WCI #63: Hate Mail and a Disclosure

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 White Coat Investor Podcast 63 titled Hate Mail and a Disclosure.

No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums trying to gain a financial education the way the hobbyists do. For a fraction of the price of hiring a professional financial planner, the Fire your financial advisor online course will take you from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school or residency, but never was. Fire your financial advisor also has a version eligible for CME credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this and the White Coat Investor can help.

Our quote of the day today comes from Bruce Lee who said use only that which works and take it from any place you can find it. I kind of wish the person who sent me this email would have understood that quote and read that prior to firing this off. You know, here at the White Coat Investor I get hate mail every now and then. A lot of times it's left as comments on the blog, often from people who sell things like whole life insurance and loaded mutual funds and annuities. But sometimes they, you know, just send me an email and I think it helps them feel better sometimes. But I got this email recently from a financial advisor who said I was recently approached by someone who is a resident about this blog. I got fired up about this blog. My husband is a doctor and I have over 10 plus years with various firms in the financial services industry and I have been certified as a CFA and a CFP and most recently as a retirement specialist with one of the largest firms in the country. Your advice is reckless. Very reckless. Giving blanket advice on something because you think you know it all is completely and utterly appalling. You have no business giving advice like this without the proper education. You're the exact person that keeps me up at night. Stick to your day job and stop this blog. What worked for you doesn't work for everyone. Frankly, you need the whole financial picture to make a sound financial recommendation. This is disgusting. You know what it sounds like to me is that this particular advisor just lost some clients because they read something on the white coat investor and realized that didn't gel with what their advisor was telling them. So at any rate, let's do a disclaimer here, which I don't think I've done nearly as often on the podcast as I do on the website. Not a financial advisor. If this is news to you, you probably need to pay a little more attention to what you're listening to. I'm a doctor, I'm licensed to practice medicine, and I'm licensed to drive, and both of those only in Utah. So if you're somewhere besides Utah, I'm not licensed to do anything for you. So this entire podcast is for your entertainment and for your general education only. If you're considering something I'm telling you here as personalized, formal financial advice, you're probably making a mistake and you're probably an idiot. Okay? This is a podcast. 10,000 people listen to it. All right? This is not personalized financial advice to you. That should not be something that I need to say to someone who listens to podcasts, but apparently maybe it is. So if you hear something that you think would be useful for you and it sounds fishy, it sounds odd, you didn't realize it, it's something new to you, look it up, check it with some other reputable sources, check it out on IRS.gov, check it out with your own advisor, okay? These are things that you should do some more research into and that you should have a conversation with your advisor about rather than, you know, pretending I'm your financial advisor. Because I'm definitely not. And anybody who sends me an email gets back a disclosure that says, hey, I'm not a financial advisor, I'm not an accountant, I'm not an attorney, so double check anything I tell you. That said, I view myself more as a teacher. And in that respect, I've helped tens of thousands, maybe hundreds of thousands of doctors with their finances. And for every piece of hate mail I get in my email box, I get several dozen pieces of thank yous from doctors who say I have helped them dramatically in their financial life, saved them thousands of dollars, and really helped them to become financially successful, successful and financially independent, etc. So as Bruce Lee said, use only that which works and take it from any place that you can find it. Even if it's a blog run by some stupid doctor in Utah. Alright, let's get on to some questions from readers and see if we can help people that actually need some Help I'm attending an expensive medical school and will have an anticipated principal debt load of $310,000. A over the years from working and low cost of living, I've accumulated about $15,000 of savings. I'm also receiving an inheritance from my grandparents who passed away long ago and it is $25,000. I'll get this money in November this year and I'm entering my second year of medical school. Regardless of my specialty. Once I become an attending, my plan is to live off 60 to $70,000 depending on if I have a family and throw the rest of my salary at loans until I am debt