Podcast #120 Show Notes: Medical Mission Work in Honduras
Ever thought about doing a medical mission trip? My 15-year-old daughter and I went to Honduras this summer with Making a Difference Foundation, to spend a week assisting in a local hospital. This episode I interview her about that trip and what effect the experience had on her. I also share an interview I did with a Honduran doctor where we discuss the differences between training and practicing medicine in Honduras versus in the United States. If you have a hard time with the audio for that interview conducted in the Honduran hospital you can see the full transcription below. If medical missionary work interests you, you'll find this episode helpful in knowing what it can be like. I also answer some listener questions about financial advisor fees, including TIPS in your portfolio, VTSAX vs VTI, becoming an S Corp, and using Vanguard target-date funds in a taxable account.
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Medical Mission Work in Honduras
Making a Difference Foundation was created by one of our long-time partners, CHG, a healthcare staffing company, and they sent me on this trip to Honduras. They are the folks behind loc*mstory.com, Weatherby CompHealth, and Global Medical Staffing. All those companies are under the umbrella of CHG, a Salt Lake based company. I asked if Whitney could come with me and they said sure but we had to pay for her. We had her earn half the money. She went to some neighbors and asked if there was anything she could help them with to earn money for the trip. A lot of them were willing to give her some jobs like cleaning blinds, vacuuming, washing dishes, and babysitting. She also got a job towards the end of the school year lifeguarding at the local swimming pool that helped cover the cost.
What a Day is Like on a Medical Mission
I asked Whitney what it was like day to day in Honduras.
“Well, we woke up at like 6:00am and sometimes had to turn the AC back on because of power outages. The air conditioning was kind of faulty. It spurted water if it was too cold for too long or when the power went out, consistently it would just turn off. Then we got dressed and we went downstairs and ate breakfast to be out of there by 6:45, to be at the hospital by 7:00. We had pretty traditional Honduran food prepared, and then we would go to the hospital and split up until lunch. Lunch is a big meal down there, so we'd go back to where we were staying for lunch to have this big meal and then go back to the hospital. We spent about eight hours at the hospital every day doing all kinds of stuff, depending on what kind of doc you were or what you were just doing that day.”
Lack of Resources in the Hospital
There was a mall down the street from the hotel we stayed at. Whitney was surprised to find this nice very typically American mall with Cinemark, restaurants, escalators, and air conditioning. She was surprised to compare that to the public hospital in which we were practicing for the week.
“You would think more funding would go into the hospital than the mall, but there seems to be two very different classes. There's private clinics and there's private education, and there's a lot of private versions of everything that cost money. Whereas the public hospital is free but they don't have a lot of stuff. Things like gloves, it seems very wasteful if you throw away a pair of gloves after seeing one patient even if they're covered in blood. You only change your gloves like two or three times a day, so it was a good thing we brought gloves with us because that was a little sketchy. That would never happen in an American hospital, whereas the mall was identical to an American mall.”
It was a very interesting experience, because it gave us a chance to compare and contrast two medical systems. In fact, in Honduras itself there are two medical systems. There is both a private medical system and a public medical system. About 70% of the three quarters of a million people that live in La Ceiba, the city we went to on the Caribbean coast of Honduras, have to use the Honduran public medical system. They don't have the money to go to a private hospital or a private doctor, so they end up in this public hospital. Unfortunately, the government is not particularly efficient with regards to running its hospital.
For example, I was told an administrator there, who had worked the previous year, had not actually spent the entire budget for supplies in the hospital. The assumption from the central authorities was that they did not need all that money, and so they were dramatically under-supplied the next year and were missing lots of basic items that you would expect like gloves, for instance, as Whitney mentioned, but really short on all kinds of supplies. While the expertise and the people were fantastic, and there seemed to be plenty of staff to take care of people, the supplies were very, very limited and so you had to be very careful what you used. If you're suturing a laceration, you went right to the end of the suture. You didn't want to throw any of it away if you didn't need to.
While the staff there was quite knowledgeable and did the best they could with the resources they had, it was interesting to see how they worked with very limited resources. For instance, I watched a paracentesis in this lady with liver failure. It was done with nothing but some Betadine, an 18-gauge needle, IV tubing and a bucket, which is obviously dramatically less equipment than most of us use when we do a paracentesis in our hospitals today.
