WCI #106: Financial Advice for Those Starting a Family

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahli. Welcome to White Coat Investor podcast 106 financial advice for those starting a family.

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Thanks for what you do. The work you do is very important. It's meaningful and you're changing lives every day. I know you're not saving lives every day. That's probably something that a lot of people believe you do. But you know as well as I do that you don't. But you are affecting people's lives. Sometimes you're just reassuring them they don't have something bad or helping them manage a condition they have. But there are those times when you really make a big difference. And so thanks for going through all the training you went through in order to do that. I want to put a plug in today for the Facebook group. I think we're up to 18,400 people in that group right now. It's really quite active. It's hard for me to even keep up with all the questions being asked, much less the answers being given. So thank you to those of you who are in there answering questions. They range from the complex to the very basic. But I'm always happy to see people getting the help they need and you helping each other and your colleagues there. So be sure to check that out. It's a Facebook group called White Coat Investors. You do have to apply, but it's pretty easy to get in. If you are a high income professional and not a financial professional, we'll let you in. If you want to come in as a financial professional, you're going to have to sponsor the group. Also, don't forget to get in your submissions for the Financial Educator of the Year. We're looking for physicians and dentists who have been doing a great job teaching their colleagues and their trainees these financial principles. It's simply impossible for me to go all over the country and give all these talks myself. But there are people that are only going to be reached by a talk that comes to their residency program or their medical school or their grand rounds, or their medical staff meeting for their hospital. So those of you who are willing to give those talks, that's wonderful, thank you very much. I put out some slides a few months ago in a blog post you can use to help give those talks. And if you'd like to nominate somebody you know doing that sort of a thing, that sort of work, please do send it to awardsitecoatinvestor.com just maybe 250 words or so describing what they're doing and that'll enter them into our contest to get a thousand dollars cash just to say thank you for educating all of those doctors out there. Our quote of the day today comes from Peter lynch, who said far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves. And I think that's absolutely true. People start bailing out of the market two or three years before a market peak and really lose a significant part of the run up. Most of the time you are better off just buying and holding, riding the market all the way up and getting all of the gains and then riding the market all the way down and getting all the losses, but not having to incur all these transaction costs and and tax consequences of buying and selling all the time, much less doing. What most people end up doing is following their emotions and buying high and selling low. Another thing to remember, I think for those of you who are mostly or only listening to the podcast, I view these podcasts a little bit like the blog. They're kind of continuing financial education, right? They're great to pick up some pearls of wisdom here and there. They hopefully have a little bit of entertainment value. Although I've been listening to a lot of podcasts lately and I'm not sure this one has any entertainment value at all. But they're not a framework for you to really learn finances. Even if you start at the beginning and listen to all of them. I just haven't put them in any sort of an order to help you really have that framework to understand all these concepts of personal finance. So if you need that framework, if you don't have your Initial financial education. I recommend you also do something else to help you get that framework in place. Probably the most common thing to do is to read books. So both of my books, the White Coat A Doctor's Guide to Personal Finance and Investing and the White Coat Investors Financial Boot Camp, are set up in a specific format to help you develop that framework to hang the other principles on and really understand how they work. If you want a little bit more help, we also have our online course. We called it Fire your financial Advisor. Right. It's a little bit of provocative title, but it takes you through step by step and helps you write your own financial plan. Now, at the end of that, you may still decide to use a financial advisor, and that's fine. The course will teach you how to get good advice at a fair price, but it will also give you the framework you need to insert the things you hear on the podcast or you read on the blog into an appropriate place in your financial understanding. So make sure if you have never done any sort of initial financial education, that you get that done as well, in addition to what you're doing listening to podcasts and reading the blog. All right, let's start with a question out of the Facebook group today. And this question basically boils down to what do you do if you've invested in a bunch of muni bonds in your taxable account and then your tax bracket drops in retirement, as it does for most people, such that muni bonds no longer make sense for you? Well, this is a great question, right? Municipal bonds are not taxed at the federal level. They're basically tax free income. The yield from them is tax free, and as a result of that, they have a lower yield than a typical taxable bond, whether it's a Treasury or a corporate bond or whatever. And so it still makes sense after tax for those of us in high income or high tax brackets to invest in municipal bonds. But if that changes, you could have a scenario where you used to belong in municipal bonds and no longer do so. What do you do? Well, this becomes a problem if you've chosen to invest in individual municipal bonds. You've gone to a broker or whatever and bought these individual bonds. Because the problem with buying those is the transaction costs are fairly high, right? It's not a super liquid market when you want to get out of them, and so you end up losing a fair amount of your value of the investment when you try to get out. If you have instead invested in municipal bonds in the way I do with a low cost, broadly diversified Very liquid mutual funds such as those offered by Vanguard, it's a lot easier. You basically just liquidate it and can walk away and reinvest in whatever you like to invest in. Obviously, if there's been some gains in that fund or some gains in the individual bonds, there's going to be tax consequences to selling. But the nice thing about bonds and bond funds is most of the time there's not a lot of gains. Sometimes there's a little bit of losses, and so the tax consequences of selling them usually aren't that high. Most of the return from a bond or a bond fund comes in the form of yield. And so you've been paying the taxes on it as you go along if any taxes are due. And so it's not that big of a deal to change. It's actually usually more of a big deal to go from owning stocks in a taxable account to owning bonds in a taxable account than vice versa, just because you usually have a lot more gains and you've got significant capital gains taxes to pay that way. So if you've decided you no longer belong in municipal bonds, well, you may want to hold the individual bonds until they mature just to avoid those costs of selling. If it's a fund, you can probably transition much more rapidly. But do look at how much like anytime you sell anything in a taxable account, look at the basis, look at the value, see what the tax consequences are going to be. It's possible it could even be an opportunity to claim some losses you can use on your taxes. You can deduct up to $3,000 of capital losses against your ordinary income every year and actually reduce your taxes. All right, let's take a few questions from the Speak pipe. This first one comes from why?

