WCI #226: The State of Physician Financial Literacy

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 is your host, Dr. Jim Dahli. This is White Coat Investor Podcast 226, the state of Physician Financial Literacy if.

You'Re like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Bootcamp, a free educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White.

Coat Investor can help. All right, welcome back to the podcast. It's been quite an interesting week for me. Somehow all my shifts got scheduled in one week, so all my shifts for the month. I'm working basically every day and we are full. We got lots of COVID again. Younger people getting Covid mostly unvaccinated, but I had a couple last night that had vaccines. Luckily they weren't very sick. They didn't have to be hospitalized, but lots of COVID out there again. So thanks to those of you on the front lines. I know it's really hard to see this come back and still be dealing with it, but I'm back to wearing an N95 the entire shift again. So not real thrilled about that, but such is life. Our quote of the day today comes from John Jacob Astor. He said wealth is largely the result of habit, and it's true. Just like maintaining a healthy weight is the cumulative sum of thousands of tiny decisions. Same thing with being financially successful.

All right, let's see. By the time this drops, it's going.

To be September 2nd and you need to know about WCICON 22, right? This is the Physician, Wellness and Financial Literacy Conference, and after an incredibly successful 2021 virtual conference, we're excited to announce that we're launching the conference this year as a hybrid conference in a few short weeks. So there's going to be a live component, but also for those who can't come, aren't comfortable coming, don't fit in the conference, there will be a virtual version as well. But what you need to know, especially if you want to come to the live version, is that registration is going to open Tuesday, September 14th at 7pm Mountain Time. We'll announce the agenda, speakers and sponsors that week, but you got to get on at that time to sign up for it. Let me tell you how it went a couple of years ago. Well, four years ago for the 2018 conference, we sold out in about six, six days. That was our first conference. The next conference, the Las Vegas one, it sold out in 23 hours, but it was a third sold out in seven minutes. And so I don't know how quickly this one's going to sell out, but I suspect the live version is going to sell out. It's going to be in sunny Phoenix in February. It's going to be a great place to be.

It's a great resort.

We're going to have tons of fun wellness stuff while we're there. We're also going to learn about lots of great finance stuff. We're going to have some great speakers there, some big names you'll be excited to hear from. But this thing's probably going to sell out. So if you want to come, set an alarm in your phone now, September 14, 7pm Mountain time. That's a Tuesday evening to sign up for this and register. All right, let's answer a few of your questions, I think to start with, and we're going to have a guest on a little bit later in this episode to talk a little bit about a survey that was done recently on physician financial literacy. But let's first take a question on I bonds. This comes from Andy. Let's take a listen.

This is Andy from the Midwest. Thanks for all that you do. I was reading one of your older blog posts about I bonds, and I was wondering, since your taxable account has grown considerably, if conditions had changed where you thought maybe I bonds would be something that was more attractive than it used to be in your current situation. Thanks so much.

I bonds are great. They're particularly good. Right now they're paying 3.54%, which is really good. Right. Remember, I bonds have both a fixed component as well as an inflation index component. And so when inflation's relatively high, like it has been the last few months.

They pay pretty well.

I'm not quite sure what it's going to reset at this fall. I think after October it gets a new rate and it's probably going to be even higher. So I don't have a problem with I Bonds. I bonds are great. They're a very safe investment for Some people, they're a component of your emergency fund. You know, I like inflation linked bonds for part of my bond portfolio. I've used tips over the years, but I've never really used I bonds. And there's a couple of reasons for that. The main one is that they just. It hasn't worked out very well for us to use I bonds. They're a little bit of a pain to buy, right? You can buy some of them for.

Each spouse, and you have to buy some.

If you want to buy as much as you can, you have to actually pay a little extra on your taxes and you can buy a little more with your tax refund. But basically, married Couples Ltd. About $25,000 Year of I bonds. And they're generally held in a taxable account. So for many, many years, we basically didn't have any investments in a taxable account. And so at that point it didn't really make sense for us to do I bonds. And then now, of course, the taxable account is our largest account. But now the issue is that we're limited to buying relatively small amount of it each year. And so the additional complexity hasn't been worth it to me to add them to my portfolio because it will be such a small percentage of the portfolio at this point. And so we don't own I bonds. But I think I bonds are great. If you're in a situation where you can add a few I bonds every year over a decade or two, I think they can make up a significant portion of your portfolio. It's just never really worked out very well for us. But there are times when I bonds are a pretty darn good investment. I remember there's a time back in about 2000 when the fixed portion, the fixed portion alone on I bonds was 3 or 4%. 3% or 4% plus inflation guaranteed is a pretty darn good investment. Now, that fixed return isn't quite so good right now, but because inflation's up, they're providing a pretty good return on a safe investment. But I have nothing against I bonds. If you want to add I bonds to your portfolio, I think it's a perfectly reasonable thing to do, but it only works out for a certain number of people. And of course, there's a little bit of a hassle buying them, but not against them by any means.

All right, let's take our next question.

This one is about Fidelity and one of their products. So let's take a listen to that.