Responsibilities for Children on Medical Missions
Whitney became a lifeguard this year so she recently had CPR and AED training and some first aid training (“It was pretty in depth things from what to do if someone stabbed something in their eye or about knife wounds which you would think you would never use at a public pool, but apparently you do.”). But she wasn't sure that training helped her in Honduras or not. She felt like the most helpful stuff was what she learned in her biology class about sanitation and things like that.
She was allowed to provide a little bit of medical care in Honduras, more than she expected, but closely supervised. She helped in labor and delivery taking care of the newborn babies. She watched a few C-sections. She also delivered a placenta, something that usually you have to wait until you're a third-year medical student to do. She gave babies vaccinations and started IVs. She also put a cast on a child.
“I put a cast on a kid, and it was the same plaster material we used in my art class. You guys use fiberglass here, so they're less familiar with it, whereas I used it a lot in my 3D art class so that was interesting. It was kind of fun to be the person who knew the most about something.”
Inspiring Future Doctors
Whitney has expressed interest in going to medical school. I asked whether this trip made that more or less interesting to her. She said more but she used to think she wanted to be an ER doctor but she doesn't want to do that anymore.
“There's a lot of jobs that aren't happy, obviously, as a doctor, but especially the ER stuff. It's hard, especially in Honduras, when you knew there was stuff that could be done that you couldn't do and just having to be like, “Well, that's all we can do for them.”
For sure it was a heartbreaking emergency medicine practice. This facility served as a trauma center for this city of three quarters of a million people. We had gunshot wounds to the head coming in. We had multiple motorcycle accidents a day coming in. These are real trauma patients, and we're trying to take care of them without a functioning X-ray machine, labs are often send-outs and don't come back for hours. That's assuming the family can carry the vials to a lab and bring back the results.
When a patient needs an X-ray, the family has to raise the money for an ambulance, take the patient over there in an ambulance to get the X-ray, get it read by the radiologist and bring the patient, and the read, back to the ER for the patient to receive further care. It was a very fragmented system, and obviously not ideal for trauma. I imagine ATLS in this sort of a situation is just almost silly. They can't do the imaging that we traditionally do in a trauma patient.
A typical trauma patient that comes into my ER might get pan scanned. They have a CAT scan done from the crown of their head to the bottom of their butt, looking for every possible injury. The only CAT scan in this hospital gets fired up once or twice a week. They don't want the last of their remaining filter of some kind to go out, and so they batch CT scans for everybody in the hospital that needs one. There's no way you're getting one stat for someone with a head injury. You really get used to practicing with a lot less resources than you usually have, and that's hard to watch sometimes when you know other things can be done.
The Best, the Worst, and the Most Surprising
Whitney thought it was really cool to just see and experience how things happened in a hospital. She also thought the food was really good. She was not a fan of the hot, humid weather. It's like 2% humidity in Utah and 99.9% humidity in Honduras.
She was most surprised by the mall.
“One of our hosts, she said, “Well, there's a mall down the street. We can go run down there and grab something.” We walk in, and I was just shocked. We were just at a hospital that had some dirt floors in places and the walls were falling down. Then you walked into this mall that had escalators and looked like an American mall.”
It was pretty interesting, the contrast between the haves and the have-nots in the country. It made her more grateful for what she has here in the States. ”
“There's a lot of things that you would see in the hospital, quality of medical care and things like that, the traffic control. If you walked out into the middle of that street, you probably would have gotten hit. If it was by American traffic laws, you would have been fine, or people yield to pedestrians. It was just like, “Honk-honk, get out of my way or I'm going to run you over.”
I thought it was interesting she commented on the traffic. I've been to obviously a lot more foreign countries than her, and I thought Honduras was one of the better sets of drivers that I've run into. I've definitely seen worse. It's far easier to drive around in Honduras than it is in Rome, for instance, but it wasn't quite American standards. It certainly always makes me grateful anytime I go to a developing country. It makes me grateful not only for the lifestyle I enjoy, but also the freedoms I enjoy.
While we were there, the American embassy was firebombed. Now, that was eight hours away from where we were, but there was a nationwide strike going on among teachers and healthcare workers while we were there. It certainly wasn't a time of perfect political peace. There was some economic unrest, for sure, during the time period we were there.
