Are Structured Notes More Than a Product to Be Sold? | White Coat Investor (2024)

In This Show:

• Structured Notes
• Asset Protection in Multiple States
• Investment Fees with Different Companies
• Milestones to Millionaire
  • Sponsor:
  • WCI Podcast Transcript
  • Milestones to Millionaire Transcript

Transcription – WCI – 344
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 344.

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All right, welcome back to the podcast. We haven't recorded in a little bit, so, I've got lots and lots to talk about. We've got a whole bunch of your questions off the Speak Pipe and we're going to get to those. But I have some other stuff I want to talk to you about today as well.

For those of you who have no idea what the Speak Pipe is, that's where you can record questions and we'll answer them on the podcast. You just go to whitecoatinvestor.com/speakpipe and you can record your question up to 90 seconds, and don't feel like you have to use the whole 90 seconds, and we'll play it on air and try to answer your question.

This whole podcast is driven by you. Your feedback matters and what you want to talk about matters. Basically, if you don't like what you're hearing on the podcast, let us know and we'll try to adjust it and make those changes so that you're getting what you need out of it. We recognize that although you're not paying for this podcast, your time is valuable, and we don't want to waste it.

All right, I'm just coming back from a trip. Actually a couple of trips. And at one of those trips we were at the DLP conference down near Jacksonville, Florida. It was kind of rough, actually. I had to follow Tim Tebow on the docket, which, if you've ever seen Tim speak, that's kind of a rough place to speak at a conference to be on stage right after Tim. But it was fun. It was fun to meet him and it was fun to have a great conference down there.

My subject at that conference was that “It's not a vacation, it's a lifestyle.” And that comes from a saying that I've been using for the last few years here at the White Coat Investor when people give me a hard time. For example, I might be coming back and people are like, “What do you mean you're going on another trip? Didn't you just get back from a vacation?” I tell them, “Well, it's not a vacation, it's a lifestyle. I set my life up this way on purpose.”

And it's true. A few years ago I sat down and thought about what my ideal life looked like and compared it to my current life and recognized that I didn't have as much overlap there as I would like in that Venn diagram. And so, I started making changes in my actual life to align it more fully with my ideal life. And that involves some more trips, some more vacations, some more adventures than I was able to take seven or eight years ago.

And so, that was kind of the focus of that talk. But that saying has more than one meaning. The first meaning of course is that, yeah, I'm going to go on a lot of trips because that's what I want to do with my life. All these people talk about wanting to retire so they can travel or so they can vacation more. Well, I don't need to retire to do that because I'm able to do it while I'm still working.

But the other meaning of that phrase is that sometimes I work while I'm on a trip. And I was getting a little bit of a hard time at this second trip we went on. After the DLP conference, Katie and I went out to the Bahamas, we went to Andros Island and did some diving out there. And in between dives and in the evening, sometimes in the morning before going out, we do a little bit of work. So, we're sitting there in the lodge because that was the only place they had internet, and I was writing blog posts or answering emails or responding to comments on the blog or whatever.

And so, the other meaning of that phrase, “It's not a vacation, it's a lifestyle”, is that sometimes we're working out there. And the nice thing about that is if you're able to do some work on your trips, you can go on trips a whole lot more often than you otherwise could. And so, it kind of has two meanings.

It reminds me of the quote from Seth Godin who said, “Instead of wondering when your next vacation is, maybe you should set up a life you don't need to escape from.” And that's what Katie and I have been trying to do the last few years. And I think with quite a bit of success, we really like the way our life is set up now. It allows us to go on multiple trips.

We just spent the last 10 days out of town, basically, the first five at that DLP conference and the next five basically in the Bahamas. And then I'm here for a few days. I coached a hockey game on Saturday night. I'm coaching another one tonight.

Tomorrow I have a shift in the ER and tomorrow night we leave for Thanksgiving break. We're going down to Las Vegas. We're going to do some climbing and some mountain biking and some hiking, and some hot springs. And we're going to go to Omega Mart and watch a Cirque du Soleil show and go to the Blue Man group and have Thanksgiving dinner at a buffet. So we think it's going to be a great trip, but will I do a little bit of work on that trip, too? Almost surely. That's a little bit of our life and how we've set it up.

I encourage you to consider your ideal life, what it looks like, how much work, how much play, how much vacation time, how much time with your family and friends, and then try to make little adjustments each year in your life. Try to get it more like that ideal. And as you do that, you should have a more joyful and happy life that allows you to fulfill your purposes while enjoying the time you have on this sphere.

STRUCTURED NOTES QUESTION

All right, let's get into your questions. That's enough about me. This podcast is supposed to be about you, not me. Our first one is an email and it's about structured notes. Email says, “Financial advisors often tout structured notes as a good investment with significant potential upside combined with downside protection. The more I read, the more confused I get. They seem to me to be a combination of prop and parlay bets. I do not have a specific question that would be appropriate for the Speak Pipe, but wonder if this type of investment could be addressed on a future podcast. I searched the blog post but failed to find much information. I suspect the answers that these products are created to be sold, not bought, but did want to better understand them.”

All right. Well, the first thing I had to do was understand your question. I'm not a gambler, so I didn't really know what prop and parlay bets are. But for those who also don't know, I'm going to explain this, I had to look it up.

A prop bet short for proposition is essentially any sports bet that doesn't revolve around the winner or final score of the game. It's like you're betting on how long it's going to take the singer to do the national anthem or whether the coin flip at the beginning of the game is going to be head or tails. That's a prop bet.

And a parlay bet is simply combining a bet on the outcome of the game with some other prop. Maybe you're combining the outcome of the game with whether the Giants won the coin toss or not. That's what a prop and parlay bet is. That's a little hard for me to relate to structured notes, but I suppose there's some sort of a relationship there.

Here's the deal with structured notes. Structured notes are put together typically by a bank, sometimes by another investing company. And they're sold. If your financial advisor is recommending structured notes, they're almost surely not a fee only financial advisor. They're likely a commissioned sales person masquerading as a financial advisor. If your financial advisor is trying to sell you these things, you don't really have a financial advisor. Now you need to go get a new advisor if you need advice or learn how to do this on your own.

