WCI #168: Retirement Accounts versus Real Estate

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 Dali. This is White Coat Investor podcast 168 retirement accounts versus real estate.

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All right. A quote of the day today comes from David Swensen who said, sensible investors rely on themselves. A strategy of professing ignorance and handing assets to a trained professional invites failure. I agree with that. You still got to be involved both in your business and in your own personal finances. Boy, it's been an interesting day today. It's still July 7th. Same day we recorded last week's podcast. We did that interview with Jesse Mecham of youf Need a Budget last week. But in between our power came back on. We have been on generator power this morning we lost power and so we've been, you know, running power cords everywhere up from the generator to record the podcast. That was the first time we did that without actually having any city power. Now we're back on regular power and so hopefully this goes just fine. I actually just got back with my family from a backpacking trip. We went with our three younger kids up to the Sawtooth Mountains in Idaho and went backpacking for a few days. This was the first time our five year old actually had to walk the whole way and so she didn't have a pack. Everybody else had a pack of about a quarter of their body weight, but she did not. And so it was interesting to see how she would do. She spent most of the time hiking with a bag of Skittles in her hand. That seems to be her go to hiking food that keeps her motivated. But the last day the two older kids decided they didn't want to be backpacking anymore and so they wanted to put both of those last two days into one day and shorten the trip by a day. And so we actually walked out over nine miles on the last day and the five year old did great. So we're very proud of her. July is one of those times when we compress all of our work into just a few days, it feels like, so that we can go on some trips with the kids and that's the way our July is going to be. We've got a rafting trip coming up as well as a trip out to do some canyons in Colorado in the Ouray area that we're looking forward to. There's actually one other trip Katie and the kids are going on, but I just could not fit one more trip in and actually get all the work I needed to get done in a month. Between eight shifts and all the white coat investor work, it was just a little too much. So she's got an extra trip in there that I won't be going on, but looking forward to some more in August, I hope. If you didn't hear last week I'm putting out a call for conference speakers for WC Icon 21. This will be the first week of March you in Phoenix pandemic allowing. Obviously we'll make that call later this fall, but if you would like to be a speaker, I'd like you to apply. You can do so@whitecoatinvestor.com facultyapp. The breakout sessions are gonna have three general topics. The first is wellness, the second is basic financial topics, and the third is advanced financial topics. So you'll need to choose between those when you apply. And of course if you are applying under the wellness category, your talk will need to qualify for continuing medical Education and Dental continuing. So keep that in mind as you apply. We'd love to have new speakers. We'd love to have speakers that we've had in the past, but please apply there. Thanks for what you do. I know you're out in a pandemic. You know, it's scary just going to the grocery store. As scary as sports teams start back up and events start happening again. It's scary just to go to work and it introduces a level of anxiety, I think, into all of our lives that we didn't have six months ago. Thank you for putting up with that. You're doing it a lot more than many, many professions are. And please be careful out there. If you have not seen our recommended pages, one I wanted to highlight to you today is our financial Advisor page. We revamped this in the last year based on feedback from you guys. We got feedback from people saying, hey, I can't tell who I should hire. You got 50 people on a page and I can't tell the differences between them. So we set it up so that there are some premium listings at the top and you can really get to know these advisors. If you need help putting together a financial plan or you need help managing your assets, these are people you can trust. But we've, over the last year, we brought each of them on the podcast for a few minutes and recorded that segment with them and put that into their listing there on that page so you can actually get a sense of who they are and what their philosophy is before you ever call them up. We've let them put videos up there so you can see what they look like. We've got more information, an entire additional page of information about them. So hopefully you find that more useful. Send us feedback, what you find useful and what you don't, and we'll try to serve you even better next year than we are this year. All right, let's get into the topic of this podcast. I called it Retirement Accounts versus Real Estate, but it was triggered by this email I got who said, I know you're familiar with the semi retired MD program to advise teach MDs on real estate investing. They're actually pulling money out of 401k, et cetera. I contribute 75,000 plus a year, closer to 90,000 maybe to retirement accounts. I'm faced with the dilemma of not contributing to the cash balance plan in order to use the money for real estate investing. Honestly, that sounds crazy to me. It's a huge tax savings upfront that I doubt can be regained even in smart real estate investing. What are your thoughts on this? And I do have some thoughts on it. You know, I always worry when someone's being told to take money out of retirement accounts before they need it to spend in retirement or before they're required to by the government as a required minimum distribution. It always makes me worry that you're being sold something. You know, I think the classic example is this guy I blogged about a few years ago. He was calling it Missed Fortune back then. I think he's calling it Live Abundant now. But he's a local guy here in Salt Lake City and basically his philosophy is borrow all the equity out of your homes, pull all the money out of your 401ks and buy Universal life insurance with it. You know, Index universal life. That was the whole philosophy. And of course he's getting these massive commissions on these huge universal life policies. And you wonder, well, why is he telling you to do that? Because that's the only place most people have money is in their retirement accounts and in their home equity. And so I think you need to be a little bit wary anytime you see somebody recommending against something that is so beneficial to you. Like retirement accounts are for doctors and they're even more beneficial to doctors than they are to most people. But I totally understand too that real estate investing is really attractive to people. It's a great asset class. I invest in real estate. 