Dr. Dali, thanks for everything you do here on the White Coat Investor. Like most of your listeners, I'm not actually a doctor. I'm one half of a high income dual professional couple working in tech. So we're on track to bring about 500k in household income this year. So I know we're not necessarily your target audience, but I still do get a lot out of your advice because I think that we face similar situations as your doctor crowd audience does. So we're expecting our third baby later this year and thinking about that and planning, I find myself thinking that balancing two demanding careers and a full time family life is just too much for us. In particular, my current role is not compatible with having a young baby at home due to international travel expectations. So I'm thinking I'd like to either quit or see if my employer can offer some part time, no travel option. I've run a lot of retirement scenarios and I feel pretty confident that we are going to be five or very close to it by the time we've exhausted all of our parental leave options early next year. So I want to ask you if you have any other advice on how to approach financial decision making for such a potentially big change in our lives. Thanks.

Okay, so first of all, you are my target audience. Just because you're not a doctor doesn't mean you're not my target audience. Since the very beginning of this blog and this podcast, I've always been trying to help high income professionals of all types. Yes, I happen to relate to doctors best because I'm a doctor, right? I went to medical school, I can kind of speak the language and relate to doctors, but most of what I'm teaching and talking about is far more tax bracket specific than it is profession specific. So I wouldn't feel like you're a second class citizen if you're listening to this podcast and you're not a physician. All right. Or you're not a dentist. All right. So question here really is, what do you do if you're almost financially independent and you kind of want to make a lifestyle change, such as have a baby? Well, the options are many, right? You can quit, you can cut back, you can ask your employer to change your job, you can change the job yourself. There's lots of things you can do and it really boils down to what do you want out of your life? If you want to be a stay at home parent and you can afford to do so, go be a stay at home parent. If you feel like you would miss out on your professional life or you're worried that your income will drop and never recover, which is a serious concern, or you're worried that, you know, you just won't like it. Well, try to keep your foot in the door somehow, whether that's asking your employer to making your job a little bit easier, letting you work from home, cutting back to part time a lot of places in medicine, part time works very easily. You know, anesthesia and radiology and emergency medicine and hospitalist medicine, those sorts of shift work specialties lend themselves very well to part time work. That's why I'm always kind of amazed that I don't see a higher percentage of women to men in my field of emergency medicine. I think the last time I looked it was still about 3/4 men, but it really works well for those who want to go home and be a stay at home parent. Not only can you work shifts when your spouse is at home, but it's easy to ramp up or ramp down shifts as you go. So I guess that's really what it comes down to is what do you want? It sounds like you can afford to do either thing that you want to do, so just figure out what it is that you want to do.