What it is like to Practice Medicine in Honduras
I interviewed Annette Dyan while I was in Honduras. She worked at the hospital we were volunteering at. I asked her to tell us about the process of becoming a doctor in Honduras.
“I started my career at 17 years old, so I was quite young. The training here is eight years long. We have six years of studying here in La Ceiba, and we only can study like outside from La Ceiba, which is either Tegucigalpa, which is the capital city, or San Pedro Sula, which is three hours away from here, so it's kind of long distance. We take the first six years of training, all the theory stuff. Then we have a year of internship, and we have then a year of community service.
It's an obligatory, community-service year in which you are sent off to different towns or really remote little towns in a rural area or we can stay in the hospital. To actually stay, I always joke around that it's like the Hunger Games. You have to take a paper. It's like a huge raffle. You do as much as possible to try to get as much close to home as you can.”
We talked about her class size. The first years are around 100 students as they take all the science classes. When she graduates in September there will be a group of approximately 400 students who are going to graduate in that promotion. There are two private medical schools in Honduras. They are on the expensive side. There is only one public school, that she attends, Universidad Nacional Autónoma de Honduras.
The public school costs about $25-28 plus books and living expenses. The private schools are $400/month for 8 years because you had to pay tuition for your internship and community service years. The public school kids get paid for their internship, about $220/month, and their community service year, $300/month, but the private kids have to pay money.
She said she wasn't able to save any money on $220/month salary because she had to pay for food and transportation and they always try to help patients because the patients don't have any money.
Specialties in Honduras
I asked her about specialities.
“Most people go into general practice because they don't have a chance to go on with a residency or taking on any specialties. Usually, people at this point of their lives, they're trying to make a family or they already have some sons or daughters. Usually people are trying to make money as fast as possible. There's people who aren't lucky to pay for the tests for the residency or there's people who aren't capable to pass the test too. There's a lot of unemployed general doctors here.”
The doctors who can't find work open up their own practices in rural areas and help the community in little private clinics. But working for the public side pays a bit more, $1000-$3000/month as an attending physician. Private practice doctors are making around $400/month which is just enough to pay for your basic stuff, rent, food, transportation, but not a lot extra. But they are paid per patient so the more patients you see the more you could make. A surgeon in a private hospital could make $3000-$3500/month.
“In order to become a specialist here, you only get the public system. Even though you took the private school, you have to be on public education to get your specialty. It's in base of credit score, so you get a test and you can try to earn some credits scores from before like working on different areas of the country and try to do as much conference as possible. Actually, it's kind of on a business side, in which you have to pay for conference to get some points. All this conferences are … They are paying to the Colegio Médico de Honduras, which is the association of doctors in here. Actually, you have to pay a certain percentage in order to get your residency.”
Internal medicine and obstetrics residency is three years. General surgery is three years. Plastic surgery and pediatric surgery is 6 years. They also have psychiatry, OBGYN, dermatology, radiology, cardiac surgery, neurology and neurosurgery, but if you want to be a vascular surgeon, you have to go to another country for training, typically Guatemala, Mexico, Costa Rica, or Spain. She thinks it would be fun to go practice in another country to see what medicine was like in that country but has no real plans to leave Honduras.
I always find it interesting to see what training and practicing medicine in other countries is like. I hope you enjoy the interview with Annette. Thank you to CHG for sending me down to Honduras to volunteer in the hospital with Whitney.
Reader and Listener Q&A
Teaching Children About Money
One listener asked what we are doing to teach our children about money. I had Whitney answer this question.
“I think one of the biggest things is having to do some of the stuff yourself. I have a debit card, and I have a bank account that I manage basically by myself. The money that I earn goes in there, but I also get to spend that money. There's some restrictions obviously, but I think the ability to give a little freedom helps you learn. Even if you buy something that may not have been worth it or something, you realize that, so you learn from your mistakes more. It's worth a lot more to you if you personally have the freedom over it instead of more rules and restrictions over it. I think that helps prepare you more for when you're doing it completely by yourself.”
