401(k)s, IRAs, 403(b)s, and Other Retirement Account Questions

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 411.

Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

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All right, we're back from the conference. This is the first podcast we're recording since we got back. I literally just came home two days ago. And while you won't hear this till like three weeks after the conference is over, we just got home. And the conference is awesome every year. It's so nice to meet everybody in person.

At this point, our staff is great. I think we only had two people, one of which was our intern, one of my nieces that's going through college with the assistance of the cousin 529s we put together. But she is actually majoring in putting on events like our conference. I even brought her up on stage and she did a little part about the 529 for the conference attendees. That was one person. Then we had one of the partners of one of our employees that came. And other than that, it was the same staff we had the year before.

So people really have the drill down. They're very good at running this conference. It's a very well-run conference. And the beautiful thing about them all being so good at it is it reduces how much time I have to do things just running the conference. I'm not building the pallets anymore. I'm not unloading the pallets. I'm not doing the swag bags. All I do is I give a couple of presentations, do a panel and a few interviews on stage with the keynote speakers. And I talk to you. I literally spent four days talking to White Coat Investors almost all the time.

Is that a little exhausting? I guess a little bit, but it's awesome. After the premium dinner, we sat around the pool until they took the lights away. The hotel staff was coming to me going, “You guys can stay if you want, but we got to take the lights in.” And so, it was awesome. We were up to, I don't know what hour of the night, just talking finance and life in general with White Coat Investors. So it was a lot of fun.

Yes, I got to play a little bit of pickleball. I almost won the 5K fun run this year, by the way. It's obviously not a race, but don't tell that to the three or four people in the front. We're definitely racing. And I came close. I did not win, but I came very close. And I actually got to try to sprint for the win at the end, which I was feeling pretty good about considering I've spent the last six months trying to get into shape.

I did get to unwind afterward. We stayed for a day or two, even almost two days afterward at the resort property, did endless laps around the lazy river, spent some time on the flow rider, which is not the same, by the way, as surfing behind a boat. If you have ever gotten on a flow rider, it's a little bit different, but it was still a lot of fun.

We loved meeting so many of you that came to the conference. It is the most people we've ever had show up to the conference in person and we expect that to continue to grow in coming years. Some of you have been to every conference and it's pretty awesome. I see people that have been there for three, four or five conferences before and just get to catch up on what's happened in the last year.

Obviously, I had a pretty eventful year and hopefully for most people this year was not quite as eventful as mine, but some of the people were. We had one couple that we highlighted who had left the conference the prior year, still owed $94,000 on their student loan burden and paid it off the day the conference started. And so, they were celebrating at the conference.

A couple other people had just reached milestones as well. I think I could have recorded 25 Milestones to Millionaire episodes in the hallway, just chatting with people. But it was a pretty awesome experience and awesome to meet you guys all in person.

Thanks for coming. And I want to say a special thank you to the young lady who's been forced to listen to my voice for the last year and now has a face at least to put with a voice. It was great to meet you in person and shake your hand and take a picture with you.

I BONDS

All right, let's do a correction. Somebody sent this in and it's true and it's a good clarification. We talked a little bit about I bonds and how the interest works before and they emailed in to let me know that Treasury Direct reports updated interest on the first of the month. It doesn't show any interest for the first three months. It doesn't add any interest because you would lose that three months interest if you withdraw. But on the fourth month, it'll show one month of interest. And after five years, you get a three-month interest jump.

They noted that Empower doesn't cooperate well with Treasury Direct and doesn't refresh automatically like most financial accounts. It requires a forced refresh or you enter the Treasury Direct two-factor authentication code that gets emailed to you. If Empower is still showing you only have $10,000 in your I bonds, it's because the caller entered it once and never forced it to refresh. Thank you for that very complicated but very helpful clarification.

Let's talk for a few minutes before we get into your questions about some of the stuff I've been thinking about. I don't know if these are pet peeves or things that annoy me. They're just things I've been thinking about a lot lately and maybe arguing with people about online and in person about lately. So I'm going to run through a few of those.

I wrote a blog post about them this morning. It won't run for months. And the truth is lots of you that listen to the podcast don't read the blog and vice versa anyway. So I'm going to go through some of those today.

The first one is hyper-conservative withdrawal rates. If you spend a lot of time on financial forums, you start running into people that are like, “Oh, 4% isn't safe. In fact, 3% might not even be safe. I'm withdrawing 1.75% of my portfolio a year.” And the truth is a lot of this gets pretty nutty quite truthfully.

Studies using historical data are pretty darn clear that spending about 4% of your portfolio adjusted upward for inflation each year was highly likely to result in the portfolio surviving at least 30 years. In fact, on average in the past, after 30 years, the portfolio was 2.7 times the size of the original portfolio. Obviously the future is not necessarily the past and anxious people can be found dialing that 4% number down to 3.5%, 3% or even lower. The lowest I've seen is 0.8% somebody was advocating for as a withdrawal rate, which is just nutty.

Part of it comes down to you fight over what safe means. Well, the truth is 4% is safe, 3% to 3.5% is pretty much bulletproof. Now I'm seeing arguments out there, people saying, “Oh, well, I didn't run out of money in this scenario, but the drawdown was quite a bit. It was too much drawdown and that would have made me anxious.”

Well, it's your money, do what you want with it. If you decide it's just too much stress to spend any more than 2.5%, you probably ought to put a whole bunch of your nest egg into very sure things. Things like single premium immediate annuities, buying a pension from an insurance company, a TIPS ladder, and definitely you should delay social security to age 70, at least for the high earner. And you probably ought to let your heirs know they've almost surely got a big fat inheritance coming their way.

The second thing is a lot of people these days have kind of under-diversified portfolios. They're worried about tracking error. They're like, “Oh, the S&P 500 made 25% in 2023 and 25% more in 2024. I just want to invest everything in the S&P 500.” They don't want the other 3,500 stocks in the US, much less international stocks or bonds or small value stocks or real estate.

Nobody seems to remember 2000 to 2010 when the S&P 500 earned about 0% per year for 10 years. Trees don't grow to the sky. The pendulum's going to swing back at some point. Why stop at just investing in the S&P 500? Put it all in the S&P 100 or a tech ETF or just buy the individual MAG7 stocks directly or put it all into Nvidia.

Now, obviously the performance of an S&P 500 fund really isn't all that different from a total stock market fund. I get that. The correlation between them is very high, but there's a reason that my favorite mutual fund and that of Jack Bogle as well is the total stock market fund.

OVER FUNDED 529s

Okay, the next soapbox I want to get on is about massive 529s. And I say this as someone who's almost surely sitting on overfunded 529s that are barely into the six-figure range.

529s are a tax break for the wealthy, but some people really go to extremes. All of a sudden, they think they need enough money in there that at the time junior graduates from high school, there's enough in there to go to the most expensive college in the country, all paid for from the 529, plus dental school. And maybe throw in some private K-12 as well. So they start getting these 529s that are half a million dollars or $800,000 despite the fact that they received scholarships, they worked during school, and they have a high income now, which they could help with, but somehow they think they have to have everything sitting in cash on the day their kid turns 18. Or they think they have to max out a 529, which you really can't do anyway. That's more than a billion dollars if you want to max out the amount of money that can be in 529s.

It's funny, when I talk to people about this, I'm like, “Oh, what did your parents give you?” And they tell me nothing. And I'm like, “Okay, you did okay, just by getting no help from your parents.” But you think your kid needs $100,000 in a 529, or they're going to fail in life.

Guess what? Most of your kids are not going to attend the most expensive college in the country. Most of them aren't going to dental school. Most of them are going to get some sort of a scholarship. They're smart like you were. And you probably have a better use of your money than a super duper hyper funded 529.

College costs what you're willing to pay. Paying 10 times as much does not result in an education 10 times as good. Most of the time, it just results in an education that's different. And you better value that difference highly, if you're going to spend that much money on education. But even if you do decide to spend a lot of money on education, it doesn't all have to be saved up in advance in the 529. Your kid's probably going to get some scholarships, they can do a little bit of work, you can cash flow some of it and heaven forbid, if they go to dental school, and they have to have a little bit of a student loan.

STOCKS VS. REAL ESTATE

Okay, next topic, stocks suck. At least if you talk to some real estate investors, they think stocks are terrible. It's like put it all on red in the casino. They're just paper assets, or they're super volatile. Well, I'm shocked to learn there's some real estate investors out there that don't own stocks at all. It's super easy, super convenient, they're very liquid, and practically free now to own a diversified portfolio of the most profitable corporations in the history of the world.

I don't care how much you love real estate, put 20% of your serious money into stock index funds, and it's almost surely going to improve your portfolio.

