MtoM #142: Emergency Physician Becomes Multi-Deca Millionaire and Finance 101: Cash Balance Plans

This is the White Coat Investor Podcast. Milestones to Millionaire. Celebrating stories of success along the journey to financial freedom.

This is Milestones to Millionaire podcast number 142. Emergency physician becomes Multi deca millionaire. White Coat Investor is proud to introduce our no Hype Real estate investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there's always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth building journey today with the no Hype Real Estate Investing course@whitecoatinvestor.com courses. All right, welcome back to the podcast. This is the Milestones to Millionaire podcast where we profile you, we celebrate your accomplishments, your milestones, and use them to inspire others to reach those same milestones or whatever their goals might be. Because this financial journey you're on is a single player game. It's you against your goals. You really don't have to beat anybody else. You don't have to have more money than anyone else, or you don't have to have a higher investment return than anyone else. It's all about you and what you want and accomplishing that. So if you'd like to come on and celebrate your milestone with us, you can do so. Apply@whitecoatinvestor.com Milestones. Today we have a doc who's become very wealthy and we're going to talk with him and talk about what he did to do that and some of his secrets. Stick around. Afterward though, we're going to talk about cash balance plans, which he mentions is a significant part of his wealth building technique. So stick around after the interview and we'll talk about that. My guest today on the Milestones to millionaire podcast is Dr. John. Welcome to the podcast.

Thank you for having me.

All right, well, let's start off by telling people what you do for a living, how far you are out of training, and what part of the country you live in.

I am an emergency physician. I am now 39 years out of training, live in the Midwest, pretty much my entire professional career ever since I left home.

Okay, and what milestone are we celebrating today with you?

It's achieving certain levels of net worth. That was a goal. And also I plan to retire in the next two months.

Okay, so pretty cool. A couple of things that have gotten you up there. I don't know how comfortable you are actually talking about your net worth, but for the listeners out there, it's quite high. Much higher than most physicians I run into. Certainly much more than most physicians retire on. So tell us a little bit about how your net worth is divided up into what are you invested in, what are your assets and liabilities?

My net worth is primarily invested in retirement accounts. I'd say the total value of retirement accounts approach approximately $15 million. And that's because I'm a little bit of an obsessive saver. My wife and I like simple things. Simple clothes, simple cars, and we saved as much as we could, and we tried to do that in the most tax advantaged way. And retirement accounts, particularly cash balance plans, are extremely advantageous. And we tried to take full advantage within the law of everything we could take.

Okay. And above and beyond the retirement accounts.

We have probably about a million dollars in just personal accounts.

And.

And then we have some real estate. We have a ski home in Colorado, and we have our personal home, and that encompasses all our assets. And the ski home, maybe it was valued at like four and a half million now. And then our personal home, probably a little less than a million dollars, I think. And at this point, no debt. Debt always was an anathema for me. Never liked to have debt, and I always tried to pay it down as quickly as possible.

When did you get rid of all the debt in your life? How long has it been since you've been debt free?

Probably about 15 years or so.

Very nice. Okay, well, tell us the story. I mean, you mentioned before we started recording that live like a resident was something you were doing long before I started telling people to live like a resident.

Yes, I have the age to prove it. And I'd actually even take it a step further. When I became a resident, I lived like a medical student. As a medical student, I survived on three or four thousand dollars a year, and I tried to do that as a resident. So even though when I started in residency in 1984 I was making about $19,000 a year, I still saved about $5,000 of that. Didn't have a car my first year. Used to walk to work, walk to the grocery store. Then I met my wife. She was a nurse, and she actually made probably twice as much as I did at the time. So that gave me a little more flexibility. I actually got a car after I got in with Kathy. But fortunately she has the same perspective on life. We enjoy life without having to spend a lot of money on things that may temporarily make you feel good, but then in the long run don't add a lot of value to your life.

So let's talk about your savings rate over the years. What do you think your average savings rate was from the time you finished your training until now?

If you average it out, probably on the order of 35 to 50%.

So throughout your career you saved that much?

