WCI #56: An Interview with Mike Piper from the Oblivious Investor

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahli.

Welcome to podcast number 56, an interview with Mike Piper.

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Welcome back to the podcast. Our quote of the day today comes from Jeanette Bahalia. I hope I pronounced that right. Who said, I think the harder part is having the discipline to save. So my tip is save now or pay later. Far too many people wake up in their 60s and realize they don't have enough money. I, I say let go of the mentality of spending money for immediate gratification to protect yourself in the long term. Well, two things I wanted to plug today before we get into our interview with Mike. The first is our cool new feature that we've got enabled on these cool devices. You know, all these, what do you call these things? Echoes. The Echo dot. Echo dot. If you haven't played with these voice activated systems, they're pretty cool. But we have enabled a White Coat Investor skill on these so you can talk to your Echo dot and get them to play the White Coat Investor for you. For example, if you say to it alexa, Enable White Coat Investor.

You were.

Previously listening to the podcast titled Asset Protection.

Would you like to continue where you left off?

No, thank you. Then it'll bring you right into the White Coat Investor podcast. No thank you. Pretty cool feature. We've been learning how to use that all week. My kids all have it down, but we're still learning how to use it ourselves. But at any rate, if you listen to anything on Alexa, then you can get them to play the podcast for you. Just need to enable White Coat Investor and that should bring the skill right up. Also, in case you missed the short promotional podcast we did earlier this week, that little bonus one we had on Monday, this is the promotional week for the video version of WCICON 18. This is an online course basically that includes all the lectures and the blogger panel from the Physician Wellness and Financial Literacy conference that we held in Park City back in March. And this is your chance to attend. If you missed out on it, if you didn't get, you know, in. In those six days when the conference filled, if you weren't taken off the wait list, this is your chance to get this conference. It really turned into a slick production. It incorporates their slides into the presentation. It also has each of the speakers, their audio, their video, their slides, etc. Including the blogger panel. So it's really a fantastic production. We're very proud of it. It took us a lot of work to put it together. In fact, we initially had some problems with it that we thought maybe weren't going to be able it at all. But we managed to figure out how to clean up the audio and make it something we're proud of. But up until Sunday night at midnight, you can get it for 33% off. It's $100 off. It's a regular price of $299. For just one 99, you get 13 hours of great stuff from some of the greatest experts in the field of physician, personal finance and investing. That's almost twice as much material as you get in the first online course. We did the fire your financial advisor course. But it also is at a cheaper price for, you know, during the promotional period, it's 40% of the price for twice as much material. You can't beat that. All right, let's move into our interview with Mike Piper. All right, we've got a special guest on the podcast today. I'd like to introduce CPA Mike Piper, the creator of the Oblivious Investor blog and the author of nine financial books, really not all on investing. His writing has been featured in the Wall Street Journal, Forbes, and Morningstar, among other places. I first met him in person at a Bogleheads conference a few years ago, but I've known him virtually for many years. In fact, what many of you may not know is that Mike was a major inspiration in my starting the White Coat Investor. So if the White Coat Investor has done anything good for you, be sure to thank Mike. I'm honored that he agreed to come on the podcast today. And I'm also super pleased that he came and spoke at the conference. We in Park City in March where he gave the two highest ranked talks at the entire conference. In the post conference survey, I asked attendees to rate each speaker in one of four categories definitely keep, worth retaining, indifferent, or please replace. And 91% of the attendees ranked Mike as definitely keep and 9% ranked you as worth retaining for basically 100% positive rating. I asked them to place each presentation into one of three categories. A top three presentation worth keeping and and please replace. And 53% of the attendees thought your presentation on decreasing physician tax burdens and structuring your practice was a top three presentation and 45% more thought it was worth keeping. So that's basically a 98% positive rating, which was significantly higher than both of my talks. So, Mike, welcome to the podcast. I'm happy to have you here.

It's great to be here.

Yeah. Well, tell us a little bit about yourself. What made you get a cpa, start a blog, become an author? How exactly do you make a living? Can you explain that to the listeners?

Sure. My business model is very straightforward. So I am a cpa, but I don't do any client work and haven't for, I guess about a decade now. My business model is entirely revenue through book sales. So I write articles on my blog and the blog brings in traffic from Google and a portion of the visitors then head to Amazon and buy the books. And then of course, plenty of people find the books on Amazon and despite it that way and that's it. So revenue from book sales, that's how I've made a living for, I guess, since November 2008, almost 10 years.

Wow. So how come you went and got a cpa? Where'd the interest in accounting come from?

Well, I started going to school for marketing, I guess in undergrad and pretty quickly realized that accounting was interesting to me and something I was pretty good at. So I just ended up getting my degree in accounting instead. And really, getting a CPA certification is a pretty natural path to follow once you have a bachelor's in accounting. Not everyone does it, but it's certainly not uncommon. It's just something that makes sense to do. It increases your earnings potential. It provides you with a broad background on a lot of accounting topics. So it makes you more useful to employers or to clients really.

Now, when did you start the Oblivious Investor Blog?

In, I guess, fall 2008.

Fall 2008. That's an interesting time to start any sort of a financial enterprise.

Oh yeah, it wasn't an accident. That was not a coincidence. The whole point was things were starting to blow up, basically. And I wanted to start writing in a way to encourage people to not panic. That's what the idea of oblivious investor was about. It was try to stay a little bit oblivious, if you can, to all the craziness that's going on in the market.

Now, on that blog, you preach a message of simplicity, more so than, I think, anybody else on the Internet. And why is it that you think keeping things simple is so important?

