INTRODUCTION

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.

Dr. Jim Dahle:
This is the White Coat Investor podcast.

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All right, we've got a sale, by the way. This is our summer sale. I don't know what's special about a summer sale for most businesses, but ours is unique in that a whole bunch of our audience, about three quarters of you are docs. And for docs, the start of the new year is July 1st. Whether you're in medical school, whether you're in residency or fellowship, or once you come out, it's when you tend to hire people, it's July 1st. That's kind of the beginning of the year.

And so, we kind of celebrate a little bit with a summer sale. Our summer sale this year goes from June 22nd to July 3rd, and we're basically selling everything for 20% off. All you have to do is use code SUMMER20. This includes our online courses. Go to whitecoatinvestor.com/courses to see that. It includes all our swag. Go to whitecoatinvestor.com/store to see that. And we sell our books in the store as well. So, it's not just t-shirts and mugs and cool stickers and things like that, but it's also the books. If you want to buy a bunch of bulk books or something there's 20% off. So check that out.

EUGENE EMERGENCY PHYSICIANS BEAT THE BIG GUYS

Dr. Jim Dahle:
All right, let's get into your questions. Actually, you know what? Before we answer your questions, Megan is our producer, and she says, you got to talk about this thing with the Eugene Emergency Physicians. And I told Megan, I'm like, “This is not new in emergency medicine, Megan. This stuff is happening all the time. The only interesting thing here about the Eugene Emergency Physicians is that they won.” Because small democratic groups of emergency doctors across the country have been losing their contracts for decades, my entire career.

I've been in this small democratic group I'm in now for 16 years, since I came out of the military in 2010. And I was what I was looking for. I was looking for a partnership job, a small democratic group. And so I came to this group, and that's where I've stayed my entire career since I got out of the military anyway.

But we've constantly had this threat over our heads of losing the contract. I like docs owning their job. I like them being in business for themselves. No, it's not right for everybody. And in fact, right now, about 75 or 80% of doctors are employees. It's becoming less and less and less common. It's even becoming less and less and less common among dentists. Only about 50% of dentists are now self-employed.

But the truth about emergency medicine is that it's always a little bit quasi-employed anyway. Take my group. Yeah, we're in business for ourselves. We're self-employed, technically. We're a partnership. I get paid on a K-1 every year. But our business only has one customer, basically. We contract with the hospital to provide services at the hospital. We don't bill the hospital. The hospital doesn't pay us. We don't pay them. Our bills go to the patients.

So, they get a bill from the hospital when they go to the ER. And they also get a bill from the emergency physicians that took care of them while they were there. Obviously, the hospital bill is much bigger than the bill they get from us. But that's kind of the way emergency medicine works.

But we've always had this fear that we would lose the contract. Our contract, it might be a five-year contract at times. But the truth is, we both have a 90-day out. So it's really never more than a 90-day contract. My entire career, this business could essentially lose its only customer, really, with 90 days' notice.

And that's emergency medicine. And it's not awesome. If you're out there running a concierge primary care practice, you don't have to contract with just one entity. You might have 2,000 patients, probably fewer if you're doing concierge. Maybe you only have 400 patients. But my point is, you're not limited to one.

This has been a unique thing for hospital-based physicians, whether you're an anesthesiologist or radiologist or pathologist or emergency physician or hospitalist or whatever. This is the way the business is. And so many years ago, when emergency medicine was a very young specialty, people started noticing that they were being taken advantage of.

And there was a book that came out before the start of my career, even, that was called The Rape of Emergency Medicine. And it was actually written anonymously, initially. We all know who wrote it now. But it was written anonymously. And the denigrating term used for the people who owned these contracts was kitchen schedulers. So, basically, this is someone who all they did was schedule the docs for their shifts. And then they took this big cut of what the docs were earning.

The docs were doing all the work. They were taking all the risk. And yet, the kitchen scheduler was taking a whole bunch of the money they were making. And sometimes it was really egregious. 5%, 10%, 25%, 30%, a third, 50% of what they were earning, of what they were generating was going to the kitchen scheduler because the kitchen scheduler had the contract with the hospital. And then they hired the docs to fulfill the contract.

And so, this has been a big point of discussion and a big controversial area in emergency medicine for my entire career and longer than my career. Keep in mind that 40 years ago, there were very few emergency medicine residencies. And most people working in emergency departments are trained as internists. So they trained as family doctors. Or they just did an internship. And then they went out and started practicing.

And after a while, we realized maybe that's not the best way to provide emergency care. We could probably do a lot better job if people were actually trained in emergency medicine. It kind of became a specialty, but it was a gradual transition. Even now, in 2026, I still have one partner who did not do an emergency medicine residency. He grandfathered in when that was allowed for those who trained as internists or those who trained as family physicians.

And in small towns, even today, or places where a lot of people don't want to go, you can go practice emergency medicine still with nothing but an internship or an internal medicine residency or a family practice residency. Or sometimes some hospitals are mostly staffed just by APCs.

But if you want to go work in any of the places I was interested in working, Boise and Flagstaff and Anchorage and Portland and Denver and Salt Lake and Reno and Phoenix, those sorts of places, you pretty much have to be residency trained in emergency medicine these days.

But because of that gradual timeline, that gradual time period where there were people that weren't emergency medicine trained working in emergency departments, and because of this issue with the kitchen schedulers, we actually developed two specialty organizations.

The larger one, the older one, is the American College of Emergency Physicians or ACEP. The smaller one, the American Academy of Emergency Medicine, or AAEM, is really, in a lot of ways, the conscience of emergency medicine. And the real problem they had was that the power brokers in the specialty, those who were running ACEP, were kitchen schedulers, for lack of a better term.

They were in these large contract management groups, because the kitchen scheduler goes, “Well, how can I make more money? I've got this one contract at one hospital.” And they start going, “Well, what if I got another contract at another hospital? It's not that hard to schedule people for shifts at a second hospital. I could probably do that.”

And then they go to a third hospital, a fourth hospital, and 400 hospitals. And then you end up with these large contract management groups, or CMGs. And over the years, sometimes they are owned by one person. Sometimes it's a doctor. Sometimes they're owned by a few doctors. Sometimes they're owned by private equity. There are a lot of different structures. But the bottom line is they're not owned by the docs working the shifts.

And if you look out there, the largest of these contract management groups are Team Health, Envision, Vituity, USACS, Core Clinical Partners, and SCP Health. These are some of the bigger ones out there. And those last few I mentioned technically are physician-owned or independent, whereas the other ones are technically these contract management groups.

But obviously, as private equity has become more interested in medical practices, like they are in every specialty now, they looked at emergency medicine pretty early and started saying, “Okay, well, we could be the kitchen scheduler, and we could leverage this up, and we could make it more profitable, and make the docs run faster, and see more patients, and get better reviews, and bring in more revenue, and really get some money for our investors this way.” And so that took place relatively early in emergency medicine compared to lots of other specialties.

But this issue with these large groups coming in and getting the contracts away from these small democratic groups that might just be the 10, or 12, or 15 docs that work at that one hospital has been going on in emergency medicine for the entire time the specialty has existed.

Well, it turned out that a group called Apollo MD decided they wanted to try to get the contract at a hospital in Oregon. This was in Eugene, and the tagline that's been going across social media, and across all these physician news sites, is that the physicians fought off private equity.

I’m not sure Apollo MD actually counts as private equity, but it's one of these big groups that's a kitchen scheduler kind of group no matter what you want to call it, whether private equity is involved or not, it was an outside group that was coming in, a big group with hundreds and hundreds of docs that was coming in and trying to get this contract from this group of docs, Eugene Emergency Physicians that have been there for decades, providing great emergency care to their community, and building relationships with the medical staff there, and thought their job was pretty secure until the hospital decided they wanted to bring in Apollo MD to staff the emergency department.

Of course, Apollo MD, what they try to do, like every other CMG, is they want to keep the same docs. They want these docs to no longer work for themselves, but come work for Apollo MD. And then, of course, Apollo MD can get their cut of what the docs are earning, and typically that's a lot more than the overhead for the docs.