Hi Dr. Dali. Love your website and podcast. It fills a black hole in Medical education. I'm a surgeon in California. In my second year of practice. I was talking to an advisor at Fidelity and what to do after maxing out the usual tax advantage retirement accounts. Right now I have a regular taxable account with ETFs and that's where I do my additional savings. He mentioned the Fidelity Personal Retirement Annuity. I know the saying, quote, the investment is so bad you can only sell it to a doctor, end quote. So I want to do my research first. It's a quarter percent fee under 1 million and goes down to 0.1% after that. And it has similar ETFs with very low expense ratios. The benefit is all the dividends that are paid out and any rebalancing I want to do come without any taxable events. The downside is I have to hold onto it until age 59 and a half or suffer a 10% penalty. I'm not putting money I may need in until retirement. But is this a good idea to save on getting taxed on dividends? He says that as the taxable account grows, it will similarly generate larger dividends and larger taxable events every year. That said, I don't love the commitment to 59.5 and quarter percent fee either. I saw somewhere online that the money I take out at the end become at a short term capital gains tax rate instead of long term, which would be devastating. I'm waiting for their response on this. What are your thoughts on this account? Thank you for your input and keep doing what you're doing.

All right. This is a great question.

I really like this question. So this is what happens to doctors, right? They've learned about investing, they get all excited about it and they learn about their retirement accounts and all these good things they have. They max them out and they're like, you know what? I want to save even more, more money. What should I do? And so they ask someone who calls themselves a financial advisor what they should do now. And the answer they get depends on what that financial advisor sells. If they're an annuity salesman masquerading as a financial advisor, the answer is an annuity. If they are a whole life salesman and they ask this question, well, the answer is a whole life insurance policy. If they are somebody that tries to.

Sell their services to pick stocks, they're told to pick stocks. If they do real estate, they're told.

To do real estate. So you got to keep in mind that that is probably not particularly unbiased advice. You got what we're talking about here. This thing that Fidelity calls a Fidelity Personal Retirement Annuity. This is a variable annuity. That's what this is, okay? An invariable annuity has an insurance wrapper around it. It's an annuity technically, but all the returns are based on the investments inside it.

And so you got to look at.

A few things when you're looking at an annuity. This is assuming you want an annuity. Number one, you got to make sure those investments are good, okay? If the investments are crummy, like the vast majority of variable annuities, if the investments are crummy, you don't want it, right? You want to have low cost index funds and ETFs, like you would if you weren't investing inside an annuity. And the other thing you got to look at is the annuity costs themselves, right? These have additional costs. Even when Vanguard was offering, they had additional costs. And so you got to pay some extra fees in addition to the expense ratios on those funds. They call them sub accounts, usually in a variable annuity. So there's multiple fees there. And you got to look at all those, and you got to make sure that not only are the investments good, but the fees are okay. But before you even get to that point, you got to decide if a variable annuity is right for you.

And the answer for most stocks is.

No, it's not the right thing to do. Once you max out your retirement accounts, the right thing to do is to simply invest in a taxable account. All those fancy annuities and index funds they're telling you about in this variable or fancy index funds and ETFs are telling you about inside this variable annuity, you can actually buy those without the annuity wrapper, and you get the same.

Low cost, sometimes even lower costs, and.

You don't have to pay those annuity fees. The upside of an annuity is it grows in a tax protected way, so there's no tax drag. As it grows over the years, as that investment kicks off capital gains distributions, as that investment kicks off dividends, you don't have to pay taxes on them. And so it grows in a little bit faster way. But the problem with a variable annuity, right, you're putting in after tax money. It grows in a tax protected way. And when you take the money out, it comes out. And you pay taxes at your ordinary income tax rate, not the lower long term capital gains rate. So because of that, in any shorter time period, you come out behind because.

You'Re paying way more on the gains.

Than you would be if you were able to take that money out at long term capital gains rate. It just takes decades for the tax protected growth to overcome both the additional costs of the annuity and the fact that you're paying more in taxes when you take that money out.

So the right answer for more people.

Most people, it gives you more flexibility. It gives you a lower tax bill down the road. If you just invest in those tax efficient mutual funds and ETFs, you can tax loss, harvest them as you go. You can donate the appreciated shares to charity, you can leave appreciated shares to heirs and get the step up in basis at death. None of that happens with a variable annuity.

Now, in some states you might get.

A little additional asset protection for that variable annuity, but for the most part, these are products made to be sold, not bought. And most people don't need one. So you probably don't need this. You probably just need to invest in a taxable account. Whether your investing plan calls for low cost, broadly diversified stock index funds or low cost municipal bond funds or real estate or whatever you want to invest in, you're probably better off doing it without the annuity wrapper. And that's just the Fidelity representative selling their product to you. So good question. Appreciate that. All right, let's get a guest on here. We have Alyssa Schaefer, who is the Chief Experience officer at Laurel Road, who recently did a survey on physician financial literacy. And we're going to talk about that for a few minutes, so let's get her on.

