Jason interviews Dr. Dahle and discusses the common mistakes high income earners make with their money.
James M. Dahle, MD is a practicing emergency physician and the founder of The White Coat Investor, the most widely read physician-specific personal finance and investing website in the world with over 1.2 Million page views a month. He is also a podcaster, runs a Youtube channel, and the published author of two financial books aimed at high income professionals. He speaks nationwide and started the Physician Wellness and Financial Literacy conference. He is married with four children and lives in Utah where he enjoys climbing, canyoneering, skiing, boating, ice hockey, and mountain biking.
To learn more visit:www.whitecoatinvestor.com
Below is the full transcript:
Announcer: Welcome back America to Sound Retirement Radio where we bring you content concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. And now here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. I’m so glad to have you tuning in. It’s my good fortune to start this show with Emilia Bernal. Yeah, you’re welcome.
Emilia: Yeah, thank you, Jason. It’s great to be here.
Jason: We’re doing things a little bit different because we have a guest coming on today, but I think everybody just misses it when you’re not here to share something funny with them, so I thought we’d start out with renewing our mind like we like to, and then have you share a joke, and then we’ll bring our guest on.
Emilia: Sounds great.
Jason: But the way we like to get this morning started right is first with a verse, and this comes to us from Philippians 4:6, “Do not be anxious about anything, but in every situation, by prayer and petition and with thanksgiving, present your request to God.” And then, Emilia, you have a joke for us.
Emilia: Yes, I do. I look for these in different places. We have clients that get them to us, so I had this one come up on me. I thought it was kind of cute. Here it goes. My elderly mother was rushed to the hospital following a serious tumble. The staff placed a band around her wrist with large letters warning, “Fall risk.” Unimpressed, my mom said to me, “I’ll have them know I’m a winter, spring and summer risk too.”
Jason: That’s pretty funny, Emilia, the look you give me like, “Was that appropriate?”
Jason: I’m a winter, spring and summer risk.
Emilia: Well, I don’t want anybody to be at risk too.
Jason: That’s funny. All right, Emilia. We’ve got episode number 203. We’re going to be bringing The White Coat Investor on in just a minute. But, Emilia, thanks for being here this morning.
Emilia: Thanks for having me, Jason.
Jason: I’m very excited you’re listening to episode number 203. It’s my good fortune to bring James Dahle, MD, onto the program. He’s a practicing emergency physician and the founder of The White Coat Investor, the most widely read physician-specific personal finance and investing website in the world with over 1.2 million page views a month. He’s also a podcaster, he runs a YouTube channel, and the publish author of two financial books aimed at high-income professionals.
Jason: He speaks nationwide and started the Physician Wellness and Financial Literacy Conference. He’s married with four children and lives in Utah where he enjoys climbing, canyoneering, skiing, boating, ice hockey and mountain biking. Dr. James Dahle, welcome to the Sound Retirement Radio.
James: Thank you. It’s wonderful to be here.
Jason: Boy, what a privilege. I’m just so excited to have you on the program. You may not know this. The way that our interview came to be today is somebody that we serve reached out to us and said, “Jason, you know, I love your podcast, but the other one that I listen to a lot is The White Coat Investor. We started talking a little bit about your show and the work that you’re doing, and I thought, “Huh, this guy sounds like somebody I’d like to have on the show,” so let’s dig in here and learn more about the work that you’re doing.
Jason: Now, I want to ask you as somebody that’s working as an emergency physician, how in the world are you finding the time to write two books on financial matters, run a podcast and all the education material? Where do you find the time to do all this? Plus, you have four kids. How does that work?
James: Well, initially, it turned out I used bankers’ hours because three-quarters of the shifts you work as an emergency physician they’re in the evenings, the nights, holidays, weekends, etc. I found myself a home a lot with my wife off doing things and my kids in school and nothing going on because all my friends were at work. That’s initially when I found the time to start it. As it has grown, unfortunately, I’ve had to cut back a little bit on my practice. I’m now down to half-time, but that allows me to at least be able to give this other calling I feel in my life the attention it deserves.
Jason: Half-time on being an emergency practicing physician and moving more time to The White Coat Investor website.
James: Yeah, it used to be I kind of had two full-time jobs. I’ve cut back to full-time and one half-time, so it’s a little more doable.
Jason: All right, so why did you start down this path in the first place? What lit the fire under you to say, “I really feel like I need to add my voice to the financial education that’s being delivered?”