An emergency physician group might be run pretty lean. A small democratic group might be running at 5 or 8% overhead. We don't have this separate building we have to maintain. We've just got some coding and billing, and you've got to negotiate with insurance companies, and you've got to provide your benefits, and those sorts of things, but they run pretty lean, whereas a typical contract management group might be skimming off 30% of what the physicians are generating. So, typically, if you lose your contract, you're getting paid significantly less money, so it's generally bad.

But at any rate, this has been in the physician news for the last few months, and it got pretty interesting, I guess, partly because some of the officials from Apollo MD were less than honest on the stand under oath. And so, it's been pretty interesting.

Will Flanary, who has a big social media presence as Dr. Glaucomflecken, has been posting a lot about it, and so a lot of you, I know, have heard about it, but some of the key points were that PeaceHealth runs the hospital. Apollo MD was basically this corporate medicine group that tends to describe themselves as physician-owned, but they're certainly not a classic democratic group by any means. And then the ones who had the contract, the democratic group, were the Eugene Emergency Physicians.

So, Apollo MD sets up Lane Emergency Physicians, a shell company, for lack of a better term, not that there's anything wrong with the shell company, but it was just Apollo MD. That's what Lane Emergency Physicians were. But apparently, the CEO of Apollo MD was not so honest in court. The CEO of Lane Emergency Physicians was less than honest in court. They told lies about their request for a proposal process that PeaceHealth conducted to select a new ER group, and this all collided with some politics in Oregon.

Oregon had a Senate Bill 951, which is one of the country's toughest laws about corporate and private equity control of medical practices. And so, this case was really the first big test of this law's scope and its influence. And apparently, just last week, it would have been a podcast, but just last week, when I'm recording it, the judges made it pretty clear that they weren't going to take any of this BS that these CEOs were trying to sell on the stand, and so it looks like the emergency physicians actually won. They actually fended off this huge contract management group that was trying to take their contract, and they're going to get to keep their contract.

And so, I think there are a few lessons to learn there. One, it's worth fighting. Sometimes the docs do win, number one. Number two, maybe it's time to work with our state legislators and get laws like this passed across the country so physicians can be in control, not only of their businesses, but of healthcare, because I think when the doctors control the healthcare, they are less burned out and they provide better care.

So I just wanted to congratulate the Eugene Emergency Physicians for this pretty awesome victory and point out to these people running these big contract management groups, whether they have physician owners or not, that you know what? If you're going to lie about it and you're going to just seek profit in healthcare, well, there's going to be some consequences.

I hope there's some lessons to learn there for everybody, but keep in mind this transition to private equity owning every physician practice in the country may not be a good thing for either us or our patients, and I do think the decreasing percentage of physician ownership of their practices is a major contributor to the rising rates of burnout in not only emergency medicine, where we lead all the other specialties, but in all specialties.

Okay, enough on that topic. Let's talk about your questions. Your first one comes in. It sounds like we're going to talk about trusts.

RABBI TRUSTS

Robert:
Hey, Dr. Dahle, this is Robert. I live in the southeast, and my wife is an internal medicine physician. We're in our 40s. I am a plaintiff's personal injury attorney. I'm in law practice, and I want to talk to you about a kind of an unusual retirement vehicle that I've recently set up. It's called a rabbi trust, and it seems to me to function sort of like what something my wife had at the hospital previously, which is like an executive compensation plan where you defer all or part of your salary, and basically the way it works is I have to defer portions or all of a fee on a contingency fee case, and I have to elect that fee before I do it, but it's been sold to me essentially as an unlimited 401(k).

The fees are high. They're like 2% because it's 1% on the fund and 1% for the advisor. Normally, I wouldn't do that, but with the incredible tax savings I'm getting with this and the ability to sock away six-figure sums in addition to my 401(k) and after-tax account, it just seems like a pretty good thing to have. So, what am I missing? Are there any blind spots here? Is there something that I'm not catching? What do you think of rabbi trust and similar vehicles?

Dr. Jim Dahle:
Anytime I hear unlimited 401(k), my antennas go way up. There's a reason 401(k)s have contribution limits. It's because they're so awesome. There's a reason why the government doesn't want you to be able to put all of your money, unlimited amount, millions and millions of dollars into retirement plans, for lack of a better term.

Whether they are Roth, whether they are tax deferred, they don't want you to be able to put unlimited amounts of money in there for a couple of reasons. One, your money grows faster in there because it grows in a tax-protected way. It's a really great tax benefit, but it's also a great asset protection benefit because in pretty much every state, money that's sitting there in a retirement account, you're going to get to keep if you have to declare bankruptcy.

And so, there's limits on it. So, anytime someone starts telling you, “Oh, I've got this thing that doesn't have limits”, your antennas should go way up. A lot of times what they're talking about is some type of insurance product. Because while there is a limit on how much a life insurance company will sell you as far as life insurance goes, it's way more than the amount of money you're going to be able to put into a retirement account. Because they want to sell you a whole bunch of life insurance. It tends to be a high fee. It tends to be, if it's a cash value policy, it tends to be relatively low returns. They're not awesome. And if they can't sell it to you directly, sometimes they go to your employer to sell it.

And so, they sell the two of you together a policy that's called split dollar life insurance. And it gets really complicated. It's really hard to understand, but the bottom line is, well, if your employer is going to pay for all of it, then take it. This is assuming you can't talk them into giving you a bigger salary instead. If the employer is only going to pay for 20 or 30 or 50% of it, maybe you still want to take it. I'll take a whole life insurance policy if somebody else is going to pay for it. That's a no-brainer.

But I don't think that's actually what we're talking about here. I think what we're talking about here is a type of deferred compensation. And I published last year a post called deferred compensation plans. And I included in that several different types of deferred compensation plans. These include 457(b)s, which are relatively widely spread among academic physicians. A lot of you have access to a 457(b). And it's kind of the classic example of a deferred compensation plan. It has a contribution limit about equal to what a 401(k) has, but it's in addition to your 401(k).

And then it has a few cool features. One, it's not accessible to your creditors because it's still actually your employer's money. It's deferred compensation. They haven't paid it to you yet, so your creditors can't get it from you. It also doesn't have an age 59 and a half rule. So, it's often the first money that people spend in early retirement. If they retire at 50, maybe they spend the 457 first until they get to 55 when they can get into their 401(k) money or 59 and a half when they can get into their IRA money. So that's kind of a cool feature as well.

However, because it's sometimes exposed to your employer's creditors, and this is for non-governmental 457(b) plans, you could lose it just if your employer goes bankrupt. And even if you don't lose it, you might worry about losing it. That's not awesome either. People who have been through that have been kind of like, “I wish I'd never contributed to this because I've been worrying about it for three years while my employer goes through all these court cases and stuff.”

So keep that in mind. Those are kind of the issues with the 457(b). You generally want to contribute to your 401(k) or 403B first, but then you might also want to use the 457(b). If the investments are okay, the fees are okay, the distribution options are okay with you, the investments are reasonable, then you probably do want to use your 457(b).

Keep in mind, governmental 457(b)s are really like an extra 401(k) because that money is held in trust. You're not going to lose it to your employer's creditors. And that's usually what you get from like a state university health system or something like that as a governmental 457(b).

These other types of deferred compensation plans are much more rare, a 457(f) and a 409A. And anytime I've heard rabbi trust associated with these, what they're generally talking about is a 409A.

So, what is that 409A plan? Well, it's also a non-qualified deferred compensation plan. Similar to 457(b) that way, but instead of being governed by IRS code 457, it's governed by the rules and IRS code 409. So, if the employer is a non-profit or a government employer, a 457 plan of some kind will typically be used. If the employer is a for-profit business, a 409A plan will be used.

Otherwise it's pretty darn similar to 457, to actually a 457(f) plan. This is what it's most similar to. The vesting options, the taxation options, the rollover options are essentially the same as the 457(f). And so 457(f), if you're not known as this cousin of the 457(b), also a non-qualified deferred compensation plan, all the contributions are made by the employer and done by the employee. And it's usually just for a select management group or for highly compensated employees. And it involves money that's paid to the employee at the time of retirement.