On the other side, a lot of people who invest in traditional investments, mutual fund or index fund investors seem to think that real estate just sucks. It's impossible to own real estate without having to plunge toilets at 03:00 AM. Nobody's ever become financially independent primarily via real estate. All leverage is incredibly risky, and the only people who were ever successful were just lucky anyway. These people can talk at length about mutual fund correlations and withdrawal rate studies, but couldn't tell a cap rate from a triple net lease.

Yes, real estate is optional. You don't have to have it, but I don't see any reason to avoid it like the plague. Solid long-term returns, low correlation with stocks and bonds. What's not to like? Sometimes people are like, “Oh, I own real estate. I own the total stock market fund, or I own the S&P 500.” Well, did you realize that there's twice as much NVIDIA in the S&P 500 index fund as there is real estate? Right. It's not very much real estate, nowhere near the amount of real estate in the country.

If you want to have anywhere near the market amount of real estate, you're going to have to have something beyond what's just in the publicly traded markets. The idea that your home is a real estate investment rather than a consumption item is another crazy idea as well.

Stocks are good. Real estate is good. How much of each you want to use is completely up to you, but the idea that either of them is a bad investment is probably a little bit ridiculous.

SAVINGS RATE MATTERS

Another soapbox worth getting on is that minutiae matters. Minutiae doesn't matter. Here's what matters. You want to get rich? Here's the secret. Everybody listen up. All you kids in the car, your parents are making you listen to this. Here's the secret to getting rich. Make a whole bunch of money. So your income matters. Save a big chunk of it. That's your savings rate. That really does matter. Choose some sort of reasonably risky portfolios. Don't stick it all in gold. Don't stick it all in CDs, but don't put it all in Bitcoin either.

Reasonably risky, diversified portfolio, and then stick with it. As you stick with that for 5, 10, 15, 20, 30 years, whatever, you will become very wealthy, wealthy beyond your wildest dreams. Everything else, though, is icing on the cake at best. At worst, it's a giant distraction.

What's this minutiae I'm talking about? I'm talking about credit card hacking, travel hacking, frequent or complex rebalancing of your portfolio, chasing brokerage transfer bonuses, trying to get your expense ratio down even more when it's only seven basis points, adding another three asset classes to a perfectly adequate portfolio, buying the dips, all those sorts of minutiae kind of things that get talked about on internet investing forums don't matter very much. What matters is how much you make, how much of it you save, that you're investing in some reasonable way, and that you stick with the plan.

Another thing I see out there is people seem to think that you have to do Roth conversions. It should almost be automatic, especially after you retire and before you start taking Social Security. Well, that can be a good move for lots of people, but at a minimum – at a minimum – take a few moments to think about and at least guess who's going to be spending that money and what tax bracket they're likely to be in when they do so. If you're my age or younger, you've probably had Roth accounts accessible to you your entire career.

One of the greatest mistakes out there is making Roth contributions or doing Roth conversions while you're in a high tax bracket and then having money end up in the hands of a charity or an heir in a low tax bracket. Even if you expect to spend the money yourself, there's a very good chance, if you're like most people, that you're going to be able to withdraw at a substantially lower marginal tax rate than your rate at the time when you made the initial contribution.

People say, “Pay taxes on the seed, not the harvest.” That's terrible advice. It's not about the amount of tax you pay, it's about the tax rates. That's how you decide whether you should be doing Roth or traditional contributions. That's how you decide if you should be making Roth conversions.

But particularly for those of us that are probably not going to be spending most of the money we have, you'd be thinking about who is going to spend it, what tax bracket are they going to be? For example, we have substantial tax deferred accounts. We're not converting any of them because they're all going to charity and that charity's tax bracket is 0%. It'd be stupid to do a Roth conversion on money you're leaving to charity anyway.

Here's another dumb thing. Buying accredited investor investments when you're not really an accredited investor. What is an accredited investor? Legally is somebody who has at least $1 million in investable assets or at least $200,000 in income each of the last two years. That's almost all White Coat Investors, at least eventually.

But a real accredited investor has the following two attributes. One, they can evaluate the merits of a private investment without the assistance of an advisor, accountant, or an attorney. And two, they can afford to lose their entire investment without it affecting their financial life in any meaningful way. That's a much smaller subset of White Coat Investors and many people will never get into that category. And that's okay because all the investments that require you to be an accredited investor are optional anyway.

There's plenty of bad deals out there among private investments and there's certainly far more scammers and fraudsters in that space than there are in the highly regulated public markets. If you can't afford to build a diversified portfolio of investments with $100,000 minimums, or you have a strong preference for simplicity in your portfolio, or you'd be devastated to see an investment go to zero, just stick with index funds or at least buy your rental properties directly.

If you invest in the private world long enough, eventually something you buy is going to go to zero, no matter how much due diligence you do. All that said, a lot of people consider their private investments to be their best performing investments. That might be a real estate fund, it might be an ambulatory surgical center, dialysis center, or whatever.

Each of these investments are unique and have to be evaluated on their own merits. I think they're a worthy addition to the portfolios of people as they're building wealth and getting to substantial sums, certainly seven figure kind of sums, but they're not for everybody at every stage of their career.

Okay, another soapbox is the ridiculous fear of required minimum distributions or RMDs. People are paranoid about these things, which is bizarre to me. If you had $600,000 in taxable income as a 50-year-old doctor, you'd be rejoicing, but heaven forbid you have $600,000 in taxable income as a retiree. That's somehow a problem.

It's not a problem to have huge tax-deferred accounts, not a bad problem anyway, it's a great problem to have. What's really bad is when people start doing dumb things in order to avoid having this excellent problem to have, such as pulling money out of your retirement accounts early, or not putting money in them in the first place, or deliberately trying to have low returns, or even losing money in a retirement account, or again, as I mentioned earlier, doing Roth conversions at very high tax rates, and that money is likely to be withdrawn at lower rates.

In fact, far more retirees than do should spend their RMDs with zero guilt. If you really don't need them or want them, consider giving them to charity. That's called a qualified charitable distribution, and if you're 72 plus, that is the best way to give to charity. You can give up to $108,000 per year via a QCD.

But an RMD doesn't have to be spent. All an RMD is, is the IRS telling you, all right, you've maxed out the benefits of investing in a tax-deferred account. You now have to give the IRS their chunk, and just hopefully a smaller chunk, you get to keep some of their portion due to that arbitrage between tax rates at contribution and withdrawal, and you have to reinvest your portion in your taxable account. Heaven forbid.

That's all an RMD is. You take the money out of the IRA, you pay the taxes on it, reinvest it in taxable, and if you do that, and you're leaving it to your heirs anyway because you don't need the money, there's not going to be all that much loss as long as you invest it tax efficiently between the day you take the RMD at age 80 or 85 or whatever, and the day your heirs get a step up in basis on those assets anyway.

Okay, some other dumb things I still see people doing out there, picking stocks. I'm amazed that people are out there picking stocks. Look, think about this for a minute. If you're sufficiently talented that you can pick stocks well enough to beat an index fund when adjusted for risk and the value of your time, you shouldn't just be managing your own money. You should literally be managing billions and charging very high fees to do so.

Okay. Well, maybe you're just doing it because it's fun. At least calculate how much your fun is likely to cost you. Is that fun, to lose that much money, or would you rather spend those millions on an around-the-world cruise this summer with your grandkids, or a NetJet subscription, or a home renovation?

Once compound interest does its thing with your likely lower returns from trying to pick your own stocks, those are the kinds of expenses that are equivalent to your stock-picking hobby.

Market timing is just as dumb as it's ever been. We all think we should be able to time the market, or that somebody should be able to tell us how to time the market. Well, if you think you can predict the future, start keeping a journal of your predictions. Go back and look at them. Look at them in three months, look at them in three years, see how you did. And if you're like most people, you're going to convince yourself pretty quickly that you really shouldn't invest your serious money in a way that requires you to be able to accurately predict the future. It's really hard to do.

Likewise, if you're still using actively managed mutual funds, what are you doing? I hope you're locked into those with really high capital gains or something, and that's why you still have them.

SPIVA, the S&P, comes out with a report every six months. And the latest one came out at the end of 2024. It's just as damning as all the other ones before it. And those numbers are before tax and the cost of advice. Just going down through the latest report over 20 years, 94% of US stock funds underperformed the index. Among large caps, it was 92%. Among mid-caps, it was 91%. Small caps, 91%. All multi-cap funds, 93%.

You got a one out of 10, one out of 20 chance of picking the winner. Is that really the bet you should be making? Just buy the index fund. It's way less work. Your expenses are lower. And all those numbers are before tax anyway. Once you apply taxes, if you're investing in a taxable account, the percentages get even worse.

Another problem out there is people that just have a huge allocation to a speculative investment. And what do I mean by speculative? I mean it doesn't produce earnings, dividends, interest, rents, or any other stream of income. No financial money coming from it in any way, shape, or form.

