WCI #343: How Do You Know If You Are Getting Good Advice at a Fair Price?

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.

This is White Coat Investor podcast number 343. Love what you hear on the podcast. Looking for more great White Coat Investor content? Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others, and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our real estate partners. Check out all this and more@YouTube.com thewhitecoatinvestor you can do this and the White Coat Investor can help. All right, welcome back to the podcast. There has been some confusion. It's probably my fault. I've got to be more careful how I speak Our WCI Champion Program. Remember, this is the program where we try to pass out copies of the White Coat Investors Guide for students every first year in the country. This year we're trying something new. We're not just giving it to the medical students and dental students that the book is really aimed at. We're also offering it to pa, NP and pharmacy students. Again, you gotta be a first year. You gotta be in, you know, some sort of a brick and mortar institution where you can actually pass the books out. But if you are interested in that, you can sign up whitecoatinvestor.com champion. All the champion has to do is literally pass out the books. We send you a few boxes of books, one for everybody in your class. You pass them out, you get some swag from us. That's it. That's the whole program. Last year we managed to get the book into the hands of 70% of first year medical and dental students. We're hoping to better that this year. So please help us get the word out. Boost financial literacy. And this knowledge is so valuable you might be saving each of your classmates literally millions of dollars over the course of their career. So you can really be their hero. Just sign up whitecoatinvestor.com Champion. Okay, we are doing another Friends of WCI episode. We've done at least one of these in the past and I think they make for some awesome episodes. My partner today in this endeavor is Dr. Margaret Curtis. You may know her from her work as a columnist on the WCI blog. You may also know her from serving as a panelist. And this year being a speaker at WCICON coming up in February in Florida. But I don't know that she's been on the podcast before. So, Margaret, welcome to the podcast and thanks for being here as a friend of wci.

Thank you so much for having me.

All right, so just for those who don't know you, who've never read any of your work, who, you know, didn't see @wcicon, give us the 30 second introduction about you.

So I'm a pediatrician. I'm married to a urologist. So we have the dual physician family I live in. I used to live in Maine. I actually just moved back to Vermont and I started writing for WCI actually back in 2018. But I've been a columnist for two years and I write a lot about family and work life and contract issues.

Maine just had a bit of a tragedy in the news the last couple of weeks.

It did, sadly. Yeah. And actually it was in Lewiston, Maine, which is where I practiced for many years. So that hit close to home and it felt like my community.

I bet it did. It feels like you're under attack when that sort of thing happens.

Yeah. Yeah. It was really heartbreaking. And I'm thinking a lot about my colleagues who are there who are on the front lines of that.

All right. On a happier note, before we get into the content we have today, which we've got some awesome questions from the WC audience, we've got to talk about this comment that came in on the blog today. And this came in on one of the blog posts. I did a blog post a few months ago about doctors that were worth a lot of money. In this case, it was two docs that were worth around $50 million a piece. This comment comes in this morning and it says, I immigrated with $32 and studied for my USMLE and got into pediatrics residency and did fellowship in neonatology. I got married in 99. My wife also worked and we made sure that we saved one salary. When I was done with my fellowship, we had $140,000 in the bank and we bought our house with 50% down. I built my neonatology practice. We ran the practice well, and here's where it gets interesting. And saved four to five million dollars a year. We sold the practice in 2013 for 30 million dollars. We have several good investments, including vacation homes and fancy cars like Ferraris, Porsches. But we also believe in charity and we give away at least one to two million dollars a year. I continue to work part time and make a salary of $500,000 part time. We travel, drink good wine and good food and enjoy life. I'm 54 years old, my wife is 52 years old. We have a net worth of 75 to 80 million dollars managed by professionals, 75% equity, private equity and tax efficient funds, rest, cash and bonds. I mean I have always said that interest specialty pay variation can be dramatically higher than the inter specialty pay variation, but this is off the charts. I mean this is on the moon. What do you think about when you hear about a pediatrician making enough money that he can put away four or five million dollars a year?

That is really astonishing and I think it really shows the pay variation between procedural and non procedural specialties and the benefits that come from owning your own business. I mean really, he didn't get that much money by clocking in and out as a neonatologist, although they do tend to earn on the higher side for pediatricians. But by owning the practice and by subbing out to I assum he worked, his group, worked for many different hospital groups. So it's pretty remarkable. And I mean congratulations and well done for him. That is a pretty amazing example of what can happen when you stack up all those benefits on top of each other for many years.

Yeah, I'm assuming that he's got a number of other docs and APCs, et cetera working for him.

Yes, I'm sure he does. And I'm sure they contract out with all those different services they provide and do lots of procedures. So it's a pretty astonishing story.

Yeah, it's super impressive. I mean that's gotta be the high end for pediatricians I've heard about. But pediatricians out there making five figures, you know, typically working part time at that income. But you know, it's just a massive, massive variation. All right, well let's get into our first question off the speak pipe and this is going to be good because there's always lots of good debate and topics to discuss about this. I think It's a rent versus buy question. So let's take a listen.

Hi Dr. Dali, I have a rent versus buy question. We live in Houston, Texas where rent is significantly cheaper than the cost of owning. Should we just rent forever? What else should we consider? I'm an engineer and my husband is a physician. We're debt free and not looking to change jobs or locations in the foreseeable future. Calculating with my husband's income of $370,000 and using the 2x rule, we can afford to purchase a $700,000 home. Assuming a 20% down and current interest rate of 7.875%, the monthly mortgage is upwards of 5,800. With taxes and insurance, I can rent the exact same home for 40% less my mortgage at 3500. Why not just rent forever and invest the $2000 difference between the mortgage and the rent? Thank you so much for all that you do. We've been avid followers since 2015 and wouldn't be where we are without you.

All right, thanks for that. Great question, Melody. Rent versus buy. Renting forever, man. What do you tell her?