Well, a lot of reasons. Number one, it just makes things easier. If it takes less of your time, that's a benefit no matter what line of work you're in. Another reason is it makes it less likely that you'll make mistakes. Right. If you're managing, I mean, many of us these days kind of without having a say in the matter. We have accounts at a whole lot of different places. You have a 401k with your employer, maybe your spouse has a 401k with their employer. Then you have Roth IRA and traditional IRA and your spouse has the same things. And there's a taxable account. And so you've got, you can't avoid having a lot of different accounts in many cases. So if each of those accounts also have a whole bunch of different holdings, well, things get complicated really quickly. And so it's easier to let your asset allocation get out of whack without realizing it, perhaps be taking on more risk in your portfolio than you realize, Things like that. And so if you keep things simple, it's just easier to know where your money is, to know how your money is invested. It's easier to keep tabs on your asset allocation.

Very cool. Now you've written nine books now, revising them frequently. Actually, it seems like some of them you're revising nearly every year.

Yes. Well, the tax, the tax ones have to be updated pretty regularly just to make sure they're not out of date information, really.

Can you tell the listeners about the books?

Sure. They're basically, they're kind of like cliff notes for personal finance topics, really. So, for instance, on the topic of retirement planning, there are an assortment of great books out there. Boglehead's Guide to Retirement Planning. That's a great one. It's reasonably thorough discussions of an assortment of retirement planning related topics. And if that's something that sounds interesting to you, great, go get that book. But if you think that if you bought that book, you wouldn't actually take the time to read it and it would just sit on your, you know, your coffee table or on a bookshelf well, then that's where my book on retirement planning might be a better fit. All my books are designed to be the sort of thing that you can read in just one afternoon, really, and just sit down and read right through it or, you know, maybe a couple afternoons. So they're for people who want to know something about the topic, but who don't want to spend a ton of time really digging very deep into the weeds, just kind of getting the high level information, really.

Now, they're all also dirt cheap. I mean, the paperbacks are $14.99, the Kindle versions are $4.99. I'm amazed that you can make your living as an author selling $5 books. You must sell a ton of these.

Yes. Really? Yes, that's the answer. A lot of people buy them.

Which of these books sells the best?

Actually, the one that sells the best is Accounting Made Simple. It's one of the ones that's not about personal finance, particularly many undergrad students who are going to school for various business degrees, but who, when you're going to school for a business degree, you have to take and pass accounting courses. But many people, you know, if you're going to school for marketing or management, maybe you don't have, you know, the skill set that makes accounting super easy. Naturally. So this book kind of helps a lot of students to get through that course.

Now you're married, right?

Yes.

Any children? Nope, no children. And is your wife working?

Yeah, she's a software developer for the Federal Reserve bank of St. Louis.

Oh, very cool. And what did she think when you said, I'm just gonna write books and sell them on my blog and that's what I'm gonna do for a living?

That's an interesting question. Really? It wasn't. It wasn't. It didn't go quite like that. I was working as a tax accountant doing, I guess, tax returns for a large real estate company basically that had about 300 different entities that all needed various returns filed every year. So internal tax accounting is what I was doing. And I just started as a hobby, just writing about taxes and other personal finance topics. I didn't have any idea that I'd be doing it for a living not so long after that. But as it turned out, it started bringing in a significant amount of income and that really hadn't been part of the plan at all. And within about, I guess it was about a year and a half later that I quit my job to do this full time. But by the time I quit my job, it Was already pretty clear that it was going to be a sufficient level of income. So it wasn't a. It wasn't a very.

Didn't feel like a huge risk then.

No, no.

So what's next? You got another book planned or.

Well, right now I'm, I guess as a result of the big tax law that was passed at the end of last year, six of my nine books have needed pretty major updates and five of those updates are finished and the sixth one is probably 80% of the way finished. So I'm looking forward to being completely finished with this, this project.

That sounds like a busy spring.

Yeah, it has been.

Well, thank you so much for making time to come out to Park City to talk at the, you know, at the White Coat Investor Conference.

That was a lot of fun.

What were your thoughts about that? What'd you like about it? What surprised you there?

Well, I didn't really have any idea what to expect, so it's hard to say that I was surprised. As such, it was a whole lot of fun and it was, it was interesting that the group of attendees had a very wide range of pre existing levels of expertise. Some of the questions I got, you could tell, boy, this person really knows their stuff already. They have done a ton of research before coming up to me and asking this question. And then some of the other questions were, I mean, the most basic things that the person can really ask. You know, just asking about very basic terminology with regard to investing or very basic tax rules, like what's the difference between a Roth IRA or a traditional ira, stuff like that. So a wide range of attendees in terms of their knowledge level. So that kind of made it fun that every person who comes up to you, you never quite know what you're going to get here. You never know where this conversation is about to go. But the one thing that everyone had in common is, boy, they were excited. They were excited to be there. They were super excited to be learning about this stuff. And that made it a whole lot of fun, really, just to have a group of people who are so excited to learn.

Yeah, it was interesting. One of the complaints we got was that basically there weren't a bunch of empty seats in the, in the conference room. And I'm like, well, you can't have it both ways. Either you get to come or we have empty seats, right? So we basically sold out every seat. And if you didn't arrive early, you might have been standing in the back. And so while that was unfortunate, I guess the alternative would have been to turn Even more people down and keep them from coming. So. But it was, it was interesting that every session was packed, whereas you go to a typical, you know, continuing education conference. And it's not like that. You know, people bug out to go do different things or they're in different sessions. But this one, every one of them was full and the listeners were engaged and it was really, really enjoyable.

I thought, I thought so too.