James: Well, the main issue that caused me to get into it was it wasn’t being delivered at least not in my demographic. People in medical school and residency were getting no information whatsoever about personal finance, loan management, insurance, investing, etc. Any information that may have leaked through to them was generally coming from a commission salesman, and so it wasn’t particularly high-quality advice. And then if docs were going to get high-quality advice, they’re overpaying for it far too often.
James: After being ripped off a few times myself and during a fairly lengthy self-education process, I decided I was going to take the information I had learned kind of to the masses of high-income professionals; physicians, dentists, attorneys, veterinarians, pharmacists, advanced practice clinicians, etc, and kind of fill the gap that I saw in my own education for a profitable life.
Jason: Boy, that’s awesome. You drop a bomb there. You got ripped off. What in the world happened?
James: Well, it wasn’t like it just happened once. It seems like every time I had an interaction with a financial professional it ended badly. There was a financial advisor, and an insurance agent, and a realtor, a recruiter and a mortgage lender. It seemed like every time I had an interaction I just didn’t come out on top. I started learning this stuff on my own. I was never going to find the success that I thought all doctors got automatically.
Jason: One of the things I found, Dr. Dahle, is that especially high-income earners, doctors specifically, and I don’t know why it’s folks in your profession, but you guys try to make things really complicated sometimes, and you get involved in these really abstract high risk low liquidity investments. Do you find that working with doctors? Do you find that they think that there’s some magic bought out there, something that’s available only to them that they need to participate in, or is that just been my experience?
James: Well, part of the issue is there are things that are available only to them by virtue of them being [inaudible 00:06:39]. If you have an income of $200,000 or more a year or investible assets of a million dollars a year, you do have a whole new universe of investments. The problem is a lot of those investments aren’t very good. The issue is kind of like artist and athletes.
James: The doctors high-income is not due to their business savvy. It’s due to a special talent or knowledge that they have. They really don’t have the knowledge base needed to evaluate some of those special investments to recognize the good ones from the bad ones. And then, of course, the liquidity is an issue in all of them. I don’t know that it’s necessary to be completely liquid in all of your investments, but certainly you need some liquidity in your portfolio.
Jason: Well, it’s interesting. Maybe it’s because there is a lot of money. One of the things I see sometimes not just doctors but people of high-income get involved with are things like timeshares. They go to one of these time share presentations and float down a couple $100,000 to buy into one of these things, and then other people are paying pennies on the dollar buying them on the secondary market. Do you ever run into anything like that with high-income people?
James: Yeah, the timeshare is a classic for everybody. I think high-income people fall into it just as often as low-income people. I don’t know why anyone would ever want to own a timeshare, but if you did, certainly buy it on the secondary market where you can get it for a dime on the dollar.
Jason: So, why do you think so many doctors struggle financially?
James: I think it’s a combination of things. One, it is a lack of financial education. Two, it is a unique cashflow situation. You go through your 20s and maybe the first half of your 30s living on debt, and then all of a sudden you get a few years of a fairly normal income, a $50,000 or $60,000 as a resident, and then all of a sudden you have an income explosion, and now you’re making $200,000 or $300,000.
James: I think what happens is people just can’t handle that change. All of sudden they think if they’re going from $50,000 a year to $300,000, that they can fix that to their lifestyle. [inaudible 00:08:55].
Jason: Dr. Dahle, why do you think so many doctors struggle financially?
James: I think the main problem they have is a cashflow problem. It’s a very unique situation the doctors are in financially compared to most Americans. They end up living off debt for their 20s and part of their 30s, and then they have a few years of fairly normal income of $50,000 or $60,000 a year, and then they go to a high-income all of a sudden, $200,000 $300,000 $400,000 a year. That change is very difficult, I think, for most people to manage.
James: Just because their income went up by five or six times, they end up five or six times in their lifestyle, and then all of a sudden the student loan payments from living from student loans for decades come due. They find themselves living hand-to-mouth on $300,000 a year, which seems unbelievable to the average American who looks at that and says, “How can you possibly have financial problems when you’re making that much money?” But I see it time and time again that it’s very difficult for physicians to manage that change, especially without any sort of financial training.
Jason: Tell us about those loans and kind of that burden that doctors have to deal with to get their education.
James: Sure, the average loan for an MD graduate is $200,000. It’s about $250,000 or $260,000 for a Yale graduate and for a dentist it’s probably closer to $280,000. Now, those are averages. Half the people have more than that. It’s not unusual for me to run into docs that owe $350,000 $450,000 or more. My record is actually about $1.1 million in student loans alone. Even on a high income, that sort of debt just becomes crippling.