That reminds me of a chapter from Alan Roth's book, How a Second Grader Beats Wall Street. I think the title of the chapter is The Claw Takes Your Money. It's talking about that claw game where you pick up the stuffed animals in the machine and how you never actually win anything in it and it just takes your money. I had an interesting experience with that yesterday with another kid when I explained to him “the claw's just going to take your money.” He didn't believe me. He finally got his dad to give him a dollar, and he went and put it in the machine. Of course, he didn't get the stuffed animal, and the claw took his money. Sometimes losing money is a better teacher than doing the right thing with money.
I asked Whitney what we taught her about saving money.
“We do a lot of saving. There's a certain percent that we save for charity. One thing I've noticed a lot with teenagers is if we're making plans or something, people will be like, “Oh, I only have like $10 left in my account,” or something like that. That always shocks me because I have this safe zone for whatever reason, where I'm like, “Oh, this is a good amount, I should always have this amount in savings in case something comes up or something happens.” It was helpful for Honduras, where I could pull a little bit out of savings to help pay for that. Saving money has been important to me because then I have it for when I need it in the future. I have accounts that I'm invested in so it makes you more money in the future just for not touching it. I think a lot of teenagers could use that instead of just, “Oh, I have money. Now, I need to spend it.” It's more of, “What's going to be most beneficial with this money?”
We have 529 educational accounts, Roth IRAs, and a UGMA account for each child. We do a daddy match for the Roth IRA where they invest the money they earn and I give them the same amount of money to spend. Whitney understands that it is important to save for retirement now “because it is time to accumulate and grow interest.” She is gaining an understanding of how her money is doing that. “I own a teeny little piece of all the companies and so you get a little bit of money from all of the accounts.”
She understands what her UGMA account is. “In your opinion, it's much more helpful to have money in your 20s than it is in your 70s. It's my inheritance, but it's a lot more helpful for college or a wedding or a car or a first house than it is for some cruise when I'm 65.”
I asked her how did she learn about these accounts? What are her parents doing to help teach her about investing and these different types of tax-advantaged accounts?
“Other than listening to Dave Ramsey on repeat … We turn on Dave Ramsey and you just hear a collective groan, and then we have to answer so many questions correctly before we get to turn it off.”
She has been noted at school on at least one occasion to be the only child in class who could tell the instructor what a 401K was. Clearly, what we're doing is working. I'm not sure that we're perfect at doing it. We try to have an allowance. We try to talk about money. It's not a taboo subject. We let them manage their own money as much as is reasonable and gradually introduce more and more concepts as we go along.
I asked her how have her parents taught her to give money?
“Every year, we have a set amount that we're going to donate to charity. We have a big meeting and everyone comes up with some charities they'd like to donate it to. Then we end up narrowing it down a little bit and deciding how much money we should give to each charity based on what each family member wants. We decide these charities that are things that are most important to us and then decide how much money we can give them to help them. It shows that it's important in our family to give, but also give to things that are important to us. When we're sitting down in this meeting and we decide where it goes, one child's opinion is worth just the same amount as every other person's opinion.”
I hope that conversation with Whitney gives parents some ideas of how they can teach their children about money. Whitney is 15. She has three more years before she has to get her own car, her own apartment and her own job. Hopefully, by the time she leaves our nest, she will be far more equipped than the average American to manage finances.
Understanding Financial Advisor Fees
“I have a reasonably large taxable account as the result of a UGMA from my admittedly fantastic parents, which is managed by the family's financial advisor. During my most recent phone call with him, I had a lot of questions as a result of all the reading I've been doing, specifically about how he was paid. He said they charge a 1.15% assets under management, but as an all-in fee, meaning that the account management fees, as well as the expense ratios and costs of any trades or anything else that they do, all have to be contained within that 1.15%. This seemed like a pretty reasonable incentive structure to me, but I wanted to hear your thoughts. Have you heard of a fee strategy like this before? I really like this financial advisor because he takes a lot of time with me even though I must not be a big account. I don't think I have the time or the right personality to manage my own money.”
Obviously, 1.15% is higher than it has to be. I have a whole list of financial advisors that charge less than 1.15%. There's no doubt you can find a lower priced financial advisor. Also, the likelihood of that 1.15% including the expense ratios seems extremely low. That generally is not included in advisory fees even if commissions and other fees might be.
