Contribution Limits, Estate Planning, and Emergency Funds

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 400.

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All right, welcome back to the podcast. This is podcast number 400. That’s right, 400 of these episodes we’ve done. And since we do what? About 50 of them a year, given that there’s 52 weeks a year, that means we’ve been doing this for eight years now. It’s a long time to keep a podcast going. Most podcasts that get started don’t even last a year. So pretty remarkable. We’re excited about hitting that number this year. We’re also excited this is the beginning of 2025. So, hopefully you’re going to have a great financial year in 2025 and we’re here to help you do that as best we can.

I need to take a minute to go back a couple of months ago when we were awarded the White Coat Investor Scholarship for 2024. We failed to thank our sponsors, particularly our platinum sponsors, for that scholarship, for their support. And there were three of them that I want to mention in particular today.

They are all insurance agents. Bob Bhayani with DrDisabilityQuotes.com, Matt Wiggins at Doc Insure LLC, and Larry Keller, Physician Financial Services. Thank you for supporting the White Coat Investor Scholarship. Of course, all of the money they donated to that went to the scholarship winners, and we’re excited to help reduce those docs’ indebtedness, as well as to boost physician financial literacy by running that program through our medical, dental, and other professional schools.

I also want to make sure you guys know about our end of the year sale. There’s only a few days left. This buy one, get one sale ends January 6th. If you buy any WCI course, you get our Continuing Financial Education 2023 course for free. That’s like 50 hours of content, absolutely for free, for buying any of our other courses. So, check that out. That link is wcicourses.com.

DISCUSSION ON VOX ARTICLE: “A BIG INSURER BACKED OFF ITS PLAN TO PAY LESS FOR ANESTHESIA”

I wanted to talk about an article. This article came out in Vox last month, and of course, Vox is known for a bit of a progressive viewpoint. That’s okay, but keep that in mind as we talk about this article. The article was written by Eric Levitz, and the title was, “A Big Insurer Backed Off Its Plan to Pay Less for Anesthesia.” That’s bad. The subtitle, “What the Fight Between Anthem and Anesthesiologist was Really About.”

This was, as those of you in anesthesia know, they basically wanted to pay anesthesiologists less. They felt like they were making too much money basically, but their plan to do that was actually to put a limit on how long they would pay for anesthesia. Even if the procedure went longer than it was supposed to, they wanted to not have to pay the anesthesiologist for their time beyond that amount, which obviously sounds kind of crazy at first. What are we supposed to do? Wake them up before the procedure is done? Why is the anesthesiologist being punished? Because the surgeon’s slow, and all these other questions come into mind.

And of course, patients worried that they would have that cost passed on to them, which probably wasn’t going to happen in the first place. It just means the doctors make less money is the way it works out. And they’re treating doctors unfairly by paying them for less than the work they actually do.

This article pointed out that yeah, this would have cost anesthesiologists not their enrollees. But the author took the perspective that, “Hey, these guys are getting paid too much.” And so, one of the subtitles in the article was that providers, not insurance companies, are the primary drivers of high health care costs.

And he goes on to say, “Private insurance companies have earned the public’s distrust. They routinely put profitability above their policyholders’ well-being. The system of private health insurance provision also has higher administrative costs than a single-payer system in which the government is the sole insurer. But the avarice and inefficiencies of private insurance are not the sole or even primary reasons why vital medical services are often unaffordable and inaccessible in the United States. The bigger issue is that America’s health care providers, hospitals, physicians, and drug companies charge much higher rates than their peers in other wealthy nations.”

That’s a bit of a tired comparison. Because let’s be honest, everything costs more in America. Everybody makes more in America. No matter what your profession is, no matter what your job is, go travel the world. Guess what? Stuff’s cheaper in other places. And so, you shouldn’t be surprised when health care is cheaper there as well. I just returned recently from a trip to Africa. And guess what? Health care is real cheap in Africa. But it’s not the same health care you’re getting here for sure.

But the other thing is that this idea that doctors are a major driver of health care expenses just isn’t true. If you look at the percentage of the health care dollar that goes toward physician payments, it’s about 20%. It’s about 20%. But you know what? That is not going to physician salaries. Only 8% of the health care dollar goes to physician salaries.

So, let’s say you want to pay doctors a quarter less than what they’re being paid. You cut all of their salaries by 25%. How much does that save on your health care dollar? It saves 2%. It’s kind of the same old tired thing when people talk about, “Well, let’s keep people from going to the ER, because that’s what’s driving up the whole expense of our health care system.”

Well, emergency medicine payments, both to hospitals, doctors, everything, is only about 3% of the health care dollar. It’s a tiny percentage. Even if you cut it in half, you’re only saving 1.5% of what is spent on health care in this country. There are much bigger drivers of health care expenses out there. And the insurance companies and the inefficiencies created by them are not a small chunk of this. They are a large chunk of this.

Yes, hospitals are a big chunk as well. Pharmaceuticals are a big chunk as well. There’s plenty of inefficiency in the system. But even if we run all of that inefficiency out, you’re probably not saving that much money. Maybe you can cut it by 20% by getting all that inefficiency out of there.

The fact is health care is expensive, because we can do some pretty awesome stuff now. That stuff takes people that have been trained for a long time and are taking on a lot of risk, and it takes equipment that takes a long time to develop and is really expensive, made out of very high-grade materials. And it’s expensive stuff we’re doing. It’s pretty amazing stuff we’re doing, but it’s not cheap. America has decided, “Hey, a lot of this stuff we’re willing to spend money on”, and that is why health care is so expensive.