Jason: Wow, when it comes to paying that debt off, what is the strategy that you like to teach people to take to get rid of it as quickly as possible? Do you want them to refinance it? Do you want them to pay it down in just a few years? How do you recommend they deal with that debt?
James: Well, number one, the best student loan you ever get is the one you don’t take out, so living frugally, choosing the cheaper school you can get into it. Those sorts of issues to minimize the amount of debt helps a lot. Just because the average is $200,000, doesn’t mean you have to add $200,000. That’s step one. Step two is really a decision between going for the Federal Public Service Loan Forgiveness Program which any docs can be eligible for or refinancing your loans and paying them back quickly.
James: Most docs will end up paying back their own loans. They are better off usually getting out of the federal programs and getting a lower interest rate that they can get from private companies. And then what I recommend docs do is that they simply keep living like a resident for the first two to five years of their career after residency. A resident makes $50,000 or $60,000. That’s the average American household income. If you can just hold your lifestyle to exactly what it was during residency, there’s a big difference between your attending physician income and your resident lifestyle. You can use that difference to pay off your loans in just two, or three or four years.
Jason: That was the statement that person that introduced me to your work said that resonated so much with them, is to continue to live as though you are still in your residency. Tell me, when you’re teaching-
James: Yeah, that’s exactly it. It works great. It’s the secret to wealth as a physician really.
Jason: Well, I think it’s the secret to wealth for most people, is to spend less than you earn and keep your life as simple as possible. I know you’ve got a new book out. In your book you talk about the 12 steps. Is having a good spending plan part of that?
James: Absolutely it is part of that. I think most people need a written spending plan. The alternative is just to pull the money off the top and save and spend what’s left. That does work for some people, but I think most people need a written spending plan, a budget, at least for a while. In some ways, it functions as training wheels. The first two or three months are really hard, then it becomes easy, and then after 6 or 12 months you’ve kind of trained your financial muscles to spend less, and maybe you don’t even need the budget anymore.
James: The actual act of putting it in force and following it for at least a few months I think is very liberating for most people to make sure their money is actually going towards the things that they value.
Jason: Tell our listeners about your new book and how they can learn more about it and where they can buy it.
James: The book is called The White Coat Investor’s Financial Boot Camp. It’s available on Amazon. There’s an E-book version of it. There’s a paperback version. There should be an audio version out within the next week or so. It is accessible, easily read or listened to. Basically, it takes people step-by-step through a 12-step program to help them get up to speed with their finances. By the time most people run into the information I’m providing, they’re already in a little bit of a mess, and they’re playing a catch up game.
James: The goal of this book is to help them to catch up as quickly as possible. Each chapter not only gives them information, but it also gives them a few tasks to tick off. For example, the first chapter is about disability insurance, one of the most important things for a doc given that their greatest asset is their ability to turn their time into money at a very high rate. The to-do item at the end of that chapter is to go out and get disability insurance. I explain to them how to do that. But each chapter has a task like that. By the time you get to the end of the book, if you actually ticked all the boxes that you went through, you’ve got a written financial plan, and you’re well on your way to success.
Jason: Boy, that’s awesome. You may not know this. At Sound Retirement Planning and the work that we’re doing we developed a tool, it’s SaaS (software as a service), called retirementbudgetcalculator.com. It’s a tool that people have to pay for. It’s a one-time fee. I have access to it right now. But the whole purpose of it is to really help people understand their spending, especially before they make a big transition like transitioning into retirement. Are there any financial tools that you like to use for helping people develop a good spending plan?
James: I think it can be very simple. It can be as easy as paper and pencil. You’re basically creating an income sheet like a business would. You’ve got all your income on one side and all your expenses on the other side, and you got to make sure they match up and hopefully leave a little bit of profit, which is basically your savings. But I’ve used just an Excel spreadsheet throughout our marriage for the last 20 years, and that’s worked well for us.
James: But these days there’s all kinds of new single apps like You Need A Budget, or EveryDollar or Mint that cost you a few dollars a month, but if that allows you to be successful where you couldn’t on paper and pencil or spreadsheet, I think that’s worth doing. But whatever works for you, you got to do it some way. Try a few ways until you figure out what works for you.
Jason: When you talk about increasing your lifestyle, how do you keep that in check for you personally? How do you make sure that as your income goes up you’re not always increasing the demands on your income by buying a bigger house and a fancier car and going on better vacations? How do you do that?