20% of my portfolio is in real estate. It's got a lot of benefits. You know, the returns are solid, the correlation with your stocks and bonds is low to moderate. There are some unique tax advantages, mostly depreciation that can be passed through to cover that income from the real estate so that it can be tax free income sometimes if it's structured properly. You know, there's lots of benefits to real estate. I think a lot of doctors got a little bit scared this spring when they saw their paychecks go down or they didn't get their raises or they were asked to take time off, they weren't planning on taking off and started really looking at side gigs and passive income kind of stuff a little bit more seriously. And so I kind of get what the attraction is there. That said, I never invested anything in real estate until I had maxed, at least outside of retirement accounts, until I had maxed out my retirement accounts. I think those benefits are so huge for doctors that I wouldn't pass them up. I mean, there's not only the big tax benefit, right? Just having tax protected growth on that money, not only for the rest of your career, but for 20 or 30 or 40 years in retirement is massive. It is a huge benefit to be able to not pay taxes on your dividends and interest and capital gains as that money grows. But in addition to that, most doctors, maybe not the super savers of you out there, but most doctors are going to save money at a much higher tax rate during their peak earnings years than they are going to pull that money out at in retirement retirement. Because remember, when you pull that money out for most doctors, those tax deferred retirement accounts are going to be a large part of your taxable income in retirement. And you can use that to fill the brackets. You know, if you're married, the first $24,800, the standard deduction that comes out of those accounts every year is tax free. Then you get another $19,000 that comes out at 10%, another $50,000 that comes out at 12%, another $75,000 that comes out at 22%. I mean, that arbitrage between the tax rates is super, super valuable as well. That's why I'm very hesitant to tell people to pass up contributions to these retirement accounts, no matter what the investment's going to be that you invest in. Otherwise it has to be a heck of an investment to make up for that. But wait, there's more, right? What else is a retirement account good for? Well, it facilitates your estate planning, right? All you have to do is name a beneficiary. No need to hassle with trusts. That money doesn't go through probate. It goes immediately to your beneficiary when you die. And while the stretch IRA has been a little bit neutered as of late, you still get a stretch. Your heirs still can stretch that money out for 10 years and actually don't have to take any required minimum distributions in those 10 years. And so retirement accounts have these great estate planning features as well, but one feature that matters a lot to doctors, and maybe it shouldn't matter as much to them as it does, but doctors are all terrified of being sued above policy limits and losing everything. In most states, your retirement accounts, you know, your ERISA protected ones, the 401ks, as well as your IRAs, receive substantial asset protection. In many states, even if you had declared bankruptcy because of some crazy one out of 10,000 suit above policy limits, you had to declare bankruptcy, you'd still get to keep everything in your retirement accounts. And while you can try to protect real estate with LLC, etc. Outside of retirement accounts, that protection is not nearly as good as what is afforded retirement accounts. So between the tax benefits, the estate planning benefits, and the asset protection benefits, I really would not pass up on retirement account contributions in order to invest in real estate. So what are your other options? Well, ideally, you're saving so much that you can max out your retirement accounts and still invest in real estate. That's actually pretty easy for a lot of docs because they don't have great retirement account options. You know, maybe an HSA isn't right for them. So they got a backdoor Roth IRA, maybe a spousal backdoor Roth IRA, and maybe a 401K. That's not uncommon for many employee docs that that's all you have. And if that's the case, well, it shouldn't be hard to invest above and beyond the retirement accounts because you need to be saving 20% of your income and you can't get 20% of your income into retirement accounts. But if you got some huge cash balance plan available to you, that becomes a little bit harder. You know, if you're able to put 100,000 or $200,000 a year into retirement accounts, it can be tough to save more than that on a physician income. And so I empathize with you there. But there are other options above and beyond that. For example, you can just invest in real estate inside your retirement accounts. Most of you know about real estate investment trusts. Many, maybe most of these are publicly trade, right? They're traded on the stock exchange. And you can buy them in a mutual fund just like you can any other stock. And you can just go buy the Vanguard real estate investment trust index fund. You can buy that in your IRA or maybe it's available in your 401k and you can get real estate exposure in your portfolio using that. There are other real estate companies, there are other real estate funds. TIAA has a real estate fund we'll talk about a little bit later in the podcast. But you can just buy publicly traded real estate inside your retirement accounts. That's relatively easy to do. If you want to buy private real estate, you can do that inside retirement accounts as well. However, they have to be special retirement accounts. They have to be self directed retirement accounts. It's relatively easy to open a self directed IRA or self directed Roth IRA. If you have an individual 401k, you can get a self