Dr. Disha Spath is hosting with us again this week! Together, we answer questions about marriage, family, and finances. We talk about merging finances when you get married, 529 and UTMA accounts, how to manage complicated trusts, and how to add beneficiaries to trusts. We also discuss the importance of women getting their term life and disability insurance in place well before they become pregnant. There is a little something for everyone in this episode.
Finances and Marriage
“Dr. Dahle, I love your show and appreciate all the work you put into it. One topic that I was hoping to learn some more about is finances and marriage. I'm getting married in the spring and I'm fortunate enough to have found a truly wonderful woman with whom I share values. And while we aren't having difficulties or disagreements about dollars, we realize that there are a lot of decisions and things to do to become an organized merged household. One, I didn't know if you had any idea of kind of a checklist about how to kind of get your home in order, financially, or if you had any tips or tricks about things such as merging credit cards or car insurance. How to compare and contrast and optimize retirement accounts. How to look at banking, how different couples manage having pretty different incomes, and any other tips or tricks, I'd appreciate.”
I think issue No. 1 when you're married is a lot of people are trying to keep separate finances for whatever reason. I don't know if it's a trust thing or they just don't want to make changes or if it's some power or control thing. I think that's really hard to do well. Now, I'm sure there are a few people out there that do it well, but almost all the financially successful couples I know have been through this process and they've merged their finances in some way. I think you're going down the path the right way, but there's no doubt that there are some changes. Especially the later you get married, the more complicated your financial lives are separately, the harder this merging process is going to be. Disha, where would you start?
“What we did, when Josh and I got married, was we picked one bank where we would have our checking account, that we would pull everything else into. Josh has access to USAA. So that was amazing. It's a great service that they do. We link all of our credit cards, whether they're his or mine, and all of our checking accounts into one platform and USAA enables that. I think most banks do that now. You can pull the data in from all the different places you might be spending money, all the different cards you might be spending money on, so that it all shows up in one place. It is really key because when you're trying to go over all of your spending, you want to know where all your accounts are, and it is really nice to see them in one place.”
There are opportunities here, too. For instance, if one of you has terrible credit, by adding your name to an account that's been around for 20 years, all of a sudden you have spectacular credit. You can do that with your kids too, by the way. I'm not sure if you can put them on an account that's older than them, but I bet you can. Then all of a sudden, your kids are in college and have an 810 credit score because they've got this 20-year credit history. There are some advantages there that you might not have thought about when you merge accounts. We have had merged finances since before we really had any money. It was really easy for us, and as our financial lives got more and more complicated, we just added things on as joint accounts. We have both our names on savings accounts, bank accounts, any checking accounts, brokerage accounts, and credit cards. Anything that can have two people's names on it, we have two people's names on it just to keep it easy. You can simply add the partner's name to the cards you want to keep.
“You can actually use that if you're trying a credit card hack. Chase has five cards. You can only get five cards in five years, I think. So, each spouse can then open up five cards in five years. And so, you double your point-earning opportunities.”
There are definitely more opportunities there. You have to keep track of that stuff, though. I mean, that's like a spreadsheet if you have that many cards.
“Well, I put it all in Personal Capital. We're good to go.”
You can't combine retirement accounts. Retirement accounts are always individual—401(k) is always just in your name. Your IRA is always just in your name, but if you're going to look at all your finances together, you've now got twice as many accounts to manage in your asset allocation. That will be a little bit of a complicated process. The two of you have to actually agree on an asset allocation and then adjust the accounts accordingly. That part might be a little bit tricky to combine.
“Personal Capital is a great way to keep track of all of your accounts. They are not sponsored by me. But they should be!”
You do need somewhere to combine everything so you can keep track of it. Whether you're doing it on a spreadsheet or whether you're using Personal Capital software or some other software. Mint also has similar functions.
“Personal Capital actually breaks down your asset allocation for you. It looks up all the accounts and it just pulls in exactly what you're invested in so you can see.”
The biggest obstacle, though, the reason people don't want to combine finances is because they don't want someone else telling them how to spend. We've gotten around that. We don't really do this anymore, but for a long time, we had allowances. It was money that we didn't have to account to our spouse for. When we were really poor in medical school, it wasn't very much money. I think there was at least one month where it was $20. But we had money that we could spend and we didn't have to account to the other person for. That amount can be whatever your budget allows that helps you feel like you still have some freedom, some independence, and yet you can still be efficient when it comes to managing your money.
“Absolutely. We have fun funds, too. You brought up a really fun topic: budgeting. My favorite. OK, I understand I am the only person that is excited about that, but you know what, Josh and I sit down and budget at the end of every month and we run through our spreadsheet, a Google Doc that we update together. We have computers facing each other, so it's very official looking. We sit down and we look at all of our spending and we put it all in a spreadsheet. If something looks a little off or someone's spending too much, we point it out nicely, but we try not to judge too much. It helps us keep everything together. We both know where the money is going and we both know how we need to adjust for the next month, and then neither one has to tell the other person exactly what to do. The spreadsheet shows you. So that's nice.”
I think the hardest part is getting your goals aligned once you've gotten together and then working out that budgeting process. I would expect with most couples, it probably takes six months at least. Keep at it, know that this too shall pass, and you can get your finances aligned and be working together toward goals. Because when both of you are working together, it's really powerful. You're going to get a whole lot closer to what you're trying to accomplish.
“The caller mentioned different incomes. I say just don't even worry about whose income it is. The way we do it, because we are a team, all of our money is our money and it's not his income or my income. It makes it a lot less antagonistic in our house.”
Yeah, for sure. You go from his income and her income to our income. His and her debts to our debts. His and her assets to our assets. One of you brought more income into the marriage. One of you brought more assets into the marriage. One of you brought more debt into the marriage. What are you going to do? Do you want to be married or not? It now becomes all ours, and you start working on it together. I wouldn't start working on it before you're married. Remember there are some legal protections that come with marriage, and I wouldn't combine your finances before that point. But once you're married, I do recommend you combine your finances.
More Information Here:
Dividing Responsibilities in Our Marriage to Accelerate Our Financial Independence
Financial Conversations to Set Your Marriage Up for Success
529 Plans
“Hey, Dr. Dahle. I'm from Michigan. Just a quick question regarding 529 plans. We contribute to our kids' 529 plans. Our kids are pretty young at this point. My son goes to Kumon. I'm just wondering: can we save the receipts for Kumon, and at a future date—just like an HSA—we can show those receipts to the 529 plan and get the money back as it grows, as we contribute over time? I cannot find the answers for that. So, can you please let us know and thanks for all you do.”
Disha, what do you think?
“I had to look up Kumon. I think this is a math tutoring thing, which looks amazing. But unfortunately, 529s don't work like HSAs where you can save your receipts and just turn them in. I believe you have to turn them in by the end of the year that you are going to use that money. Is that right?”
Absolutely. You can't save receipts. You can save them until the end of the year, but by the end of the year, you have to take the money out or you're not taking it out based on that receipt. So not an option for you, but here's the deal. How much money are you putting in there? Most people don't get enough into their 529s to cover the educational costs for their kids. Plus, if you have a little too much in there, you know what most people do? Grandkids. You just change the beneficiary. It's not that big a deal if you have too much money in there.
If you're having significant K-12 educational expenses, then you might as well take advantage of the 529. If you have your kids in private school, you might as well run the money through the 529. Maybe you get a state tax break on it. Maybe you can let it grow for a year or two before you pull it out and get some tax-free earnings. But if your state is not giving you a state tax break, you're taking the money out immediately after you put it in the 529, maybe you don't want to bother. This is something for high earners. This is a tax break for the rich, if you will. Poor people don't use 529s because they don't have the money to put into 529s. So, take advantage of these things. These accounts are for you. As a high earner, you talk about all these downsides of being a high earner, right? You pay these high marginal tax rates and you have all these special taxes just for you. You're phased out of all kinds of deductions, but the 529, that one's for you. So be grateful and use it as best you can.
More Information Here:
529 Plans – A Fantastic Tax Break for the Rich
Teaching Kids About Finances When They Don't Have a Job
“Jim, how are you? I've been reading your posts and listening to your podcast for a long time now. You've been influential in my journey toward financial literacy. So, I thank you for that. I'm a middle-aged radiologist living in the state of Florida. I have six kids under the age of 14. Under our bank account, we have separate accounts for my kids where they deposit their birthday gifts, allowances, tooth fairy money, etc. Although not a lot of money at this time, they'll be continuing to add to this. As they're young, this money can grow and continue to grow for a long time.