Now let's, let's get into some more kind of technical questions. And this is really where your expertise is. And everyone's always so impressed. My wife the other day mentioned, she's like that Mike Piper, he knows a lot of stuff. And I think that's a lot of truth. There's a lot of truth to that. So let's get into some of this stuff, you know, and, and that could be useful for our listeners. So let's start out with this new deduction we've got this year that everyone's still kind of wrapping their heads around. This 199A deduction.

Yeah.

Can you explain what this is to the listeners and what misconceptions you're seeing out there about it and what ways you're hearing about people restructuring their practices and their businesses to try to take advantage of it and so on and so forth?

Yeah, I guess the shortest explanation is that this is a new deduction for up to 20% of the profit that you are getting from pass through businesses. And pass through businesses that includes a sole proprietorship or a partnership or an S corporation or an LLC taxed as any of those things. So an LLC taxed as a sole proprietorship, partnership or S corporation. And again, the deduction is for up to 20% of the profit that you're getting from one of those types of businesses. But there are an assortment of limitations that can kick in to reduce the amount of that deduction, basically. And as far as misconceptions, I can't say that I've seen a whole lot lately. More of what I've seen is just people who are just confused about the whole thing from start to finish because the unfortunate truth is that this is a very complicated tax provision and it's a complicated thing that's going to affect a whole lot of people. So that's, that's unfortunate, frankly, that a whole lot of people's taxation is going to get a lot more complicated starting this year. So that's the basics. We can dig into the different limitations if you want.

Yeah, let's just cover each of them briefly. There's, there's at least three or four that I think are pretty significant that people need to know about. Yeah, let's at least cover those.

Okay, so the first one that doctors definitely will want to know about is that if your business is a specified service business, then there is a phase out for this deduction. And a specified service business includes whole lot of different types of businesses, but it includes anything in the field of medicine. So certainly most self employed doctors are going to find that their businesses are specified service businesses. And if your business is a specified service business, then as your taxable income crosses a certain threshold and then proceeds through a phase out range, then the amount of this deduction that you get is reduced and eventually eliminated. So for a single person, that threshold is $157,500. For somebody who's married, filing jointly, it is twice that amount, so $315,000. So again, once your taxable income exceeds that threshold, if your business is a specified service business, then the amount of this deduction that you get will start to be reduced. That's basically the gist of it.

Now this is interesting that it's based on taxable income. It's not based on your total income, it's not based on your adjusted gross income like most tax phase outs are. It's on your taxable income. Why do you suppose that is and what difference does that make?

Well, why that is I don't have any idea and I don't want to try to guess what they were thinking, frankly. But it's a big deal as far as tax planning because it means that really any type of deduction that you can get can help to keep your income under this applicable threshold or make your taxable income lower such that you're. It's not as far through the phase out range basically. So any type of deduction that you can qualify for can increase the amount of this deduction, this deduction for pass through business income. So additional deductions for your business, if you happen to notice there's something that you weren't deducting that you could be deducting. Or if you are a sole proprietor, for instance, contributing additional funds to a solo 401k would reduce your taxable income and could help increase the amount of deduction you get for pass through business income additional. So if you itemize your deductions, and of course fewer people are going to be itemizing this year than in previous years, but if you do itemize, charitable contributions would qualify not only for their normal deductibility, but would reduce your taxable income and therefore help to increase the amount of deduction you get for pass through business income. So you hit on a really key point here, that anything that reduces your taxable income could potentially increase the amount of your deduction for pass through business income.

You know, it's really interesting to think if you're really close to that threshold, could giving some money away to a charity could actually result in you getting a very large deduction, even giving just a small amount to a charity?

Yes, but it's not. Crossing that threshold isn't a disaster immediately because after that threshold then there's a phase out range and the deduction is phased out gradually over that range. So it's not as if when you're under the threshold you get the whole deduction. And then if you were, you know, a dollar over the threshold, you lose the deduction completely. So it won't be. It's not the sort of thing where a person has to make absolutely sure they stay right under that threshold. If they're a little bit past the threshold, they'll still get most of their deduction.

Yeah, good point. And thankfully tax software should be able to figure out the phaseout amount because it looks like a fairly complex calculation is going to be coming our way to try to sort that phase out out.

Absolutely. Doing this by hand is not something I would suggest TurboTax or something similar is going to be super helpful in that. And frankly, I do this all the time, not just for this new deduction, but for things in general where you test, okay, well, what if I contributed an extra thousand dollars to a retirement account, a tax deferred account, or what if we made an extra thousand dollar charitable contribution? What happens? How does our total tax bill change? And frequently the answer will surprise you. I mean, you might say, oh, I'm in the, you know, such and such tax bracket. But that's not the only thing that's changing. You might find that an extra thousand dollar deduction helps you stay under some particular threshold and now you qualify for a credit or a deduction that you didn't qualify for otherwise. So doing what if tax planning with something like TurboTax is super useful, I mean, all the time. And it's, this is another way in which it will be useful. But that's something that's helpful for really anybody to be doing.

Excellent point. Now on this, on this particular limitation on the deduction, I'm starting to get questions now from doctors asking about this topic. They have a practice that is a specified service business you know, it's a medical practice, but there are portions of it they're wondering if they can split out into a separate business and then qualify for this deduction for the split out portions of the business. For example, a common one is they want to have a separate business that then rents some of the equipment in their practice to the specified service business. Have you any thoughts about that or other schemes that you're starting to see people try to do to try to take advantage of this law, even though, you know, they're physicians or dentists or something like that?