Okay?

Our next question comes from Josh, a military resident.

Hello Dr. Daly, I'm a big fan of your podcast and your forum posts. I wanted to ask a quick question. I'm a military resident and I had a few questions that I was hoping you could address on the podcast. I was wondering what your opinion is or recommendations are in regards to life insurance and disability insurance options for active duty physicians. That's the first question. And secondly, I was curious if you could comment on any sort of tips or financial advice you would have for physicians who are starting a family. My wife and I are expecting our first child soon and I was hoping to get some advice on what sort.

Of.

Financial suggestions you might have regarding that. Thank you.

Let's take the first question. First of all, life and disability insurance for active duty physicians is tricky. Of course you have servicemen's group life insurance, right? That's $400,000. It's basically five year level term that they won't turn you down for. And so get that right. That's a no brainer. Go get that life insurance. It's basically term life insurance at a reasonable rate. You can also, if you have insurance before you come into the military, which is probably the smart way to do it, just buy term life insurance before you become a military doc and you can take that with you. And that continues to work as well. You will notice, however, that once you are in the military, it's a little bit harder to buy insurance of all types of I did not have trouble buying term life insurance in the military. The only caveat there was that it didn't COVID death from acts of war. But if you read most insurance policies carefully, you'll notice that most of them don't cover that. Right? If we have another Pearl harbor or we have a nuke dropped on San Francisco, insurance companies aren't going to pay out for those deaths. For the most part, it's an act of war. And so I would just go and shop for term life insurance the usual way. Go to that list on my website where I have recommended agents. Call one of them up and say, I Need to get some term life insurance? You can use a site like termforsale.com or insuringincome.com without giving any of your personal information. You can see the going rate for the various kinds of policies for somebody in your age and health status. Disability insurance is much more tricky. However, if you have a policy before you go on active duty, a lot of times it will continue to be in effect, but it's worth talking to your agent and or the company to make sure. That happened to me when I went on active duty, I already had a policy from my civilian residency that I bought during civilian residency. It wasn't from the residency, I suppose it was from the standard. And I asked him, I said, is this going to pay out if I'm disabled while I'm on active duty? And it basically came down to yes, as long as I'm not disabled from an act of war. And so we chose to continue to pay those premiums throughout the time I was in the military and had that in service. Obviously you also have the military disability program that's going to cover you. Now that's not that great of a program, right? It doesn't pay that much. Most doctors do not feel comfortable living on just the amount that military disability will pay. But it's not nothing. You can't just ignore it because it is a meaningful disability and policy, particularly if you're severely dis disabled. Especially when you combine it with the fact that once you go on disability, you're also getting Tricare, which helps. But if you actually want to go out and buy an individual disability insurance policy while you're active duty, I think your only choice is massmutual. But the approach to take is to call up an independent insurance agent that can sell you a policy from any company and just ask them that question. And I think most of the time what they're going with these days is a mass mutual policy for the active duty document. All right, your second question is the one I titled the podcast after actually having a related question we're going to get to afterward. But basically asking for tips for physicians starting a family. You know, a lot of this is kind of common sense stuff. Realize that this is going to have dramatic impact on your finances. You know, so much so that when people hear a story of somebody who hit financial independence