James: Well, we certainly are upgrading our lifestyle as we go through our life. We’re doing a home renovation this year. We go on lots of vacations and take our kids with us. At this point in life we walk into a dealership and buy a brand new car with cash, but there are many years in which we didn’t do that. In fact, in college I think I was donating plasma for food money.
James: But I think the secret is simply to be intentional and do it on purpose. Look at your money and tell your money what it’s going to do rather than have your money tell you what you’re going to do. As our income has increased throughout our lives, we have simply deliberately decided not to spend it all and to use it to meet our financial goals. We’re pleasantly surprised to be able to become millionaires just seven years out of residency. That was on an income averaging about $180,000 a year.
James: It was simply a written plan. We wrote it down at the beginning, and we followed it, and it worked. This stuff just isn’t that complicated if you will sit down and think about it.
Jason: Yeah, you’re right. One of the things we tell people all the time it’s simple, but it’s not easy because if it was easy, everybody would do it. It’s pretty simple, pretty basic concepts. You’ve been married now, you say, over 20 years. Was there ever a time where you and your wife were not on the same page in terms of financial goals? And how do you guys frame that conversation? Sometimes people think different about money in relationships. Have you guys always been on the same page, or what does that look like?
James: We have been on the same page. The reason why is we got on the page before we got married. We sat down and had these conversations not only about what we wanted with children, and religion and the other areas of big conflict in marriage, but we sat down and talked about finances before we ever had an income, before we ever got married. I’m not going to say we’ve always perfectly agreed every time on what we should spend our money on. That would be silly. But once a month for the last 20 years we’ve sat down and talked about where our money is going and come to some sort of agreement or compromise every month.
James: The beautiful thing is after doing that for a few years you have enough money to do whatever you want to do. There really isn’t anything to have a conflict over anymore. But in those first few years, yeah, we had to work through a few things and decide that this month we weren’t going to do something in order to be able to do something else.
Jason: Awesome. One of the things I hear from some people that work in the medical profession is they will tell me … And maybe it’s a local thing. Maybe you’re experiencing it where you are. They say to me that they feel like it’s changing. They say that they feel like there’s so much more emphasis put on the business end of delivering healthcare and the profitability of delivering healthcare. That’s causing burn out for some people where they just don’t want to work in the industry anymore because the focus is so much on reducing costs and driving revenue. Are you seeing that at all? Is part of that a result of these high student loans where people are trying to figure out their income, so they’re motivated to earn more?
James: Yeah, for sure doctors and their financial situations are contributing to burn out, but the truth of the matter is it’s hard to get burned out at a job you don’t need. If you’ve got enough money to be financially independent, which a doctor who’s actually paying attention to their finances and living deliberately should reach within 10 or 15 years of starting their career, it’s really hard to get burned out at that point I’ve discovered.
James: But that said, there is certainly a lot of pressures on docs these days. A much larger percentage of them are employees due to the consolidation of healthcare in the last decade. When you’re an employee, you have much less control over your job. I think it’s been shown quite clearly in burn out studies that not having control contributes to burn out more than what your salary is necessarily.
James: I encourage docs, when it’s right for them at least, to try to own their practices still or at least have some sort of control about it even if they end up giving up a little bit off the top end or end up having to put more work in for it, which is more likely. I think self-employed docs are much less likely to be burned out than employees.
Jason: It’s so interesting. Because I have a chance to walk life with a lot of people that are making this transition into retirement, one of the questions I like to ask them after they’ve retired is, “What’s the best part? What do you like the most about it so far?” The number one answer I get back from so many people is, “I don’t have to wake up anymore based on what the alarm clock says. I don’t have to get out of bed at four o’clock in the morning.” I thought to myself, “If that is the best part of retirement initially for so many people, what would happen if we created a culture where we just allowed people to sleep and we gave them more freedom and flexibility? Maybe they wouldn’t have this strong desire to end their career.” What do you think of that when you hear that being the number one response?
James: I think that’s exactly right. Rather than sitting there in your cubicle and pining away for the day when you can retire or for your next vacation, why not try to create a life that you don’t need to retire from, that you don’t need a vacation from? Find work that you just absolutely love and are dying to get out of bed to do in the morning. I think that’s the goal for all of us.