Yeah, absolutely. Splitting income out can, can in some cases be effective in exactly the way that you've described. There's an assortment of other things that can come into play here. For instance, in addition to the phase out that we discussed for specified service businesses, there's also a limit with regard to the wages that the business is paying. And essentially the, the greater the amount of wages that the business pays, the greater the amount of deduction that you can qualify for. So this is something again that you'll either want to do what if tax planning with TurboTax or talk to an accountant about. But in some cases, increasing the amount of wages that you're paying, possibly to yourself or possibly to other employees can reduce your tax bill. Now in ways that might not have been so obvious because they increase the amount of this deduction that you qualify for. There's also going to be some uncommon cases in which filing separately for married people might be made somewhat more advantageous than it would have been before. It's still definitely going to be the case that most married couples are going to benefit from filing jointly. But in some cases you might find that filing separately can increase the amount of this pass through business income that one spouse can get. And as a result it might on the whole reduce the couple's total tax bill.

Yeah, it's really an interesting aspect that this is supposed to be, you know, a business related deduction. But two doctors, for instance, with the exact same business, two partners in a business, one of them could get the deduction and the other one not simply because of what their spouse does for a living.

Yeah, absolutely.

A little bit unfair there when you think about it that way. Although I'm not sure how exactly they would have written a law to avoid that problem.

Yeah, I mean there's a whole lot of cases like that where it doesn't necessarily, the outcome doesn't necessarily make sense.

What other significant limitations on this, on this deduction would affect physicians?

So in addition to the Phase out for specified service businesses. I briefly mentioned that there is a wage related limit and the way this, the way this limit works is if your income, again this is your taxable income if it is in this same range. So if it's over those same thresholds that we discussed earlier, then your deduction can be limited to half of the wages that the business is paying or if this is greater, a quarter of the wages that the business is paying, plus 2.5% of the basis that the business has in qualified property. So things like depreciable tangible property. So basically the key point here is again, if your business is paying wages, you might have incentive to increase those wages. And number one, that might be paying other employees. But the other big takeaway is that if your business is currently a sole proprietorship or a partnership, meaning that you are not currently an employee of the business, you now might have an incentive or an additional incentive to elect S Corp tax treatment for your business so that you would be an employee of the business and now your business would be paying wages to yourself basically, and therefore increase the amount of this pass through income past your business income deduction for which you qualify. So again, the math gets pretty messy pretty quickly, unfortunately. So again, it's the sort of thing where discussing your personal situation with a tax professional is likely to be advantageous. But this is at least something that you might want to ask them about. If again, if your business is currently a partnership or a sole proprietorship, you would at least want to look into how things would change if you elected s corporation tax treatment. So now the business would be paying wages to you and therefore potentially increase the amount of your pass through business income deduction.

For sure. It can definitely get complicated. Let's try boiling it down just for a minute. Let's say we've got a hospitalist, a married hospitalist that makes $200,000 practicing medicine as an independent contractor. Let's say he's structured as a sole proprietorship. Is he going to qualify for that deduction?

Is he married?

Married, making $200,000?

Okay. And how much does his or her or how much does his spouse make?

Let's assume his spouse makes nothing. Just to keep it simple.

Makes nothing. Okay, then he's under this threshold, since he's married. If they're filing jointly, the threshold is $315,000 of taxable income. So he's well under that income limit. So he would qualify for the full deduction.

He's not limited by the 50% of wages limitation.

Correct. The that wage. The 50% of wages limitation kicks in over the exact same phase out range as the phase out for specified service businesses. So there's still this threshold of 157,500 if you're single or twice that amount. So 315,000 if you're married, filing jointly. So if this particular doctor is married and their household income is $200,000, they're well below the $315,000 threshold. So they'll get the full amount of the deduction.

That could be a pretty huge deduction for somebody making $200,000.

Absolutely. I mean, 20% of the business's income, basically.

Yeah. I mean, that might knock 20 grand off their taxes. That's pretty cool.

Yeah.

Okay, let's move on a little bit to another subject. Let's talk about something you've written an entire book on, the LLC vs. S Corp vs. C Corp decision. I have a lot of people come to me and say, should I be a sole proprietor, Should I be an llc? Should I be an S Corp, C Corp, et cetera? What, what I know there's obviously there's an entire book worth of material on this, but what are some of the things people should be thinking about as they look at those decisions on how to structure their business?

Okay, there's two big questions really. Number one is you need to be thinking about liability, and number two is you need to be thinking about taxes. And with regard to liability being a sole proprietorship or a partnership, those are definitely the highest risk choices. Forming an LLC or a corporation can reduce liability in some ways. The specifics are going to vary by state. So it's hard to say anything super definitive about how much a person's liability risk would be reduced by forming an LLC or a corporation. But in almost every case there will be some degree of protection with regard to taxes. Your kind of default structure is if you're the only owner of the business, by default it's going to be a sole proprietorship. And if there are multiple owners, by default it's going to be a partnership. And then if you want, you can elect instead to have S Corp or C Corp taxation. And you can do that by forming a corporation or by forming an LLC and then choosing to have it taxed as an S Corp or a C Corp. And the very short version is that C Corp taxation is not usually a tax saving tool. Often C Corp taxation is something that's imposed upon you rather than something that you elected for tax saving purposes. And the reason for that is that the business itself has to pay income tax on its profit and then when it distributes that profit to shareholders, that payment's known as a dividend and the shareholders have to pay tax again. So basically you're looking at two levels of taxation. And as a result of that, the specifics have changed this year relative to last year. But the overall outcome is still that C corp taxation is not usually tax saving tool. In contrast, S corp taxation often does result in tax savings. And the reason for that is that owners of an S corporation do not have to pay self employment tax on their allocated share of the business's profit. So, so let's say you've got you're making $200,000 of income and you're a sole proprietor. Well normally if you're a sole proprietor, you're going to be paying regular income tax on that $200,000 of income and you're also going to have to pay self employment tax. So it's regular income tax and self employment tax if you're a sole proprietor. If you instead elect S corp tax treatment now, the business will have to pay you a certain amount of wages and it's a quote, reasonable amount of wages. So that's going to vary depending on the type of work you're in and where you live and how much experience you have and so on and so forth. But to just make up a number, let's say that $150,000 would be a reasonable amount of wages. Well now that $150,000, you'll still have to pay income tax on that. And because it's wages, you'll have to be paying Social Security and medicare taxes. But that $50,000 of profit that's left over, you won't have to pay self employment tax on it. You would still have to pay income tax, but not self employment tax. So that's where the tax savings kicks in basically. To summarize, again, S Corp tax treatment can save you money if the business is earning enough money to pay you a reasonable amount of wages and still have profit left over because that leftover profit won't be subject to self employment tax.

