WCI #177: Financial Planning for Children with Special Needs

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 number 177, financial planning with special needs children. Let's see. We're recording this on September 10th. It's to go live on September 24th. Hope you're having a great September. It's one of my favorite months. Not one I spend a lot of time in town on, thankfully. I like spending time in Southern Utah in September. It's a wonderful time to be at Lake Powell and so spend a lot of time there. Just came back from a five day trip there for Labor Day with the kids. It was a wonderful trip except for the last day when we had to come home through 40 miles of 2 to 3 foot chop. Not always fun in a boat, but it was, it was worth it for the four other great days. I hope you are having a wonderful time at work, at home, with your family, doing your hobbies, whatever it is you do. But thank you for being a doc. Most of you are docs that listen to this podcast. It's not easy work. I just came back from a shift late last night. You're asked to do difficult things with limited resources in difficult, sometimes ethical, and sometimes just difficult to see situations. And so thank you for that. Also thank you for those of you who filled out our podcast survey. We're getting a lot of really useful information. A lot of you apparently want me to get Warren Buffett on the podcast. I'm not sure I'm going to be able to get Warren Buffett on the podcast, but I've directed Cindy to try. So if Warren Buffett agrees to come on the WCI podcast, we'll get him on. Also thanks to those of you who Watch this on YouTube. You may not know, but you can actually watch the making of this podcast on YouTube. The video and everything of me is on there. We've got a camera, camera in the room where I'm recording the podcast. And so we figured, hey, we'll just produce some YouTube content at the same time. But it's interesting the comments you get on YouTube, right? It's a different crowd on YouTube. So I get lots of comments about my personal appearance. Apparently I discovered this morning that I have pointy eyebrows. Nobody ever told me that before. So thank you for all that great constructive criticism that we're getting on YouTube. All right, who else do I need to thank? I need to thank our scholarship judges, those of you who have been judging in September, all these scholarships. How many did we get? Cindy? 800, 892 applications for the WCI scholarship. So thank you to you guys for judging it. Thank you to those who donated to it. Thank you for the sponsors. You'll be seeing a few sponsored posts on the blog in September and October from those sponsors. So thank you for supporting those who support what we're doing. Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the white code investor can help. All right, got a few more things to tell you about. We'll talk about that later in the podcast though. Let's start with our main topic and our main topic for this podcast is Special Needs Kids. And so it came from a suggestion by email I got just a few days ago. I'd like to suggest a topic for a podcast, Financial Planning for Physician Families with Kids with Special Needs. I've been through most of your website and I have not found that yet. About two years ago our six year old son was diagnosed with neurofibromatosis and it has dramatically altered our financial planning. I think it's applicable to many topics of interest to your audience. Insurance, financial planning, estate planning, etc. Okay, so let's talk about all the things that are different with a special needs kit. Number one, your investing horizon. You're no longer planning just for your life, which might be, you know, a 20 to 50 year time period. In some ways your investing horizon is now your child's entire life. So perhaps it's 80 more years instead of 40 more years. So that should suggest a more long term approach to your investments. There is going to be more inflation that you need to keep up with, which would suggest perhaps you need a more aggressive asset allocation than you would otherwise have. You still can't be more volatile than what you can tolerate. But perhaps you stay at 60 to 90% of your portfolio in stocks or real estate or other risky assets for a decade or two longer than you otherwise would. Perhaps you also work a few years longer to buff up that nest egg to make sure it's going to last through this longer retirement period. Number two, government resources. You're going to need to learn about all the programs and accounts that you may never need for yourself, but you will need to navigate for your child in order to have that child maximally benefit from these options. This includes Medicaid, Medicare, Social Security disability, for example. You may not know this. You can get Medicare under age 65 if you're disabled. But there's some unique rules. For example, here's one of them. You can keep your Medicare coverage for as long as you're medically disabled. If you return to work, you don't actually have to pay your part a premium for the first eight and a half years, but after that you do have to pay the part a premium. I can't explain why it's eight and a half years. That's just the way the rule is. But all these ins and outs of government programs, they can be incredibly complex. And if you're going to help your special needs child, you got to learn how they work. And so I would definitely get in on that stuff. Here's another example. If you can't afford that premium, a lot of states actually offer what they call the Medicare Savings Program or a qualified medical beneficiary program. That basically is a state program that helps pay Medicare Part A premium. So state program pays the premiums for a federal program, pays part A premiums, Part B premiums, and other cost sharing like deductibles and coinsurance and co payments for those with limited income and resources. So you really got to understand about those special government programs. And unfortunately, because of those and their eligibility requirements, you may also have to do some special financial planning in order to make sure that your child qualifies for them. If you just leave your assets to your child, you know, you die with a $2 million nest egg and leave that to your child. They might not be eligible for all the government resources that they would be eligible for otherwise. It's a little like FAFSA planning for college financial aid, not something that most doctors have to do because their kids don't qualify for financial aid anyway. But some families do that. They basically try to hide assets from the FAFSA or put it in assets that the FAFSA doesn't ask about or care about or rank as highly. And that way their kid qualifies for more loans and maybe even some grants and scholarships. It's a little bit like Medicaid planning for your parents nursing home, right? The idea is to qualify to get Medicaid to pay for the nursing home by taking the assets from some place where they're not exempt and put them someplace where they are exempt from the Medicaid calculation as to how much your parents have. Same process, except now you're doing it for your disabled child. So what you're probably going to end up with