you do every day.

Keep your head up, your shoulders back. You've got this. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. 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:
Welcome to the Milestones to Millionaire podcast.

This episode is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and 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 get this critical insurance in place, contact Bob at whitecoatinvestor.com/protuity, or you can email [email protected] or call (973) 771-9100.

All right, the financial crash course is tomorrow. If you're hearing this the day this drops, if you're hearing the day after it drops, it's today, August 18th, 06:00 P.M. Mountain. I'm going to show you how to be debt-free within five years of getting out of residency, and to be well on your way to becoming a multi-millionaire.

We're going to cover what actually matters. Figuring out what to do next with your money, investing with confidence, reducing your tax bill, protecting your wealth through insurance, estate planning, asset protection steps, but most importantly, we're going to talk about how to actually use your income to build the life you want.

It's totally free. Register at whitecoatinvestor.com/crashcourse. Even if you can't make it at 06:00 P.M. on the 18th, 06:00 P.M. Mountain time, even if you can't make it, sign up anyway. We'll send you the replay. You can't make it live, but if you do attend live, you'll get a free bonus download, a financial plan template that serves as your personal roadmap to building wealth, and we're giving away five free enrollments in the Fire Your Financial Advisor attending level course. That's a $799 value to live attendees. You got to be there live to win that. So, sign up now, whitecoatinvestor.com/crashcourse. We'll see you live on August 18th.

All right, we got a great interview today. This is somebody who has followed the plan. I tell you how to do this all the time. I tell you how to do it. Save your money. Make sure you're getting paid fairly. Invest in a reasonable way. Stay the course with your investments. Well, we're going to have a story today about somebody who did that, and it really paid off well for him. So, let's take a listen.

INTERVIEW

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

Carlos:
Hi, thanks for asking me to be here.

Dr. Jim Dahle:
Yeah, we're thrilled to have you. Tell us a little bit about yourself. Introduce yourself to the audience. How far are you out of training, what do you do for a living, and what part of the country you live in?

Carlos:
I'm an obstetrician gynecologist, and I've been in practice for 25 years, and I live in southern U.S. in Arkansas.

Dr. Jim Dahle:
Okay, and what milestone are we celebrating today?

Carlos:
Well, we recently surpassed $20 million in net worth.

Dr. Jim Dahle:
$20 million? You said that so matter-of-factly, like I just called you up and said, “Hey, what should I do with this patient with a vaginal bleeding?” You're just like, “Yeah, $20 million, no big deal.” Congratulations, that's pretty awesome.

Carlos:
Thank you very much.

Dr. Jim Dahle:
The fascinating thing about this is we recorded another interview earlier today with another multi-deca-millionaire. It'll run a few weeks after yours, and it feels like it's becoming a little more common in medicine for doctors to achieve those sorts of net worth $5 million, $10 million, now apparently $20 million. I know there's been a tailwind in equity returns the last few years, and of course, there's always inflation, but still, it's pretty remarkable to hear.

Tell us the story. You're 25 years into your practice, and where did all this money come from? Is this just money you made clinically, or did you start a business, or do you have a hundred doors under management in your real estate empire, or how did you build this much wealth?

Carlos:
Well, we started a solo private practice in a small town, and that's how everything got started. Initially, we just started investing on our own in equities and retirement plans, things like that, and then as the years have gone on, we've gotten into commercial real estate, short-term rentals, and just real estate in general. And our net worth is basically half equities and half real estate, and it's just kind of ballooned over the years.

Dr. Jim Dahle:
Okay, so kind of a balanced approach.

Carlos:
It's turned into a balanced approach. It wasn't always that way, but it did turn in that way.

Dr. Jim Dahle:
What's the most money you ever made in a year clinically?

Carlos:
About $450,000.

Dr. Jim Dahle:
Not all that different from the average OB-GYN income. How much of that did you save most of the years that you were working?

Carlos:
Well, initially, when we first started, we were saving upwards of 30%, and as years have gone on, it's less now, probably more like 10%, but initially at the beginning, we were working hard to build up our retirement portfolio and try to save for the future.

Dr. Jim Dahle:
Now, you use the pronoun we. Who else is in the we?

Carlos:
That would be my wife. She works for me. She manages my clinic. We have two clinics now, and she manages both of them, and so she has a full-time job with us.

Dr. Jim Dahle:
And do you have other gynecologists or APCs working for you, or are you the only one seeing patients in these clinics?

Carlos:
No, we do have a nurse practitioner that does work with us full-time, and she runs mainly one of our clinics while I run the main clinic, and she helps also at the main clinic, but it's just us two.