It's like if your advisor is trying to sell you some index universal life insurance policy. They're an insurance agent, they're not a financial advisor. Even though they're allowed by law to call themselves a financial advisor, that's really not what they are.

Same thing if they're trying to sell you loaded mutual funds. If they're talking about A shares and B shares and C shares, not a financial advisor, you need to go get a real financial advisor. Somebody who works only for fees, Most of them charge AUM fees, which are fine if you don't have that much in assets. Others charge hourly or kind of an annual rate, some sort of a flat fee. But you need to understand how they're paid so you can understand whether you can trust their advice.

But a structured note, the idea behind these is to appeal to your psyche. People want the upside without the downside of investing, but risk and return are very closely connected when it comes to investing. We all know about index funds. An index fund gives you the market return, on average, the market. We're talking about US stock market over the last hundred years or whatever has made approximately 10% a year, but it also sometimes crashes dramatically. It goes down 40 or 50%. People don't like that. It doesn't feel good when the money you put in the stock market instead of doing a kitchen remodel disappears.

They like to have some sort of downside protection so they can't lose all that money. And what a structured note is, it offers that. It gives you downside protection. You can only lose so much or you can't lose any money. And how do they pay for that? Well, they reduce your expected return. Now instead of being able to make 10%, maybe you only are likely to make 6%, but they ensure that you can't lose money.

Well, the problem with these things is the way they set them up is in general you're giving up too much in order to get the guarantees. And there also tends to be commissions and then fees and complexity. And you can bet that complexity does not favor you.

I think your initial assessment of structured notes is correct, that these are products made to be sold, not bought. And you can just avoid them completely, in my opinion. The problem is if you want to understand every single one of them, you have to dive into them. Just like all these IUL policies, every one of them is unique. You can't compare them apples to apples. They've all got different terms and conditions and you got to wade through them all. I think you're better off just avoiding them and frankly I would avoid those who sell them. So hopefully that's helpful to you about structured notes. I haven't owned any, don't plan to own any, etc.

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Now, a couple of things you need to be aware of when it comes to credit cards. First is credit cards are not for credit, they're for convenience. If you are carrying a balance on a credit card, you're doing this all wrong. You shouldn't have any credit cards if you pretty much ever carried a balance on a credit card. These are not for you. The interest rates are 15 to 30%. If you are not paying them off every month that is like one of the dumbest financial things you can possibly do.

Two, be aware that studies show you likely spend more when you use a card instead of cash. You likely spend more when you use a credit card instead of a debit card and you likely spend more even when you use a debit card rather than checks. Keep that in mind that you are likely to spend more money using credit cards.

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All right, let's talk about asset protection. Here's a question off the Speak Pipe.

ASSET PROTECTION QUESTON

Dr. Q:
Hey, it's Dr. Q, first time caller, longtime listener. Thank you for all that you do. I just had a quick question on asset protection. I have your book and I've read it briefly. I was just wondering on if you live in one state and practice in another, which state laws should you be practicing for asset protection? While the states are very close in proximity to the laws are drastically different. Thank you.

Dr. Jim Dahle:
Okay, great question. The book he's talking about is The White Coat Investor's Guide to Asset Protection. This is a book I did a couple of years ago. It's all about asset protection and it's got a couple of purposes. One, doctors are way too fearful about this. We're all afraid we're going to be cleaned out by a lawsuit. It's actually incredibly rare that doctors lose personal money to a malpractice lawsuit.

Almost always in these lawsuits, you're playing with the house money, you're playing with the insurance company's money. That's why you paid those malpractice premiums for so many years is so that when this happens, the insurance company is going to pay for your defense and they're going to pay for any judgment or settlement that comes as a result of the case. So, it's very rare. That's one of the main points of the book.

Another point of the book, however, is that asset protection law is state specific. And so, something like half of the book is simply a listing of all the state laws that apply to asset protection. You can go through state by state and see what the laws are and it's pretty interesting actually. They're very unique. A lot of big differences from state to state. But the book is worth it just for that section, just to know your own state laws. You can get that at Amazon, you can buy it at the White Coat Investor store, you can buy it wherever.

But I do recommend it. I think it's worth checking out. It's maybe not the first White Coat Investor book you should read but if you're looking for something on that niche topic, check it out.

All right. What state laws apply when there's a lawsuit when you live in one state and you work across the border? Well, it depends on what state you're sued in. That's probably the laws that are going to apply most fully. But the truth is that both laws are likely to apply in some way and it's going to be fought out in court.

And so, it's hard to really answer that question in advance because you really don't know how it's going to shake out. So, look at both laws or both states set of laws. Recognize that worst case scenario, the ones that are going to apply are the ones that are least favorable to you in the situation and act accordingly and hope for the best. It's possible that the most favorable ones to you will apply, but that's probably going to be an argument between two sets of lawyers in court and I can't really tell you how that's going to go.

Sorry. I wish it was more clear cut than that. Asset protection is murky to start with. There's a lot of not only written law, but case law involved in these cases. The good news is you're probably not going to ever have to really deal with them.

IT SAFETY QUESTION

Dr. Jim Dahle:
Okay, next question, this is from Joanne. We're going to talk a little bit about IT safety.

Joanne:
Hi Jim, this is Joanne. I'm a family med doc in the Pacific Northwest. I had a burglary a few months ago from identity thieves and they took some of my account information. I realize now how silly I was in the way I was keeping account information on a piece of paper, etc. And they seemed really quite attuned to that. I was just wondering if you could remind all of us about basic IT safety with all of our accounts being online these days. Thanks. And shout out to Megan for producing the podcast.

Dr. Jim Dahle:
Hey. All right, Megan got a shout out. We love it. Yeah, Megan works really hard putting this podcast together, so you definitely should thank her. It's interesting when I do this podcast, I only spend about the time you listen to the podcast doing it. And Megan and Wendell, our AV guy, it probably takes four to five times what you hear of work to put a podcast together, and I'm only doing one of those. So, we appreciate you thanking the staff. Without them, there would be no White Coat Investor, for sure. I would've quit four years ago.

Okay, IT safety. Yes, you should do it. It's good. You definitely do not want somebody else getting your passwords. You cannot use the same password on every account. You cannot write down your passwords and keep them someplace they can easily be stolen. You should not be logging into your financial accounts from hospital computers or other public computers.