Well, I thought this was a great question. So usually the rent versus buy question comes from people who are early in their career, maybe in medical school or in training. And the answer to them is usually you should just rent because you don't know where you're going to be. You've got better things to do with your time than maintaining a house and better things to do with your money, like managing your student loans. But this is a couple who's established in their career, they're established where they live and they're just wondering if they should forego expensive home ownership and rent. And I think there are arguments to be made for both sides. The cost of a mortgage is just the start of your homeowner costs. There's also obviously your taxes, there's homeownership, excuse me, home repair. And it can really add up, whereas rent is all you're going to have to pay. So. So in Americans, we tend to think of homeownership as a path to wealth. I think there are, because historically homes appreciate over time and for some people it's sort of a forced savings account. But this couple obviously is very disciplined and high achieving and I'm sure they have the discipline to save that difference every month and invest it wisely for the long term. So I think you could certainly make an argument for them renting long term. It wasn't clear to me from this question if they want to be homeowners. Another question I hear a lot right now is should we buy right now when the rates are high, or should we wait until rates go down? And the answer to that is that we don't know the rates are going to go down. They could just as easily go up again. We're actually still in fairly low interest rate territory if you look at the long term history of mortgage rates. So rates could go up again. And I think the answer to that question really is figure out how much house you can afford right now, including your interest payment and then buy that house and be happy with it. But if they don't want to be homeowners, if that's not the right fit for them, then they should rent and not worry about what everyone else is doing. That was my take on this question. What do you think?

Yeah, you know, the mortgage thing cracks me up. The mortgage rate thing. Right. Our first mortgage in 99 was 8%. Our second mortgage in 2006 was 6.25%. The home we're in now, by the time we paid it off, it was 2.75%. This. That was not normal. Right. Normal mortgage rates are 6 or 8%. So people talk about them being high. I view that as far closer to what normal is going to be than what we experienced the last few years. And I think people that are expecting mortgage rates to go back to 3 or 4%, I think they're up in the night. I don't think that's going to happen. If you're not going to buy at a rate of 6 or 7 or 8 or 9%, you're probably not buying any time soon and maybe never. So I don't think you can let the interest rates by themselves scare you off and keep you from buying. I think it's important that we talk in general about this and then talk specifically about their situation. Because in general, a rent payment is going to be higher than the mortgage payment on the same house, and it has to be that way. Or real estate investing makes no sense whatsoever. Because a real estate investor, their only source of income is rent, and they've got to cover all their expenses and get a profit off of that. Right. So they've got to be able to pay the mortgage. They got to be able to pay insurance, utilities, you know, repairs, vacancies, property management fees, all that stuff, plus presumably have a little bit of positive cash flow. And so the natural situation is that rent should be more than a mortgage. That is clearly not the case in their situation. I've run into other people, it's often the Bay Area. It's seems like the cost of a mortgage, even when rates were low, was outrageous compared to what they could rent basically the same or a similar house for. I don't know that I expected to see that in Houston, though. But apparently they're seeing it in Houston as well. And so you've got to look at your individual situation. If that varies from the general rule, and in this case it does. And in that case, buying in this situation only gets you two things. One, it's a Speculation play that for whatever reason, that house is going to continue to appreciate like crazy. And maybe it will, maybe it won't, but that seems like a, you know, a little bit of risky thing to bet on. And two, some people just like owning. You know, you can paint the walls. You don't have to ask anybody permission to do stuff. And so I think that's, you know, there's some value to that. A lot of people want to own a home. It's one of their life goals. And as you mentioned, I think if that's not one of your life goals, then you may come out with a better deal. Renting. But pay attention to it year to year to year. I wouldn't be surprised at all if in two or three years those numbers reverse themselves. Whether rents go up or whether the cost of housing goes down or flatlines or whatever. I wouldn't be surprised if that situation reverses itself. So I'd pay attention to it and be willing to change if at some point down the road, ownership does make more sense. As a general rule. I'm a big fan of ownership, though. I think most docs probably ought to aim to own their home at some point during their career.

No, I agree. And one of the benefits of a mortgage is that you know exactly what you're paying every month for the next 15 or 30 years. And of course, you don't know that with rent. And rent always goes up over time, as do home repair costs, as do. As do insurance costs and taxes. So you just have to watch that number and see what it does and be prepared. And maybe part of your investing of your. She said she had a $2,000 difference between rent and mortgage. Maybe part of her investing is into a fund. So they could at some point buy a house if that makes sense for them in the future.

Absolutely. You know, this question comes up in many different variations. One variation you see essentially is people wondering should they buy a house when they're ready to buy the house, when their, you know, life is at the place that they should buy a house, or should you wait until it seems to be a good deal? You know, whether that's because rates are low, it's because, you know, rents are high relative to the cost of buying a house, is should it be more driven by your personal life or more driven by the macroeconomic environment? I've always leaned toward your personal life, but when you see it get really out of whack, like in this sort of situation, makes you wonder if that's the right advice to be Giving out.

No, I agree with that because the, the flip side of waiting until the market seems right is that you can then buy because you have fear of missing out, because everyone else is fine, because it seems like a good market to get into without really thinking through your personal reasons for doing it and then coming to regret it. And I think we're going to. We've seen that some in the last few years, people who rush to invest in real estate when rates are really low and when everyone's all excited about investing in real estate, and some people who are doing even now investing when maybe isn't the right move for them. And I think in a few years we're going to see people. Properties come onto the market when people realize it wasn't actually the right move for them. So I think you just have to buy what you can. When the time is right. For you personally, when you have a mortgage, excuse me, a down payment saved up. When you're stable, when you're stable in your personal life and your professional life, then go ahead and pull the trigger and don't worry so much about what the interest rates are doing. The payment's going to be the same. It's just some's going to the bank and some's going towards your equity. And you can't, you can't control everything.

And recognize that sometimes this is going to work out well for you and sometimes it's not.

It is.