Yes, some years it was higher. There was a period of time where I had my own corporation and had a cash balance plan. And during those years I might have been saving close to 90% or 95% because at that time the cash balance plan was such an advantage. Because if you took all your clinical income and between Kathy and I working, we could incorporate both into the cash balance plan. We could certainly defer federal tax, which is an advantage in and of itself, although you eventually have to pay it. But then state income tax, you certainly defer it. But depending where we retire, we may have eliminated it. We eliminated Social Security tax, which when you're independent, you're paying both sides of Social Security. Same thing with Medicare, same thing with local income tax. So taking advantage of that during those years was very, very helpful. And literally we were not paying $30,000 or $35,000 in tax that we otherwise would have had to pay by using the cash balance plan. And during those times we lived on. We don't really spend a lot of money, but we had two kids, so we did spend some money. And we had purchased stocks earlier in my career and I lived off those stocks. I would sell them and have capital gain on them. But then since we don't spend a lot of money, we ended up paying 0% capital gains rate. So there were a number of years that we paid little to no federal income tax, although we did pay state income tax. And the thing I would convey is to your listeners is it's taking advantage of every potential tax benefit you can and try to maximize the value for yourself and then not having to live an extravagant lifestyle.

When you first started saving for retirement, there was no such thing as Roth IRAs, Roth 401s, Roth conversions. @ what point in your career, if at all, have you started taking advantage of that opportunity to use a tax free account?

That was later in my career, actually, once the law changed, where you were permitted to do Roth conversions is when I started using the Roth accounts. Because of my income level for most of those years, I didn't qualify to contribute to Roth. I did, however, even back many years ago, contribute after tax monies to a traditional IRA that had accumulated over a period of years. And then once I had the ability to convert, I did convert those to Roth once the law permitted me to do so. So I had done it years ago when I had the cash balance plan. My income was actually low enough to qualify for a Roth, but I really directed everything into the cash balance plan at that time because it was just such, so advantageous from a tax standpoint.

What would you say your ratio is now of tax deferred money to tax free money?

It is roughly 80. 20.

80, 20. Okay.

I've been trying to convert pre tax money to after tax money.

And what lessons did you learn from your parents? Tell us about your upbringing that affected the way you've managed money.

I was one of six children. My parents were high school dropouts, emphasized the importance of education to us, even though they had been high school dropouts, they really emphasized that to us. And they also emphasized frugality and not spending beyond your means. And one of the most intangible things that have really helped me is that family is important, relationships are important, and that's where you can get a lot of your pleasure in life, is your relationships with friends and family.

Now, you're expecting to retire here in just a few months. What do you expect to spend in retirement in any given year?

We have a certain level of income we need just to meet our expenses, and Kathy and I will take some trips. To be perfectly honest, I don't think we could spend the money that we've accumulated, and it is ultimately going to be left to charity.

Are you planning to leave any of it to your children?

I tend to believe, and I think Kathy believes as well, that you kind of need to earn your own success in life. Certainly from a monetary standpoint, we've helped them with college. They each got a car when they finished college, and I think they need to make their own lives. We will support them to a certain extent, but I don't think it's beneficial for anyone to inherit a large sum of money. I think you have to earn it to really appreciate it.

Okay, well, let's say there's somebody out there that's like you were 30 years ago that wants to be financially successful, wants to be a DECA millionaire. Plus, what advice do you have for them?

First is don't live beyond your means. Control the spending and learn to appreciate life without having to spend a lot of money. I think that's the first thing. The second thing is save all you can save. I've never regretted the money I Saved. I mean, I've spent a lot and I don't think that I've lived a, a spartan lifestyle where we denied ourselves things. But we enjoy trips and things where we don't have to spend a lot of money, whether it's hiking up the mountains or doing other things. We get a lot of joy from that. Enjoyed our time with our children when we did that as well. The third thing I would say is educate yourself as much as you can. And I think WCI is a great way to educate yourself. I think the advice is extremely cogent and extremely useful. And I think that no one will watch after your money as carefully as you will. So if you educate yourself and understand the opportunities that you have from a financial standpoint, it'll help you make really good decisions in the future so that you can maximize the value to yourself and your family.

Now, you and Kathy are very wealthy, and there's a lot of people out there that say you can't become very wealthy without starting a business or using a whole bunch of leverage or, you know, having all of your investments in real estate. But clearly your primary savings method has been simply funding retirement accounts and saving money from pretty typical careers. What's your answer to those people that say you can't become really wealthy without doing those other things?