at 40 and find out they don't have any kids, they just dismiss it because their financial lives are so different. Having children versus being single. But realize that this decision to have children has some pretty dramatic changes on Your retirement dates, for example. We had our first three kids fairly close together, two and a half years apart, each of them, and then our fourth child is about six years later. So we had a pretty good gap there. And at that point we were certainly financially literate. And so it was really a decision whether to have another child because it meant we either were empty nesters at 52 or at 58, which is obviously very different. If you're thinking you might enjoy an early retirement, and so think long and hard, particularly as you get older and start having children, it really does have an effect on when you can retire. Now, obviously you can retire with kids still in school. Some people do some crazy stuff and still travel the world with teenagers and homeschool them and that kind of stuff. But for the most part, as your kids get into high school, they're going to be involved in activities, they're going to be in school plays, they're going to play on sports teams. They're not going to be able to miss a lot of days of school and still get good grades. And so you're probably going to want to be a little bit more stationary. Now, if that jive is just fine with your early retirement goals, then no big deal. But for a lot of us, we look at that and go, well, I might as well work. The kids are in school all day, five days a week, so I might as well continue to have some sort of work that I find meaningful. And so just realize that that can have significant consequences on what early retirement might look like for you. Now, of course, when you add more people to your family, you're going to have some additional expenses that might come in the form of a larger house. You need more bedrooms, for instance. You might pay more in utilities because the kids won't turn the stupid lights off. You might also end up having to buy a lot more food. Now, in the beginning, that's not much because the kid doesn't eat much, or maybe he's eaten only breast milk, et cetera. But as they get older and you get a bunch of teenage boys, you're gonna be spending a lot more on your grocery bill, transportation, right? You're gonna be hauling them all over the place. You're gonna wear your cars out sooner, you're gonna burn a lot more gas, you're going to probably get them a car when they're 16 to drive themselves around because you're sick of doing it. Your insurance is going to be higher. Both your auto insurance and your umbrella policy is going to cost more money. While you have a teenage driver on there, the kids have their own activities. And if you haven't seen the Keeping up with the Joneses that goes on with kids activities, you haven't seen anything. I mean, private school is just the beginning. Maybe you're paying 10, 20, $30,000 a year for private school. Maybe you've also got them in ballet, a traveling sports team. You know, it just goes on and on and on. And so it can be really expensive to have children. You know, you look at some of these surveys and they estimated at a quarter million dollars raising a child at age 18. And I know there are doctors out there who spend far more than that, especially if they've got the kids in private school, K through 12. That doesn't mean they have to cost that much. You know, I've got a family down the street with 12 kids, right? They're clearly not spending $250,000 per kid raising these kids to age 18. There are ways to economize. There are ways to cut back. There are ways to do it cheaper. But either way, it's not like they're cheap. So this is really mostly a lifestyle decision. What do you want out of your life? Do you want to raise a family? Do you want to have children? If you do, this is going to work out right? You are in the top 1, 2, 3% of incomes in this country. If you can't raise a kid, who can afford to raise a kid, right? So if you want kids, go ahead and do it. Don't let the financial consequences dissuade you. But don't kid yourself that there aren't financial consequences. Plus, if you don't have any kids, you're never gonna have any grandkids. And everybody tells me they are so great that you should have them first. All right, let's take our next question from Amar.