We bought a house in 2006, right? And we kind of knew things were bubbly. It wasn't a complete mystery that chances were good things could implode in 2006. Prices have been going through the roof for the prior three years. And so we hedged a little bit in that we bought a house that was much less expensive than what we could afford. It was about 1x. Our mortgage was about 1x our income. And that was on a low income, that was on a military income. And then when we went to move in 2010, it was a completely opposite environment. It was a total buyer's market. You know, we looked at 30 homes and the only one that sold over the next six months was the one we bought. None of the rest of them even sold. And obviously we got a much better deal on the second home than we did on the first home. In fact, we sold that first home after nine years, still at a loss. And luckily the second home was much more expensive than the first home. And so it ended up working out fine for us overall. But basically we were just buying when it made sense. For us to buy in our personal lives. And so, you know, it's possible that it doesn't always work out well for you doing that, but I think as long as you stay within some reasonable guidelines, you'll be okay in the end.

I agree. But I think one more thing I would say about that is that people get very caught up in this idea of real estate appreciating, and it typically does. But real estate is so hyperlocal, even in neighborhoods within the same city can have different appreciation patterns. There's a real estate cycle that people write entire books about, none of it really based on a lot of science. And so you, you can't always count on appreciation either, or you can't count on a certain amount of appreciation. You just have to buy a house because you want to live in it and it works for you, and then the appreciation is a nice extra. But you, you can't bank on it, literally.

I'm not even sure it's that nice. We might be better off if homes didn't appreciate, you know. Why do you say that ways? You know, because what happens when your home appreciates? Well, your property taxes go up, you know, and mine have gone up. I don't know, maybe 100%. Thirteen years I've been in this home.

Yeah, they probably have.

Yeah. And the only time appreciation really hurts you because you're going to need a place to live, you know, if you sell one house, you got to move into another one that's also appreciated most of the time. The only time it really hurts you is when you're not in the game, you know, anything at all. Then it's, that's the fear. Right. We all fear if we wait to buy, it's going to get so expensive, won't be able to afford to buy it all or ridiculous price later. And I think that's the fear that drives a lot of people to maybe buy before they're. They're 100% ready to buy.

I agree. I agree. So I think our answer to this caller is if renting is right for you, then keep on renting and investing and you're obviously, you're doing great.

Yeah, I agree. And watch it, because that might change.

Yeah.

Okay, let's get on to another question. And it's another one of those classic questions that everybody has that has no right answer and should make for a decent debate. But this one can be an email. I'll read this one. It says, after Saving up a 20% down payment, we recently bought a home with a 7.8% interest rate. We've been setting aside all extra cash flow to build up our down payment. Now that we're in the house, I'm debating what to do with that excess cash flow of roughly $6,000 per month. I was planning on put all of it in my taxable brokerage account, but considering the high interest rate, should I overpay my mortgage instead or should I do a split? Please note that I take the standard deduction and I'm maxing out retirement accounts, funding my HSA and doing my backdoor Roth. This $6,000 is excess cash flow. Thanks for your insight. Wow, what a great position to be in, to be maxing out everything. And presumably they didn't mention student loans, so presumably the student loans are gone and still have $6,000 to do whatever you want with a month. I don't know, I might look at some of that and think about spending it.

Yeah, maybe it's time to go to go have a little fun after all this hard work you've been putting in. No, I think congratulations on your new home. Congratulations on doing so well. And I think that you're in a good position and whatever choice you make is going to be a good one. So there are, there, there are situations where it's clearly better to invest or clearly better to pay down debt. So if your debt is at credit card debt at 19%, you should be paying that off like a house on fire. If you have a mortgage rate at 2.5% and you haven't maxed out your retirement accounts, then you should be maxing out your retirement accounts and investing. This person, I think, is somewhere in the middle and where exactly that spot for you is where you'll make more money with one versus the other is highly individual. And you have to sort of do some math. You have to figure out how much interest you're paying if you're taking this, if you are itemizing your deductions, figuring out what kind of tax benefit you're getting, although the tax benefit alone is not a reason to keep a mortgage. And this is something I've said before and I kind of harp on it because it drives me bananas. There are even some financial advisors who say keep your mortgage because of the tax write off. A tax write off is not free money, it's just a discount on money you're paying. So you get, you pay less in taxes, but you're still paying the same amount to the bank. So that by itself is not a reason to keep a mortgage. There are downsides to paying a mortgage. You're less liquid. You essentially have, you're losing diversity because you've got more of your equity in one piece of real estate. But there are upsides too. You save a ton of interest, you have more security because you know you own your home outright and you might just be happier paying off your mortgage or it might be more in line with your values to not have a mortgage. So I think again, either way, I think this person is going to do just fine. What do you think?

Well, I agree they're going to do just fine. I mean, they're maxing everything out. They got 6,000 bucks left over. Of course they're going to be fine. And I think the advice you give is kind of the standard advice. I mean, that's what I've been telling people for years. You know, figure it out. How do you feel about debt? What are the interest rates, you know, what are your alternative investments? But this is a mortgage at 7.8%. That's a heck of a guaranteed return on an investment. I mean, you can go put your money in a money market fund right now. You pick the best money market fund out there and you might make 5.3% right now. That's the best guaranteed investment you can get. This person's taken the standard deductions so that interest is not helping them on their taxes in any way, shape or form. They're truly after tax paying 7.8%. That's really attractive to me. I mean, I would probably still max out the HSA and the 401k and all those tax protected accounts, but I don't think I'd build a taxable account. If I had a 7.8% debt. I think all that extra money, that $6,000 a month would go toward it. They don't say how expensive their house is, but I'll bet that mortgage is gone in five years. You know, if you're throwing $6,000 a month month at it, wouldn't surprise me if it's gone five or seven, maybe 10 years at the most. It's just going to be paid off so fast. I mean, where else are you going to get almost an 8% return? Bonds aren't going to give it to you. A lot of people think the long term return on stocks is only 7 or 8%. Don't know that's necessarily true, but that's what a lot of people believe. And if you got to take a bunch of risk to make even 9 or 10% or you can get 8% guaranteed I don't know, I find that pretty attractive.

So at what point would you suggest someone not pay down their mortgage and invest? Is it really, do you go off of the really safe investments like T bills or do you look more at the stock market investing? What's your cutoff?