This money's not currently earning anything in the savings account, and I would like the opportunity to teach them about investing. Unfortunately, none of my children have jobs, and I don't have a business where I can figure out a creative way to employ my children. Opening up their own Roth IRA account would've been ideal and putting the money into low-cost mutual index funds, such as one of the Vanguard Target Retirement Date funds. I'm not sure if I can open up a kid's brokerage account at Vanguard or Fidelity and transfer after-tax money into their accounts. I would assume I may be able to open a joint account and probably subject their money to my taxes, which would kind of defeat the purpose. What would be the best way to teach kids how to be responsible with money, and at the same time, maximize the returns along the way? Thank you for all that you do.”
Disha, can you answer this one?
“My kids and I love to invest, and the way we do it when it's not earned money is an UTMA. Acorns actually has a great interface where the kids can see the compound interest working. They can see what they're invested in. My oldest son, who is 6, likes to go around saying he owns a piece of Amazon every time we buy something from Amazon. He's like, ‘Mommy, I'm making money.' There is a fee for Acorns because it's a nice interface. It's $5 a month. But we pay that just so the kids can have that experience of feeling like they own a part of a business and really understand investing. The UTMA is great if they don't have earned income. Of course, Roth IRAs are great if they do have earned income. The last thing that we invest for them is 529s, which you've already talked about.”
Your question sounds like an ad for UTMAs. UTMAs are a kid's brokerage. It's a custodial account. Your kids don't control it until 21 in most states. The age varies a bit by state. Until then, it's their money. So, if you spend it, you have to spend it on their behalf. Then when they hit that age, it's their money. The downside of this account is they can spend it on whatever they want. The upside is that it gets a significant tax break. It's around $1,200 a year that doesn't get taxed at all, assuming they don't have any other unearned income. Then, another $1,200 that gets taxed essentially at their earnings rate. That is up to about $2,400 a year in income that you are not paying at your tax rate. Now, if it earns more than that, you start paying what's called kiddie tax, which is at your tax rate. It gets paid on your tax return rather than their tax return, essentially, which is great. If you're investing tax-efficiently, you can put a lot of money in there before you get to $2,400 a year in income. I mean, the yield on a total stock market fund right now is well under 2%. You could have over $100,000 in there before you start paying it at your income tax rate.
We also use UTMAs. We have 529s for college. We have Roth IRAs for any earned money my kids have. Which is a lot for the teenager. She maxes out her Roth IRA now, but for the other ones, it's whatever we pay them for modeling, mostly, and maybe a few odd jobs and a lemonade stand and that's about it. We view the UTMA as a pretty significant fund. We call it the 20s fund and it's kind of a trial inheritance for them. Because if you think back to when you could really have used money, when you could have really used an inheritance from your parents, when was it?
“It was in your 20s.”
You have all these expenses and you have no money and you have no ability to make money at any sort of a decent rate. That's when you need it. Whatever it might be. It might be a wedding, a honeymoon, a car, a down payment, missionary work, grad school. There are all kinds of expenses that you have in your 20s. The thing we like about that idea is we're giving them an inheritance, and then we see what they do with it. Before they get the real inheritance, we get to see how they manage a small inheritance. Now we know whether we put it in trust or something, because it turns out they need to spend through a trust. But hopefully, by the time they're out of their 20s, we know that because we've watched what they did with the first one.
You're definitely looking for UTMA. If you're just talking about putting tiny amounts of money in it, something like Acorns is probably really good. If you're going to be serious about it, though, I'd go wherever you put your accounts—whether that's Fidelity or Vanguard or Schwab or whatever. But they've got minimums. Vanguard, I think, it's $1,000 minimum. If you're not going to put a thousand bucks in there, you probably don't want to start at Vanguard.
More Information Here:
What Is an UGMA or UTMA Account?
Term Life and Disability Insurance for Women
This next one isn't really a question but came from an email. It's something that somebody wrote to point out, and while I feel like I've said this before, I may not have been as adamant about this as I should have. This fact bears not only mentioning, but repeating.
“Until all women have no doubt in their mind that this is a high priority, a young woman who has had no prior medical problems may suddenly find herself with any number of unforeseen abstract obstetric complications, placenta previa, preeclampsia, etc, which will likely complicate her life insurance application and probably raise her premiums. Your rule of thumb seems to be, to get life insurance if you have any dependents who would need your income, should something happen to you. But for women, we should be applying even before we have any dependents if there is any possibility or future plan of pregnancy.”
As we all know, pregnancy isn't always planned. In fact, in the emergency department, the rate of immaculate conception is about 15%. People say there's no possible way I can be pregnant, and about 15% of them are. It's not actually having the dependent, it's plans to have a dependent in the near future. I'm not saying you have to do it when you're 25 and not planning to have kids until you're 35, but you need to have term life and disability insurance in place before you get pregnant.
I tell people to buy this stuff when you come out of residency. As far as disability, buy it when you come out of medical school; buy it as an intern. Now, that doesn't always mean before you have kids. But often it means for a doc before you have kids. But as far as term life goes, when someone depends on you, you need to have insurance. In this case, you could run into problems. It's not like you just get these medical problems during pregnancy; people die during pregnancy still. It's a lot safer than it used to be. But there was a sad story a couple of years ago. It might have even been an OB resident who died during childbirth and no insurance. It's a terrible, sad story. GoFundMe is not an insurance company. It breaks my heart when I see some newspaper article about some 25-year-old father of three, and there's GoFundMe at the bottom.
The main point is get your life insurance and get your disability insurance before you get pregnant. You don't need to buy it 10 years before you get pregnant. But as you're starting to think about starting a family, that's the time to get that insurance in place.
What to Do If You Have Won the Game
“Dr. Dahle, thanks for helping make all of us better physicians through financial education. I think my wife and I have won the game and wonder if we should stop playing. However, I'm not sure how to do this and what it actually means. We're a two-physician family in our early 50s with two kids and a current combined income of about $900,000. We have no debt and plan to retire in five years. Our combined assets include about $5 million in tax advantaged accounts, $2 million in taxable, $1.3 million in 529s, $45,000 in an HSA, $200,000 in cash, and an additional $1 million in private equity real estate. We have a demonstrated high-risk tolerance, but decreasing our risk seems prudent. On the other hand, we could stomach a 50% reduction in a bear market and still be over our financial independence number. Any suggestions?”
Congratulations on your success. You're doing awesome. You guys are really killing it. The fact is you say you're going to work five more years making this kind of money. I mean, your assets are going to be double what they are now five years from now. I suspect your spending habits probably aren't going to change all that much. What you really ought to be thinking about is what you're going to do about estate taxes, because you almost surely are going to have an estate tax problem. Start thinking at least a little bit about your estate planning.
This concept of ‘stop playing when you've won the game,' comes from William Bernstein. The idea was to have a liability matching portfolio. Where your portfolio matches your future expected liabilities, and the idea is with the things that are going to match those liabilities, you don't take a lot of risk. Whether you're putting those into TIPS or I bonds or those sorts of things, relatively low-risk assets for the money you absolutely must have. Then everything else, you can take whatever risk you want, because as you mentioned, even if you lose half your assets in the market, you're still OK.
Next, is there something you can spend money on that is going to make your life happier? If there is, go spend the money. Whether that's upgrading a car, whether that's doing a renovation on your house, whether that's going on a trip, or, more likely, whether it involves changing something about how you're earning money. Maybe you take less call. Maybe you do fewer night shifts. Maybe you take every Friday off, whatever it might be. You need to, at this point, be looking at those sorts of things. Because otherwise, you're just going to be leaving a whole lot of money behind when you go, at the rate you guys are going. You can buy some of your life back by spending money on those items.
What other tips do you have for somebody making $900,000 a year who is planning to work five more years and already has $9 million? What do you tell that person?
“You should outsource. At this point, if I were in your shoes, I would be outsourcing as much as I could, just so I could just relax and enjoy my life with my kids.”
But as far as the asset allocation, if you want to do what Bernstein says, basically go out and buy enough TIPS to cover all your future expenses, all your future mandatory expenses. Then you can take additional risk with the rest of the portfolio, but that's where the quote comes from that you've heard before to stop playing when you've won the game. TIPS are basically inflation indexed bonds. They're not a screaming deal right now; they actually have negative real yields right now. You go buy a five-year and it's around minus-1% real is what they're selling them at. But the idea was when you can get them with at least a 0% real or 1% or 2% real rate on them, then you could at least keep up with inflation with it without really taking on significant risk.
