140: Financial Mistakes - Retirement and Investments

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Hey everybody, onto another episode of the Dental Boardroom podcast. We are carrying on this series about financial mistakes that dentists make. I just wrapped up a series on tax mistakes. Really? How does. How do. Why are we overpaying in taxes? Well, this new one is on retirement and investment mistakes. So think 401k, think IRAs, think paying off debt versus investing. Think about where your money is going as you try to invest it in ways that gives you a return on that investment and maximizing that return. That's the subject for this episode. Let's kick off by going with the very first point. If you're watching this on YouTube, you can see I got four points here. I'm going to talk about each one of these. The first one is wrong type or timing for a 401k. The second one is not doing a defined benefit plan, also known as a cash balance plan. Paying off good debt instead of investing is the third bullet point. And the last one is investing in private deals without proper diversification in their overall global investment portfolio. Those are the four things I'm going to elaborate on over the next 30 minutes or so here. Here we go. Wrong type or timing for a 401k. Let me zoom out and just talk about a 401k in general. There's a lot of opinions out there about 401ks. There are people who are supportive, there are people who believe they're a big scam and everything in between. Let me share my thoughts and findings being in the real world of helping dentists save in tax dollars every year and prepare for financial independence. As you know, at practice cfo, I started this firm first and foremost as a wealth management firm. I'm trying to drive a good life for dentists and how do you define that life and attach price tags to the things that that authored life design is going to require. And then using the CPA arm, which I bolted on a year after I started the business in order for me to have better X rays financially to give that sort of financial planning advice. Well, let me tell you what I'm seeing and why we recommend 401ks aggressively at practice CFO. And if you're a client of practice CFO, you probably have a 401k. Unless maybe you just started up, your cash flows may be low and you got some other bigger priorities initially maybe paying off credit card debt or building an emergency cash reserve or that kind of thing, which I always say those are the first rungs on the ladder. The 401k is maybe a rung or two up from that. But once you get there, the 401k is an absolute beauty. And I'll tell you why. As you grow your income and your cash flow, guess what else grows? Your tax bill. And the tax bill isn't flat. Your tax payments aren't a flat percentage of your taxable income. As you know, we have a progressive tax system. And a progressive tax system means not only as your tax, as your income goes up, do you pay more dollars of that income to the IRS. You pay a higher percent of your dollars relative to that income to the IRS. So if your taxable income is $100,000, you might pay and I'm going to say federal and state here combined and I'm going to assume let's say a 5% state tax rate. California is closer to 10, New York's higher, some are zero. I'm going to use a 5% tax rate. And if you're at $100,000, you're probably only paying honestly income tax. I'm not talking about FICA tax here, I'm talking about income tax. You're probably paying around, I don't know, $10,000 in income taxes. And if you have kids and you're married and your spouse doesn't have income, you might be all the way down to zero. Once you factor in the deductions for having kids and the child tax credit and whatnot, you might be paying zero. If you're single with no kids, filing as a single taxpayer and you're making 100,000, yeah, you're probably going to pay 10,000 to $15,000 in taxes once you. And so let's say that's 10%. Let's say it's 10%. That's $10,000 of $100,000. 10%. Well, once your taxable income gets up to, let's say I'm going to use an extreme example. You get up to a million. I mean it's not so extreme that I don't see it because I do a well run practice with a really good business minded doctor has the ability to take home a million dollars a year. Are you looking to buy or sell a dental practice?