I sometimes wonder if my third job is going to be working on helping to fix our crazy health care system, because it truly is crazy. But this idea of heaping all the blame on doctors just making too much money probably is not the answer to fixing our health care issues in this country.

All right. I had somebody ask for a guest to come on the podcast, and I had no idea who I could call. But they asked for somebody who has left the medical field to work in the insurance industry. So, if you fit that bill and would be interested in doing a short interview on this podcast, there is some demand to hear your story. Email us at [email protected] if you fit that bill.

MULTIPLE RETIREMENT ACCOUNT RULES

Let’s get into your questions now. Here’s a question by email. “I wanted a bit of clarification since my hospital retirement staff don’t know the answer to this. If I max out the employer and employee max of $69,000 in my 403(b), does that mean that I cannot put in 20% of my 1099 income in a solo 401(k)?

My establishment has a 401(a) where all the employer contributions go, and it’s coupled with the 403(b) at the end of the year. We don’t need to contribute anything to the 401(a) plan, but that means I can contribute $46,000 after the max for a backdoor Roth on my 403(b). This would be all great if I can also contribute 20% of my 1099 income to a solo 401(k). Please let me know your thoughts.”

Yeah, this is a bummer. One of the rules, and if you have access to multiple retirement accounts, you really need to read my blog post called Multiple 401(k) Rules. But it goes through all the rules. And one of the rules, the last one I have listed on that page, is really a bummer for those of you with 403(b)s who also do some self-employment work.

Most of the time, if you have two separate unrelated employers, and you have a 401(k) at one, then you have your side gig, your 1099 work, and you open a solo 401(k) there, both of those accounts get a separate 415(c) limit. That 415(c) limit is the total contribution amount. Last year, it was $69,000. I don’t have it on top of my head what it is for this year, $72,000, probably something like that. You get that total limit with both of those 401(k)s.

Now, your employee contribution, $23,000 or $24,000 or whatever that is this year, you only get one of those shared among all of the 401(k)s you have, but you get the total limit for each of them. Well, that’s not the case for a 403(b). Your 403(b) and your solo 401(k) share one 415(c) limit. So if you’re maxing out your 403(b), in this case, with this email, it was last year, it was $69,000. You can’t put anything in a solo 401(k). You can’t make an employer or an employee contribution. I’m sorry about that. You can always save more in taxable, of course, but that’s the way it works.

Another one came in and said “My CPA is suggesting I do a SEP IRA next year with my 1099 side hustle. Considering that I have the opportunity to do a mega backdoor Roth through my regular W-2 job, and the SEP IRA has a different 415(c) limit from the 403(b) plan, I’m thinking that combining that with a cash balance plan for my 1099 and doing a mega backdoor Roth through my work 403(b), I will come out ahead on tax savings.

Despite the fact that my wife and I will miss the $14,000 Roth, she is also a 1099 nurse practitioner, we can set up a customized solo 401(k) with Roth option or do a SEP IRA and later roll it over into a Roth. Let me know what you think.”

Well, let’s talk about this. We’re talking about retirement account contribution limits, and you’re in a pretty complicated situation here. Again, I refer you that multiple 401(k) rules post, but the real question is we boil this down here. There’s a lot of moving parts here.

First of all, your spouse ought to do a solo 401(k). A solo 401(k) is almost always better than a SEP IRA for multiple reasons. Occasionally, you find a reason where that’s not the case. For the most part, you want a solo 401(k).

The real question as we boil this down is does your SEP IRA get treated any differently than a solo 401(k) would in this situation? I think that’s probably not the case. I think it does not, but I wasn’t 100% sure, so I checked with Mike Piper. You guys know Mike Piper. He blogs at the Oblivious Investor. We’ve had him on this podcast multiple times. And he actually got back to me very quickly, and he agreed with me.

He said this, “I haven’t been asked this before, but after looking, I’m pretty confident this is not a workaround. You can’t just use a SEP IRA and get around this limit that you have with 403(b)s.” The issue with 403(b) plans, he says, with respect to the 415(c) limitation comes from section 415(k)(4), which says 403(b) plans count is under your control. When we do the aggregation of plans under 415(g), the 403(b) is going to be problematic when combined with any type of plan, that actually is under your control, whether that’s a solo 401(k) or a SEP IRA.

You cannot, because you can’t combine a 403(b) with a solo 401(k), you also can’t combine a 403(b) with a SEP IRA and get a totally new 415(c) limit. They’re going to share the same limit. That’s just a bummer if what your employer offers is a 403(b), and I’m real sorry about that, but that’s the way the rules work.

Okay, new subject. Let’s talk a little bit about gifting.

GIFTING REAL ESTATE BEFORE DEATH

Nick:
Hi, Jim, this is Nick from the Midwest. My grandparents have been working with an estate lawyer, and they’re planning as if the estate tax threshold will be cut in half in 2026, the expiration of the Tax Cuts and Jobs Act.

My grandparents’ wealth is majority in commercial and rental real estate. They donate a large amount and contribute to all of their great-grandkids’ 529s to maximize gifting yearly. They are planning on giving each of their kids and grandkids a property at the end of this year. I will be receiving a debt-free duplex. Most of the properties they own have been purchased long ago and have increased significantly in value. Unfortunately, we will not be getting a step-up in basis since properties are being given before their death.

