WCI #57: Questions from Doctors Doing Well and Doctors in Trouble

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 episode 57. Questions from doctors doing well and doctors in trouble.

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

We'Ve got out lately is the video version of WCICON 18, the physician wellness and Financial Literacy Conference held in Park City last March. If you're interested in getting this, it's a great time to do it. It's a wonderful conference. We had a lot of fun and the video version is almost as good as being there live and available for a lot less travel and cost. It's just $299 now and it's selling like hotcakes. So go ahead and come on over to the website or check out the links in the show notes and get your copy of it today. Also, if you've got an Echo Dot or some other type of voice activated device, enable the White Coat Investor skill. Just say Alexa Enable White Coat Investor and it should pop the podcast up for you. Just like that. Our quote of the day today comes from Susie Orman who said stop buying things you don't need to impress people you don't even like. I like that quote. I don't know if it's the fact that I've been doing so many listener questions on the podcast this year, or whether it's just an effect of the growth of the White Coat Investor, but I've had a ton of great questions in my email box lately. I think today for the podcast we're just going to do questions. Here's the first one. Towards the end of my residency I developed a somewhat rare medical issue which with which left me with unilateral hearing loss. Unfortunately, I waited until the end of my residency to apply for disability insurance and was not unsurprisingly rejected with the condition that they would consider me in a year's time. I'm about to complete a one year fellowship and over the course of the year I'd applied to a second carrier for disability insurance was also rejected. And per the agent who handled my case, I was told they would also reconsider in a year's time, two years from the onset of my illness. Unofficially, my agent told me that given the relative unknown nature of my hearing loss, it is unlikely that I would be approved unless my hearing improved, which is unlikely to happen at this point. It seems unlikely I will be able to obtain disability insurance. I was wondering if I have exhausted all my options and do you have any other suggestions for alternatives to disability insurance to look into? I like this question. It's unfortunate for the doc in this situation, but it's a good question that will allow us to say a few important things about disability insurance. Number one, get disability insurance as soon as you start making money. That means as an intern, you never know what's going to happen to you during residency. I've heard entirely too many stories of docs becoming disabled or otherwise uninsurable during residency. One of my residency classmates rode his bike into or not one of my classmates, but one of my residency mates rode his bike into the hospital each morning. And while he was on the trauma rotation, the chief kept telling him, if you keep riding your bike, you're going to get hit and I'm going to put a chest tube in you. And eventually he did get hit. She was on and she put a chest tube in him. Thankfully, he had a full recovery, but things like that do happen to residents, so get some disability insurance in place early in your residency at the latest. Another thing to keep in mind here, if you don't have perfect health, you want to be using an independent insurance agent. That's somebody who can sell you a policy from any of the big five or six companies. And the reason for that is because they know which company's best for your specialty, your gender, your state, your level of health. And one thing you should ask them to do if you have some sort of unusual hobby, you know, risky hobby like rock climbing or skydiving, something like that, scuba diving, flying, or if you have an unusual medical condition, they can kind of shop your condition around to the various companies. So without having a formal application to the company, that then ends up in an insurance database, you can find out about what your rates would be and whether they'd even consider selling you a policy. But the way these medical conditions tend to work is they either say we're not going to insure you at all. They say we will insure you, but we're only doing it for a five year benefit instead of a benefit to age 65 or 67. Or they put a rider on the policy that the rider won't pay if your disability is due to that particular medical condition. And this varies by the medical condition. You know, there's obviously thousands of different medical conditions people can have and the insurance companies treat them all differently. But the key is to work with an independent agent and informally shop it around until you can figure out whether this is going to be even worth applying formally to a company for. I suppose you can still have a surprise after you apply, but I think doing it informally first is likely to help you to avoid getting reported to the database and causing problems down the road. Alright, next question. I would love to get your opinion about assisting family members with loans for a home mortgage. I'm considering making a low interest loan to my son in the purchase of of his first home. The apparent advantages include a benefit for him in getting a loan at a discounted rate and avoiding the hassle and expense of applying for the loan, and a benefit for me in obtaining a fair return on a portion of my non equity holdings. The obvious disadvantage comes in doing business with family members, which is something I would typically shun in this case. I feel comfortable with the risk and feel that I am investing in helping my son better his life. He is fortunate to have a very solid position as a professional with a large company