It's often called a Supplemental Executive Retirement Plan or SERP. We're throwing all these terms out there, deferred compensation, 457(b), 457(f), 409A, SIRP, rabbi trust. There's all these terms out there and they all have meaning, but it's very easy to get confused when you try to keep track of it all.

But with these plans, the benefits are taxed when they vest, not when they're paid out. So that makes it an ineligible 457 plan, but they often have a higher contribution limit than the 457(b) plan. A 457(f) and a 409A, higher contribution limits than the 457(b) plans. In fact, it's even possible to put 100% of your compensation into them. So you get taxed on it as each tranche of these contributions gets vested.

Now we've talked about 457(b)s, 457(f)s, 409As. Where does the trust come in? Well, these 409A plans typically use a trust or often use a trust to reduce risk. And when you do that, you can use one of two kinds of trusts. You can either use what's called a rabbi trust or you can use a secular trust.

And as a general rule, a secular trust is better than a rabbi trust in this regard. In a rabbi trust, the assets are basically unreachable by the employer, but not as creditors. But in a secular trust, the assets are unreachable by both. But the taxation is different between the two. So when a trust is not involved, the taxation occurs in a secular trust at the time of vesting. And with a rabbi trust, the taxation doesn't occur until distribution, which is a significant advantage and likely the reason that the rabbi trusts are actually more commonly used than the secular trust, because it allows you to delay the taxation a little bit longer. But of course, now you've got to worry a little bit more about losing it to creditors like you worry about in any deferred compensation plan.

Okay, I hope that's answered the question of whether what these things are, what we're talking about here. The bottom line is every one of these plans is unique. And whether you should use it is a highly individual decision. Almost surely, you should not be contributing to these deferred compensation plans, whether it's 457(b), 457(f), 409A, Rabbi Trust, SERP plan, whatever you want to call it, until you've already maxed out the better accounts.

What are the better accounts? Your HSA, if you qualify to contribute to one, your backdoor Roth IRA for you and your spouse, your 401(k), your 403(b), your 401(a), if there's one of those, your spouse's 401(k) or 403(b) or 401(a). And then you start going, “Would I rather use this deferred compensation plan or would I rather save in a taxable account?” That's what you're comparing it to. And yes, there is a tax break there, but there's some risk of loss with some of these.

But that's really the decision you're making. You get more flexibility in a taxable account. It's really your money. It's not deferred compensation, but it's exposed to your creditors. And it's going to grow a little bit slower because it's getting taxed as it grows. But you can keep your fees super low in a taxable account. If you go open it at Schwab or Fidelity or Vanguard, and you only buy broadly diversified, low cost index funds or ETFs with expense ratios under 10 basis points, investing is basically free.

Well, that doesn't sound like what this questioner is talking about. He's talking about 1% to some sort of an advisor, another 1% to the investment manager, 2% is a pretty good drag on your returns. At that point, I started going, “Well, maybe I just want to use a taxable account.” Even though there's some tax benefits.

We all get so afraid as doctors, as White Coat Investors, as high earners, as highly taxed people, as people in the upper tax brackets, we all get so bummed about paying taxes that sometimes we let the tax tail wag the investment dog. And we make dumb decisions based primarily on taxes. Maybe we buy a whole life insurance policy because it grows in a tax protected way. And if I take the money out in retirement, I can take it out without paying taxes. Well, you can take money out of your house without paying taxes too. It's called a loan. You pay interest on a loan, but you don't pay taxes on it.

Well, it's the same thing if you borrow against your whole life insurance policy, your borrow against your portfolio or your borrow against your house or your car or your RV or whatever. It's tax free, but not interest free. But lots of docs get suckered into buying an insurance policy they probably shouldn't have bought.

Likewise, lots of docs end up in investments that are sold primarily for tax benefits. The best tax benefit you can get from an investment is just lose all your money. Now you've got this huge capital loss you can use to offset other capital gains, but you're not coming out ahead.

You can get a similar benefit by giving your money to charity. You get this charitable deduction, but you don't come out ahead. Maybe you get 40% of what you gave away back as a tax benefit, but you're not coming out ahead. So it's got to make sense as an investment first, before you let the tax tail start getting into the picture a little bit.

Now, I think lots of people use their 457(b)s and their 457(f)s and their 409As with or without a rabbi trust all the time. And if they put some of their retirement savings in there, I think that's probably fine. But if you've skipped your 401(k) and you've skipped your Roth IRAs in order to put more money into your 409A, you're probably making a mistake. Don't let the tax tail wag the investment dog.

Okay, that was a long rant. You guys ask complicated questions. What do you want. It just takes that long to answer your question.

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today, Ben sent us the quote by email. The quote was, “Don't just do something, stand there.” And Ben told us it was from Warren Buffett. And just before we started recording today, I'm like, that sure sounds like something Jack Bogle said. I'm not sure Warren Buffett said that. We went looking and we actually couldn't find a time that Warren Buffett actually said that, Ben.

But it's a great quote. I know Jack Bogle said it and lots of other people have said something similar. And it mostly means, don't feel like you always have to be doing something in response to market movements. You don't. Most of the time, you can just stand there and guess what? You're a long-term investor. This investment is going to work out just fine in the long term.

All right, we got another question about trust here. Hopefully, it doesn't take quite as long to answer as the last one.

IRREVOCABLE TRUSTS AND YOUR BROKERAGE ACCOUNT

Ken:
Hi, Jim. My name is Ken, and I heard you talk about having an irrevocable trust where you have your brokerage account. Could you explain why you would do this, how it benefits you and your family, and when would it be a good idea? Thank you.

Dr. Jim Dahle:
Sure. That's a very broad question, so I guess we're going to take a while to answer this one as well. A brokerage account, also known as a non-qualified account or a taxable account, can be owned by you, your spouse, the two of you together, your trust, your business. All kinds of entities can own a brokerage account. All we're talking about here is a brokerage account that's owned by a trust. You can do that if you want, if there's a good purpose for you to have a brokerage account inside a trust.

Now, lots of people like to have this when they die. They have their brokerage account owned by a revocable trust. They're still paying all the taxes on it. It's still accessible to their creditor. There's no asset protection benefit there. But now, those assets don't go through probate. They're distributed at the time of your death in accordance with the trust document. It doesn't go through this public, expensive, time-consuming process known as probate.

Probate's worse in some states than others. My parents were basically told by their estate planning attorney, just go through probate, it's not a big deal in Alaska. I guess that's true. I'll find out because I'm the executor, I guess, eventually. But that's a revocable trust.

An irrevocable trust is irreversible. It's money that you've given away. You've given it to someone or something else. You can still pay the taxes on it. That's called an intentionally defective grantor trust, an IDGT. And there are reasons why you might want to do that or you might not want to do that. Remember, trust tax rates are pretty high. So sometimes it makes sense for you to pay the taxes at a lower rate than the trust might be paying the taxes at.

But the bottom line is the person who is the grantor, the person who put the assets in the trust, generally is not the beneficiary of an irrevocable trust. Now, that's not entirely true. These days, there are these trusts out there, the domestic asset protection trusts. They're available in, I don't know, 15 or 20 states where you are not only the grantor, but the beneficiary. There's not a lot of case law associated with these. So you don't really know if it's going to work in your asset protection situation. You'll probably never have.

And we're all worried about these above policy limits judgments. The truth is a doctor actually losing personal assets in a malpractice suit is very, very rare. Even if there's some huge judgment initially, it's usually reduced to policy limits on appeal. Or the hospital's picking up part of it or some other entity or some other doctor is picking up part of it. And the doctor ends up basically losing the policy limits of the malpractice policy.

But occasionally, very rarely, they do lose personal assets. And the idea is if you were involved in that sort of a situation, you'd say, “Well, I can't lose this brokerage account or my house because it's in a domestic asset protection trust and it's been there for years.”