Some people go so far as to have a dedicated computer that all they use it for is logging into financial accounts from home. I think that's maybe a little overkill, but I understand where they're coming from. Passwords should be changed periodically. You should close browsers after you get done being in financial accounts and so forth.

I also recommend you have some sort of a password program and I promise this will make your life easier, everywhere except the hospital. For the hospital, you still have to remember your stupid passwords, but for your passwords at home, you can just use something like LastPass. That's what we've been using. And then all you have to remember is one master password. And every time a website comes up you can simply just click on the box and it feeds your password in there.

And that allows you to use a 12 character nonsense password with capitals and small letters and numbers and symbols that no one's ever going to break into all of your passwords. And they'll all be unique and you can keep track of them all. You can share this with your partner and work colleagues, whatever, but it's really, really helpful. I highly recommend something like that and just being smart about things.

The other place you've got to be careful is when you get texted things, when you get emails and they want you to click on links. That can be very bad. Do not do that. If it's at all suspicious, if it at all seems funny, you have to have your antenna up and not click on links, not download things that are suspicious. And if you do realize you've screwed something up, get on it right away and get things taken care of.

Another great step you can take, particularly if you're kind of done with the borrowing phase of your life, is to freeze your credit. That'll keep people from opening credit cards in your name. That'll keep people from being able to open any sort of line of credit in your name because your credit will be frozen. It doesn't take that long to unfreeze your credit, but it's worth doing. You can do it for your kids, as well. People can open accounts in your daughter's name and nobody will know about it because you never check their credit report because they don't have any credit. But you have to be careful about those sorts of things, too. Lots of people have their kids' credit frozen, as well.

So, lots of good things to do. This happens to lots of people though, it's not uncommon. There are services out there you can hire that might help to protect you, but mostly help you to get everything taken care of once you do have your identity stolen. Whether they're worth it or not, I don't know. I haven't dealt with one personally, but I've had some people say maybe it's not worth it because you just put a whole bunch of time and effort in while others say, “Hey, it was definitely helpful when I had my identity stolen.” It's not that expensive if it's something you want to buy, I don't have a recommended provider for that.

QUOTE OF THE DAY

All right, let's do our quote of the day. This one is from Epictetus. I don't know if I'm pronouncing that right. I'm probably not. Probably some Greek person who said “Wealth consists not in having great possessions but in having few wants.” And I think there's a lot of wisdom there.

All right, let's take a Speak Pipe. This one's from Mark who wants to talk about investment fees.

INVESTMENT FEE QUESTION

Mark:
Hey Dr. Dahle. This is Mark from the Southeast. I have a question about fees for investments. I have most of my taxable portfolio in a Charles Schwab account that is invested in a total stock market index fund. However, a small percentage of my portfolio is in an Edward Jones account.

That was a custodial account for my parents that I've never really done anything with. And after talking with the advisor, it seems that there would be different types of fees that they could charge to continue investing with Edward Jones.

However, the explanation from the advisor seems very convoluted and the way that she frames it, it seems that she's saying the fees would be very similar to what I currently pay to invest with Charles Schwab. Is this correct? Is there any light that you can shed on this situation? Thank you so much for your help.

Dr. Jim Dahle:
I have to be careful how I phrase this. There's a very short list of financial firms with whom I will never do business and to which I will never send anybody. That consists of banks like Wells Fargo, for instance. Insurance companies such as Northwestern Mutual and advisory companies such as Edward Jones.

I do not like the way Edward Jones runs their company. I do not like how their advisors work. I do not like their fee structure. There's very little about it that I do like. The first thing I would do if I had an account with Edward Jones is I would move it somewhere else like Charles Schwab. Find a place to have it.

Now these investments, I don't know what they are, but they are probably loaded mutual funds. They're probably front loaded, meaning you already paid the commission on those funds. You're probably not paying ongoing commissions, but expense ratios are likely fairly high in comparison to a good low cost broadly diversified index fund like you would get from Schwab or Fidelity or Vanguard or iShares.

So it may be worth changing those funds out. But you mentioned this is a taxable account, and a taxable account that was a custodial account, meaning it's probably pretty old because you're probably now a doc that's 30 or 35 and your parents probably opened this thing for you when you were 10 or something. And so, you probably have a pretty low basis on those investments and it might not be worth selling them due to the very high capital gains that you have on them and the taxes you'll have to pay. It may be worth building your portfolio around them.

This brings in the discussion of what to do with legacy investments and there's lots of things you can do with them. If you have a loss, obviously, you can easily sell them. If there's not much of a gain, you can sell them. If you have a bunch of capital losses from something else that you can offset gains, you can sell some in proportion to that. You can use them for your charitable giving. If you give to charity, that’s a great way to flush those out of your account. And sometimes you just build your portfolio around them, but if they're really terrible, well, you just bite the bullet and you sell them and you move the money into what you'd rather invest in.

But the first thing to do anytime you have legacy investments like that is figure out what your basis is, what would really be the cost to sell them and invest in what you'd prefer to invest in.

But as far as what the “advisor”, and I want to put quotes around that word when we're talking about somebody at Edward Jones is telling you that the fees are similar to what you can get at Charles Schwab, well, that's a very vague statement. There's probably a mutual fund that you buy at Charles Schwab that's going to be the same fee as this mutual fund that you now own or was purchased through Edward Jones, but there's probably something cheaper at Charles Schwab too. It's like a half-truth kind of classic for these sorts of investment people.

STUDENT LOAN QUESTION

All right, let's talk a little bit about some student loans for a minute.

Jay:
Hi, Dr. Dahle. My name is Jay. I'm a neonatologist. Thank you for everything you do. I've worked with one of the advisors recommended on your blog to establish some optimal student loan repayment plan for myself based on my life circ*mstances, income and student loan burden.

We've settled on 20 year non PSLF forgiveness. I plan to aggressively make payments into a slush fund for the next three to five years that I will then use to make the monthly student loan payments and pay off the tax bomb when it hits. This will effectively allow me to forget about my student loans after three to five years, even though we're still making payments for the next 12.