That said, if you only have a small balance, 1.15% times a small balance isn't a huge fee. If you like the advisor and you feel like you're getting good advice, feel free to use him for now, but as your assets grow, you may want to negotiate a lower fee or find a new advisor once you start acquiring assets as an attending physician. It's not necessarily a deal killer I think at this point, but you don't want to be paying 1.15% when you have a $5 million portfolio. That's a very expensive financial planning and investment management fee.
Why to Include Treasury Inflated-Protected Securities (TIPS) in Your Portfolio
I noticed your portfolio has 10% invested in Treasury Inflated-Protected Securities. I've also seen TIPS included in a portfolio for the middle-late investor. However, many portfolios, like the Vanguard Targeting funds, don't include TIPS. What are the reasons to include or exclude TIPS from a portfolio?”
For those who don't know, TIPS are special bonds issued by the United States treasury that not only pay a yield, like most bonds, but also have an inflation-protection component. The idea behind this is that they protect you against one of the most important risks of bonds, unexpected inflation. If inflation spikes all of a sudden, TIPS are actually adjusted upward in value and provide some significant protection against what is perhaps the most significant risk that investors face, inflation.
Obviously, you get some inflation protection in the long term from stocks and real estate because in the long run, the returns tend to out pace inflation. As those companies can raise their prices with inflation and landlords can raise rents, so they tend to keep up with inflation in the long run, but not necessarily in the short run like TIPS do. TIPS are a different asset class. They provide some different characteristics and I think have a reasonable place in a reasonable portfolio. They make up 10% of my portfolio, which is half of my bonds. I think that's been good for me. Obviously, there hasn't been a lot of unexpected inflation in the last 10 years.
They haven't performed awesomely, and I think because of that, they've fallen a little bit out of favor in a lot of portfolios out there. I think a decade ago, a lot more people were including them in their portfolios that aren't necessarily including them now. You mentioned the Target Retirement Funds from Vanguard that don't include TIPS. That's true in some of the higher-date funds, but if you look at the 2020 Fund and the Income Fund, you'll see that they've added TIPS into those funds. It seems that the smart folks at Vanguard believe that TIPS have a place for the investor that has a higher percentage of their portfolio in bonds and/or is closer to retirement.
You can take from that what you will. Maybe you don't need TIPS now and you need them later. You need them later if you believe what Vanguard is telling you with their Target Retirement Funds. As for me, I think splitting my bond portfolio 50% nominal and 50% inflation indexed is a reasonable strategy that I've stuck with over the years and plan to keep sticking with. Certainly, they're not a mandatory class to be financially successful. Just because they've done poorly in the last 10 years, to me, that's a sign of a diversified portfolio. If everything you own is sky rocketing, you may not be diversified, not as diversified as you should be anyway.
VTSAX vs VTI
“From listening and reading to your materials, I understand each mutual fund and its related ETF to be essentially similar. For example, VTSAX and VTI are often noted as similar enough with the slight preference for VTSAX's broader holdings. Recently, Vanguard has been pressuring me through repeated communications to divert my final holdings such as VTSAX to VTI all to save 0.01 in expense ratio. If I convert, do I risk ever getting back into VTSAX? If they close the fund to new investors, what if they close VTSAX and then change the index that VTI tracks to one I don't prefer? Should it worry me that Jack Bogle did not like ETFs and their marketing trading characteristics and now Vanguard wants everyone to convert from traditional mutual funds to ETFs? If I'm just chasing a 0.01 expense-ratio savings, why not shift out of Vanguard to Fidelity's Zero Funds?”
Basically, they're talking about two share classes of the Vanguard Total Stockmarket Fund. VTSAX is the mutual fund version. VTI is the exchange-traded fund or ETF version. It's the same fund though. The expense ratio is nearly identical. It's literally 0.01% less for the ETF, but you don't want to obsess about expense ratios. I wrote a blog post a few months ago called Don't Obsess About Expense Ratios. It was actually talking about Fidelity's new 0% expense ratio funds, but the same principle applies here. If you're worrying about 0.01% in expense ratios, you're worrying about all the wrong things when it comes to these mutual funds.
There really is no significant difference between the ETF share class and the mutual fund share class. Use either one. It's fine. When I buy at Fidelity or Charles Schwab, I buy the ETF because the commissions are lower there for ETFs than they are for mutual funds. When I'm at Vanguard, I buy the mutual fund just because I prefer mutual funds, and it's the same cost at Vanguard.