And maybe it'll work, maybe it won't. They have these in Utah. They have domestic asset protection trusts. We actually put our house in one. Our house is owned by domestic asset protection trust. And maybe we get to keep it if we get sued for a gazillion dollars, maybe we don't. We'll see. Honestly, we'll probably never find out because we'll probably never have that sort of a lawsuit.

But that's not necessarily what we're talking about here. What we're talking about here is irrevocable trust that you're using for some sort of purpose. And the purpose might be just because you don't trust. You use trust because you don't trust.

You want to make sure that your kids are getting money in a certain way, whether you're here or not. If you're here, you can control it when they get the money. But if you're not here, well, the trust can control when they get the money. Maybe your trust says they have to graduate from college before they get their inheritance or they don't get their inheritance until they're 40 or if they're doing drugs, they can't have the inheritance or whatever. That's why you have a trust. A trust can control that sort of a thing.

But there's a real benefit to putting money into a trust, an irrevocable trust, relatively early in your life. And the benefit is that it is then outside your estate. And so, estate taxes will not apply to the growth on that asset in the irrevocable trust. That's the benefit.

And so, lots of people that are successful or in a state with a very low estate tax exemption or in a period of time when it looks like the estate tax exemption, the federal estate tax exemption is going to be reduced dramatically, they tend to move money into these sorts of entities. They tend to give money away. Whether they're giving it to charity or giving it to their heirs or giving it indirectly to their heirs or a charity or whatever via an irrevocable trust so they can reduce their potential future estate taxes because estate taxes are huge. While they don't apply to the vast majority of people, including the vast majority of white coat investors, the tax rate's really high. After the first million, it's like 40%. Huge. And there might be a state estate tax or a state inheritance tax in addition to that.

And so you could lose a lot of money. If you leave your kids $40 million above and beyond any estate tax exemption, 40% of it might go away. So whatever that works out to be, $16 million, $18 million in taxes. Whereas if you had just gotten those assets out of your estate early on and gotten them into an irrevocable trust, you might not have to pay any of that.

Now, there's usually a trade-off. Because those irrevocable trusts don't get a step up in basis of death. So, they'll probably end up paying more in income tax in order to save that estate tax money. But if you've got some estate tax reasons you don't trust and you want money out of your estate, you might want to use an irrevocable trust.

Now, Ken, your question was a question about my finances personally. And what a lot of White Coat investors out there need to realize is my finances are not your finances. The White Coat Investor has been a very successful business. It's basically owned just by Katie and I, and it makes lots of money and it's worth a lot of money. And we've been very financially successful. We actually are expecting to have an estate tax problem.

And so a few years ago, when it looked like that estate tax exemption was going to go down after President Biden got into office, we decided we're going to move some of our assets into an irrevocable trust. And the type we chose to use was a Spousal Lifetime Access Trust or a SLAT.

And this is a cool trick. It's a little bit like an asset protection trust in that the beneficiary of the trust is Katie. I'm the grantor, she's the beneficiary. I put money in trust for her, but it's owned by the trust, technically. And so, it gives us some asset protection benefits. If somebody just sued me. Well, the assets in the trust aren't mine, so they can't have those assets.

We moved a majority of White Coat Investors as well as our brokerage account into a trust because we expected to continue to increase in value and we didn't want to pay estate taxes on that increase in value.

And so, that's why we have the trust. Now, it's mostly estate tax purposes. It's also just for estate planning purposes. It wasn't primarily for asset protection purposes, but we expect some asset protection benefits from that. But we're really not getting tax benefits beyond those estate tax benefits. It's an intentionally defective grantor trust, so we're still paying all the taxes on that brokerage account every year. All the dividends it pays out, all the capital gains it has paid out, but we still want to tax loss harvested to reduce our tax bill each year.

And like I said, our heirs aren't going to get a step up in basis on all those assets inside that trust. So in some ways, it's going to increase our income taxes, not decrease them, but in exchange for saving a whole lot of money on estate taxes.

That is why, long story short, we have our brokerage account inside irrevocable trust. Do you need to do that? Probably not. Most doctors are retiring with 2 or 4 or 6 or 8 million or something like that. That's nowhere near the estate tax exemption. The estate tax exemption right now is $15 million per spouse. $30 million total. And since President Trump came into power, they passed a big law in the middle of 2025, hopefully you didn't miss it, but basically made that permanent, so it didn't reverse in 2026 like the original legislation said it was going to, and also indexed it to inflation.

Now, Congress can change that anytime they want. Obviously the president, whoever's in office then, can sign off on it. That estate tax exemption can go down, but right now it's $30 million. That's a lot of money. Most White Coat Investors are not going to have $30 million when they die. And if they are, they can probably just give away some, but as they go along and not have too much of an issue staying under that estate tax exemption. So they don't need an irrevocable trust for the purpose we have an irrevocable trust for, which is to reduce estate taxes. I hope that makes sense.

Okay, let's take another question. I think this is a personal question as well. I don't know why you guys find my finances so interesting. I think yours are far more interesting than mine are.

CHANGING ASSET ALLOCATION AS YOU AGE

Speaker:
Hi Jim, thanks for everything you do. I was wondering if you're changing your asset allocation in your retirement portfolio as you age. For me, for years, I've been at pretty much 10% bonds and 90% equity in real estate, physically 60% in US stock, 20% in international stocks and another 10% in REITs. Now that I'm just over 50 years old, I was thinking about possibly increasing my exposure to bonds. I’m wondering what your thoughts are.

Dr. Jim Dahle:
You're asking multiple questions here. The question is, what should you do? What do most people do? And again, what am I doing? So, let's try to address all those questions.

First of all, asset allocation is your mix of investments. It's how much money you have in US stocks and how much in international stocks and how much in nominal bonds and how much in inflation index bonds and how much in real estate, how much in Bitcoin and how much in whatever. It's your mix of investments. That's what asset allocation is.

And as a general rule, when you're young and have lots of your earning potential ahead of you, you can invest pretty aggressively because even if you have a terrible investment return, you still haven't earned most of the money you're going to invest during your life. And so, you can take lots of risk when you're young.

And then as people get older, as they start getting closer to retirement or once they are retired, they tend to take less risk. Their asset allocation becomes less risky. More money's in cash, more money's in bonds. Maybe they're not invested in as risky of stocks or real estate. Maybe they pay off the real estate properties so they're not so leveraged. You take less risk as you get older because the consequences of that risk become bigger. You don't have as much money left to earn.

And especially around the time of retirement, you have this sequence of returns risk where despite having adequate average returns during retirement, you run out of money because you had the crummy returns first.

And so, most people do reduce the risk they take as they go along. The classic guidelines or rules of thumb or you reduce it by 1% a year, your stock to bond ratio by 1% a year. The amount you're supposed to have in stocks is 100 or 120 minus your age. 100 minus your age, if you're 40, means you have 60% in stocks, 40% in bonds. If you're 60, you have 40% in stocks, 60% in bonds. Those are kind of the rules of thumb that people use out there.

But this is probably important enough that you shouldn't just use a rule of thumb. You actually should consider your need to take risk to reach your goals, your desire to take risk. Would additional money be particularly useful to you? Do you have a high marginal utility on those additional earnings? And your ability to take risk, which generally decreases as you go throughout life. But this also affects your risk tolerance. Are you likely to panic sell if your stocks drop 50% this fall. You got to take that into consideration as you set your asset allocation.

I would say most people, particularly in the five years before they retire and the five years afterward, typically do reduce the risk on their portfolio. If they were only 10% bonds, maybe they go to 30% bonds or 40% bonds. Or maybe they set aside three years worth of withdrawals in cash. Even if stocks and bonds are both down, just like they were in 2022, you don't have to tap either one of them. You can just spend from the cash and then maybe refill it in a couple of years when markets have recovered a little bit. And so, typically people do reduce risk.

What should you do? I don't know what you should do. You didn't talk much about your need to take risk, your ability to take risk, nor your desire to take risk. I'm not really sure what you should do, but you can certainly bounce this question off some of our online communities, the Facebook group, the White Coat Investor Forum, the subreddit, the Financially Empowered Women's group. You can ask this sort of a question and get some feedback on your asset allocation plan.