I'm wondering, however, if you have any ideas to decrease or somewhat mitigate the tax bomb when it does hit. I've considered ideas such as taking a one year sabbatical, so I won't have any earned income in the year of forgiveness, but I'm wondering if there are any other ideas or strategies you could recommend. I do have 12 years to plan for this. Thank you.

Dr. Jim Dahle:
Wow, great question. I don't think I've ever had this one before. I'm not a huge fan of IDR forgiveness, which is what we're talking about. This is either PAYE, pay as you earn forgiveness at 20 years for grad student and undergrad loans, or it's SAVE forgiveness at 25 years for graduate loans and 20 years for undergraduate loans.

And of course, that forgiveness does not require you to work at a 501(c)(3). It doesn't require you to work at all. You just have to make payments for 20 to 25 years and the rest is forgiven. Unlike PSLF, it is not tax-free forgiveness. It is taxable forgiveness. Taxable at your ordinary income tax rates all in the year in which you receive it. So, if you're making $400,000 a year and you get $400,000 in forgiveness that year, you're going to owe taxes that year on $800,000 even though you only made $400,000.

As you can imagine, that can be quite a hardship and something that you really do need to save up for. But if you save early for it and you invest it so that money is growing toward that tax bomb, it's entirely possible that you could come out ahead. Typically, the people who do this are people with a relatively high debt to income ratio.

So, what can you do to reduce that? Well, saving up for the tax bomb is obviously a good idea. You've figured that out. But if you had no other income in the year you receive that forgiveness that would certainly lessen the tax bomb. Some of it would probably happen tax free, some it at the 10% bracket, the 12% bracket, the 22% bracket, the 24% bracket, etc. But you still need to live. So, if you're going to do that, you have to save up a year's worth of living expenses, too, in order to take that year.

I don't know, man. Now it feels like you're basing your whole career and these big career decisions around your student loans. I hate that. I hate that for you. I like to see these things out of people's lives less than five years out of training so they don't have to think about it anymore. Instead, you're going to have student loans.

Let's say you came out of training at 35 and maybe you have your student loans at best till you're 50 or so. I'm 48 now. I cannot imagine still having student loans. It'd just be wild for me to still have student loans that I was dealing with from decades ago. I hate that.

But it's true that the numbers may look good that way and especially with this new SAVE program that's out this year. Instead of your discretionary income being your income minus 150% of the poverty line, it's minus 225% of the poverty line and then it's only 10% of that discretionary income that is your payment for your student loans. So, it's a little bit more generous than it used to be. And so, a few more people are going to make that decision that this makes sense for them to drag this out.

If you're not sure if this makes sense for you, if you're having trouble running the numbers, I recommend you meet with one of our folks at studentloanadvice.com and they can book a consult for you. With one flat fee they'll go over your student loans, help you run the numbers, help you decide between going for PSLF, refinancing your loans, going for IDR forgiveness and all that stuff that goes into coming up with a good student loan plan.

Other things you could do. Well, it doesn't really help to do a bunch of tax loss harvesting to reduce that tax bomb. That's not going to help you because those are capital losses and this is going to be ordinary income when you get it. You could make huge contributions that year to tax deferred accounts. That will lower your income so you could pay a little bit more toward the taxes on that bill and maybe in a lower tax bracket. But mostly the main thing is going to be saving up for that tax bomb knowing it's coming so it's not a huge surprise and just recognizing that that's part of the deal, that's part of your student loan plan when you go for IDR forgiveness.

Also, remember, it may very well make sense for you to be in the PAYE program, not the SAVE program, because it's five less years that you've got to make payments before you get that forgiveness.

THE SOLOPRENEUR’S RETIREMENT ACCOUNT SOLO 401(K)

Okay, I wanted to talk for a minute about a book, and if you're watching this on YouTube, you can see the book now. This book is called The Solopreneur's Retirement Account Solo 401(k). It's an entire book dedicated to one of my favorite retirement accounts. It's written by Sean Mullaney, CPA, who I've met and congratulated on this book. He sent me a copy of it. I love it. I think it's great.

If you have a solo 401(k) and you don't feel like you understand what's going on with it, I recommend you pick up this book and buy it. It's not that long. It's only, let's see here, even with the notes at the end, it looks like before the notes it's 194 pages. It's not that long. You can get through it in a few hours, but I think there's a lot of good stuff in here.

I love the fact that the third chapter here after the history of retirement savings and solo 401(k) basics is “Why not a SEP IRA?” And that's a great question because far too many people are told by their CPA, told by their financial advisor that they should be using a SEP IRA. And for most of you high income earners, that is bad advice. You should be using a solo 401(k) instead of SEP IRA for a handful of reasons.

But if you are a solopreneur, basically if you own a business and you don't have any employees other than possibly your spouse, a solo 401(k) is the retirement plan for you. You can also do a personal defined benefit plan on top of that. But a solo 401(k) is where it's at. This year I think you can put in $66,000 into this. And with the way the rules are changing with Secure Act 2.0, you can get more and more of that into Roth if you want. You can get a personalized plan that allows you to do after tax contributions. Sometimes you can get $66,000 in there with only making a five figure amount.

So, it's really a great, great retirement account and obviously investing in retirement accounts gives you a little bit of extra asset protection. It facilitates estate planning and it reduces the tax drag on your investments so your money grows faster. When you're given the choice you almost always want to save for retirement anyway in retirement accounts rather than in a taxable account. Taxable accounts are for money after you've already maxed out your retirement accounts.

CASH BALANCE FUNDS AND ASSET ALLOCATION QUESTION

Speaking of these personal defined benefit plans and cash balance plans, our next question off the Speak Pipe has to do with cash balance plans.

Speaker:
Hi Dr. Dahle. Thanks for all the great advice you've given over the years. I have a question with regard to how to handle cash balance funds in terms of your overall asset allocation. Right now about 20% of my retirement portfolio is in my group's cash balance plan and it's invested and guaranteed at 5%. I'm also an owner in this practice, so I guess technically speaking I'm guaranteeing that 5%.

I've been mentally treating it as part of my bonds or fixed income allocation mostly because of that 5% guarantee, but actually looking at the individual components that the fund managers have been investing the money in the cash balance plan, it actually looks like it's only about 25% bonds and 75% other various financial products that the plan manager is investing to try to reach that 5% target.