James: I don’t know that we all achieve, and I don’t know that anybody ever achieves it completely. But as we work towards that, I think we start looking at retirement as a chance to maybe do work that didn’t pay us enough to maintain our lifestyle beforehand, but now we have enough money that we can do that, whether that’s a core career as a river guide, or whether that’s writing a book you always wanted to write, or whether it’s being a stay-at-home grandparent.
James: I don’t know what it might be in your case, but I think taking care of finances early on can really facilitate those kinds of options in your life.
Jason: All right. Folks, if you’re just joining us, you’re listening to episode number 203. I’ve got Dr. James Dahle on the program. He is the author, podcaster. He’s a doctor. His website is whitecoatinvestor.com. He’s got two books out, a brand new one that’s available on Amazon. He has agreed to be able to just continue this conversation for a little bit longer for our podcast listeners. If you’re driving down the road in Seattle this morning and you want to catch the rest of the show, I want to invite you back so that you can hear it.
Jason: We’re going to be transitioning because I want to ask him some questions about retirement and just this transition that he’s making in his own life where he’s working less as a physician and more with his blogging and podcasting and the opportunities that are available to people in the world today. Dr. Dahle, any final words for our listeners driving down the road in Seattle this morning?
James: Well, please be careful of the traffic. I know it can be bad out there. If you’re looking for more information geared specifically at high-income professionals, whether they’re tech workers, or doctors or attorneys, etc, come check out whitecoatinvestor.com. I’m writing certainly with you in mind and these financial issues that you uniquely face in mind. I hope you can find something there of value to you.
Jason: Awesome. Dr. Dahle, we’ll be right back after this to continue the conversation for our podcast listeners.
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Jason: Dr. Dahle, are you still there?
James: I am still here.
Jason: Okay, great. I want to continue this conversation. I want to ask you about retirement. Somebody approaching retirement, how would they know if they’ve saved enough to really be able to make that transition and be comfortable? I’m pretty opinionated about this myself, but I’m curious to hear what your thoughts are on this subject.
James: The best way to know whether you have enough is to actually know what you’re spending because every formula that determines how much enough is the main input is what you spend. If people don’t know how much they’re spending, there’s no way they’re ever going to get the right answer here. But there’s a lot of complex formulas and calculators out there that can really help you to zero in on this number, but the bottom line is it’s going to be somewhere around 4% of your assets. That’s approximately how much you can withdraw from a portfolio and expect it to last through a typical retirement.
James: Now, some people are very conservative. They might use a 3% or a 3.5% number. Those are who are a little older or maybe a little more cavalier, might use a four and a half or 5% number. But, in general, that’s kind of the neighborhood most people usually end up in even when they use the more complex calculators. My approach would be to make sure you’re in that neighborhood to start and then adjust as you go.
James: If your investments are doing particularly well, perhaps you can bump up spending a little bit. If you run into what we call sequence of returns risk where you have a bunch of bad return years right at the beginning of your retirement, well, you probably have to tighten your belt a little bit. It’s best not to retire just on the bare verge of being able to barely support your bare minimum living standard.
Jason: You could be a commercial for that calculator that I developed, the retirementbudgetcalculator.com. That’s the reason we built the software is because everybody is putting the emphasis on the wrong part of the equation. Everybody wants to talk about your asset allocation, your diversification, your low fees, your indexing versus active versus passive. But I said, “Jeez, retirement is an exercise in cashflow. Let’s build a calculator that really helps people understand their expenses, especially high-income earners.”
Jason: Now, we’ve worked with a lot of doctors, and pilots, and engineers and people that have high income. I have to tell you my experience is the more income people have, the less they know about where that money is actually going because it’s easy to spend because they don’t have to track it all, so to hear you say that is just right in line with what we’re teaching people all the time.
Jason: One of the reasons that I hear from so many people that they are wanting to retire is because they’re burned out on the 60, 80 hour work weeks. A lot of them said to me. They said, “Jason, you know, we don’t want to stop working completely. I just want to do something where I can work 30 or 40 hours a week, have a little bit more time freedom, but I still want to contribute.”
Jason: You’ve done something unique and interesting where you’ve built a financial education business. That’s one way I think people could help supplement their income, but talk to us about some of the ways that you think people might be able to start to make that transition into retirement if they haven’t necessarily saved enough yet at this point.
James: For sure. The best way to do this if you don’t have enough to retire today is to continue to work part-time. That gives you so many benefits. Not only are you putting more money into social security, so your social security payment will be larger, but you’re delaying taking social security, which makes your payment larger. You’re giving your investments that you already have more time to compound. You’re maybe even being able to add more money to those investments, which will give you a higher income later.
