WCI #313: The Proposed Ban on Non-Compete Contracts and Whether It's Fair

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.

Swipe Code Investor podcast number 313 if you're looking to boost returns, lower taxes and build wealth, join the WCI Monthly Real Estate Opportunities List for tips and strategies to maximize your real estate returns. And for introductions to exclusive investment opportunities, expect educational emails that introduce you to syndicators, fund companies, online courses and online real estate platforms. Go to whitecoatinvestor.com reopportunities to sign up today. You can do this and the White Coat Investor can help. Welcome back to the podcast. We're recording this actually back in March. March 29th is when we recorded this. I've still got two feet of snow on my front lawn as we record this. Hopefully by the time you hear this as it drops on the 4th of May, I don't have any snow on my lawn, but on the 4th of May I'm going to be on the Salt river in Arizona and hopefully we still have plenty of water from all that snow melting on the river. Looking forward to that trip a lot. But in order to go on it, I got to record this in advance, like much of what we'll be running in May, because May is a time to play, not a time to be recording podcasts. All right, let's get into your questions. This show is driven by you. Your feedback is very important to the White Coat investors. So we love your feedback. We really appreciate it when you fill out the annual survey, but you drive the content of this. If you ask for guests, we bring the guests on. If you leave questions on the speak pipe, those are the questions we answer. If you're like, man, all the questions are too advanced, I'll leave some beginner kind of questions on the speak pipe. If you're like, all the questions are too easy, we'll leave some questions that get us out into the weeds on the speak pipe, but we usually have plenty of those and we'll get your questions answered and we'll talk about what you want to talk about. This is driven by you and your financial concerns and successes and those sorts of things. First question off the speak pipe is from Roy. Oh, if you want to leave something on the speak pipe, that's a whitecoatinvestor.com speakpipe. Our first one though today from Roy that he has left on the speakpipe is about a medical reimbursement Plan. Let's listen to his question.

Hello, Dr. Dali, my name is Roy.

I'm an internist in Northern California. My private practice group is looking into subscribing to a medical reimbursement plan. This is different than an HSA or such thing. It's apparently allowed under Internal revenue code section213 and purports to allow you to reimburse yourself pre tax for qualified medical expenses, out of pocket expenses and the like.

I'm not at all familiar with this.

There is an annual fee and a per transaction fee associated with it as well. Is this a good idea, a good thing? Is it legitimate? Would love to hear your thoughts.

Thank you very much.

I've got you guys trained well. The first question you ask is, is this a scam that'll keep you out of trouble in life? That's actually a good first question now. It's not a scam. These are legit. I have had a health reimbursement account or arrangement before, an hra, that's what we're talking about here. And they can be used in conjunction with an hsa. They must be used in conjunction with a health insurance plan. But essentially this is your employer paying for some of your health insurance. And if you are the employer too, that allows you to pay for some of your health care with pre tax dollars. So that's a good thing. The way mine was used in my group is it essentially turned our high deductible plan into a low deductible plan. So we had a plan that qualifies as a high deductible health plan. So we could use an HSA. But the actual deductible that I saw was like 250 bucks. So I'd pay the first 250 bucks. I think the HRA picked up to 2,000 or 2,500. I can't remember what it was. This has been quite a while ago. And then I met the deductible, but most of that deductible was paid by the hra. And this was when I was in the partnership track, so I was an employee. This is something we do for our employees. And so that was really cool. I thought it was neat to have a low deductible plan, a high deductible plan, that was actually a low deductible plan. So it's kind of beneficial that way. There's lots of different ways to pay for healthcare with pre tax dollars. There's FSAs, there's HSAs, there's HRAs, there's the employer picking it up. And so there's lots of ways that you can do that. And obviously a lot of the time your health insurance premiums are also paid for with pre tax dollars. And so this is a good thing. You know, I guess there's ways to make it bad. If the fees were really high or something, maybe it's not still a good thing. But most of the time this is a benefit worth using. Maybe looking into implementing in your group, I don't know. That makes a huge difference if you're just if you got to fund it yourself, the employer's not putting any money toward it and you have plenty of money in an HSA anyway. But I don't know that it really moves the needle. But if you're an employee and your employer is offering this, say thank you. This is a great benefit. All right, let's talk about non competes. We'll start with this question off the speak pipe.