Hi, this is Amar. We have a flexible spending account through my current employer. However, I hear there are a lot of benefits of having a HSA Healthcare Savings Account from investment standpoint, period. I want to know if I can have an HSA in addition to an fsa. And if so, do I have to purchase my own health insurance since that would be more expensive versus going through employer sponsored health insurance plan, period. Please advise how I can take advantage of this Healthcare Savings Account HSA plan. Thank you.

So this boils down to, can I have an HSA in addition to an fsa? And the general rule is no, because an FSA usually comes along with a low deductible health plan. That doesn't qualify for an hsa. So would you purchase a high deductible health plan on your own just to be able to contribute to and invest in an hsa? No. If your employer is going to benefit, pay for your health insurance. Take the health insurance they're paying for, even if they're only paying for a third of it or half of it. Right. First you make the health insurance decision which health insurance plan is right for you, and that's usually the one that somebody else is helping you pay for. But sometimes if you have a lot of health problems, you hit the maximum out of pocket every year. You know, a high deductible plan is probably not the right plan for you. But if a high deductible plan is the right plan for you, be sure to use a health savings account. It's the best account available to you, right. For investing, it's triple tax free. You get a deduction when the money goes in, it grows tax protected. And when it comes out, so long as you spend it on health care, it comes out totally tax free. You can also use it for other expenses after age 65, penalty free, but not tax free. And if you save up your receipts as you go along, you might be able to pull out a big chunk of it, totally tax and penalty free, and buy a sailboat with it just based on health care expenses you had in the past that you paid for just from your cash flow. Alright. Our sponsor on this podcast is Origin Investments. Now Origin is a company that I have both invested with and they have invested with me. They have bought ads on the white coat investor over the years and treated us well. And they've certainly been doing a good job with my investment. You know, it's interesting that they kind of take a little bit different approach. They don't take all your money up front. They call for your money as they have investments to invest in. And so I think it's been a year, a year and a half since I committed to invest $100,000 with them. And I think I probably only invested about 70 so far. And that's perfectly fine. I'd stay fully invested elsewhere. And when they are ready for more money, I, you know, that's my month's insurance or my month's investment allocation. And so it goes to there. And that keeps them, you know, invested only in the properties that they think are the very best ones and doesn't give them additional pressure to invest money when they don't see a good deal. And so I appreciate that about Them, they came out to Park City this year, brought their whole team and they were skiing out here, invited me to come up and join them. And so I did. And I figured, hey, bunch of people from back east, I think they're based in Chicago. How good of skiers can they be? I figured they wouldn't be very good at all. So I took my snowboard. I'm not a bad snowboarder, but I'm not as good at snowboarding as I am at skiing. And so I thought, eh, these guys can't be any good. I'll keep up just fine. Little did I know that Michael Episcopi, who is their principal, is a hardcore snowboarder. And I spent the whole day trying to keep up with him and everybody else there was a pretty accomplished skier as well. I think some people had even skied for college or professional teams and tried out for the Olympics, that sort of a thing. And so it was actually pretty impressive. I joked with them by the end of the day that they weren't a real estate company, they were a skiing company. But I swear that's, you know, one of their interview questions is how well do you ski? So you fit in there. But we had a good time with them and I would certainly feel comfortable investing with that team if you're looking to do that sort of real estate investing. All right, our next question off the speak pipe comes from Rick.

I am a 43 year old nurse anesthetist from the Midwest part of the country. Annually I make around $250,000 and I am debt free. I have two children. One is through college with no loans. The other one is a junior in high school, which I have around $24,000 in a 529 plan contributing $500 per month. I went through divorce, lost around $250,000 in retirement and have been maxing out to recover up from that. I sit right now with around $320,000 in my retirement portfolio. I did get remarried and my wife is a general surgeon and together we make approximately $1.1 million annually. Now the question, my employer has a pension plan that was frozen that I have to do something with. Do I roll that over into my 401k tax deferred because we are in the highest tax bracket and pay taxes at a lower rate when I'm older, or do I put that into an ira, roll it over into a Roth, pay the taxes now of around 22,500 and then have the tax free money to grow over the years doing the math, it appears to me that if I do the Roth route, I will be a plus $100,000 post tax money in retirement. Is that the smartest way? Thank you for what you do. We greatly appreciate your service.

Okay, so we're talking about a CRNA here that's married to a general surgeon. They're making 1.1 million together and want to know what to do with a frozen pension plan. Well, a frozen pension plan sounds like it is tax deferred money that you can do whatever you want with. So you could roll this over into an ira. That's probably the traditional thing that's done. The problem with doing that, of course, is that you cannot then do backdoor Roth IRAs because you end up being subject to the pro rata rule. And so if you're going to roll it over, you generally want to roll it into a 401k of some kind, which is probably what I would do most of the time. Now, another option, of course, is just to convert the whole thing, meaning do a Roth conversion. The problem with that is when you take tax deferred money and you move it into a Roth account, you have to pay the taxes on it in that tax year. So they don't mention how much money this is. But if it's two or three or $400,000, well, that's going to be a big hefty tax bill. And most doctors in that situation would opt not to do that, particularly given that you're in the top bracket now. You know, with an income of $1.1 million, you are way into the 37% tax bracket. And so is it really wise to do a Roth conversion in the top tax bracket? It can be, but only if you expect to be in the top tax bracket pretty much the rest of your life. And then it can make sense. But for most of us, we're going to drop somewhere south of that when we hit retirement. You know, maybe it's only down to the 32% tax bracket, but still, still saving money at 37% and paying taxes at 32%, not to mention your ability to fill all the other brackets with the withdrawals, is a winning combination. So don't go too crazy trying to do Roth conversions. You know, prepaying all those taxes may not be a good idea unless there are some very dramatic changes in our tax code. His second question comes here, actually, on a separate recording.