My question is, I do not necessarily desire to be a landlord, but I also don’t want to pay a huge tax bill on selling the property. With the consideration I may inherit more properties in the future, should I just assume the suicide hustle of being a landlord and hire a property manager? Is there anything the estate lawyer should think about when a person’s wealth is mostly real estate? Thanks for all you do.

Dr. Jim Dahle:
Well, the right answer when somebody wants to give you a property is thank you very much. This is a true first-world problem if ever there was one. If somebody wants to give you a cash-flowing rental property, this is a wonderful thing. You do not want to be a landlord, fine. You can hire out just about everything that has to do with this. It probably already has a property manager in place.

Now, if I had the ability to talk the grandparents into maybe holding on to it until they die and then leaving it to you, I might do that. Because the problem with them gifting it to you is you inherit their basis, which has probably already been fully depreciated given they are grandparents. And so, there’s nothing else you can do to depreciate it. You can’t cover that income.

The income from the property is going to be fully taxable. If you want to sell it, you’re going to have to pay all that depreciation recapture and the capital gains with it. That’s not awesome either. And even if you exchange it into another property that you do want, it’s already fully depreciated. That depreciation doesn’t get reset somehow when you do that. It’s kind of a bummer there.

One option might be if you don’t want to be a landlord, you could do an exchange, a 721 exchange where you’re basically exchanging it. It’s an UPREIT exchange. You’re exchanging it into a REIT for shares of that REIT. That would give you a more passive investment than what this is, but I think your main two choices are one, be a landlord and have this be part of your portfolio and fold it in as part of your portfolio or sell it and meet the taxes. You don’t have to sell it this year. You can wait until the time when maybe it’s better for you to sell it, but that’s the way it works, unfortunately, when you’re being gifted something before they die.

You might try to talk them into waiting until they die to give it to you. I’m not sure what the rush is to give it to you before then. Maybe they’re not that old. Maybe they’re still expect to live 20 or 25 more years. I don’t know, but it sure would be nice for you to inherit this with a step-up in basis. I would definitely explore that option, but otherwise, I just say thank you very much. Either way, even if you’ve got to pay the taxes on it, you’re still getting a lot of money being given to you. It’s a wonderful gift for them to give to you. And I think that’s great.

I don’t know that I have any other comments to make on it. If your grandparents were asking my advice, I’d probably counsel them to consider trust and things like that in case the inheritors aren’t in a position to really manage the money well. I would tell them to consider trying to hold onto these properties until they die so the heirs get the step-up in basis. They’re able to leave them more money.

But as far as what you should do with it, I think the answer is give them a very great, big thank you note and move on with your financial life. There’s no obligation for you to hold onto the property just because they gave it to you in that format. You can always sell it. Let’s say it’s a $300,000 property and your tax bill on it is going to be $100,000. Well, they just gave you $200,000. Now, you got to decide what you want to do with it. It might be own this property. It might be invest it in index funds. Either one of those options is completely reasonable, but you’ll have to make that decision of what you want to do for yourself.

QUOTE OF THE DAY

Our quote of the day today is, “Believe that you are worthy of financial freedom. Do something you love and then all you ever have to do is be yourself to succeed.” That’s from Jen Sincero.

All right. One of our favorite podcast frequent flyers here, Tim from Salt Lake City has an estate planning question.

DO YOU NEED A TRUST AS PART OF YOUR ESTATE PLANNING?

Tim:
Hey, Jim, this is Tim in Salt Lake City, again. Another estate planning question. My family’s finances are relatively simple. My wife and I own a house that’s in both of our names. We own a taxable brokerage account that’s in both of our names. All of our other retirement accounts have beneficiaries listed, that is each other and our kids. And we have a will that says if we both die at the same time, then all the assets go into a custodial trust or something that will be managed by a family member for our kids.

I’m wondering beyond that, do we really need much more in terms of estate planning? I know your book talks about domestic asset protection trusts and the idea that trust can help avoid probate, but with everything in our names and or with beneficiaries listed, it seems like things are mostly set. What’s the argument to do more than that? Thanks.

Dr. Jim Dahle:
Well, some people set up a revocable trust to keep assets out of probate. If your taxable investing account was in the name of a revocable trust, then that money could go to the heirs a little bit faster, a little bit less expense. It’s a little more hassle during your life to manage that. A lot of people don’t put it in place until later in life. My recollection is you’re relatively young still. And so, maybe it’s not time to do that yet. Obviously, you never know how long you’re going to live, but that’s one way to do it.

Now, if you have an estate planning problem, an estate tax issue, then you often want to do some other things, set up some trusts and things like that to get appreciating assets out of your estate relatively early on. But if you’re not anywhere near the estate tax limits, which although they’re scheduled to be cut in half at the end of this year, I’m skeptical that’s going to happen given who controls the White House, the Senate, and Congress. I think that’s probably going to be extended moving forward. Then you might want to do more planning if that were the case, or if you have additional asset protection concerns. You’re in Salt Lake City. Utah is a domestic asset protections trust state. It doesn’t give much protection to your home equity other than that. It’s like $80,000 or $90,000 of your home equity protected. Beyond that, it’s accessible to your creditors.

It’s not unreasonable to put your home into a domestic asset protection trust here in Utah, but I wouldn’t say that’s a mandatory step. It’s very rare for doctors to lose assets, personal assets. Almost always, any judgment they get against them for malpractice or whatever is reduced to policy limits, if not initially, then on appeal. But if you wanted to put those sorts of things in place, you could do that as well. That’s more of an asset protection move than it is an estate planning move.