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But let's say a million dollars. Well guess what your effective Guess what your tax rate is going to be and I call it your effective tax rate, which is how much you pay divided by that million dollars of taxable income. I'm not talking collections, I'm not even talking sort of bottom line cash flow in your practice. I'm talking about what translates from your practice over to your 1040 tax return, including whatever a spouse makes. And adding that up, that's after overhead, that's after depreciation, it's after all of that. What's left? That's your taxable income. And if it's a million dollars, the tax bracket federally you are now after about 600,000. You're now at 37% is going federally for everything above that, roughly 600,000 married, filing, joint tax return. Everything above that is at 37%. And in California, that's going to be at around 10%. Now you're at 47% of every dollar, between 600,000 and a million dollars. That's almost $200,000. It's probably around $180,000, $190,000 in taxes just on that tier of 400,000. From 600,000 of taxable income up to a million dollars of taxable income. Now most dentists are probably going to be somewhere around 250, up to around $600,000 of taxable income. That's typically what I'm seeing. A good doctor is pulling in around 4 to 500,000 in taxable income on their tax return where it specifically says taxable income on there, which is your income from W2s and K1s, plus interest or dividends, less your itemized deductions, you know, less qualified business income deductions, you know, all that stuff. What's left, it becomes your taxable income. And then you filter that number through the tax brackets and that calculates how much you pay to the irs. And the states have their own tax brackets as well. That is your taxable income. And so if your taxable income is say $500,000, you're not quite in the highest tax bracket yet. You're close to around 35% as opposed to 37, but you're up there. And in California, once you're making like $90,000, you're already near the top tax bracket as well. And so it gets very expensive there. So that going back to my main concept here is if you're making 100,000, you're probably paying 10% of that 100,000 is going to taxes. If you're making a million, it's probably closer to about 32% of your million is going to taxes. So it's not like just 10% at 100,000 and 10% at a million, 10,000, 100,000 respectively. No, it's going to be like 10,000 for the $100,000 taxable income. Dr. Versus probably around $320,000 for the million dollar taxable income, going from paying 10,000 in taxes to 320,000 taxes. You see how that steps up dramatically not just because of the higher taxable income, but because the effective tax rate, the percentage goes up as well. And that's called a progressive tax system. And that's the system we have. And it's based off the economic concept, what's called the marginal utility of the dollar, which means that as a person earns more money, the value of that next dollar becomes less valuable to them. The value goes down with every new incremental dollar, because your first, let's say $20,000 is going just to put food on the table and ideally a roof over your head, period. That's a lot of value. However, if you go from a million dollars to a million and $10,000, that extra, you know, that extra $10,000, you've already got all your basic life cost covered. This is all about discretion and more savings. And so the perceived value economically of that new dollar, once you're already making a lot goes down because you have all of your needs already covered. And so there's an incremental decline in the value of every new dollar that you earn. And economics, if you've taken calls that the declining marginal utility of the dollar, utility meaning sort of practical value of that dollar. And so it's kind of built that economic concept into the tax code. And that's why, as your income goes up, every new dollar, the IRS or government feels that they can tax more because it's a lower value to you. And it's also a way of sort of reallocating wealth in a capitalistic system. I'm a huge fan of capitalism. I'm a huge fan of, of how it allows people to get a return on their time and effort and skill set. If they take the energy and momentum and dollars in order to develop those things, then they get rewarded for those things. And that's the underlying concept, of course, of capitalism, which we all know. I think capitalism at its extreme, it needs the edges softened a bit, otherwise you get a disparity of wealth that only accumulates. And this is the whole battle between capital owners and workers. You know, if you go back in history, this has always been a big thing in economics and government, is you got this fight between labor and capital. Capital being those people who own things, own businesses, own real estate, own stocks and bonds, and all of that. Those are the capital owners. Well, capitalism in its worst form eventually accretes wealth so much to the capital owners at the expense of the labor that it creates this battle, this literal thing that produces the decline of economies and countries is this battle between labor and capital. And that's why a good system has to temper capitalism in a way to reduce that disparity. Otherwise the disparity or that gap grows and grows and grows until there's just a revolt by the labor class. And this is why kings are brought down and Beheaded and all that stuff through history is because that gap just gets too wide. And we're definitely seeing that happen right now. The level of wealth is being concentrated in a way that I typically have been very supportive of business owners and wealthy people who have really