I guess my question is, do I treat it as bonds? This would be the simpler thing to do although in reality the money isn't technically completely invested in bonds. How would you approach this? Thanks.

Dr. Jim Dahle:
It sounds like you understand the issues here very well. With a cash balance plan, the return can be set up in a number of different ways. It can be set up to basically give you the return that the fund got. It can be set up to be something like 5% like yours is. There's a lot of different ways to do that. But you recognize that any guarantees it provides are coming from you as the owner of the company.

So if there's a big, huge bear market and you're way underwater in this plan from that 5% return, you have to make additional contributions into the plan. Now that's not such a bad thing. Those are tax deferred contributions. You get a tax break on that money you put into your cash balance plan, but you do have to make those contributions or the plan pretty much blows up. So you have to be prepared to do that. And if you're not prepared to do that, you shouldn't be in a cash balance plan.

The way these typically are used, they're typically used for five or 10 years. And it's basically another 401(k) that's masquerading as a pension. It has to follow the pension rules and that's why it gets all convoluted, why the expenses are a little bit higher, why actuaries have to be involved, why you can't manage the investments individually like you do in your 401(k) is because it's supposed to look like a pension, at least to the government, to the IRS. And there's nothing fishy here. They know what's going on. And these are perfectly legit, perfectly legal things to do, but that's why.

So, how do you treat it in your asset allocation? Well, mine has always been a relatively small part of my funds. It's a tiny percentage of my retirement funds. I don't know. It's certainly less than 1% of the money I have for retirement. So I ignore it. I don't count it toward my retirement asset allocation at all.

The way ours is currently set up, we're allowed to choose one of the Vanguard LifeStrategy funds. I actually chose the more aggressive one that they allowed me, which was the moderately aggressive or whatever they call it. It's about 60% stocks and 40% bonds and that's pretty aggressive.

If you talk to people who set these things up for you and they tell you take the risk in the 401(k), put your bonds, put your low returning stuff in the cash balance plan. And that's probably good advice most of the time. It really doesn't bother me if I had to put in additional money into this plan. I've got the money to do it and that wouldn't be a big deal for me. So I don't mind being a little more aggressive there.

But it brings up these issues like my partnership is planning to close its plan in a year. And they were really worried that the market could go down and people would have to contribute cash into their accounts. And so, they actually ran the numbers. On average it was only like $700 they'd have to contribute into the account to bring it up to par. Because basically when you close the plan, it couldn't be underwater of what had been contributed to it over the prior five years.

And they're really worried about it. They're worried that everyone was going to get all mad and that people wouldn't have the cash flow. And I guess that's a legitimate worry. There's plenty of doctors out there living hand to mouth. They were going to close this thing in like a year. They actually moved everybody to cash last month. You can opt out of that. So I opted out and put my money back in the investments that I had, but anybody who didn't opt out of it is now sitting in cash just so that they don't have to contribute that additional money in there.

And frankly, I guess you could do that in your fund. This thing is guaranteeing 5%. Money market funds are now paying 5%. You just put it all on a money market fund. Take no risk whatsoever, meet your 5% goal and go from there.

But if the fund makes more money, if it makes 8%, even though it's only guaranteeing 5%, it's developing this surplus over time. And when that plan is closed, you get the surplus. So, it's not such a bad thing to earn a little higher return even though the plan is set up with a guaranteed 5% return.

These are kind of complicated. It's hard to wrap your mind around it until you really dig into the details. I've got a number of blog posts on cash balance plans. If you have one, you should read those blog posts so you can understand what's really going on there.

But how do you treat it in your asset allocation? If it's small, I just ignore it. I think it's fine to treat it like bonds. You can actually look at the asset allocation in the cash balance plan and use that. Yours sounds like it's 75/25, which is actually pretty aggressive. You could just treat it like that, that you have a balanced fund that's 75/25 in your asset allocation. Lots of ways to skin that cat. I don't think there's a right way to do it. I would just be consistent in how you did it over the years.

Okay, let's take a question from Diana.

I BONDS QUESTION

Diana:
Hi Dr. Dahle. I'm a pulmonary critical care physician in Illinois and I have a question for you about I bonds. Like many of us did in 2021 and 2022, my husband, myself and our trust purchased series I bonds. At that time the fixed rate was 0% and the variable rate was 6 or 9% with inflation being so high. Now I believe the fixed rate is around 0.9% and the variable rates are coming down around 3%.

I've heard the recommendation to actually take that money out before the five year mark, pay the three month interest penalty and then reinvest it either in a certificate of deposit or high yield savings as many of those accounts are paying 4 and 5% now or stock market, eTC.

My question is, in pulling that money out now, we would have to pay income tax on that interest. Is it actually worth it to move that money around or would it be better just not to mess with it and leave it in place till the five years? Thank you so much for your thoughts.

Dr. Jim Dahle:
Well first of all, thanks for what you do. Being a critical care doc is no small feat. Now, when you look at burnout surveys, critical care and emergency medicine are battling each other for the most burned out specialties every time.

I was talking to an anesthesiologist in the Bahamas, who was in New York during the pandemic and had a dramatically different experience with the pandemic than I did. His entire hospital was quickly converted into an ICU. The entire hospital. And for four or five months instead of doing elective cases, he was basically an ICU doc and it's a little bit traumatic having gone through that sort of an experience and I know a lot of you have. So thanks for what you do.

All right, we're talking about I bonds. I've got some I bonds. We're keeping our I bonds. We're not cashing them out. We're adding more each year. I know it's not as good as it was in 2021. You're not getting the 9% rate that you were getting, but you have to ask yourself, why do I own these? Did you go into I bonds just because you were looking for something that paid a little bit more on your cash? Is this like your emergency fund? Is this like your cash holding in your portfolio? If so, then yeah, now is probably the time to change. Take it out of the I bonds. Heck, you can just put it in a money market fund that's paying 5%, 5.25% and probably come out ahead this year.

But if you look at I bonds as part of your allocation to inflation index bonds, TIPS and I bonds, as a long run part of your portfolio long term, then you may want to just leave that money in the I bonds like we are and add more money to it. You can't go back and put the money back in I bonds. You can only put so much money each year in the I bonds.