directed individual 401. Instead of just opening a cookie cutter one at Vanguard or Fidelity or Schwab or wherever. You can actually hire a company to basically write the plan document correctly so that you can have that feature in your 401. My 401. Right now, the white coat investor individual 401 has got that feature. We haven't actually used it, but I told them to throw it in there when they designed the plan. I needed some other features that I needed a customized plan for, primarily mega backdoor Roth IRAs. But our plan has that feature. It's not that hard to get. So if you are using an individual 401k, you can just set it up so that it allows for self directed investments like that. That's a great option. You can even buy individual properties. You want to buy the house down the street and rent it out. You can do that inside your self directed IRA or self directed 401k. Just keep in mind that every dollar that goes into that property has to come out of the retirement account. And every dollar that comes out of that property has to go into the retirement account. Right? You can't mix this with your personal assets now. So it's a little bit more complicated that way. But it is something that can be done. You do need to be a little bit careful about unrelated business income tax. This applies in self directed IRA, but not a self directed 401k. But basically, if that property is leveraged, you may end up still paying taxes even though it's inside your ira. So learn about those rules if you're going to have a leveraged property inside a self directed ira. So here's another option, right? If you're really into real estate, you took this semi retired MD course and you really want to get started, but all your money's in retirement accounts. Well, here's another option. You can take a 401 loan. You can borrow the maximum of either $50,000 or 50% of the balance, I guess whichever one's lower from your 401k, and use that as a down payment on a property. And then you can slowly pay back your 401. It has to be paid off over five years. Remember, if you separate from the job, you have to pay that back by the time the next tax day rolls around. So if you borrow the money in January and you quit, you got to have money back into the 401 by the next April 15, unless you file an extension then you have till October. So that could give you quite a few months, up to 21 months of being able to use that after you quit a job. But if you stay with the job, you got five years to pay it back. So that's an option. The last option, of course, is just withdrawing money from your retirement account. I don't think that's a good idea. That is a big tax hit for a working doctor because you're going to pay at your ordinary income marginal tax rate. For most of us, that's 32%, 35%, 37%, something like that. Plus you got to pay a 10% penalty. So you might be pulling that money out at 40 or 50% effective tax rate. That's not a good deal. It's got to be a heck of an investment to do that. I guess it's a little bit worse than not contributing at all in that you then have to pay the penalty. But they're both pretty bad. So I would still try to max out my retirement accounts and invest in real estate in addition to that, if you so desire. Remember that real estate is optional too, right? Many doctors, including myself and the physician on fire, became wealthy, even financially independent, doing nothing outside a boring old index funds invested mostly in retirement accounts. Even now, only 20% of my portfolio is in real estate. It's just an asset class. It's a good asset class, but it's just an asset class. Don't put it on some pedestal that it doesn't necessarily deserve, like many real estate gurus, books, blogs and courses do. Especially if you actually like what you do and are willing to work a reasonably long career. Now, if you're trying to become financially independent in six years or something out of residency, you're probably going to need to take a fair amount of risk, both entrepreneurial risk and leverage risk, and that sort of a thing that real estate can help you with. But if you're okay with a typical 20 or 30 year career and saving 20% or so of your gross income, you will get to financial independence without ever touching real estate. Okay? So I hope that makes it clear on how those two factors can mix together for you. All right, our next question also came in via email. I'm very interested in a stable value fund in addition to my total bond market fund. Have you any opinion or writing on the topic? Is a rather confusing instrument that is new to me. One's offered in my 401. It might be an interesting article to write. Well, first of all, let's talk about stable value funds. A stable value fund is essentially a portfolio of bonds that is insured to protect the investor against a decline in yield or a loss of capital. Okay. So the owner of a stable value fund will continue to receive the agreed upon interest payments regardless of the state of the economy. So it's a common option in some retirement plans. It's not all that dissimilar from the TSPG fund, you know, and the idea behind this for federal employees is that you get treasury bond yields with money market risk. So you're getting a bond like instrument. The yields are usually a little bit less than you can get with bonds because something's got to pay for that insurance. But you can't lose principal value. So think of it like a money market fund on steroids. So it's fine to use in your portfolio if that's an asset class you want in your portfolio. This is a very low risk thing to invest in. Don't expect super high returns out of it. But at the same time, you're not Taking a ton of risk on with it. So I think it's fine to use. Almost all of the ones I've looked at that are in people's 401ks are fine to use. You know, some are obviously better than others. If you start googling around, you'll see. I think this is as of the third quarter of 2019. I see funds from Putnam, from Invesco, Wells Fargo, and you look at the returns on these, and for the year prior to the third quarter of 2019, the returns were about 2.7%. So they're not stocks. Your returns are, even in the long run, will probably be a little lower than bonds, but you get that stability of principal. So if that's attractive to you, I think that's fine to invest in. It's a reasonable option to have in a 401. Think of it as a money market fund with a little bit higher yield. Okay, let's take our next question off the speak pipe. This one comes from Jason.