Hey Dr. Dali, I'm a longtime listener, but first time caller. Thanks for all you do. My question has to do with the proposed ban on non compete clauses, both by the FTC as well as Congress. I feel like these clauses are bad for everyone. They're bad for doctors as well as patients and that doctors should not have to leave their communities communities if they want to leave their employer or a bad partnership. Unfortunately, I have not seen much support from the medical community for this. In fact, the AMA came out with a statement saying that they felt that a ban on non compete clauses was not necessary. Fortunately, the American College of Emergency Physicians has come out in support of it as well as the American College of Surgeons. But I would love to see a groundswell of support from the medical community for this. And I guess my question is how can we best support this and get awareness out there as well as what are your opinions on a ban on non compete clauses? Thanks so much.

All right, let's talk about non competes. Here's the deal. First of all, I'm surprised you think the medical community doesn't support this. I just saw an article. We're including it in the April monthly newsletter. You should sign up for those newsletters by the way. If you haven't, you can sign up@whitecoatinvestor.com just go down to WCI and there's a newsletter subscription form there. They're totally free, but I include the best links each month from articles that I find on the web. And in March I found this article about how 90% of doctors are in favor of banning non competes. So I think you're totally wrong if you think the medical community as a whole does not support these. I think the vast majority of doctors are very excited and positive about these potential bans going into place. Whether it's done by the ftc, whether it's done by Congress, whether it's done by whoever. They're thrilled about it. And the reason they're thrilled is because most doctors are employees, right? There is no good that comes from a non compete for an employee. Of course not. It's a restriction on you as an employee. So it's all bad if you're an employee. So no surprise there that most people don't like them. I think we ought to inject a little more nuance into the discussion though, and that might help you understand why maybe not everybody's against them. For example, our employees here at WCI sign a non compete. Obviously there won't be if the FTC bans them, but they sign a non compete and it's very specific non compete. I basically tell them they can't go work for any of our competitors and we give them a list of the competitors and basically tell them they can't start another business that's essentially doing the same thing as wci. And we view that as protecting some of the information about wci, how it runs and some of that proprietary information. So I understand why some businesses want non competes because I've got a non compete and it would be a big deal for me to spend a year training somebody to work at WCI and then they turn around and because some other company that competes with us wants them, wants that information, they pay them a few thousand dollars more, they go work for them and all of a sudden they've got access to all the information of how WCI runs. So I get why companies want to protect that sort of thing. Now that's not necessarily the reason that most doctors have non competes put into their contracts. The issue there is oftentimes the employer is investing a lot of time and money and effort into bringing them out and establishing them in their practice. For example, let's say you are a doc in a relatively small town, maybe you're the only doc of your specialty in that town. You bring an associate out to work for you, you pay off $50,000 of their student loans, you give them a $20,000 signing bonus, you pay for them to move out, you establish them in pract, introduce them to the community, you cover their overhead for three months, you give them a salary for three months before they're even really generating any money for you. And then they walk out the door at four months, open a practice across the street and start competing with you. How's that going to make you feel? Not so good. And so you can understand why that doc, that employer, would want to non compete. And what's a reasonable thing to do? Well, a reasonable thing to do is to have some sort of reasonable time limitation that they can't walk across the street the day after they quit and open a new practice and compete with you. So maybe they got to wait 6 months or 12 months or 2 years or whatever. But an unreasonable time period would be 10 years. If you say they can't do that for 10 years, that's not reasonable. And the same thing with distance, right? Maybe they can't go across the street, but if they go five miles away, maybe that's okay. They're really not going to take that many patients with them. If the patient's got to drive a long way, maybe it's 10 miles, whatever. But if you want to put a non compete there, that's 250 miles, that's not reasonable. And those tend not to be enforceable. And so I don't think a complete ban on non competes is necessarily fair either to the employers. And so that's kind of the nuance in the discussion. But there's no doubt that I am in the minority when it comes to that opinion. Most docs think these are so terrible for doctors and patients that even any possible good they could do is not worth it and that they should be completely just eliminated. I'm not sure I quite share that opinion. I think there's some value. I think they do need to be reasonable and limited for sure. But there's two people in the contract and you want to be able to protect both of them in a reasonable way without you having to totally pack up and move. If the employer treats you crappy, if the non compete means you have to move your family, that's probably overly restrictive in my opinion. If it means you got to commute for eight more minutes to a new job, I don't think that's overly restrictive. And if you only got to do that for a year and then you can go back and open a practice across the street from your prior employer, I don't think that's too restrictive. So I guess my argument would be for a little bit more nuance there rather than a complete ban. But I have a feeling that it's going to happen anyway and most doctors are going to be happy about that, because most docs are employees. Like I said, there's really no benefit to an employee. For a non compete, it's all bad for you. As far as patient care goes, I'm all for a continued relationship. Right. I want doctors to be able to have that continuity of care with their patients. But at the same time, if without the non compete, that job doesn't happen at all. If that employer is not willing to bring an associate to town, that's not good for patients either. So there's more nuance to it than I think you're, your question included. But there's no doubt that these have been abused in the past. Some employers put these in just to punish you, to put on the opposite of golden handcuffs. They're just handcuffs, and I'm obviously very much against that. All right. No matter where you work, whether you're in practice by yourself, whether you're a partner, whether you are an employee, however you work, thanks for what you're doing. It's hard work. It is important work. If no one said thanks today, let me be the first. We have our partner, Don Wenner, back here on the White Coat Investor podcast with us. He's the CEO of DLP Capital and a long term partner of wci, as well as manages some of my own investment money. Don, welcome back to the podcast.