So what are we talking about? We're talking about things like precious metals, talking about Beanie Babies. We're talking about empty land, and cryptocurrencies, and art, and NFTs. I sometimes get in arguments with people about Bitcoin, especially. It went up like 100% last year, so lots of people talking about it these days, or some other investment.

And then I find out at the end of a long, exhaustive argument that they only have 1% of their portfolio in it anyway. Fine. If you want to put 1% or even 5%, I talk some people into going, if you're going to bet on this, at least make a reasonable bet. If you're keeping it to a single-digit percentage of your portfolio, I don't have any problem with that whatsoever.

If you want 4% in gold and 4% in Bitcoin, knock yourself out. But if you're putting 50% of your portfolio into Bitcoin and the other 50% into Nvidia, you're really betting the farm. That's probably a mistake. Don't take risks you don't need to take in order to make money you don't need so you can buy things you don't want to impress people you don't even like.

Okay. Enough ranting. Let's get to your questions. This one comes from Paul.

RIGHTS OF SURVIVORSHIP TAXABLE ACCOUNT

Paul:
Hi, Dr. Dahle. My name is Paul. I am currently in my last year of medical school, and I have a question about taxable accounts. I got interested in investing when I was in high school and my parents opened an investment account for me with Edward Jones. Now it is a joint with Rights of Survivorship Account with my spouse and has about $130,000 in it. What should I do with that taxable account? How can I maximize its usage? I would love to get it into a tax protected account somehow, but not sure where to start. Thanks for all your help.

Dr. Jim Dahle:
Great question, Paul. First of all, this is a wonderful gift. Be sure to thank your parents profusely for this. $130,000 would have been huge for me in my 20s. That would have made a dramatic difference in my life and how I lived it. It's a ton of money at your stage of life. Some people with regular jobs, they come out of college and they don't get to that level of wealth until they're 30. It's a lot of money.

What should you do with it? Well, first of all, I don't love hearing that it's an Edward Jones. That makes me worry, not just about what your money is actually invested in, but that's probably where your parents are invested as well. And that is not usually an awesome low fee index fund kind of place to invest. It's often a lot of actively managed funds, substantial fees and commissions, loaded mutual funds, that sort of thing kind of place to invest.

The best financial planners I know do not work at Edward Jones and would not work at Edward Jones. So, it may be worth talking to your parents as you become more financially literate and helping them.

But what should you do? Well, you can move everything in kind to wherever you actually want to invest your money, whether that's Vanguard or Fidelity or Schwab or whatever. Places with low commissions and low cost index funds and places where you're not having someone constantly trying to sell you stuff. You're probably going to want to move the money in kind to one of those places.

Then you've got to figure out what your investing plan is. You need a written investing plan. Now, I tell lots of people they don't maybe need this until they're a resident or even toward the end of residency, but you've already got money. So you need one now, even as a medical student, what you're going to invest in, what your asset allocation is, what your goals are.

And then once you have your asset allocation, you can decide what investments to use. And maybe if you're really lucky, you can keep some of those investments you have, but chances are good you're not that lucky, that these are not awesome investments you want to hold long-term.

But here's the good news. You're in med school. Your tax bracket is probably very, very low. You're probably in the 0% capital gains bracket. So if you act quickly, before the end of the year, you can probably do a bunch, even if you're realizing gains, you can rearrange this whole portfolio for very little tax costs. You can probably get out of that stuff you don't want to own long-term without having to pay much in tax on it.

I would recommend, yeah, getting educated and looking at it this year, before the end of the year and making all the changes you need to in this account. Even if they are good investments, you might be able to do a little bit of tax gain harvesting. Be a little bit careful. As you get toward the end of med school, if you have federal student loans and you think you're going to want some benefits, the income driven repayment plans, or you want to go for public service loan forgiveness, you kind of want a really low income that last year of med school, meaning the end of your third year, beginning of your fourth year.

That's what you have to show when you go to certify your student loans. Be a little bit careful about that. It may not matter to you. If you've gotten $130,000 from your parents, hopefully they paid for med school too, and you don't have any student loans, but that's something to be aware of.

Now you mentioned trying to get some of it into retirement accounts, and you can do some of this as well if you have earned income, you or your spouse has earned income. You can live on the taxable assets while deferring or making Roth contributions equal to as much as you're making in earned income.

As a resident, now you're maxing out your Roth via the backdoor if necessary and your spouse's retirement accounts and anything the residency program is offering you as a retirement account, and you're living on the taxable account. In a way you're moving taxable assets into retirement accounts, and that's a smart thing to do as well.

Again, most med students don't have earned income, so you can't really move money into a retirement account until there's some earned income to justify that contribution.

I hope that's helpful. Congratulations to you, Paul, on your success and your family for giving you such a great gift. Please help them. Help them get a real financial advisor if they need them, and at least making sure they're in low-cost diversified investments.

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Okay, next question comes from Joy off the Speak Pipe. By the way, if you want to leave a Speak Pipe question, just go to whitecoatinvestor.com/speakpipe. We'd love to answer it on the podcast.

REBALANCING YOUR PORTFOLIO

Joy:
Hi, Dr. Dahle. Thanks for everything you do. I've been a longtime listener, but this is my first time asking a question. I'm rebalancing our portfolio through purchase of additional funds, and do this about once a year when we do backdoor Roth IRAs and a brokerage contribution. Our 401(k)s are on auto invest. Some of our accounts are traditional and others are Roth.

For purposes of rebalancing, do you recommend taking into account the relative higher value of the Roth money? And if so, how would you go about doing that? I'm thinking about multiplying the Roth values by 1.3 when I figure out the percentage of those investments relative to the overall portfolio. I chose 30% arbitrarily thinking about general tax brackets. This could be way off base. I would appreciate your thoughts.

Dr. Jim Dahle:
Okay, awesome question. This is a great question. I think this is the first time this has been asked on the Speak Pipe. This is true. If you are going to do everything technically correctly, you should adjust all of your accounts for the taxes, and you should look at them on an after-tax basis.

That seems relatively simple for Roth and tax-deferred accounts, and your method seems reasonable for that. But it gets a lot more complicated for a taxable account. Because everyone has a different amount of basis on each investment, and your capital gains tax bracket can change as time goes on. And it's actually practically speaking really hard to do.

And so most people don't do it. Even if they know it's the technically correct thing to do, they don't do it. I don't do it. I look at it all on a pre-tax basis. I count Roth money exactly the same as tax-deferred money when I'm rebalancing my portfolio, when I'm looking at percentages in my portfolio. Is that wrong? Yes, it's wrong. It's technically wrong to do, but the other way is just so complicated, I don't know that it's worth it.

The only place this really comes into play in my experience is people that think it's somehow smarter to put the highest returning assets into the Roth account because the Roth account is all yours.

Well, the truth is if you adjusted it all for taxes, it wouldn't matter whether you put those assets in a tax-deferred account or the Roth account. But since we don't do that, then yes, there is an advantage there. It's not a free lunch though. You're really just taking on more risk because your after-tax asset allocation is more aggressive if you put the high expected return investments into the Roth account. So, no free lunch there.

Your method seems reasonable, but I don't know that I would go to that much trouble, Joy. I don't. I love messing around with spreadsheets. I've got a long complicated investment spreadsheet that includes every distribution and every contribution to not only our retirement accounts, but our taxable accounts for the last 20 years. And I don't do this. That should tell you something. That it might not be worth the pain of doing. Just acknowledge that, yes, Roth money is worth more than tax-deferred money. Keep that in mind as you build your portfolio.

But I don't know that I'd try to do what you're trying to do. If you decide you want to do it anyway, yeah, I think 0.3 is enough of an adjustment. It seems reasonable. But is that going to be the exact amount for you? No, it's not going to be the exact amount for you. It's going to be something different from that, but probably in that neighborhood.

QUOTE OF THE DAY

Our quote of the day today comes from Larry Swedroe. He said, “Anyone who says active managers can win should wear a t-shirt that says, I can't add.” I love it.

Okay, next question is about a closed solo practice.

BACKDOOR ROTH OR CONTROL YOUR OWN INVESTMENTS

Speaker:
Dr. Dahle, thanks for all your work on our behalf. I closed my solo practice in 2020, and since I was no longer in business, I rolled my 401(k) money into an IRA account, where most of the money is at Vanguard index funds, and some is invested through an SDIRA account into real estate debt funds that are currently illiquid.

In my new position, I'm in a group and have a 401(k) account. The 401(k) administrator will allow me to roll my Vanguard funds into my new 401(k). However, I do prefer to manage my retirement account myself if possible.

My goals are being able to do a backdoor Roth yearly, as well as getting better asset protection with a 401(k) versus an IRA. Would I violate the pro rata rule if I do not roll over the SDIRA account money? Should I try to start some business that can land me at 1099 and roll the IRA into that 401(k)? I'm currently in Pennsylvania, but moving to New Jersey. Your thoughts would be welcome. Thank you in advance.