And so, if you want to build a substantial portion of them, you've got to keep adding to it and not be taking money out of those I bonds. You just can't put that much money into them each year. And so, it really comes down to how you view that. There's not a wrong answer to this question. You can't cash out during the first year. If you cash out during the second through fifth year, you lose three months of interest. But you still may come out ahead having done that and then moving into something like a money market fund or some other type of bond fund, whatever, for that money.

But I view it as a long-term holding. We're just sitting tight on it. We recognize that it's not as high of a yield as it was a couple of years ago and that might go down. It might go up, but it's going to help protect our portfolio from inflation in the long run. We're just sitting on ours and I think that's okay.

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Thanks for those of you leaving us five star reviews and or telling your friends about the podcast and the blog and the books and the courses and all that. Our most recent review came in from EyeReview1117 who said “Grateful. I can’t recommend the podcast and other WCI resources more highly. I am amazed at what I have learned from the podcast, blogs, and books. I have transformed from financially illiterate to actually identifying mistakes financial advisors were making with family. I owe a tremendous degree of my financial success to Dr. Dahle and am very grateful for everything he has done. He truly is helping high income professionals achieve financial independence.” Five stars.

Thank you so much for those kind words and for that review. It truly does help your colleagues to find the podcast. It's funny how that works, but that's just the way the podcast world works. Without reviews, nobody finds out about your podcast. So, thanks for those of you who have done that.

All right, I won't be talking to you again until after I come back from Las Vegas. We're going there for Thanksgiving this year. Should be interesting having Thanksgiving dinner at a buffet. But we got lots of fun stuff planned, going climbing, going hiking into some hot springs, going to do some mountain biking. We're going to go see some shows.

I hope you're having a great time at Thanksgiving. For those of you who are working, thank you so much for doing that. This year I got Thanksgiving off. I'll be working at Christmas time, but it’s important what you're doing.

You've got this financial stuff. It's not that complicated. You can do it. Keep your head up and shoulders back and 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.

Transcription – MtoM – 147
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 147 – Anesthesiologist pays off student loans in two years despite becoming disabled.

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INTERVIEW

All right, we have got a great interview today. I didn't realize how good it was going to be until we started into it. In fact, we actually finished the interview before I realized how good it was going to be and then went back and inserted some additional content into the interview. You'll see what I mean in a second. Let's get Corey on the line.

My guest today on the Milestones to Millionaire podcast is Corey. Welcome to the podcast, Corey.

Corey:
Thank you for having me, Jim.

Dr. Jim Dahle:
Tell us what you do for a living and how far you're out training and what part of the country you're in.

Corey:
I'm an anesthesiologist and I’m just over two years out of training and I'm in the Midwest.

Dr. Jim Dahle:
Okay. And you have done something remarkable. Tell us what you've done.

Corey:
I've paid off my student loans.

Dr. Jim Dahle:
Okay. You're two years out and the loans are gone. That's pretty awesome. How do you feel about that?

Corey:
It feels amazing to have them paid off. It feels like a huge weight has been lifted off my shoulders and now I can focus on other things I'd like to accomplish.

Dr. Jim Dahle:
Wow. All right. Well, let's talk about the weight. How much did you owe?

Corey:
$260,000.

Dr. Jim Dahle:
$260,000. That's a little more than average.

Corey:
Yeah, some of that was from undergrad as well, but most of it was from medical school.

Dr. Jim Dahle:
Okay. So you pretty much borrowed your way through medical school. Is that right? Or did somebody help you with some of it or did you work a little bit or it was all loans?

Corey:
It was all loans.

Dr. Jim Dahle:
People don't pay their student loans off in two years unless they're have become financially awakened. When was your financial awakening?

Corey:
It was probably in my third year of medical school. That's when I discovered your podcast. I started reading your books and I just realized, “Okay, I need to tackle this right away and get this paid off.”

Dr. Jim Dahle:
At that point you owed $150,000, $200,000 already, huh?

Corey:
Right, right. Yeah. I just realized I need to put most of my paycheck to the loans once I get started and it works.

Dr. Jim Dahle:
Did your student loan burden affect your specialty choice in any way that you can remember?

Corey:
Not at all. No. Anesthesia was always kind of my top choice anyways, so that didn't really have any impact.

Dr. Jim Dahle:
Yeah, it's fortuitous, right? Some of us fall in love with something that makes a little more money than other things.

Corey:
Yeah, it was meant to be. So it worked out well.

Dr. Jim Dahle:
Tell us about your income over the last couple of years.

Corey:
Over the past two years, my base salary is $350,000 and then we also get quarterly bonus as well, which range from anywhere from $20,000 to $40,000.

Dr. Jim Dahle:
Okay. Pretty typical anesthesiologist kind of income. And did you pay any of this off during your training or did you just kind of leave it all for the attending years?

Corey:
When I started paying off my loans in residency, I just started paying a couple hundred dollars each month just to get the habit going. Then once I came into being an attending, I put both of my salary toward the student loans. I also use my quarterly bonuses. I put all of that towards my student loans as well. I try to live as frugally as possible to get that off my back.

Dr. Jim Dahle:
Now as we're recording this, we're right at the end of the student loan holiday. In this time period when you were putting most of your salary toward loans, you didn't actually have to make any payments and your interest rate was at 0%. What made you decide to pay them off anyway?

Corey:
I think it was more of a psychological thing for me. I am a pretty debt averse person, so I just wanted to get that off my back and I could focus on other financial goals that I have for myself. I didn't want to have to worry about the public service loan paperwork. I just felt better just getting it off my back as soon as possible and I had no regrets about that.

Dr. Jim Dahle:
And did you do any investing at all in the last couple of years?

Corey:
Yeah. Yes, I did. With index fund, following your advice and that has paid off as well.

Dr. Jim Dahle:
Okay. So you've been contributing to 401(k) or a Roth IRA or what have you been doing?

Corey:
Yes. Contributing to a backdoor Roth IRA. My work does not have a 401(k) per se. We actually have a pension system that we contribute to.

Dr. Jim Dahle:
Okay. You're saving for retirement and you paid off your student loans in less than two years, which tells me you didn't spend that much money.

Corey:
No.

Dr. Jim Dahle:
How did you maintain that kind of spending discipline?