I don't know. I mean part of it is there's a lot of value in a tax protected account not only from taxes, there's also those estate planning, those asset protection benefits down the road. And so I feel a little bit differently if you're investing in a tax protected account, in this case taxable account versus paying off the mortgage. And I think that's a much harder case to make for investing. Obviously if you got a mortgage or a student loan at 2% and you can 5% in a money market fund, I'm not going to criticize that person for carrying their debt for what. That's a no brainer. And obviously if you've got, you know, 30% credit card debt, that's a no brainer to pay that off in the middle. It's a little bit more of a debate but for me, man, you can do better than you can get with bonds and cash. By paying down that mortgage it makes you wonder should you have bonds or cash in your portfolio at all or money that you would be putting into that go toward the mortgage? In some ways a loan functions as a negative bond in your portfolio. And so you got to wonder when those rates get as high as 7.8%, I think we're going to be seeing more of that. Based on what the Fed's talking about, we may see another quarter point or half point interest rate rise in 2023. So I don't know, you start getting up there 6, 7, 8, 9%. I think I'd pay off the debt. I'm a little bit debt averse compared to most people too, but that's pretty attractive to me.

Yeah, no, I think you're right. I understand that and I think the math really makes sense. I'm not entirely debt averse when it's low rate debt, but yeah, this is getting up there and this person also I think has room to do both. They could, you could make an argument for paying down the mortgage earlier. Of course you have to make sure you don't have a prepayment penalty on your mortgage. Pay down the mortgage fast, mortgage faster and invest maybe, you know, it depends on your. My answer to a lot of these questions is what is your financial plan say? So how much should what's Your asset allocation should, are you enough in bonds? Are you enough in stocks? So really go back to that and it often kind of answers that question for you. But as long as this person is investing in accordance with their financial plan, then I think there's some room for there to stuff a little extra in a taxable account. I think there's a lot of good answers here.

Yeah. And, and if you really can't decide, and a lot of people can't decide. Right.

Yeah.

The hard decision, they're afraid of regret and what they chose. You can split the difference. You're going to do the wrong, you know, quote unquote, wrong thing with half of it. But it also means you're going to do the right thing with half. So if that helps you, you know, I've got a partner that he splits his retirement account contributions, 50% Roth, 50% tax deferred. He knows one of them is wrong. He doesn't care. You know, he's like, you know, I know I'm doing the right thing with half of it, you know, and that's good enough for him. And maybe you're one of, one of those people that, you know, that'll help you to avoid regret down the line. And it's perfectly fine.

It is also perfectly fine to pay off a mortgage just because you hate having a mortgage. If it makes you feel better, if it's aligned with your values, it's fine to pay it off even if it's at a lower interest rate. There's nothing wrong with that. There's nothing wrong with being debt free. It's a, it's a great place to be.

Actually, you know, part of the reason we paid ours off and ours is 2.75%. We paid it off. Granted, you know, you could only make 1% in a savings account. You could only make 0.25% in a money market account at the time. But we paid it off because I felt like we were borrowing money to do all the frivolous stuff we were doing. We bought a car, we went on vacation. It felt like we were borrowing at 2.75% to do that. I would be okay borrowing at 2.75% for a necessity or even inexpensive luxury, but not for the stuff we were spending money on. That just didn't sit right with me. And since money's fungible, we ended up paying it off.

It's true. And a lot of people who wouldn't dream of carrying a credit card balance are okay with having a high interest rate mortgage. It's really the same thing. It's just debt. It's just debt that you owe. So that makes a lot of sense to me. We still have a mortgage on our place, about 140,000, but our interest rate is 2%. So we're keeping the mortgage for now and investing the rest. And that makes sense for us. I mean, we can put it in our local bank in a CD and make double that. But I agree with you about the importance of paying down debt. And the math with this situation does kind of lean that way. The 7.8% return on your investment is a great return.

You know, the question comes up a lot with regards to whether to use a down payment or not too. Do you save it up or do you use that money to invest? And obviously getting to 20% down payment gives you some benefits. One, if you want to sell the house, if it's gone down in value, it provides you a little bit of safety. That way you don't have to bring money to the table to get out of the house. It also helps you avoid private mortgage insurance. That's assuming you didn't do a physician mortgage for those who put down less than 3, 20%. But it's a little bit of the same debate, isn't it, whether to use that money for a down payment or whether to leave it invested.

Yeah, I'm so risk averse. I'm so traditional in a lot of ways when I look at money that the thought of a no down payment mortgage makes me really nervous for no really good reason. I'm sure someone could come up with lots of reasons why I'm wrong, but that's just where I come from.

Well, some people want to down even more than 20%. And it's a little bit of the same question. Do you wait to buy so you can come up with 30% or 40% or 50% or whatever? Or do you get in in case it starts appreciating like crazy?

Well, now we're back to the question of when do you buy? Which is when it's right for you. And I don't mean to take us totally off track here, but anyway, I think my answer to this this person is again, they're doing great. And there's not a wrong answer here, but it certainly makes sense to at least partially pay down this mortgage at this interest rate.

If you knew that your interest rate was going to be 7.8%, give you a pause to go, well, maybe I'm going to save up for another year and put down 35% instead of 20%.

Depends on the price of the house, depends on my income, depends on how much I was stretching to buy it. I don't think there's an easy answer to that question. I think I'd have to sit down and do some math.

Yeah, that's a hard question to answer for sure.

Yeah. So it's a very vague answer.

Yeah. I'm sorry all you guys are dealing with this issue. I'll tell you what, one of the best things about being debt free. We've been debt free since 2017, is this is something I no longer have to deal with.

That's great.

Wonderful to never have this debate with myself, never talk to my wife about it, never have this issue. You know, I bought a truck last month and you know what? We didn't even think about going to get a loan and a loan for it. We paid cash for it.

It.

And we just never have this debate anymore. And it frees up at least a little bit of mental bandwidth. And that's kind of a nice side benefit of being debt free.

I think that really is. We hit a milestone recently when we sold our house in Maine. We didn't have to buy a new place, we sold our old place and we put a big chunk of money in the bank. And it is amazing the difference it makes psychologically and emotionally. Just everything else. Everything else seems like less of a big deal. It's really nice.