More Information Here:
What Bond Fund Should You Hold
Beneficiaries on Trusts
“Hello, Jim. This is John from Minneapolis. Congratulations on setting up your family's will and estate plan. I did the same thing about two years ago, but I've been a bit lazy about changing my beneficiaries to my trust. I was wondering if you could explain how you went through that process. Was it difficult? Did you have to get notarized forms to add a secondary beneficiary of your family's trust? I also have a question about something on one of my 401(k) plans that is asking if I want to waive what is called the QPSA. I'm not sure if I should waive that or leave that in place. Basically, it sounds like if you die, your account gets put into an annuity that is paid out to your spouse if that's the beneficiary or primary beneficiary. I'd rather have what the asset allocation is currently in my 401(k) go to my spouse rather than an annuity. Can you explain if the QPSA should be waived and any other tips you have about setting up secondary beneficiaries with respect to a trust? Thanks for everything you do.”
I think there's a little bit of confusion—if not in your mind, then in the minds of some of our listeners. We're talking about two types of beneficiaries. When you make a trust, there's a trust document written up that talks about the beneficiaries of the trust. It's important not to confuse those beneficiaries with the beneficiaries of your retirement accounts, for instance, or your life insurance policies or your annuities or whatever. Those are set up by the trust document. The beneficiaries of your trust are from the trust document. What the trust document says, that's who's going to benefit from whatever is in the trust. However, what a lot of people want to do is they want all of their money when they die to go through the trust. If you want that to happen, the trust has to be named as the beneficiary. Usually, it’s not a secondary beneficiary; usually, it’s a primary beneficiary—unless the first beneficiary is your spouse and then the second to die, and it goes into the trust.
But how do you do that? Well, it depends on the institution. If you want to change the beneficiary of Vanguard, you log into vanguard.com. You get the text from your phone, you put that in there, and then you're in and you go to beneficiaries and you change it. That's all there is to it. You just do it online. You hit enter and you have new beneficiaries. You can change what percentage goes to everybody. It's super easy. Now, every institution might be a little bit different. If you want to change it under your life insurance policy, maybe you have to fill out their form and send it to them.
But this is an important part of setting up a trust. Because if you don't ever actually put anything in the trust, if you don't rename it so the trust owns it, or you don't make the trust the beneficiary of it, you just wasted a lot of money and time and effort on setting up a trust. If there's nothing in it, you're not helping anyone. That's an important part.
It sounds like you set up a trust a couple of years ago and you still haven't really funded it or gotten it all set up. Remember the first part doesn't do any good unless you do the second part. That might be, if this is a revocable trust and you're just trying to avoid probate with stuff, that might mean retitling your house, it might mean retitling your vehicles, your boat, whatever, setting up your will so that anything left over goes into the trust. You have to make sure you take care of all those steps.
“Also this is your reminder, whether you have a trust or not, to go in and actually choose your beneficiaries in all your accounts, because that's a step that a lot of us forget. And then once something happens, it's a mess.”
If there's no beneficiary at all, it gets paid to your estate and that's not what you want. You want it to go to a person most of the time, or at least you want your trust set up so that it doesn't have to withdraw all at once. A bigger problem, I think, is people don't change their beneficiary when they need to. If you get divorced, change your beneficiaries. Otherwise, all your money's going to your ex. Evaluate those beneficiaries every now and then.
We had to google what QPSA is.
“It's an annuity. If you don't want it to happen, then don't choose that.”
If you don't want your spouse to get an annuity, don't choose it. But here's the deal. Remember retirement accounts, the general goal and the general guideline the government has for retirement accounts is you can't screw over your spouse. You can't somehow keep your spouse from being protected also by your retirement account. When you move money out of a retirement account, a lot of times you need your spouse's signature to do it. You have to keep in mind that everything to do with the retirement account and how you get money out of it, they're thinking about your spouse. This sort of thing is put in place thinking, ‘Well, what if my spouse doesn't know how to manage money? Let's put an option in there so they can just annuitize it. And my spouse will have an income for the rest of their life and doesn't have to think about it.'
They're coming from a good place with this sort of a suggestion, but if you don't want it to happen, you don't have to have it happen. Your spouse can just roll your retirement account into theirs when you die. It's just a simple rollover. Then they have a bigger IRA or a bigger 401(k) or whatever it gets rolled into. I hope that answers the question. QPSA is a new term to me. But it's just annuitizing the annuity or annuitizing the retirement account when you die.
When to Hire Financial Advisors vs. Doing It Yourself
“My extended family has been blessed to have significant success in business. The success has brought many complicated trusts, dividends, etc. With the dividend trust payments, our financial situation has changed drastically. We want to be good stewards of these blessings, but I also want to live the core tenets of a white coat investor. The issue I'm having is with the complicated nature of these trust income and tax locations. I'm struggling with seeing in the future where we are not tied to the same advisors and lawyers that set this up for our extended family.
Do you think I should accept at a point that we need to work with these trust lawyers, accountants, and advisors, or should I push on ahead as to do it yourself or managing this large amount of income? Additionally, I've considered a hybrid option, employing a WCI-sponsored pay-per-hour advisor, to act as a guide in both dealing with these trusts and the people that come with it and also continuing to try to simplify and handle our finances myself.”
Disha, what would you do?
“I like the second option, to have someone else look over the situation and just make sure it's not costing you too much money and they're doing a good job and to continue to try to simplify and handle your personal finances while learning about what's going on in the trust. I think that's a great idea. Why not? Right?”
I'm a do it yourself-er at heart. I'm not the most hardcore do-it-yourself-er on the street. But I'm pretty hardcore to do it yourself. But at this point in my life, I have three attorneys. We have an intellectual property attorney. We have a general business counsel attorney. We have an estate planning attorney. I'm working with a different attorney with my parents, for their estate planning. You know what? You're not going to be an expert in every trust, every legal question out there. You're going to need to use attorneys at some point in your life. And that's OK. Don't feel bad getting an attorney when you need an attorney and pay them what they're worth and get good advice. Don't be penny-wise and pound-foolish when it comes to that sort of a thing.
I think you're going to need to work with, if not those attorneys, if you really hate them for some reason, or you think they're giving you bad advice or you don't trust them, then sure, get new attorneys. But you're going to need attorneys, at least one, to help you sort this stuff out. This is the one that presumably your parents or grandparents trusted. Why not start there? Same with accountants. If you want to try to do your own trust tax returns, be my guest. If you want to do your own S corp returns, yes, they can be done by yourself. But at a certain point, you've got to go, ‘I've been successful enough. Is this really how I want to use my time? Am I really qualified to do this?'
We now have an accountant doing WCI tax returns every year. They went back and they changed a couple of things. There were trivial things, but a couple of things that I was doing wrong on the S corp tax returns. If I'm getting things wrong on them, I know most white coat investors, if they try to do really complicated stuff on their own, are probably going to get some of it wrong.
Don't feel bad using an accountant. You certainly have the money for it, it sounds like. So do it yourself-ing is fine, but don't be a rabid do-it-yourself-er. Get advice when you need advice. And if that means talking to a financial advisor, a classic financial planner, asset manager type, to get a second opinion, I think that's a great step. It's fine to pay for some hourly advice for a second opinion. Lots of people do that every year, even though they manage their own assets. Honestly, when it comes to preparing your taxes, setting up wills and trusts and that sort of thing or managing your money, you might want some help. Asset management is not complicated. A handful of index funds is really all it takes, and you can do that. But don't assume that because you can do that, you can also handle all that other crap, too. There's room here to find a middle road and even room to get an advisor just to keep an eye on the other folks and make sure you're not getting hosed. It doesn't mean you have to pay them 1% of your assets the rest of your life. You can pay somebody a flat fee or an hourly rate to get that sort of a second opinion.
Sponsor
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Quote of the Day
This one comes from Warren Buffett. He said,
“Don't ask a barber if you need a haircut.”
People are going to try and sell you whatever they sell.
Student Webinar — Planning for Success — What Medical and Dental Students Need to Know About Money
White Coat Investor and studentloanadvice.com are hosting a webinar for medical and dental students. The webinar is on February 23 at 6pm Mountain Time. It will stream on YouTube, the WCI Facebook group, the WCI Facebook page, Twitter, and on LinkedIn. We will be talking about:
- Why your patients need you to be financially literate
- The secret to being a financially successful doctor
- How to not worry about student loans
- How to save money during residency interviews
- Why buying a house during residency may not be a great idea
For more information and to register, go to whitecoatinvestor.com/student-webinar.
CFE 2022
If you did not get to attend WCICON22 but you want all of the awesome content, it will be available as an online course. Each year, we call this course Continuing Financial Education. This year's course is CFE 2022. It won't be available until around February 23, so be watching for that. Once the course goes live, you can access it at whitecoatinvestor.com/cfe2022.