if you go to do that and you go see an attorney in your state that specializes in this is you're probably going to end up with a special needs trust. And this is all governed by state law. So it's really hard to get into specifics because every state's a little bit different. But in general, a special needs trust is a legal arrangement and a fiduciary relationship that allows a physical or mentally disabled or chronically ill person to receive income without reducing their eligibility for public assistance disability benefits from Social Security or Medicare or Medicaid or Supplemental Security Income or whatever. So because it's a fiduciary relationship, right? It's a trust, there's a trustee with a fiduciary duty, then that person has to manage those assets for the disabled person. So it basically covers the person's financial needs that aren't covered by public assistance payments. That's the idea behind it. So the idea is to have money that you can use for anything that the public programs don't pay for. These trusts are generally irrevocable. They're not revocable trusts. So once you put the money in there, it's just like you've given it to your special needs kids. That's good for asset protection purposes, right? Your creditors can't get it out anymore, but you also can't take it out and then spend it on a sailboat for yourself. So your creditors nor winners of a lawsuit can access those funds that are for your beneficiary. So expect that, you know, if you have a significant amount of assets like most of my listeners do, and you have a special needs child that if you go in and see an attorney in your state that specializes in this, they're probably going to talk to you about a special needs trust, and that's probably a good thing for you to do. Okay, next decision number three. What health insurance plan to use? Should you be using A high deductible health plan. Should you be using a regular low deductible PPO plan? Well, the truth is disabled kids generally have more health care expenses. So if you end up having a disabled kid, it probably isn't going to make sense for you to have a high deductible health plan, even if it allows you to use an hsa. You got to run the numbers, of course, but most of the time, I think you're going to find yourself in a relatively low deductible plan, gold plan, et cetera, instead of the bronze plan and that sort of a thing. As always, with this decision, choose the plan first. First that makes sense for your family. And if that plan happens to be a high deductible health plan, then of course, use the HSA for investing. But don't let the presence of an HSA as an investing account sway the decision for the health insurance account. All right, number four, you can get the benefits from an individualized education program. What these are, they basically come from the fact that there is state law that says the state has to educate your kid. And if your kid has special needs, they have to provide special ed until they're 22 or until they receive a regular high school diploma. So as part of that special ed, your child may qualify for all kinds of therapy paid for by the school district that your health insurance wouldn't pay for and government programs aren't going to pay for. So that might include physical therapy, occupational therapy, psychological therapy. Make sure you look into it and understand the details of that program. Okay, Geographic arbitrage number five. Right. Just like you can move to a state that has a lower cost of living and a lower tax burden, and that might not be a bad idea if you need to save more for a special needs child. That's not what I'm talking about. I'm talking about moving to a state where the benefits for disabled people are better. They're better in some states than in others. And so that's an opportunity for you to move and get, you know, a better education or more benefits for your child or, or to have them in a better place in the event that something happens to you where they're eligible for more programs. All right, number six, insurance. As a general rule, your nest egg plus your term life insurance added together needs to equal your financial independence number. But with a disabled kid, your financial independence number is probably a little bit higher. So you're probably going to need a higher benefit amount in your life insurance, a longer term for that life insurance or both. You don't necessarily need whole life insurance, though. Despite the fact that it's often sold and oversold to parents with disabled kids, whole life insurance is still not a bad thing to leave in an irrevocable trust, especially if you prefer the guarantee it provides. Right? There's a guarantee there if you die early, if you die young, they're going to get a certain amount that's guaranteed. That's the benefit of it. If you prefer that to likely leaving them more money by using standard investments, you can choose that option. But you can also cover that need with term life insurance. Whole life insurance, like other permanent life insurances, can also provide a little bit of a permission to spend your other assets. So if that's hard for you to spend your other assets because you're worried you got to leave as much as you can behind for your disabled kid, maybe you should buy how much you're planning to leave behind to your disabled kid in whole life insurance and then spend everything else and then you won't feel guilty spending it. It's a little bit of a psychological crutch, but lots of us need these behavioral crutches in our lives. Disability insurance, of course, is also important. And again, you probably need a little more than usual to make sure you can still fund the now larger necessary nest egg from that disability insurance payout, that benefit in the event that you get disabled. But still, even if you have a special needs kid, disability insurance and term life insurance can still usually meet your insurance needs. All right, let's talk for a minute about Able accounts. I've written about Able accounts on, on the blog. It's been a few years. I think my article was from 2018. So a couple of years ago. Since then, these have become even more popular. All right. It used to be a couple of years ago when I wrote this article, only 21 states had able accounts. Now 39 states have able accounts, including my state of Utah. And so it's a great option here. It came about from legislation passed in 2014 by Congress. It was called the Achieving a Better Life Experience act. Able, which basically provides a tax advantage to those saving for the needs of the disabled. So think of an Able account as a529 for disabled kids living expenses. That's the best way to think about it. There's no age 59 and a half rule. It's got the same $15,000 annual contribution limit. And if you're mentally or physically disabled at a young age, that basically is a way to save in a Tax advantaged way for their living expenses. The money goes in post tax, but it comes out as long as it's used for their benefit, comes out tax free. So like a Roth IRA or a 529 that way. The rules are pretty straightforward. They're not too bad. The beneficiary has to be disabled before age 26. That's one of the rules. Anyone can