Part two, to my question. With the upswing in the stock market, do I wait roll my, my money, pension into a traditional IRA Let it sit momentarily while we're hoping that the stock market takes a downslide and that value decreases while holding the same number of shares to pay less tax. Is that a risky chance of the market continuing to climb, or would you suggest doing that and sitting on that for a little bit, waiting and hoping that it drops? Thank you.

Okay, so this is basically. Should I time the market when I do a Roth conversion? Well, if you could time the market reliably, yes. I mean, the best time to do a Roth conversion is in the depths of a bear market, right? Because it's based on how much money you convert, not on how many shares of stock you converted. So right after a big market drop, that's a good time to do a Roth conversion. Right. But you really don't know if there's another market drop coming or if it's about to recover. And so I would do your Roth conversions when the timing seems right based on the other factors in your life, rather than trying to look at the market and time the market with respect to a Roth conversion. It's just too hard to do both when you're putting in new investments, when you're shifting around your investments and when you're doing Roth conversions. I just think trying to time the market is a fool's errand and you'll end up hurting yourself at least as much as you help yourself. Our next question comes from marijuana.

Hi Dr. Dali. My husband was a primary care physician for six years. After following your blog, he decided to go back into a new residency and fellowship. After five years, we're just about done. My husband's taking a job in a low cost area of living. So here is my question. We bought a house at one third our yearly income with 3.25% interest loan. If all goes well, we hope to build a dream home in five years. My question is, do we collect the next down payment in a high yield savings account in some sort of low cost investment fund or do we pay off our current loan in full? Thanks for everything you do.

Okay, if you already own a home and you are trying to save up for a nicer home, there is really no reason for you to be putting that money into a high yield savings account that's paying one or two, two and a half percent maybe if you're lucky, especially if you've got a mortgage, just 3 or 4%. Just pay down the mortgage. It's the same thing. Because when you leave that house, you're going to sell it and you're going to take all the Home equity. You have everything the house is worth minus what you still owe on it, and use that for your down payment. In fact, most of the time, when you put in an offer on the new house, you're going to use a contingency offer. It's going to be contingent on you selling the other house. Now, obviously, in a really hot market, that makes your offer a little bit worse if you're doing a contingency. But most of the time you can get a bridge loan or something if you can't get that sort of a problem. This is what we did when we were in the military. We bought a little tiny townhouse, and our plan was to save up in that townhouse for our new place, you know, our Dr. House. When we left the military after our live like a resident period was over, and so we just paid down on the mortgage. That's where we put our extra savings for that down payment. And by the time we got out of there in four years, we almost had the thing paid off. Now we had a real problem, though, because that was 2010 and we couldn't sell the thing for the life of us. So I ended up having to refinance the mortgage. I thought it'd just be for a few months, so I didn't. I picked one with really low fees because I thought that was going to be the major expense. We ended up keeping that for four or five more years as an investment property. So that didn't work out super great either as an investment property or because of the loan, but it certainly worked out to save up. I think at the time, the mortgage was 6% or something. So we were a lot better off at that point earning 6% on that money than we would have having it in a savings account, which at that time was probably only paying half a percent. So that's what I recommend you do, Mari, that you just pay down the mortgage you have and use that home equity to pay for the next one. Our next question comes from Eric.