Hi, Dr. Dali. First, I wanted to say thank you for playing a huge role in my financial literacy and also getting me on track after making a few financial mistakes early on in my career. So my question is in regards to asset allocation and how it changes as we get closer to our retirement date. When do you consider changing the allocations in your different accounts? When you're 20 years, 10 years, five years away from your retirement time? Thank you for all that you do and look forward to hearing from you.

Okay. Jason's basically asking, how should your asset allocation change as you approach retirement? And there's no Bible on this topic, right? Everyone's got an opinion and nobody really knows whose opinion is right? Because in the long run, the more aggressive the asset allocation, the more likely it is to have higher returns. But at the same time, your ability to tolerate fluctuation and volatility of the value of your portfolio is lowest around the time of retirement. This is known as sequence of returns risk. And the idea is that your returns are in those last few years of your working career. Your accumulation stage and the first few years of your retirement or your distribution phase are much more important to your overall lifetime portfolio performance than any other years. And so the idea is to have those years be a little bit less volatile. Some people call this a bond tent, right? And so they increase the percentage of bonds for five years before retirement or five years after retirement retirement. Other people, you know, set a formula up in advance that every year of their career they're going to go down in their stock to bond ratio by 1%. So maybe they start out at 75, 25 and each year they go down to 74, 26, 73, 27, etc. Year by year until they get to the retirement date. It's fine to have that written into your investment plan as well. I think that's the key though. Just pick a plan, something reasonable and put it into your investment plan. Thus far I've basically kept my portfolio static throughout my career. Basically 60% stocks, 20% bonds, 20% real estate and that works for me. I may just carry that on through into retirement because I'm pretty tolerant of it. I've got more than I need, I can tolerate the fluctuations. And so you may just choose a static portfolio as well. But I think the key is to put it, write it down, put it in your investing plan and follow it. Keep in mind, Jason, you mentioned how do you change your asset allocations in different accounts? My recommendation is you look at all your retirement accounts, you know, all your money for retirement, even if that includes a taxable account as one big portfolio. And so you're not necessarily changing each account's asset allocation in response to age. You just want to change the overall asset allocation as needed. All right, let's take our next question off the speak pipe.

This one comes From Thomas hello Dr. Dali.

I am a hospital employed anesthesiologist, three years out of residency working for a large private not for profit hospital system in the Southeast. I currently max out our hospitals 403 and 457 plans, have a 401A contribution from my institution and max out my Roth IRA. Our new CEO recently championed and introduced a new retirement plan option based on a split dollar life insurance loan regime plan he had at his prior job. The underlying product this plan is using is a fixed index universal life policy. I have read extensively on your site about the perils and disadvantages of fiuls. However, since this plan is being administered through my institution, its structure is different than that of commercially available fiuls in that my hospital system decreases my salary to the amount I select and then places that amount as a Pre tax loan plus a 15% match on top to cover the majority of insurance and death benefit expenses. While I understand the annualized returns on this product are very unlikely to rival an after tax stock portfolio, the ability to decrease my income tax burden while also giving me the ability to loan money out to myself tax free seems very attractive. Do you see this as a beneficial vehicle for retirement and or decreasing my annual taxable income and if so, how do you recommend I determine how aggressively I should fund this new option? Thank you again for everything you do and I hope this email finds you well.