contribute to it, but it's only a total of $15,000 per beneficiary. So even if grandpa opens an account and you open an account and Uncle Bob opens an account and Aunt Sally opens an account, $15,000 total, you don't get $15,000 apiece. So that's a little bit different from a $529,000. It's $15,000 total per year per beneficiary. And if you miss years, there's no catch up. The beneficiary can actually contribute from their own earnings a little bit over $12,000. In addition to that $15,000 total, the account has to be opened and maintained by a parent, guardian or designated agent. Somebody that they say has signature authority. But withdrawals can be made by either the beneficiary or the signature authority. You can change the beneficiary and do a rollover to a different account. If you have two disabled kids, for example, you could roll some into that other sibling's account. But basically you can use this thing for almost anything. You can justify almost anything for their benefit. Education, housing, and that includes a mortgage or property taxes or utilities, transportation, employment, training and support, assistive technology, health care, prevention and wellness. I mean, what can't be put into that category, right? I mean, you can buy golf clubs for that. Financial management. So you can pay your financial advisory fees out of it. Well, their financial advisory fees, legal fees, expenses for the account itself. You can pay for their funeral and burial in the unfortunate case that they pass away. And you can pay their basic living expenses. So you can use it for almost anything as long as you're using it for their benefit. There is a maximum on how much can go in there. It's kind of similar to 529s that way once you get a certain amount in there, you have to stop contributing. That's typically in the $350,000 range. You can also only have one able account at a time, unlike 529s. Right. You can open a 529 in Utah and California and New York. But you can't do that with able accounts one account at a time. Interestingly enough, you kind of want to make sure you spend the money in this account because if there's anything left in it that might actually go to the state to reimburse them for what they paid for your disabled child. So you kind of don't want to leave a bunch of money in there when you're a kid dies, you want to use it up, you know, at the end to pay for any burial expenses or anything like that. So lots of interesting stuff there about it. Lots of places to open one. I'd look at your estate first. There are some states that offer a bit of a tax break for it. I know Iowa, Michigan, Nebraska, Ohio, Oregon and Virginia do. There's probably more states now that do. Fees aren't too bad in these accounts. Usually something like 40 or 50 bucks a year and maybe an asset based fee, something like 0.35% a year. So not too bad. You can't get all the benefits from it that you can from a trust, but there's no reason that you can't use both. Keep in mind that 529s can be converted to able accounts. So if your child's not disabled before age 26, you can put money in a 529 for them, and when they're declared disabled, you can then roll that over into the able account. All right, enough about financial planning for special needs children. I hope that's helpful to those of you who have them or know them or have a friend with special needs children. Let's do our quote of the day. Our quote of the day today comes from Robert Dorigazi. He's a cardiologist and an author. He said with whole life, you have insurance for your whole life. And there are clearly times that life insurance is not required. That is certainly the truth. Okay, let's talk about bitcoin. Why not? You guys all want me to talk about bitcoin? I'm always getting emails. You should talk about bitcoin on the podcast. You know, I have all kinds of these aficionados, these fans of bitcoin who want me to talk about it and other cryptocurrencies. For example, I got a comment the other day about it. Thanks so much for your podcast. I really have been enjoying it over the past few months. I'm a first year med student. Congratulations on getting into med school and minored in economics in college. So I've been interested in many of the macro factors going on right now. And you'll notice that people interested in cryptocurrency are Always talking about macro factors, particularly, you know, concerns about future inflation or concerns about confiscation by governments tend to be what they worry about. And, and that's what pushes them to put a significant chunk of money into cryptocurrencies in hopes that they could hide this from a confiscation event or that it would somehow be exempt from an hyperinflation event. He goes on to say, I was wondering if you would consider having Preston Pish on your podcast to chat about the global macro environment, government debt, inflation and Bitcoin as a store of value. Like I mentioned, I realized cryptocurrency can be wildfire and terribly risky. Isn't that the truth? However, given the current environment, I almost believe it is irresponsible not to have any education about the asset class given its properties. I'm a big fan of education. I really think you ought to learn about all kinds of stuff and cryptocurrency isn't a bad thing to learn about. The main benefits of it, of course, are that there's a fixed supply, right? Supposedly you can't just go make your own new Bitcoin. Now. It's not necessarily the case. You can go spend a whole bunch of money in energy and apparently mine new Bitcoin. So it's not totally fixed, but eventually it'll be fixed. It's decentralized so the US government can't control it, although they seem to be becoming ever more effective at taxing it and exerting some control over it. And it's useful for cross border payments. Well, I suppose some of us make cross border payments from time to time. I don't make very many, but if that's a big need you have, that might be useful, especially if you need to get around that, that pesky rule about only carrying $10,000 in cash in your suitcase. He goes on to say institutions and investors are starting to realize this as fund managers like Paul Tudor Jones and publicly traded companies like MicroStrategy add Bitcoin to their balance sheets. I don't know what this argument is. People use this all the time. I should invest in Bitcoin because some hedge fund does, or because some bank does, or because some wealthy individ, you know, their goals are not the same as mine. I wouldn't invest in Bitcoin just because of that sort of a thing. Especially since I still can't use it to buy anything I want to buy. Right? My gas station isn't taking it. My grocery store isn't taking it. This is Not a useful currency. It certainly is not a stable currency. Right. Is volatility dramatically exceeds that of the stock market, and I'm not putting grocery money in stocks until I spend it. So I think we can see there that it's, you know, still an instrument of speculation. Not a useful currency at this point. All right. He goes on to say, I think if this is done safely and if investors are not over leveraged, I think this could protect value if inflation rises. Could and can and may are such useful