Dr. Jim Dahle:
Well, the first thing I think about when I hear about people moving to New Jersey is how much New Jersey hates the residents, between the taxes and things like HSAs not being a tax protected account really for state income taxes in New Jersey and California. But I don't know that I'm going to talk you out of moving to New Jersey. Folks in New Jersey certainly need good docs. Thanks for going there.

All right, here's the deal. Your goals are not congruent. You cannot have everything you want. You cannot invest in these private investments and do a backdoor Roth every year and have complete control over your investments like you can in an IRA. You can't do it all. So you've got to choose what you want.

Yes, if you opened a solo 401(k) and got a customized one that allowed you to have those real estate debt funds in the plan, you could pull this off. You got to start a business to do that, obviously.

Now, I guess you could do that with some relatively minimal business. Some people have done it with nothing more than doing a bunch of surveys. If you go to whitecoatinvestor.com/medicalsurveys, you can see some of the people we have that offer these sorts of surveys. And I guess you could open a business that takes surveys, a sole proprietorship, but that's enough if you get an EIN to open a solo 401(k) and you could roll all the money in there. That would allow you to do everything you're wanting to do.

You get all the IRA money into a solo 401(k) where you can control it. And if you design it right, you can do things like these private real estate debt funds in there. And you can still do a backdoor Roth IRA each year.

The alternative is just leave it the way it is. Use your new 401(k), leave your money in the IRA, and just don't do a backdoor Roth every year. You can still do your spousal backdoor Roth every year. Because these are only your IRAs we're talking about. And just don't do your own. Just invest that $7,000 or $8,000 a year in taxable. It's not the end of the world to not do a backdoor Roth IRA every year.

Those are kind of your two options. I don't know how much hassle I would go through just to be able to do a backdoor Roth IRA each year. This is something for people to think about. When you leave a practice, close your own practice or go somewhere else, you don't always have to take that money out of the 401(k) immediately. You can leave it there until you have another 401(k) available to you. And you can just roll the money into the new 401(k) and not have a pro rata issue with the backdoor Roth IRA process.

But you can't have money in an IRA, any IRA, whether self-directed or not, at the end of the year in which you do a Roth conversion or that conversion will be prorated. That's just the way the Roth conversions are reported on form 8606. Take a look at line six on that form and you'll see what I mean. Those are kind of your options. Good luck with your decision.

Let's take the next question from Ben.

CAN A 403(b) BE ROLLED INTO A 457(b)

Ben:
Hi, this is Ben from Lakeville, Minnesota. On January 17th, 2023, your blog published an article called, Can a 403(b) be rolled over into a 457(b)? It links to a handy IRS table showing which types of retirement accounts can be rolled over into a governmental 457(b). It notes 403(b)s, unlike 401(k)s, can be rolled over into a governmental 457(b). But the governmental 457(b) plan has to have two sub-accounts, one to differentiate between your direct 457(b) contributions and another for your 403(b) rollover funds.

While you're working for an employer that offers a governmental 457(b), you can't take those funds out penalty free. Once you separate from the employer, you can access those funds penalty free before age 59 and a half, unlike an IRA, 401(k) or 403(b).

I have a few thousand bucks sitting in an old governmental 457(b) from a previous employer. I called recently to ask their phone rep whether I could roll over 403(b) dollars into the plan, then take distributions of those particular funds from my governmental 457(b) account penalty free. The phone rep said if that were true, she'd be seeing a lot more people doing that, considering it'd be an excellent early retirement loophole.

Can you answer once and for all whether 403(b) rollover funds can be distributed from a governmental 457(b) plan, penalty free, after separating from the employer?

Dr. Jim Dahle:
Okay, this might be one of the more complicated questions we've had asked on the podcast in a while. I had to listen to it a couple of times. I had to go find the post you were referring to, which by the way ran on January 17th, 2023. It's more than two years old at this point. It was written by a guest contributor, but indeed it does link to the chart you described, which is found at IRS.gov, and I have no reason to not believe that chart is true.

So, can you roll over money into a governmental 457(b) from a 403(b)? Yes, you can. Can you access money from a 457(b) before age 59 and a half, penalty free? Yes, you can. As long as you're separated from the employer, you can take that money out, as long as the plan allows it.

This 457(b) you're trying to roll money into has to allow you to roll money into it, and it has to allow you that distribution option that you're looking for. It may or may not, and based on what that person on the phone's saying, sounds like they may not allow you to, even if the IRS allows it. So, yes.

Would a few people do that if they knew about it? Yes. Do a lot of people know about this? No, not very many people know about it at all. In fact, there's a whole bunch of people listening to this Speak Pipe questioning their car going, what is that guy talking about? We are way out in the weeds on retirement accounts here at this point. So, most people don't know this is an option, but it would be an option for someone who wants to retire early.

457(b) money is great money for an early retiree. Not only do you want to spend 457(b) money as early as you can, particularly if it's a non-governmental plan, because it's not yet your money, so it's technically subject to the employer's creditors, but it doesn't have that pesky 10% penalty that your IRA does. Nor does it have the 10% penalty your 401(k) has if you try to access it before separation, before age 55. 59 and a half for IRAs, 55 for 401(k)s plus separation, and 457(b)s, there is not an age limit on that. 457(b)s get to decide their own distribution options, and it's got to offer you a distribution option that you are actually happy with.

But one nice thing about governmental 457(b)s is one of the distribution options is always just to roll it over into an IRA, which is what lots of people do with governmental 457(b)s. Obviously, that brings the age 59 and a half rule into play, and it sounds like that's what you're trying to avoid in your situation.

I hope that's helpful. The IRS says you can do this. If you go to irs.gov, you look at that table, same table you're looking at, I looked at, and yes, it says separate accounts. So no reason you couldn't do that. Go for it.

All right, everybody, as we dive into the weeds here, you realize that sometimes finance can feel about as complicated as medicine, but what you do out there is complicated. It's hard, and it gets done 24-7, 365. So thanks for those of you out there who are doing that.

The next question comes from Joe. I guess we're going to get into politics here based on this question.

SHOULD I CHANGE MY ASSET ALLOCATION DUE TO POLITICAL INSTABILITY

Joe:
Hey, Dr. Dahle, we've been listening to you for a long time. Thanks for all the info. A topic that I don't think I've heard you talk about, well, especially now that the political situation in the U.S. is up in the air, we don't know kind of how stable a government we're going to have.

What's the best practice in terms of diversifying where your net worth is in terms of government access? Should we keep some of our net worth in foreign exchanges, or should we own property internationally, or should we have an international bank account? How do you mitigate risks of political instability with the country you live in? It's crazy that we have to ask about this, but I think it's probably a good time to start thinking about this type of thing. Thank you.

Dr. Jim Dahle:
Okay. The reason I don't talk about this sort of stuff on the podcast very often is because I don't want to tick off half of you. Because no matter what I say, half of you are going to be mad about it. I have a pretty good idea, Joe, what political candidate you voted for in the last election just from the question you're asking. Because members of one political party are thrilled with the current political situation in our country, and members of the other political party are crying in their tea and they think this is the worst thing that could ever possibly happen.

You'll notice the opposite thing happened four years ago. Everybody in one party was terribly upset. Everybody in the other party was thrilled. Well, this happens every four years. Welcome to America.

Now, has it been particularly interesting watching what's been going on in Washington the last few weeks? Absolutely, it has. It makes for absolutely fascinating TV. What am I doing with my portfolio in the meantime? Absolutely nothing.

A few weeks ago, I published a blog post. It ran on February 4th. I wrote it, I think, the day before because our content director said, “Dude, you got to write something about this.” It was called Staying the Course Despite the Trump Tariffs. And he said, “Probably all you're going to say in this post is stay the course.” And I'm like, “Yes, I am. I'm going to stay the course.”

Because here's the deal. I don't know exactly what's going to happen. My crystal ball is cloudy. Now, I have built a portfolio that I think hedges my risks about as best as I can. And there's lots of risks in the world. Some of the big ones, if you ask William Bernstein, are hyperinflation, deflation or depression, devastation, and confiscation. And maybe you feel one or more of those risks is higher now than it was a few months ago when there was a different administration in the White House.

But you ought to be thinking about those risks all the time when you're designing a portfolio. For example, the most common one is inflation. I take inflation very seriously when I build my portfolio. A big chunk of it's in stocks, a big chunk of it's in real estate, half my bonds are in inflation indexed bonds. I keep the duration short on the rest of them. Because inflation is a real risk.

Deflation is not as likely, confiscation and devastation are even less likely, but they are possible. So, no, I don't wait until one party wins the White House and then run out and decide to move all my money to Switzerland, or invest in a new property in Costa Rica, or put it all in Bitcoin or anything crazy like that. You ought to have a reasonably diversified plan beforehand. And if you do have a reasonable plan, stick with it, stick with it. And 5, 10, 20 years from now, you'll be glad you did. This too shall pass.