Milestones to Millionaire
#53 — Dentist Reaches Financial Independence
There is value in persistence. Even if you do not have the highest income, if you persistently save a significant percentage of it and invest it in a reasonable way, eventually it grows to be quite a sum of money, and you will be free from the need to work for your money. A typical rule for financial independence is when you can live on 4% of your nest egg.
Sponsor: DLP Capital
Full Transcript
Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.
Dr. Disha Spath:
Hi, and welcome to the White Coat Investor podcast number 250 – Marriage, kids, and finances. I'm your host Disha Spath and I'm here with Dr. Jim Dahle.
Dr. Jim Dahle:
Hey everybody.
Dr. Disha Spath:
First, this podcast is sponsored by Pearson Ravitz. Pearson Ravitz are disability and life insurance advisors founded by and for physicians. This White Coat Investor recommended agency grew out of one MD's experience with a career-changing on-the-job injury.
Dr. Disha Spath:
Today, Pearson Ravitz serves the medical community in all 50 states. At Pearson Ravitz, they help you as a doctor safeguard your most valuable asset, your income, so you can protect the most important people in your life, your family.
Dr. Disha Spath:
Pearson Ravitz makes human connections before they make quotes. Go to pearsonravitz.com today to schedule your consultation with a Pearson Ravitz advisor.
Dr. Jim Dahle:
All right, it's great. We are spending the whole weekend here together in Utah. We recorded last week's episode yesterday. We're recording this week's episode today. But the difference is we're recording this on January 29th before our big conference and you're listening to this after our big conference. So, we hope the conference went really well, but we can't actually say it did yet. We think it probably did because the people who are planning it and put in a ton of work, it's going to be awesome. But at this point, it's too late for you to go because the conference is over.
Dr. Disha Spath:
Oh, too bad.
Dr. Jim Dahle:
But if you want within the next week or so, we are going to have that content available to you as an online course. We call this course each year, Continuing Financial Education. And this year's course is CFE 2022, Continuing Financial Education 2022.
Dr. Jim Dahle:
If you feel like you missed out, and if you didn't go, you did miss out, you can get that course at whitecoatinvestor.com/cfe2022. Now it may not be there by the day you hear this podcast, but within the next week or so, we're going to have that course available. So be watching for that.
Dr. Jim Dahle:
But it's been a good weekend. We've had a lot of fun. We recorded podcasts yesterday all morning, and then we went snowshoeing. We got to fire the t-shirt cannon, which is going to be the highlight of the conference, we hope, if we don't take out any chandeliers in the ballroom.
Dr. Disha Spath:
Exactly. Yeah. You're trusting me with a cannon.
Dr. Jim Dahle:
Yeah, but we both practiced a lot. So, we think we can actually not take out anybody's eye. Then you went snowboarding today, right?
Dr. Disha Spath:
We went skiing today.
Dr. Jim Dahle:
Skiing.
Dr. Disha Spath:
I learned how to ski. It was amazing.
Dr. Jim Dahle:
And how'd that go?
Dr. Disha Spath:
I actually got down the hill without wiping out too badly, so.
Dr. Jim Dahle:
I see you and your husband here, neither of you with a broken leg.
Dr. Disha Spath:
Okay. So that's a win.
Dr. Jim Dahle:
The kids are still alive.
Dr. Disha Spath:
So it was so fun. So beautiful.
Dr. Jim Dahle:
Congratulations, Brighton, right?
Dr. Disha Spath:
Yeah. Brighton.
Dr. Jim Dahle:
I bet it was beautiful up there today. It was a sunny day.
Dr. Disha Spath:
Oh, it's so pretty.
Dr. Jim Dahle:
Yeah. Awesome. Okay. Well, today we got lots of fun stuff to talk about. Let's start with finances and marriage. Let's talk about marriage. This is really going to be an interesting one to answer because both of our spouses are in the room here with us. So, we'll see what this question is, but I'm afraid of where it's going to go. All right. Let's take a listen.
Dr. Disha Spath:
Let's do it.
Speaker:
Dr. Dahle, I love your show and appreciate all the work you put into it. One topic that I was hoping to learn some more about is finances and marriage. I'm getting married in the spring and I'm fortunate enough to have found a truly wonderful woman with whom I share values.
Speaker:
And while we aren't having difficulties or disagreements about dollars, we realize that there are a lot of decisions and things to do to become an organized merged household. And one, I didn't know if you had any idea of kind of a checklist about how to kind of get your home in order, financially, or if you had any tips or tricks about things such as merging credit cards or car insurance, how to compare and contrast and optimize retirement accounts. How to look at banking, how different couples manage having pretty different incomes, and many other tips or tricks, I'd appreciate.
Dr. Jim Dahle:
All right. Well, I think issue number one when you're married is a lot of people are trying to keep separate finances when they're married for whatever reason. I don't know why. I don't know if it's a trust thing or they just don't want to make changes, or if it's like some power or control thing. I think that's really hard to do well. Now, I'm sure there's a few people out there that do it well, but almost all the financially successful couples I know have been through this process and they've merged their finances in some way.
Dr. Jim Dahle:
So, I think you're going down the pathway the right way, but there's no doubt that there's some changes. And especially the later you get married, the more complicated your financial lives are separately, the harder this merging process is going to be. Disha, where would you start?
Dr. Disha Spath:
What we did, when Josh and I got married was we picked one bank where we would have our checking account, that we would pull everything else into. And Josh has access to USA. So that was amazing. It's a great service that they do.
Dr. Disha Spath:
All we do is we link our credit cards, all of our credit cards, whether they're his or mine, all of our checking accounts, into one platform and USA enables that. I think most banks do that now. You can pull the data in from all the different places you might be spending money, all the different cards you might be spending money on so that it all shows up in one place. And that's really key because when you're trying to go over all of your spending, you want to know where all your accounts are. And it's really nice to see them in one place.
Dr. Jim Dahle:
Yeah. There are opportunities here too. For instance, if one of you has terrible credit, by adding your name to an account that's been around for 20 years, all of a sudden you have spectacular credit. You can do that with your kids too, by the way. I'm not sure if you can put them on an account that's older than them, but I bet you can. And all of a sudden, your kids are in college and have an 810-credit score because they've got this 20-year credit history. So, there's some advantages there that you might not have thought about when you merge accounts.
Dr. Jim Dahle:
But we've got everything completely merged. We've had merged finance since before we really had any money. And so, it was really easy for us as our financial lives got more and more complicated, we just added things on as joint accounts.
Dr. Jim Dahle:
All our credit cards, we have both our names on savings accounts, bank accounts, any checking accounts, brokerage accounts. Anything that can have two people's names on it, we've got two people's names on it just to keep it easy and joint.
Dr. Jim Dahle:
But how do you do that? What I would do is just pick the credit card you like. If somebody's got a really good credit card, add your name to it. They got some awesome gas cards that you can't get anymore. Like, we've got this PenFed one you can't even get anymore, but it gives you 5% back on gas. It's what we put all our gas on. So, if one person had a card like that, put the other person's name on it. Great.
Dr. Disha Spath:
Yeah. And you can actually use that if you're trying a credit card hack. Chase has five cards. You can only get five cards in five years, I think. So, each spouse can then open up five cards in five years. And so, you double your point-earning opportunities.
Dr. Jim Dahle:
Yeah. There are definitely more opportunities there. You got to keep track of that stuff though. I mean, that's like a spreadsheet if you got that many cards.
Dr. Disha Spath:
Well, I put it all in Personal Capital. We're good to go.
Dr. Jim Dahle:
Yeah. If you keep track of it, keep track of it. Retirement accounts, you can't combine. Retirement accounts, always individual. 401(k) is always just in your name. Your IRA is always just in your name, but if you're going to look at all your finances together, you've now got twice as many accounts to manage in your asset allocation. So that's going to be a little bit of a complicated process. The two of you have to actually agree on an asset allocation and then adjust the accounts accordingly. So that part might be a little bit tricky to combine.
Dr. Disha Spath:
Personal Capital.
Dr. Jim Dahle:
Personal Capital does it well, it sounds like.
Dr. Disha Spath:
Not sponsored. Not sponsoring today, but they should be.
Dr. Jim Dahle:
Somebody go get an affiliate deal with Personal Capital. Actually, I think just about every blogger, but us has a Personal Capital deal. I don't think we have them as a sponsor, but yeah, we could probably go get one. But it does work.
Dr. Jim Dahle:
But you need something to combine everything so you can keep track of it. Whether you're doing it on a spreadsheet, whether you're using Personal Capital software or some other software. Mint, I think, has similar functions.
Dr. Disha Spath:
Yeah. And it actually breaks down your asset allocation for you. Look up all the accounts and it just pulls in exactly what you're invested in so you can see.