I do recommend that people outline this in the written financial plan. When they take our Fire Your Financial Advisor online flagship course, there's a discussion in there about how you're going to reduce your risk as you go throughout your career. And I do suggest you write something down there.

Okay, what have we done? Well, we've kept ours more or less the same. From the time we had basically nothing until we have more money than we're ever going to spend. We've kept our asset allocation more or less the same. I think we were 75% stocks and real estate and 25% bonds. Initially, we made a change a decade ago or so where we basically went 60% stocks, 20% bonds, 20% real estate, and we've just held it there.

And the reason why is because that need, ability, and desire to take risk. We have less need to take risk, yes, but we got way more ability to take risk than we used to have. And I've never been able to calculate exactly how those two offset each other. We basically just kept it the same and that's worked out just fine for us. What we've discovered in 2008 and 2018 and 2020 and 2022 is that this is about right for us. 60% of our money in stocks, we can handle that, even a big nasty downturn and be just fine with it.

That's where we've kept our risk. We've got 20% in bonds, you've got 10%. Maybe you want to go to 20%. I don't know, it's a very individual question, but honestly, the most important thing is sticking with what you choose rather than what exactly you choose. Sticking with your plan matters way more than what your plan is. This assumes you have some sort of a reasonable plan, sounds like you do, but sticking with it matters a lot.

I hope that discussion is helpful. I'm sorry there's not a right answer where I could just tell you this is exactly how you should do it. If you want somebody to do that, you can hire a financial advisor. We've got recommended financial advisors. They'll tell you exactly what to do, but there's a whole wide range of reasonable, you just need to pick something in there and then follow your plan.

Thanks everybody out there for what you do. If you're coming home from work and you had a rough shift or you had a death today or a patient or a family member chewed you out or you're just feeling a little bit crispy right now, I'm sorry, but it's appreciated what you do. If nobody told you thanks today, let me be the first.

Okay, let's talk a little bit about some asset allocation changes, it sounds like that Jason is considering.

SWITCHING FROM BOND FUNDS TO ALL STOCKS

Jason:
Hey, Dr. Dahle, I have a question about switching from bond funds to all stocks in my qualified retirement accounts. I have a bearable annuity that just matured and followed the S&P 500, so it's done extremely well. I just re-upped, and it will mature around the time that I am retiring, and I plan to convert it into a SPIA with a date-certain payout from the time I retire until I reach 70 and plan to start collecting Social Security.

Because I have this long time horizon, and I don't plan on taking any RMDs until that time, and I don't plan on taking anything out of the Roth and leave that for my kids, I'm thinking I should switch out of bonds in those retirement accounts and go into all equities. I appreciate your thoughts on that, and I'm also going to stay heavily in equities in my brokerage account since I don't have to worry about sequence of returns risk, I believe, since I'll be living on the annuity between retirement and age 70 when I start taking Social Security. I look forward to your thoughts. Thank you.

Dr. Jim Dahle:
Okay, I think that question just went over the heads of a whole bunch of people. So let me define some of the terms that he's talking about here. He's talking about an annuity. And he's been investing inside of a variable annuity for a number of years, it sounds like, and it sounds like he's going to continue to invest that money inside a variable annuity and eventually annuitize that money.

Let's talk a little bit about what an annuity is. An annuity, think of it as an insurance product used for retirement. And the classic type of annuity is a single premium immediate annuity, a lifetime single premium immediate annuity. This is the classic type. And basically what you're buying is you're going to an insurance company, you're giving them a lump sum of money, and you're buying a pension. So you're telling them here is $100,000, and the insurance company says, “Okay, I'm going to give you $500 a month every month from now until the day you die, whether you die next month or whether you die in 40 years, I'm going to give you $500 a month every month until you die.” And that's a single premium immediate annuity.

Now, the insurance companies have realized that if we sell these with lots of bells and whistles and lots of different variations, we can probably sell more of these. So they do, they come with all kinds of variations, one of which is a set payout.

Because people who buy immediate annuities, these lifetime immediate annuities, are worried that they're going to die next month. They're going to put $100,000 in there, the insurance company is going to give them $500, and they're going to lose $99,000 plus dollars because they made that decision. Instead, they gave up a little bit of that payout, and now maybe instead of getting $500 a month, they get $450. But the insurance company guarantees that we'll pay for at least 10 years. If it's not paying it to you, it'll pay it to your heirs. And people go, “Oh, and now I don't feel so bad about the possibility of losing it.”

Well, it's all the same to the insurance company. It costs them the same once you multiply it out by a large number of people. Either way, it works out the same for them. They don't care. So if that helps them sell more annuities, they're going to sell more annuities that way. No big deal.

This particular White Coat Investor has decided to deal with the sequence of returns risk by using this annuity. It's an immediate annuity in that it pays out immediately once you annuitize it, but it pays out for a period certain amount of time. He didn't say the time period, but maybe it's 10 years. So he's set it up so that at age 65 or age 70 or whatever, it's going to start paying out money for 10 years, and then it's going to be done.

So, it's just a method of spending your money more than anything else. And so that's great. For him, it's one way you can deal with sequence of returns risk. I don't think it's a very common way to deal with it. I think it's probably easier to use just like a TIPS ladder, using treasury inflation protected securities, just buy 10 of those, one to mature each of those first 10 years. If you're worried about sequence of returns risk, you could do it with that.

But this is not an unreasonable way to deal with it. It will certainly function that way. This particular questioner is also relatively wealthy. This is somebody who's put a bunch of money into retirement accounts and doesn't think he's even going to need it. He sounds like he's just going to live off his taxable brokerage account, which is fine. I'm not even sure he needs all of that.

When people have so much money that their burn rate is very low, they're only spending 1% or 2% of their portfolio instead of the classic 4%, I encourage them to step back for a minute and say, “Well, maybe there's something else I can spend money on that will make me happier.” And that's great if you want to do that. Or maybe you ought to start giving more of it away. Maybe you ought to spend a couple of hundred thousand dollars a year, and maybe you should also give away a couple of hundred thousand dollars a year. Maybe that'll get you up to your 4%. So something to think about there.

But if you're 100% sure or close enough to 100% that you're not going to use the money in your retirement accounts other than what you have to take out as required minimum distributions. And even those you give to charity up to a little over $100,000 a year as a qualified charitable distribution. If you're sure you're not going to need it, it's going to your kids, then you can invest with a different time horizon.

Now the need, ability, and desire to take risk has changed. So maybe you don't need to manage that portfolio as a 70% stock and 30% bond portfolio. Maybe now you can manage it as a 100% stock portfolio. Because it's not going to you, it's going to your heirs, and maybe your heirs are only 22 years old. And so, they can afford to take on a whole bunch more risk. And that's totally reasonable to do.

What I would encourage you to do though, is portion out your accounts and say this money is going to inheritance. This money is what I'm going to live on and actually have separate asset allocations for them. And maybe you're managing your money with a 60/40 portfolio. And maybe you're managing this money that's going to go to charity or it's going to go to your heirs or whatever, with a 100% stock portfolio. I think that's totally reasonable. I wouldn't feel like you got to blend it all together. Once the money is being used for different purposes, I would use a different asset allocation.

I hope that's helpful and helps answer your question. I'm pretty sure I saw this question get discussed on the White Coat Investor Forum a few weeks ago as well. And I suspect Jason, that all your questions have already been answered, but if not, hopefully this discussion was helpful.

SPONSOR

Dr. Jim Dahle:
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That's the end of our podcast. We got into the weeds today. I apologize if it went over people's heads. We'll try to remember to discuss basics on this podcast as well. But until then, keep your head up and your shoulders back. You've got this, we're here to help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
Welcome back to the Milestones to Millionaire podcast.

This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or to get this critical insurance in place, you can contact Bob by emailing info@protuity.com or by calling (973) 771-9100 or just by going to www.whitecoatinvestor.com/protuity.