The most important thing for estate planning is get the beneficiaries listed right. Make sure you have a will so that your minor children are taken care of. Those are the big steps, and you’ve done those. Very well done.

WHAT IS A GRANTOR RETAINED ANNUITY TRUST?

All right. Our next question comes by email. They said, “Can you provide a definition and example of a grantor retained annuity trust?” A grantor retained annuity trust or a GRAT, what is that? Well, that’s an estate planning tool that’s used to minimize taxes and large financial gifts made to family members.

The goal with it is to try to use as little bit of the lifetime gift and tax exclusion as you can. You’re basically creating an irrevocable trust for a certain period, put assets into it, and then the trust pays an annuity to you, the grantor, each year. Then when the trust expires, the beneficiary receives the assets.

The idea is that they’ll pay less or no gift taxes on it because a lot of the value was used up by the grantor when the trust expires and that last annuity payment is made. That’s the theory behind a grantor retained annuity trust.

I told the emailer that these always seem like a solution looking for a problem to me. I asked him, “What problem do you see a GRAT solving for you and how unique is it?” If you have enough money that the GRAT is useful, you probably have enough that you can just do something a lot simpler and solve the estate tax issue with less hassle.

For example, a better option I think for a lot of people is what Katie and I do, which is a type of intentionally defective grantor trust called the Spousal Lifetime Access Trust. That’s where you have one spouse be the grantor and one spouse be the beneficiary. It’s a type of asset protection trust. It’s intentionally defective, meaning that we personally pay all the taxes on the trust, so taxes don’t deplete the assets of the trust.

The idea is you put highly appreciating assets into it using up some of your exemption or in exchange for a promissory note. Then that appreciation is now out of your estate. Whether that’s your brokerage account or whether that’s a rental property empire or whether that’s a small business like a practice or White Coat Investor or whatever, that appreciated asset is outside of the estate. Any further appreciation on it is not going to go toward your estate and won’t count against any exemption you have left.

If you expect to have an estate tax problem, what you need to do is meet with an estate planning attorney in your state. That’s well worth it. You’re talking about having more than $26 million if you’re married when you die, $27 million I think it is now. You’ve got enough money that you can pay the estate tax planning attorney a few thousand dollars and you’re still going to come out ahead. You can talk about GRATs, you can talk about SLATs, and you can talk about cruts and all kinds of fun stuff in those meetings and figure out what’s best for your situation because there are downsides to all of these trusts and methods to minimize income, inheritance, and estate taxes and meet your financial goals.

But you need to really figure out what your situation is, what your goals are, and then pick the right tool to meet those goals rather than hearing about something cool like a GRAT and saying, “I want a GRAT.” You really need to do a comprehensive planning process. Just like you do comprehensive financial planning before you start selecting investments, you want to do comprehensive estate planning before selecting trusts. Same basic process though.

All right. Thank you to all of you out there for what you do. A lot of you don’t hear this very often. Maybe you’re on your way home from a bad shift or a bad day in clinic or bad day at the office or whatever and you’re feeling very unappreciated. Let me tell you, there are people out there that appreciate you and sometimes they don’t always tell you. So if no one’s told you today, thank you for what you’re doing. There’s a reason you’re a high income professional. There’s a reason you spent all that time in school or in training and learning your craft. It is important and you are making an important contribution to the world. I know more than many people after giving this last year and how much interaction I’ve had with the medical industry, but it is very much appreciated what you did to achieve your expertise.

All right. Our next question comes from David, up to Speak Pipe. Let’s take a listen.

HOW LONG SHOULD IT TAKE TO SAVE UP AN EMERGENCY FUND?

David:
Hey, Dr. Dahle. Thank you for all you do. I’m a new attending and working on saving my emergency fund of four to six months of expenses. I was curious on what you thought the average physician, how long that should take them to save up an adequate emergency fund.

Dr. Jim Dahle:
That’s an interesting question. I’m not sure anybody’s ever asked me that. I like the way you said four to six month emergency fund. Classically, people describe it as a three to six month emergency fund, but four might be a better idea. The reason why is because disability insurance, your long-term disability insurance starts paying out after three months of disability, but it’s paid out in arrears. It’s paid out at the end of that next month. It’s really four months before you receive a payment from your disability insurance. Maybe four months is the right period of time for doctors to have as an emergency fund.

Classically, an emergency fund is what you spend each month times four to six months in cash and something safe. It’s okay for it to earn interest, put it in a money market fund or a high yield savings account or whatever, but you don’t want to invest it in a real estate property or even an index fund. The point of this money is to have the return of your principal, not to get a great return on your principal.

How long should that take? Well, let’s do the math. This is your expenses. How much are you spending? Well, if you’re spending, let’s say you’re spending 50% of your income, your gross income. You might be paying 30% in taxes and saving 20% of it. Then that would suggest that it’s going to take a little bit of time to save up four months for it. 50% of a month’s income times four is essentially two months income. If you’re saving 20% a month for that, how long is that going to take? Well, that’s going to take about 10 months to save up that emergency fund.

Now, of course, the more you save and the less you spend, the faster you’ll have that emergency fund. Certainly, I think it ought to take less than a year. It’d be great if you can save it up in less than six months, but that requires a pretty high savings rate. We’re talking you’re getting your savings rate up to 30, 40, 50% in order to do that.