It's very helpful, thank you. Now I see a lot of confusion with regards to LLCs and how they are taxed. Can you talk a little bit about the taxation options for an llc?

Sure. By default an LLC is just going to be disregarded. So what that means is that if you are the only owner of your business and it's currently taxed as a sole proprietorship and then you form an LLC and Keep conducting business while it's going to keep being taxed as a sole proprietorship unless you elect a different type of tax treatment. So you can intentionally elect S Corp or C Corp tax treatment for your llc. And if you are one of multiple owners of your business, so it's currently a partnership and you form an LLC by default, it's going to be continue, it's going to continue to be taxed as a partnership. But again, you could then elect S Corp or C Corp tax treatment.

Now, I've heard a lot of people say an LLC electing to be an S corp for tax purposes is kind of the best of both worlds. You get the simplicity of the llc, you get the liability protection that the LLC provides, but you get to save some of the hassles of being a corporation. What do you think about that approach?

Yeah, I think that's a good assessment. Again, things are going to vary somewhat from state to state in terms of exactly the degree of liability protection offered by an LLC as opposed to an S Corp. In some states there might be one or the other that has a certain higher level of protection. And different states have different rules about who's allowed to form an LLC or who's allowed to form a corporation. So in certain states, doctors or other professionals, so accountants, also lawyers and so on, might be required to form a special type of LLC or a special type of corporation which can subject it to additional regulations. So there's some degree of state specific rules that you need to be paying attention to. So talking to a local attorney can help. You can research it on your own, but make sure that you're looking for information that's specific to your state. With regard to liability topics.

Are there states that don't allow an LLC to be taxed as an S corp?

No, that's, that's all federal law. That's a federal thing. Yeah, exactly.

Okay, very cool. Another thing I think a lot of doctors don't realize is they're, you know, when they think about liability, what they're thinking about is malpractice.

Right.

And they don't realize that neither an LLC nor a corporation shields them from malpractice whatsoever. It's always a personal tort. And so I think a lot of people are, you know, they don't even care so much about the tax benefits. They're trying to reduce their malpractice risk. And it's really kind of a waste of time and money to do it for that reason.

It might be and it might not be. It's not going to protect you from your own malpractice. But if you have employees, having an LLC or an S corp could prevent you from having personal liability for their malpractice.

Oh, that's a good point.

The employee would still have personal liability for their own malpractice and your business would still have liability for the employees malpractice, but you might not have personal liability for the employees malpractice.

Very cool. Thank you for that. All right, let's turn to another one of your favorite subjects. In fact, I was reviewing the White Coat investor conference because we're getting ready to put it on video here soon. And you mentioned that you love talking about Social Security, which might put you in a very small club.

Yeah.

But let's talk a little bit about Social Security. What are the biggest mistakes you see with people claiming Social Security?

Boy, there's a lot of them not paying attention to their own personal circumstances is one of them. Another one would be only thinking about themselves rather than thinking about themselves as a couple if they're married. So I see this a lot where let's say you've got a husband and a wife and one of them earned considerably more than the other one over the course of their career. So you've got a higher earner and a lower earner. And the higher earner, it turns out, is in very poor health. So they have a short life expectancy. So they claim Social Security early, thinking, oh, I'll take the money now because I don't know how long I'll be alive to collect it. But that's a big mistake, because when that higher earner delays or when that higher earner claims benefits early, it reduces the amount of survivor benefits that that lower earner is going to get for their whole rest of their life. So if they had been thinking about as the higher earner, what they actually want to be thinking about is the couple's joint second to die life expectancy, which even if one person has a short life expectancy, a joint life expectancy is going to be quite long. And so really, in almost every case, if you're a married couple, the high earner should be waiting until 70 or at least close to 70, somewhere near that end of the spectrum, maybe 68 and a half or 69 in a few months or something like that. But the high earner should almost never be filing early. The math is almost never going to work out in favor of doing that. Conversely, the exact opposite mistake can happen. So the lower earner might say, oh, well, I'M in great health, so I'm going to wait. But if the higher earners in poor health, then what the low earner should be thinking about is the couple's first die life expectancy, which is short because one person's in poor health. So really, the key point to take away here is that if you're a couple, you need to be thinking about both of you. And the high earner should always be thinking about the couple's second to die life expectancy and the low earner should always be thinking about the couple's first to die life expectancy. So you just always have to be thinking about both people because if you're only thinking about one, mistakes are very, very likely. Another mistake that I see all the time is both people filing at their full retirement age or close to it. That's almost never going to be the ideal solution because when the higher earner delays taking benefits, it increases the amount that the couple receives as long as either of the two people is still alive. And conversely, when the lower earner delays taking benefits, it only increases the amount that the couple receives as long as both people are still alive. So as a couple, you get more from every month that the higher earner delays than for every month that the lower earner delays. So it doesn't make any sense for the two people to do the same amount of waiting. You want the higher earner to do more waiting and the lower earner to do less waiting because you get more out of every month that the higher earner waits. So both people claiming, you know, around their full retirement age or around the same age as each other is pretty uncommon. That that's going to be a very good solution.