Hi, Jim. First, I want to thank you for all that you do. I have been following you now for a few years, and while my wife and I are relatively new to the world of personal finance, we are on the road to fi. My question for today pertains to just that we are both physicians and live in a high cost of living area. Specifically, we live in Seattle, which has experienced an annual real estate appreciation rate of about 12%. Whether that will continue is anyone's guess. We have lived in the house that we live in now for about three years and it's worth about $1.2 million. And our unpaid principal is about $770,000. We have a fixed 30 year mortgage with a 3.25% interest rate and our monthly payment is about $4,600 including escrow of note. We bought the house before we came to know about FI and we probably wouldn't have in hindsight. It's more house than we really need. Aside from the house, we are actually doing pretty well. We're saving about 35% of our income, having paid off our student loans and maxing out our student, excuse me, our tax advantaged accounts. Our question is considering the cost of buying and selling a house in terms of commission, assuming that we're not going to be moving out of this expensive area anytime soon. And finally, considering the 12% prior growth rate in this area, does it make sense to downsize into an 800 or 900 thousand dollar house or stay put? Does the new tax law and the loss of deductions change that equation since we had our mortgage before 2018? Thanks in advance.

Okay, so this is a really fortunate situation, right? You ended up buying a big house, maybe more than you should have bought in the first place. And then you scored in a hot real estate market, right? Seattle, the bay area, Washington, D.C. new York City. You know, this does happen from time to time. That's why even at times when you probably shouldn't have bought a house, sometimes you still get lucky. So the question now is, do you downsize just so you can hit financial independence sooner? Well, how badly do you want financial independence, right? I mean, some people downsize their lives dramatically because they hate their job and they want out. They might sell their $30,000 car and drive a beater because they want to be financially independent. If you're in that sort of a boat, then this is a great way to free up some money that you can invest and hit financial independent sooner. You'll have a larger nest egg, you'll have lower annual consumption cost for your house, etc. Now, are you going to come out financially ahead? I don't know. It really depends on what your housing market does over the next five or ten years. So I would look at it in a couple of ways. One, if you're then going to go back up in house in a few years, I would just stay where you're at. Two, it's not like this is totally unreasonable for this couple to have this house. If you like the house, you really would rather stay in it, then just keep it it does save you the transaction costs. It's not insignificant to sell a house and buy another, you know, round trip. About 15% of the value of the house is what you can expect to pay in most markets. And so you got to be a little bit careful anytime you've already bought something, right? All those, all that opportunity cost, all those transaction costs, that's already water under the bridge. So just let that go. So does recent tax laws affect that much? Not a lot. I mean, bear in mind with the new higher standard deduction, if you're now going to take that, owning a house is not nearly as good of a deal as it was before just because the mortgage is not as deductible or may not be deductible at all. But with a mortgage this size, it's probably still going to be a significant itemized deduction for you. Also keep in mind with a really expensive house, I think the change was that only $750,000 of a new mortgage is actually deductible. But that wouldn't apply to this couple in this situation because they're talking about downsizing and their mortgage will clearly be less than that amount. So I wouldn't worry too much about that. So Eric, it really comes down to what you want to do with your life. If really hitting fi just as soon as you can is super important to you, then sure, downsize the house. But otherwise I don't think this particular house is unreasonable for you. And clearly if you change your mind later, you can always sell it. Our next question comes from Mike.

Hey Jim, this is Mike. I wanted to ask you about how you calculate savings rate. Do you use net pay or total pay each month? Additionally, do you consider student loan payments in that savings calculation? Thanks.

When I'm talking about savings rates, I'm talking about everything you save divided by your gross income, not by your net income. But you can calculate your savings rate any way you like, right? I'm not a dictator on this topic. If you want to do it based on net income, you can do that. I would encourage you to be consistent as you go throughout the years and so you can compare last year's saving rate to this year's saving rate and go forward. But when I'm recommending 20% as a general rule, doctors to save for retirement, that's of your gross. And no, I'm not counting money you're saving up for your kids college. I'm not counting money to pay off your credit cards. I'm not counting money that you're saving up to go toward a wakeboat. I'm not counting money that goes toward your student loans. I am just counting money that goes toward retirement in that 20%. But if you want to calculate your general savings rate and you want to throw in extra payments on your mortgage or you want to throw in extra student loan payments, I don't think that's an unreasonable thing to do. Just be consistent how you do it. I think the idea in those situations is once you've paid off the student loans or once you paid off the mortgage, that money will be redirected toward retirement. And if that's the way you're looking at it, I think that's fine to include it in your savings rate. But like I said, this is all you, however you want to do it. Personal finance and investing is a single player game. It is you against your goals. It is not you against your neighbor. It's not you against your brother in law. It's not you against anybody else. All right, our last question today comes from Raphael.