James: Delaying retirements just works on every angle to improve your financial position, but working part-time is almost as good just because you’re able to live on what you’re earning rather than your investments, giving those investments time to compound and giving your social security payment time to get larger. All those things I think help. Plus, it’s much harder to get burned out when you’re working half-time I’ve discovered.
James: I go into the hospital now to see patients, and I’m excited about it. I’m full of compassion for the patients. I think I’m a better doctor halt-time than I ever was full-time. I think you’ll fall in love all over again with your career if you can figure out a way just to do it a little bit less.
Jason: That’s awesome. Do you ever see yourself wanting to retire?
James: In the traditional sense where you walk away from work one day and get the golden watch and spend the rest of your life on a golf course, probably not. I have discovered in my life that work is a meaningful part of it. That it provides something that I can’t seem to get anywhere else. But I’ll tell you, I’ve got a bunch of things in my life that I like to do. What I discovered probably at some point in residency when I was working 80 hours a week is that there’s actually nothing in my life I like to do more than 20 hours a week, but there’s a dozen things that I enjoy doing that much.
James: I think for me at least I’m probably always going to have at least some work. Whether it’s paid or not, it’s hard to say but some work even well into my 60s, 70s and maybe even 80s if I can maintain my health long enough to do that. I look at somebody like “Jack” Bogle who was basically working in something he really believed in until the day he died and certainly not because he needed the money. I think that sort of a role model was impressive to me. I hope to be able to continue to contribute even into my senior years.
Jason: My mentor he worked up until he was about 77-years-old and then only stopped working because he got cancer, and it slowed him down. Like you said earlier, when you love what you do, it doesn’t feel like you’re going to work. I’m excited when I get up in the morning. People make fun of me because I roll out of bed at four o’clock in the morning not because I have to but because I’m excited for the day. What are you most excited about today?
James: Well, the first thing I did this morning I had to get a newsletter out. I send out a newsletter to my readers once a month just a pretty newsletter with a market update and a special tip that doesn’t show up on the blog and a summary of the best stuff on the web over the last month for physicians and other high-income professionals. I was kind of excited to get out of bed and finish that up and get it out before this interview. But I’ll tell you what, this afternoon I’m going boating. There’s other things that get me up and I get excited about too.
Jason: Cool. Have you ever made your way out here to the sunny state of Washington?
James: I have. I was out there a couple of years ago on a trip to go climb Mount Baker and Mount Rainier. We were not successful on Baker, but we were successful on Mount Rainier. We got a nice block of weather there. It’s certainly a beautiful place.
Jason: Awesome. I wanted to ask you about taxes for high-income earners. What have you found to be the best way to reduce a tax burden for high-income earners?
James: It’s really funny when you talk to docs about taxes. They’re all convinced that they’re paying too much in taxes. A lot of times they’re right, but they’re convinced it’s because they just don’t know about the secret deductions or because they’re not having their tax forms filled out by the right person.
James: In reality, lowering your tax burden is about changing your financial life and the way you live it to a way that the IRS approves of. That might mean saving for retirement, saving for healthcare, owning your own business, getting married and having kids, those sorts of things, borrowing money to buy a house. Those are the things that lower your tax bill. I think that’s something that a lot of people don’t realize.
James: The other thing people want is they just want to pay less in taxes, which is kind of silly when you think about it. The easiest way to pay less in taxes is just to work less and make less money, but, in reality, what you want usually, most people anyway, is they want to have the most amount of money after tax rather than actually lowering their tax bill. I think if you really stop and think about it, you want to pay more taxes because it means you’re making more money. When you understand the tax code, that’s what you start changing your focus to.
James: But the biggest tax deduction I find the doctors are missing out on is simply the tax for their retirement accounts. I can’t believe how many doctors I ran into that aren’t maxing out what’s offered by their employer, such as a 401(k) profit sharing plan, or a cash balance defined benefit plan, or what’s available to them as a self-employed doc. Too many docs don’t even know about an individual 401(k), for instance. A lot of people get suckered into bad investments or insurance-based investments without even maxing out a Roth IRA which they can do indirectly ever since 2010. I think that’s probably the main thing most docs are missing, is just taking advantage of all these tax protected accounts that the government is offering to them.
Jason: Well, I’m glad you brought out maxing out a Roth IRA, especially when we talk about high-income earners, because we know that once your income gets to a certain point, you can’t make those contributions. But I’ve listened to some of your shows where you talk about the backdoor Roth IRA. Will you take a minute and talk to our listeners about that strategy?