Okay, so this is a complex question. I have got a post all written all about split dollar life insurance. I've titled it why I Hate Split dollar life Insurance. It'll run at some point in the next few months. Because I get this question by email pretty frequently, once or twice a month, probably from somebody whose hospital is putting a split dollar plan in place. I think the best way to think about this to, you know, be able to understand what's going on, is that a cash value life insurance policy is being sold to your employer. If you will remember that, you will understand. Split dollar life insurance. Is it a benefit? Well, think of it this way. If somebody else is going to buy me a whole life insurance policy, I'm going to take it. It's not that the asset doesn't have value, it does have value. I wouldn't buy it myself, but I'll take it if somebody else is going to buy it for me. And so with the split dollar life insurance plan, what your employer is usually saying, and every one of these is a little bit different, is that I'll pay part of it. So the employer is now paying part of it and you are paying part of it. Well, now is it worth it to you? Well, it's harder to say if they're paying a big part of it, it certainly is. If they're only paying a tiny part of it, maybe it isn't. So the first thing I might do if this was something coming from my employer is try to talk my employer into offering me something else. Maybe putting a cash balance plan in place instead, or talking the employer into, if they really want to do this and think it's awesome, into paying the lion's share of it. At which point it's probably worth taking for you. But if I found myself paying for the majority of the premium, I get a lot less excited about it. Then all the downsides of dealing with cash value life insurance come into play. And I've outlined these many, many times on the blog and on this podcast. In essence, it isn't that there are no benefits to it, it's just that you end up paying too much for the benefits. And you can see why an insurance agent would go to your employer and try to sell this sort of a plan to them. Now they don't have to go to the individuals. They can just go to one company, one hospital, one CEO, and all of a sudden they've sold 30 policies or 100 policies or 300 policies. You know, obviously there's some massive commissions there and this agent is making out like a bandit. So keep in mind what is happening with a split dollar life insurance policy. A cash value life insurance policy is being sold to your employer. All you have to decide is whether they are paying for enough of it that it's worth it to you to pay for the rest in order to get the benefit. Typically, what happens when you separate from the employer is you can take the policy with you, you can buy it, you know, essentially from the employer and take it with you. But then what do you have? You have a cash value life insurance policy that you really have no need for, you know, trying to convert it into some sort of weird retirement plan for you. So you got to keep that in mind. Now, this post I've got coming out is going to go into all the nitty gritty details. There are several different types of this. They call them an economic benefit plan, they call it an equity arrangement, they call it a loan plan. And I go through what you should do with it, and that post will be running here within the next few months, I'm sure. I'll also discuss whether you should keep it after you separate from the employer. But I end that post with a section about whether the employer should offer this benefit. And my opinion is no. If you're an employer, don't get suckered into buying these things. Offer your employees something they really want. If you're going to put a bunch of money into a benefit, put a cash balance plan in place rather than a split dollar life insurance plan. It's not that awesome no matter what that agent is telling you. I think in this case you said that the employer's only giving you a 15% match, so they're only paying for 12 or 15% of this policy. That doesn't sound very awesome to me. I might just pass on it and just take the money and salary and invest it elsewhere. You know, we mentioned real estate at the beginning of the podcast. You know, may, maybe this is money that you could invest in real estate just out in a taxable account instead of messing around with this cash value life insurance plan. But really, if you're going to invest in this thing, it's a lifelong commitment. You really need to understand it, understand what you're buying, how it is likely to perform under various different economic situations, and go from there. That gets even more complicated when it's not a whole life policy. They're offering when it's an index universal life policy. Now, you got a gazillion moving parts that you got to keep track of, so good luck with that. The bottom line is if the employer buys a lot of it, you might as well take it. If you're having to buy all or almost all of it, I'd probably pass on it. Okay, our next question comes in via email. This one is about tiaa. The emailer says TIA has a couple of unique products. TIAA Traditional and TIAA Real Estate Account. I'd like to know your thoughts on these unique investments and how they would fit into one's portfolio. Would you consider the TIAA as part of the fixed income portion of one's asset allocation? If so, what percentage of the fixed income should it be? In your opinion, would it be reasonable to use this instead of TIPS for the real estate account? Would you recommend investing in it if one has allocated 5 to 10% of one's portfolio to real estate? Feel free to use these questions in your podcast. I know a lot of academic positions work for universities that have access to these TIAA products. In general, TIA is considered to be one of the good guys in the financial world. Both of these are common holdings in 403 plans usually is where you find them. The fixed annuity is not a terrible option. It's not a bad substitute for fixed income. It's not going to act exactly like nominal bonds. It certainly isn't going to act like tips. So I don't think it's a tip substitute. But if you want to include that as part of your fixed income allocation, I think that's reasonable. I'd set a percentage for it and that's what it would be in my portfolio. If you look back at this over the last year, returns were about 3.7%, it looks like, so not too bad. You know, they have a couple different types. One was 3.1%, one was 3.7%. So I'd expect, you know, bond like returns out of it. You know, I think that's fine to use. As far as the real estate, I'm not entirely certain what you have in your portfolio. There's a couple of different options there. There is a TIA real estate account which comes with the ticker Q R E A R X, which really doesn't have that awesome of returns over the last year. The expense ratios on these things are moderate, you know, in the 0.5 to 1% range. You know, a lot of people like it in that it holds real Estate directly rather than buying real estate investment trusts. And so some people have liked it over the years for that reason. Not sure his performance has really been all that awesome the last few years. And so I don't hear people talking about it nearly as much as they used to. TIA also has a mutual fund. I'm not sure how the two are related, but this is an institutional fund, which I wouldn't be surprised if that is in your 401k either. It's Tirex is the ticker for it. And if you look at that over the last few years, you know, it's got 10 year returns of almost 12%, you know, so that's not too bad year to date. This year it's down about 7%, which isn't too bad considering how real estate's done. It's got an expense ratio I think of 0.78 as I recall. Let me look that up. No, 0.51, which is pretty high for an institutional fund, but, you know, not terrible as mutual funds go. And so if you want to use that for your real estate holdings, I think that's perfectly fine. I think I like that a little bit better than the real estate account, but it's a little bit hard to see how the two of them interact with each other. So again, if you want exposure to those asset classes and they're available in your 401, I think those funds are fine to use. I don't think it's a rip off. I don't think it's some terrible investment. I don't invest in either one of them. But then again, I don't have access to TIAA investments in my 401k so it wasn't even an option for me. You know, lots of people's 401ks are a little bit unique that way. The military and federal TSP is unique. It's got the G fund that nobody else has. This is something that your 401k may have. And I think it's fine to use just like it might be fine to use a stable value fund like we talked about earlier. All right, let's take our next question off the speak pipe. This one comes from Brett.