Okay. Our guest on the White Coat Investor Podcast right now is Alicia Schaefer, the Chief Experience Officer with Laurel Road. Welcome to the White Coat Investor Podcast.

Thank you so much. Thanks for having me.

Now, Laurel Road has been a White Coat investor partner for a long time, since before they were called Laurel Road. And one of our longest actually relationships that we've had, I think. But we recently teamed up to do something kind of unique and we did a survey. We sent it out to White Coat investors. You sent it out to your list of doctors and got a lot of really interesting information. Basically asked a few dozen questions to a few hundred physicians and dentists. About 75% of those had been practicing less than 10 years. Just to give you a flavor for maybe some of the responses that we're going to talk about today in the survey. But before we get into those, can you tell us a little bit about why Laurel Road decided to do the study?

Sure. So we like to really stay on top of what our members are doing, what they're feeling confident about as it relates to their finance, what they're not feeling confident in and of, we find ways to help them. For the past few years, we've actually been doing a great survey looking at the differences between millennial men and women and their financial literacy. So this time we decided to layer a different survey, but in a similar vein, really focusing on physicians and dentists and looking at what are they doing in light of the pandemic for themselves when it comes to their finances. Are they going to change their behaviors in any way? And how generally did they feel about investing, about the confidence they have to do so, the resources, how do they. How do they learn about resources out there? So it was really interesting to get their perspective. I think we had a lot of this information, more anecdotally from our members, but this was a really good way to bring it together, especially with your members from the White Coat Investor, to understand as a collective group of physicians and dentists, how they're feeling and especially how the pandemic has impacted them.

So what impressed you the most about it?

Well, it was interesting. I mean, I think generally the pandemic seems to have been a pretty good wake up call for people in a lot of ways, as we can all imagine. We've all sort of changed our lifestyle accordingly. But for doctors and dentists specifically, they really seem to have felt less prepared than they would like to have been throughout the pandemic period. We know that a lot of doctors, unfortunately, had to close their businesses for a period of time or focus on other things, and now there's almost a reinvigoration of wanting to focus on their finances. So almost 75%. Almost. Well, I should say more like 2/3 of doctors now plan to be more financially focused in 2020, this year and beyond, given their career and given what's happened over the life of the pandemic. And that's actually even more pronounced for women, which is really great to hear because oftentimes women feel a little bit less confident in focusing on their finances. So it really seems to have been a wake up call, not only in many areas of people's lives, but in their financial lives.

Yeah, I thought the COVID questions were particularly interesting. One of them asked whether they invested more or less during the pandemic and why. And surprisingly, a lot of people skipped that question. I think 39% of people skipped it, which surprised me. But most of those who actually answered it either invested about the same as the prior year or more, which I was happy to see because there was a lot of pressure on physician incomes and to see so many people still investing quite a bit. Depressingly, of course, 23% said they'd considered leaving the profession during the pandemic due to stress or burnout, although I'm not sure that's any higher than any other year given all the burnout surveys I see for physicians. But anecdotally, I feel like a lot more docs are retiring after going through the pandemic. I have a lot more of my partners talking to me about feeling burned out after putting on all the PPE and being worried about taking stuff home to their families. And especially now where we're battling the delta variant and our vaccines maybe aren't as effective and it's affecting young people a little bit more than previously. So, yeah, I was impressed at how many people decided finances might matter a little more to them now than it did a couple of years ago. But there are a lot of other interesting questions on the survey as well. Let's go through some of those. One of the questions asked respondents to rate their current financial literacy. 4% gave themselves a 10, 10 out of 10, 13% a 9. And then you start getting into bigger groups. The biggest group was an 8, 26% gave themselves an 8, 23%, 7 and then 12% each on 6 or 5. But only 10% gave themselves anything in the bottom half of the range. Do you think doctors overestimate their own financial literacy?

I think doctors like to stay informed, so I'm not sure if they overestimate their financial literacy. But I think interestingly enough, some were perfectly happy, like you said, to be a 9 or an 8, not necessarily a 10. And I think that's really interesting. I think that doctors became doctors to do just that, right? To practice medicine and not become financial experts or advisors. And just as a personal anecdote, I'm married to one, so I can say that personal. He wants to spend his time with his patients and his practice, not necessarily on investing. So they want to be informed, they want to be confident. They want to have the information to ask the right questions and trust the person that they may be putting their finances in their hands, but they don't necessarily need to be experts. I think that's the way they generally feel. Right. So I don't know if they overestimate their financial literacy. And in fact, just getting to that specifically, we've talked to couple thousand doctors individually over our research and they're pretty honest. I mean, they're pretty honest to say, hey, you Know, especially in the younger years of practicing, we didn't learn about all of this in medical school. Right. We were so focused on practicing medicine and learning that we didn't, we didn't focus on this. So I think they're pretty honest generally about where they are. And I think generally they know that they want to feel more confident, but they don't necessarily need to be experts.