I think that's about all I can say without making half of you mad at me and stop listening to the podcast. I'm not here to promote one particular political point of view. I do hope that of all the craziness that seems to be happening in Washington in the last couple of months that some good things come out of it, but we'll see. We'll know in a few months or a few years, but don't do anything crazy in the meantime. Don't make some dramatic change in your student loan management plan. Don't realize a bunch of capital gains to change from one type of investment to another because you think this one's going to tank because of the change in policies in Washington.

The markets are very good and our economy is very good at withstanding whatever happens by whatever branch of government. And we tend to muddle through regardless. So, make sure your portfolio will muddle through regardless. I hope that's helpful.

The next question is about a private practice and a 401(k).

WHAT TO DO IF YOUR EMPLOYER FAILS NON DISCRIMINATION TESTING IN YOUR 401(k)

Rick:
Hello, Dr. Dahle. This is Rick from the Northeast. I've been enjoying your content material for the last few years and thank you very much for your expertise. I work for a private equity owned physician practice. We have a 401(k) provided by the company with about a $10,000 per year match. For the last two years, my employer's plan has failed the non-discrimination testing and they have refunded me a check for about $2,000 to $3,000 of my original contribution each year, as well as forfeited a portion of the employer match. I've had to file that refunded amount in the following year as income.

I heard you talk about non-discrimination testing in the past and I mentioned that in that scenario, your company has potentially added funds to the 401(k) accounts of your less compensated employees to pass the testing. Is there any requirement that our company needs to do the same? Are you just doing this because it is the right thing to do and not because it is required by the rules? Do you think we physicians have any recourse in this situation or have any advice on how we should handle it? We've grumbled about it to management but haven't gotten anywhere. Thanks again for your thoughts on this matter.

Dr. Jim Dahle:
Okay, let's talk about non-discrimination testing. The point of a 401(k) is to help your employees to save for retirement. That's the point. The point is not to make you rich as the owner, it's to help your employees to save for retirement. In order to have access to this great tax benefit, be able to defer taxes and have your money grow in a tax protected way and potentially take it out later at a lower tax rate.

In order to qualify for that, your plan has to pass non-discrimination testing and there's several different types of tests. It's very complicated. We're way out in the weeds if we're going to actually talk about how this testing is done. But it has to pass the testing. And basically you can't have the plan just benefit the owners and the highly compensated employees like physicians too much and not the regular folks using the 401(k).

What typically happens is the docs want to put all kinds of money in there. They want to put $70,000 a year in there and Joe Blow that works at the front desk, doesn't want to put any money in it. At the end of the year, the plan fails the non-discrimination testing because it's not helping Joe to save for his retirement. It's only helping the doc in the back to save for his retirement.

And so, the employer, which is often the doc, is faced with a question. The question is you can either contribute enough into the lower paid employees accounts that it then passes the discrimination testing or you can take your contributions out until it passes the testing. Those are your two options.

Now you are private equity owned apparently now and guess what? They don't care as much about Joe's retirement. They don't want to put extra money in there. And granted a doc that's got 48 people working in his or her practice might feel the same way. But if you only have a couple of employees you might be fine throwing another $3,000 or $4,000 in there in order for you to be able to put $70,000 into your 401(k). But if you had 20 employees and you put $5,000 a piece into there, now you're putting $100,000 into their accounts in order for you to be able to put $70,000 into your account.

Well, maybe that's not worth it. Maybe you ought to just invest in taxable instead. And so, that's why lots of docs with practices, lots of dentists out there, they decide not to offer any sort of retirement plan at their practice. There's no 401(k), there's no SEP IRA, there's no SIMPLE IRA. They just invest in taxable. Some get suckered into buying some sort of whole life insurance or something, but most of them just invest in taxable instead because it's just too much money. It's too expensive for the benefit they're trying to get.

So, no, you cannot force your employer to make those contributions to the low-paid employees instead of returning your contributions. That is well within their rights. They can legally do that and then of course you have to declare it on your taxes and you have to pay taxes on it because it's no longer in a tax-deferred account.

Kind of stinks that they don't have to pay you the match though. That feels pretty dirty. It seems like it'd be better if they just returned to you the contribution, but I'm sure they're legally allowed to do that. They're no dummies when they write these sorts of contracts. So they're probably perfectly within their legal rights to do that. Does it feel dirty? Yes, it does.

Now, what can you do about it? Well, here's what I would do about it if I were you. I would start running classes on saving for retirement for all the employees at the company and start encouraging all those low-paid employees to put money into their 401(k)s.

Point out the match. Tell them they're leaving part of their salary on the table. Show them compound interest charge and how much their money is going to grow to and point out how much they don't want to live on just social security in retirement because if they put more into the 401(k) and they get more of a match, well, guess what happens? You're allowed to put in more. And it'll still pass the non-discrimination testing.

That's the approach I would take. You can go bicker and moan to the employer and say, “Hey, why don't you just send me back my money rather than taking the match away?” I might do that too. But in reality, the problem here is the non-discrimination testing is not going to allow you to do something that the lower-paid employees are not doing.

So get them to do it with you. Go start teaching them financial literacy and you might be impressed what happens. At our company, people know about retirement accounts. They know about their benefits. And that helps it not be some crazy amount that we have to match into accounts that we have to pay as a penalty on the non-discrimination testing. But I guess if it got too ridiculously outrageous, we'd stop doing it and we'd tell the highly compensated employees, including Katie and I, that we just can't put as much in the 401(k) as we used to, or maybe we'd close the 401(k) altogether.

But for now, it seems to be working well with the group of employees we have, but most of them contribute quite a bit of money to their 401(k)s. They're all interested in retiring someday. None of them are going to be working here at the White Coat Investor when they're 75.

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All right, don't forget about that match week promotion. Through the 25th, if you book a consult with Student Loan Advice and complete the consult, you get a free copy of the Fire Your Financial Advisor resident course, now through the 25th.

Thank you for sending this episode to a friend that it might help. Thank you for leaving a five-star review and telling your friends about the podcast. A recent one came in saying, “My go-to financial podcast. I've been listening to this podcast since its inception. The more I listen, the more I learn and I'm inspired. I appreciate the diversity of invited guests and the positive message and celebrations of those who are interviewed on Milestones to Millionaire. Dr. Dahle and his staff are providing an invaluable service. Thank you for all you do.” Five stars. I appreciate that kind review.

All right, it was a long podcast today. I hope it was worth it. I guess I'm feeling very wordy after going to WCICON. I hope some of you that weren't able to make it this year are able to make it next year. If you didn't hear, it was announced that it's going to be in Las Vegas next year at the end of March. It'll go on sale in September-ish or so, but you'll want to book it. The last time we were in Las Vegas, we sold out and hopefully we do it again.

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

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 214 – Medical student finishes school with a positive net worth.

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Locumstory.com is where you should go to find out if locum tenants make sense for you and your career goals. What makes locumstory.com unique is that it's more of a peer-to-peer platform with real physicians sharing their experiences and stories, both the good and bad, about working locum tenants, hence the name Locumstory.

Locumstory.com is a self-service tool, which means you can poke through their content at your own pace with no pressure or obligation. So, that's it for this sponsor promotion, which is sponsored by a completely free-to-use sponsor, locumstory.com.

All right, welcome back to the podcast. This is the Milestones to Millionaire podcast, where we celebrate your financial successes and we use them to inspire others to do the same. You can come on this podcast. You apply at whitecoatinvestor.com/milestones.

All right, it's the end of match week. This drops, I'm recording it like in February, a month before, but this thing drops March 24th. And so, congratulations to all of you who just matched. That's wonderful, super happy for you. And my condolences to those who did not match. There is light at the end of the tunnel, I promise. I've got a blog post out there, what to do if you didn't match. You can go to whitecoatinvestor.com and search for that.

Lots of people go through this every year, and a big chunk of them just match the next year and everything works out with their career just as they'd hope. But there are other options, even if that doesn't work out.

But for those of you who have matched and need to figure out what you're going to do with your student loans, we have been running a promotion all week with studentloanadvice.com. We are giving away a free White Coat Investor course. This is our Fire Your Financial Advisor resident version.

We're giving it away for anybody that books a consult with Student Loan Advice between 3/17 and 3/25. So, that's through tomorrow, the day after this drops. Your consult doesn't have to occur during that time period, you just have to book it during that time period. And we'll give you this free White Coat Investor course, that's a $300 value. You get that after you meet with the folks at studentloanadvice.com.

And the truth is, residency match day, the 21st, was when medical students found out where they've been accepted to residency. And that's a common time to start thinking about what you should be doing with your student loans.

So, let a professional guide you through the best options to manage your loans. Our experienced staff have consulted with more than 2,300 borrowers on over $720 million in student loan debt. And you can potentially save hundreds to thousands of dollars with your custom student loan plan. The average client that's worked with Student Loan Advice has saved $160,000 on their student loan.