It's a nice side benefit of wealth in general and cash in particular.

I think it really is. It's pretty amazing.

All right, well, those of you out there on the front lines who are dealing with these questions, who are struggling with how much to put down whether to buy a house. Is now the time? Can I max out retirement accounts? How much to spend? They're tough questions and it's tough to take care of all that on top of the stresses of your daily profession. Whether you're a physician or a dentist or an attorney or a small business owner or an engineer, a tech worker, whatever, you know, you're doing something hard. That's why you get paid so much. That's why you're, you know, part of the high income professionals that listen to this podcast. And if nobody has thanked you for that hard work you do on your day to day, let me be the first today. So thank you for that.

Absolutely. And I also think it can be helpful to remember that at high income levels, you're doing most things right. You're going to be fine. It's kind of the 8020 rule you know, if you get 80% of things right, the other 20% you can afford to mess up on a little bit and you're going to be fine.

Yeah, it's nice to be rescued from our bad mistakes by our income, isn't it?

Absolutely.

Okay, next question. This one comes from Colton on the speak pipe. Let's take a listen to this. Hi, Jim, this is Colton from Billings. First of all, thank you for everything that you and your team do at the White Cone Investor. I have a 401k question for you. I currently work as an associate dentist in a group practice with plans of partnering. At the moment, I have access to the company 401k but have been told that once I partner, I will no longer be able to contribute. I understand that when companies decide to use a 401k, they have to offer it to everyone employed. And so I was wondering about the idea of opening a solo 401k. Once I partner, if everyone else has access to to the 401k the company current provides, is that doable? I know that a lot of dental practices instead will open a simple IRA, but if I could do a solo 401k, I think that would be a whole lot better. What are your thoughts? Wow, he's about to get himself into a lot of trouble. That's my thought. Here's the deal. When you have a practice that you're the owner of, that you're an employee of, that you're a partner in, this is one business entity and that one business entity can have one retirement plan. Essentially, you cannot as an owner offer 1 401k to your employees and go off and open your own 401k for yourself. Likewise, you cannot have a 401 that only benefits you. That's the whole point of all these testing rules for 401s. They're to keep owners from getting all the benefits or the highly compensated employees from getting all the benefits and hosing the low paid employees, the non highly compensated employees. That's why 401ks and other retirement plans have all these specific testing rules. But trust me when I say you cannot get around these. If you do, the penalties are very large. It is not worth doing. You cannot go Open a solo 401k when you make partner. Your option is to offer the same plan to yourself as you do to the employees. Now, that plan might be a 401k, it might be a simple IRA, it might be a SEP IRA. Whatever it is though, you will not be able to do something different than what you were doing for them. And in a lot of ways, you won't be able to get nearly the benefit that you're offering to them unless you offer them significantly awesome benefits. That's the bottom line for how a company 401 works.

Yeah, I felt like I didn't really understand the situation. I had more questions than I had answers. I don't understand why, what reason he was given for not being given access to the 401k once he makes partner. So that's my first question is why can't he contribute to the 401k? What are the other partners doing? How are they all saving? Because access to a retirement account is a huge benefit. And so he needs to dig into that a little bit more, I think. It didn't really make sense to me. It occurred to me that maybe the person running the plan just doesn't understand how this works. I have run into office managers and plan managers and benefits folks who just didn't understand. I had a practice, someone I worked for once who had founded the practice and set up the benefits, and he said, oh, we don't have an ira. We have a simple. And I said, well, actually a simple is a form of ira. And the point is that it may be the people who are administering your plan just don't really get how this works. So. So I can't think of any valid reason why you wouldn't be able to access this 401k after you make partner. And if you can't, or if there's some, whatever the glitch is, you should be able to negotiate around this because this is a big deal. I wouldn't, I don't think I'd take partnership if it meant that I couldn't have any access at all.

Well, I agree. Somebody's confused because it's unlikely that this doc would not be able to contribute something, something to the plan. You may not be able to get, you know, $66,000 in there, maybe not even able to get $22,500 in there because of the testing. And that comes down to the fact that the other employees are not putting any money in. Right. If nobody's saving anything other than the match they get, maybe they're not even putting anything in there and getting the match. That absolutely can limit how much the partners and the highly compensated employees can put in. But it's unlikely that they wouldn't be able to put anything in. So I think somebody is confused. You need to go back and talk to the plan administrator and the TPA and all that and figure out, well, how much can I really put in? The other solution you can do here is by getting the other employees to actually contribute to the plan. You know, when everybody's using this plan, when everybody's maxing it out, it gives the highly compensated employees the option to put more into the plan without failing the testing. And so this was a big thing for us at WCI when we put our 401k in, right. We were like, well, how much do people want to save? You know? And it turns out some people would rather have big old 401k contributions and relatively small salaries. And in a small practice you can make those adjustments so that you can do that. The other thing to keep in mind, and people fear this all the time, right? They're like, oh, well, I don't want to, you know, put too much in the 401k because then I'll be penalized when it fails the testing rules. What they don't understand is what the penalty is. The penalty is you have to put money into the accounts of your non highly compensated employees. That's it. You don't pay the IRS anything, nobody comes after you, you're not getting audited. You have to make an additional contribution into your employees retirement accounts. That's the penalty. And I understand that some people don't want to do that because their employees don't value the 400, 401k or whatever, but that was not a bad thing to me. I look at that and I go, that sounds like the best penalty in the world. Right. I get to pay people more. I get to help them save for retirement. That's not a bad penalty to me. But I can understand if you're a dentist and it's just you putting money into a 401k and you got 12 employees or something and you're going to end up putting more in as their matching dollars than you're even going to be able to save yourself and the 401k. I can understand why you might want to minimize the cost of that 401k, but I think a big part of this is lack of education for the employees on the value of the retirement account benefits that you're providing. And I think if you really educate well, you know, those penalties aren't nearly as large and you're able to put more into your 401k yourself.

Yeah. So maybe you need to do a little educating of both your plan manager and of the employees and get everyone on the same page so you can all be contributing to your 401k.