Thank you, Jim. Pleasure to be here.

Yeah, I wanted to talk with you about a few issues that people have been talking about in general, but particularly in regards to commercial real estate. You know, banks are melting down left and right. It feels like, you know, even the bank that we do business with, with wci was put on a watch list, essentially one of the large regional banks here in Utah. And so people have been thinking about this, talking about this. All of a sudden people care about FDIC insurance and that sort of stuff. And of course, interest rates have gone up 4% plus ish in the last year and are, you know, the Fed signaling at least a little bit more going up? And I wanted to get your thoughts first on how these phenomenons are affecting commercial real estate in general and then affecting DLP in particular.

Yeah, that's, that's a big one, Jim. So coincidentally, as we're, as we're sitting here talking right now down the hall of my conference room, I have the leadership team, the board and the management team of the bank I own, as well as the leadership team from South State bank, which one of the largest banks in America, who's here in our offices doing Alco training is what it's called so training on assets and liabilities and credit and risk. And really we're getting to use some real life, very fresh examples of some of the problems going on with, you know, silicone bank and signature and a lot of things happening right now today. And it's very, very interesting times to say the least. And we're very blessed on our side of owning a bank. Our bank is actually benefiting from this. We're having an inflow of deposits and we're not dealing with any of the challenges that some of these larger banks face. And I think the fundamental issue that's going on from, from my seat is a pretty obvious one. If you just took a step back and you said owning assets that produce very low returns doesn't make sense in the long term. And so owning long term mortgages or bonds at 2, 3% made sense to these banks when they were paying nothing on deposits and we were in a zero interest rate environment. And there are, and which is what's causing a lot of the issues with many very good banks right now is there's significant unrealized losses sitting on the books and wide out in the open for these public banks that nobody paid attention to for some reason. And all of a sudden now people are when some of the news has come out. So it's the polar opposite DLP in a lot of ways our private funds, especially our lending funds are very similar to that of a bank. Right? We do private credit, but what we do is very similar to bank lend money out with an expectation of a return and our principal back. And all of our lending we do at DLP is very short term in nature. Our average loan matures in six months. So our interest rates only fixed for on average about six months. So we're actually been benefiting from the 4% increase in rates. And then our rates are going up because our rates are adjusting based on what's going on in the market. And we didn't take long term exposure, we didn't lock in our rates for five years or 10 years or 20 years or 30 years. So it's benefiting us as a private lender and then we're benefiting on the other side as a commercial real estate owner in that we have a lot of our debt locked into these low interest rate loans that are a problem now for the banks, but a benefit to the borrower to have a 30 year fixed rate or a 10 year fixed rate in the 3, 4% range. So you know, for those who planned ahead and predicted or planned that There'd be some sort of volatility going on in those. In commercial real estate, a lot of the turbulence that's been happening actually is benefiting us. But if you didn't plan ahead and you thought forever we'd have zero cost to capital and forever property values and rents and so forth would just keep going straight up. You know, this has been a pretty rude awakening, you know, for many over the past, over the past year. So I can dig a lot deeper, deeper into that for sure, but I'll kind of pause there and turn it back to you.