free. This would take anywhere between three to seven years depending on which specialty I go into. Essentially, my thoughts are minimizing my student loan debt by $30,000 because I'd still want a cushion of savings seems fruitless to me because I'm assuming it would take me it would save me five months on payments. Let's assume $180,000. Take home $70,000 to live off of $9,000 per month to loans. The difference between with interest added and worst case compounding interest during residency 450,000 loans versus 400,000 loans. On the other hand, I could use this 40,000 and allow it to grow until I'm an attending and potentially have a good chunk of change to do with what I please and especially if I invest it appropriately, which could come in handy and be more valuable to me later in life. Basically, I'm not sure putting $30,000 into my student loans now is worth saving a mere five months of payments later as an attending plus minus a few months, especially with the potential to grow it over a 10 year investment period if I play my cards right. If it helps for context, I'm planning on going into surgery, specifically neurosurgery at this time, although we will see how the cards fall of course. So perhaps assume an anticipated salary of 300,000 which is what I did above. Okay, there's so many problems in this email that I can't get to them all at once, so we're going to take them one at a time. First of all, this assumption that a neurosurgeon makes $300,000. I think this med student needs to go talk to some neurosurgeons and actually talk to them about their finances. That would be an extremely low salary for a neurosurgeon. Second of all, this doc or this med student is assuming that your take home on a $300,000 salary would be $180,000. That's an incredibly high tax rate. I don't even think you can get that as a single person in California. But that's assuming you're putting nothing into a tax deferred account. You're not paying anything in mortgage interest, etc. That would be a ridiculously high tax rate. So let's be realistic about how much we're paying in taxes here. For a typical attending, a typical effective tax rate is usually in the 20 to 25% range. And if you're a good saver and have lots of tax deferred accounts available to you, getting below the 15% range for an effective tax rate is not unusual. But the thing I don't like the most about this email is this whole pissing in the ocean effect, right? When you're a medical student and you're signing for this monopoly money every semester, it feels like taking out a little bit less or, you know, paying a little bit toward your loans during residency. That sort of thing is just pissing in the ocean. It just doesn't make any difference whatsoever. So why bother at all? But that mindset is exactly what gets docs in trouble. And if you're wondering how people end up with these 600,000, 700, $800,000 in student loans, it's that mindset, what's another 20,000 when I already owe 600,000, right? So I'm just going to buy this car on credit. What's another 10,000 when I already owe a quarter million dollars, so I'm going to Europe on credit cards? And that kind of mindset is what keeps docs from ever really obtaining wealth. But at the core of this question, it breaks down to the payback debt or invest question, which is this eternal question that every doc has until they're completely debt free. You know, can I outearn whatever I'm paying in interest? And that's what this med student is asking, you know, but the problem is this mindset of I think I can outearn what I'm paying in student loans is a little bit more difficult than it sounds. For instance, typical student loans about 6% right now. And there are no guaranteed 6% investments out there. So if you want a guaranteed investment, maybe you can get 2%, maybe 3% if you type your money for a long time, but you're not going to get 6%. So that means you have to take some risk. So now you're looking at a guaranteed 6% or a risky maybe 7, 8, 9, 10%. And that, I think is a pretty significant gamble, one that if I had the choice, I would take the guaranteed 6% rather than the potential 8%. And so I think it's not a great idea to take this money and invest it in hopes that you're going to outperform what you'd get from just paying off student loans or not taking out student loans in the first place. The other thing this doc talks about or this student talks about is that there's no difference between $450,000 in loans and $400,000 in loans. And let me assure you, having talked to many docs that have 450 and $400,000 loans, there is a difference. $50,000 is $50,000. And to make that much money post tax and carve it out of your lifestyle is not easy. It requires some serious sacrifice. So to discount that because the only money you've ever seen in your life is monopoly money, I think is a huge mistake for medical students to do you know, the difference of keeping your loans $30,000 or $50,000 lower is huge. Getting out of debt sooner is huge. And so don't assume this money doesn't matter on the Other End of the Training Pipeline okay, our next question. I was wondering if you have written or would write a blog about the differences and pros cons