words, aren't they? Anytime you use these words, you can follow it with pretty much anything you want. Right. Because it puts his hedge on what you just said. Yes. It could potentially protect you in this year in the event of hyperinflation. It might not too, and there might not be hyperinflation, but it could protect you. All right. He goes on to say, more broadly, blockchain in general, I believe, will change the world. Entirely possible. Very useful technology. A quick search on cryptocurrencies such as Algorand or Cardano has shown how the scientific peer review process has seeped into this space, and use cases are unlimited. I agree there's lots of uses for blockchain, just like there's lots of uses for the Internet. But that doesn't mean that every company with.com at the end of its name in the late 1990s is going to be a great investment for your portfolio. Pets.com, for instance, was not a great investment. Likewise, there are going to be a number of these cryptocurrencies available out there and these coins available out there that are not going to be great investments. In fact, there's no guarantee that any of them, at least those existing today, are going to be great investments. Will there eventually be some coalescence in this space? Yes. Will cryptocurrencies continue to be used and probably become more useful as time goes on? Yes. Will I still be able to exchange dollars at some future point for cryptocurrency? Absolutely, yes. So no reason you have to buy it now just because it's probably going to be used more frequently in the future. We're still in the early stages, he goes on to say, but the projects that do survive, I believe will change the world. Okay. Entirely possible. Although these assets are highly volatile. Absolutely true. And full of many scams. Also absolutely true. I encourage people to have an open mind about it because there's some amazing innovation going on masked by the hype and pain of volatile prices. I agree. There's amazing innovation going on. I agree. It doesn't hurt to have an open mind, but you don't want your mind so open that your brains fall out of it. Right? Use your head, people, okay? There's a lot of hype. There are very volatile prices, and at the end of the day, what you're investing in is at best a currency. So if you're not buying yen, you're not buying euros, you gotta ask yourself, why am I buying cryptocurrencies? Okay, it's the same thing. It's an instrument of speculation. You're buying it in hopes that down the road someone else will pay you more for it. He finishes. I'm interested to hear your thoughts on this. I think you just heard them. I also think having some education about this could benefit listeners. I agree. There are way too many people who are running out there and putting way too much of their portfolio into bitcoin, mostly out of fear of missing out and in hopes of getting rich quick. So make safe and educated decisions. As I've said over the years, there's no Bitcoin in my portfolio. But if you're a true believer in bitcoin or some other cryptocurrency and you think it's a better hedge against future economic catastrophes and other commonly used assets like gold or commodities or farmland, and you're convinced that of the hundreds of cryptocurrencies out there that bitcoin will be one of the winners, then go buy some. It really doesn't bother me what you spend your money on. But limit its percentage in your portfolio to a play money amount something like less than 5%. And don't assume that just because blockchain technology is useful that bitcoin must grow to the sky. I think there's the Winklevoss twins, the people that were apparently involved in Facebook early on who predicted recently that bitcoin was going to $500,000. Maybe it is, maybe it isn't. I honestly have no idea. But there are many future potential scenarios where the future investment return on Bitcoin will be terrible. And don't discount the possibility of that. You are making a risky bet. Maybe it'll pay off, maybe it won't. Don't bet the farm on it. Okay, for those who aren't aware, through next Monday at midnight mountain time, we're running a promotion on medical degree to financially free. This is Jimmy Turner, the physician philosopher's course. You can get more details at it at whitecoatinvestor.com MDFF There's a free webinar whitecoatinvestor.com mdffwebinar but this is a $647 course. It comes with a 14 day guarantee. There is no risk to you. And what the course is about is to take those who really are not managing their cash flow well and giving you the motivation and the tools to manage it. Okay, so in the beginning of the course they talk a lot about your why, why you're investing, why you want control of your finances, why this stuff matters. And then he shows you how to essentially budget your income, which for most of you is pretty significant income, and use that to accomplish your financial goals. He shows you how to protect that income not only from financial catastrophes that you might think about like disability or death, but also from less common things or more common things that you might not think about like your own bad behavior. He teaches you all that. Then he shows you how to use that cash flow of yours to pay off your debts. And then of course, once those are gone, to invest and to grow wealth and become financially free. So a very useful course for those of you who have taken or taken a look at fire your financial advisor, the white coat investor course, and felt like it was too advanced, it launched you into too much too soon and didn't spend enough time on cash flow and budgeting, this is the course for you. The promotion we're doing this week is a pretty sweet deal. What we're doing is if you buy this course and obviously you don't return it in the 14 day guarantee period, we're going to give you WC icon Park City. That's 13 hours of additional content. That's a 300 value. We're just going to throw it in for free. If you buy medical degree to financial free. Plus if you decide you want to upgrade later to fire your financial advisor and take that course, that'll walk you through portfolio design and some of these more complex topics like estate planning and asset protection, those sorts of things that we cover in that course. We'll give you 100 bucks off that too. So it's pretty sweet deal you're getting here. You get a medical degree to financially free. You get WCICON Park City all for $647. Plus if you want to buy fire your financial advisor later, you get 100 bucks off that. So a great deal for you. Take advantage of that. Whitecoatinvestor.com MDFF and that's available through the 28th. That's Monday night at midnight. Okay, let's take some more of your questions here. All right, we'll take this one off the speak pipe from Eric. Let's take a listen.

Hi Dr. Dali, I'm thinking about converting some of my bonds to TIPS funds. Notice when comparing what's at Vanguard to what's at Schwab that Vanguard considers a short term TIPS fund to be those less than five years remaining, whereas Schwab considers short term less than one year remaining. What do you consider short term and how do you decide whether to purchase short term TIPS versus the longer term tips? Many thanks.