And the truth is, if you study your practice, sometimes the right answer is not a 401k. Sometimes it's a simple IRA. To make things more confusing, there's not only something called the simple IRA, but there's something called the simple 401k, which is very similar. Or a SEP IRA, or no plan at all. Sometimes it just makes sense to not have a plan and do your retirement savings in a taxable account. All right, let's do our quote of the day. This one comes from Thomas Stanley. You may not know Thomas Stanley. Stanley and Danko. They were the authors of Millionaire Next Door. And he said, at the end of the day, success cannot be purchased. And that's because the things that really matter in life, they're not financial things. So although we talk about finances all day long on the podcast, remember that in the end that's probably not the thing that's going to make you feel happy and make you feel successful. So pay attention to the other more important things in your life. Your health, your relationships, those sorts of things. And keep that in mind. Okay, we got another reader question. This one comes in via email. The reader says, we've taken your advice to get advice at a fair price. Okay, so that's great. I know if I am getting a fair price or at least a price I'm comfortable with. What I am less sure of is how do I know if the advice I am getting is in fact good advice? I've read your book and the blog for some time, but I struggle to know if I'm ready to dive into the do it yourself world or if I should stick with a flat fee financial advisor for a while longer. But then the question of am I getting good advice Comes back up. Does this person really have my best interest at heart? So what do you think? When is someone ready to diy? And if we aren't ready, how do we know if the advice we are paying for is good?

That's a great question. I love this question.

This is a great question. It's harder to answer. You know, my mantra is good advice at a fair price. And I can tell you what a fair price is. That's pretty straightforward. Too many people don't know the answer to that. But it's not that complicated, right? It's basically a four figure amount a year. If you're paying between 1,000 and $10,000 a year to do financial planning for you, manage your investments, you're paying a fair price. If you're paying somebody $50,000 a year, you're probably paying too much. If you're trying to get it for $300 a year, you're probably not paying enough to actually get decent advice. So the price is actually pretty straightforward. The advice. I think that is hard.

That is hard. But this is a great question because this is someone who was where we all started out, which is how do I know what I should be looking for and how do I know when I'm ready? The question of where do you find the advice and how do you learn to vet advice is a great one. It's really a two part question. Obviously I believe in the white coat investor mission and message or I wouldn't be doing this. But I still think it's important to go elsewhere to double check your sources. The places I look for one is the White coat investor forum is a great place. A lot of really smart people who will give you good advice. I tend to stay away from the social media sites because I think there's less quality control. There are other, lots of other good websites out there. Bogleheads is a great one. Some things in the Bogleheads universe and then I tend to also look on just what I'd call legacy sites like Investopedia or the major media outlets have financial sections and a lot of that information or advice isn't relevant to doctors. But you can still get a basic financial education. What you're trying to do is keep reading until you see the themes emerge and you can spot the outliers. And once you can do that and you start to anticipate what the answers to questions will be, then you know you've reached a certain level of competence. You reach the kind of consciously competent level. You don't have to get to the expert level, but you have to be aware of the, the themes and you can spot, once you can spot the outliers, you can start digging into why they're outliers and figuring out why they're saying what they're saying. So for example, most reputable, most responsible financial advisors will tell you to stay away from whole life insurance for good reasons. But whole life insurance can be appropriate if you're planning for a child with a disability. So once you can spot that outlier answer and kind of dig into it, it will make sense. And I think that's, that's sort of how you know when you're ready to either DIY or to just oversee a financial advisor. Because even if you hire someone to help you with this stuff, you still need to know what they're doing and why. Because no one will ever care about your money as much as you do. And because there are people out there who either don't have best intentions or sort of stray off of the straight and narrow for whatever reason. So that's how that was how I got to where I am today. And I. That's the advice I give most people who are starting out.

It's hard, though, because once you know enough to really recognize good advice, you're very close to knowing enough to be able to do it yourself. It's not that far apart and this stuff is not that hard to do. I mean, if you've been able to learn nephrology, if you've been able to learn neurology, if you've been able to learn how to do pediatrics, that is far more complicated than managing your portfolio and being your own financial planner. You don't have to know everything about financial planning and investment management to do this stuff yourself. You only have to know the parts of it that apply to you. And you also, the thing people don't realize is it's not either or it's not black and white. It's either do it yourself 100% hardcore or turn everything over to your financial person. There are lots of gradations in the middle. You can have them help you design the financial plan, help you implement it, and then you kind of maintain it. You can have them design it and you implement it and maintain it. You can do a checkup once a year with an hourly rate financial advisor, see how things are going. There are just so many options in between. It's not all one or all the other. I think the key is knowing yourself a little bit and knowing what works for you and what doesn't work for you. I think this is a little bit difficult for lots of people. And I think, to be honest, I think a lot of people's confidence trails their knowledge by about a year. They look back and say when they finally go diy, they look back and say, I probably could have done that a year ago, but I just didn't feel confident in my ability to do it. Is there anything we should be doing to kind of boost people's confidence that they can do this as a DIY project?

That's a great question. I think you're right. People's confidence tends to trail their actual competence. I think that's very true among physicians and other high earners who like to know what they know and are used to having a obviously are Very highly educated and have trained very hard for the jobs that they have. So jumping into something feels very foreign to them. I think the message that you don't have to get everything right, you don't have to know everything, you don't have to have everything at your fingertips. And it's okay to start with one area of your finances first. You don't have to get everything all at once. So maybe you start with just asset allocation within your retirement plans. That's a great place to start. Or maybe to start with a household budget. That's a great place to start. I can think of some situations in which it's reasonable to have a financial advisor, regardless of your own level of financial education. One is when you're starting out, so if maybe you're, you're kind of watching and going, going along with them stepwise until you say, oh, I, I could actually do this. Another is when you have a big change in your life. You know, you have little kids or you decide to get to end a part time, or you just don't want to do it anymore and then you let someone else take over. But you know enough that you've kind of got a structure in place and you can supervise them maybe from a distance as they go along. So hopefully everything we do is increasing people's confidence and saying that message. You can actually do this yourself. And it just takes a little time and a little hand holding to get people to that point where they can. But absolutely, people can do it themselves. It's just a question of giving them really clear steps.