Yeah, for sure. You know, Warren Buffett's the one who's, who classically has said that you don't know who's swimming naked until the tide goes out. And the tide has gone out. You know, when interest rates went up and people with variable rate debt have gotten in a little bit of trouble with that, all of a sudden their cost of capital went from 4% to 9%. And that's caused, I know, some commercial real estate operations, some trouble. Also the classic mistake of short term debt to buy long term assets, right, which is really what got Silicon Valley bank in trouble. They got these deposits which are essentially callable debt at any time, and they used them to buy 30 year treasuries that then dropped in value, of course, but it does present opportunities because typically as the cost of borrowing goes up, that has an effect on the value of real estate. You know, people have more trouble affording it because they can't afford to get the leverage to buy it. And so that has, you know, some pressure on the price gains. Have you been seeing that produce opportunities to buy for dlp or do you feel like that's, you know, affecting everybody kind of equally?

Yeah, those are wonderful, wonderful comments and, and questions. Yes, for sure. The challenge of a lot of the adjustable rate debt or short term debt that's been taken out by real estate operators over the last few years has been a problem for many. Not to mention, in the scheme of things, the typical real estate I'll call Syndicator really is leveraged to 98, 99, if not 100% leverage. What I mean by that is they took out 75, 80% debt in first position and then went out and got an equity partner who brought them up to 97, 98% effective leverage because their returns don't get paid until after the equity. And then they went out to family and friends or other people to raise the rest of the money to take them, depending on how they structured it. Really 100% leverage. And that's caused many problems. And not only did they do that, but they didn't set aside cash, they didn't set aside reserves. And now the short term challenge of these heavy growth in rates has created a lot of pressures. On the other side though, you use the kind of concept of short term liabilities for long term assets, but long term, I don't think there's many people who look at say multifamily real estate, which is fundamentally what we invest in, but we're mainly focused on workforce, multifamily. I don't think there's many people who look at workforce housing and don't say that property values are going to continue to go up if you looked at a three year horizon or a five year, let alone a 10 or 20 horizon, and that rents aren't going to continue to go up and demand isn't going to continue to be really strong. There's not many people who look at the asset class and don't have, when you take even a midterm or a long term review, have a very positive view. Really a lot of the pain right now is very short term. It's the today's interest rates which may or may not continue to go up. But whether they do or they don't, it's short term pains. And the short term pain that a lot of people are facing creates some opportunities here on the short term to pick up fundamentally great assets that are going to continue to grow in value, that are going to continue to have increase in income at distressed prices or stressed opportunities. And maybe the cash flow is not as good on the short term because of the rates available today. But again, those are short term challenges. The other short term challenges going on that you just said, you know, the heavy increase in rates has made it very difficult for a lot of people to be homeowners and has only increased the percentage of Americans who are going to stay renters, which only further drives more demand and stability and ultimately increase in rents because more and more people are choosing or in need of continuing to be renters. So there's so many positive fundamentals that make us feel really great in this environment to want to own, to want to acquire, to want to invest in an affordable workforce housing, and to feel confident even if right now we would have to take out 6% or 7% debt to buy a property, feel really great about it, and feel really great that at some point over the life of our investment, the odds are good we're going to be able to refinance into lower cost debt and increase cash flow even further. So for us, we've been focused even in the peak of the market on buying assets with really strong unlevered returns. So the number one metric we focus on in acquiring properties is yield on cost, which tells us what do we generate in cash flow, not factoring in any leverage at all. So what we're most focused on is our stabilized yield on cost. That's just the cash flow we would generate if we bought the property, all cash. And we were focused on generating over a 7% yield on cost in the peak of the market when it was arguably a 4 cap rate market. And when you can generate 7, 8% unlevered current returns, not factoring any appreciation, not factoring in the tax benefits, not factoring in the benefits of leverage, just the cash flow we generate from renting out our properties, we feel that's a great place to be in virtually any market. And in the last kind of volatile cycle we had of COVID two of the best three deals we ever bought in our history, we bought over 30,000 apartments, hundreds and hundreds of properties. Two of the three best deals I ever bought were the first two deals I bought post Covid. So we think right now is a similar environment. We're going to find some really great opportunities to pick up assets significantly distressed due to some of the challenges other sponsors and operators are facing right now, largely due to liquidity crunches.