Corey:
Well, like you mentioned in your books and the podcast, I just inflated my lifestyle just a tiny bit after my training and I've just been saving everything else. I don't live an extravagant lifestyle. I'm pretty happy living simply and I just knew that I wanted to be financially independent as soon as possible.

Dr. Jim Dahle:
So is there anybody else involved in your financial life? Do you have a partner or a spouse or any kids involved?

Corey:
No, I'm single.

Dr. Jim Dahle:
Okay. Do you think that it would've been harder to do what you did the last couple of years if there had been?

Corey:
I think it would've been a little bit harder to do that if I had other people in my life. If I had a partner, I would try to make sure that we were both on the same page financially before I would've tackled my student loans the way that I did.

Dr. Jim Dahle:
That's one nice thing about not having one is you can do whatever you want.

Corey:
Yeah. Exactly. Yeah. It was definitely much easier just being on my own, but I think I still would've paid them off in a similar amount of time, even if I did have a partner.

Dr. Jim Dahle:
Corey, I understand that you had some health difficulties while you were going through this process. Tell us what happened to you.

Corey:
Yeah, just over a year ago, I was out running and then I was about a mile in. Then all of a sudden I started having some visual changes, which was obviously not normal. And I looked at my phone and I really couldn't read it. I called for help and then got to the hospital and did some tests on me. Then they told me that I had had a stroke. I had a vertebral artery dissection. They think the clot formed in there and then shot off into the brain.

Dr. Jim Dahle:
And this was at what stage? You were a resident? You were an attending then?

Corey:
I was an attending then just about a year in.

Dr. Jim Dahle:
Okay. So, apparently that didn't stop your ability to earn?

Corey:
No, no. Fortunately, I took your advice. I had gotten disability insurance when I was in residency. Fortunately, I was able to use the disability income and still put money toward my savings and paying off student loans.

Dr. Jim Dahle:
How big was the benefit you bought during residency?

Corey:
As an attending, I got around $8,000 a month, I believe.

Dr. Jim Dahle:
Okay. Did you upgrade it when you became an attending?

Corey:
Yes, I did.

Dr. Jim Dahle:
Okay. So you had $3,000 or $4,000 or $5,000 or something as a resident and then you upgraded it to $8,000 as an attending. Is that right?

Corey:
I believe so. Yes. Plus my employer also has short and long-term disability insurance as well.

Dr. Jim Dahle:
Okay. The total amount of disability insurance you had in place when the stroke happened was what?

Corey:
Probably about $9,000 or $10,000 a month.

Dr. Jim Dahle:
Okay. And so, did you have to use it? Were you disabled?

Corey:
I was disabled, yes. I couldn't work because one of my deficits was reading. I had to teach myself how to read again.

Dr. Jim Dahle:
Whoa.

Corey:
Yeah.

Dr. Jim Dahle:
Are you still on disability insurance benefits?

Corey:
No, no. I was out of work for three months doing speech and occupational therapy and then they would cleared me back to work.

Dr. Jim Dahle:
So it was just three months at total you were out.

Corey:
Three months. Yes.

Dr. Jim Dahle:
Wow, that's scary, huh?

Corey:
It was super scary. Yeah. I actually had to take driver's training again, get recertified in that. And yeah, it was quite a long process. I had to do a neuropsych evaluation. It was about a six hour test to make sure I could still process everything that could be going on in the operating room. And fortunately that went fine. I’m being able to work again without any sort of restrictions.

Dr. Jim Dahle:
Well, I have a pretty good idea how you're going to answer this next question, but I'm going to ask it anyway. What advice do you have to those docs in residency that are putting off buying their disability insurance?

Corey:
I would say you never know what can happen. I've talked to all of my residents about disability insurance now. I feel like I'm kind of the poster child of disability insurance. Even though it's expensive, it's so worth it. Like you've said in your podcast, one out of seven physicians end up having to use the disability insurance. I think it's so important that you need to protect your investment that you've made into go into medicine and protect your income.

Dr. Jim Dahle:
Yeah. What now? What are your other financial goals? What are you hoping to accomplish in your financial life?

Corey:
I would like to be financially independent within the next 10 to 15 years or so, and eventually I'd like to buy a house as well.

Dr. Jim Dahle:
You're just going to basically take what was going towards student loans and start investing it toward a down payment and some additional retirement savings. Are you planning to increase your spending at this point? Is this kind of the end of your “live like a resident” period?

Corey:
Not at this time. I don't really need a lot in the way of stuff, so I just kind of keep on living the way I am. Maybe travel a little bit more, but I don't need to live extravagantly. I'm very happy the way I'm living right now.

Dr. Jim Dahle:
Yeah. Okay. So let's say there's somebody that's like you were five, six years ago. They're a third year medical student or a fourth year medical student and they're really feeling the weight. They've got $200,000 or $300,000 or $400,000 sitting on their shoulders. What advice do you have for them?

Corey:
First thing I would tell them is to read your books. First of all, they were very instrumental in the way that I've been saving and investing over the past several years. And I would also tell them to sit down and try to figure out, “Okay, how am I going to pay this off?” Whether it's going to be through the public service loan forgiveness, or just try to save as much as you can and then try to pay them off.

Dr. Jim Dahle:
Yeah. What about some of these people that are afraid to go to medical school, they're afraid to borrow a quarter million dollars to pay for medical school. Do you think that they should be or that they shouldn't be having come out the other side of it?

Corey:
That really didn't worry me when I was going through training. I think being a physician, you're always going to have a job that is very well paying. I don't think it's really something to be too concerned about. I think as long as you have good spending and saving habits, you'll be able to manage the loans just fine.

Dr. Jim Dahle:
Yeah. I'm guessing you have a budget.

Corey:
Actually I don't.

Dr. Jim Dahle:
No budget at all. You've just already trained yourself not to spend too much money.

Corey:
Yeah. I use the Mint mobile app and just kind of look at how much I've been spending and I just kind of go from there.

Dr. Jim Dahle:
You figured its good enough. No reason to turn the screws any harder, huh?

Corey:
No, no. I've been successful up to this point. I will continue what I'm doing.