gone through the painstaking process of developing that wealth, that they have sort of a right to enjoy that wealth. But there also has to be a certain extent to which it is sustainable in the long run as an economic entity known as the United States of America, for that to continue and work and, and to maintain a middle class. This whole thing is dependent on a middle class. As soon as the middle class goes away, this whole thing goes away. And there's a lot of problems that stem out of that. So you'll find me doing this sometimes launching into philosophy and economics sort of lesson, not lessons, but just, I don't know, diatribes. I get into this stuff. But my, let me bring this back down to planet Earth here. The progressive tax system, in a way, is trying to solve for that problem. And that history shows, ends up leading to the demise of a lot of economic systems is because of that. And so as we don't like to pay taxes, and I do everything I can, everything I can in order to save our clients taxes, the reality is, is that most of our clients, dentists, are not the ones causing the wealth gap problem in our country. It's people who are worth hundreds of millions and billions of dollars that will move to a different state in order to avoid paying state taxes and will do everything they can to avoid taxes. When in reality, like how much do you, I mean, if you have a billion dollars, like, what's the point? I mean, let's be real, you couldn't, if you tried, you couldn't spend your money fast enough. And so I'm not saying that we should go and take all our money by any stretch, but I am saying that there is a rationale to a progressive tax code as opposed to just a flax tax code that to make the whole system work, capitalism, not sort of tempered, can lead to problems. And so the progressive tax code is helping mitigate that a little bit. But our clients aren't the ones who are in the billions of dollar category or the hundreds of million dollar category. So I fight really hard to get tax deductions down. And the 401k is one way to do that. The 401 is, is one way to do that. And let me explain why in a dental office, a typical dental office is not a business that has a lot of employees. So the ratio of ownership to employees, if you even go back to my term, capital and labor, you as dentists own the capital of your business. You're the owners of the business. We literally call these things cap tables, which is how much each owner owns. At my company, you know, I own 70% and I have partners who own the other 30%. That's called the cap table. So you are the capital owner of your business, your employees are the labor, and you have very few labor relative to owners. Typical dental office might have, I don't know, 8 to 10 employees, full time employees and the 401k hits the sweet. That type of business is the sweet spot of a 401k. If you had 30 employees and one owner. Now you have so many employees that you're going to have to pay an employer contribution to on that 401k that it erodes the ultimate value that feeds into you as the business owner. So what I always look for when it comes to 401ks is a do you have the cash flow of at least $70,000 or so in your cash flow to be able to fund a retirement plan? I could maybe even come down to $50,000. But if you can't fund that much, you're not going to fund your own 401k. You're not going to be able to put a spouse and fund their 401k. And if you don't fund your own 401, what it becomes is not an asset building tool. It becomes an expense on your P and L that lowers your profit margins. I guess the one benefit is that your employees have this benefit that they see that you're putting in some money for their retirement. Reality is that I've seen most employees just don't appreciate it. They don't see it, it's not money in their pocket today. They can't use it to go buy stuff. See, they don't place the same value on that dollar going into the 401k as they do going into their personal checking account. There are some employees who are really intent on building their retirement savings. I would just say that's the exception, not the norm. In which case I wouldn't say to set up a 401k as purely a benefit to your staff. I say set up the 401k as a benefit to you with an incidental benefit to your team members. With that point in place, let's look at some, some numbers on this if you can. I'm going to what I Tell my doctors, I really like you to be able to set aside $100,000 a year into your savings accounts. And a 401k if you're under age 50 will let you do that 24,500. And then the overall max contribution that you can fund into a 401k plan is, I believe it's right around $70,000. Yeah. Total is $72,000 for 20, 26. So 24,500 of that $72,000 is your own employee portion out of your W2 as an employee of your own corporation, that's your employee portion. The other 72,000, less 24,500. What is that, 40? I don't know, 48,000 or so. That amount goes in a second tier of the 401k called the safe harbor profit share. There are actually two tiers. The safe harbor is one. And you have to do the safe harbor in order for you to fund your 24,500. And then the profit share is elective. If you're going to do this and fund your 24,500, you have to fund the safe harbor, which is typically 3% of eligible employee wages. 