Dr. Jim Dahle:
All right. Well, I haven't pulled out a spreadsheet and tried to run the numbers on this, but I think you've done pretty well with your investments. Were these boring old index fund investments, or did you happen to pick a couple of really hot stocks, or how have you invested over the last 25 years?

Carlos:
Most of it is just general index funds. We started off with DOO, SPI, QQQ, places like that, and we just consistently invested into those funds, and over the years, I have picked stocks in general. I've owned tech stocks for the last 15 years. I'm the type of investor that buys something and doesn't sell it. I'm kind of Warren Buffett-ish in that I have a Facebook stock that's been up 1,700% that we still own, and it's just one of those things where you are patient, buy what you can, and just let it grow over time. You get to a point where I'm at now where it just kind of balloons, and it’s just from reinvesting dividends as well as just compounding, which everyone talks about, but it's real.

Dr. Jim Dahle:
Yes. It might feel like it takes a little while to kick in, but it does kick in eventually.

Carlos:
It does.

Dr. Jim Dahle:
Okay. Tell us about the pivot, the diversification into commercial real estate. How did you get interested in that?

Carlos:
Well, it's interesting. The first 10 years of practice, we did buy property here and there, just around our local area, lots, things like that. Then we started our second clinic, which is probably our first big real estate purchase. Then in 2011, we decided to go ahead and refinance our home to get around 3%. Then when we did that, we extracted about $100,000 from the refinance, and we decided to go ahead and buy a vacation property in Florida.

At the time, 2011, it was the absolute nadir of the market because they were coming out of a really difficult time. We got a really good foreclosure that doubled in value within 3 years because we caught it at the absolute bottom. We sold it and purchased another home through 1031 Exchange on the beach. It was one half of a duplex, but it was nice. It was right on the water. We owned it for about 11 years. Earlier this year, we got an unsolicited offer to purchase the property. It was almost 400% from what we bought it for. That's what catapulted us to where we are now.

Then we did another 1031. Actually, we're at our beach house right now that we purchased with the 1031 Exchange. We deferred the taxes on all the profits from the original $100,000 investment. It turned out to be about $3.6 million.

Dr. Jim Dahle:
Pretty awesome. It sounds like these have been mixed use. They're partially investment properties, and you're also using them every now and then.

Carlos:
That's right. We've gotten to the point now where we rent. Initially, when we bought the first house, we did not rent. But then as we got further into it, when we bought the beach house by the water, we started renting it. Then we realized that that was a pretty good source of income.

The current house we have is doing very, very well. That has been a big stepping stone on where we started getting into rentals. Then I started doing commercial real estate in my hometown. I secured a lease with our hospital to put their outpatient clinics into an office building that hadn't been built. Once we secured the lease, we built a building. We have been leasing it to them for the last, I believe it's eight years. We have some very significant cash flow from that. We bought our office as well as a couple of rentals in our building that we are currently in that we lease out.

Dr. Jim Dahle:
How much debt are you carrying now?

Carlos:
We have about $1.2 million in debt on our real estate. That is minimal compared to what we bring in.
Dr. Jim Dahle:
That doesn't seem like much compared to $10 million in real estate.

It's not.

Dr. Jim Dahle:
Very cool. What was the most you ever felt leveraged? How much did you have at the peak of how much leverage you used?

Carlos:
I would say at the peak, we probably had over $3 million in debt. They were all income-producing properties that we had the debt on.

Dr. Jim Dahle:
You were always cash flow bonded.

Carlos:
Always. It never felt bad.

Dr. Jim Dahle:
What do things look like going forward for you? How long do you expect your work? How do you expect your investments to change over time?

Carlos:
I know I've talked to my wife. We're probably in the eighth inning of our game. We're getting close to that. Probably, over the next few years, we want to start doing a little more estate planning to get ready for our children to take over whatever we've created here.

Also, try to do some backdoor Roths to get that organized because I've always been out of the income where I can really contribute significantly to them. But I need to start trying to figure out what the plan is to shift things over and acquire a couple of more rental properties so when we do end up retiring, we will have a significant income to continue.

Dr. Jim Dahle:
I think with $20 million, you should be able to have a significant income for retirement. You shouldn't have any trouble doing that. Pretty awesome. Well, if there's somebody out there that wants to be like you that is going, “Boy, I sure would like to have $20 million by the time I've been 25 years out”, what advice do you have for them?

Carlos:
It's a great question. I've been thinking about that, actually. I think the most important thing is to invest early, be consistent, and be very patient. That's the key, especially with equities. Investing is very important. If you are consistently doing it and you take your time and don't panic and just let it ride and just live the fruits of your labor, it's going to eventually pay off.