Awesome. Well, for those who aren't familiar with DLP Capital, they offer both equity and debt real estate funds. The equity is focused on workforce housing. The debt is focused on lending to experienced operators in first lien position. So two different types of assets both available at DLP and you can get more information on that@whitecoatinvestor.com DLP be aware that they are now offering a lower minimum investment for White Coat investors. It is now $100,000 minimum investment for White Coat investors. And you can get all the information you need about that@whitecoatinvestor.com DLP Don, thank you so much for coming on the White Coat Investor podcast and giving us your thoughts on the changes in commercial real estate. With all the excitement in the banking sector these days.

Thanks, Jim. That's a good way to put it.

Okay, let's talk about now a question specific to a practice owner.

Hey, Dr. Dali, I'm looking at divesting my interest in practice and the payout is between 3 to $3.3 million and I'm trying to decide if I take the payment as a lump sum and pay capital gains and ordinary income taxes on that or. Or whether I should consider holding the note and getting the interest over the next 10 to 15 to 20 years. And if I didn't hold the note, I would probably put the money into real estate to have passive investment income coming in and the depreciation to offset taxes. Curious on your thoughts about that. Thanks.

All right. That question is way too simple for the situation you're actually in. It doesn't work that simply. It's not just a question of do I take the lump sum or do I hold the note? Because when people are coming to you, they may be willing to pay you more if you were to hold the note. Right. So would you rather have 3.5 and hold the note or three and get your lump sum? Well, that's a different question. Right. Obviously, if it's the exact same amount of money and exact same amount of sales terms, et cetera, exactly the same. And you can either have the money or you can get the money over time you're going to take the money, right? Because there is a certain risk that they stop paying you. And I don't know what you get back. Maybe you get your practice back if they stop paying you, but maybe they've damaged it so much or maybe you don't even want it back that that's not a good option. And so there's risk in holding the note. So if all else is equal, take the money, but all else is not usually equal. Plus you have to look at, well, what are they paying you? 8% interest is better than 4% interest, 12% interest is better than 8% interest. What are they going to pay you? Is this really that great of an investment? You should actually ask yourself, if I didn't already own this practice, if I didn't already and I was just offered the option to invest in this note, would I do so? The answer is probably no, you probably wouldn't. Because it's very risky, right, to have that sort of a note. And so you got to keep that in mind. As far as the taxes go, you're going to be paid the same. You're going to pay taxes the same on the sale of the business, right? It's going to be capital gains taxes, probably long term capital gains taxes, assuming you've owned it for at least a year. So that's the same whether you take the note or not. The only difference is the interest on the note is taxable at your ordinary income tax rates, not taxable for payroll taxes. But neither is the capital gain. So whether they pay it to you over time, the actual value of the practice is going to be capital gains and the interest will be ordinary income tax. So that part shouldn't really sway your decision one way or the other. You just have to look at the whole thing as a package and decide whether taking back that note is an option or not. This happens a lot in real estate. You know, somebody buys an apartment complex, eight door apartment complex, and they have it for 20 or 25 years, they get sick of landlording, they're trying to retire and they want to sell it, but they can't find anybody to buy it, not for what they want to sell it for, unless they do the financing themselves. And they can get a pretty good term because the person buying it can't qualify for financing from the bank. And so maybe they're willing to pay an 8% note to the seller and that's a way they can get the property now. And so in that sort of situation, because it allows you to actually sell, you may take back that note. The other thing is it's relatively easy to foreclose on an apartment building. You don't have to build it back up for the most part. Maybe you got to repaint it or something, but they can't destroy it too much like they could a medical practice. Whereas if you had to foreclose on a medical practice and take that back because they stopped paying the note, that might be a little bit harder to do, especially if you've been