and I believe he's in an excellent position to repay the loan. Do you mind giving me your thoughts on this controversial topic? Well, there's no doubt that if multiple generations work together, they can come out ahead financially in a number of different ways. When you do your estate planning across multiple generations, when you smooth consumption by having older generations offer loans to the younger generations, you can make everybody better off, at least on a mathematical basis. But there's a reason people say don't loan money to family members. Thanksgiving dinner does not taste the same when you're sitting across from the table from somebody you owe money to. In a lot of ways you're far better off just gifting the money. Now be aware of the gift tax laws. You can't give more than a certain amount without having to report it to the irs. But if you do decide to loan money to a family member, remember that there's actually an government dictated minimum interest rate that you must charge them. You can't give them a 0% interest loan. @ least if you do, the interest that you don't charge is considered a gift to them. And so again, you need to be cognizant of the gift tax laws with regards to that loan. But as a general rule, I'm not a big fan of making loans to family members. I think it can destroy a lot of relationships. You got to be really careful. How are you going to feel if they don't pay it back? How are they going to feel if they don't pay it back? And all those behavioral considerations must be taken into consideration. This was an interesting question. I got it came in said I am a little confused about the selling that's been going on by Mark Zuckerberg. Based on my readings on Insider Insights, should I hold off on any Facebook purchases? Also on 321gold.com, I am seeing the daily treasury bills are releasing less monies, usually 26 billion. The latest was 17 billion. Should I be concerned about recession coming? I appreciate your podcast. I commute for 30 minutes. Placing your podcast at 1.5 speed allows me to listen to your show in its entirety before getting to my office. Well, I guess what I would say is take the show off 1.5x speed and listen to what I've been saying. Number one, I'm not a fan of buying individual stocks at all. I don't pay any attention whatsoever to the news about Facebook. I don't pay any attention to what Mark Zuckerberg has said or done because I buy all my stocks through index funds. I own all of them. All the winners, all the losers. When Facebook does well, I do well. When Facebook does poorly, I do poorly. But the best part about it is I don't have to either know or care about what Mark Zuckerberg is doing. If he's selling shares, great. If he's buying shares, great. I don't care. And that's one beautiful thing about it. Insider Insights I don't know anything about that website, but it sounds like what I call investment porn. That is basically material that has no redeeming quality and actually will decrease the quality of your investments. 321gold.com sounds like a website that I would avoid to be quite honest about it. You know, when you get into those sorts of websites and those sorts of sources of investment information, you got to bear in mind that usually they're selling something and that's usually not something you want to be buying. It's not an unbiased source of investment information and particularly if they're hawking gold, which it sounds like they probably are based on the URL of the website. You got to keep in mind that it's going to be kind of a perma bear outlook on the economy and so they're always going to be predicting a recession. Buy gold now because stocks are going down. Well, I don't know. Maybe stocks are going down. I have no idea. But I do know this. Nobody at 321gold.com knows either. Next question. My wife, a psychiatrist and I, an anesthesiologist, will be finishing our training in a little over a year. We own a home, have one child, plan for another one. My wife plans on working part time and I was hoping for me to pull in about $350,000 and her to earn about $100,000 part time. We each carry $400,000 in debt. I'm in the process of refinancing our loans and I wonder if it is the right choice for her debt as I'm worried about having to pay $5,000 a month each going forward. How much will I lose in taxes over the next 15 years if we file separately and do not refinance her loans? With this strategy, I could refinance the loans in my name, put as much as possible toward them while keeping my wife's on pay as you earn at the 10 to 10% discretionary income payment of 1 to $2,000 per month until the forgiveness period at the 20 year mark. Does this make any sense? Well, this is a couple that definitely needs to spend some time and probably some money on getting some advice from a student loan specific advisor. I mean we're talking about $800,000 in student loans here on an income of what they're talking about of being about $450,000. That's not a crazy debt to income ratio, but it certainly isn't a great one. This plan of her doing pay while working part time could possibly work out better, I suppose. Remember, with pay you're going for forgiveness at 20 years, so you got to make payments for 20 years. It doesn't require you to work for a 501. It doesn't require you to work full time. But the forgiveness is also taxable, unlike public service loan forgiveness. So you really have to run the numbers and you really have to have a pretty good idea of what your financial life is going to look like for the next 20 years if this is your plan. If it were my wife and I And we'd run up $800,000 in student loans. Going part time wouldn't be an option for her. She'd be working full time at least until those loans were paid off. I'm all for part time work for one or both of you, and I'm a big fan of having a stay at home parent. And especially for mothers, I like them to be able to get what they want. If they