I wouldn't necessarily take any pressure that Vanguard's given you to convert. That's not something you have to do. If you prefer mutual funds, stay there. If you want to convert, that's not a bad thing either. Jack Bogle was far more worried about what investors tend to do with ETFs, which is speculate and trade them hour to hour and day to day rather than holding them for the long term. I don't think he really cared if you're going to buy and hold for the long term an ETF that's broadly diversified and low cost versus a mutual fund that's broadly diversified and low cost. He really didn't care. Both are fine. I own both. Don't expect much difference in performance between them.
Investing in Bonds vs Paying off Debt
“I know you've answered the question of investing versus paying down debt many times. I understand both sides, and I'm trying to do some of both. I have $100,000 in student loans at 6% and a $600,000 mortgage at 4.38% that I'm trying to pay down, but I'm also investing in a taxable account after maximizing my retirement savings. I know you're an advocate of bonds making up some of your portfolio, but it seems to make no sense to buy bonds in my situation because that money would be better spent getting a guaranteed 4% paying down my debt. I'm therefore putting 100% of my investment in stocks. Do you think this is a reasonable thing to do?”
The way a lot of people look at loans is that since they're also guaranteed return investments, at least paying them down is, they're kind of negative bonds. Rather than investing in bonds, you could pay down your loans and call that the bond component of your portfolio. That works fine. It really does work that way. The only issue with doing that is a lot of people fail to remember that when the stock market's dropping and they don't tolerate the stock market losses. In a big nasty, bear market, you might lose 50% of the money you have in stocks. You're not really going to be thinking about the fact that, “Oh well, at least I paid down a bunch of my student loans,” at that point. You're just going to be going, “I lost 50% of my money, I've got to bail out.”
I think it's probably worthwhile to still carry a few bonds in your portfolio, at least to help remember how bonds work and to decrease the volatility of the portfolio a bit in a market downturn, especially if you're a young investor and have never been through a bear market before. I always think you ought to err on the conservative side until you go through your first bear market, but it's true, paying down loans is the equivalent of investing in bonds.
Obviously, at 4.38% or 4%, you're not going to find high quality bonds that are paying that these days. At best you're getting 3-3.5%. It's a great use of your money I think to pay down your loans in that sort of a situation. In fact, I didn't really have much of a taxable account while I had any sort of debt other than a mortgage. Even that I ended up paying off before I had too much of a taxable account. I'm a big fan of maxing out retirement accounts and taking advantage of all those asset-protected and tax-protected accounts that are available to you and then once you have additional money, above and beyond that, using that to pay off your debts.
If you want to carry a little bit of debt at a low interest rate for a while and invest in a taxable account, hoping to beat that, I don't think that's crazy, but don't get too carried away with it. Most doctors are far more comfortable with debt than they really should be.
Real Estate Funds Going into the Public Sector
“I recently invested in a private real estate fund. Its past returns have averaged about 12% a year, and the first couple of months have been comparable. I've just received notice that it's considering going into the public sector. I have two questions. One, would you be hesitant to continue investing in the fund knowing that it might be switching from private to public? Two, since all of your recent podcast interviews have had experts discussing their hesitance to investing in the private real estate funds, is this something that you're reconsidering in your investment portfolio?”
I know exactly what fund this listener is talking about because I'm invested in it as well. It's a real estate fund that becomes a REIT, a real estate investment trust, and is now probably going to end up going public, meaning there'll be an initial purchase offering and then it will be traded on a daily basis on the stock market. I'm not a big fan of individual stocks, so I will probably end up getting out of this fund at some point after it becomes publicly traded. I will be surprised if this particular fund, which is very well managed, does not go up in value significantly in the weeks and months after it goes public. It wouldn't surprise me to see it go up 30% in value. At that point, obviously the yield, the expected return on this investment is going to be lower after that run up.
The fact that I don't like buying individual stocks and at that point, I'll expect a lower return going forward, I will probably get out of the investment at that point. I'll make sure I qualify for long-term capital gains on any gains I may have, but I may move that money back into another private real estate fund. In this case, it's a debt fund. I wouldn't necessarily have any concerns buying into it at this point. I think it's a great fund. I wouldn't necessarily have any concerns that it's going to tank in value as soon as it becomes publicly traded. It's a well-run fund with good investments. It's not going to tank, certainly not in any short-term fashion.