Excellent point. Now you kind of fall in the camp that most financial authorities, authors, gurus fall in, which is generally you should be trying to delay to age 70 before you take your Social Security, even though that's a minority of people that actually do it. Yeah, but there, but there's a decided minority, people out there that think, think you should take the money early and invest it. Now, you just published a post on your blog today, maybe even in the last few days, that talks about what that means to take it early and invest, whether that's a good idea or not. Can you talk about that and what things people should consider if they're actually thinking maybe they want to try to do that?

Sure. Really? That's what the analysis always should be. You should always be weighing, take the money now and invest it as opposed to filing later. You should always Assume that if you claim benefits early, you're going to invest them because you might as well. Or even if, even if you're claiming benefits early and you're spending that money well now that means that you don't have to spend down your portfolio as quickly. So part of your portfolio gets to stay invested and earn a rate of return. So if you're going to do the analysis properly, you have to assume that if you claim benefits early, you're going to invest the money. And the big question then is, what rate of return should I assume that I'm going to earn? And in my opinion, the most appropriate rate of return to look at is the rate of return from tips. That's treasury inflation protected securities. So those are treasury bonds that pay a certain after inflation interest rate. So right now, for instance, 20 year tips have an interest rate of almost exactly 1%. So that means that they promise to pay you inflation plus 1% over that 20 year period of time. And the reason that tips are the, in my opinion, appropriate investment to look at, to look at the rate of return you'd be earning is that they're the investment that has the most similar level of risk to Social Security because both of those things are backed by the federal government and they're both inflation adjusted. So they're more similar to each other than Social Security is to any other investment. Now some people might say, okay, fine, so that's most similar, but I'm still going to take the money early because I'm going to take it and invest it in stocks and that's going to earn a higher rate of return. Okay, fine, but what you still have to be looking at is, is this person's portfolio exclusively invested in stocks or do they still have some bond holdings as well? Because if they do, then what they probably should have done is spend down those bond holdings to delay Social Security because the rate of return you can be expected to get from delaying Social Security is generally greater than the rate of return that you can expect from bonds with interest rates where they are today. So most people are going to benefit by spending down their bonds to delay Social Security because a, it results in on average, a higher, a higher rate of return, and b, it offsets longevity risk. It helps protect you in the event that you live for a very, very long retirement, which turns out to be very expensive because Social Security will keep paying for that entire period of time. So really, again, the rate of return that you should be assuming is basically the rate of return from the safest investments in your Portfolio. That's what you should be looking at now.

What is the ballpark rate of return you've got to get to come out ahead, investing the money instead of delaying stage 70?

Yeah. For an unmarried male, the rate of return that you would have to get in order to make it as good to claim at 62 as it would be to claim at 70 would be about 1.7% above inflation. For an unmarried female, they'd have to get about 2.9% above inflation. And if you look at interest rates right now, there's as plain as day that there's simply no way to get those rates of return in a safe way. It's not available today. With today's interest rate market. For a married couple, it's going to be different and it's going to depend on the difference in the two spouses earnings history and on their difference in age. But the big takeaway is that for the higher earner, the rate of return that they would need to earn in order for it to make sense to file benefits at 62 would be super high. High enough that it's not going to happen, basically. Which is at least not. It's not going to happen in any remotely low risk way. Which is why experts just almost unanimously recommend the higher earner and a married couple wait until 70 in most cases or wait until close to 70. Conversely, the rate of return necessary for it to make sense for the lower earner to file early is lower than it would be for an unmarried person. So it's not at all out of the question for it to make sense for a lower earner to the lower earner in a married couple to file for benefits early and invest the money. In many cases that's a perfectly reasonable thing to do. It just, it doesn't usually make sense for the higher earner to file early and invest the money that's almost never mathematically advantageous.

Yeah. Now you mentioned 2.9% plus inflation for an unmarried female. I mean, a 3% inflation environment, that's a 5.9% guaranteed return. You know, that's indexed to inflation. So it takes into account that inflation risk. It's an awfully attractive guaranteed return these days.

Yeah, it's not quite a guaranteed return. That's the, that's the expected return. Because you can't actually calculate the rate of return that actually ends up happening until we know what date the person's going to die.

Which of course, that's an excellent point.

By which point it's too late to make any useful decisions. But 2.9% above inflation is the expected return. And again, it's a very low risk because this is backed by the federal government, it's inflation adjusted. So, I mean, boy, that's a heck of a lot better than the expected return you're going to get on any sort of fixed income investment these days, aside from, I mean, maybe the most speculative of bonds.

Thanks for addressing that. Now, when we think about Social Security, most of the time we're thinking about these retirement benefits, but that's really not all that Social Security does. In a couple of respects. Social Security also provides, in some ways a form of life insurance, in some ways a form of disability insurance. Can you talk a little bit about those aspects of Social Security and how to incorporate those into your financial planning?