All right, what do I consider short term tips? Well, I don't know. Either one's a fine definition. Just decide which one you like. The important thing is to know what you're buying, right? TIPS are treasury inflation protected securities. They are treasury bonds that potentially provide a return in three different ways. Appreciation in the value of the bond, a periodic coupon payment, or the yield of the bond. Both those components are the same as a nominal or regular old bond bond. But in addition, there's an inflation component to its return that helps protect you from unexpected inflation. Right? Expected inflation is already built into the yield of a bond of any nominal bound. It's the unexpected inflation that gets you. Because TIPS are also a Treasury bond, it helps avoid equity risk. You may get a little bit of a boost in a flight to quality. It tends to be a go to asset in that aspect, unlike a corporate bond which contains a little bit of equity risk. Really it's a little bit different. It's a Treasury bond. And so as far as short term versus intermediate term, the important thing is simply to know what you're buying. One year TIPS are fine. Five year tips also fine. They're both fine to have in your portfolio, but they'll behave differently. Your expected return on a five year bond is going to be higher than that on a one year bond. In a period of falling interest rates, a five year bond will outperform one year bonds and vice versa in a period of rising rates. Obviously a longer term bond is going to be more volatile than a shorter term bond. My current holding is the Schwab regular TIPS etf. SCHP is the ticker. But I've also owned the Vanguard TIPS fund in the past and I probably will again at some point in the future. I'm sure both of those are fine holdings that will allow you to invest in TIPS with, you know, very little hassle, very little expense and daily liquidity. Now you can go buy TIPS directly from the Treasury. You can go to Treasurydirect and buy them directly and hold them for 30 years if you like. That is an option. It obviously cuts out the expense ratio on these funds, but these funds expense ratios are so low they're practically free to start with. So you're not saving a lot there. I don't actually hold short term tips. I guess I hold mostly, you know, intermediate term tips, but I don't think there's necessarily a right answer there. You want to hold short term tips. I think that's reasonable too. The important thing, as usual, is to get a portfolio that's reasonable and stick with it through thick and thin. There will be periods of time when shorter term tips are better than longer term tips, and periods of time where longer term tips are better than shorter term tips. Okay, another question. Couple of questions that came in by email from one listener. Let's take them one at a time. Would you consider talking a little bit more in depth about 401 s and 403 s or any similar retirement plans? On a podcast episode in the future, I specifically wanted to hear more about things like true UPS Investing and if there's any tips on keeping track of your contributions across multiple 401s. I've listened to just about every podcast now, and you've only talked about contribution limits for multiple 401s or a solo plus an employer 401 choosing investment options traditional versus Roth versus mega backdoor. There's nothing about the nuances themselves. I realize these can be planned and employer specific, but I'd appreciate it if you could take a minute or two to shed some light on these. As an example of a possible question, if you quit a job after one year, but employer contributions aren't 100% vested until three years, can you leave the money for two more years to get 100% of that employer contribution? Or does that all end as soon as you quit, so you're stuck with just 33% of that contribution? My company's retirement plan contexts are useless in answering questions like this. I think true UPS are especially confusing. Would appreciate any help with those on the podcast. Okay, so let's talk about 401 s and 403 s. All right. Vesting. Okay, a vesting plan. This feature that's in some 401s is basically a way to put golden handcuffs on employees to get them to stay at the company longer than they otherwise would. For example, it might be phrased that your employer match does not vest until you've been at the company five years. So that means if you leave the company anytime before you've been there five years, all the match that you got on your contributions get taken back by the company. So that's a bad thing, obviously, right? You thought you were getting all this money and you really weren't because you didn't stay there. And so you need to understand vesting rules, especially when it comes time to leave a company. Now, if the company doesn't give you a match anyway, who cares, right? And for lots of high income professionals, you're highly compensated employees and they don't give you a match anyway, right? Or if you are in a partnership, you know, with a 401k profit sharing plan, it's probably all your money doing the match anyway. So if the money goes back to the employer, it's coming back to you, no big deal. So those plans typically are not written with a vesting schedule. And that's like my plan at my partnership, we don't have a vesting schedule. Whatever you put in there, you get to keep when you leave. Leave Vesting does not affect your contributions. The money you put in there from your paycheck you get to keep no matter when you leave. That's your money. The vesting refers to the match. And you need to understand the rules in your 401. It may be worth staying at the employer for another month, for example, to make sure you get what is vested. So your possible question, if you quit a job after one year, but employer contributions aren't vested until three years, can you leave the money for two more years? No, they don't want you to leave your money in the 401k, they want you to stay in the job. That's the point of it. And so no, you can't just leave your money there and try to get the match. They're going to take the match back at least whatever portion is not vested. Now if it vests 33% a year, then you get to keep 33% after you leave a year. If it's 0% vested until three years, then you don't get any of the match if you leave after one year. That's just the way it works. Okay? True ups. What true ups are are a way to find fix a problem that some 401ks have. Some 401ks are set up such that they will only match a certain amount per month. So if you don't put the same exact contribution in each month of the year, you may get shafted not receive some of the match. So you need to ask how does the match work? And it's sad. In this doc's Case that the HR can't answer even basic questions like this. But you need to figure out how your match works. If your match is limited to a small amount, you know, $200 a month, or however it might be limited, then you need to make sure you contribute every month to get that $200 a month or whatever it is. But if the plan has true ups, what that means is at the end of the year, they go back and they look at everything you contributed. And if you can contributed enough to get the entire match, then you get the entire match. They true it up at the end of the year and contribute anything that they should have but didn't. So true ups are a good thing. You want to understand how your match works. And if you, if it's kind of squirrely like that, and if you max it all out by April, they won't give you your entire match. You want to ask about true ups, and if there are no true ups and you got some squirrely way they do the match, then you better make sure your contributions just trickle in during the year to make sure you get the entire match or you'll be leaving part of your salary on the table. All right, I think I got most of those answered. Any tips on keeping track of your contributions across multiple 401ks? Well, I keep track of every contribution I make to all my investment accounts. It's on a spreadsheet. If you're going to manage your own finances, you pretty much have to be spreadsheet proficient. And if you can't make a simple spreadsheet, keep track of the contribution to your various accounts, you're probably not going to keep