want to stay at home, great. They want to work part time, great. They want to work full time, great. But I think in a lot of ways you close a lot of doors in your life when you make a decision to attend medical school, Especially when you do it on credit and especially when you borrow enough money that your loans are two times your income. In my opinion, one of those doors that you've closed is the ability to be a stay at home mom or even work part time right out of training. I mean, I don't know, that's great for your medical skills to start with, but I think it's particularly bad when you owe a ton of money. Now, this particular doc is married to an anesthesiologist, so this actually might be a financially viable option. But for most doctors, going part time right out of residency or with those kinds of loans just isn't an option. And so I think what I would do in that sort of a situation is cut our spending to our bone, have both of you work full time and maybe even a little more and really just crank down on those loans, throw a ton of money at them, and when you get them under control, then start entertaining options like a stay at home parent and one or both of you going part time, I think getting that sort of financial freedom is pretty beneficial. But I can't say for sure that dragging them out for 20 years and getting paid forgiveness while filing your taxes as married, filing separately couldn't potentially come out ahead numerically if you actually spreadsheet out the 20 years. And so I think it's worth at least doing that and seeing what kind of a difference it could make in running those numbers. But there's a lot of assumptions that go into that process and you're probably best off hiring somebody for a couple of hundred bucks that can help you run those numbers. Bear in mind, with this particular couple, either way, they've got a lot of work ahead of them, so they need to keep their spending down and really start shoveling money towards some loans. Even if they decide to do the pay thing for her loans, they've still got $400,000 of his loans to pay off. So it's not like they're going to be moving into the big fancy doctor house anytime soon. At least I hope they don't. There's another question. Thanks for all the wonderful things you do to help out all of us federal fellow physicians. I recently switched positions with my previous job. I had a 401k with nearly 5050 traditional 401k and Roth 401k. All was invested in Vanguard Target funds. My new job is a 403 without Roth option or without any Vanguard funds and the remaining funds have a higher expense ratio. Without completely thinking it through, I transferred the 401k to a Vanguard IRA. Both the traditional and Roth have I ruined my Future BackDoor Roth IRA or is there a solution? Well, this is the problem. The old advice was when you left an employer you rolled over your 401 to an IRA and the reason for that is you usually got lower investment costs, you had better control, etc. And so over time, every time you left a job you took your 401 and you put it in the IRA. The problem with that is line six on form 8606. That's the form you report a backdoor Roth IRA on and unfortunately it introduces a pro rata calculation anytime you do the conversion step of a backdoor Roth IRA. Essentially you can't have any money in a SEP IRA, a simple IRA or a traditional IRA and still do backdoor Roth IRAs in any sort of effective way. And so the solution, whether you had one pre existing or whether you just accidentally created a traditional tax deferred IRA is one of two things. You can either pay the taxes and convert the whole thing to a Roth ira, which is usually the best solution if it's small, or you can roll it into a 401k or 403. In this case he does have a 403 at his job and so he could roll the IRA in there and begin doing backdoor Roth IRAs if he likes. Now if it's a terrible 403, maybe you don't want to do that, but even an average one is probably worth doing that so that you can take advantage of the backdoor Roth ira. Alright, here's another one. I'm in a two physician marriage, no kids. My spouse has been attending for five years and I'm finishing residency this year. We paid off all our loans. I was an MD, PhD. She had some tuition, support from family and hope to buy a house this spring or summer with the money we've saved by living like residents, our combined income will likely be around 550 or 600,000 for the next four years. And if I make partner at the practice I'm joining, it will likely be closer to 900,000 thereafter. So we're pretty blessed. We've each maxed our 403 the last four years, each contributed a backdoor Roth IRAs to the max, and have a fair chunk in taxable accounts to be used toward a down payment. Sounds like they're doing awesome, huh? The bank of America is offering to drop my mortgage rate for a 7:1 arm by an eighth of a point if I roll over some investments to their Merrill lynch accounts. I could do this. I have $92,000 in a 403 for a job I'll be leaving on June 30th. And 86,000 in a Vanguard taxable account plus 37,000 my wife sold ORP from a residency in Texas and another 50,000 in cash to make the $250,000 minimum. My question is, how can I do this so that it doesn't compromise my backdoor Roth IRA from earlier this year via pro rata? Is there a way to do this without having to pay additional tax on the 403, the taxable account, or the ORP? Well, I think before answering the question this doc asked, I'm going to answer the question that he should have asked, which is, is this worth it? Is it worth putting all this money at Merrill lynch in order to knock an eighth of a point off my mortgage? And I guess I'd argue it probably isn't. That's a fair amount of hassle. Chances are that you're not going to be as happy with your investments at Merrill lynch as you were at Vanguard. And it's going to be overall, I think probably not make sense to do that said, could you do it? You