of a financial advisor versus an accountant. Well, the training is different for these two professions. For an accountant, for instance, they typically get a degree in accounting and oftentimes go on and become a CPA or certified public accountant. And what that represents is a significant amount of education and a significant amount of expertise. And especially if they go on and get a personal financial specialist designation, which is like a CFP in addition to their cpa, then I think they're a pretty good advisor to have. Not only can they give you good tax advice, which is what most CPAs specialize in, but then they can also give you good financial planning and investment management advice. So I think that's a pretty good route for someone to take that wants to be an advisor. The word financial advisor, of course, has very little meaning. I mean, you can become a financial advisor in a week just by taking a few relatively easy exams and going out and selling products for one of the big brokerage houses. I mean, those people call themselves financial advisors. So I think we have to distinguish between the commissioned salesman with zero training and education and a really good financial advisor that's got appropriate designations, that is doing things the right way and minimizing their conflicts of interest and those sorts of things. But the main difference between a good financial advisor and a good accountant is that the accountant focuses more on tax both tax preparation and hopefully tax strategizing, whereas the financial advisor tends to focus more on financial planning and investment management. Now, it's possible you need all of those services and that you can't get them all from the same person. You may have to hire both a financial advisor and an accountant, or you may decide that you're going to do some of that work yourself. Maybe you'll do your own tax prep, maybe you'll do your own investment management. It just depends. Whatever you're comfortable doing yourself, then do yourself and hire the rest out. Okay, this one isn't so much a question as a tip from a reader that I thought was good enough to bring on the air and talk about. He says, I want to thank you for all your advice over the years. I've been an active reader since my last year of residency. I'm an emergency doc practicing on the west Coast. With your guidance, I've paid off $150,000 in student loans and $13,000 in car loans while maxing out my solo 401k HSA, wife's 401k and two backdoor roths in the two years since I graduated residency. Guess what? It really does work, folks. If you apply these principles, you can go from a very negative net worth to all of a sudden being relatively wealthy just by following the advice you find on this podcast and the blog, he says. I think the big driver was renting $2,400 a month instead of buying $5,000 a month with no down payment for a house in Seattle. We now have $150,000 saved in tax advantaged accounts. The decreased financial burden has allowed me to enjoy my job more by avoiding the parts I didn't like. No more nights. I give away shifts when I want to plan trips, etc. By not buying, we've also kept the flexibility to move again if needed, take a year off for travel, take extra time off if we have a baby, etc. I wanted to share something that may benefit some of your listeners. Finishing residency as a sole proprietor, I used delayed tax filing practices to enable myself to max out my tax advantaged accounts. I want you to listen closely here because I think this is an important technique. It one that my wife and I certainly did to a certain extent when we came out of residency. And I think most smart docs do to some extent as well. I've seen some people get very extreme about it and manage to pay off their substantial student loans by Christmas using a similar technique that I'll talk about in a minute, but this doc says in my first tax year as an attending I only made 90,000 in the four months that I worked. I needed most of that money to cover expenses associated with moving, security deposit, higher rent, new licensing, business costs. By filing for a tax extension, I was able to delay contributing to my 2016 Solo 401 until October of 2017. I also delayed contributing to 2016 Roth IRA and HSA until just before April 2017. I repeated this practice in 2017 and am continuing so far in 2018. I plan to finally catch up this year and fund all my 2018 tax advantaged accounts this year and maybe even open up a taxable account. I had a savvy tax accountant who charged me a flat fee around 500 bucks to do my taxes, answer questions on deductions, including himself, help file the extensions and set up my business practice. Delay in tax filing is a great tool for the new sole proprietor 1099 employee, which allows them to not miss out on tax deferred accounts early in their career. This creates opportunity for compounding interest. Start early in your career and the biggest con is that if a catastrophe strikes, you may not be able to fund the account. In this case, you would owe back taxes on the amount you did not contribute. There's some increased psychological pressure and stress knowing that you have to contribute for