I think you have to think of yourself as a can do person rather than a can't do person. And I think you can do what you set out to achieve if you focus on it and educate yourself and are disciplined with it. And I think that is certainly something that you can do. I mean, we did make some money in real estate with the vacation home in Colorado. But that's not most of our savings. Most of our savings was knowing the law, knowing what you're permitted to do, and taking advantage of that and living frugally.

So how did you decide it was time to retire? Both from the non financial aspects and the financial aspects.

Primarily, it's time to spend with your family and your spouse. For me, that was the biggest motivation from a financial standpoint. Some salesperson, I'll say if insurance said, oh, you can retire now, and it's like, yeah, I'll retire when I feel like retiring. I'm actually retiring early compared to my brothers who work till their 70s. So it wasn't really a financial decision as much as a family decision. It was the right time to spend more time at home. You see some of your colleagues whom you've known for many years passing away or getting sick, and you have to pick the right time. And I'm in my 40th year of practicing medicine now, and I think this was the right time.

Okay. Well, Dr. John, you have done very well for yourself. You should be proud of yourself. You and Kathy both. You have accumulated significantly. You will have a very comfortable retirement, and you'll be able to do a ton of good with your charitable giving throughout the rest of your life and after you pass. So thank you so much for coming on the podcast and being willing to share your experience and your wisdom and inspire others to do the same.

Thank you for having me and thank you for wci. I think you really help hundreds or thousands of physicians throughout the country, and the knowledge that you pass will help many people achieve their financial goals.