Hopefully, that is what it is early on. We’re talking about this “live like a resident” period where you come out of residency and you have a relatively small emergency fund and you want to beef it up. Hopefully, you can get that done in just a few months, but it’s not going to be instantaneous. It’s a significant sum of money.

I would say this ought to take somewhere between three months and a year to get an adequate emergency fund. Hopefully, you already have something when you come out of training. You’re just adding to it. Maybe you’ve already got a month or even two months’ worth of your attending size emergency fund saved up and you just need to build it up a little bit.

This is one of those things that when you come out of residency, when you come out of fellowship, you have all these great uses for money. You want to do Roth conversions of any tax deferred money you have. You want to save up a down payment for your dream home. You want to pay off some credit card debt that you happen to still have hanging around. You want to max out some retirement funds. You want to start an HSA or 529s for your kids or whatever.

Well, guess what? You don’t have enough money to do all this stuff. You’ve got to prioritize. Make a list of what’s most important. The emergency fund ought to be pretty darn high on that list of what’s most important to you and start ticking it off.

As long as the money lasts, you work your way down the list. When you run out of money, that’s as far as you get and you go on to it next month. But if you’re doing this right, I promise you, if you’re doing this right, you get richer every month. Every month of your life, essentially, you become more wealthy.

That’s the way it’s been for Katie and I in our lives. Yeah, there’s a few bear markets where maybe we became a little less wealthy over a year or two, or maybe WCI made less money, so the value of WCI was less one year than it was the year before. Situations like that, sometimes we became less wealthy than we were the month before or the year before.

But as a general rule, we’re in a better financial position every month since we got out of residency than we were the month before. That’s the way it should be if you’re doing this right. You start ticking off these goals. When you come out of residency, you got a dozen of them that you’re working on. Well, after 10 or 15 or 20 years, you’ve only got like one or two you’re still working on. You ticked off all the other ones as you went along. That tells you that you’re doing things right, that you’re having success and that you’re winning this game.

Don’t worry about it too much. You want to have all these goals ticked off right in the beginning, and the only way to do that, of course, is to live like a resident for two to five years after you come out of residency, but have a little bit of patience, give yourself a little bit of grace, you’re going to get there, stay focused, have reasonable goals, work toward them, use that discipline you’ve developed over the years, and you too will achieve financial success like so many other White Coat Investors have just like you in the past.

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Don’t forget our buy one, get one free sale ends January 6th. You can go to wcicourses.com and see all the courses we have for offer. You buy any of them and not only do you get this usual one-week guarantee, if you’re not satisfied, you get your money back 100%, but we’re also giving you Continuing Financial Education 2023 for free. That’s like 50 hours of additional content in addition to the course you’re buying. So check that out, wcicourses.com.

Thanks for those of you leaving us a five-star review and telling your friends about the podcast. Recent one came in very short, called it “The gold standard. Listen to this, read the blog, profit.” Five stars. Thanks. That’s a great review. I appreciate that.

Keep your head up, shoulders back. You’ve got this. We’re here to help. We’ll see you next time on the White Coat Investor podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 203 – Interns saves up an emergency fund.

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One of our columnists made $30,000 in a year just doing these surveys. It’s entirely possible. Now, some specialties get paid more than others. Their opinions are more desired, especially if they tend to prescribe expensive medications or treatments or equipment. As an emergency doc, it’s not always been the most lucrative thing for me, but some specialties is very lucrative.

If you’ve been looking for a little extra income or just enough income to have a side business to open a solo 401(k) so you can do a rollover or something, this is a great way to do it. Check it out, whitecoatinvestor.com/physiciansurveys.

All right, we got a new milestone today. We’ve never done this milestone, which I think is awesome. A lot of times we have people that have become financially independent or they paid off their mortgage or decamillionaires or whatever. But I kind of like doing some of the early milestones even more. We talk to people that are back to broke all the time, or they pay off their student loans, or they made a 401(k) contribution, or they bought a car, whatever.

Well, today we’re going to talk to someone who has basically saved up an emergency fund. It’s early on in your financial career for sure, but this doc is early on in his career. So I think it’s a perfect match. Let’s get him on the line.

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Philip. Philip, welcome to the podcast.

Philip:
Thank you so much for having me. I appreciate it.

Dr. Jim Dahle:
Tell us where you’re at in your journey today as far as your professional career.

Philip:
Sure. I’m an intern in a categorical internal medicine program. I’m currently located in the southeast of the U.S. I just finished up medical school earlier this year and graduated in May.

Dr. Jim Dahle:
Okay. As we record this, it’s only November. You’ve had four paychecks in your life here if you’re like most doctors.

Philip:
Yes, exactly.

Dr. Jim Dahle:
So, what milestone can we possibly be celebrating at this point with you? What have you accomplished?

Philip:
That’s right. The milestone that I’m celebrating for today is I finally saved up enough money in my savings account to cover a month of rent, which was the only financial goal.

Dr. Jim Dahle:
Yeah.

Philip:
Yes, yes.

Dr. Jim Dahle:
Very cool. So it’s a month of rent or a month of all your expenses?

Philip:
Well, initially it was only a month of rent. Now since there’s been a little bit of time since I applied, I can cover almost two months of total expenses now. So, moving up there, moving up there.

Dr. Jim Dahle:
Basically you’ve established an emergency fund. Maybe it’s a little bit small still, but you’ve established an emergency fund just four months out of medical school. Very cool. Well, tell us about medical school. How’d you pay for medical school?