I think a lot of people don't have the patience to do that. Honestly, the biggest, I think, failing of medical education is the fact that they don't teach people this stuff in school or try to at least encourage them how to manage their money once they're out. It's kind of like you watch these athletes that make tons of money and they get out and they just go crazy.

Well, physicians are not any different. We're in our early 30s when we finish. Then we have people that we know that have houses, kids, cars, all this stuff. Then we finally get out. We finally get a big paycheck and you want to blow it. That's the worst thing you can do. You've got to take care of yourself first and find a very good partner to be in it with you.

Dr. Jim Dahle:
For sure, your income is your greatest wealth-building tool. Divorce certainly cuts your assets and that income in half, so definitely to be avoided. Well, congratulations to you on your success, Carlos. This is really impressive.

Carlos:
Thank you very much.

Dr. Jim Dahle:
We're very proud of what you've accomplished. Thank you so much for being willing to come on the podcast and share it with White Coat Investors.

Carlos:
Well, thanks for having me. I hope I can encourage some people to invest like we did and be just as successful.

Dr. Jim Dahle:
Okay, that was a great episode. I hope you enjoyed that. We've actually got another similar story coming up. Same specialty. This is in about a month, I think, it's going to run. Same specialty, same net worth. These are not orthopedic surgeons. These are not plastic surgeons. These are not ENTs. These are docs who are making average doctor incomes, average doctor specialties, but are still building lots and lots of wealth.

You can do it. You got to pay attention to this financial stuff. You got to be disciplined. You got to become financially literate, but you can do this.

FINANCIAL BOOT CAMP: INVESTMENT FEES

Dr. Jim Dahle:
When investing, you need to pay attention to your costs. That includes not only any fees you might pay to an advisor, but the fees you pay for the investment in the first place. Those fees have to come out of your return. There is nowhere else for them to come from. If the pre-fee return is 10% and there's 2% in fees, that means your after-fee return is only 8%.

That makes a big difference over time. Just like compound interest works on your returns, it also works on your investment costs. They're worth paying attention to, especially these days when investing can be nearly free. If you function as your own investment manager, i.e. you don't have a financial advisor, you cut those fees out.

Now, as long as you're doing things as well as a financial advisor would be, you're going to come out ahead by whatever fees you would have paid that financial advisor. Some people are paying 1% a year, so they get returns that are 1% a year better. Over the course of 30 years, that means you have about a third more money than you would otherwise, so the fees really matter.

Typical investment fees, such as for mutual funds, include an expense ratio. That's all the costs of running the fund divided by the assets in the fund. While the industry standard for that is about 1% a year, the truth is most low-cost, broadly diversified index funds, like those you would get from Vanguard, Fidelity, Schwab, BlackRock, or iShares, and companies like DFA and Advantis typically charge dramatically less than that. In fact, often less than 0.3% or 30 basis points.

Many of them are less than five basis points or 0.05%, like the Vanguard Total Stock Market Index Fund ETF, which is currently charging 0.03%. In fact, Fidelity's got a few index funds for which the expense ratio is literally 0%.

Now, while there's not much difference between 0% and 0.03%, it's interesting to see them use that presumably as some sort of a loss leader for the other places where they do make money.

But the bottom line is you can invest in every stock in the world, every bond in the world, essentially for free these days. So you've really got to ask yourself when you are paying fees, why?

As I mentioned, there are a lot of mutual funds out there that charge higher fees, higher expense ratios. It's not unusual to see an expense ratio of 0.5 or 0.6 or 1% or even more. And they get away with that because people don't know that investing can be pretty much free. And they also think that they're getting a benefit for paying that money.

They think the active manager is going to get them out of the market before it goes down. Pick only the stocks that go up and get rid of the ones that are going down or short the ones that are going down. But the data suggests they're not very good at doing that. It's very hard to beat the market long term. So you're better off just paying really low costs and matching the market.

In fact, the main reason why index funds beat actively managed mutual funds the vast majority of the time in the long run, especially after tax, is a cost story. They just cost less. It isn't that active managers can't beat the market. They just can't beat it by enough to pay for their own costs. And so, you've got to pay attention to those fees.

Other fees you might see are called loads. These are commissions. And there are “advisors” out there who give advice in exchange for selling you these commissioned investments, such as a loaded mutual fund. And the load can be paid up front. It can be paid when you exit the fund. It can be paid all along as you go each year when you own the fund.

Those are called A loads and B loads and C loads or A shares, B shares, C shares. And pretty much what they don't tell you is that there are mutual funds that are no load, that you don't have to pay that commission at all. Again, if you're going to places like Vanguard and Fidelity and Schwab and BlackRock and buying their very low-cost index funds, you can avoid those loads.

So, pay attention to your fees. They do matter. Keep them as low as you reasonably can. And recognize that the only place those fees can come from is your investing return.