You can book that at studentloanadvice.com. You got to book it before tomorrow to get the special promotion though. And it's a free White Coat Investor Fire Your Financial Advisor resident course.

All right, we got a great interview today. Our interview today is with a medical student who I hope just matched a couple of days ago. I don't know, because we're recording this a month before match day, so there's a little bit of uncertainty there, but I'm sure he did just fine.

Stick around after the podcast. We're going to talk about a conversation I just had with my 20-year-old daughter about home buying that has a lot of applicability to all of you finishing med school this year, and even those of you already in residency. So let's talk a little bit about that.

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Alex. Alex, welcome to the podcast.

Alex:
Yeah, thank you so much, Dr. Dahle, it's a pleasure.

Dr. Jim Dahle:
It's wonderful to have you here. Let's introduce you a little bit to the audience. Tell us where you're at in life, about your family, which has had some recent changes, and what part of the country you're in.

Alex:
Yeah, I'm a fourth-year medical student. At the time of recording, I'm about three months out from graduation, living in the Midwest right now, and about 11 weeks ago, I had my first child. So, me and my wife are just very happy and hopefully getting enough sleep.

Dr. Jim Dahle:
Very cool. And tell us a little bit about your wife's career.

Alex:
Yeah, she works as an accountant. She's been doing that for about the last five or six years now.

Dr. Jim Dahle:
Okay, the whole time you were in school, she was working as an accountant?

Alex:
Yes, exactly.

Dr. Jim Dahle:
Okay, now share with us the milestone we're celebrating today.

Alex:
Yeah, this is a big one I've been working towards for a while. I am going to be projected right now to be graduating medical school with a positive net worth.

Dr. Jim Dahle:
Wow, positive net worth. Most medical students coming out of school have a negative net worth, minus $200,000, minus $300,000, minus $400,000. So, let's hear the story about how you have a positive net worth.

Alex:
My parents helped me a lot by helping to pay for my college. I also worked hard as an RA and got a good scholarship there. I didn't graduate college with any student loans. I worked for about three years after college and just lived in my parents' basement, saved up money before school. My wife did a similar thing. She was living in a small apartment and was saving up a lot of money too. At the time she was just my girlfriend and then we got married in medical school and we also came into a fairly sizable inheritance as well from a family member passing away. And then on top of that, we just made a pretty big intentional effort to save as much as we could in medical school.

Dr. Jim Dahle:
Okay, lots of things going for you. You've got a working spouse, you've gotten inheritance, you went crazy on the budgeting and becoming financially literate during school. So lots of things going your way. Let's talk a little bit of specifics, give us a sense for what this looked like. What's the cost of attendance at your school? What's tuition and fees cost there?

Alex:
Cost of attendance is about $80,000. Tuition is about $60,000 to $65,000 for every year. And my wife and I were taking out student loans, but also working and kind of living off of her income during that time.

Dr. Jim Dahle:
Okay, $60,000, $65,000, we're talking about $250,000 you had to come up with to cover this cost during the course of school. So, how big is the inheritance?

Alex:
The inheritance was about $150,000.

Dr. Jim Dahle:
Okay, that's a big chunk of that $250,000 to cover your tuition.

Alex:
Yeah, definitely.

Dr. Jim Dahle:
And you guys had some money saved up when you started school. How much did you have saved up and about how much did she have saved up when you got married?

Alex:
I had about $45,000. I was making, I think, something like $30,000 to $40,000 before school had started. And then my wife had something like $50,000 or $60,000 at that point. By the time that we got married between the inheritance and everything we had, it was probably close to that $180,000 to $200,000 range already.

Dr. Jim Dahle:
Okay, you had quite a bit of assets compared to most people starting med school. And then you had this benefit of her income. And I assume that's mostly what paid your living expenses.

Alex:
100%. Yeah.

Dr. Jim Dahle:
At least since you got married. What year were you in when you got married?

Alex:
Between first and second year.

Dr. Jim Dahle:
Okay, so most of med school, three of the four years anyway. Okay, very cool. Now this was all going great until you decided to have a kid, right? And then she's had some maternity leave. So, has that been paid maternity leave the last few months?

Alex:
Yeah, through her company, it's 100% been paid. We're extremely fortunate and grateful for that too.

Dr. Jim Dahle:
Okay, this is not a terribly uncommon path through medical school. It's not the most common path for sure, but it's not terribly uncommon to be married to another earner and to have some assets when you come into medical school.

If we look at the statistics published by the AAMC, about 27% of medical students graduate without any student loans at all. And so, people are doing this, people are getting through school between family help and their spouse helping and doing their own work, but everyone's got to chart their own path. So, tell us about your path and the decisions you guys made along the way and what you've done to become financially literate and figure this out.

Alex:
Yeah, I think it started, both of us growing up independent of each other kind of became a little bit more debt averse as opposed to anything else. And then in high school, I had the Financial Peace University from Dave Ramsey that guided me there for a number of years. And then as I was starting to apply for medical school, I found the White Coat Investor and I was like, “Oh, I'll worry about that stuff once I get into medical school.” And then when I finally opened up the acceptance letter, I was thinking, “Wait a minute, I'm going into how much debt to get this education?” That's when I really started diving into it more and really learning a lot more.

My wife and I just, again, wanted to make a very intentional effort that, “Yes, we're going to be taking out student loans, we're going to be going on this journey together and we want to set ourselves up by doing at least the big things the right way.” And then from there, just taking it one day at a time.

Dr. Jim Dahle:
Yeah, okay. So, how much do you have in student loans?

Alex:
In student loans, I just checked before the call, it's about $270,000.

Dr. Jim Dahle:
Okay, you got quite a bit in student loans. And those are all federal or what kind of loans are those?

Alex:
Yes, they're all federal.

Dr. Jim Dahle:
Okay, you're a Dave Ramsey fan and Dave Ramsey tells you not to borrow for your education. How'd you feel taking those loans out?

Alex:
It definitely hurt a little bit, but I don't know, learning a lot of different perspectives between the White Coat Investor, things like I will teach you to be rich. A couple of other sources showed me that it's not just that there's one way that there's completely debt aversion. There's a lot of different ways to get to where you want to go. And there's just so much good that you can do in this profession and a lot of wonderful things that you can do with the income that you'll eventually get. So, it made it worth it.

Dr. Jim Dahle:
Yeah. You had assets coming into school. She had assets coming into the marriage. This inheritance comes along. You didn't use any of that to pay tuition.

Alex:
Not yet, yeah.

Dr. Jim Dahle:
You chose to take out the student loans. Tell us about that decision.

Alex:
Yeah. When I'd first gotten into medical school, that was in 2021. That's when there was the student loan interest pause. And so, we were looking at the high yield savings account rates and we were like, “You know what? We could invest this money. There's a risk we might lose some of it. We could put it in the high yield savings and then it'll grow compared to having 0% loans.”

We decided to take out the loans, but then our money would just kind of continue to grow on the side. And so, we've had, in some ways, a little bit of analysis paralysis, but especially trying to do some family planning and having some moving for clinical years and having to move for residency, we figured having a little bit more money on hand would be better than just paying down the loans immediately. And so, even though interest is now back and it's accumulating, we've decided to hold onto it for a little bit longer before we pull the trigger on doing anything big with it.

Dr. Jim Dahle:
Yeah. Is all this money sitting in cash or have you invested any of it into longer term investments?

Alex:
At this point, it's in a high yield savings account for the majority of it. We do have some split between a little bit in brokerage and then some from her works 401(k) and then her Roth IRA, but the majority is in a high yield savings account because we're thinking, “You know what? We might pull the trigger on trying to take down as much of these student loans within the next year or two or for sure within the next three to four years.” And so, we wanted it to be a lot more available and a place where it might grow slowly, but it's not going to have the risk of us losing a sizable portion.

Dr. Jim Dahle:
It sounds like you are not considering public service loan forgiveness, is that true?

Alex:
Yes, that's the case. I'm going to be going into family medicine, which I know is technically a little bit lower earning, but I think with our debt aversion and kind of doing some of the math, we're like, “You know what? We can just pay this all off in one fell swoop and that might save us more money in the long term.” So we're going to go that route.

Dr. Jim Dahle:
Okay, you're expecting at some point in the next few years to write a check for $270,000 to Sallie Mae and just pay these off.

Alex:
Yeah, which is weird to think about, but we're getting there, yeah.

Dr. Jim Dahle:
Biggest check you've written in your life, I assume.

Alex:
By far, by at least two or three zeros at that point.

Dr. Jim Dahle:
Yeah. Well, that'll be exciting to do that. And it's interesting to think in this situation, what would I do? What would I do if I had $270,000 in loans and $270,000 in assets? What would I do? I certainly get the debt aversion. We paid off a mortgage that was 2.75% a few years ago. Now money market funds and high yield savings accounts weren't paying much when we did that.