track of them. That's just all there is to it. Now, do you actually have to keep track of them? No. I mean, I guess in the end all you care about is, you know, how much is in there. But the bottom line, if you need to track it for your match, to make sure you get your entire match, well, you better be on top of it and write down each month how much you've contributed, how much of the match you've gotten so far, how much more you need to contribute to get the rest of the match, et cetera. You're going to have to be on top of those details if you want to get your maximum benefits. Hope that's helpful. Okay, we're going to take this doc's second question. This is probably a very simple and or silly question, but I still don't completely understand deductions. My wife and I are W2 wage earners. We have no 1099 income. We take the standard deduction every year. Rent, our house. I took a hospitalist job. Now, that involves a significant commute, 150 miles round trip, seven out of every 14. That sounds terrible. You know, it's interesting. With commutes routinely surveys of the things that make people the least happy, the most unhappy, commuting is always at the top of the list. So if you're looking for someplace to spend money to make your life more happy, moving close to your job is highly likely to do that. So do what you can to keep your commute short. I know it makes it difficult to listen to these long WCI podcasts, but it probably does make your life more happy overall. And I'm only putting one of these out a week, so you only need a 10 minute commute to listen to the whole thing over the course of the week, right? Okay, yes. Since this is my normal commute, I cannot claim miles or gas as a deduction, correct? That's correct. You cannot deduct commuting mileage or commuting expenses in any way. It sounds like based on your podcast, it's only if I were to drive between this hospital and another hospital during my day that I could duck miles only between the hospitals. That's correct. You can deduct work miles if you're in business, but you're a W2 earner. You're not in business for yourself, so that's not a business expense. It's probably an unreimbursed employee expense, which you can't even really deduct those anymore. You used to be able to deduct them on schedule A, but they were subject to a floor that kept anybody from really getting much of a deduction for it. But as an employee, you don't get that deduction anyway. So if you are in that situation, try to get your employer to give you something for those mileage that you're driving, because that's the only way you're getting any money for it. Last question is, is it an either or for standard deduction or itemizing deductions as a W2 earner? It's an either or for everybody. It doesn't matter if you're a business owner. If you're an employee, what you are, you either get the standard deduction or you itemize your deductions on schedule A one or the other. And with the new higher standard deduction, a lot more people are not itemizing. For a married couple, I think in 2020, I think it's $24,800. So unless your itemized deductions are greater than $24,800, there's no point in itemizing. You might as well just take the standard deduction, keep your life really simple, not have to save all those receipts, et cetera. But if you are giving more to charity, paying more in taxes, and when I say taxes, I mean up to $10,000 a year in property taxes and state income taxes combined and charitable contributions. If all that doesn't add up to more than 24,800, you might as well just take the standard deduction. But you can't take both. That's not entirely true. There's a new provision this year. I can't remember all the details of it offhand. I'd have to look it up. But I think you can give like 300 bucks to charity and you can deduct that in addition to the standard deduction this year. So that's a new, new thing there. But you know, you can't deduct $15,000 you gave to charity plus the $24,000 standard deduction. You got to weigh them and choose between one and the other. And his final question, since I'm W2 and not 1099, I can't deduct my scrubs, stethoscope, et cetera, correct? That's correct. They're unreimbursed employee expenses. The good news is, you know, your stethoscope and scrubs aren't that big of a tax deduction. So don't beat yourself up about it. Truly, the big tax deductions for doctors are your retirement accounts, right? You want a big tax deduction, max out that 401. That's probably your best deduction out there, particularly as an employee if you're self employed and you can qualify for it. The 199A deduction, which is the pass through business deduction, may be bigger. All right, our next question off the speak pipe comes from an anonymous listener. Let's take a listen.

Hey, Jim, I'm not a physician, I'm a software engineer. But lurking around in the WCI YouTube channel has given me a lot of value. So thank you very much for that. I hope you don't mind me asking a question here. My question essentially is should I financially plan for the future that I want or the future that might end up happening? The future that I want is to get married and buy a house and start a family and all that good stuff. The future that might be Is that after my breakup last year, I'm feeling hopeless about my relationship future and the thought has crossed my mind that I might be single for the rest of my Life. I am 33 and I maximize my mega backdoor, regular backdoor and 401k contributions right now while living in my rent controlled apartment. However, if I end up marrying and buying a house, starting a family and all the stuff that I want to do, then I feel like I might need all this cash to not be tied up in retirement accounts and be available so that I can make down payments and things like that. Would you suggest that I diversify my saving strategies? Thanks.

I like the way he phrases this. Should I plan for the future I want or the future that may end up happening? I empathize with your situation of not knowing the future. The downside, of course, if you knew what the whole rest of your life entailed, would you really want to know it right now? I mean, for example, if you knew how you're going to die, when and how, would you really want that information? Probably not. That's part of the fun of life is having that mystery hanging out there. Right? But in this case, your question basically boils down to should you not max out retirement accounts in order to have money in a taxable account or in cash or whatever that's available for shorter term purchases? I think in this situation where you're not engaged to be married doesn't sound like even a partner right now, I don't think I'd bother doing that. I think max out the retirement accounts. But the key, of course, is to maintain flexibility. You can always withdraw Roth IRA contributions. You can withdraw up to $10,000 in earnings for a house down payment. You can borrow $50,000 out of your 401k. And when you get in a serious relationship where you're starting to go, okay, I'm gonna need money for a wedding and a honeymoon and a ring and, you know, a new house and all that sort of stuff, you can start saving up at that point. Lots of people are engaged for many months or even years. It gives you lots of time to save up for those expenses, especially if you've got a good savings habit. The other thing to keep in mind is if you do get in a serious relationship, you get married down the line, whatever, your partner may bring cash to that relationship and maybe you're bringing the retirement accounts to the relationship. So you'd be perfectly fine in that situation. You'd really regret not having maxed out your retirement accounts. If that were the case. But I'd be pretty hesitant to pass on the known tax and asset protection benefits of retirement accounts because you might at some future date need a little bit of cash. If you're really worried about it, you keep a little bigger emergency fund, maybe six months instead of three months as some sort of a compromise. But for the most part, you know, operate under the way your life currently is under current tax law. And usually that means maxing out your retirement accounts with your savings. Okay, this question came in via email. Really great question. I