out of practice for five or 10 years at that point. So tread carefully, read all the terms, get good legal advice, good luck. I hope this works out spectacularly for you. I know for many people it does if they're looking to retire soon. And many people that are selling out to private equity or somebody else, it does not. Because then they find they're working for less and they have much less control and more burnout. So be careful, especially if you're selling early in your career. All right, let's take a question from David about short term life. Know what to make of that? Hey Jim, this is David, retired ER doc from California. I have a question about what to do with short term money. I found the best place is six month treasury bills. They're easily bought through Vanguard. They pay a 4.8% annually guaranteed rate. You can take the money out anytime you want without penalty. And they're even great for personal money because in California you don't have to pay taxes on the interest. And if you Use a tax program. At the end of the year, Vanguard will figure out all your taxes and your accounting. Can you see anything wrong with this? Thanks. Oh, sounds like we're just talking about short term investments. Sure. Treasury bills are fine. They're really popular right now. I'm not sure why they're so popular. They certainly weren't popular when they were paying 0.25%, but they're popular now. They're paying 4.55%. But all this is essentially is building your own money market fund, right? You can go to Vanguard and you can get the Treasury Money market fund. Very liquid, very convenient, one purchase, et cetera, super easy. And they will manage a bunch of treasury bills for you. Or you can roll your own by buying the treasury bills yourself, either at Treasury Direct or via a broker like Vanguard or Schwab or Fidelity or TD Ameritrade or whatever. Either one's fine. That's all you're doing, though. You're running your own little treasury money market fund. And if you do that, you get paid a little for it. Whatever it costs Vanguard to run that fund. That's what you're making by doing it yourself. I don't know what it is. 0.3%, maybe you get an extra 0.3% you wouldn't get otherwise. And that seems about right if you're telling me treasury bills are paying for 4.8 and I think the fund's paying about 4.5. It's about 0.3%. That's about what the expense ratio on that money market fund is. So it makes perfect sense, you're right, that when you invest in Treasuries, the interest is state and local tax free. That means more to those of you in Chicago and Manhattan and California than it does to those of you in Texas and Washington and Nevada and Florida. But that's just the way treasury bills work. That's the way any treasury bond works, whether it's short term or long term. You know those are state tax free. And you're right that if you're using TurboTax, you can just download your consolidated 1099 from Vanguard or Fidelity or wherever right into the program and it'll insert it right in there. And that works pretty good for the most part. You might want to be careful with the state tax free interest. I'm not sure all the tax programs handle that exactly right. So double check when you're doing your taxes to make sure that's right. You don't need to make an adjustment there. But great observation David, I guess that question was not about life insurance. I was trying to figure out what short term life insurance was, but once we listened to it carefully, that's not what it was about. If you do need help with your life insurance though, we have a recommended list for insurance. They can help you with life, disability, et cetera. We even have a few other types of insurance on that list. You can find it@whitecoatinvestor.com Insurance Insurance. These are vetted agents. They've been vetted by me, but most importantly, they've been vetted by you. Because White Coat investors have been using them for years and years and years. And if I ever get a complaint, which does happen rarely, we just go to them and they fix it. And so that's really great. We've got some great people on that list that can really help you with evaluating whether you need more insurance or helping you to buy some. Obviously they're commissioned, obviously they pay us. Right. Conflict of interest there. But that's part of how we support the site so that this podcast is free to you. We have to make money somewhere in order to pay the staff because I'm not going to do everything at White Coat Investor and for some reason my staff wants to get paid every month. It's really weird. Alright, let's talk about annuities. This question from Robert on the speak bite.

Dr. Dolley, this is Robert from South Carolina. I'm calling with a question about annuities. In the past I never would have.

Considered them, especially with interest rates very low.