James: Sure. Prior to 2010, there were basically three rules that affected high-income earners when it comes IRAs. If you had a retirement plan at work and a high income, you could not deduct a contribution to a traditional IRA. You could still make the contribution, but it was a non-deductible contribution. You also could not contribute directly to a Roth IRA because your income was too high. But there was a third rule that was in effect prior to 2010, which basically kept you from doing a Roth conversion if you had a high income.
James: You could not take money out of a traditional IRA and put it in a Roth IRA and pay the taxes on it. In 2010, that last rule changed. Congress changed the rule, and what that facilitated is what’s been referred to as a backdoor Roth IRA, which sounds all shady. I mean, Congress and the IRS have lost this, so I prefer calling it an indirect Roth IRA rather than a direct one.
James: Basically, you put the money into a traditional IRA. Now, it’s not deductible, and then the next day, or the next week or whenever it settles you move it into the Roth IRA. Because you never got a deduction for putting it in the traditional IRA, there is no tax cost to moving it to the Roth IRA. In the end, the effect is the same as if you had contributed it directly to a Roth IRA. Of course, in the future that money is going to go grow for you and your heirs completely tax free in that Roth IRA.
James: It’s a great way for docs to not only protect their investments from the tax drag inherent in a taxable account, but it’s also a way in most states to provide a little bit of extra asset protection to their money in the event that they’re sued above policy limits.
Jason: The pro rata rules I’m sure are something that you talk to people about in terms of making those conversions, but is there an additional resource where you talk about some of the nuances with those rules around doing those conversions from the after-tax IRA into the Roth?
James: Yes, this is unfortunately the most complicated part of the whole process. There is a rule, and it basically just comes down to how you report this process to the IRS on Form 8606 that basically says you’ve got to empty out all of your traditional IRSs, SEP IRSs and SIMPLE IRSs by December 31st of the year you do the conversion step of the backdoor Roth IRA process.
James: I know that just flew over the head of most of your listeners because there are a lot of big words in there, but that is all spelled out very clearly with examples, including examples of the tax forms, on a blog post I have called the Backdoor Roth IRA Tutorial. If you google those words, my link will be the first one that pops up. I will take you by the hand and walk you through this process. It really is much less complicated than it sounds the first time you hear about it, but you do have to be careful of the pro rata rule.
Jason: Very good. We’ll make sure to link to that in the show notes. I wanted to ask you about real estate investing. As a high-income earner, what are your thoughts about investing in real estate?
James: I think real estate is a great asset class. It’s also completely optional. I don’t think people should feel like they have to invest in real estate to be successful. The easiest way to invest in real estate is to just simply buy a mutual fund that invests in real estate investment trust. One of my favorites is just a very low-cost broadly diversified Vanguard Real Estate Investment Trust Index Fund. I’ve invested in that for the last 15 years.
James: On the other end of the spectrum, as far as control, and tax benefits and hustle, is owning your own investment properties, you know, buying the house down the street and renting it out. But in between those two things are lots of other options that are available to accredited investors. You can invest in a private real estate fund. You can invest syndicated real estate deals. This might be 100 people going in and buying an apartment complex together, for instance. You can invest in hard money loans either directly or through, again, a private fund.
James: You can go to these new single crowdfunded sites, there’s got to be over 100 of them now, where you may only have a minimum investment of $2,000, or $5,000 or $10,000 and you go in with a 100 or 200 other investors and buying a property. There’s a lot of ways to be a little more involved than you would be with the real estate investment trust fund but yet not be getting calls to fix the toilets.
James: There’s a wide spectrum I think if people can find where they sit on that as far as introducing real estate into their portfolio, but they just need to be aware once they move away from low-cost index funds, that it is a little bit of a caveat emptor market. You really need to know what’s going on with the deal because every deal is individual, and they are not all good deals.
Jason: Boy, I have to tell you as somebody that walks life with people and helps them transition into retirement as an advisor that actually has boots on the ground, I always tell people it’s one thing to be a commentator and talk about these things and be somebody that can write articles about it because you can retract your opinion later and nobody’s life is affected, but if you make a mistake, and you’re making people make a transition through retirement, and it’s a significant mistake, you can blow up their financial life.