Yeah, yeah. You're alluding to the follow up question to that one where they ask, what do you want to be? How financially literate do you want to be? Do you want to be a 10 out of 10? And only 50% said yes. So many of them were perfectly an 8 or a 9, which I thought was pretty interesting.

Yeah, it's very interesting. And I think just to also share one thing that we hear over and over, not necessarily the focus of this study, but many other research pieces that we've done, is that doctors want to also learn from their peers. That's why I think the white coat investor is such a success. One of the reasons is because that's a place where they can learn from their peers and people like them. So that's a huge source of wealth and information for them.

The risk tolerance question was particularly interesting to me. When asked how they would behave in a bear market, only 40% really gave an answer. And 47 of those 48% said I'd buy more stocks. Of course, 1% said I'd sell stocks low, but the rest said some combination of, I don't know, I don't invest or other. And I wonder if just knowing about the concept of risk tolerance actually helps to increase it. What do you think?

I absolutely agree. I think there's so much information out there now that sometimes people can get, and doctors are no different in some ways, but sometimes people can get misled a bit. And I think it may sound simple, but I think if somebody's investing in a mutual fund, right, but 100% of the stocks in that fund are growth funds, they may think it's balanced just because it's a mutual fund. But if they're all growth stocks, that's not balanced. Right. It's a more aggressive strategy. So I do agree there's definitely space for more education around the different levels of risk tolerance and where you might want to be according to your career stage and your trajectory, your age, all that type of thing. So fully agree with you. The outcomes of that question was probably a function of some knowledge and some opportunities to educate a little bit more.

There is a question that asked or a series of questions that asked about what people were planning to do with their finances in 2021, 31% said they were planning to refinance student loans. I wonder if that number's gone down a little bit since the student loan holiday was extended to January 31st. But 41% plan to reorganize their finances, 34% plan to speak to a financial advisor, 21% plan to change their portfolio, 16% plan to refinance a mortgage, 3% plan to take out a personal loan, and 14% plan to open a 529. Was any of that particularly surprising to you?

Well, I mean, the student loan number was surprising to me. As you know, we've been in the student lending refinance space for quite a while now, and the fact that 30% are still saying they would like to consider refinancing their student loan, it's surprising because there's been a holiday. And like you said, we're not sure if that number would have changed if they're asking it right now, but we're actually seeing volume in our student loan refinance business start to pick up. So people are sort of realizing that maybe some of the forgiveness programs might not come to pass, and so they want to continue to take advantage of the low rates that are out there. So While I think 31% may be a little high, a little low, we're not sure in this environment. I think it was still interesting that at the time this question was asked, there was such a high percentage still looking to refinance. So that really stuck out to me. As far as speaking to a financial advisor. 34% there. It doesn't surprise me. We hear that over and over that, you know, year after year, doctors want to speak to a financial advisor and get unbiased advice. And we've been doing some work in that space as well. So that didn't surprise me. Actually, I'm a little surprised it's not a bit higher. But those are the two things that kind of stuck out to me.

One of the questions asked what resources docs used to increase their financial literacy. Financial Advisors was 49%, books were 53%, blogs and website were 75%. I was happy to see that. Podcasts, 51%, in videocasts, forums, and Facebook groups, 31%, online courses, 14%, and live and virtual courses were between 5 and 13%. So I'm excited to see the blogs are still at the top of the list. You know, there's been this trend over the last 15 years that people read blogs less and watch YouTube and listen to podcasts more. Any comments on resources docs use?

Sure. I mean, like I said in some of the previous comments, we find time and again doctors want to learn from each other. So I think that's why blogs and websites continue to be at the top of the list. You know, as a marketing person, that's a lot of my background, although there's other things associated with it now. But as a marketing person, there's been a trend over probably the last dozen years where it's more about bite sized content and meeting people where they are. So it doesn't surprise me terribly that podcasts and videos are a lot more now than probably a couple of years ago, because that's just a trend where people want quicker, more impactful, bite sized pieces of content or data points to help frame their decisions. And you can get that from a podcast or a video where you might be kind of multitasking and doing other things. That doesn't surprise me too much. And actually, just like you are glad to see blogs at the top of the list, I'm glad to see some of these other channels just because it means we can get some of our messages out there in a more friendly way and something that people want.

The retirement age question was also interesting. 15% planned to retire prior to age 55 and 20% plan to work beyond 65. So the vast majority are between 55 and 65, you know, a fairly typical retirement age. I sometimes worry because I run into so many docs interested in fire and retiring early and all that, that I worry there's not going to be any doctors take care of the rest of us. But you know, the study suggests that that's really not that many people that are trying to retire early. The vast majority of people are looking at having a pretty typical retirement age. I also saw that 41% of respondents said that stock index funds composed the largest part of their portfolio. And the rest of the answers were pretty small, aside from actively managed stock funds of 7%, individual stocks less than 5%, cryptocurrency less than 0.5%. But it did bother me a little bit that almost 40% didn't answer the question at all. And I worry that that's because they have no idea what they're actually invested in. Any thoughts about why 40% didn't answer that question?