I try not to buy investments that I'm not willing to hold onto for years, and that's the case for this fund as well. I'm willing to hold onto it for years, but as it becomes publicly traded and subject to the whims of the stock market, I may disinvest and look for another fund, hopefully with a nice capital gain to show for my efforts.
And the follow-up question, are you going to stop investing in this asset class because several podcast experts we've had on don't really like them? It's true. Rick Ferri and Bill Bernstein and Alan Roth, I asked them all that same question. If you've been listening to the podcast, I asked, “What do you guys think of these private real estate investments?” To be fair, several of them said, “I don't know much about them.” That's not something they invest in. None of these are mandatory investments, but I knew their positions on them when I invested in them. This isn't a revelation to me.
I've read their books. I've talked to them all in person. I know how they feel about private investments. That's part of the reason why 85% of my portfolio is in index mutual funds. That said, I think there's still a place for real estate in a portfolio. I'm not a huge fan of direct real estate investing for me because I don't like being a landlord. I don't like the second job aspects of it. I don't think I'm all that good at it either, but I like real estate as an asset class.
I think that private real estate investments are a reasonable way to invest in it but buyer beware, the due diligence here is far more difficult to do than it is on a typical index fund. You don't have to invest in them. I don't think it's crazy to invest in them. If you do, really do your due diligence and be careful how much you invest in any given investment and how much of your portfolio you put into them. But yes, I expect to continue to invest in some private real estate investments. As I have on the blog for the last few years, I'll continue to update you a couple of times a year on how my investments are doing. So far, they've done great, so I'm really happy with them. Hopefully, that will continue.
S Corps for Physicians
“What is an S-corp and why can becoming one be advantageous for physicians? What are the steps needed to become an S-corp, what deductions are acceptable and any other strategies to use within the S-corp to minimize taxes?”
The benefit of an S-corp is you don't have to pay Medicare taxes on the portion of your income that you call distribution. When you are a sole proprietor, all your profit from your business, is subject to Medicare taxes. If you elect S-corp taxation, whether you were previous a sole proprietor or a partnership or an LLC or a C-corporation or whatever, if you elect S-corp taxation, whether or not you actually form a corporation, you get that benefit that you can now call part of your income salary on which you pay all your regular income taxes plus your payroll taxes like Social Security and Medicare. Then the other part is distribution on which you don't have to pay payroll taxes. If you're like most docs, you've already maxed out your Social Security taxes, so what you're saving is the Medicare tax, 2.9% of everything you call distribution. If you have an income of 400,000 and you call 300,000 salary and 100,000 distribution, you just saved 2,900 in Medicare taxes. Obviously, you're going to get the same Medicare benefit as everybody else, so that's pretty clean savings right there.
If it's worth the hassle and the expense of becoming an S-corp to save that money, then it's usually worth doing. Don't expect any additional malpractice protection from incorporating in that practice. It doesn't really give you any. Malpractice is always personal, but you may save some taxes. A lot of people think you have to incorporate to have a bunch of deductions, though. That's not generally the case. Almost all business deductions that are available to an S-corp are available to a sole proprietor. You can still write off your CME. You can write off your scrubs. You can write off your stethoscope. You can write off your business miles.
All of your work-related expenses, you can write off just as easily as a sole proprietor as an S-corp, so don't kid yourself that there's some huge savings there. What there is is a big hassle. You now start filing a bunch of extra tax forms. You have to be filing W2s and W3s for your employees. You're now an employee of your own S-corp, so you have to do all that employee paperwork that your employer used to do for you. That can be a big pain. You have to file a 941 form every quarter with the taxes that you withheld from yourself as an S-corp. There's a fair amount of paperwork, and if you don't want to do it, which I can't blame you, having done it now for the last couple of years, you're going to pay an accountant to do it. It's going to cost you a little bit of money there. You have to weigh that against the additional tax savings on the Medicare taxes.