All right, for those of you who would just like to save a few bucks on some of the stuff you're buying, check out our discounts. We have discounts for doctors and all kinds of people, all kinds of things, cell phone plans, travel, whatever. Go to whitecoatinvestor.com/wizardperks. Wizard perks, just like it sounds, and you'll be amazed how much money you can save on stuff you buy regularly.

I think some of the biggest savings we're seeing out there is on cell phone plans and travel, but there's all kinds of other things that you may find discounts on. So if you would like to pay a little less for some of the stuff you're buying anyway and use that money to buy other stuff or to go on a cool trip or to pay off loans or to advance your way toward financial independence, this is a great way to do it.

All right, let's get our interviewee on the line. I think you're going to enjoy this episode.

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is going to remain anonymous, but introduce yourself a little bit to our audience. Tell us what you do for a living and how far you are at a training, what part of the country you're in.

Speaker:
Okay, I am currently a palliative care fellow, but previously I was a hospitalist for 15 years. We're in the Southwest and I'm about 16, 17 years out of training.

Dr. Jim Dahle:
Okay, very cool. And tell us what milestones we're celebrating today with you.

Speaker:
There's a couple of milestones. The first one is a million in investment accounts, which only led me to my second one is I went back to be a palliative care fellow after I had enough investments accounts, hopefully trying to build a better life. I made some mistakes. Initially, I had a whole life policy. I exchanged it into a variable annuity and I just realized that my variable annuity is up to basis. So now I can surrender that policy and bring it over into a brokerage account.

Dr. Jim Dahle:
Very cool. Very cool. So three milestones, really. And you are we, you're married currently. Tell us about the family situation.

Speaker:
Married to my wife for about 17 years. She is a second generation immigrant, very scarcity mindset. I did not discover the White Coat Investor truly until 2018. That's when I had my financial awakening. But because of her scarcity mindset being very debt adverse, she had us following some of the White Coat Investor principles even before I knew what the White Coat Investor was.

Dr. Jim Dahle:
Very cool. So, tell us what you drove as a new attending hospitalist.

Speaker:
A Scion. We did not buy new cars. Our house was about 1.5 times my initial salary. And we had a lot of school loans that we really were throwing all of our money at first. And that's why I say her being so debt adverse helped us initially because she was adamant not buying the doctor house, not buying new cars until we had all of our school debt out of the way.

Dr. Jim Dahle:
Yeah, very cool. So you came out of training the first time in what? 2010? Something like that?

Speaker:
2009.

Dr. Jim Dahle:
Okay. And approximately what was your net worth then?

Speaker:
Negative $350,000.

Dr. Jim Dahle:
Negative $350,000. You had $350,000 in student loans and you had nothing else?

Speaker:
Nothing else.

Dr. Jim Dahle:
Yeah. Okay. And you paid off the student loans when? By about 2018? So over the course of the next eight years or so?

Speaker:
Yeah, it took about nine years to pay it all off. My wife had $90,000 in school loans too. So her interest rate was about 8%. So we tackled hers in about five years and then sort of did a snowball method where we were paying for her. We just started paying for mine and then got it done in about nine-ish years.

Dr. Jim Dahle:
Okay. Was she working for pay at that point? Or what does she do?

Speaker:
Well, she's a PA. She was initially a dietician when we first met. She went back to PA school. That's where the bulk of her student loans were from. And once we had children, we got together. And a little background for myself. My dad really wasn't around and having a parent around was something very important for me, for my kids. And so we talked it over. She agreed to really drop back to PRN and stay home with the kids mainly.

So she's been contributing a little bit. It's been one or two shifts a month. Her goal is always to try to make as much as private school tuition costs. So she's been helping out a little bit with that.

Dr. Jim Dahle:
And you came in contact with WCI about eight years ago. Do you remember how or why?

Speaker:
Matter of fact, yes. My sister-in-law is a real estate agent. And she mentioned, I swear, she mentioned 2017, a year before I actually listened to the White Coat Investor. And I had the initial reaction like, “Man, I don't know anything about this. I don't want to know anything about it.” And I just put my head in the sand.

But once I started listening to your podcast, that's what really got me started. I guess I'm really a podcast listener. I've listened to all of your podcasts and that's what really got me going. Then I checked out the website. The first article I read was Hundred Portfolios Better Than Yours. And then it just snowballed after that, slowly every month, every year you get more and more literate as time goes on.

Dr. Jim Dahle:
At some point you made a decision to go back to fellowship.

Speaker:
Yes.

Dr. Jim Dahle:
Tell us about that decision and why and what's that going to mean for your family financially?

Speaker:
I realized after 10 years of being a hospitalist, my time as a hospitalist was running out and I had to do something. And so, about five years, I was looking for different ways. I started working hospice on the side and it was way more fulfilling than I ever thought it could be. It's just hospice couldn't pay the bills, pay the loans and save for retirement. Once I realized we had a million dollars in investable assets, instead of buying my Tesla, I wanted to go back to fellowship and try to get a better life for me and my kids.

Dr. Jim Dahle:
You want to do what you want to do for the rest of your career?

Speaker:
Yes. Yes.

Dr. Jim Dahle:
How big of a pay cut do you think you're looking at going from being a hospitalist to being a palliative care doctor?

Speaker:
Well, it's changed recently. After COVID, the hospitalist group here, and I'm doing fellowship in the same place that I was a hospitalist, they're getting raises every year. So initially I was looking at maybe a 10 to 15% pay cut, but now that gap has gotten even larger. It's about 20%.

But the why motivated me to learn about financial independence because getting my freedom back so that I have more autonomy over my time so I can spend it with my wife and kids, because there's definitely one thing I've learned, the more love and time I pour into my family, I get that back tenfold.

And unfortunately, my hobbies don't generate money. I like being coached, not just doctor. And I want more time to do that while I have the kids are young, because I know once this time passes, I'll never get it back.

Dr. Jim Dahle:
You mentioned that your wife in particular grew up with a little bit of a scarcity mindset. How has that changed now that the two of you are millionaires?

Speaker:
It hasn't changed. She's going to have a spending problem, like you say. It's really hard for her to let go of the dollar. She doesn't buy expensive handbags. She doesn't spend a bunch on clothes. She balances our checkbook on a daily basis, and she cares where every cent is. I'm more the big picture guy. She's definitely into details and makes sure that every penny is used very wisely, which has really helped us over this whole financial independence journey.

Dr. Jim Dahle:
Now, somebody out there is going, “Well, they say they pinch pennies, but their kids are in private school. Tell us about that decision and why you decided that.

Speaker:
Well, we're in a place where the public schools are not great. My wife and I both, we wouldn't feel great about sending our kids to public school. Private school is a much better education, better learning environment, and preparing them for college much more so than, say, public school.

Dr. Jim Dahle:
Now, you mentioned you'd made some mistakes, and you mentioned you bought a whole life policy once. It sounds like you're just about done with. You had a big enough loss that it was worth exchanging into a low-cost variable annuity and letting it grow back to basis tax-free, it sounds like. Tell us a little bit about that and any other “mistakes” you feel like you made.

Speaker:
Okay. The whole life, I was referred to it by one of the other residents that I got my disability through them. I got my whole life through them. It wasn't until after I had my financial awakening that I realized that was just not something I wanted to keep. Going back to fellowship and taking a huge pay cut, only making $6,000 to $8,000 this year, I couldn't see myself paying those premiums whenever. Now, we had to tighten up our belts a little bit.

That really made me exchange it even before I started fellowship because I knew this pay cut was coming. Some of the other mistakes I've made is mainly with my loans. Whenever I finished school in 2006, I had $350,000 in debt. I put everything into forbearance. During residency, I did not make a payment, which now I realize was a huge mistake.

In 2009, after residency, I remember the highest my balance ever got was $418,000. It really ballooned a lot over those three years, which was a huge mistake. I was able to pay everything off, but if I could go back, man, I wouldn't do that over again.