3%. You can do a match if you want. And in different podcasts, I'll go into when to do a match versus an automatic 3% on that safe harbor. That's for a different podcast. But just know there's a little bit amount you got to fund there for your team in order for you to fund the 24,500. Then if you have more cash surplus, then you go into this third category called profit share. So you have elected deferrals. That's your employee contribution. You got the safe harbor, which is the small amount you got to do for your team in order for you to do your elected deferrals. And then you have the third category, which is profit share, totally elective, you don't have to do it. And if your cash balance is sufficient at the end of the year, you can go and drop some money into that profit share. But with that profit share, you can get all the way up to $72,000. If you're older than age 50, you're able to fund an additional $8,000 in there. And if you're between the age of 60 and 63, an additional $3,250 on top of that 8,000. So that's called catch up contributions. But overall, I want to see at least 70%. I'm okay if it goes down to maybe 65, but I prefer 70% of every dollar coming out of your pocket into the 401k plan for you spouse staff is going to you and your spouse 70%. If that's true, and let's say you $100,000 comes out of pocket and 70,000 goes to you and possibly a spouse 70,000. And I'll discuss at a different point whether or not or when to put a spouse on payroll. Primarily, if you have cash flow and your spouse is not funding a 401k outside in a different business, it's a great idea to put them on payroll up to an amount needed around $26,000 to fund their elected deferrals. But if you get them, if you have 70,000 or more coming out of your pocket, that's going to you and 30,000 or less going to your team, it becomes a very good thing. Because 100% of it is tax deductible. Unless you elect the Roth portion of your elected deferrals, then it's not entirely 100% tax deduction deductible. I talked about this in my last podcast episode. But you get to deduct $100,000 if your federal and marginal tax rate is 40%, you just save $40,000. So here's the benefit. You save $40,000. 30,000 of that went to pay your team. So you could essentially say the IRS funded your employer contribution to your team. You're left over with a net $10,000 tax benefit that you don't have to pay the IRS of 10,000. And now you got 100,000 DOL $70,000. In this case, 30,000 went to the team. $100,000 is going to grow tax free for a long time. Compounded. It's a beautiful thing. And yes, every year you've got to pay a couple thousand dollars to a third party administrator to make sure it's compliant with Department of Labor and IRS testing that other types of investment accounts like IRAs and brokerages don't have to pay. 401ks are unique that way. But even paying, let's say 3,000 a year for 401k administrative costs, even then you're still coming out positive. Now, a lot of these 401ks, it's 80% plus goes to the doctor. And the older you get, the more you pay yourself as a W2, the fewer staff you have, the fewer eligible staff you have, the more that percentage goes to you. Out of total, out of pocket investment into the 401k plan.

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And so you're, you're the other benefit there. I didn't sort of focus on this a lot, but the, the other benefit is also you can tell your team that you are funding this benefit for them. And it's really important that at least once a year they see and you can do a handout, but they see what is the balance that shows them what you put in. So if you funded, let's say $5,000 for a given team member, they should see that you gave them $5,000. If they don't see it, it's like it never existed. If they see it on paper or on a screen, it becomes more real to them. So you got to make that visible so they feel the benefit. And then if they you have a really good hygienist who's being offered a higher pay somewhere else, but that somewhere else doesn't offer the same type of employer contribution of the 401k. Now you have another reason for them to stay. Okay, so that's the 401k plan. Huge fan of the 401k plan. Rest assured, at practice CFO, if you're a client of practice CFO, we're not going to force a 401k plan. It has to be at the right time in the life cycle of your practice before plugging that in. Because as much as I love it, there may be other priorities first. Alright, now let's say you're a little bit older, you're really cranking it, you've got a strong cash flow and you've likely paid down most or all of your practice debt. And maybe you have a home debt paid off so you don't need as much money there. On the personal front, maybe your kids are out of the house so you have less of a personal overhang financially and you've just got a lot more surplus in the practice. And because of this you're probably paying a lot more in taxes now. A lot more in taxes. So if that's the case, the defined benefit plan, which is a type of cash balance plan, a defined benefit plan suddenly and dramatically increases the allowable contribution into your retirement plan and get a 100% tax deduction for it. And it's very different than a 401k plan. A 401k plan is called a defined contribution plan. And a defined contribution plan, which is the 401k defines the limit of how much you can fund into that plan. And I named out those limits. 