I get the debt aversion, but I also see all these people out there getting free government money. Public service loan forgiveness, despite having substantial assets, getting $300,000 or $400,000 forgiven tax free. And now obviously they have to take a job that qualifies for that, but there are lots of jobs out there for many, many medical specialties, including family medicine that do qualify for public service loan forgiveness.

But you're just ruling that out completely. You just want to pay it off. Is that because of a philosophical position you have about receiving that sort of a benefit from the government?

Alex:
I think so, yeah. Maybe you could call it philosophical, but my wife and I, as we were talking about it again, we said, kind of like you said, there's a limited number of jobs where you can qualify for that. And we were like, “You know what? We just want to be rid of debt. We don't want to worry about it. We want to move on with our lives.” And I think as other people on this show have said too, it's really once you pay off that last student loan that you're really done with medical school. And we're like, “You know what? Let's just be done with medical school as soon as possible.”

Dr. Jim Dahle:
Yeah, yeah, it certainly does feel that way. That's for sure. Okay, tell us about some of the financial conversations you guys had as you were preparing to get married. Now, at this point, you're a first year medical student. You're borrowing money like crazy to pay for medical school. And she's like, “What the heck am I marrying into here?” Tell us about those conversations and how you guys came to work on your financial plans together.

Alex:
Yeah, I think it really probably started happening even before we were engaged where I kind of said, “Hey, I'm pursuing this path that obviously will open a lot of financial doors. But in the short term, there's going to be a lot of loans and the tuition will be high. And we might have to do the beans and rice that Dave Ramsey says.”

But I think talking about it early and often was, again, sometimes a little bit hard to have conversations on how do we live our life? Do we live in cardboard boxes for the next couple of years or do we try to increase our lifestyle a little bit so that we can really work hard during those years to pay that off?

I think trying to build a plan and trying to get on the same page was extremely important and something that we wanted to do even before we got married. Once we did that, I think it was a lot easier to have a shared vision of where we're going. And that makes it a lot easier to take some of those next steps to get there.

Dr. Jim Dahle:
Yeah, now she's obviously had some professional financial training being a CPA. What did you do to become financially literate? You mentioned you at least knew about the White Coat Investor before starting school, but what's been your process in developing your financial literacy?

Alex:
Yeah. Again, as I said, I started with Financial Peace University in high school and then really got into the White Coat Investor. And then you also had, I think it was an interview with Ramit Sethi from I Will Teach You to Be Rich. And that opened my doors saying like, “Oh, there's other perspectives, there's other things to learn about.” And so I started looking at other books and then the little book of Common Sense Investing and just really finding these other things.

I remember somewhere along the line, you said that your piece of advice was listen to a new blog or read two books every year or something along those lines. But that kind of inspired me to say, “I need to really continue to pursue a lot of different perspectives, get a lot of education for myself because it's not necessarily something that they teach you in medical school.” It's helped me learn a lot more about this complex topic and get a lot more financially literate myself over time.

Dr. Jim Dahle:
Now, somebody out there has listened to your situation and they're like, “This guy's borrowing 8% or 9% right now and earning 4% in his high yield savings account. And they're like, “What's he waiting for? He's not going to go for public service loan forgiveness, why not write the check today?” What would you say to that person?

Alex:
Well, I would probably say to them is that, especially in fourth year medical school with having a baby and with a couple of other uncertainties in life, sometimes having that cash on hand for at least a little bit longer is really useful. And so, we're looking at probably a cross country move, we're looking at daycare, which is going to be expensive. And while I will be getting an income, will that income cover those things? And so, we're holding off on just a little bit before we pull the trigger, but I don't think there's 100% of right answer.

Now, would it be probably money-wise smarter to pay it off all at once? Probably, it might be smarter even to just pay it off today once I'm done with your call, but talking with my wife about what's important to us and having that security for at least a couple months before we start residency, I think that is really important to both of us. And so, right now, that's our plan, that's what we're going to do.

Dr. Jim Dahle:
Yeah, it is more complex than I think it looks at first glance. Match days in a month. It's not a month from the time they hear this podcast, but it is a month from the time we're recording it. You don't know where you're going, if you're going even really. Technically that's always a possibility. I hate to remind fourth year medical student about that. And presumably she's got to change jobs. If this family is going to stay together and you're going somewhere else, well, she's swapping jobs and there might be a significant gap in earnings in addition to those higher expenses as you move to a new place.

I don't think holding on to at least some of it is a bad idea at all. There are some things that you really need cash for. And even if that means you pay a little bit in interest to retain that optionality, it's probably worth doing. So I can certainly agree, holding on to some of that, at least until you get settled in your new positions.

Well, there's somebody out there like you. They've got some assets, they got a spouse that's making money, they've got an inheritance, they've got some money saved up. They want to get to the end and be in a similar situation to where you are, a net worth of zero or better and feel like they're not starting off in a big, huge hole. What advice would you have for them?

Alex:
To people listening to this, they might hear the things I've said and they would say, “You know what? This guy, he's really lucky to have been put in the situation he's in to be fourth year medical school, positive net worth finishing and all that.” And I'd say that that's probably right.

But one of the things I really appreciate and that I really like is that luck is when preparation meets opportunity. There have been a lot of opportunities that have come our way and unfortunately, it would have been easy to squander an inheritance or not really save up before coming to medical school or not really being intentional about saying we're going to save X amount while we're in school.

And so, I think really working hard to make sure that you understand just the basics of personal finance, your loans, maybe read the White Coat Investor and some other books along the way. That really helps you to be prepared for those opportunities that do come. And even if you don't take the perfect approach to all of them, you can take a really good approach to set yourself up well for the future.

That would be my biggest piece of advice is that my wife and I worked really hard to prepare ourselves. And then when these opportunities came, we were really able to take advantage of them.

Dr. Jim Dahle:
Yeah, well said, Alex, well said. All right, well, thank you so much for being willing to come on the podcast, inspire others with your milestone and hopefully they can reach your milestone as soon as they can and as appropriate in their lives as well. So, congratulations to you and thank you so much.

Alex:
Yeah, thank you to you and the rest of the White Coat Investor team. You guys are amazing.

Dr. Jim Dahle:
All right, I hope you enjoyed that interview. I know a lot of you are out there going, “Oh, this guy had an inheritance. Oh, this guy married an accountant. Oh, this guy had some money coming into med school.” Everybody's got advantages in their life. You could be saying, “Oh, this guy's going to match an orthopedic surgeon.” Well, he's not. It's going to be a family doc. Some of you out there are back surgeons or you are cardiologists or you're something that makes more money than a family doc.

Everyone's got their advantages and their disadvantages when it comes to your finances. And what you need to do is maximize the benefit of your advantages and minimize the benefit of your disadvantages, whatever they might be. And they're all unique for all of us. If you're coming out with $400,000 in student loans, hopefully there's something out there that will help offset that, one of your advantages. Maybe you'll be in a low cost of living area. Maybe you will be going into a high income specialty. Maybe you're in a residency that pays particularly well. Everybody's got their advantages. So, take advantage of what you have and work forward.

Remember, this is a single player game. It's you against your financial goals. That's it. You don't have to beat your fellow medical students. You don't have to beat your fellow doctors. You don't even have to beat the market to reach your goals. It's you against your goals. So, keep that in mind as you work on your own personal finances and investing.

FINANCE 101: BUYING A HOUSE DURING RESIDENCY

Now, at the beginning of the podcast, I mentioned we're going to talk about my daughter. My daughter called me up yesterday and she said, “Dad, what do you think about me going to do summer sales next summer?” For those who aren't familiar with summer sales, this is basically people that go out and sell something door-to-door, pest control sometimes. That's a common one. And sometimes some other sorts of products, but they get paid very well. It's all commissioned sales. And if you're good at it, which I think she would be, you can make tens of thousands of dollars in the summer before you come back to college.

She's like, “Well, what do you think if I go do summer sales, make a whole bunch of money and buy a house?” This is my 20 year old, right? “Buy a house and live in the basement and rent out the top and then have that be my first real estate investment.” This is what she tells me.

I was proud that she said, go earn the money to do this rather than take my 20s fund and do this. But we had to talk about some realism when it comes to house hacking, when it comes to real estate investing.

The first thing I asked her was, “Well, where are you going to live when you get out of school six months after you buy this house? Where are you going to be? – I don't know, dad. – Well, what's your job going to look like? – I don't know, dad. – How much income are you going to have? – I don't know, dad. – But you think buying a house now and starting your real estate empire now is the way to go. Is that right?” And she's like, “Well, okay, it doesn't sound so smart when you put it that way.”

That's how it sounds when I hear lots of new residents talking about buying their homes. You sound just as foolish. Now, to be fair, lots of people out there have made house hacking work. It's worked in medical school. It's worked in residency. The idea is you buy a house and you rent out all the rooms to fellow residents or fellow med students. And they're paying for all the costs of ownership.