Yeah, I agree with you. I think either they're not invested. Right. Because I think the survey did go out to the majority of doctors that were practicing for 10 years or less. So they're probably not yet investing in a significant way. So that would be my guess that probably the most people either probably were not investing at all versus didn't know what they were investing in. And I think that's just as concerning. Right. Because if you've been practicing for several years, it's sort of time to invest some time in that. Right. Somewhat not surprising is the fact that they may not be investing because they may not feel confident to invest. So we've done a number of studies on doctors and then more broadly where people talk about their competence levels. And I'll bring this point up again because I think it's definitely worth bringing up that so many of women are not confident in their ability to invest smartly compared to men. So this was a study that we did earlier in the year with a broader audience, including doctors, and less than 3/4 of women said that they wish they were more confident in their ability to invest compared to almost 90% of men. So there is a gap there as well. And I think it's probably the same between female physicians and dentists versus their male counterparts. So I think that might be playing into some of it as well.

You know, the fascinating thing about it is when you survey their actual ability and how good of investors they are, how good they are at following their plan and staying the course, women are way better than men. Women are by far better investors. So it's interesting that the confidence lag there. You know, they should be more confident given the data, but maybe it's the confidence that's getting the men in trouble. Maybe they're just overconfident.

That's a great point.

And maybe women are appropriately confident, you know.

Yeah, that's a great point. When you say that women, you found that women can be better investors, do they take a more proactive approach, you find, or do they take a more, you know, aggressive approach? What makes them better?

What makes them better is they don't mess with it. They let it ride. They're a little bit more passive about it. And it turns out in investing, ignoring your investments is a pretty powerful technique. And it works very well so long as your plan is reasonable. Not messing with it tends to increase returns. And the data shows that women are less likely to mess with their investing plans. So it's pretty clear. Study after study have shown that women are better investors.

Interesting. They can wait off the cycle.

Exactly. Another interesting part of the survey was the savings rate question. Only 32% said they saved less than 20%, although another 10% said they didn't know how much they saved, 41% said they saved 20% or more, and 50% saved 30% of their income or more. If we assume that those that didn't answer the question aren't Saving at least 20%, that means just saving 20% of your gross income puts you into the top 10, 40% of doctors. Why do you think doctors don't save more money despite their high incomes?

Well, a question that we get all the time is how much should I save versus how much should I pay down debt? And obviously you would know that more than half of doctors graduate with an average of $200,000 or more of student loans. And so we get the question all the time from our members or prospects saying, how do I know what the right thing to do is to pay down my debt or to save more? And of course, the answer depends, the answer really depends on what rate you have on your debt and that type of thing. So I think it's just this trajectory that's very different for physicians and dentists versus other professions where they have this delayed start. Again. Speaking from my personal experience, I've been with my husband since medical school and residency and fellowship, and obviously now he's many years into being an attending doctor. And there's so much of that time that you don't have money to invest or to really save. And then you get out of the residency program and you think, okay, I have to really start paying down my debt now for the first time. And so then there's just this tension of do I continue to pay down my debt or do I continue to or do I start saving? So I think there's that constant tension there for a lot of doctors, especially those with loans. And I think even at the time when they do start making some more expected higher salaries as attendings, then there's a tension of do I buy a home or do I pay down debt? So it all comes down to the rate that your debt has, what your goals are, and the rate that you may be able to borrow money or save more money. One thing that we've done recently is we've launched this high Yield savings product which is on White Coat Investor site. But we've launched that product and it gives a really, really great rate, really kind of best in class rates for savings. And there are other strategies out there, of course, but if there's short term sort of needs to save money, it's a really great rate. So there's lots of things out There that you can do. But I think it comes down to that constant tension of do I pay down debt or do I save or do I buy a house?

Yeah. That URL to get to that page is whitecoatinvestor.com LaurelRoad and you can see all of our partnerships there with Laurel.

Road when you go to that page.

But tell us a little bit about what's new over at Laurel Road these.

Days and things doctors need to be aware of.

Sure.

So in March, we launched actually a whole new, what we call internally, value proposition, but really a whole new suite of products specifically for doctors and dentists. We've always focused on doctors and dentists. We have wonderful partnerships and thousands of members that are doctors and dentists. So it's not a new space to us, but we really decided to be even more focused and we launched a number of new products for doctors and dentists. The High Yield Savings product, I talked about a financial insights tool, which is actually really cool. You can go on if you're a doctor or a dentist and look at your salary and a number of other financial milestones, and you can compare that against your peers. So we used all the data that we have on our members, and now we're providing data points back to members to help them understand where they are relative to their peers on a whole host of things like salary, debt, income, et cetera. And there's actually another really interesting product where you can refinance your student loan. Couple that with the savings product, and the more sort of you're able to give in savings, the less your student loan rate becomes. So that's a really cool product. And it kind of speaks to what I spoke about earlier, is that constant tension between do I save or do I pay down debt? And this kind of takes care of both. So a lot of things happening for doctors and dentists, especially at our company, we've decided to really zero our focus on doctors and dentists for now. So really exciting stuff.