24,500 for if you're under age 50. If you're older than 50, there's a catch up contribution. And then the safe harbor profit share elements have limits. And the most you can do if you're under 50 is $72,000 a year. If you're older than 50, it can end up being 73,250. I'm sorry, 83,250 if you add on the catch up contributions. But that's it. That's it. You cannot go above that no matter what. There are, there's something called a mega 401k contribution which I'm not going to get into because it just doesn't apply for most dentists. So I'm going to ignore that. But that's the max. The defined benefit plan is different. It doesn't define how much you can put in in a given year. It doesn't define that. What it defines is how much what you do put in can turn into later on as a benefit when you retire and start pulling from that plan that account to pay for your personal life expenses. That's a future benefit. So let's say you drop in 200,000 a day in your defined benefit plan. Yes, you can do 200,000 or more. You drop that in the plan and an actuary has to be involved and the actuary is going to cost two to three thousand Dollars a year. That is one of the administrative additional expenses to a defined benefit plan. And honestly, doctors, a lot of docs like, I don't want to pay 2,000, $3,000, and then I have to pay the other TPA to the. I'm paying Wes, I'm paying 5,000, $6,000 for these 401 administrative costs. You sure this is a good idea? And that's when I'm like, doc, you just put $300,000 in there. You are at a 47% marginal tax bracket. That just saved you $130,000. And you now have 200,000, $250,000. That's going to grow tax deferred for a long time. Yes, it's worth it to pay the $5,000 of administrative expenses, which are tax deductible, by the way, at your marginal tax rate, which is really out of pocket, probably closer to $3,000. And it is absolutely worth it, 100%. The question is, is it worth it? The question is, is that the best use of your next available dollar? And if you're looking to expand, you may need to drop 100 grand into a really aggressive marketing campaign. You may need to hire an associate, and there may be some cost to getting that associate in place or another build out to expand your operatories. So I'm not saying that every dollar of surplus cash flow should go into a DB plan. What I'm saying is once you're in sort of that really successful period as a practice owner and you're in what I'll call maintenance mode, where everything is humming, you've got the ops you need, you got the equipment you need, you got the team you need, you paid off a lot of your debt, your personal life expenses aren't going up. You're really, really in stride. That's the point in time when I say it's probably time to move to that rung on the ladder in your growth plan toward financial independence of setting up a defined benefit plan. And so typically, our doctors that we do this for, they're older than 50 and they're older than the average age of their staff, or they have only three to six eligible staff members. So this becomes valuable for an oral surgeon, for example, or an endodontist who might be 45. And so, and their staff might even be older than them on average, but they only have three or four eligible staff because they don't have hygiene. And it's a very simple HR structure, in which case the DB plan can be a great thing for even a Younger doctor if they have low staff. But for a general dentist with hygiene, front office assistants, yada yada, maybe even associates on payroll, if an associate is a 1099, that doesn't count, they're not eligible. But a W2 associate they are. Then we typically say this typical profile of a doctor is their early to mid-50s or up. They are a little bit older than their average staff, they have most of their debt paid off and they're really cash flowing and they're in a high tax bracket. Now the DB plan becomes an absolute beautiful silver bullet. And we've done this a lot at practice cfo. It requires a very specialized understanding and oversight of the defined benefit plan because of the regulations around these. But this is something that our assembly line here has been very fine tuned to execute on a well designed and well implemented DB plan. The thing for us that we always will say is don't do this at home, don't do this on your own. Otherwise this thing could really run you off a cliff if you're not careful