But now that rates have gone up quite a bit, it seems like there might be a place in our portfolio for an annuity. I'm also curious about taxation issues. It looks like they're funded with after tax money and then the money that's withdrawn later on is taxed at an ordinary income rate upon withdrawal.

But it does look like there are.

Some annuities that might be tax free.

For example, those from a settlement. I'm curious as to your take on.

Annuities and their taxation and as to whether or not annuities have a place.

In a modern physician's portfolio.

Thank you.

Okay, let's just give a broad overview of annuities. I do not think of annuities as a way to invest. That's probably not the right way to think about annuities. Now if you're using a variable annuity, that is an investment vehicle, but those for the most part should be avoided anyway. They're generally just a way a product designed to be sold not bought. So think of an annuity as a way to spend your money in retirement rather than a way to build your nest egg for retirement, if that makes sense. As far as the taxation, if you buy an annuity with qualified money, meaning money that's in a 401 or an IRA or whatever, then when it comes out and is paid to you, because annuities, essentially buying a pension when it's paid to you, that's 100% taxable, just like any withdrawal from an IRA would be, it takes the place of required minimum distributions for that money that's now in the annuity. But that's how it works. 100% taxable ordinary income tax rates. If you buy it with non qualified money, meaning you buy it with after tax money, then the taxation on it is determined by what's called the exclusion ratio. So some of the money coming out as principal, you don't pay tax on that, just like you wouldn't on basis if you sold a taxable investment and the gains are taxed at your ordinary income tax rates. This is the downside of annuities. When the money comes out, it doesn't come out at qualified dividend rates, it doesn't come out at long term capital gains rates, it comes out at ordinary income tax rate. So it grows in a tax protected way, just like your retirement accounts do. But when it comes out, it's taxed at a higher rate. So you need many years of tax protected growth to make up for the fact that it's taxed at a higher rate when it comes out. So that's why for the most part, investing in an annuity, just like investing in a non deductible IRA that isn't converted to a Roth IRA, probably isn't the best move most of the time because that's the way it's taxed. So keep that in mind. Also, there's an age 59 and a half penalty. Annuities are for retirement. So just like a Roth IRA or 401, unless you qualify for an exception, if you pull that money out before age 59 and a half, there's an additional 10% penalty. So for the most part, annuities are products designed to be sold, not bought. Single premium immediate annuity might have a place in a spending plan, you know, in retirement for people who are worried about running out of money. If you're really worried about running out of money, you might want to buy some longevity insurance, which is a delayed income annuity. One type of that is a qualified lifetime annuity. Contract. Is that what it is? Qlac Qualified Lifetime Annuity Contract. Longevity Annuity Contract. That's just when you do it with qualified money. That's what a delayed income annuity is called when you buy it with retirement money. Some people might want to buy those, but for the most part these are products that annuity salesmen are out there selling to you and that usually means you don't want to buy them. So hope that's helpful. All right, let's do our quote of the day. This one's from the late Jack Bogle said if you have Trouble imagining a 20% loss in the stock market, you shouldn't be in stocks. That's true. You can lose a lot of money in stocks in a hurry. And I wouldn't even say that 20% is the limit. 50% is what stock market lost in 20082009 and some asset classes did worse peak to trough REITs like the Vanguard REIT Index Fund lost 78% in the 20082009 stock market. I know because I owned it. So be aware that particularly in the short term, stocks are very volatile. Easy to lose a lot of money in them. Okay, let's take a question from a serviceman here.

Hi Dr. Dali, thank you for all the work you do at the White Coat Investor. I also just wanted to mention I'm a second year medical student at VCU in Richmond, Virginia and I was my class as champion last year. We all really appreciate your generosity in giving us the White Coat Investors Guide for students. Now for my question. I'm in the Air Force HPSP and I've been maxing out my Roth with my stipend for the past two years. My dad set me up with a firm he has used for investing in Richmond. My advisor is a fiduciary and is charging me a 0.9% fee per year. I figured it was a cheap enough deal since it will only cost about $200 per year with how much I currently have invested and this would allow me to learn a little bit more before eventually managing my own investments. The firm also did a good job for my dad over the life of his career. So I thought I would be getting good advice for cheap. But I turned out to be quite wrong with this. I was pleased with a different advisor than my dad given my small portfolio and he invested in individual Google stock in addition to a collection of other ETFs in my non Roth fund. He purchased the individual stock when Google was near its Peak in January 2022 I saw this, but just got busy with school and training. Over the summer, my portfolio performed about 8% worse than an already bad market in 2022, largely due to a 30% loss in Google stock. Can you think of any good reason for him investing in an individual stock like this? And would you fire him now or ask him to fix it? I'm thinking he was trying to game the market and I should just move on before he makes another mistake.