really like this one. My dad and his five siblings have inherited a lake cabin from my great aunt about three years ago. It has been in the family since 1899. Is where my dad and siblings spend every summer growing up. It's worth about half a million dollars based on comps. It was left in a trust to the family with about a $50,000 levy fund. Thank goodness. That was a great move to leave a little extra cash to take care of. This place makes about $4,000 in profit from a government farm lease. That's great. The cost of the cabin are just shy of the $4,000 a year for tax and utilities. With significant updates, there's only about $10,000 left in the levy fund. I'm emailing you because unfortunately one of my uncles died in the last couple of months. I'm sorry to hear that. It is now very clear there's absolutely no plan for this trust moving forward. With five surviving siblings and 16 grandchildren, my dad and his siblings try to use as much as they can. And there's a ton of sentimental value. I'm not sure how the grandchildren would use this, how often they'd use it without an invite from parents. Do you have any recommendations on how to manage this going forward? Oh, boy. I don't think that selling it with any living sibling is an option. Selling it when there are 16 grandchildren gets pretty messy. How would a buyout work based on current tax assessment or on fair market value with a barely net positive cash flow until there's a major renovation needed again. Anyway, could we just keep sharing it within the family? Oh boy, this thing's a mess. This is the problem with leaving your assets to multiple people, right? In a lot of ways, it's better to leave something else to one child and leave the cabin to another one just to keep things simple. The only easy question that I've been asked here is when doing a buyout, should we use the tax assessment or the fair market value? We'll use the fair market Value. You know as well as I do that tax assessments aren't anywhere close to fair market value. If it is, you'd be down there contesting it with the tax authority. Right. And so don't use that. What should you do at this point? Well, you need some sort of an agreement within the family. And that agreement might be that it gets sold when the last of the siblings dies, when the last of that second generation dies. And if one of the grandchildren wants to buy it because it has a ton of sentimental value to them, well, they can buy out all the other grandchildren. But that agreement needs to specify exactly how the shares in this thing are split up. Are they split up and divided by the number of people in the second generation, by the number of people in the third generation, or exactly how will that work out? The document needs to really specify that. And there's going to be some resistance just to drafting up this document. Right. Because some people are. It's going to force them to make decisions now they'd rather put off for a long time. But the longer you put them off, the more painful they're going to be, the more valuable this property is going to be and the bigger headache it's going to be. So what can you do? There's lots of things you can do, but in the end, the goal is to try to find some sort of consensus compromise situation where you know, there's an agreement, a document that dictates exactly how shares are inherited, how shares are bought out, when they're bought out, et cetera. Good luck. I don't envy your situation. It's cool to have a piece of the property, but you may want to just walk away from your piece of it just because there's so much hassle. Once you divide half a million by 16, it's not that much money anyway and maybe not even worth the hassle and the family drama that it's likely going to cause at some point. And to those of you thinking about leaving assets like this to your kids, really think about how this is going to happen. I love the idea that they left some money to pay its expenses so that they didn't have to go around to the family and get that out. But this was really a bad idea to just leave this to six different people. Not smart. Bad estate planning. Okay, next question. Also from anonymous caller. Let's take a listen.

I have a question about rental properties. We have three of them and our most expensive rents for $4,500 a month. We have a family that would like to rent the home. Net income about $12,500 per month. Credit score of 620 with two prior bankruptcies, one dismissed and one disputed and no bankruptcies pending. A rental agency suggested a conditional approval with a doubling of the security deposit, which would equal two months rent.

I'm not as certain.

Would you recommend approving them for this rental or is this a setup for a tenant that doesn't pay? Thanks so much.

Okay, long question, easy answer. No, right? I'm not going to rent to somebody that has two bankruptcies. Right. Hello? They've shown not only once that they can't manage money and they don't pay people money that they owe money to, but they've done it twice, right? I mean, everyone deserves a little bit of forgiveness in their life. But two bankruptcies? No, I'm probably not going to rent to you. There are too many other good tenants out there. If you're not seeing good tenants applying to live in your property, maybe your rent's a little bit too high. Lower it down or give it a little more time and you'll likely get better tenants applying to come live in your property or fix the property, whatever the issue is with it that the only people applying for it are people in this sort of a situation. I definitely lower the rent first before I rent it to somebody with two bankruptcies. And I'm sorry, I don't know where people with two bankruptcies go to rent. Maybe they go to places that are where the rent is too high and no one else applies for it. I don't know. But I'm not taking on that risk. I'm sorry. Okay, next question off the speak pipe. This one's from Eric.

Hi, Dr. Dolly. I have a question about 529 accounts. We use these accounts to save for our daughter's College. She's currently five. And we have $70,000 saved, which suggests that we are almost done saving for a four year public school, but would need to add more for an average private school and certainly more for an expensive private school. This year we decided to send her to private kindergarten because we had a hard time believing that younger kids could learn virtually. Is there any benefit in putting the private school tuition into a 529 account first and then withdrawing it to pay the private school tuition. Thanks so much.

All right, well, is there any benefit to running K12 private education through 529? Probably not, but check your state, right? If there's a state tax benefit, there may be, but if you're otherwise maxing out that 529 every year for college, then you know, there's not going to be some additional tax benefit to using it to pay for, you know, K through 12 private education. Might as well not use up that annual contribution and just cash flow, the stupid thing. But look into it. You know, if you are not already contributing enough to the 529 to get your maximum state tax benefit, then sure, run it through there and you'll get a few hundred dollars back every year in exchange for doing that. But most of the time you're probably already putting in enough to maximize that. Okay, next question on the speak pipe. By the way, if you want to leave us a question on the white coat investor, you can leave that@whitecoatinvestor.com speakpipe and we'll get your questions on the show. All right, Tom from Boston, let's take a Listen.

Hi, Dr. Dali. This is Tom in Boston. No, not Tom Brady. Unfortunately, he now lives in Tampa. My question for you involves international stocks. What percentage of an asset allocation do you think international stocks should comprise and where should they go? I've heard it discussed that international should go in taxable because you get a foreign tax credit. And that foreign tax credit is only available on accounts that pay taxes. So your taxable account, it's not available in your tax deferred accounts, your IRAs, and it's not available in your tax free Roth accounts. So those are my two questions. What percent of your asset allocation is ideal for international and where do they go?