because it has minimum funding requirements. And if you don't design this at the right time and in the right way, you may end up having to put $200,000 in there. And you're like, wait, I don't have $200,000. And that's a problem because once you get that in place in a given year, you can't go back and reduce that. You got to pay a minimum. Now, every year, the way they work is they say, here's the minimum, here's the maximum. The minimum might be 50,000, the maximum might be 450,000. And you can do anywhere in between. Because all it's trying to do is, is say you got a benefit 20 years down the road when you hit age 68 and the benefit can't be more than x at an 8% growth rate, factoring in inflation and whatnot, that's what the actuary is for, is they do that projection to calculate that future benefit and they back in today in what's called a discounted cash flow back into today to say how much can you fund? And if you're just starting that DB plan and you're 57 and you've only got roughly nine years before you hit that benefit age you got, you're going to be able to fund this thing like crazy. I literally had doctors put $400,000 a year for a period of years before they got maxed out. Now once it gets maxed out, you essentially have to turn it off. That's the problem with the DB plan, you hit the benefit max, the 401. There's no benefit max, there's just a contribution max. So you could fund that 401 safe harbor profit share plan until the day you sell your practice, but the DB plan, you can only fund it until you've maximized that benefit. And every year, based on the returns of that plan and the balance of that plan, you may be able to add a little bit more every year. So that's why I say they're delicate. They should be invested differently than the 401k. You don't want to be as aggressive in the defined benefit plan because of the market falls. And your DB plan falls like 2009s and P500 falls almost 60%. You're going to have to come out of pocket massive amounts of money to replenish what it fell because again, it has to maintain a balance sufficient to provide for that benefit in the future because the benefit doesn't change. And so you may have to come out of balance if come out of pocket. And if you get like a phenomenal 30% rate of return for a few years because you randomly select Nvidia before Nvidia became what it is today, then that plan could become overfunded and you actually have to tone it back or even make taxable distributions out of it. So these things need to be managed. Well, this is why I say don't do it. Don't try this at home on your own. But we do a lot of these. We manage it with, right in with that, that, that, that range to keep this thing sustainable and really beneficial. And we have saved doctors and really, if you look at the compounded effect of value over time of these things, we've added four or five million dollars to their retirement plan by the time they retire through these amazing, beautiful things, half of which if not more would have been in the IRS's pockets and had we not done that defined benefit plan. So I love, I love doing those things. So not doing a defined benefit plan, when you get to that stage of your life where cash flows are so strong and then you end up paying so much in taxes and the mistake is not properly understanding and implementing a defined benefit plan. And there will be a lot of people giving you scare tactics why not to do it. And that's because they don't understand it and they don't have the system in place to oversee it correctly. Alright, moving on to the next one. Paying off good debt instead of investing this one's A little more clear of a subject. We have an innate aversion to debt. Most of us do to debt. We don't like owing somebody else. It's like a form of mental bondage. We don't like it. And so sometimes we get extremely eager to go pay down our debt. And what I have to do is step in and say, hold on, let's understand your debt in context. There's debt that enables you to acquire and grow an asset, and there's debt that enables you to acquire and just say acquire a depreciating consumer item. And so a car loses its value. That's a consumer item. Clothes, meals, entertainment, food, all that stuff that is, they're not assets. They don't go on your personal balance sheet to increase your net worth. They go down in value. And we don't want debt for those things. This is why credit card debt is bad. Consumer debts. Line of credits used to buy boats. Line of credits used to build pools. Line of credits to do those things. Those things generally don't add to your asset value. Now, could a pool add to the vase of value of the house? Some. But I guarantee you it's not going to be dollar for dollar. Remodels typically don't add the value of the house dollar for dollar. And the remodel is usually like 30 to 50%. And so a portion of those are all consumer items because they don't grow your balance sheet. And so I don't like it when doctors want to pay off debt that is low interest and focused on an asset. So