Hi Dr. Dali. My name is Raphael and I'm currently a second year GI fellow with one year left remaining in my fellowship. My plan after fellowship is to join a private practice where I will be partner with one other physician. Currently I have two dependents in my wife and my young son with another child on the way. At present all of our assets are in a Chase savings account amounting to about $200,000 in total. We are new to investing and I'm wondering what to do with this sum of money to optimize my gains and returns. I certainly plan on doing two individual Roth IRAs for my wife and I and then the backdoor Roth ira. When I join the practice, as I imagine I will meet the upper limits that will make me exempt to the Roth ira. The current practice I'm joining has no retirement accounts and I was wondering what the best retirement account in addition to the Roth IRA would be, such as a SEP 401k for the small business. I'm also wondering in addition to disability, life insurance and liability insurance, how else I should invest the remainder of that $200 after setting up those accounts. Thank you for all that you do. You've truly changed my life and my family's as well as my co fellows who I've spread your message to. Thank you.

Okay, Raphael starting he's joining a practice as soon as he gets out of his GI fellowship and that practice is not going to offer a retirement account. That's very unfortunate. So in that sort of a situation, the first thing I would do is talk to the other partners, talk to the owners and go, hey, what's up? Why do we not have a retirement account? This is stupid. We're leaving our money accessible to creditors. We are leaving our money accessible to Uncle Sam. Let's at least consider putting in a retirement account. Maybe it'll cost too much to provide a match for our employees, but let's at least consider it and look at it again. So that's number one. Number two, if you are truly a partner, you're paid on a K1 in this practice then. Or if you're an employee, if you're paid on a W2, no, you can't go use a SEP or an individual 401k. You just can't do that now for some reason. You're just a contractor at this job. You're truly an independent contractor. Then you can go use a SEP, IRA or better yet an individual 401k. But just because your employer doesn't offer a retirement plan doesn't mean you can go open a self employed retirement plan. You're not self employed and that's a requirement to open those plans. So if you've got $200,000 sitting around, let's think about all the things you could do do with it, right? That's a very fortunate position for somebody coming out of their training. Most people have a negative net worth at this point. So if you have that, what can you do with it? Well, I would buff up your emergency fund, right? Take three months worth of expenses and set that aside. Leave that in cash. I would pay off any debt I had. If I got some student loans left over or credit card debt or an auto loan, wipe that stuff out, get it out of your life. Maybe you want to use some of it for a down payment on your next house, right? Instead of using a doctor loan. That'll get you a little bit better terms. It'll give you a lot more options of people to borrow from. It'll probably give you a little bit lower interest rate and lower fees. It's a good thing to do with money. So maybe use some of it for a down payment. For the rest that you wish to save toward retirement, put it into a backdoor Roth IRA first. One for you and one for your spouse in 2019, that's $6,000 each. If you're 50 plus, which I presume you're not coming out of fellowship, you get an extra thousand dollar catch up contribution. If you are going to have a high deductible health plan. You can fund an HSA for a couple that's $7,000 per year. You can also just invest the rest in a taxable account. Typically, you'll want to do that in tax efficient investments like maybe a municipal bond fund or a total stock market fund, or a total international stock market fund or some equity real estate, those sorts of things. That's certainly a reasonable place to invest. And if you don't have enough room inside retirement accounts to save as much money as you need to save for retirement, you're going to have to do it in a taxable or a non qualified account. So you might as well get started. Okay, next week on the podcast we've got William Bernstein, MD. That's right, Bill Bernstein, author of the Four Pillars of Investing and a number of other books. It's going to be really exciting. We're going to be recording it here in just a few minutes, so I'm excited to talk to my Bill. Be sure to tune in next week and not miss that podcast.

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Head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor podcast.

My dad your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.