Jason: I feel like an advisor’s role in some ways my experience has been just to keep people out of things that they shouldn’t be getting involved with in the first place if it means potentially jeopardizing their financial future. For our listeners out there, I want to encourage you before you go off exploring any of these alternatives make sure with the core of your resources that you’ve got a really good plan and don’t try to be the guy that’s chasing down every alternative investment out there. That would be my word of caution on that.
Jason: One last question, Dr. Dahle, before we let you go because you talk about a subject that’s near and dear to me because I’ve seen at happen to a lot of people, but the question is regarding long-term care insurance for successful people. What’s your take on long-term care insurance? You kind of have a unique perspective both from the money side, but then also as a healthcare provider you get to see what happens to people when their health starts to fail. What’s your thoughts on long-term care insurance?
James: Well, I think when it comes to long-term care insurance you can really divide society into three buckets. The bucket with the least amount of assets, their strategy when it comes to a long-term care situation … They get put in this for years. It’s a real financial catastrophe. Their strategy is basically spend down to Medicaid levels. A Medicaid will begin picking up the bill for the long-term care.
James: The second group, the people who are married to somebody that they could leave them impoverished by spending down to Medicaid levels, are the people for whom long-term care insurance is right. It’s hard to define exactly who those people are, but they’re probably people with a retirement nest egg of somewhere between $100,000 and perhaps a million and a half. These are people for whom long-term care insurance can make a lot of sense in that you are protecting against a very serious financial catastrophe. If you end up in a nursing home for a long time, it can be pretty expensive and really leave you not in a great situation.
James: The problem, of course, is that long-term care insurance is maybe not totally ready for prime time yet. It’s certainly getting better year after year, but a lot of those companies and policies that were in force just a few years ago ended up coming back to the insureds and saying, “We’ve got to raise prices, or we’re just going to cancel the policy.”
James: I think for high-income earners hopefully these folks are able to get a nest egg that’s larger than that million or $2 million. They can afford to self-insure this risk. I think that’s probably what they ought to do if you can get yourself into a position where you can afford to have one member of the couple in a nursing home for 3, or 5, or 10 years and not have it obliterate your financial plan.
James: If you get yourself into that situation, I would skip the long-term care insurance. I certainly do not plan on ever buying the product for myself or for my family just because it’s a risk that I feel like we can self-insure.
Jason: That’s an interesting take for sure. Do you go without health insurance then and automobile insurance as well?
James: Well, the issue with health insurance is that the risk is so much higher. You wouldn’t believe how much money I can run through in a year after a car accident. I mean, you walk in the door of the trauma one that goes to the ICU, and we may spend a million dollars on you in the first week. The risk for long-term care just isn’t that high. I mean, you can buy the nicest long-term care facility in my city for somewhere between $50,000 and $100,000 a year. It’s just not the same risk as a big healthcare.
James: As far as auto insurance goes, I think you can do the same thing as far as collision and comprehensive coverage, but the big risk there is liability. If you end up driving over somebody whose life might be worth $5 million, again, in 30 seconds you can blow through $5 million worth of assets. I don’t think that’s a risk worth running. I think these true financial catastrophes you should insure against and insure well, but a long-term care risk that might only total up to half a million dollars when you’ve got a $4 million portfolio is simply something that you can afford to self-insure.
Jason: It’s an interesting perspective, and I hear it both ways. I actually agree with you. What I always tell people is don’t make an emotional decision about long-term care. That’s why we believe so strongly in building a plan because when you have a plan then you can stress test for the event and then we know whether or not you have enough assets. That’s how we answer the question, but it is interesting.
Jason: I wanted to just finish up our conversation today by reminding our listeners who are listening to episode number 203. I’ve got Dr. James Dahle on the program. He runs a website called The White Coat Investor. Dr. Dahle, if you have one last word of wisdom that you’d like to share with our listeners before we finish up today, what’s the most important thing that they need to know?
James: I think the message I would give to high-income earners is that you would not believe how hard and how much sacrifices people with the more typical income have to make in order to become financially independent. If you make half of those sacrifices, you will have wealth coming out of your ears that will allow you to have a financially awesome life.
James: I encourage you just to pay a little bit of attention to your finances and really hit the high yield items that can make a huge difference in your life. It’s just not something you can ignore and expect to automatically become wealthy and automatically be financially successful. You do have to pay at least a little bit of attention to it. The less attention you’re going to pay, the more important it is to get high-quality help.
Jason: Awesome. Dr. Dahle, thank you so much for being a guest on Sound Retirement Radio.
James: Thank you very much for having me.
Jason: All right, take care.