multiple years and that may not be right for everyone. It helped me to visualize the person that I owed this money to as being myself. So what's he talking about here? Well, you don't actually have to file your tax forms on April 15. You can file an extension and that allows you to file them in October instead of April. Now the rules for a lot of retirement accounts allow you to contribute until the day you file your taxes for the previous year. But if you don't have the money in April, you still want to contribute for the previous year. You can file in October and that gives you four more months to come up with the money. And if you're living like a resident, you can come up with that money in the next few months and be able to max out those accounts. So, so what's typical, and this is what my wife and I did, is when you come out of residency you have so many needs for your cash. I mean you want to may want to come up with a house down payment. You got to get your emergency fund bigger. Maybe you owe some credit cards or a car loan or you got to pay your parents back or something like that. You want to max out these retirement accounts, you got student loans to pay off. You have way more need for cash than you have cash. And what this allows you to do is to not miss out on that opportunity to have tax advantaged space in those retirement accounts by delaying when you contribute. The easiest one to delay is your Roth ira. You know, if you come out of residency in July, you have until April of the next year to put that Roth IRA money in. And so that gives you a lot of months to come up with that $5,500 for you and $5,500 for your spouse. You can also, you know, backdate 401k contributions and HSAs, some etc. In a lot of ways just by understanding the contribution deadlines. And so that allows you to use the money you're making in July and August and September to pay off debt or to save up a down payment, those kinds of things, while still being able to get that money into the retirement accounts. Sure, the money doesn't start compounding until you actually put it in, but you haven't lost that tax advantaged and asset protected space forever. And so, you know, what typically happens is over the first few years, you're gradually moving that date up. Maybe the first year out of residency, you do it in October of the next year, then April of the next year, and then maybe by December of the year. And eventually you get to the point where Katie and I are at in our lives, where we're maxing them out in January and February and March of the actual tax year that we're contributing for. You know, and so you gradually move it up month by month as the years go by until you're getting that advantage right from the beginning of the tax year. Okay, next question. I have a question regarding my 401k and IRA. I just left my first employer at the end of last year and they are now rolling over my 401k account, about 120,000. Because I believe I'll be at my lowest tax rate this year due to Trump tax reform. I'm thinking of doing a full Roth conversion on the entire amount after rolling into my ira. I also want to do a backdoor Roth this year. Is this possible? And not pay additional tax on the back door, 5,500. My goal is to have as much Roth money as possible in retirement. Well, I'm not going to talk about the wisdom of that goal that may or may not be A very good goal. As a general rule, you want to have a mix of tax free and tax deferred and taxable assets when you get into retirement, but you want to get those tax free assets without having to contribute or convert tax deferred assets during your peak earnings years when you're at these high tax brackets. So it doesn't always make sense to do Roth conversions when you're an attending physician working full time. But I'm just going to let that slide. And if the goal here is to get as much Roth money as possible in retirement, yeah, this is a great way to do it. It's called a Roth conversion. You got $120,000 in your old 401k, you can put that in a Roth IRA. You just owe taxes on $120,000 of extra income this year. Certainly you can do that. No, that's not going to affect your backdoor Roth IRA, because on December 31st of this year, the year you do the conversion, you're not going to have anything in a traditional SEP or simple ira. And so that's not going to cause any problem with your backdoor Roth ira. That's still basically going to be a tax free contribution. You just have to do it in two steps instead of one because you make too much money. Next question. My dad bought a variable annuity 10 years ago worth $182,000. It was sold to him by a particularly crooked financial advisor. I was reading your recent post on how to extricate yourself from the annuity, and it said if the value is close to the basis, to invest the money into an index fund. Sorry, how do you calculate this? What exactly does that mean? Sorry, I'm an investing newbie. Okay. Basis is what you paid for something. So if you bought a mutual fund for $10,000 and you later sell it for $15,000, you only owe tax on the $5,000 of gain because your basis is $10,000. When it comes to a whole life insurance policy, your basis is the sum of