The problem is this is an extraordinarily risky time in your life to begin real estate investing. Real estate investing has enough risk in it anyway. You've got leverage risk, you've got some market risk, you've got some vacancy risk. You've always got that in real estate investing.

But to take that on when you don't have any real income at all, it's a very risky time to be doing that sort of thing. Can it work out? Absolutely, it can work out. If your tenants are all great, nobody destroys your place, you don't have a bunch of vacancies, your loan works out, you stay cash flow positive and you enjoy what you're doing and you keep this property for 5 or 10 or 15 or 20 years, maybe this all works out wonderfully.

But there's a lot of potential for badness to happen. And I think this sort of thing happens when people get in a rush. They get in a rush to be financially successful. Well, you don't have to rush financial success. Most of you listening to this are high income professionals or you're in school or training to become a high income professional.

And the truth is, if you can apply the basics of financial literacy and a little bit of financial discipline to your life, you're going to be financially successful without any tricks. You don't have to do any tricks to do this. You don't have to have the perfect credit card hacking strategy. You don't have to have the perfect house hacking strategy in order to be financially successful. You're going to be financially successful by making a lot of money, carving a big chunk of it out and using that to build wealth, to retire your debt and to invest in some reasonable way.

That's how you become wealthy. It's not about the tricks of figuring out just the right credit card to use or just the right way to file your taxes or anything like that. Stop looking for the tricks and make sure you get the basics right.

Now, if you want to play around with the tricks on the side, that's fine. Get a brokerage bonus when you move your money from Fidelity to Interactive Brokers or something. Fine, knock yourself out, but that isn't what makes you wealthy. What makes you wealthy is making a lot of money, carving a big chunk of it out to build wealth with and investing it in some reasonable way and giving it a little bit of time. That's how people become wealthy.

Be careful with stuff like house hacking before you have any real income and realize that not every real estate investment works out great, especially if you end up with a bunch of unplanned vacancies, a bunch of unplanned expenses and you don't have a lot of income or a lot of equity already in the home to make up for that.

I encourage you to take risks in your financial life. I'm a big fan of ownership, but there's a time and a place for both of those. And that time and place is not usually while you're in college, much less medical school or residency.

Now, all you people that just matched last week, congratulations on your match. Now you all want to buy a home, and your partner definitely wants to buy a home. You may not have talked to them about this, but they want a house. They want a house and they want a fence around the backyard and they want to be able to take pictures of it and buy furnishings for it and show it off to all their friends because they finally made it, they've been supporting you through school the last few years and dang it, it's time for life. We've been delaying gratification for a long time, let's go buy a home.

At least think about renting during your training. And the reason I tell you this is, there's a number of reasons. One, you're a busy person during training. You're going to be working a lot. You don't have a lot of time to be dealing with the hassles of home ownership. And there are lots of hassles of home ownership. If you've never owned a home, you may not believe this, but it's true. Stuff is always breaking, stuff always needs to be fixed and maintained and refurnished and whatever. There's lots of hassles with home ownership and you don't have lots of time.

The other problem is you've been told a whole bunch of lies about home ownership. And maybe people didn't intend to lie to you, but they did anyway. And it might be professionals, it might be your family members, it might be your friends, but they've told you lies.

Here's some examples of some of the lies. “My mortgage is less than my rent. So, it must be smarter to own than to rent.” Well, the problem with that is you expect a mortgage to be less than rent. Imagine you're a real estate investor. You buy this place and you got to pay all the expenses and with the money you're taking in from rent and hopefully have something left over for profit. If the mortgage has to be paid as one of those expenses, it's got to be less than the rent or you're definitely not going to be anywhere close profitable.

And in fact, a fairly good rule of thumb is that about 45%, 45% of what you bring in as rent is going to go toward non-mortgage expenses. And we're talking about taxes, we're talking about insurance, we're talking about vacancies, we're talking about the other stuff you have to have to have an investment. The mortgage should be significantly less than rent in order for it to really be a good deal.

Okay, here's another lie that you've been told or maybe heard, or maybe just assume that owning a home is the American dream. It is not the American dream. I don't know where that comes from, probably the National Association of Realtors or maybe some National Association of Mortgage Lenders. People that want to sell you something and they make a lot of money by you buying and selling homes, and the more you do it, the more money they make.

They're big fans of not just home ownership, but multiple home ownership. They want you buying and selling all the time. That is not the American dream. The American dream is to come and have a more successful life in America after you left your home country than you had there. It's not owning a home. Maybe it's owning a business more than it's owning a home, but it's just being financially successful in your new life as you come to America. Well, a lot of you have already been in America for eight generations. We don't need to worry about the American dream for you.

Something else that people tell you about home ownership that's a lie, and that is that paying rent is throwing money away. That's not true. It is exchanging money for a place to live. If paying rent is throwing money away, what is mortgage interest? What are property taxes? What are realtor fees? What are all these other costs of homeownership, insurance, and replacing the roof? If that's not throwing money away, what is? It's just as much throwing money away as paying rent.

The only money that's going toward your pocketbook when you own a home and you're making your mortgage payment every month is whatever's going toward principal. And when you have a 7% 30-year mortgage, it's a very tiny percentage of your mortgage payment that is going toward principal and that is actually building home equity for you.

Yes, the property is hopefully appreciating as well. Maybe you're doing something to add some value to it. But for the most part, most of the cost of homeownership, most of the payments you make goes to the exact same place your rent does. You're exchanging it for a place to live. So, don't believe any of those lies.

The main calculation you have to make when you're trying to decide whether to rent or own is whether the home is going to appreciate during the time you own it by more than your transaction costs. Transaction costs. We're talking 5% to buy, 10% to sell, 15% total. 15% of the value of the house. This is a $500,000 house. The transaction costs are probably $75,000. You need it to appreciate $75,000 while you're in that. If it appreciates at 7% or 8% a year, well, you're going to make money in just two years. If it appreciates at 5% a year, you may make money after three years. If it appreciates at 3% a year, well, after five years, you're going to be making money. If it appreciates at 1.5% a year, well, after 10 years, you're going to be making money.

But there's obviously no guarantee. You don't know when you buy a house how quickly it's going to appreciate. But on average, if you look at the historical data, historically, homes appreciate by about 3% per year.

And so, what that would suggest is that if you're going to be in there longer than five years, you ought to own. Because most of the time, you're going to come out ahead. And if you're in there less than five years, you probably ought to rent. And residencies are typically three to five years long. So most of the time, you're not in there five years. And you're probably coming out behind. Historically, most of the time, buying a house for the three to five year period that is residency.

Now, I know that's not the case in the last few years. Lots of people that bought houses did not lose money. Because houses have gone through the roof since about 2010. Trees don't grow to the sky. That doesn't happen forever. We bought a house in 2006, moved out of it in 2010, couldn't even sell it. Couldn't find anybody to buy it at any sort of reasonable price. Ended up finally selling it five years later. Nine years total in 2015. We bought it for $138,000. We sold it for like $116,000 nine years later. There is no guarantee that you're going to make money even owning more than five years. But on average, five years is long enough.

Now I know I can't talk most of you out of buying a home. Most of you are going to buy it no matter what. And here's the good news. The good news is your future income is probably going to rescue you even if it turns out to be a bad decision. Because you just make so much more money as an attending that even if you got to carry that house for a while, or even if you have to come up with $10,000 or $20,000 or $50,000 to get out of the house, you're probably going to be able to do it eventually.

But that doesn't mean it's not a bad decision, just because you have the means to overcome it. At least consider renting when you go to buy your house during residency. And if you want to do house hacking or something in med school or residency like my daughter is, know that this is a pretty high risk proposal. That it wouldn't be that hard to come out behind doing this.

You don't have to become rich as an undergraduate or as a medical student or as a resident. You're all in this pathway where you're going to become a high income professional, most of you doctors, where you're going to be making $200,000, $300,000, $400,000, $500,000, $600,000 a year. If you will make that high income, you'll carve a big chunk of it out to build wealth with and invest it in some reasonable way, you're going to do very well financially and have an awesome financial life.

You don't have to play all these tricks to do it. You don't have to house hack. You don't have to credit card hack. You don't have to swap your brokerage account around every year for signup bonuses. That's not the stuff that makes you wealthy. What makes you wealthy is making a lot of money, carving a big chunk out and investing it in some reasonable way.

So, if you want to buy a house, go buy a house. I can't talk most of you out of doing it anyway, but at least consider renting during your residency. You don't have to deal with the hassles of ownership and you can just walk away at the end of your period and go on to buy a house as an attending down the line. And you're probably most of the time come out ahead financially by doing so.

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All right, keep your head up, shoulders back. You've got this. We're here to help. We'll see you next time on the Milestones to Millionaire podcast.

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.