It's our pleasure. Okay. Lots of lessons to learn from that interview. I think there are a few to think about. One, savings rate matters. When you save a lot of money, you become very wealthy. When you don't save much money, you don't become very wealthy. It's sexy to talk about investments. Everyone wants to talk about investments. Let's talk about Bitcoin or Ethereum or my real estate empire, or let's talk about timing the market or factor investing. Everybody wants to talk about that. Nobody wants to talk about savings rates. But the truth is, the most important determinant of how much wealth you end up with, how large your retirement accounts become, is how much money you put in there. So how do you put more money in there? You fill them up. You do it early in the year, and you do it for many years. Dr. John has been saving and investing. What did he say? 39 years. 39 years. That's. I mean, whatever you want to call a full career in medicine, that's beyond that. Right? So he worked into his 60s and saved money the whole time from the time he was a resident on through until the time he was about to retire. And that's a lot of time for money to compound. Someone that's maxing out retirement accounts, you know, he actually doesn't have that big of a taxable account. It's almost all in retirement accounts outside of the real estate that he uses. But, you know, you put that money in there, give it time to compound. And the magic and miracle of compound interest over the decades really builds to a lot of wealth. Lots of estate planning, I think ideas in there as well. You know, you've got to struggle. Each of us have to struggle. How much are you willing to leave heirs? How much do you want to give away during your life? Versus after you pass. Now, those are all questions that once you become successful, you're going to have to wrestle with too. So be thinking about that. All right, I told you at the beginning of the podcast, we were going to talk about cash balance plans. These are often called defined benefit plans. And a cash balance plan is really a type of defined benefit plan. As you'll recall, when it comes to retirement accounts, there are two main types. The first is a defined contribution plan. These are your classic 401s, 403s, 457s. What's defined as the amount you can put in there every year, the contribution. There's no definition of what it'd be worth in the end. That all depends on how well the investments do. So over the years, corporations and employers have slowly leaned more toward these types of plans because it reduces their liability and risk down the road. You know, if they promise you a defined benefit in 30 years, the investment risk is now in the employer. It's on the pension plan. If it's simply a defined contribution, the risk of not having enough money for retirement is now on you. That has its pluses and minuses, right? It's now under your control, which is great. But if you suck at investing or you suck at saving, you're not going to have much money in there. You would have been better off with the pension. All right, so that's defined contribution plan. A defined benefit plan is a pension classically, right? You go to work for GM building cars, you stay there for 25 or 30 years, and when you finish, they give you a gold watch and a pension, meaning they pay you a certain amount of money every year for the rest of your life if you're lucky. It's indexed to inflation and also includes a health care benefit. Those have kind of been going away more and more over the years. It's harder to find a job with a pension these days. For docs, maybe the VA and military and jobs like that, that's about it. That was about the only ones where you're getting pensions. However, there is a type of retirement account that is called the defined benefit plan cash balance plan. And the best way to think about this is that it is another 401 masquerading as a pension. So it's required to follow the pension rules. So that determines how much can be put in there in any given year. And it's actuarially determined, meaning you have to get the pencil pushing actuaries to tell you how much you can contribute and the way it tends to work is that the older you are, the more you can put in there. So when you get into your 50s or 60s, you can have huge contributions into these divine benefit plans. I mean, contributions like $100,000, $200,000 a year that you can put into a defined benefit plan. And, you know, if you're 32, your contribution is probably not that much. And the reason why is there's a total amount that you can put into these things and a total amount it's supposed to grow to. And so the actuaries calculate backwards and assume a rate of return and tell you, well, this is how much you can put in this year. For example, the defined benefit plan that we have in place at my partnership right now, I'm allowed to put 17,500 into. And the docs that are even younger than me may only be able to put 5,000 into. And yet the docs that are older than me might be able to put in $120,000 a year. And so it's not really fair that way in some respects. But that's because it's a retirement account, you know, a 401k masquerading as a pension. So it has to follow the pension rules. But here's the way, you know, savvy docs are using these things, all right? You start a defined benefit plan, you use it for 5ish years, you put your money in there, you kind of invest it relatively conservatively. So you take your risk on the 401 side because you usually have a 401 profit sharing plan in conjunction with this defined benefit plan. And the defined benefit plan tends to be invested a little bit less aggressively. You know, higher percentage of money in bonds and that sort of a thing. But after five or six years, there's usually a good reason why you can close this plan. So you close it. There's a few fees associated with that that you got to pay the lawyers and the actuaries, but usually not too bad. You close the plan and you roll the balance into your 401. And then you start again with another plan, a plan in which you're probably able to now contribute more to because you're now older. So if you're maxing out a 401 profit sharing plan this year for people under 50, that's $66,000. And you got a defined benefit plan on top of that. And you're doing backdoor Roth IRAs for you and your spouse. Maybe you're doing an HSA as well. It wouldn't be unusual to be putting away 100 or even $200,000 a year into tax protected and asset protected accounts, or where this money is now growing faster than it otherwise would be because there's no tax drag on it. Now imagine you run that process out for 20 or 30 or 39 years. How much money are you going to have? And the answer is probably eight figures. That's just what it grows to when you're putting away that kind of money every year. And so that's how Dr. John and his wife became very wealthy people. They just maxed out retirement accounts, made sure they understood what retirement accounts were eligible to them, took advantage of these big defined benefit plan contributions, and went with it. Now, even if you aren't eligible for a bunch of money going into retirement accounts, you can always use a taxable account. There's nothing keeping you from saving 100,000 or $200,000 a year toward retirement. You know, no matter who you are and what retirement accounts are left to you, obviously you have to have the income to do it. But if you have the income, you can put away that much for retirement and guess what? It grows. And you will become very wealthy doing that. So I thought that was a pretty good example of a doc that's just done. The basic plan. This is what I call the basic plan, the default plan, which is to go to work, see patients, work hard, save a good chunk of your income, invest it in some reasonable way, max out your retirement accounts, nothing special, no entrepreneurship, no huge real estate empire or anything. And over time, it really works well. People become multimillionaires. If you really do it well, deca millionaires. And you go on and have a very comfortable retirement and can do a lot of good for heirs, for people around you, you can be ridiculously generous and you can support some serious charitable causes. All right, our sponsor for this episode is our no Hype Real estate investing course. It'll provide the framework to you for developing further knowledge and experience as you progress in your investing career. Particularly with regards to real estate. It might be called an introductory course because it touches on all aspects of real estate, all the way from, you know, short term rentals to publicly traded REITs. But there's always more to learn. This is not a short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. So I encourage you to continue your wealth building journey and your financial literacy journey today with the no Hype Real Estate Investing course. You can find out all about it@whitecoatinvestor.com courses. As always, our courses come with money back guarantees, so if you don't like it, you can get your money back. There's no risk to you. Go check it out. All right, that's the end of another great episode of Milestones to Millionaire. Hope you're enjoying these. Send your feedback if you think there's something we can do better. 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Sam.