Dr. Jim Dahle:
Okay. So, the biggest obstacle though, the reason people don't want to combine finances is because they don't want someone else telling them how to spend.
Dr. Disha Spath:
That's true. That's true.
Dr. Jim Dahle:
We've gotten around that. We don't really do this anymore, but we do this for a long time. We have allowances. It was money that we didn't have to account to our spouse for. And when we were really poor in medical school, it wasn't very much money. I think there was at least one month where it was $20.
Dr. Jim Dahle:
But we had money that we could spend and we didn't have to account to the other person for. And, so if you feel like “I don't want someone telling me how to spend,” just set it up so you have allowances. And doesn't have to be $20, it can be $20,000, whatever your budget allows. But enough that you feel like you still have some freedom, some independence, and yet you can still be efficient when it comes to managing your money.
Dr. Disha Spath:
Absolutely. We have fun funds too. And you brought up your really fun topic, budgeting. My favorite. Okay. I understand I am the only person that is excited about that. You know what? Josh and I sit down and budget at the end of every month and we run through our…
Dr. Jim Dahle:
It'd be nice if you could do it once a year, huh?
Dr. Disha Spath:
Yeah, that would be nice. But that wouldn't be very accurate.
Dr. Jim Dahle:
Tell us, what does your budgeting meeting look like?
Dr. Disha Spath:
We have a spreadsheet, a Google Doc that we update together. We have computers facing each other, so it's very official looking. We sit down and we look at all of our spending and we put it all in a spreadsheet. And if something looks a little off or someone's spending too much, we point it out nicely, but we try not to judge too much.
Dr. Disha Spath:
It helps us keep everything together. We both know where the money is going and we both know how we need to adjust for the next month, and then neither one has to tell the other person exactly what to do, the spreadsheet shows you. So that's nice.
Dr. Jim Dahle:
That's probably the hardest part, I think, is getting your goals aligned once you've gotten together, and then working out that budgeting process. I would expect most couples, it probably takes six months. Probably takes doing this six times before you are kind of getting it right. And most of the disagreements you're going to have are going to come out in those first six months.
Dr. Jim Dahle:
So, keep at it, know that this too shall pass, and you can get your finances aligned and be working together toward goals. Because when both of you're working together, it's really powerful. And you're going to get a whole lot closer to what you're trying to accomplish. All right. Got anything else to say on that subject? I think we addressed all the issues, didn't we?
Dr. Disha Spath:
Yeah. The last thing he said was different incomes. I say just don't even worry about whose income it is. The way we do it, because we are a team, all of our money is our money and it's not his income or my income. And it makes it a lot less antagonistic in our house.
Dr. Jim Dahle:
Yeah, for sure. You go from his income and her income to our income. His and her debts to our debts. His and her assets to our assets. And you know what? One of you brought more income into the marriage. One of you brought more assets into the marriage. One of you brought more debt into the marriage. What are you going to do? Do you want to be married or not? So, it now becomes all ours and you start working on it together.
Dr. Jim Dahle:
Now, I wouldn't start working on it before you're married. Remember there are some legal protections that come with marriage, but I wouldn't combine your finances before that point. But once you're married, I do recommend you combine your finances.
Dr. Jim Dahle:
All right, let's take our next question here. This one's about 529s, it sounds like. Let's take a listen.
Speaker 2:
Hey, Dr. Dahle. I'm from Michigan. Just a quick question regarding 529 plans. We contribute to our kids 529 plan. Our kids are pretty young at this point. My son goes to Kuman and I'm just wondering, can we save the receipts for Kuman and in the future date, just like an HSA, we can show those receipts to 529 plan and get those money back as it grows, as we contribute over time? I cannot find the answers for that. So can you please let us know and thanks for all you do.
Dr. Disha Spath:
Okay. I had to look up Kuman. I think this is like a math tutoring thing, which looks amazing. But unfortunately, 529s don't work like HSAs where you can save your receipts and just turn them in. I believe you have to turn them in by the end of the year, that you are going to use that money. Is that right?
Dr. Jim Dahle:
Absolutely. You can't save receipts. You can save them until the end of the year, but by the end of the year, you got to take the money out or you're not taking it out based on that receipt. So not an option for you, but here's the deal. How much money are you putting in there? Most people don't get enough into their 529s to cover the educational costs for their kids.
Dr. Jim Dahle:
So, it's not a matter of trying to get the money out. Plus, if you have a little too much in there, you know what most people do? Grandkids. Grandkids. You just change the beneficiary. So, it's not that big a deal if you got too much money in there.
Dr. Disha Spath:
I think you can use it yourself if you want to do some continuing education. I plan to use any extra on a cooking class in Italy at some point.
Dr. Jim Dahle:
Yeah, for sure. You can change the beneficiary. I'm not sure the cooking class in Italy is going to be permissible though. You're going to have to look that one up.
Dr. Disha Spath:
I'm pretty sure it is.
Dr. Jim Dahle:
Most of the time it's got to be through a US institution. So, if it's a cooking class in Italy, through a US university or something, it's going to work.
Dr. Disha Spath:
Business opportunity.
Dr. Jim Dahle:
But if you're just calling up a random person in Italy, that's probably not going to cut it. But you can use these things for K through 12. If you've got your kids in private school, you might as well run the money through the 529. Maybe you get a state tax break on it. Maybe you can let it grow for a year or two before you put it out and get some tax-free earnings.
Dr. Jim Dahle:
If you're having significant K through 12 educational expenses, then you might as well take advantage of the 529. But if your state's not giving you a state tax break, you're taking the money out immediately after you put it in the 529, maybe you don't want to bother.
Dr. Jim Dahle:
But otherwise, this is something for high earners. This is a tax break for the rich, if you will. Poor people don't use 529s because they don't have the money to put into 529s. So, take advantage of these things. These accounts are for you as a high earner, you talk about all these downsides of being a high earner, right? You pay these high marginal tax rates and you got all these special taxes just for you. And you're phased out of all kinds of deductions, but the 529, that one's for you. So be grateful and use it as best you can.
Dr. Jim Dahle:
All right. I hope your COVID numbers are doing what our COVID numbers are doing. It's January 29th and our numbers are down 50% here in Utah from the peak a couple of weeks ago. I know in New York they're down three quarters at least a couple days ago when I checked. And at the rate we're going, there's not going to be any COVID at all by the time you hear this podcast.
Dr. Disha Spath:
Oh God, you're jinxing this.
Dr. Jim Dahle:
But, who knows, maybe there's…
Dr. Disha Spath:
There's going to be another Omicron.
Dr. Jim Dahle:
What's the variant? Row? What's next? I don't know. But anyway, those of you that have been on the front lines, thank you. Thank you for what you're doing. I got COVID this last month. It was not the world's worst experience I ever had, but it wasn't any fun. It was a wicked sore throat. I don't know where I got it. Whether I got it from work or one of my daughter's friends or what. But for those of you who have had it, it's not that fun. You definitely don't want it if you haven't had it yet, but you know what? Omicron plus vaccinations, hopefully, it's not too bad, because there's an awful lot of us out there that have had at this point, some of us more than one time.
Dr. Disha Spath:
Omicron.
Dr. Jim Dahle:
You're not saying it that way on the East Coast. How are you saying it?
Dr. Disha Spath:
It's Omicron.
Dr. Jim Dahle:
That's how you're saying it.
Dr. Disha Spath:
Omicron, like O-micron.
Dr. Jim Dahle:
Write in and tell us how you pronounce it because we've got a serious debate here. But we'll find out, we'll find out because you guys are going to come down on one side or the other, one of us is going to be wrong.
Dr. Disha Spath:
It's not going to be me.
Dr. Jim Dahle:
All right. Let's get back into kids and finances. Teaching children about finances without them having a job is our next question. I've only got one of my kids with a job and I've been teaching them about finances for years. So, I'm interested to hear this question.
Speaker 3:
Jim, how are you? I've been reading your post and listening to your podcast for a long time now. You've been influential in my journey towards financial literacy. So, I thank you for that.
Speaker 3:
I'm a middle-aged radiologist living in the state of Florida. I have six kids under the age of 14. Under my wife and I joined a bank account, we have separate accounts for my kids where they deposit their birthday gifts, allowances, tooth fairy money, etc. Although not a lot of money at this time, they'll be continuing to add to this. And as they're young, this money can grow and continue to grow for a long time.
Speaker 3:
This money's not currently earning anything in the savings account. And I would like the opportunity to teach them about investing. Unfortunately, none of my children have jobs and I don't have a business where I can figure out a creative way to employ my children. Opening up their own Roth IRA account would've been ideal and putting the money into low-cost mutual index funds, such as one of the Vanguard targeted retirement date funds.