Sure. So Social Security provides a degree of disability insurance and life insurance in that if you die and you have minor children, they can receive a benefit based on your work history, essentially is roughly the way it works. So it's a degree of life insurance, and that certainly has a value. And so it's important to keep that in mind when you're paying your Social Security taxes is remember that part of the value you're getting from this is the life insurance and the disability insurance that you get. It's not just the retirement benefits that you're going to get down the line, but it's also important to recognize that those levels of life insurance and disability insurance are just not sufficient. You need additional life insurance if you are. I'm sorry, if you have people depending on you for income, you need additional life insurance. Absolutely. And same thing with regard to disability insurance, because with Social Security disability, it's a very restrictive definition of disabled. So if you've been working as a doctor, making it a very high income, and now you get sick in some way or have some injury in some way, that you're no longer able to do that, but you are able to work in some much lower earning capacity. Well, Social Security is not going to consider you disabled in most cases, so it's not going to provide the level of protection that you probably want. So most likely doctors are going to want to get an actual disability insurance policy through, you know, an actual insurance company with an own occupation definition which says that you're disabled if you can no longer perform your own occupation. So again, Social Security has definitely a valuable degree of life insurance and disability insurance, but for most people, especially higher earners, you're going to want to supplement those with insurance policies that you purchase on your own.

Yeah, I agree with that. I also was surprised, though, to see, especially if you have small children at home and will for a number of years, just how much that survivor benefit would be. I think I looked at mine if I died today, that survivor benefit for a number of years until those kids got older, I think it was four or five thousand dollars a month. I mean, it was not an insignificant benefit at all.

No, yeah, it's not insignificant at all. It's very meaningful. People often, I mean, this is getting political, but people frequently say, oh, Social Security is a bad deal, but the way they're doing their math, they're only looking at the retirement benefit they're ultimately going to get when, whereas a significant amount of the money they're paying is paying for this disability insurance and life insurance. And it's still not as if you're getting a high rate of return on the money, on the taxes that you're paying here. But it's a lot better than if you completely ignore those types of insurance that you are getting now.

The rate of return actually varies quite a bit. An interesting when you really dive into the weeds on this and you start learning about the two bend points in Social Security, really up to the first or even the second bend point, the rate of return really isn't too bad. Can you talk a little bit about the rate of return up to those bend points?

Well, again, to calculate an actual rate of return, we have to know how long the person's going to live. But as far as financial planning, that we can do in advance. In a real life scenario, the rate at which your retirement benefit grows as you accumulate more and more earnings history over your working years, it grows at a reasonably fast rate for a short period of time, and then it grows at a slower rate for a fairly extended period of time, and then it slows down again to grow at an even slower rate. So basically, really the big takeaway here is if you are a high earner, so somebody earning over the maximum amount that Social Security is going to tax in a given year. So roughly $128,000 per year in today's dollars, if you're earning at that level, the payback you're ultimately expected to get from Social Security for your first 20 years of earnings, pretty good. It's not, you know, not off the charts or anything, but it's, it's pretty, it's pretty good. However, after that, it falls off a cliff, basically. And so additional years of earnings won't do nearly as much to increase your ultimate retirement benefit. After you've got about 20 years of maximum earnings.

Sounds like, you know, pretty good argument to be thinking about retirement around 50 as a doctor.

Yeah, exactly right.

Interesting. Let's move off Social Security now and let's just pause for a second. I asked people an hour or two ago on Twitter whether they had any questions for you they wanted me to ask on the podcast and I got one from Dr. Grump says I should tell you you're doing a great job. He's been following your posts for years. But as a question for you, what does your personal portfolio look like these days?

Well, it's the same thing it's been for the last several years and it's as simple as you could possibly get. The entirety of our retirement savings are in the Vanguard Life Strategy Growth Fund. So all of our solo 401k accounts, both mine and my wife's Roth IRA, traditional IRA, all of it's just in this one fund. So very straightforward, very simple. And then we just have checking accounts, just basic plain old checking accounts. That's it.

Like I said, he's a huge advocate for simplicity. One mutual fund, three accounts. Pretty awesome. Alright, let's talk a little bit about about some of the frequent tax issues that you hear about from high income professionals. Maybe some of the issues people asked you about at the Park City conference or elsewhere. What, what do you hear about from docs? What are they asking about when it to comes comes to tax issues?

Certainly one that's a popular topic among the attendees at that conference was solo 401ks. People really want to know about that and how much they can contribute and where they should open an account. And you actually probably know more about all the different places where a person might open a Solo 401. You've probably looked into it more than I have. But from what I've learned, Vanguard is a great place in that they offer the option for Roth contributions as well as regular contributions. But one downside is that they don't allow for rollovers, incoming rollovers. So often if somebody's planning to do a backdoor Roth IRA strategy, they want to take any pre tax amounts that they have in their traditional IRAs and move it into a 401k. And having a solo 401k can be a way to do that. But it doesn't work if your solo 401k doesn't accept incoming rollovers. So that's kind of one reason why Vanguard is not as good of a fit. And I gather that Fidelity does offer that. So that's an advantage of Fidelity. The downside of Fidelity is that they don't offer Roth contributions. So you tell me, do you know who offers both of those options, Roth contributions and incoming rollovers, while still having low costs and no administrative costs and good investment options?