Okay. Sorry that happened to you. Happens to a lot of people. Financial advisors are not necessarily good at their job. It turns out there are a lot of terrible financial advisors out there. You have unfortunately hired one. So should you fire them? Yes, you should. Do you need to do it immediately? No. First, figure out what you're going to do. Are you going to be a do it yourself investor? If the answer is yes. Great. Set up your plan. Figure out what you're going to invest in, then let the advisor know you're firing them and move the money into your desired asset allocation and move on. If you're still going to use a financial advisor, go hire that financial advisor before you fire this one. And they can handle all the paperwork and all the hassle of moving your investments away from that advisor and reinvesting them. Either way is fine. Financial advisors get fired all the time, particularly bad ones, so they should be used to it. But no, there's no excuse to be investing in individual stocks. You shouldn't be doing, your advisors shouldn't be doing it. And you've just demonstrated why. Because it's hard to pick stocks because you don't have a functional crystal ball and neither do financial advisors. So don't just buy one of them, buy all of them. And yes, in 2015, in 2022, you would have lost money if you'd bought all the stocks. But you know what? You wouldn't have lost as much as if you put all your money in Google. There's no guarantees there that Google or Tesla or Ark Funds or whatever meme stock of the day is going to outperform the overall market. So the best way to invest in stocks is a low cost, broadly diversified collection of index funds rebalanced periodically. And you just can't beat that. And it's super easy. I think. It's so easy that it's pretty easy to do it yourself, I think. But even if you're not doing it yourself, you're paying somebody to do it. That's what they should be doing for you. You should look at what your advisor's doing. And go, that's so easy. I could do it myself. Well, that's probably true, but if they're not doing that, you're probably doing worse. So yeah, this advisor needs to go. Glad your dad got treated well, I'm suspicious he may not have been, especially if he's got a lot of money and he's still paying 0.9%. But while you're paying a good price for your advice, there is no price low enough for bad advice. And so if you're getting bad advice, you need to move on to a new advisor sooner rather than later. But get a plan in place before you go and you may find it helpful to take our fire your financial advisor course. Put together a plan on your own, or at least help you have the tools and the language and the vocabulary you need to discuss with a potential future financial advisor. One other piece of advice that I learned I do learn stuff every now and then. Believe it or not, I learned on the WCI forum the other day. 457 accounts can be used by independent contractors. Now, the plan doesn't necessarily have to allow their independent contractors to use it, but they can allow their independent contractors to use the 457. So if you're contracting with a hospital and they have a 457, you might want to go to HR and ask if you can use their 457 plan. Assuming it's a good one and all the usual caveats with 457s, be aware when it does pay out, I think that's W2 income, so be aware of that. You may end up having to deal with the hassles of having W2 income when you pull that money out. If you're looking to boost returns, lower taxes and build wealth, join the WCI Monthly Real Estate Opportunities List for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities. Expect educational emails that introduce you to syndicators, fund companies, online courses and online real estate platforms. Go to whitecoatinvestor.com reopportunities to sign up today. You can do this and the White coat Investor can help. Don't forget, if you need insurance, check out Our recommended list whitecoatinvestor.com insurance and thank you. For those of you who have left us a five star review, here's one from GB Stackhouse says Even for Know it Alls, I'm an older and experienced investor and have been financially independent for years. Yet Dr. Daly continues to provide great new content that still teaches me things. That's very kind of you. It's our pleasure to serve you. We're glad you're here. We know you have a choice in your podcast listening and we're happy you fly with us. Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the podcast.

The hosts of the White Code Investor Podcast are not licensed accountants, attorneys or financial advisors. This podcast is free entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.