could do it. I mean, all those taxable assets can just be transferred in kind from the Vanguard brokerage to the Merrill lynch brokerage without any tax consequences. The 403 can be rolled over into an IRA at Merrill lynch as well as the other retirement account. So it could be done. The problem with that is that you couldn't roll it into a 401k there. So you would eliminate your ability to do the backdoor Roth ira. So when you add all that up, worse investments, higher investing expenses, the hassle, the inability to do the backdoor Roth ira, all just to knock an eighth of a point off the mortgage, I think it's probably not worth it, especially with how well this couple's doing financially. It sounds to me like they're going to be paying off this mortgage early anyway. So I don't think we should be running the numbers out on a 15 or 30 year mortgage. And assuming there's going to be a ton of savings there, I'll bet they have it paid off in five or seven years. In addition, I'm not sure that I can think of anything that would induce me to move investments to bank of America or Merrill Lynch. Next question. I expect when I do retire that I'll have a substantial amount in non tax advantaged accounts, mainly money socked away in index funds. I've been diligently putting away significant amounts each year. If someone has 8 or 10 million or whatever and was diligently saving over the years, a good chunk of this will be unrealized gains, it seems to me. How do you properly factor in what the tax bite will occur? Seems like you have to work that into your 3 or 4% or whatever you're trying to use as a rough ballpark for a withdrawal rate. Seems like you're facing a bigger tax consequence no matter what compared to someone who will be withdrawing at a rate that keeps them in a low tax bracket. And so you probably won't have as much as you would think. Simply saying you're going to take 3 or 4% out. Well, yeah, I think that's exactly it. What you got to realize is when you're talking about a withdrawal rate from your portfolio in retirement, that withdrawal rate also has to pay your taxes on withdrawals from the portfolio. Now if all that money is in a Roth ira, it comes out tax free. So you don't have to account for that. If it's in a traditional or traditional IRA or a tax deferred account of some kind, you'll have to pay taxes at your full marginal rate in a taxable account. It varies. You'll likely qualify for some sort of qualified dividend or long term capital gains rate on the gains. But there's a lot you can do to really boost the tax efficiency of withdrawing from a taxable account. For example, you can first just spend the dividends. You know, the dividends you got to pay taxes on anyway. You can also sell shares that have a high basis. You know, if you bought shares for $10,000 and they're now worth $11,000 and you sell them, you only have to pay taxes on that last thousand dollars. The rest comes out tax free. You can also tax loss, harvest if you go, and that can offset some of your gains. But the general rule here is you're going to get out of there for quite a bit less than your marginal tax rate, especially if you're savvy about how you take money out of there. So do you have to account for that? Yes. Is it going to be 30% of that money going to taxes? No. It's probably going to be down in the 5 or 10% range on your overall withdrawals from your taxable portfolio, but it's hard to predict exactly what it would be for any given person. Obviously, it could range from nothing to quite a high tax rate. Next question. I'm finishing the first year of my Pedes residency. I've been following your blog since starting residency. Just as of this last enrollment period, my employer is now offering a Roth 401k option. Great. Out of laziness. I've only just now gotten around to addressing whether traditional Roth 401K would be a better option. Yeah, I'm sure it's laziness has nothing to do with how busy you are as an intern. I know in general you recommend residents to go for the Roth 401k option. That's correct. But if I'm reading my employer's benefits materials correctly, I only get the employer match if I contribute to a traditional 401k. I won't get the match. If I go the Roth route, I contribute 4% of my $55,000 salary to the 401k and get a 1.75% employer match. In this case, is it still better to get the employer match using a traditional 401k and then doing a Roth conversion when I finish my residency? I guess I'm having trouble conceptualizing the math that would need to be done to figure out how much of a money difference this would make. I don't think there's a lot of calculating that has to be done here. That's pretty weird that they only match the contributions to the tax deferred side of the 401k. It's so weird. I suggested to this doc that he double check it, that he actually go into HR and ask them. But he sent me a link to his page for his 401k and literally that's what it says. You don't get a match unless you put it on the tax deferred side. So if that was really the way the 401k is, that's what I'd do. I'd contribute to the tax deferred side and get the entire match. That's your number one priority. Not getting that match on your 401k is like leaving part of your salary on the table. So whatever you have to do to get that, make sure you get that above and beyond that, everything else should go into Roth accounts, Whether It's a Roth IRA, whether it's the Roth 401K, 403. That's generally where you want to be investing as a resident. You know, the only possible exception I could even think of is if you're married to a attending neurosurgeon or something. And maybe you're already in the highest bracket and you want to do more tax deferred money. I don't know, maybe some student loan situations where it makes sense to get your taxable income as low as possible. But as a general rule, Roth is for residents, and tax deferred is for people in their peak earnings