You know, I'm incredibly frustrated by the solo 401k offerings out there. I have yet to find one that's perfect. You know, as you mentioned, the Vanguard 1 has a limitation that it doesn't take IRA rollovers. It'll take 401k rollovers, but not IRA rollovers, which is interesting. They also force you to use their slightly more expensive investor shares instead of the Admiral shares. So those are kind of the downsides of the Vanguard product. Fidelity, as you mentioned, has some limitations as well. I think if I were doing it all again, I might go to E Trade because they allow you a Roth option. They allow you loans from the 401k, which got a little bit better this year with the tax reform. You don't have to pay them back quite so quickly if you separate from the employer. They also offer, you know, IRA rollovers. If you want to buy Vanguard funds, you can, you have to buy their ETFs, and of course there is a small commission for that. So if you're doing a lot of transactions, maybe they're not ideal either. But that's probably, I think, the best general option. There's a few people out there that are actually hiring TPAs to design their own solo 401k so they can have their own, you know, put the features in it that they want to. But obviously that adds another layer of expense and hassle. So I wish I could just say go to Vanguard, you know, which is real easy thing to do for like a Roth ira. But I don't think I can quite endorse them, you know, as wholeheartedly as I have for a lot of other things.

Okay, thanks. That's good to know.

What other tax issues do you hear about from the docs at the conference or elsewhere?

Well, one thing that we talked about at the conference and that many people had follow up questions about was tax efficient investing. So once you've already maxed out your retirement accounts and you're investing in taxable brokerage accounts, how can you reduce the tax costs that you're paying on an annual basis? And there's a few strategies we can dig into that. As much or as little as you'd like.

Sure, let's hit the major points. Anyway, I think that is a common topic.

I hear about Okay. I think the single biggest thing you can do is just try to avoid owning very tax inefficient assets in your taxable brokerage accounts. So personally, I'm a fan of index funds rather than actively managed funds. But if you're going to own actively managed funds, you generally don't want to own them in a taxable account because they have a lot of turnover, which means they're buying and selling their holdings on a regular basis. And what that means is that you as a shareholder are going to be having to pay more capital gains taxes per year and the capital gains that you're going to be paying taxes on are likely to be short term capital gains which are taxed at your regular income tax rate, opposed to long term capital gains which are taxed at a lower tax rate. So again, if you want to own actively managed mutual funds, you want to make sure to own them in a retirement account rather than your taxable brokerage account. Same thing with REITs, real estate investment trusts or mutual funds that invest in real estate investment trusts, they pay a high level of income and a fair bit of it is taxable as ordinary income. So again, if you want to own those, make sure that they're in a retirement account. And then the third thing that's in that category is high yield bonds, also known as junk bonds. They pay a high level of income and it's taxable as ordinary income. So if you want to own those, make sure it's in a retirement account rather than a taxable brokerage account. In my opinion, that's the most important thing to do. It's also the easiest thing you can do. There's also strategies like tax loss harvesting which can provide some benefits. They take more ongoing work, but this strategy of just making sure that your assets that have the highest tax cost per year, make sure that you don't have them in a taxable account. It's super easy to do. You only have to make the decision one time and you don't have to fiddle with it. It's easy to do and it will reduce your taxes.

Very cool. Thank you. Speaking of taxes, what do you think about a doctor preparing his or her own taxes?

I think if it sounds fun to you, by all means, go for it.

You, that's a pretty. That's a pretty small percentage that are going to think it's fun, I think.

Sure. Okay. Well, I mean, if you don't think it's fun, then you probably shouldn't be doing it. I mean, it doesn't cost all that much to have somebody else do it for you. But if you, if it does sound like something that would be interesting. God, because, you know, you find all this personal finance stuff to be very interesting, then go for it. You're going to learn some things in the process. If you've never done it before. I mean, you're definitely going to learn some things. It's going to take time. You wouldn't want to wait until April 10th and then start doing your return, especially if you've never done one before. But, yeah, go for it. I don't think there's anything wrong with doing your own tax return. I would certainly encourage the use of tax software, TurboTax or something similar. But yeah, if you want to do it, go for it.

A lot of docs are afraid of making a mistake. Should they be afraid of making a mistake on their taxes?

Well, it's certainly not out of question that you might make a mistake. Using tax software can reduce that likelihood, but it doesn't eliminate it. I mean, tax software, basically, they guarantee that they're going to do the math appropriately, but they can't guarantee that you're going to input all of your information appropriately. So, yeah, mistakes can happen. You could find a tax professional to check over your return if you wanted, but usually a mistake's not going to be. It's not going to be a disaster. You're not going to go to jail for a tax mistake. It's going to be, you know, they'll send you a letter and it'll say, hey, we looked at your return and we think you owe this amount of additional taxes. And you look at that letter and you look at your return and you figure out whether you agree with them or not. And if you do agree, you just write a check and there's going to be some, some interest there, you know, for having underpaid taxes. But it's not, it's not like credit card rates of interest. It's based on treasury bonds. So it's a low rate of interest per year. So, yes, mistakes can happen. And you should not, you should be ready for that, you know, because if you've never done it before. Yeah, it's not out of the question at all that you might make a mistake, but it's not usually going to be anything super, you know, disastrous if you do make a mistake. People make mistakes on their tax returns. It happens all the time.

Very cool. Well, we're getting long here, so I think we better wrap this up. But I sure appreciate your time coming on the podcast today.

Mike thanks. It was fun.

For those who want to learn more from Mike, you can find his blog@obliviousinvestor.com youm can find his books at Amazon. These include Accounting Made Simple, Taxes made simple, LLC vs. S Corp. Vs. C Corp, Social Security Made Simple, Independent Contractor, Sole Proprietor and LLC Taxes, Investing Made Simple, Microeconomics Made Simple. You're kind of getting the theme here, but you get them on Kindle for $4.99. You get them, you know, written if you're on Amazon prime in your mailbox in 48 hours for just $14.99. So be sure to check those out as well. Thank you, Mike.

Thank you.

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