all the premiums you've paid for that insurance. When it comes to an annuity, like this doc's father has, it's the sum of all the payments you've made into it. So this doc's been paying on what's probably a crummy annuity. Given it was a crooked financial advisor that sold it to him, he'd been paying on that for 10 years. So maybe if he's paying $5,000 a year for 10 years, maybe he's paid in $50,000. Over 10 years and maybe it's worth $55,000. So his basis is 50,000. It's worth 55,000. If he cashes it out and puts it into an index fund, he's going to have to pay taxes on that $5,000 above and beyond the basis. That's the way tax basis works. It's possible sometimes to have your basis be higher than the value of the investment. And with a lot of investments, it's a good idea to sell them at that point. That's called tax loss harvesting. Then you can take that loss and use it to offset any long term capital gains you may have, any dividends you may have, and up to $3,000 a year of your ordinary income. And so that can make a lot of sense when you have a loss. But it gets a little bit tricky when you're trying to. When you have an insurance policy or an annuity for a loss, those are a little bit harder to get any sort of a tax loss out of. And what people usually end up doing is leaving it in a variable annuity or roll rolling it into a good variable annuity with low costs, letting it grow back to the basis, at which point they surrender it and move it on to another investment, tax free. Next question. I'm a practicing emergency physician who's currently just about seven years out of residency. I have a hospital disability policy that covers 60% of my base pay, comes out to about $15,000 a month before tax. And I also have my own personal policy with guardian that is currently $7,500 a month in tax free benefit. I exercised a rider on my policy and they're now offering me $6,730 per month more. My question is, at what point is there too much disability insurance or is there no such thing? My total premium would be somewhere around $650 a month for disability in total. Should I exercise this option? Well, you know, people will sell you a lot more insurance than you need. You really only want to insure against financial catastrophe. Now, disability is one of those financial catastrophes, at least until you become financially independent. And so you probably ought to have disability insurance. But the question is, how much is enough? Well, you want enough disability insurance to cover your living expenses and to save for retirement. So how much is too much? It depends on what you're spending and how much you need to save for retirement. If you're spending $10,000 a month, well, you better have at least $10,000 a month in disability. And if you also figure out you need to put another two or three or $4,000 a month toward retirement in order to not be living on just Social Security. When you get to age 65 or 67 and that disability insurance policy quits paying, then you better get enough insurance to cover that as well. So that would argue for something in the 13, 14, $15,000 a month range for that particular doc. But everybody's going to be different. If you're super frugal and you only spend, you know, four or $5,000 a month and you want to save another three or $4,000 for retirement, then maybe you only need seven or $8,000 in disability insurance. If you're married to another doc and your plan in the event of your disability is just to live off your spouse's income, then maybe you don't need any disability insurance at all. So how much is too much is really an individual question. But those are the factors to consider in this case an emergency physician, which is probably making, you know, something on the order of 25,000 or $30,000 a month. You know, we're talking now about this doc having nearly $30,000 in disability insurance, most of it probably coming tax free. That sounds like probably too much. Quite honestly, I'm not sure this doc needs that much. I certainly have never carried that much disability insurance and this year probably will be canceling the policies I have. We're just getting too close to financial independence, and especially given that that wouldn't cover much of the income coming from White Coat Investor. So it just doesn't really make sense for us much longer to have disability insurance. We'll probably be canceling our policy later this year.

No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums, trying to gain a financial education the way the hobbyists do, for a fraction of the price of hiring a professional financial planner. The Fire your financial advisor online course will take you from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school, or residency, but never was. Fire your financial advisor also has a version eligible for CME credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this and the White Coat Investor can help.

Also, be sure to check out the White Coat investor forum if you haven't lately. Lots of active threads there, and you can learn a lot while helping others. Head up, shoulders back. You've got this. We're here to help you. See you next time on the White Coat Investor Podcast.