Yeah.

I mean, there's a credit card there that gives you a 2% back toward a student loan. There's the High Yield Savings account, I think, as we record this. And obviously these rates change daily, so don't hold me to this three months from now. But today it's 0.75%, which is pretty darn good these days. Of course, our deals that we've had for student loan refinancing, these aren't new, but you get $550 cash back when you refinance. Plus we're giving you the White Coat Investor fire your financial Advisor course, another $800 value. And then of course they have a mortgage product as well that they'll give you a 0.25% rate discount on. So everything Laurel Road, go through whitecoatinvestor.com LaurelRoad to see those special deals that you have with them. Alyssa, thank you so much for coming on for doing this study. To start with, that was not an insignificant amount of resources that that Laurel Road dedicated to that as well as coming on to talk about it and what we can learn from it.

Thank you for having me. Really appreciate it and love the partnership with White Coat Investor. Thanks so much.

All right, I hope you enjoyed learning more about that survey and seeing where doctors are at right now with financial literacy. Let's get back into some questions off the speak pipe from regular listeners. Our next one comes from Frank. Let's take a listen. It sounds like he wants to maximize his public service loan for you.

Hi Dr. Dali, big fan of your podcast and blog. I have a question about lowering my adjusted gross income for the purposes of PSLF so that I could have lower loan payments. I'm a hospitalist. I make about $350,000 through my primary hospital job, which is a nonprofit. And over the past six months I've started working for a consulting firm and it's been fairly lucrative, making an additional 250,000 a year roughly in 1099 income. Also, around the same time six months ago, my wife started working as a family doctor, making about 250,000 a year as well through 1099 income. My question is whether it might be beneficial for both my wife and for my side consulting business to convert from a sole proprietor to an S corp in order to claim lower income for the purposes of reducing my adjusted gross income on the PSLF income certification form that happens every year. I'm curious to hear your thoughts about this. Thank you.

Wow, you're really killing it. $600,000 as a hospitalist is a fantastic income. You know, I talk to people all the time about income and they just don't believe me when I tell them that the range of intra specialty incomes is really quite wide. And they assume that whatever income they're stuck at, which invariably is in the lowest quartile for their specialty, is just what people make in their field. And that's just not the case. You know, every specialty, if you want to make more money, there is a way to do it.

All right.

But anyway, let's get into your specific question. You guys are making $850,000 a year. All right. It's going to be really hard to have low payments, right? I don't think in this situation that even doing married filings separately is going to help you much because there's such a gap between your incomes. You know, you can run the numbers you can get with studentloanadvice.com Andrew over there can help you run the numbers and help you decide on what the best plan is. I don't necessarily think there is nothing you can do to lower your AGI. I think maxing out tax deferred accounts is probably a really good idea for you. You maybe you start an additional 401k for that side gig, work, make sure your wife has got a solo 401k. Maybe you even do personal defined benefit plans to put away additional money in a tax deferred way to lower your AGI to maximize how much you get for public service loan forgiveness. Although quite frankly, if you just wanted to pay your loans off, you didn't mention how big they are. But when you're making $850,000 a year, you can knock out a lot of student loans in a hurry if you just want to pay them off. But if you're going for public service loan forgiveness, you know, paying the minimums and trying to keep that AGI looking as low as it is. Obviously you're always better off making more money, even if it means you're paying a little more toward your loans and have less forgiven, you know, isn't a bad idea. But your strategy to incorporate is not going to help. It might help with your overall tax bill, right? The main point of incorporating as a document is to lower your Medicare taxes. So you're making $600,000. Really, you're only making sounds like you're an employee for 350,000 of it. So you're making 250 in the side gig. Let's say you paid yourself a salary for that of 100,000 and you took $150,000 as a distribution. Basically what you're saving there is $150,000 times the Medicare tax, the 2.9%.

That's it.

So what does that work out to be? $4,000, $5,000 a year in taxes. That's what incorporation saves you.

So if you want to incorporate, go ahead and incorporate.

And it's probably worthwhile in your situation. But all that income is going to count toward your adjusted gross income. It all filters in there. And so it's not going to lower your pslf Payments, you know, you need to look to tax deferred accounts to doing that. You might even want to make sure you're in PAY or IBR rather than repay to do that. Because remember, repay doesn't have a cap on your payments. And with your income, you know, your payments might be more than they would be under the ten year standard plan. So look into that. It may be worth spending a few bucks and talking with andrew over studentloan advice.com but you know, I don't think your particular strategy is going to work for what you want to do with it. All right, our next question comes from Ben. Let's take a listen to it.

Hi Dr. Dali, I have a question in regards to LEAPS or Long Term Equity Anticipation Securities. I have read some about them in the Bokleheads forums, although I am not sure if they fit a Boklehead style investment strategy. Could you please explain how leaps work and whether or not they fit the typical Bogohead portfolio?

All right.

This sure sounds a lot more complicated than it is. Right? Long Term Equity Anticipation securities or leaps. All right. What these are are options.

They're just options.