Dr. Jim Dahle:
Okay. Looking back here, a couple of years ago you had this plan. You hadn't actually gotten an attending paycheck yet, but you had this plan. Looking back now, was it easier or harder than you thought it was going to be two years ago?

Corey:
It was easier than I thought it would be. Like I said, I started paying off the student loans during residency and it's kind of like the snowball effect. It started a little bit here and there, and then once it became an attending, I paid off more and more. As I started seeing the individual loan getting paid off, I just threw more money at them. And it was just so gratifying to see each loan get paid off.

Dr. Jim Dahle:
Yeah. What was the typical check you'd write in a given month to pay off your loans?

Corey:
It was probably around $6,000 or more. And then once I had a quarterly bonus, it could be anywhere $20,000 to $40,000.

Dr. Jim Dahle:
Yeah. The quarterly bonuses made a big chunk of it, it sounds like.

Corey:
They sure did. Yes. Yes.

Dr. Jim Dahle:
Yeah, because it doesn't feel like that's your real income. Your real income is the other check you're getting.

Corey:
Exactly. Yeah.

Dr. Jim Dahle:
It's almost a mental game there. Very cool.

Corey:
Yes.

Dr. Jim Dahle:
Well, this is pretty awesome. I'm totally impressed, Corey. Two years is awesome, especially for somebody who was an above average loan burden. Congratulations to you on accomplishing this goal, and thank you so much for coming on the Milestones to Millionaire podcast to inspire others to do the same.

Corey:
Thank you Dr. Dahle.

Dr. Jim Dahle:
All right. Well, that was a pretty impressive accomplishment. I was impressed just to see someone pay off their student loans in two years. That's no joke. $260,000 by the time you're two years out of training is awesome. If you can do that, you should totally give yourself a pat on the back. If you can do it and save for retirement, that's even better. And if you can do all that despite becoming disabled in the middle of it and having to teach yourself how to read and drive again, you're practically superman. I hope you find that as inspiring as I do.

FINANCE 101: DISABILITY INSURANCE

But we ought to talk about something here, and that is disability insurance. We've talked about it before on this podcast and obviously we talk about it all the time at the White Coat Investor. It is chapter one of the White Coat Investors Financial Bootcamp. It's chapter one for a reason. Because if you don't have disability insurance and something happens to you like happened to Corey, it can torpedo your entire plan.

Nobody caress that you just invested a decade and a half into your ability to trade your time for money at a high rate. Nobody cares. If you haven't insured that huge asset that you now own is not going to be worth anything. Nobody's going to pay you for having gone to medical school. Accept a disability insurance policy. That is how you ensure that asset that you have.

Now, his benefit wasn't huge. It was $8,000 or $10,000 total between the two policies, but $8,000 or $10,000 is far better than nothing. And honestly, I don't even know if a brand new attending has worked for long enough to actually get Social Security disability benefit. You have to put in a certain number of quarters. The younger you are, the fewer the quarters it is. I think it can be as few as six quarters but I don't know that that's necessarily the case for someone in their thirties. I'd have to look at the numbers exactly.

But the point is, it's hard. It takes a long time. You often have to get a lawyer to get Social Security disability and you have to be disabled from being able to do anything in order to qualify for that. Most of these good policies that you buy from our recommended agents, from the big five or six companies, don't require you to not be able to do anything. They just require you to not be able to do your specialty. And you know what? If you can't read, you probably can't do anesthesia. That's enough to pay out the entire benefit.

And so, that's why it's important to buy this stuff. And I hope hearing a real life example of someone who had to use it, is helpful to you. Now, he didn't have to use it for long and that happens a lot. He said it was only like three months. And so, I don't even know if he got into the long term disability policies that he had or in them for very long. It sounds like he had a short-term disability policy as well. And that's a decision you have to make.

Short-term disability, it's bad, but it's not necessarily a financial catastrophe. If you can't earn for three months or so, it's not the end of the world. If you've got a three month emergency fund, you've got the money to live on for those three months.

In actuality, when you talk to people who have been disabled, it's really four months though. Because they tend to not actually pay you that benefit until a month after the elimination period ends. I don’t know if it's a scam there, but that's the way it works. So keep in mind, maybe a four month emergency fund is the right way to go.

But that's the deal with short-term disability. Sometimes it gets used a lot for maternity kind of related stuff, is where I see it get used a lot. Some policies will consider just like a regular uncomplicated pregnancy disability for a few months and actually pay you for that. So, that's worth looking into if you're planning on having a baby.

But anyway, the big financial catastrophe though is a long-term disability. As you guys know, at least those of you who take care of strokes, not all strokes get better. Even in a young person that's doing rehab like crazy, it doesn't always get better. There was really no guarantee that he regained his ability to practice anesthesia. Not to mention there's no guarantee that this sort of thing can't happen to him again. And so, the real financial catastrophe is not being able to earn for the rest of your thirties, your forties or fifties and your sixties. But at least if that had happened to him, he'd be getting $10,000 a month for the next 30, 35 years and hopefully adjusted to inflation as it goes.

So, important, important, important stuff to buy. I can't emphasize that enough. Now, I no longer have disability insurance, but I'm also financially independent. You don't have to keep this stuff forever. I know it's expensive. Some of you are paying 4 or 5, 6% of your disability insurance benefit. So, if you're getting a $10,000 a month benefit, you might be paying $500 a month to get that. And if you have a $20,000 benefit, it might be twice that much. I understand it's expensive.

When you get financially independent, maybe give yourself a little cushion, another year or two maybe, go ahead and cancel your policy. It's okay. You don't need it forever. You only need it when you need to protect against a financial catastrophe.

Keep in mind, there are some policies that have a graduated payment where you pay less in the first few years and you end up paying more later. But that's okay if you're going for early financial independence. You actually come out ahead with those sorts of policies. So you can look for those if that's really your financial goal. If you only expect to be paying these premiums until you're 40 or 45, you may want to look into a policy that does that.

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All right, this has been another episode of the Milestones to Millionaire Podcast, where we feature you and your stories to inspire others to accomplish the milestones that you have already accomplished. You can apply to come on at whitecoatinvestor.com/milestones. Till next week, keep your head up, shoulders back. You've got this. We'll see you next time.

DISCLAIMER
The hosts of the White Coat Investor podcast 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.