Dr. Jim Dahle:
Very cool. Well, congratulations on your success. It's pretty awesome what you've accomplished. Obviously, the next thing you have in front of you is completing this fellowship, but financially speaking, what's your next milestone you're going to be working on?

Speaker:
My next milestone is I don't think I have another 20 years of full-time work in me. I've got a medical issue that is really shooting up my risk of cancer, especially as I get into my later years. This Palliative Care Fellowship makes you realize more than anything, tomorrow is not promised. Enjoy the journey. My plan is to try to get part-time as soon as possible and just work part-time forever. I can see myself working part-time hospice until I'm no longer able to work.

Dr. Jim Dahle:
Well, I like part-time work so much that I have two part-time jobs. I'm a big fan. I'm right there with you. Very cool. Okay, there's somebody out there like you that maybe they're a hospitalist staring at $400,000 plus in student loans. Maybe there's somebody that's like, I want to do a different specialty. I want to go back to fellowship or I want to do a different residency. What advice do you have for them?

Speaker:
The advice is very easy. Following the White Coat Investor philosophy, the bulkhead philosophy, live below your means, use extra to pay down your debt. We didn't live completely like a resident. We lived better than a resident. We survived off $120,000 and we had a really good life and used the rest to pay down debt.

It didn't feel like we sacrificed a whole lot. We did sacrifice not buying the doctor house and having the doctor cars, but we still went on vacations. We still had a really nice life on more than a resident. We used that to really kickstart off everything. The compounding interest is just amazing when that really starts working in your favor. It's doing more than the heavy lifting I'm putting into the retirement accounts for sure.

Dr. Jim Dahle:
Very cool. Well, congratulations on your success. Thank you so much for being willing to come on the Milestones podcast to share it with the rest of the White Coat Investors.

Speaker:
Thank you, Dr. Dahle. With you, I wouldn't even be in this fellowship. I wouldn't have my investment assets and I wouldn't be looking at coming up to part-time work here soon. Thank you so much for what you've done for this community. I really appreciate it.

Dr. Jim Dahle:
It's our pleasure.

All right. I hope that was fun. A lot of people ask us, we want to hear more from lower paid specialties. We don't want to hear from the decamillionaires, et cetera. Well, here we go. Somebody that's been out there in practice for 16 years, now a million bucks in investable assets. He can do it. You can do it. Yeah. He didn't make any student loan payments during residency. Maybe he's not in the ideal specialty for him to do for 30 years. Maybe he bought a whole life insurance policy he didn't really mean or wish he hadn't bought. We all make mistakes. But here he is, a millionaire at mid-career. He can do it. You can do it.

FINANCIAL BOOT CAMP: RETIREMENT ACCOUNTS

Dr. Jim Dahle:
There are two main types of retirement accounts. They're defined contribution accounts and defined benefit accounts. A defined contribution account is your typical 401(k). You put money in and depending on how well your investments do, that's how much money is in the account later for you to spend.

The other type of account is a defined benefit plan, defined benefit account, defined benefit retirement plan, whatever you want to call it. But that is a plan where the employer is taking the risk rather than you taking the risk of how well the investments do.

The employer has promised you rather than a defined contribution into the account, they have promised you a defined benefit from the account. So, if the investments do really well, the employer gets to keep the extra. If the investments do not do really well, the employer has to make up the difference.

This is a classic pension. You go work for the employer for 30 years or 20 years or whatever it might be, and they pay you a pension for the rest of your life. The nice thing about these pensions is they tend to have an inflation adjustment aspect to them. Not always, but often, which is difficult to get these days. You can't necessarily buy that from an insurance company. You can get it from social security, especially if you delay your social security to age 70, then you can get a comparable inflation index benefit. But typically, you can only get that from a pension.

Sometimes the pension also includes some sort of employer-provided healthcare benefit as well, some type of health insurance that maybe is an addition to your Medicare or instead of Medicare or something like that. But that's what we're talking about when we're talking about a pension.

The downside to a pension is it's not your money. You don't get to decide what to do with it. For example, if it was your 401(k), you could just take all the money out today and buy a sailboat if you want to. A pension is not that flexible.

The other big risk with a pension is that something happens to the employer. And if that happens, your pension could go away. Now, there are some semi-government entities that often is just a bunch of different pension companies banding together, insurance companies banding together to guarantee these sorts of things, but they usually only guarantee a certain amount. So if your employer goes out of business, you're probably still losing something.

And that becomes an issue when you're given the option to just take your pension as a lump sum and have the money that you now control. It's no longer subject to your employer going bankrupt versus the guarantees provided by the pension or where the company is taking the risk on the investments. That can be a challenging decision for sure.

The problem with pensions is they're mostly not available anymore. It used to be that you go work for a company, a corporation, you put in your time and you qualify for your pension. It was wonderful. And lots of people had pensions. They might've had some savings in addition to them, but they mostly lived on their pension and their social security. This is what my father had. My father worked for the state of Alaska for a long time and qualified for a pension. And literally that's what they live off of. They live off the pension, the social security. They don't even really touch their nest egg.

That's not the case for most workers today. Their companies don't offer pensions. Typical places you can get a pension is usually a government employer. It might be the military. It might be another government entity or a state entity or something like that. There are still some companies that offer them. But for the most part, you really don't see them as often as you used to. They really are disappearing.

And the main reason why is because companies didn't want to have that risk on their books. And they thought they could get away with putting less toward the retirement of their employees. Because the truth is most employees don't care nearly as much about retirement benefits as they should. They will often prioritize getting a higher salary rather than getting a higher retirement benefit. And so, that's the main reason they're disappearing.

Every pension is different. And you have to read how your pension actually is calculated to understand it. But maybe a typical way it's done is they look at your last three years or so that you're working for that employer and look at what you were earned as salary and give you 50% of the average of what you earned those three years as your pension.

So, if you were earning $100,000 a year on average those last three years and it paid 50% of that, you'd get a pension of $50,000 per year or just over $4,000 per month as a pension and probably indexed to inflation going up each year with those payments.

Now they can arrange it any way they like. They can start paying you a pension after five years. They can make you wait 20. They can make you wait 30, whatever. That's up to them and how they define that pension. And usually the idea is to put some sort of golden handcuffs on the employees. They don't quit after a year. They don't quit after six years. They'll stay for their 15 or 20 or 30 years with the same employer because they want to qualify for that pension.

When you qualify for it, that's called being vested in the pension. So vesting means you now get the pension. If you keep working for a few years, maybe the pension amount goes up, but until you hit that floor, minimum number of years to qualify to get it, you're not yet vested.

And if you leave before then, you may not get the pension at all, or you may get some lower amount of it, but they're typically not portable unless you're changing jobs with the same employer. If you go from one employer that offers a pension to another employer that offers a pension, you're probably not taking those years with you. You're probably starting all over and accumulating your 10 or 20 or 30 years to get the pension.

Now, how should you think about this if you have a pension in your overall financial plan? A lot of people like to somehow attach a value to it and use that as the bond portion of their portfolio. I would recommend against doing that. I would simply take all your guaranteed sources of income and subtract that total amount from the amount you need to spend.

For example, if you figure you need to spend $120,000 a year during retirement, you've got pensions and social security that's going to pay a total of $60,000 a year. Well, now you only need $60,000 from your portfolio. That's the way I would think about it rather than trying to somehow incorporate the pension into your portfolio.

But absolutely having a pension does affect decisions like when you claim social security or whether you do Roth conversions, et cetera. Because just like social security, that pension can fill up some of the lower brackets in taxable income and make it so your required minimum distributions from tax deferred retirement accounts will all be taken in higher brackets.

So if you qualify for a pension, you may be more likely to make Roth contributions throughout your career. You may be more likely to do Roth conversions. You may wish to delay your social security, which is generally a good idea anyway, at least for the higher earner, because that's one of the few inflation index guaranteed sources of income out there. But maybe if you have such a huge pension that you don't need social security as much, maybe you'll decide to do something different with your social security claiming decision.