practice debt at 4, 5%, even 6%. That's tax deductible interest. I don't like paying that off. I don't. Unless you come to me and say, wes, I just cannot sleep at night. And this is more about the most efficient way of increasing my net worth. It's not about that. It's also about me being psychologically comfortable and I don't like that debt. In which case, at the end of the day, I'm here to educate, give you data and you make the decision. But I'm going to press pretty hard on that because it's on me. It's on me. This is what I'm hired for, to accelerate your financial independence, give you financial organization, and help you have the resources to define and author your life. And so what I want to do is I don't want to pay off a 4.5%, 5% tax deductible debt. I want to set up that 401k first because now I am going to put money into something that's going to give me a tax deduction. And guess what? When you pay off debt, you don't get a single dollar of tax deduction for the principal reduction. You do a little bit on the interest portion of of that debt, but that's not much, especially as you go down the life of that loan. The less tax deduction you get on interest because you're paying mortar principal and principal payments are not tax deductible. And so I would much rather you put money in a 401k where a, let's say you get a 7 to 8% rate of return where paying off a tax deductible rate of 4% is actually only getting about a 2.5% rate of return. So A, I'd rather get an 8.5% rate of return than a 2.5% rate of Return. That 6% makes a huge difference on that money, especially when it compounds over time. That's number one. Number two is that the tax benefit of funding that 401 is just significantly more than the tax benefit of paying off that debt. You get 100% tax deduction on funding that 401. You could do the Roth component which gives you partial tax deduction, but it's largely the same thing. So I'm going to encourage you to really try to think mathematically and smart around what the data would say and the probabilities of success. And that is that you don't pay off good low tax deductible debt that was used to buy an asset like a house or your practice. I will say before funding a 401, let's pay off high interest rate credit card debt, high interest rate potential car debt or some other consumer debt. So don't pay off good debt. I'd rather see you invest. Avoid the mistake of doing the opposite. All right. Lastly, investing in private deals. Let's talk about this one for a sec. As a dentist you are a bit of a target. Yeah, you've got a target on your back and the target is oh so and so is a dentist. I bet they're stacked with money. And if they think you're stacked with money, whether or not you are, you're going to get pitched, you're going to get pitched by your brother in law, by your friend, by, I don't know, somebody from your yo group, somebody from your, I don't know, just different people. You're going to be out with friends at a bar and they're going to talk to you about stuff and they're going to tell you about this investment that they think is just cranking it. Maybe it's an investment in crypto, maybe it's an investment in a private real estate deal. Maybe it's an investment in your brother in law startup business, whatever that is. You're going to get pitched with these from time to time. And they're very luring, like the siren song. They're very luring because you're like, wow. And all I'm doing is investing in blue chip stocks on the stock market or index fund. Wow. I feel like I'm fomo. You start to feel this fear of missing out. And so you end up getting lured in and you end up dropping money on a lot of these private placement deals. And when I say private, that simply means you're not buying it on from a stock exchange. You're not buying it from Schwab or Vanguard or Fidelity or what's the one kids using these days, Robinhood or E Trade. You know, you're not buying it from those as publicly traded securities. You're investing in a non public trade, a non public investment. And so you don't have transparent. Here's the problem. A, you don't have transparency to see how these things are really performing. There's no daily stock valuation. So you can't see that. You can't log in and at any given moment see what it's worth. You might get a statement every quarter or every year or worse every couple years to see what the value is. B, the value is probably pretty subjective. It's a CFO somewhere or some person who's aggregating what is the market value of that private investment. And so there's a ton of subjectivity into it. They may say it's worth X, when in reality, if you try to sell it, it's going to be worth 60% of X. So there's a lack of what's called liquidity. There's not a marketplace for it. You can't as easily go and sell your ownership of that thing like you could a stock on the stock market which log into your Schwab account in two seconds. You can have that sold pretty much. So it's very opaque and therefore it's very risky. And could some of these turn