Philip:
Sure. A combination of things. Partly I did get a scholarship from my school, which was very helpful. I’m very grateful to have gotten that fairly substantial scholarship, which was good. I did have some family assistance in the form of an inheritance that I got partway through medical school.

Dr. Jim Dahle:
I’m sorry to hear that. Inheritance always comes with bad news.

Philip:
Unfortunately, unfortunately, yes. And then the rest were loans. But I still have over six figures of medical school loans. So, just kind of a combination of multiple sources.

Dr. Jim Dahle:
Very cool. At what point in this process did you kind of start becoming financially literate? When did that become important to you? You’re only four months out of medical school and you’re already on the White Coat Investor podcast. Clearly at some point finances has become a priority for you. Tell us about that.

Philip:
Definitely. Definitely. I always had a little bit of a mind for finances growing up. I tended to be more inclined towards savings than spending, et cetera. But I really didn’t know anything about the finances for physicians, about the strategies for paying back student loans, things of that nature, really until I think the third year of medical school, which is when I really started to take an interest in it.

I don’t know, one day, I remember distinctly, actually, I was going to the gym and I thought, “Gosh, I actually have no idea what I’m supposed to do for paying off these loans. I don’t know how this works. I’m borrowing this really huge sum of money. But I know people they become doctors and they’ll have high enough income and they pay it off.” It’s like, I have no idea how that process works or what I’m supposed to be doing here.

I actually started listening to the White Coat Investor podcast at that point and then bought the book and read it. And yeah, the rest is history. And then just went from there and continued to listen to the podcast and read some of the books suggested by the original White Coat Investor book. And that’s what really sparked my interest.

Dr. Jim Dahle:
Very cool. Now you’ve listened to this podcast. You’ve heard some people on here. We’ve had a deck of millionaires on here. What made you think that hearing this milestone that you’ve accomplished would be helpful to some people?

Philip:
Sure. Yeah, multiple reasons. I think it’s important to start with financial literacy, as you’ve always said, as early as possible. I think that’s really beneficial. Hopefully this will be encouraging to some of the listeners to really start to take an interest in that really early in training or early in residency.

I think it’s important to celebrate those small wins too. I think that the way to build up towards that decamillionaire status, et cetera, is really by having a series of smaller goals that eventually build up over time. This is kind of one of the very first of those goals.

Dr. Jim Dahle:
Very cool. Anybody else involved in your financial life? Married, partners, kids, anything?

Philip:
No, I’m single, no children.

Dr. Jim Dahle:
Did you buy a house? Are you renting a house? What did you decide to do for your housing during residency?

Philip:
I’m renting an apartment. Renting an apartment right now.

Dr. Jim Dahle:
And how do you feel about that decision now, four months after making it?

Philip:
I think it was good. I do know some people from my medical school class, not necessarily in the same program, but from my graduating class. I know some of them did buy houses. I think for some people, it was actually a pretty good decision. One person was going into a pretty low cost of living area. They looked at the mortgage and were like, “You know what? I’m just going to buy a house”, which I think was reasonable.

But for me, at least, internal medicine being a three-year program, I think what I’ve heard is it takes about five years to at least recoup the transaction cost of buying a house. For me, just renting for three years or maybe a little bit longer was worth it. I think it also makes things very simple for me because anytime I have an issue or have a problem with the apartment, I just call the management and let them take care of it while I’m at work, while I’m at the hospital. Don’t have to look after a lawn. I don’t have to worry about replacing the hot water heater. I don’t have to worry about replacing the oven, et cetera. So it kind of simplifies my life a little bit, which I really like.

Dr. Jim Dahle:
Have you looked into disability insurance at all?

Philip:
Yes. I’ve been meaning to buy some additional disability insurance. I do have the short and long term through my employer, through my program. And I do want to apply down the road for the own occupation separately underwritten policy. At some point, I haven’t done that yet. But I was meaning to earlier in the year, and I was trying to avoid the premiums for a little bit in the beginning of residency, trying to save up a little bit of money. And now I’m struggling to find the time here and there to find a program looking to it. But that is definitely a goal.

Dr. Jim Dahle:
Yeah. Don’t feel like I’m giving you a hard time. You’re four months out. You’re doing awesome. Does your employer offer any sort of retirement accounts or anything to you?

Philip:
They do. And they also offer a guaranteed standard issue policy as well, which I’ve looked at. But yeah, I think I’m just going to go for my own underwritten policy. I know one of my co-interns got his own underwritten policy. He said the premiums actually weren’t that much, which is nice.

But in terms of retirement accounts, yeah, we do have a 401(k). I’m making just enough Roth contributions to meet my employer match. Otherwise, the rest of it is mostly either going towards expenses or just going to the emergency fund.

Dr. Jim Dahle:
Well, you’re doing awesome, man. This is all the big priority stuff for residents. And you’re knocking it out of the park. You’re only four months in. You’re becoming financially illiterate. You got some savings. You’re putting something away for retirement. You got some sort of disability coverage in place, and you’re still sorting that out somewhat.

But you’re doing everything right. And I suspect if we brought you back in three or four years and interviewed, you would be doing everything right as an attending as well. I have no doubt that you’re going to hit the ground running when you become an attending.

Philip:
That’s cool. Well, thank you. I just went down the list of financial priorities for residents in the White Coat Investor. And I was like, “okay, well, I’ll just follow those. I’ll go from there.”