Hi, Dr. Dawley. Thank you for everything that you do. I have a question regarding 457 Roth conversions and backdoor Roth. I just finished my training. I have a governmental 457B which I can do a Roth conversion to this year. And I was planning on doing that because it's going to be a relatively low income year. I Also wanted to do a backdoor Roth conversion. I was wondering if there's any reason that I can't do both in the same year. So I was hoping to do the 457B Roth conversion and a $6,000 backdoor Roth IRA contribution. Let me know what you think, if that's okay or if there's any rules or reasons that that should be not okay. Thank you very much.

All right, so this question is really two questions. 457 allows for Roth conversion. Any reason I can't do this? No, there's no reason you can't do that. If it allows you to do a Roth conversion. Do a Roth conversion. Does a backdoor Roth conversion in the same year affect that? No. No, it doesn't. You know, people worry a little bit about the pro rata rule for the backdoor Roth IRA, but remember, that only applies to IRAs, SEP IRAs, simple IRAs, traditional IRAs, rollover IRAs, et cetera. It doesn't apply to 401ks, 403bs, 457s, et cetera. All that stuff has nothing to do with the pro rata rule for the backdoor Roth ira. So it's perfectly fine to do both a Roth conversion of a 401 or a 403B or a 457, or even a traditional IRA and a backdoor Roth IRA in the same year. No problem there. All right, our next question is also off the speak pipe from an Anonymous caller.

Hi, Dr. Dali. Thank you for everything you do. I am a family medicine physician practicing in Pennsylvania. I have contacted several of your trusted recommendations for disability insurance. They've all been very professional and helpful. Unfortunately, I have a medical condition that disqualifies me from getting disability coverage. I made the mistake of not enrolling in my employer's group coverage when I first started at my hospital. My spouse works full time, and if needed, we would be able to live off of his income. I wanted to see what adjustments you would recommend we should make in our financial plans accounting for me not being able to hold disability coverage. Thank you so much, and I look forward to hearing your response.