Speaker 3:
I'm not sure if I can open up a kid's brokerage account at Vanguard or Fidelity and transfer after-tax money into their accounts. I would assume I may be able to open a joint account and probably subject their money to my taxes, which would kind of defeat the purpose.
Speaker 3:
What would be the best way to teach kids how to be responsible with money and at the same time, maximize the returns along the way? Thank you for all that you do.
Dr. Disha Spath:
Okay. I'll take this one. My kids and I love to invest and the way we do it when it's not earned money, is a UTMA. And Acorns actually has a great interface where the kids can see the compound interest working. They can see what they're invested in. My oldest son, who is six, likes to go around saying he owns a piece of Amazon every time we buy something from Amazon. He's like, “Mommy, I'm making money.” I'm like, “Yes, you're making lots of money because of me.”
Dr. Jim Dahle:
Some tiny fraction of a penny.
Dr. Disha Spath:
Yes. There is a fee there because it's a nice interface. It's $5 a month. But we pay that just so that they can have that experience of feeling like they own a part of a business and really understand investing.
Dr. Disha Spath:
The UTMA is great for that if they don't have earned income. Of course, Roth IRAs are great if they do have earned income and there's some way you can find to do that. And the last thing that we invest for them is 529s, which you've already talked about.
Dr. Jim Dahle:
Yeah. Acorns is the one that rounds up, right? Isn't that the one that rounds up, like you spend 624s on something, and then it's like, do you want to put 76 cents in Acorns? That's the one?
Dr. Disha Spath:
They have different accounts, but that's more for your adult account.
Dr. Jim Dahle:
Okay. Fair enough. So yeah, UTMAs. We're listening to your question, I'm like, is this like a UTMA ad, or something? But that's exactly right. It's a kid's brokerage. That's what it is. It's a custodial account. And so, your kids don't control it until in most states 21. It's 21 in Utah. It's 21 in most states. But in some states, it's 18. Some states it can be as late as 25. But until then, it's their money. So, if you spend it, you got to spend it on their behalf. And then when they hit that age, whatever it is, usually 21, it's their money.
Dr. Disha Spath:
They can spend on whatever they want.
Dr. Jim Dahle:
Whatever they want, cocaine and hookers, a trip to Europe, a new Tesla, whatever, it's their money at 21. So that's the downside of this account. The upside is that it gets a significant tax break. It's around $1,200 a year that doesn't get taxed at all, assuming they don't have any other unearned income. And then another $1,200 that gets taxed essentially at their earnings rate.
Dr. Jim Dahle:
So that's up to about $2,400 a year in income that you are not paying at your tax rate. Now, if it earns more than that, you start paying what's called kiddie tax, which is your tax rate. It gets paid on your tax return rather than their tax return essentially.
Dr. Jim Dahle:
So that's great. If you're investing tax-efficiently, you can put a lot of money in there before you get to $2,400 a year in income. I mean, the yield on a total stock market fund right now is well under 2%. And so, you could have over $100,000 in there before you start paying it at your income tax rate.
Dr. Jim Dahle:
UTMA, is I think exactly what you're looking for, but we have the same thing. We have 529s for college. We have Roth IRAs for any earned money they have. Which is a lot for the teenager. She maxes out her Roth IRA now, but for the other ones, it's whatever we pay them for modeling mostly and maybe a few odd jobs and a lemomade stand and that's about it.
Dr. Jim Dahle:
But we view the UTMA as a pretty significant fund. We call it the 20s fund and it's kind of a trial inheritance for them. Because if you think back to when you could really have used money, when you could have really used an inheritance from your parents, when was it?
Dr. Disha Spath:
It was in your 20s.
Dr. Jim Dahle:
In your 20s. You got all these expenses and you have no money and you have no ability to make money at any sort of a decent rate. So that's when you need it. Whatever it might be. It might be a wedding, a honeymoon, a car, a down payment, missionary work, grad school.
Dr. Disha Spath:
Residency interviews.
Dr. Jim Dahle:
Residency interviews. All kinds of expenses that you need in your 20s. And so, the thing we like about that idea is we're giving them an inheritance, and then we see what they do with it. Before they get the real inheritance, we get to see how they manage a small inheritance. Now we know whether we put it in trust or something because it turns out they need to spend through a trust. But hopefully, by the time they're out of their 20s, we know that because we've watched what they do with the first one.
Dr. Jim Dahle:
But that's what you're looking for. You're looking for UTMA. If you're just talking about putting tiny amounts of money in it, something like Acorns is probably really good. If you're going to be serious about it though, I'd go wherever you put your accounts, whether that's Fidelity or Vanguard or Schwab or whatever. But they've got minimums. Like Vanguard, I think it's $1,000 minimums. So, if you're not going to get a thousand bucks in there, you probably don't want to start a Vanguard.
Dr. Disha Spath:
That's our plan to transfer over to Vanguard.
Dr. Jim Dahle:
All right. Quote of the day. Why don't you give us this one, Disha?
Dr. Disha Spath:
“Don't ask a barber if you need a haircut.” Warren Buffet. It's true. People are going to try to sell you whatever they sell.
Dr. Jim Dahle:
Right. And where this comes up a lot of times is disability insurance. It's like I tell people, you go to the disability insurance agent to help you decide which policy is best for you. They show you all these policies and demonstrate which one is ideal for your particular state specialty, gender, whatever.
Dr. Jim Dahle:
But you don't go there and go, “How much disability insurance do I need?” Because the answer is “As much as you can buy”. And with all the bells and whistles and riders and stuff. The ones on our recommended list, they're very good. They all make great money. They have lots of clients, they're going to help you. But at the same time, this is how they make their living. There is a financial conflict of interest there.
Dr. Jim Dahle:
So, it's probably best, at least if you decide about how much you need before you go in there. If you want a $10,000 a year policy, or $10,000 a month benefit, you don't want to come out of there with a $25,000 a month benefit. So, decide those things before you ask the barber if you need a haircut.
Dr. Jim Dahle:
Okay. This one, we should go over. This was an email. This isn't really a question. It's more something that somebody wrote to point out. I feel like I've said this before, but maybe not as much or as adamantly as I should have.
Dr. Disha Spath:
It's worth repeating. You know what? I will do it.
Dr. Jim Dahle:
All right.
Dr. Disha Spath:
Okay. This fact bears not only mentioning, but repeating, “Until all women have no doubt in their mind that this is a high priority, a young woman who has had no prior medical problems may suddenly find herself with any number of unforeseen abstract obstetric complications, placenta previa, preeclampsia, etc, which will likely complicate her life insurance application and probably raise her premiums.
Dr. Disha Spath:
Your rule of thumb seems to be, to get life insurance if you have any dependents who would need your income, should something happen to you. But for women, we should be applying even before we have any dependents if there is any possibility or future plan of pregnancy.” It is a great point.
Dr. Jim Dahle:
Yeah. Here's the thing too. As we all know, pregnancy isn't always planned. In fact, in the emergency department, the rate of immaculate conception is about 15%. People say there's no possible way I can be pregnant. And about 15% of them are. And so, it's true. It's not actually having the dependent, it's plans to have a dependent in the near future. I'm not saying you got to do it when you're 25 and not planning to have kids until you're 35, but you got to have term life and disability insurance in place before you get pregnant. Before you get pregnant.
Dr. Disha Spath:
That would be the best way to plan.
Dr. Jim Dahle:
Yeah. I tell people to buy this stuff when you come out. As far as disability, buy it when you come out of medical school, buy it as an intern. Now, that doesn't always mean before you have kids. But often it means for a doc before you had kids.
Dr. Jim Dahle:
But as far as term life goes, when someone depends on you, you need to have insurance. And in this case, you could run into problems. And it's not like you just get these medical problems during pregnancy, people die during pregnancy still. It's a lot safer than it used to be. But there was a sad story a couple of years ago, it might have even been an OB resident who died during childbirth and no insurance. It's a terrible, sad story.
Dr. Jim Dahle:
GoFundMe is not an insurance company. I mean, it's funny, but it's sad. It breaks my heart when I see some newspaper article about some 25-year-old father of three, and there's GoFundMe at the bottom and I'm hoping the GoFundMe is in addition to some life insurance, but I think most of the time it is the life insurance. If you look at what the average GoFundMe raises, it's a four-figure amount. It's not a lot of money. Your family is not going to live on it for very long.
Dr. Disha Spath:
Yeah. This message was longer. But I think that was the meat of it.