Dr. Jim Dahle:
Very cool. Have you given any thought toward long-term goals, toward your “why” and what you think you may care about later in your career? Or is it just too early? Right now, you’re figuring out how to practice medicine and take care of living.

Philip:
Definitely. Yeah, that’s definitely the first goal is to be good at internal medicine. And that’s challenging. It’s certainly been challenging, but definitely enjoying it. I guess career wise, thinking about probably planning on fellowship, I think. I’m thinking nephrology at this point. Maybe I’m also interested in critical care. So, there’s some combined nephrology and critical care programs I might look into. That would be interesting.

In terms of longer term financial goals, I think the next big one would be to pay off my student loans. I think that would be a priority for me. I’m very debt adverse. So I don’t like the idea of having that big student loan sitting there. It bugs me to owe people money. So I think that’ll be the next big goal, is to try to pay that off quickly as an attending.

Dr. Jim Dahle:
Very cool. Somewhere out there, there’s an MS4 listening to this. And it’s like, “Oh, that’s where I want to be in a year.” What advice do you have for them?

Philip:
Yeah, definitely. Well, definitely try to read some financial books, some financial blogs, good quality financial books and good quality financial blogs. Sometimes it’s a little bit hard to parse out what’s more entertainment and what’s actually good data-backed information. But definitely learn, and I would say, figure out what your priorities and your short-term goals are. I think that’s really the key.

And partly why I submitted my application to the podcast is to really determine what your short-term goal is, and then to set a budget and then be able to work towards that short-term goal and then build up to the next one. But for MS4s, yeah, definitely work on financial literacy. There’s a little bit more free time in M4 year to do that and just get yourself a good baseline of knowledge before you go into intern year, because there’ll be obviously less time to learn about finances.

I think some of the mistakes I made in M4 year, I should have taken out more student loans, actually. People told me, like, “Oh, you need to do that. It’s going to cost a lot to relocate and everything.” And I was like, “No.” The interest rate for me for the PLUS loans was like 8%. I was like, “No, I’m not going to do it. I’m not going to borrow any more at 8%. It’s too much.” But then I basically ran out of money and had to put a little bit on my credit card. I had to ask my parents for some help, too. I was like, “Oh, gosh, I should have just borrowed like an extra $10,000 or something just to give myself a break.”

Dr. Jim Dahle:
Turns out 8% is lower than 29%, huh?

Philip:
Well, I got lucky. I have a credit union card that I was able to pay off quickly. And I think it’s only at 12%. But yes, the repayment terms are a lot better for federal student loans than they are for a credit card.

Dr. Jim Dahle:
When did you get your first paycheck? Do you remember when it arrived?

Philip:
I think I got it maybe at the beginning of August. So, it was a little bit of time, too, because we start July 1st is when I started. But that first paycheck doesn’t come until even a month after that start date, which was rough.

Dr. Jim Dahle:
And you got to pay first month, last month’s rent, deposit and moving expenses. Not to mention all those interview expenses. A little bit extra in hand when you walk out of medical school is not a bad thing. You’re absolutely right about that.

Philip:
No, I was looking at some low numbers in my checking account. I was like, “Oh, gosh, it would have been nice to have a little bit more of a buffer just for at least for the feeling of security. Nothing else.”

Dr. Jim Dahle:
Yeah, absolutely. All right. Well, Philip, you’ve done fantastic work. Thank you so much. Congratulations on your success.

Philip:
Thank you.

Dr. Jim Dahle:
We really appreciate you coming on and showing people that milestones start early. But getting yourself on the right track early on can make a huge difference later. So thank you so much for being willing to come on.

Philip:
Well, thank you so much for having me. I’ve been a big fan for a few years now of the podcast. I think it’s so cool that I can actually be on the podcast myself as a guest. I think that’s so neat. I think that’s really great. So thank you so much.

Dr. Jim Dahle:
That’s one of the best parts about this podcast, it’s really all about the audience. It’s not about me or us. It’s let’s celebrate your wins and use it to inspire someone else to do the same.

Philip:
Well, thank you very much. I really appreciate it.

Dr. Jim Dahle:
Okay, I hope that was helpful. It’s always enjoyable to have somebody with an early milestone and just getting started right. People that are accomplishing this sort of a thing as an intern are going to have no trouble managing their finances as physicians.

As you’ll recall, when they do surveys of physician net worths, and they ask docs in their 60s what their net worth is, 25% of them are not millionaires. Now, this is after 30 years of position level paychecks. Maybe they’ve been paid $10 million and have less than a million dollars left. In fact, 11 to 12% of those docs have a net worth of less than half a million dollars.

This is net worth. It’s everything you own minus everything you owe. It’s your house. It’s your retirement accounts. It’s your investments. It’s your cards, your clothes, your pet. It’s everything. It’s everything you own. Less than half a million dollars at the end of a career, it’s just a real shame. Getting your ducks in a row early is the way you prevent that. Save something from the beginning and keep saving. And you’re not going to have this issue when you get to the end of your career.

FINANCE 101: YEAR-END CALCULATIONS

All right. Today, we’re going to talk for a minute. This podcast drops, I think it’s the last Monday of the year when this thing drops. So, by the time some of you are listening to this, it’s already the New Year.

I want to talk about some of the things I do at the end of every year that you might want to do some of them as well. One of which is a calculation. Calculate my net worth once a year. Everything I own minus everything I owe. We put it in a spreadsheet and compare it to the year before.