Okay, this is kind of an unfortunate situation. This caller can't get individual disability insurance due to medical conditions already passed on a group plan that they could have had. That's unfortunate because your best option if you can't get individual disability insurance is work for somebody that gives you a group disability insurance. I suppose you could change jobs, but outside of that, you may not be able to get a group policy. One Option might be going through a professional association. You know, your county medical association may have something set up. Maybe your specialty association has something set up that you could do. It's worth looking into those things. But in this situation, you're telling me you can live off your spouse's income. In that case, maybe you don't need disability insurance at all. There's a lot of dual doc couples out there that don't carry disability insurance. They view each other as their disability insurance policy and feel like they could live off the other person's income completely. I wouldn't say that the majority of dual doc or dual income couples do that. I think most of them probably buy at least a little bit of insurance on each of them, but it's certainly an option. So it's not the end of the world. I'd be much more worried if you were married to a stay at home partner of some kind that didn't have substantial earnings. The other thing you can do is just try to hit financial independence a little bit earlier than you otherwise would. Because when you become financially independent, you drop your disability insurance anyway. I don't have any disability insurance. I don't need it anymore, and so I dropped it. When you're financially independent, you can do that. And so that may also be an option. Maybe not now, but within a few years, especially on a dual income. You know, you can save a lot of money on a dual income and reach financial independence pretty early. And even if you're not quite there yet, the closer you are, the less risk you have from a disability. It just doesn't hurt you that much when you become disabled. Of course, you can also try again when the medical condition stabilizes, right? Even something like cancer. If you've been cancer free for five years, you can often go and get disability insurance. And so maybe if your medical condition, whatever it is, becomes more stable, you can get a policy even if it excludes that medical condition. So don't be afraid to check back in a few years. You may be surprised what you can get. Our next question is from an anonymous caller. Let's take a listen.

Hi Jim, thanks for taking my question and thanks for what you do for the white coat community. My question is. My wife and I have been saving for a down payment on a house and have about $200,000 of cash saved up. But due to shenanigans from our employer, we have realized that we no longer want to work for this hospital for the long term. So we have put our house buying plans on hold. We'll be looking for new jobs, probably even looking at a new city due to our non compete clause. Thankfully, we have rented as you suggested and that is going to be a great boon to us. But we're now pushing our house buying time estimate out to the three to five year range. What do you think you would do in this situation with the cash? Would you hang on to it since it's still relatively a short investment horizon, or would you deploy some or even all of it according to your written investment plan? Thanks in advance.

All right, so you got all this money saved up for a house and now you've decided you don't want to buy a house. That's fine. Nothing wrong with that. In fact, that's why I tell people to rent until they know they like the job and the job likes them for situations just like this. But now you're three to five years away from buying a house for whatever reason. Seems a little long to me. It would seem to me if you change jobs in a year, within six months or a year of being there, you may know you're now ready to buy. So that might only be a year or two away. But you're telling me three to five years. I'll take you at face value. What should you do with the money that you don't need for three to five years? Well, there's lots of options. The first one is just leave it in cash. You know, if you're sure you're going to want this money in three years and you want this exact amount and you don't want to have to worry about it going down in value, you can leave it in a savings account, you can leave it in a money market fund, it's still going to be there. It's fine to do that for any kind of short term investment. So a lot of people like the rule of thumb to not put anything in stocks or real estate that you need in the next five years and this money would fall into that category. What else could you do if you know you're not going to buy anything for the next three years? You could buy a three year cd. You get a little higher rate than you will in a savings account. By doing that, you could take on a little bit more risk and you could put it into a short term bond fund or even a longer term bond fund, intermediate fund maybe. In general, you want to keep the duration of the fund shorter than the time period when you'll need the money. So using that philosophy, you would stick with a short term fund until you're maybe a year out and then switch to a money market fund. But if you're willing to take more risk, you could put it into a balanced fund. You know, something like Vanguard's Wellesley Income fund. It's about 35% stocks, 65% bonds. It's a pretty good long term fund. I think long term returns over decades are like 9 to 10%. But if you look at its worst year, it's only like minus 5 or 6%. So you could lose money there, but you're probably not going to take a massive, massive hit on a fund that's 65% bonds. You could also just move this money into your regular asset allocation for long term investments and plan to start saving up again for your down payment and save it up between now and when you need the money. And that would be a reasonable option as well. So lots of options here. I wouldn't necessarily feel like you have, you know, any bad options there. I guess the bad option would be buying bitcoin on leverage with money you need in a year. That's probably not wise, but of all these things we've talked about, you could argue any of them are reasonable to do. All right, let's take our next question from Dean.