With an option, you're betting on the price direction of a security, right? You can have a call, you can have a put, you can buy them, you can sell them, right? You're betting on the direction. You can make a lot of money because you can control a lot of price change with very little money down.

The downside, of course, is it's really.

Easy to lose your entire investment. My first investment, actually that one of my dad's friends talked us both into when I was a kid was an option and I lost my entire investment. The whole thing was wiped out. I think it was 500 bucks, which to a kid at my age, that was a ton of of money. It might have been all my money. At any rate, I'm not a huge fan of options. Not just because of that experience, but because it's betting. You know, it's not investing. You're not buying the shares of a company that has profits that you expect to continue to employ people and use their energy and their ideas to build products and services and help other people and, you know, build this enterprise that becomes more and more valuable each year and has real earnings and real profits. All you're doing is betting with options. You're betting right, you're betting the price will go up or you're betting the price will go down. Okay? And that's all this thing is, is options. Why is it called leaps? Why is it called Long Term Equity Anticipation Securities. It's called that because the duration of these things, not, maybe not duration is maybe not the right term to use. But the length of these options contracts is between one and three years, whereas most options contracts are a matter of a few weeks, couple of months, that sort of thing. So these are longer options is all they are. You're just betting over the price change on a security, whether it's an ETF like VTI or whether it's an individual stock like Apple. You're just betting on the price change over a longer period of time, one to three years, rather than a shorter period of time. So no, I don't recommend you get into these as any significant part of your portfolio. If you got to play in stuff like this, that's for the fun money part of your portfolio, limit it to 5% or less. You know, the same amount you're going to invest in art or invest in gold or invest in cryptocurrency or pick individual stocks with, right, you want to mess with a little bit of your money, you know, then section it off from the serious money going into real investments that are long term investments. And if you run out, if you lose it all, don't refill it. Right? You blew it. You showed that you really have no role messing with that sort of stuff. But if you want to go mess with a little bit of your money, 5% of your money is not going to, you know, ruin your financial plan. As a doctor, most of us, if we're doing the rest of our financial lives right, earning good money, saving a big chunk of it, investing it in some reasonable way, we can afford to lose 5% of our money and still be perfectly fine. So if you want to mess with that stuff, go ahead, limit it to a small part of your portfolio. All right, next question comes from Craig. Might be one of the more common questions we get here at the White coat investor.

Hi, Dr. Dolley, this is Craig from Ohio. Another classic invest versus pay down debt scenario for you. We just took out a $548,000 mortgage at 2.69% for 30 years. Once our current home closes in a couple weeks, we'll be receiving $190,000 in equity. Originally, I had planned to roll this equity to pay down our new principal, which will save us over $198,000 in interest over the life of the loan. Meanwhile, if I were to invest that $190,000, even at a modest 5% annual rate of return after subtracting long term capital gains taxes that $190,000 could grow to over $662,000 in 30 years. In your payoff debt or invest blog post, you caution us to also look at after inflation returns so that we can truly get an apples to apples comparison. Can you please shed some light on how to factor inflation into this equation when comparing investment returns versus interest saved by paying down debt? Seems like it would affect both sides and therefore be a non factor. Second, it seems like a no brainer in this situation to invest as opposed to pay down principal for context purposes. I'm 37 years old, the mortgage is 2.15 times my income, no other debt, and have over $1 million saved in retirement. Thank you for all that you do.