I wouldn't feel like everybody has to do it themselves, but I think the message ought to be you can. If you have interest in this, then you are likely to develop both the knowledge and the discipline you need to do it successfully. A lot of people just aren't interested though. Sometimes I think the best service I can do for those folks is just connect them to someone that's going to give them good advice at a fair price. And that's why we keep a list of recommended financial advisors. So you can go, okay, this person, you know, maybe we don't, aren't going to have a 100% perfect fit. Maybe, you know, I'm still going to be paying thousands of dollars a year to them, but I know I'm not going to be hosed. That's what I can tell you. When you're picking somebody off the WCI recommended list, you're not going to be hosed. And either with price or with, you know, the quality of the advice and I think there's some value that as well. Tell us about your own personal experience throughout your career with advisors. Have you used an advisor for a while? Do you use one now? You've been a DIYer the whole time. Where have you been at with financial advisors?

So when I met my husband, he had, I was a medical student, he was already in attending, so he had two advisors. One was a guy who worked for or one of the big financial companies that has a lot of products like you can buy their, you could buy into their mutual fund and that kind of thing and you know, pay a percentage of assets under management. So that was where some of his money was and then some of it was with a banker who his family had known for a long time. He was kind of a guy at Morgan Stanley and they were both good people and they were both trying to do their best by us, but they both had other agendas. And you know, the first guy had a fee structure that just cost us a lot of money. And the second guy was managing what money was there very conservatively. He was all about asset, excuse me, capital preservation. So we really weren't getting the benefits of all the boom times that were happening. And this is 20 plus years ago. @ the time we got married, I was a resident, we had little kids. I had zero time or energy or interest in managing our finances. Neither one of us. My husband had started his own practice, so. So we were really maxed with everything we were doing at work and at home. And then eventually what got me interested in financial planning was our tax bill because we paid the alternative minimum tax, I think three years in a row. And I had just had it. And our accountant at the time said, well, a great way to save on taxes is to refinance your mortgage and have higher interest payments. And I thought that that doesn't quite seem right. So I started researching and I found, I found the way. This is one of the reasons this is such a bugaboo with me. So I started doing some online research and I found the white coat investor, among other sources and started educating myself and eventually transferred over all our assets to our own management. We had stopped using the first advisor years ago and eventually, maybe five years ago, we took our accounts from Morgan Stanley and put them under our own control. So that's where we're at now. We don't have an advisor. We want to do some real estate investing. And I think at that point we would. We've had a single family home rental in the past, but if we get into more advanced real estate investing, I would get an advisor, at least for the first few years to make sure I'm doing everything right in terms of taxes and then see how we feel. We might take it back over from that person or we might just let it continue under their management because again, like I said, I think it has so much to do with where you're at in your life. And we may decide that we're very happy having someone else do the tax planning and the finances for us and let us enjoy kind of a semi retirement.

I think most listeners kind of know my story with financial advisors. You know, the last true financial advisor I had, you know, the classic financial planner investment manager, was his resident. Felt like I was ripped off and decided I was going to embark on my own. The wonderful thing about being your own investment manager from the beginning is you get to practice on a four figure portfolio, you know, and then it becomes a five figure, six figure, seven figure, hopefully an eight figure portfolio, you know, whatever it is, as it grows. And so it can be really intimidating to people to move tens of thousands or hundreds of thousands of dollars around between investments. But it's not that intimidating if you've been doing it for 20 years. You know, it's really the same orders you put in on four figure investments years ago around more money, but it's the same game. And so I think that is a real benefit of starting out in the beginning, you know, and you just become much more comfortable with it as the years go on.

Yeah, that is a great point.

Okay. There's some red flags out there though, that I think, you know, this person is asking, how can I recognize bad advice? How can I recognize good advice? Let's give them some red flags. What are the red flags? You would, you would say if your advisor's doing this, you ought to, you know, you ought to have a red flag go up in the back of your mind that maybe you're not getting good advice.

Well, the first, most obvious one is are they trying to sell you something like, do they have a great investment for you that's only going to cost you 5% a year? Something like that. So, looking to see what their agenda is and how they're going to make money off of this advice they're giving. Another is, are they really out of line with what you've read in other sites that I promise he's promising you something that no one else is promising you.

Those are the 5% returns a year.

Exactly. If it sounds too good to be True, it probably is. The third is any kind of, kind of a guru. You know, I've been reading all this stuff about Sam Bankman Freedom following his trial and people really bought into not just the product, but him as a person. And this, this image. And we see that over and over again. Every few years another guru comes along and people, people fall for it, People fall for the hype. None of this should be about one single person or one single person's advice. It should really be about financial institutions and long term trends and good, good data and, and there's no. Because no one else has got to figure it out.

A few other red flags that ought to pop up, right? And I think you're absolutely right. When you're talking about looking for the themes, does this gel with what you're reading about on good blogs? Does this gel with what you're hearing on good podcasts? Does this gel with the good financial books you're reading? Does this gel what people are talking about on forums? I think absolutely. Finding the themes is really important. But a few red flags that ought to pop up if they're trying to pick stocks for you, right? If some relatively low level financial advisor could pick stocks well enough to beat the market, he should not be managing your $350,000. He should be managing billions, billions and billions of dollars if he is a talented stock picker. So what does that tell you? He's probably not a talented stock picker. And that's not, you know, some terrible insult. Most people aren't. Most people are not talented stock pickers. So if they're trying to pick individual stocks for you, that is a red flag that ought to go up in your mind. Likewise, if they're trying to pass money out under separately managed accounts to other people, pick stocks for you, that should be a red flag. If they're putting you into high expense ratio mutual funds, you're already paying this person. You might even be paying them 1% a year. You shouldn't be paying another 1% to a mutual fund manager. Mutual funds are now essentially free, right? 0 basis points, 2 basis points, 5 basis points, 10 basis points. That's all the same as free. You shouldn't be paying for mutual funds if they are pawning investments on you that are 0.8%, 1%, 1.2% expense ratios, that should be a huge red flag to you. And likewise along the same lines, if they're actively managed mutual funds, that should be a red flag. The data is very clear that you're almost always better with Index mutual funds and actively managed mutual funds. So that should be another red flag. If they're trying to sell you whole life insurance or annuities, that ought to be a red flag, especially if that comes up in, like, your first few visits with them. Right. This is something that is like an estate planning topic way down the road that maybe there's some use for you to use one of those. But if you're in the first visit, you have probably stumbled into an annuity salesman masquerading as a financial advisor. So I think those are all big red flags. All right, what about designations? Right? What's the value of a CFP or some of the equivalent designations out there? Do they have to have it? Is it useful at all? What are your thoughts on the designations?