I think you ought to do that about once a year. That is the measurement of wealth. It’s not your income, despite what the media will tell you. Despite what the IRS sometimes seems to think. Income is not wealth. Income is what you make. Wealth is what you have. And the measurement of wealth is net worth.

I think it’s worth measuring once a year. You don’t need to calculate it every week for crying out loud. That’s the whole point of this is to be able to automate some of this. Have a great life and still have your finances taken care of. You don’t want to spend your whole life on your finances.

But once a year is probably a good idea to calculate your net worth. You might be surprised the first time you do this. It might take a stiff drink to add up all those debts. Because for most docs and many other professionals, the first time you calculate your net worth, it’s going to be negative. It might be $200,000 in the hole. It might be $500,000 in the hole. That’s pretty sobering to realize that you’re actually less wealthy, more broke than the person living under the aqueduct. But the key is not necessarily where you start, but what direction you’re heading in and how fast you’re going. So, start calculating that.

Something else worth calculating every year is your savings rate. This is just everything you put away toward retirement, usually is what it’s calculated as, divided by your gross income. I generally recommend for attending physicians and similar professionals that they save 20% of their gross income for retirement every year. If you need to pay off student loans, that’s in addition to that. If you need to save for your kid’s college, that’s in addition to that. If you want to save up for a second house, that’s in addition to that. About 20% is what needs to go toward retirement savings.

So, calculate it every year. See how you’re doing. If you calculate it and you’re like, “Oh, 18% this year.” Well, that’s pretty good. You’re in the ballpark. If you’re 32%, you should go, “Wow, we did really well. Do we really need to be saving this much? What are our financial goals?”

But if you calculate and you find out it’s 4%, that’s a problem. 18% might be enough. Who knows what your number is really going to be. Is it 18% or 22% or whatever? It’s not 4%, though, I promise you. If you’re only putting 4% toward your retirement and you’re not a resident or a fellow or something, there’s a problem. You’ve got to be saving more money than that toward retirement or you’re just not going to get there.

The way you have big retirement accounts is by putting a lot of money into them. You can hope that your investments will do a lot of the heavy lifting. They will do some of the heavy lifting. But you have to do quite a bit of it too. Especially in the beginning. I think of when we realized we were millionaires and it took us about seven years out of residency to become millionaires. I looked at our portfolio and 80% of our first million dollars was just brute force savings. It was money we didn’t spend.

Now, everyone says they want to be a millionaire. It’s not actually true. Most people want to do is spend a million dollars. That is not the same thing. In fact, it is the polar opposite of being a millionaire. You become a millionaire by not spending a million dollars that you could have spent. That’s how you become a millionaire. So, if you want to be a millionaire, you got to save some money.

All right, what else do I do at the end of the year? Well, I usually update my investment spreadsheet. We track our investments. And so, I update that spreadsheet and see where we’re at. Some people rebalance at the end of every year. Obviously, by the end of the year, if you are of RMD, required minimum distribution age, which is now highly variable. It used to be 70. Now it’s 72 for some. It’s going to be 75 eventually for most people. If you’re of that age, you got to take your RMD. Not taking an RMD before the end of the year has a big penalty. It’s like half of what you were supposed to take is the penalty. It’s huge.

The only other penalties I know of that are really big in life are not filing your form 5500-EZ when you close a solo 401(k) or when it has more than $250,000 in it at the end of the prior year. You basically have seven months to file that. So, it’s due the end of July in a year in which you had $250,000 or more in there. It’s due seven months after you close it whenever you close your 401(k). There’s a big fat penalty associated with that you don’t want to deal with. Now, most people are usually able to get out of that penalty but you still want to be aware of it.

If you had a company in place before January 1st, 2024, an LLC or a corporation, you’ve got to register that with FinCEN. It’s a requirement this year. They’re trying to crack down on money launderers or whatever. So you’ve got to register the beneficial ownership information of your LLCs and corporations. That’s supposed to be done by the end of the year as well.

There is a blog post on all this stuff, if you go to whitecoatinvestor.com and go to the search bar, search “FinCEN” or “Beneficial Ownership Information” or “Financial Transparency Act”, you’ll find that. If you search “5500-EZ”, you’ll find that. If you search “Savings Rate”, you’ll find that. If you search “How to Calculate My Return”, you’ll find that.

I’ve been writing blog posts now for 13 years, almost 14 years. Every question that doctors have that I can come up with that I can answer with a blog post, there’s a blog post on. And if you come up with a new one, I’ll write a new blog post just for you and run it out on the blog as well. Because this is a resource for you and your financial life. And the end of the year is kind of a time where most of us step back for a second, see how we’re going, see what progress we’re making toward our goals, do a few calculations, update some spreadsheets. And I hope you’ll take some time this week to do that.

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Please get your contracts reviewed. I run into docs every now and then that have some crazy term in their contract. And then they try to leave the employer and it costs them a bunch of money and a bunch of hassle. Don’t do that. Know what’s in your contract. If there’s anything you don’t understand in it, please, please, please get it reviewed. It only costs a few hundred dollars. It’s not that expensive. Don’t be penny wise and pound foolish.

All right. I hope you enjoyed this episode of the podcast. We love having you on. This podcast is about you, your successes, your challenges, and we thank you for what you do out there.

Keep your head up and shoulders back. You’ve got this. We’re here to help you. See you next time on the Milestones to Millionaire podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.