Hi Jim, this is Dean from the upper Midwest. My question is regarding retirement withdrawal strategy. I am thinking down the road a bit. First, let me give you an idea of my financial context. I am 47 years old and I project that I will retire in 10 or so years. My portfolio will be approximately 2/3 taxable, 20 to 25% tax deferred, which is currently a cash balance plan, 10 to 15% in the Roth IRA HSA. I would presumably roll my cash balance plan over into a traditional IRA upon retirement. So I have read a little about withdrawal strategies and want to get your thoughts. I have read about two similar yet differing strateg. First, beginning at age 59 and a half years old and after retirement I would withdraw enough from the tax deferred account to fill up the lower tax brackets to use for spending. Next, I would dip into the taxable account. Second, similarly beginning at age 59 and a half and after retirement I would withdraw enough from the tax deferred account to fill up the lower tax brackets, but then convert that money to a Roth IRA so spending would come from the taxable account brackets solely. Both are similar with the goal of trying to minimize minimize the required minimal distribution by 70 and a half. But differing approaches as to what to do with that money. Do you agree with one of these Approaches or are there any other thoughts or approaches that you would recommend? Thank you so much for all that you do.

Okay. Lots of complexity in this question. Actually, Dean's got 2/3 of his money in taxable, about 20% in tax deferred, and 10 or 15% in a Roth or a tax free account plans to retire at 57. He's trying to decide between two strategies, but in reality, there's two questions mixed together here. The first question is, should Dean do Roth conversions? And the answer to that is almost certainly yes. This is someone who's retiring at 57 won't have to start taking Social Security until 70, I guess it would be. And so that gives you 13 years to do Roth conversions with somebody with a big, huge taxable account and a relatively small Roth account. That wouldn't be a bad idea to convert some of that tax deferred money to a Roth account. Now the idea is, as you go along through the years, that you just convert the amount that takes you up to the top of the next tax bracket. So if you find yourself in the 24% tax bracket, you would only do enough conversions that it would take you up to the top of the 24% tax bracket each year. So that's probably going to be a good idea for you to do Roth conversions. The other question is, well, how should you spend the money? How should you pull the money out? And there's a few general principles here with lots of exceptions to them. As a general rule, you want to spend taxable money before tax protected money, okay? And so you really got to keep in mind those benefits of retirement accounts, right? They protect your money from taxes as it grows. You don't have to pay taxes on dividends, capital gains, any other type of distributions as it grows. You only have to pay taxes when you take money out of the account. So keep that in mind. As a general rule, if you'll spend taxable first and then get into your tax protected accounts, you will end up with more money. Also, as a general rule, you only want to use tax deferred money up to the top of the nearest bracket. And if you need more money above and beyond that, you take from your tax free or Roth accounts. And the idea between that is you can mix and match there enough and essentially set your tax rate, set your tax bill in retirement. But when you have all three types of accounts, you've got a lot of flexibility in choosing how exactly you're going to withdraw from those accounts. And you can essentially, if you want to have lower taxes one year than another. You probably can keep in mind as you start spending a taxable account that you want to generally spend the high basis assets first, the stuff that doesn't have much of a tax bill. For example, if you bought stuff at a share price of 100 and you're selling it at a share price of 110, you only have to pay long term capital gains taxes on $10 a share. The rest of it comes out totally tax free. But if you have low basis shares, you know you paid $10 per share and now it's worth $100 a share. That is going to cost you a lot more in taxes. So if you're planning on leaving money to charity or leaving money to your heirs who would get a step up in basis at your death, you know you may not want to sell those low basis shares. That may be a reason to instead use retirement account money instead of taxable money. So like I said, lots of exceptions there. Especially if you're in poor health, you're in your last few years of life, this is not a great time to be selling low cost basis shares. Take advantage of that step up in basis at death and just spend from your retirement accounts in that situation. But most of the time your heirs would love to have a stretch Roth IRA left to them that's even better than a taxable account, you know, even with the update in basis. So lots to talk about there as far as retirement strategies, but the key is to individualize it. Look at your tax bill, look at where you expected to be throughout retirement, where it is during the accumulation phase, and then you can make some smart decisions about how to use your taxable tax deferred and tax free money to lower your overall tax rate for you and your heirs throughout retirement.

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