Congratulations Craig. You have discovered leverage. A lot of people get really excited the first time they discover leverage because the math looks so awesome, right? You borrow it 2 or 3%, you invest at 5 or 6 or 8% and there's a free lunch there, right? You're basically arbitraging between those two numbers and on that 180 or $200,000, you're basically earning 5% on it or whatever the difference is between what you're borrowing at and what you're earning at over the course of 20 or 30 years. And of course over that long time period, that does add up to be a lot of money. So this is the benefit of leverage. This is why lots of real estate investors prefer to keep their properties somewhat leveraged. This is why some people use a margin loan for their taxable investing account to boost returns. This is why some people take their time paying off their student loans, take their time paying off their mortgages in order to kind of arbitrage that the math is undeniable. That's the way the math works. You got to do a few things to adjust the math and make sure it's accurate. You do have to adjust it for inflation, but you're right, that works on both sides. You do need to adjust it for taxes, right? And that might help. It might hurt, right? On the investment. You're going to pay some taxes as it grows and you're going to pay some long term capital gains taxes on the debt. You might get a break if that interest is truly tax deductible to you. You also however, have to adjust it for risk. Now think about this. Paying off your mortgage early is guaranteed. It's totally risk free. So you got a 3% mortgage, that is a 3% return to pay it down. And you can't really find a guaranteed 3% investment out there right now. So if you want a guaranteed 3% investment, that mortgage looks very enticing, very appealing. You know, it's even better if you got higher interest debt, right? You got an 8% student loan or you got a 15% credit card. That is your best investment. You ought to be paying that thing down. Guaranteed 8 or 15%. That's awesome. When you get into 2 or 3% with some refinance student loan or some great mortgage you just got, well, now there's some room to argue. And so some people do. You know, there are those of us who like being debt free. We paid off our mortgage. It was only 2.75%. We paid off our mortgage in 2017, and we really don't plan to take out another one. You know, even if I wanted to take out another mortgage, Katie wouldn't let me do it. And so we're gonna live debt free the rest of our lives. We like that. It allows us to take risk in a lot of other places in our life. It allows us to not have to worry that everything we're buying because money is fungible, that we are doing so on borrowed money. And we know that there's always going to be a roof over our heads and the heads of our kids, no matter what happens to us. So we like a lot of the benefits of being debt free. But there's no doubt that one of the downsides is that we don't get to arbitrage that debt and try to earn more money with it. Now, a lot of people think they're doing that, and in reality, they're just maintaining their loans and spending their money. They're not actually investing it. That's pretty common, actually. I would say that's the vast majority of people that think they're arbitraging their loans. They just use it as an excuse not to pay it off. They don't actually invest any more money than they otherwise would. But assuming you've decided you're one of that small minority of people that can actually do that, the math works out pretty well most of the time in the long term. I mean, if you really don't think you can beat 3% with your portfolio over the long run, you got a lot bigger problems than whether you're paying off the mortgage or investing right now, because you probably need your portfolio to make more than that in order to reach your financial goals. So once you make a decision to use debt to try to grow your portfolio a little bit faster, there's A couple of questions that are going to come to mind. The first one is what debt, right? And you're looking for debt that is fixed rate, long term, non callable, and your mortgage meets all those requirements. It's even better if the interest is deductible, right? Those are the sorts of debts you want to use. Now you can use a margin loan as well. That of course is callable, so it doesn't meet all of those requirements. Student loans can also be something somebody might consider doing this with. But those are the main types of debts. If you're trying to do this with some short term car loan, or you're trying to do this with a 15% credit card, that's not going to work out. It's got to be appropriate, relatively high quality debt that you're trying to do this with. So that's issue number one is what debts do you use, can you get those debts, etc. The second issue is how much, how.

Much do you leverage?

Because there's a risk, right? You lose your job, the market tanks, your home goes down in value all at the same time. Now what have you over leveraged? Are you now going to go broke? Now I'm debt free.

I'm never going broke, I'm never going bankrupt, right?

I guess I can go broke, but I can't go bankrupt because I don't owe anybody anything.

Nobody ever went bankrupt without any debt.

And so you got to be careful not to over leverage. And when you talk to people who have spent a lot of time thinking about this, the ratios they come up with for that very tiny subset of people who can actually handle this is 15 to 35%. 15 to 35% of what you may ask, of all your assets. Okay, so if all your assets are $1,500,000, that would suggest, you know, 15% of that's going to be about $200,000, $250,000, something like that. 35% would be closer to, let's see, that's probably, you know, $500,000. So that's the size of debt we're talking about, right? $200,000 to $500,000. For someone that has $1,500,000 in assets, that seems to be a reasonable amount where you're not taking on too much risk, but you're still getting the benefit of leverage. So I think before you do this, you really need to spend a lot of time thinking about it, that this has to be part of an intentional plan. It's not just willy nilly, you look at a given debt and you look at a given investment, you're like, oh, it makes sense, we'll do this, we'll do that. That's how people get in trouble. If you're going to use debt as part of your financial plan, it needs to be part of the plan.

It needs to be written in there.

What kind of debt are you going to use? How much of it are you going to use? How are you going to adjust that as you go along? So I would recommend before you do this, that you read a book called the Value of Debt and decide if that's a road you want to go down and want to do this. And if you do, I think that's perfectly reasonable. I think you ought to follow the guidelines he gives in that book. But if you don't want to do this and you just want to have a debt free life, hey, I think it's great. And that's obviously what we're doing. We don't need to take leverage risk to reach our financial goals. Perhaps you do. Maybe you don't want to save as much as you would need to without the leverage. Maybe you want to give even more money to charity. I don't know what your financial goals are or where you're at, but if you need to use leverage or you want to use leverage, I encourage you to use it in a very smart, systematic way rather than willy nilly as I think the vast majority of people use it and some people get in trouble with it because of that. All right, we're getting to the end of this. I don't want to go too long. I don't want you to still be listening to this next week when our next podcast drops. But a few reminders. One is WCICON 22, September 14, 7pm Mountain time. If you want to come, plan to get on your computer and sign up at that time. Thanks to those of you who've left us a five star review and told your friends about the podcast. Our most recent one comes in from Kotar who said Great podcast. I was feeling a little late to the game at 39, but appreciate your advice that this isn't a competition against others, but rather against our own goals. Learning more each day thanks to wci.

If you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Bootcamp, a free educational email series and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White.

Coat Investor can help. Thanks for what you do. Your work's not easy. That's why you get paid so much to do it. Let's make sure you're taking that income, that high income, and turning it into a high net worth. Keep your head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor Podcast.

My dad your host, Dr. Daly 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.