Well, certified financial planners, kind of the gold standard, I believe, for individual financial planners. And honestly, I don't know a whole lot more beyond that. I think probably as important as that is how they charge, how you pay them. Are you paying them a flat fee and what does that include versus assets under management as a percentage? You should look for someone who is charging you just a flat fee and doing no more than what you think you need.

Yeah, I like to see a cfp. You know, a CFP requires three years of some sort of financial experience. It's often in sales. It might be insurance sales, might be mutual fund sales. But three years of some sort of experience and they have to take a test. You know, if you look on the forums of the people talking about taking this test, they average about 200 hours of studying for the test. So there's some body of knowledge there. Most of it's honestly in compliance and the legalities of being a planner and not so much in, you know, financial planning itself. But there's, you know, a fair amount of content there about financial planning. I like seeing it, though, because to me, it demonstrates a commitment to the profession. I think the message has to be, though, that a CFP is not enough. You cannot just see somebody with a CFP and assume that you're by necessity getting good advice from them. You know, I think you've mentioned that there are CFPs at, you know, plenty of insurance companies that are, whose primary job is selling insurance products. And the CFP is not a guarantee in any way, shape or form that you're either paying a fair price or getting good advice. But I do like to see people having it. And if I see somebody who's been practicing as a financial planner for 10 years and hasn't bothered that Kind of raises a red flag in my mind. Why didn't she go get a cfp? And that's a question I would ask.

I think that kind of gets back to something that I feel very strongly about, which is that I do think everyone does need a fair amount of financial literacy. Even if you're going to hand yourself over to a planner or even if your spouse is going to be managing your finances, There are so many stories of people who come to the end of their marriage or their spouse dies and they suddenly realize their finances are a mess and they never bothered to look into it. And even if it's not your thing, even if you really don't like it, you don't feel like you have the bandwidth, you need to have a basic understanding of where your money is and what's being done with it. And that's true whether it's your spouse, your brother, or your financial planner. And it's not hard to get a basic level of education. That's what we're trying to get at here. But I think it's really important for everyone.

You know, Mike Piper gave a great talk at the Bogleheads conference. I wrote a blog post about this a few days ago. It hasn't run yet, but he called that partner, that less involved partner. The partner is less involved in the finances, the oversight committee. And that person's really important for a couple of reasons. One, it may become your job. You know, death, disability, divorce, dementia, delirium. It all happens, you know, all these D's in our lives. You may become the finance person, whether you want that job or not. But number two, you have an important job as an oversight committee. You know, there are people out there that are trusting their spouse to manage the money for the household and the rest of their lives. And yet that spouse is managing the money, has all the money in Tesla stock. And they need oversight. People need someone making sure you're not doing anything crazy. So absolutely, that person can be just as important to the finances of the relationship as anyone else.

Totally agree.

All right, Margaret, it has been great to have you here.

Oh, thank you so much.

These episodes go great. I think people like to hear a little bit of debate and a little bit of alternative viewpoints. And we thank you for what you've done for the White Coat Investor as a columnist. Looking forward to hearing your talk at wcicon.

Two talks, actually.

Two talks. What are you going to be speaking on this year?

One is going to be on advanced contract topics for physicians, and one is going to be on how to Survive a Toxic workplace.

Wow. They both sound terrible. As far as situations to be in. I hate negotiating new contracts and obviously everybody hates a toxic workplace, but pretty important topics to know.

Well, hopefully I can steer people out of ever having to be in a toxic workplace or know how to get out of one and I hope they'll be interesting. So I hope people will come to the conference. It's going to be really fun.

Yeah, looking forward to that. By the way, if you are still interested in signing up for that, you still can. WCIEvents.com is where we sign up for the conference. It's going to be great. We're in Florida this year, first week of February. Looking forward to seeing as many of you there as we can. Love what you hear on the podcast. Looking for more great White Coat Investor content? Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others, and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our real estate partners. Check out all this and more@YouTube.com thewhitecodeinvestor you can do this and the White Coat Investor can help. Don't forget about the WCI Champions program. We need champions to volunteer. That is a person in a first year class of an md, deo, dmd, dds, pa, NP or Pharmacy program. And all you got to do is pass out the books. That's it. Please sign up if nobody in your class has yet done so. Thanks. For those of you who've been leaving us five star reviews, that helps us to spread the word about the podcast. It's almost as useful as the word of mouth. Friend to friend, spreading of the word goes. This latest one says WCI isn't just for docs, he said. I previously left a five star review but want to update it. Wish there were six stars. Jim provides information that other financial podcasts don't discuss. For example, in a recent episode he covered filing the IRS 5500 for solo 401ks, his blog of details that other blogs and newsletters missed. Had I not listened, I could be facing a $100,000 IRS penalty. Highly recommend the podcast and WCI website. Well, we are very grateful we were able to save you 100 grand and hopefully that will be the minimum amount that most long term WCI podcast listeners can benefit from their time with us here. Thank you for what you do. Thank you for being here Today, this podcast is about you. Your feedback and comments and questions are what drive the podcast. So thank you so much for that. If you want to leave a Speak Pipe question, you can@whitecoatinvestor.com speakpipe Till next time, keep your head up, shoulders back. You've got this.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your 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.