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Dr. Jim Dahle:
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DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Dr. Jim Dahle:
A glide path is simply the way in which your asset allocation, or mix of different investment types, changes over time. Classically, people take less risk with their investments as they get older, and so their asset allocation becomes more conservative, less aggressive, as they move toward retirement and then into and through retirement and approach their ending years.

Classically, people have started out with, you know, 80% or 90% or 100% stocks in their 20s, and then as they move toward retirement, they're down to, you know, 60% stocks or something like that, and they continue to reduce that risk they're taking throughout their lives. That is what most people mean when they say an investment glide path.

You can change that in intervals. You can change it every five years. You can change it every year and just gradually make it less aggressive as you go.

There is some pushback to this, of course. There are some studies suggesting that, yes, you do need to decrease the amount of risk you're taking right around the time you retire, but then can actually take more risk as you go throughout retirement. That might help protect your portfolio growth from high inflation, and so it deals with, you know, the sequence of returns risk where you're trying to avoid losing a bunch of money just before you retire or just after you retire.

Sequence of returns risk, of course, is that risk that you run out of money in retirement despite having adequate average investment returns to support your withdrawals because the poor returns came first, and withdrawing from a portfolio that's dropping in value is a pretty good way to decimate it quickly. That's sequence of returns risk, and so taking less risk in your portfolio around the time of retirement is a good way to reduce that risk.

So that's the main reason why investors change their asset allocation over time. They have been gradually converting their earned income, their potential income, into, you know, actual assets, physical assets that they're going to live on during retirement. So it's a gradual process as you put in your time and effort and sweat and tears throughout your career, as you're slowly losing time and you're gaining money, right? And because you have less to put in there as time goes on, you know, the idea is you take less risk as you go on.

There are funds called funds of funds or target retirement funds or lifecycle funds that try to do this for investors so they don't have to do this manually themselves. So if you go invest in a Vanguard Target Retirement 2060 Fund, they design it for somebody that's going to stop working in 2060.

So when you first start investing in that in 2020 or 2025 or 2030, it's going to be pretty aggressive, right? It's going to be like 90% stocks. Then as you get closer and closer to retirement, it'll be 80% stocks and 75% stocks and 70% and 65%, until the time you retire, maybe it's 60% stocks or 55% stocks. And then a few years after you retire, maybe it's even less than that.

That's the concept of a target retirement fund. Not only does it rebalance itself between the various different asset classes, but it becomes more conservative over time. So that can be a great one-stop solution, at least for those that invest only in retirement accounts like Roth IRAs and 401(k)s.

There's some reasons why maybe it's not a great asset to use in a taxable account, but it's a great one-stop shop, especially for a resident or somebody just starting to save for retirement with all their money in a Roth IRA or something like that.

So common mistakes people make when creating or following a glide path are maybe making it too steep, right, to where they get too conservative too early, or not making it steep enough, right? I mean, there are some people that haven't changed their mix of investments from the time they were 95% stock at 25, and here they are at 60, and they're still 95% stock. Well, maybe that's a little too much risk for you to be taking, and maybe you should have made that glide path a little bit steeper.

So those are the main issues: just not making it steep enough and making it too steep.

And what's right depends on you. You know, even the various financial companies that build these target retirement funds don't necessarily agree on exactly how steep that glide path ought to be. You know, they might differ by 10% in the stock-to-bond ratio. It might be different from one company to another, so it's best if you lift up the hood and look underneath and see how the glide path really changes as the years go by, and is that okay with me?

And you're not stuck with it as long as you didn't buy it in a taxable account. If you're like, I'd rather be a little more aggressive, you know, in five years you can change from the Target Retirement 2060 Fund to the 2070 Fund, and now your glide path won't become more conservative for a period of 10 years longer than it otherwise would have.

Really, when you're setting your asset allocation, you want to pay attention to your need, ability, and desire to take risk. So, hopefully, as time goes on, you acquire more assets, your need to take risk goes down. Now, maybe you're very wealthy, and your ability to take risk has actually gone up. Then you've got to figure out how those two things balance each other out.

But really, we're just talking about setting your asset allocation and how it's going to change over time. So I suggest when you put together a written investing plan that you actually decide in advance how your asset allocation is going to change over time.

You might decide, well, I'm going to do it all at once when I turn 55, planning to retire at 60. I'm going to go from 80/20 to 60/40 at age 55, five years in advance. That's the only change I'm going to make. I'm going to stick with that throughout retirement.

You can make it very simple, or you can do something like the target retirement funds are doing and become 1% less aggressive every year. It's up to you how you design your glide path, but give some thought to how your asset allocation is going to change as you move toward and throughout retirement.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.