years. The other thing to keep in mind as a general rule is when you leave residency and you're allowed to move that money out of the 401k or 403, you want to do so before the end of the year. And the reason why is because you're in a lower tax bracket. That year you leave residency because for half the year you earned like a resident, and half the year you earned like an Attending. The next year, the whole year you earned like an Attending. And so that year that you earned like a resident for half the year is a lower tax bracket. And that's the time, if you can possibly squeeze some more money out of your budget to pay for it, to do a Roth conversion of any tax deferred saving you did during residency or fellowship. And so pay the taxes, move it into your Roth ira. You'll be glad you did. All right, next question. I'm very appreciative for your initiative to help educate doctors on this most important part of life. I wish I'd known about your book and all this years ago. Yeah, I wish somebody had given me my book, too. I read your book last year and now I can understand these various terms. Unfortunately, I've made some bad financial decisions. Here's the summary. Finished training one and a half years ago after fellowship, no student loans. Well, that's good. Made the max contribution to 403 and 457 from employer for one and a half years. All right, that's good. But I'm changing jobs to a private practice. Will no longer have the option of 457. Okay, that's all right. Unfortunately, bought a $48,000 per year premium for whole life insurance through a well known mutual insurance company. I'm sure regular readers and listeners know exactly who I'm talking about. My wife doesn't work, we have three children. I got back surgery three years ago, got a lot worse, but now I'm able to work again. But my starting salary at the new job will be half of what I make now. How do I get out of this whole life insurance mess? Well, there's two problems here. Number one, this doc has mistaken he insurance agent for a financial advisor. It's not the same thing. Even though the insurance agent wants you to think they're a financial advisor, they are not. And so two things here probably need to be changed. Number one, the IRA at the insurance company is probably not where you want to keep that. So that'll need to be moved over to a better place to invest, such as Vanguard. If it's traditional ira, you may want to convert it as well so that you can start doing backdoor Roth IRAs. That'll be relatively easy, relatively pain free. There will probably be a few fees to close the account. Of course, the advisor will need to be fired. You need to go get real advice if you need it, otherwise do it yourself. The big question however is what to do with this whole life insurance policy that he's been paying $48,000 a year for financial malpractice. To sell that sort of a policy to a doctor in this position, it's ridiculous. At any rate, the truth is he's only into this couple of years. It sounds like two, three years. If he can still get life insurance at a good rate, term life insurance, he should buy that before doing anything with the whole life insurance policy. But at two or three years into it, you're still well underwater on these sorts of poor policies. And the truth is you're almost surely getting, you're almost surely better off getting rid of. It leaves you two options. One, you can just surrender it and walk away with whatever cash value you have. Two, you can exchange the cash value into a variable annuity and let the annuity grow up until it equals the basis, basically what you paid in all those premiums. And that allows you to have some tax free growth on that money. At which point you can surrender the annuity and reinvest the money in a taxable account. But in this sort of situation, it just sounds like this doc's been sold a policy completely inappropriately. If it wasn't inappropriate in the beginning, it certainly is now that he has half the income and he just needs to get out of it. But make sure you have real term life insurance in place before canceling any sort of whole life insurance policy. Next question. I'm an anesthesiologist. My private practice group has decided to sell our practice, which means every physician in the group will receive a buyout of an amount to be determined. I can't decide whether I should use the money to pay off my current home or sell my house and buy another house in a better school district. I will be a new mom this summer. Congratulations. And our current school district is mediocre at best. We've only been living in our house for three years. We bought it brand new and our son won't be school age for another five years so he'll still have time to think about it. Curious to hear your thoughts. It'd be nice to have our mortgage paid off. We lived like residents after my fellowship and we were able to pay off my medical school loans and my husband's law school loans in two and a half years. We just finished off car loans so all we have is mortgage debt. Awesome. They're doing great. But it seems kind of silly to buy a house because you think you might need it in five years. Why not wait four or five years to buy it? It just doesn't seem to make any sense. I mean, if you want the house for some other reason than the good school district that you'll eventually need, then sure, move. But I think at this point I'd stay put and keep building wealth and look to move in four or five years. All kinds of things could change in five years. Maybe something happens to your job and you move to a different city. I don't think we need to be buying homes just because eventually we're going to want to have one in a different neighborhood.

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

Head up, shoulders back. You've got this. We can help. Be sure to get the video version of the Physician Wellness and Financial Literacy Conference. See you next time.