All right. What percentage of allocation should international stocks be and where should they go? Well, there's no right answer here, right? I think the right answer is pick a percentage and stick with it because there are going to come times where international stocks outperform US Stocks and there are going to be times where the opposite is true. What you don't want to be doing is shifting back and forth all the time and mistiming it and ended up being in domestic stocks when international stocks are doing well and international stocks when domestic stocks are doing well. So pick a percentage and stick with it. Some people would argue that you don't need stocks, international stocks at all. Jack Bogle classically made this argument right. He said never more than 20% and you can get by with 0% because US companies do so much business overseas. I don't know that I necessarily agree with him on that point. I think a little bit more than that is probably a good idea. But that 20% number he throws out there isn't a bad percentage. That's totally Reasonable. At a maximum, I would put market weight into international stocks. So if international stocks make up 50% of the world stocks, I think that probably ought to be your maximum 50%. And the reason why is I've seen little benefit for taking on additional currency risk beyond, you know, that point of maximum diversification as far as number of securities you have there. But most people I think are somewhere in between those numbers. My own personal number, I have one third of my stocks in international stocks. So I think anything from, you know, 20% of your stocks being international to 50% of stocks being international is reasonable. I'd pick a number in there and stick with it. Where should they go? Well, if you're using something like what I use, which is the total international Stock market fund, that is a very tax efficient investment. It's a great holding for your taxable investing account, assuming you have a taxable investing account. Obviously if all your investments are in a Roth IRA, we'll put international stocks in the Roth IRA. Don't skip out on a Roth IRA or 401k contribution in order to invest in international stocks in a taxable account. But if something has to go into taxable, a total international stock market fund is a pretty good choice. Even in emerging markets index stock index fund is a pretty good choice. In a taxable account. Yes, you get that foreign tax credit which you wouldn't get if you were investing inside a Roth IRA or other investing account. However, the benefits of being inside the retirement account outweigh that benefit. And it's important to understand that you're better off just being in a tax protected account then you are getting the foreign tax credit. It's not that big of a credit, I assure you. But if you have to put something in taxable, that's not a bad thing to put out there first. It's not dramatically better than just putting a US Total Stock market index fund though. And the reason why is because an international total market fund has a higher yield than a US Total market fund due to value current valuations. So if the yield's 3% on that international fund and 2% on the US fund, well, that is probably the difference in that yield and the tax efficiency of the investment because of the yield is going to make up for that foreign tax credit. So it's really sixes. You know, I have both of them almost entirely in taxable now because my taxable to tax protected ratio has been growing the last few years and I don't lose any sleep about any of it. You know, it's almost all intaxable for me. So yes, it makes a a fine taxable holding. Other good taxable holdings municipal bond funds are good taxable holding. Very, very tax efficient and of course equity real estate because then you can take advantage of the depreciation on that to shield some of the income from taxation. Also a good taxable account holding. Okay, our next question comes in via email. This may be appropriate for the podcast. I wasn't sure how to submit it for that again. Whitecoatinvestor.com speakpipe I read your most recent podcast this morning. A listener asked about including the defined benefit plan and their asset allocation. Our three person practice is starting one for the first time this year. I'm the youngest partner of 48, so we're each doing our maximum allowable contribution which is around $120,000. Cool. In the podcast you said we keep closing it and rolling it over into 401ks. Our plan administrator and CPA recommended that we run it for five years minimum for fit testing. How often do you roll yours over? Well, the only one I have is the one I have with my physician partnership and I'm on my third one. I've been with the group 10 years, so the first one I think went about 10 years. The second one went about five years and we're on the third one now. So five years seems like a reasonable amount. When I talk to TPAs and those who advise these plans, they generally recommend that you keep it open at least three years with those equal contributions each year. So I think three is the bare minimum. Five is probably a good idea. I think you're getting good advice from your plan administrator and cpa. Another one via email My question in regards to paying taxes on your dividends and appreciated funds in a taxable account, I try to place the most tax efficient funds in my taxable account and keep the allocation in line with my investing plan. That sounds smart. How do you suggest handling the dividends that are received and appreciated shares if I do not have them automatically reinvested? Would reinvesting these gains quarterly be a smart idea? Why? Keeping a portion in the sweep account to pay taxes later in the year. I just wanted to understand and get advice on different strategies or a good strategy. All right, let me tell you what I do with my taxable account. Nothing in taxable gets reinvested. Okay? All my dividends, all my capital gains distributions, all the interest, all the rents, everything I get in my taxable account goes into my bank account or a sweep account or a money market fund or whatever. And then once a month when I go to invest whatever money I can invest that month, whether it came from my clinical job, whether it came from white coat investor profits, whether it came from bank account interest, whether it came from stock dividends, whatever it came from, I invest it all together one day a month. And the benefit of doing that, rather than reinvesting those dividends as they go along is you don't have all these different tax slots to keep track of, which makes it a little easier when you go in to choose which lots to sell. And when you choose, when you're trying to tax loss harvest. It keeps things a little bit simpler. If you really want to reinvest your dividends in taxable, you can do that. The brokerage will keep track of your basis. It's not that big of a deal, but I find it cleaner to just pay everything into taxable and then pay, you know, invest that once a month from my bank account. That's what I'd recommend you do. I think it's really simple to do it that way. There's no reason to wait a quarter. If you're investing every month, why wait a quarter? I guess if you only invest once a quarter, then maybe I'd do it once a quarter. But I usually try not to let my money sit in cash quite that long if I don't need to. But those are probably the main ways that people look at that. I hope that's helpful and answers your question. Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the white coat investor can help. Thanks to those of you who are leaving us a five star review and telling your friends about the podcast. Those reviews really do help spread the word. Most recent one came in from WM Beer. William Beer, maybe who said great education across many levels. WCI has done so much for so many professionals. There are pointers for newer investors and those early in their career and more advanced topics mixed in for those that want to get into the weeds. I look forward to this podcast weekly and have a better understanding and vision of my financial future. Thanks to the WCI Network. Forever Grateful five stars. Thanks so much for that. If you want to check out that course I mentioned earlier, the link will be in the show notes. It's whitecoatinvestor.com MDFF and that special that special deal where you get our other course for free and a hundred dollars off fire, your Financial Advisor goes through Monday night the 28th, so check that out. Head up, shoulders back. You've got this and we can help. Stay safe out there. 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.