Dr. Jim Dahle:
Yeah. I think that's the main point. So yes. Get your life insurance, get your disability insurance before you get pregnant. Very smart move. But you don't need to buy it 10 years before you get pregnant. But as you're starting to think about starting a family, that's the time we get that insurance in place.
Dr. Disha Spath:
Absolutely. All right. Next question.
Speaker 4:
Dr. Dahle, thanks for helping make all of us better physicians through financial education. I think my wife and I have won the game and wonder if we should stop playing. However, I'm not sure how to do this and what it actually means. We're a two-physician family in our early 50s with two kids and a current combined income of about $900,000. We have no debt and plan to retire in five years.
Speaker 4:
Our combined assets include about $5 million in tax advantage accounts, $2 million in taxable, $1.3 million in 529s, $45,000 in an HSA, $200,000 in cash, and an additional $1 million in private equity real estate. We have a demonstrated high-risk tolerance, but decreasing our risk seems prudent. On the other hand, we could stomach a 50% reduction in a bear market and still be over our financial independence number. Any suggestions?
Dr. Jim Dahle:
All right. First of all, congratulations on your success. You're doing awesome. You guys are really killing it. I mean, a $900,000 income. We're trying to add up your assets. We're around what? $9 million, something like that. $9 million. You killed it. You're doing awesome.
Dr. Jim Dahle:
And the fact is you say, you're going to work five more years making this kind of money. I mean, your assets are going to be double what they are now five years from now. And I suspect your spending habits probably aren't going to change all that much.
Dr. Jim Dahle:
So, what you really ought to be thinking about is what you're going to do about estate taxes, because you're almost surely going to have an estate tax problem. And so, start thinking at least a little bit about your estate planning.
Dr. Jim Dahle:
But as far as this concept, this concept of stop playing when you've won the game, comes from William Bernstein, who basically said that. And the idea was to have a liability matching portfolio. Where your portfolio matches your future expected liabilities and the idea is with the things that are going to match those liabilities, you don't take a lot of risk. Whether you're putting those into TIPS or I bonds or those sorts of things, relatively low-risk assets for the money you absolutely must-have.
Dr. Jim Dahle:
And then everything else, you can take whatever risk you want, because as you mentioned, even if you lose half your assets in the market, you're still okay. It's like Warren Buffet. What did he tell his wife to put the money in after he is gone? 90% S&P 500 index fund and 10% in treasuries, I think is what he said.
Dr. Jim Dahle:
Because the truth is there's so much money there that even if you lost 90% of it, it's still more money than you're ever going to spend. And you guys aren't quite in the Warren Buffet category, but it's the same basic philosophy here. Some things you ought to be thinking about. Estate planning, if you don't have at least the bones, the skeleton of estate planning in place, it's time to start thinking about that.
Dr. Jim Dahle:
Two, is there something you can spend money on that is going to make your life happier? If there is, go spend the money. Whether that's upgrading a car, whether that's doing a renovation on your house, whether that's going on a trip, or more likely, it involves changing something about how you're earning money.
Dr. Jim Dahle:
Maybe you take less calls. Maybe you do fewer night shifts. Maybe you take every Friday off, whatever it might be. You need to, at this point, be looking at those sorts of things. Because otherwise you're just going to be leaving a whole lot of money behind when you go, at the rate you guys are going.
Dr. Jim Dahle:
You're just doing so very well that you got to be thinking about all those other things. Maybe it's lawn care, maybe you're doing your own lawn care, your own snow removal, cleaning your own house, those sorts of things. You can buy some of your life back by spending money on those items. And you are at that stage of life when you ought to be thinking about all of those things. And if you still like mowing the lawn, fine, go mow the lawn. If you hate it, why are you still doing it? Because you can afford not to.
Dr. Disha Spath:
You can't take it with you. Yeah.
Dr. Jim Dahle:
What other tips do you have for somebody making $900,000 a year who is planning to work five more years and already has $9 million? What do you tell that person?
Dr. Disha Spath:
You know what? I'm just like, hey, good job. But for real though, you should outsource. At this point, if I were in your shoes, I would be outsourcing as much as I could just so I could just relax and enjoy my life with my kids.
Dr. Jim Dahle:
But as far as the asset allocation, if you want to do a Bernstein says do, basically go out and buy enough TIPS to cover all your future expenses, all your future mandatory expenses. And then you can take additional risk with the rest of the portfolio, but that's where the quote comes from, that you've heard before to stop playing when you've won the game.
Dr. Disha Spath:
And TIPS are Treasury Inflation Protected Securities.
Dr. Jim Dahle:
Exactly. They're basically inflation index bonds. The idea behind those, and they're not like a screaming deal right now, they actually have negative real yields right now. You go buy a five-year and it's like, minus 1% real is what they're selling them at.
Dr. Jim Dahle:
But the idea was when you can get them with at least a 0% real or 1% or 2% real rate on them, then you could at least keep up with inflation with it without really taking on significant risk.
Dr. Jim Dahle:
All right. We're going to talk about some more people with first-world problems here. We're going to talk about some trusts. We got a question from John here. I think it's about my trust, which we're just putting in place as we're recording this. So, let's take a listen.
John:
Hello, Jim. This is John from Minneapolis. Congratulations on setting up your family's will and estate plan. I did the same thing about two years ago, but I've been a bit lazy about changing my beneficiaries to my trust.
John:
I was wondering if you could explain how you went through that process. Was it difficult? Did you have to get notarized forms to add a secondary beneficiary of your family's trust?
John:
I also have a question about something on one of my 401(k) plans that is asking if I want to waive what is called the QPSA. I'm not sure if I should wave that or leave that in place. Basically, it sounds like if you die, your account gets put into an annuity that is paid out to your spouse if that's the beneficiary or primary beneficiary. I'd rather have what the asset allocation is currently in my 401(k) go to my spouse rather than an annuity.
John:
Can you explain if the QPSA should be waived and any other tips you have about setting up secondary beneficiaries with respect to a trust? Thanks for everything you do.
Dr. Jim Dahle:
All right. Great question. I think there's a little bit of confusion. If not in your mind, in the minds of some of our listeners. We're talking about two types of beneficiaries. When you make a trust, there's a trust document written up that talks about the beneficiaries of the trust. It's important not to confuse those beneficiaries with the beneficiaries of your retirement accounts for instance, or your life insurance policies or your annuities or whatever.
Dr. Jim Dahle:
Because those are set up by the trust document. The beneficiaries of your trust are from the trust document. What the trust document says, that's who's going to benefit from whatever is in the trust.
Dr. Jim Dahle:
However, what a lot of people want to do is they want all of their money when they die to go through the trust. And if you want that to happen, the trust has to be named as the beneficiary.
Dr. Jim Dahle:
And usually it’s not a secondary beneficiary, usually it’s a primary beneficiary, unless the first beneficiary is your spouse and then the second to die, it goes into the trust. That happens a lot as well.
Dr. Jim Dahle:
But how do you do that? Well, it depends on the institution. If you want to change the beneficiary of Vanguard, you log in vanguard.com. You get the text from your phone, you put that in there and then you're in and you go to beneficiaries and you change it. I mean, that's all there is to it. You just do it online. You hit enter and you got new beneficiaries. You can change what percentage goes to everybody. It's super easy.
Dr. Jim Dahle:
Now, every institution might be a little bit different. If you want to change it under your life insurance policy, maybe you got to fill out their form and send it to them. But this is an important part of setting up a trust. Because if you don't ever actually put anything in the trust, if you don't rename it, so the trust owns it, or you don't make the trust the beneficiary of it, you just wasted a lot of money and time and effort on setting up a trust. If there's nothing in it, you're not helping anyone.
Dr. Jim Dahle:
That's an important part. It sounds like you set up a trust a couple of years ago and you still haven't really funded it or gotten it all set up. Remember the first part doesn't do any good unless you do the second part. That might be, if this is a revocable trust and you're just trying to avoid probate with stuff, that might mean retitling your house, it might mean retitling your vehicles, your boat, whatever, setting up your will so that anything left over goes into the trust.
Dr. Jim Dahle:
You got to make sure you take care of all those steps. If you only do half of it, you're just going to leave a mess for your executor to unwind. And everyone's going to be looking at each other going, why didn't he bother fixing this while he was still alive? He could have saved just a lot of time and effort.
Dr. Disha Spath:
And this is your reminder, whether you have a trust or not, to go in and actually choose your beneficiaries in all your accounts, because that's a step that a lot of us forget. And then once something happens and then it's a mess.
Dr. Jim Dahle:
Yeah, because if there's no beneficiary at all, it gets paid to your estate and that's not what you want. You want, especially a retirement account, because you can stretch these things for 10 more years. You want it to go into a person most of the time, or at least you want your trust set up so that it doesn't have to withdraw all at once. A bigger problem I think is people don't change their beneficiary when they need to.