in to be 100% rate of return in two years? Yeah, that's essentially what private equity is trying to do in some ways get these outsized returns. Except the difference is private equity gets highly involved in the operations of their Portfolio companies and thereby it's not just praying and hoping they're actually going to make it work. But with these private deals, I've just seen over and over people's expectations not being met. There's a particular one that has gone around a lot with dentists. It's down in Texas and it involves real estate deals. And it has a very patriotic name. And I can't tell you, I've seen doctors get so frustrated by this. They got super hyped, drank a ton of Kool Aid, got really excited about it. Some founding doctors said how it just made them a ton of money. And then in reality, if they're making a ton of money, why go and try to sell it? Maybe out of the goodness of their heart, why not keep it a privately, a private secret? Why? Why? And so they recruit a ton of dentists into this and they drop a ton of money into. A lot of doctors are stopping their 401ks, or they're not paying down bad debt, or they're not funding kids education accounts or they're not putting money into savings account. Because they get so pulled into this hype thinking this is going to be this, the end all, be all investment. That's their little secret in their life that other people don't know about. And that mentality just sucks a lot of people in. And then what happens as time goes on? They're like, okay, how's it doing? Can you send me something to show me the value? And you don't get it, you get it late. And then when the time comes that some distributions are supposed to be made, they're either not made or they're not made to the same tune. Now in the beginning, a lot of times they are. But a lot of things become kiting schemes where new members put money in and that money ends up being the distribution for existing members, not necessarily a return from income generation from the underlying asset. And that's a problem. And you know who did that? Bernie Madoff. That's how Bernie Madoff accumulated his what, 80, $90 billion was essentially a kiting scheme pull from Peter to pay Paul. And it is a classic, classic scheme in different formats that circles around in the financial markets. That a lot of these exotic private investments end up being is just that. And the person who's placing these gets transaction fees and management fees out of this. That really sucks the true cash flow dry. And then eventually the thing falls apart. I've seen a lot of doctors lose a lot of money over this to the tune where they have to delay their retirement five to 10 years because of that detrimental mistake. It's a big one. That's a big one. So please be very careful. I'm not saying not to do it. I'm just saying have proper due diligence. Ask other members or investors, how has the return been? Have they actually seen the cash flows from it? What is the reporting going to be like? How consistent is that reporting going to be? Look at their balance sheet. If you say, okay, I'm interested, send me the balance sheet of the fund or the business. You can see how much do they have in cash, what has been the income. And you may not be sort of versed in. Analyze a balance sheet and income statement should be if you're a practice owner at some extent. But if you're not, give it to your CPA or give it to somebody who really knows finance and have them look at it. Is this company a going concern? Which means is it solvent? Is it look like it's going to continue on? Does it have a good underlying business model concept? And if so, that should be a pretty healthy P and L and balance sheet. But if you, if you just trust what people are saying at these conferences and you go drop 100 grand into this without doing that due diligence, chances are you're probably being a victim of a scheme. And there's a lot of these things out there, a lot of them. So be careful with that. All right everybody, that is retirement and investment mistakes that dentists make. Going through those, one final wrap up, wrong type or timing for a 401k, not doing a defined benefit plan, paying off good debt instead of investing and investing in private deals without proper diversification or due diligence. All right everybody, that wraps up this episode of mistakes dentists make. The next one is going to be business and practice management risks. I'm going to talk about not understanding the true cost of PPOs, not understanding lease terms, partnering without profit split modeling. So yeah, partnering with somebody without properly modeling how profits are going to be shared, lacking financial planning and analysis of their P Ls, not using good KPI and KPI software or team huddles. Those are the things I'm going to focus on. And what I'm going to share with you are real life experiences and stories that I have seen with dentists. And anecdotally I think you'll find some value in these as I expand on those. So until next time, have a great.