Now, I mentioned earlier that a lot of people are offered a lump sum by the employer. You can either have this pension or you can have $600,000 right now. And that's a difficult decision. Maybe the best way to evaluate it, though, is to go to an annuity company and price out what it would cost to buy your pension.

Now, that's hard to do if the pension offers an inflation adjustment, because most of those single premium immediate annuities you can buy from insurance company do not have any sort of inflation protection. They're not indexed to inflation. So that can make it a little bit hard to compare apples to apples.

But basically, if you go there and you see that buying your pension would cost you $800,000 and they're only offering you $600,000 instead of your pension, well, that would suggest that you should keep the pension instead. You're not getting a good deal on what they're offering you as a lump sum for the pension. That's basically the way to think about it, how to calculate whether you should take that benefit or whether you should take the lump sum.

As a general rule, although I don't like the risk aspect that something could happen to your employer, I like the aspect of a pension for a couple of reasons. One, it puts a floor underneath your income like Social Security does. And that's nice to know in case something terrible happens with your investments, that at least you'll have enough money to put food on the table and keep a roof over your head in retirement.

That guarantee has value. Even if you think you might be able to out-invest the rate the pension offers, you may not be able to do that once you adjust your investments for risk. Because when we're talking about guaranteed income, you really need to be comparing to things like CDs and treasury bonds and those sorts of things, not what you think you're going to earn from your investment portfolio of properties and stock index funds and that sort of thing where the outcome is not nearly as guaranteed.

The other thing to think about is that people who buy annuities, meaning some people don't pay them until the day they die. And presumably, this applies to pensioneers as well. They live longer. I don't know if they just want to stick it to the man, so the employer or the insurance company has got to pay you as long as possible.

But data actually suggests that the people who have these do actually live longer. And that might be that the people who go for them are just tend to be healthier people in general who are likely to live a long time and so see more value in a guaranteed payout until the day they die. But it is true. So you ought to keep that in mind as you consider whether or not to take these sorts of things. I hope that's helpful and helps you understand how pensions work.

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All right, that's a wrap for this episode. If you'd like to be on this podcast, we'd love to have you. I don't care what the milestone is. You can be a multi-decamillionaire. You can be back to broke. We'll celebrate it with you. And in fact, lately, people seem to be coming up with all kinds of unique milestones like this one, going back to fellowship. But if you want to apply, go to whitecoatinvestor.com/milestones.

All right, keep your head up, shoulders back. We'll see you next time on the podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Many high-income professionals wonder if they should rent their home or buy their home. There are a lot of factors that go into this question, but the main one is how long you're going to be in the home. As a rule of thumb, if you're going to be there five or more years, it generally makes sense to buy, and if you're going to be there less than that length of time, it generally makes sense to rent. The reason for that is that there are a lot of costs associated with buying and selling a home, and the longer you're in the home, the longer the period of time over which you can spread those costs out.

Those transaction costs are a lot higher than most people who have never owned a home think. It's pretty typical that you spend something like 5% of the value of the home buying it. I'm not talking about the down payment. I'm talking about expenses. That might be paying a realtor, paying an attorney, closing costs for the loan, fees, and those sorts of things. Flying out to look at the home. You recognize as soon as you move in that you've got to do some renovations just to get it up to speed. Maybe you've got to buy a lawnmower to take care of it because you've never done that before, and you've got to buy snow shovels and a bunch of fertilizer, those sorts of things. When you move into a home, those expenses add up. It's not insignificant, and many people who've never done it are shocked that it's a really expensive thing to do.

It's even worse on the back end. It's not unusual to pay 6% to the realtors who sell the home. Plus, it might sit vacant for a few months, and you might have to fix it up just to get it sold. Of course, you've got some other closing costs when you come to the table to actually get rid of the home. Altogether, it's probably 15% of the value of the home. If it's a $500,000 home, we're talking about $75,000 round trip to buy it and to sell it. You need that home, for the most part, to appreciate more than that 15%, more than that $75,000, while you're in it in order to come out ahead.

When I was a medical student, we bought a condo for $80,000. We sold it four years later for $83,000, and you would think we made money. We didn't make money because we didn't make more than the transaction costs cost us over that time period of owning that home for four years. Of course, there are periods of time when homes appreciate very rapidly, and you can come out ahead owning a home for only a year and a half. There are other times when homes are not appreciating at all. I have another house that I bought in 2006 that we sold for a loss in 2015, nine years later. There's not any sort of guarantee that you can even make money, even if you hold it for five years. You're just more likely to. I figure you're probably going to make money about 50% of the time when you own it for five years, probably a third of the time when you own it for three years.

The odds are against you for buying a house for most medical residencies. There are all kinds of other reasons why it's probably not a great idea for residents to buy a home. Certainly, far more residents than do should consider renting during residency. The nice thing about rent is it tells you the maximum you're going to pay for housing, whereas a mortgage payment only tells you the minimum you're going to pay for housing because there are all kinds of other expenses associated with owning a home.

It is not as simple as saying, “Oh, the mortgage is less than the rent would be, so I'll just buy it.” That's not how it works. There's far more that goes into home ownership than just paying a mortgage. Not only are you paying the principal and interest on the mortgage, but you've got to pay property taxes, you have to insure the property, and you have to maintain the property.

Somebody's got to mow the lawn. Maybe you have to pay somebody else to do that or buy the equipment yourself. Somebody's got to take care of the driveway. If you live someplace where it snows, there are just a lot of things that happen in home ownership. Water heaters only last so long. Ovens only last so long. Microwaves only last so long. Carpet only lasts so long. Shingles and paint only last so long. Those are significant expenses. So it's not just about the mortgage payment versus the rent payment, and if you think that simplistically, you're going to make a lot of mistakes when it comes to housing in general.

I'm a big fan of ownership. I want doctors to own their homes. I want them to own investments where they're equity owners, such as stocks and real estate. I want them to own their practices and their jobs because they have more control over them. They're less likely to be burned out when they control their work environment. I think ownership is a good thing, but there are times when it just doesn't make sense to own your home. Typically, those times are when you're not going to be in the home very long. Usually, when you expect to be there long term, it makes sense to buy.

Now, you might not want to buy immediately when you move to a new town. You don't know the new town. You don't know that you're going to like the job. You don't know the job is going to like you. You're not exactly sure which areas you want to live in. You don't know where the schools are better than the other ones and which neighborhoods are better than the others. It can make sense when you move to a new town to rent for six or 12 months before you buy.

We did that when we moved to Utah and have no regrets about it whatsoever. We were able to be very opportunistic buyers because we had no timeline in which we had to buy a home. We could make offers that were lowball offers and wait and see how desperate the sellers were to sell their home. We ended up getting a very good deal on the home we've been in for the last decade, almost two decades. It can make sense not to buy immediately. Just be aware of that.

Now, of course, that means you've got to move twice. You've got to move now, and you've got to move again in a year when you actually buy the home. But it's probably worth it despite the additional hassle and additional expense. The home may appreciate in that time period, but you're also probably going to become significantly wealthier if you're like most doctors who become wealthier every year as they go throughout their lives. You may not buy the same home a year later that you would have bought immediately upon arriving in that city because you may realize, “Oh, I can afford a bigger, nicer home that I want more than the one I would have bought a year ago.” There are lots of benefits to doing that.

There are also places in this country where the cost of renting versus owning is just so far out of whack that you may still want to rent. I think about the percentage of the value of the home that it costs to rent it in a place like San Francisco, and I can understand why people might choose to be long-term renters there. Even people who own real estate might buy rental real estate in Massachusetts or Missouri or Oklahoma and actually rent their place in San Francisco, and that can make sense.

Just keep in mind that there are some times and some places where the prices of homes have been bid up so high that they really aren't great investments. People who are buying them or holding them as investments are counting on appreciation rates that might not be all that realistic going forward.

This can be a complicated question, but most of the time it boils down to just how long you're going to be in the home. If you're going to be there five-plus years, you probably want to be buying. If you're going to be there for a year, you probably don't want to be buying. You can take a gamble if you think you're going to be there three, four, or five years, but recognize that the majority of the time you're going to lose money in those situations.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.