Dr. Disha Spath:
Right. If you get divorced.
Dr. Jim Dahle:
If you get divorced, change your beneficiaries, otherwise, all your money's going to your ex. Evaluate those beneficiaries every now and then. What else can we say about trusts?
Dr. Disha Spath:
Yeah, the QPSA question.
Dr. Jim Dahle:
Oh yeah. The QPSA. We had to Google this. We didn't know what QPSA was.
Dr. Disha Spath:
It's an annuity. If you don't want it to happen, then don't choose that.
Dr. Jim Dahle:
Yeah. If you don't want your spouse to get an annuity, don't choose it. But here's the deal. Remember retirement accounts, the general goal, the general guideline, the government has for retirement accounts is you can't screw your spouse. You can't somehow keep your spouse from being protected also by your retirement account. There are all these things.
Dr. Jim Dahle:
When you move money out of a retirement account, a lot of times you need your spouse's signature to do it. And so, you got to keep in mind that everything to do with the retirement account and how you get money out of it, they're thinking about your spouse. This sort of thing is put in place thinking, “Well, what if my spouse doesn't know how to manage money? Let's put an option in there so they can just annuitize it. And my spouse will have an income for the rest of their life and doesn't have to think about it.”
Dr. Jim Dahle:
They're coming from a good place with this sort of a suggestion, but if you don't want it to happen, you don't have to have it happen. Your spouse can just roll your retirement account into theirs when you die. It's just a simple rollover. Then they have a bigger IRA or a bigger 401(k), or whatever it gets rolled into. I hope that answers the question. QPSA, new term to me. But it's just annuitizing the annuity or annuitizing the retirement account when you die.
Dr. Jim Dahle:
Our last question today is another one on estate planning. This one is from an email. “My extended family has been blessed to have significant success in business.” Awesome. “The success has brought many complicated trusts, dividends, etc.” First-world problems. That's what we're talking about today.
Dr. Jim Dahle:
“With the dividend trust payments, our financial situation has changed drastically. We want to be good stewards of these blessings, but I also want to live the core tenants of a White Coat Investor.
Dr. Jim Dahle:
The issue I'm having is with the complicated nature of these trust income and tax locations. I'm struggling with seeing in the future where we are not tied to the same advisors and lawyers that set this up for our extended family.
Dr. Jim Dahle:
Do you think I should accept at a point that we need to work with these trust lawyers, accountants, and advisors, or should I push on ahead as to do it yourself or managing this large amount of income?
Dr. Jim Dahle:
Additionally, I've considered a hybrid option, employing a WCI sponsored pay-per-hour advisor, to act as a guide in both dealing with these trusts and the people that come with it and also continuing to try to simplify and handle our finances myself.” What do you think? What do you tell them?
Dr. Disha Spath:
I like the second option. To have someone else look over the situation and just make sure it's not costing you too much money and they're doing a good job and to continue to try to simplify and handle your personal finances while learning about what's going on in the trust. I think that's a great idea. Why not? Right?
Dr. Jim Dahle:
Yeah. I'm a do it yourselfer at heart. I'm not the most hardcore do-it-yourselfer on the street. That's a pediatrician that lives down the street. But I'm pretty hardcore to do it yourself.
Dr. Jim Dahle:
And at this point in my life, I have three attorneys. We have an intellectual property attorney. We have a general business council attorney. We have an estate planning attorney. I'm working with a different attorney with my parents, for their estate planning.
Dr. Jim Dahle:
You know what? You're not going to be an expert in every trust, every legal question out there. You're going to need to use attorneys at some point in your life. And that's okay. Don't feel bad getting an attorney when you need an attorney and pay them what they're worth and get good advice. Don't be penny-wise and pound foolish when it comes to that sort of a thing.
Dr. Jim Dahle:
So, yes, I think you're going to need to work with, if not those attorneys, if you really hate them for some reason, or you think they're giving you bad advice or you don't trust them, then sure, get new attorneys. But you're going to need attorneys, at least one, to help you sort this stuff out. This is the one that you're presumably parents or grandparents or whatever trusted, why not start there? That's a reasonable place to start.
Dr. Jim Dahle:
Same with accountants. If you want to try to do your own trust tax returns, be my guest. If you want to do your own S corp returns. Yes, they can be done by yourself. But at a certain point, you got to go, “I've been successful enough. Is this really how I want to use my time? Am I really qualified to do this?”
Dr. Jim Dahle:
We now have an accountant doing WCI tax returns every year. And they went back and they changed a couple of things. There were trivial things, but a couple of things that I was doing wrong on the S corp tax returns. And if I'm getting things wrong on them, I know most White Coat Investors, if they try to do really complicated stuff on their own, are probably going to get some of it wrong.
Dr. Jim Dahle:
Don't feel bad using an accountant. You certainly have the money for it, it sounds like. So do it yourselfing is fine, but don't be a rabid do-it-yourself-er. Get advice when you need advice. And if that means talking to a financial advisor, a classic financial planner, asset manager type, to get a second opinion, I think that's a great step. It's fine to pay for some hourly advice for a second opinion. Lots of people do that every year, even though they manage their own assets.
Dr. Jim Dahle:
Honestly, when it comes to all this, when it comes to preparing your taxes, setting up wills and trusts and that sort of thing, or managing your money, managing your money is the easiest part. Asset management is not complicated. A handful of index funds is really all it takes, and you can do that, but don't assume that because you can do that, you can also handle all that other crap too.
Dr. Jim Dahle:
There's room here to find a middle road and even room to get an advisor just to keep an eye on the other folks and make sure you're not getting hosed. And it doesn't mean you got to pay them 1% of your assets the rest of your life. You can pay somebody a flat fee or an hourly rate to get that sort of a second opinion.
Dr. Disha Spath:
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Dr. Disha Spath:
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Dr. Disha Spath:
I actually use Pearson Ravitz myself, and it was a wonderful experience. I just have to say. Pearson Ravitz makes human connections before they make quotes. Go to pearsonravitz.com today to schedule your consultation with a Pearson Ravitz advisor.
Dr. Jim Dahle:
Awesome. Okay. What have we got coming up? On the 23rd, we've got a student webinar. If you are a medical or dental student, this is for you. You can sign up at whitecoatinvestor.com/student-webinar. It's totally free.
Dr. Jim Dahle:
It's at 6:00 PM Mountain. So that's 5:00 Pacific, 8:00 on the East Coast. If you can't make it, you'll be able to watch a recorded version as well, but sign up there so you get an email that actually reminds you to attend the webinar.
Dr. Jim Dahle:
It's totally free. It's something I would present if I came out to your medical school, but I can't go out to all the medical schools. So, this is the best I can do. And we're going to have it on YouTube and Twitter and our LinkedIn account and the Facebook group, and our Facebook page. And we're going to be streaming it live.
Dr. Jim Dahle:
Andrew Paulson is going to be with me from Student Loan Advice, and we're going to be talking about student loans. We're going to be talking about spending as a student. We're going to be talking about choosing a specialty. We're going to be talking about all kinds of stuff that's relevant to you and your financial situation.
Dr. Disha Spath:
And it's free.
Dr. Jim Dahle:
And it's free.
Dr. Disha Spath:
So why don't you come?
Dr. Jim Dahle:
So, you might as well come. Don't forget about that online course coming out CFE 2022. That's at whitecoatinvestor.com/cfe2022. It'll be out in the next week or so.
Dr. Jim Dahle:
Thanks to those of you who have left us a five-star review and told your friends about the podcast. Here's our most recent one, “Incredible podcast. This podcast is a must-listen for anyone looking to achieve financial freedom. Dr. Dahle walks through so many different aspects of finance in a way that is easy to understand and provides actionable advice to help you build your wealth. Five stars.”
Dr. Jim Dahle:
Thanks for that great review. I'm looking for the first one. We're looking for our first five-star review that mentions Dr. Spath. So, if you're the first one to put that one in there, we'll send you a book or a t-shirt or something in appreciation.
Dr. Disha Spath:
All right. Yeah.
Dr. Jim Dahle:
We do appreciate those five-star reviews though. They really do help other people find the podcast and help them become financially literate too.
Dr. Disha Spath:
And it means a lot to us to know that you value what we have to do, and what we're saying.
Dr. Jim Dahle:
But if you want to leave us a one-star review, don't. Just send us an email and tell us what to fix. Public praise, private feedback, right? That's what we're looking for.
Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney, or financial advisor. So, this podcast is for your entertainment and information only, and should not be considered official personalized financial advice.
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