You have to declare a significant portion of your income as distribution. Remember that the IRS requires you to pay yourself a fair salary. You can use a salary survey to determine what that is or some other reputable source or argument to determine it, but if you're going in there and trying to convince the IRS that a full-time doctor's only getting paid $60,000 as salary and $350,000 as distribution, you're probably going to lose that argument. You're going to end up paying a bunch of taxes and penalties to the IRS when they audit you on that point. As a general rule, you want to make sure you are paying yourself a fair salary and you have a good method to justify the salary you are paying to yourself.
Is it Reasonable to Use Vanguard Target Date Funds for a Taxable Account?
“I utilize the Vanguard Target Date Retirement Funds for my retirement account. I don't like to move money around too much, nor to make a lot of changes. My question is is it reasonable to utilize the Vanguard Target Date Funds for my taxable account.”
If you really really want to keep things simple, it's an option. It's a one-stop shop for a mutual fund, especially if it's available in your 401K and your Roth IRA and your taxable account. You can just put it all in one fund and forget about it. There's some value in just keeping it simple there. The downside of using a target date fund or a target retirement fund or a life cycle fund, whatever you want to call them, in a taxable account is they generally have fully-taxable bonds. If doctors are going to own bonds in a taxable account, which many would rightfully argue that they shouldn't, the bonds they should own are generally municipal bonds. I have yet to see a target date fund with municipal bonds in it.
It isn't that tax efficient plus you're kind of stuck with it if you later decide you want to have a more complex portfolio. Now, you've got this fund with all these capital gains that you're going to have to pay capital gains taxes on if you want to change the portfolio. You're stuck with this tax inefficient holding in the account. As a general rule, I recommend against target date funds inside taxable accounts, but obviously if you're really trying to keep things simple and you're willing to pay some extra taxes in order to keep them simple, it is an option.
When You Should Make Your $19,000 Retirement Account Contribution as a Resident
“I'm just starting my PGY3 year in internal medicine and I had a 401K-related question. I currently have both a pre-tax and Roth contribution option in my 401K as a resident with no offered match by my employer. After graduating next June, I will be joining a primary care practice and starting work with them in August of 2020. For my 401K with them, they're offering 100% match for the first 3% and 50% match on the next 2%.
My question is primarily how to allocate my $19,000 worth of 401K contributions for the 2019/2020 year. My concern is that contributing to my 401K as a resident between January and June would potentially prevent me from obtaining the full match amount during the August through December months with my new employee as an attending. That being said, everything I contribute as a resident, I can do as Roth contributions, but once I start as an attending, I only have the option of pre-tax contributions. My thinking was to not contribute at all to my 401K between January and June as a resident, then between August and December contribute the $19,000 maximum and obtain approximately $8,500 in matching funds with my new employer. Just wanted to hear your thoughts on what to do with these different options.”
This is a really insightful question. Most residents aren't thinking about this stuff as they go to graduate. He's trying to maximize his benefits in that year when you transition from resident to attending. Obviously, you want to get as much of the match as you can from this new employer, so you'd better talk to them carefully. A lot of new employers don't let you use the 401K for the first year or year and a half after you start with the company. Make sure they're actually going to let you use it when you go to the new company. If they're not, you're better off maxing out the residency one.
If they will truly let you use the 401K and truly will give you a match, you want to save enough of that $19,000 contribution to get the entire match. That's free money. That's part of your salary. You don't want to leave that on the table. If you have to put in all $19,000 to get your $8,500 max, don't put anything in the residency 401K. If you've only have to put in 8,500 in the new 401K to get that $8,500 in match, put the rest in the Roth 401K at the residency. If that's an option, that's what I would do, but you just really need to nail down the details of how this new 401K is going to work so you can plan out what to do with your old 401K.
Ending
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Full Transcription
Intro: This is The White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.
WCI: Welcome to White Coat Investor podcast number 120, A Teenage Trip to Honduras. As a white coat, you have valuable knowledge. Various companies want that knowledge. And they’re willing to pay you for it! That’s why we’ve put together a list of recommendations for companies that pay you to take surveys. If you’re looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money, start a solo 401(k), and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash! Go to whitecoatinvestor.com/PhysicianSurveys. You can do this and The White Coat Investor can help.
WCI: Thank you for what you do. While it might be routine for you, it is anything but for your patients who trust you on the worst days of their lives. There's a lot of work, stress and liability, and somebody should tell you that your work matters, so if your patients haven't lately, I hope you'll accept my sincere thank you. Also, be sure to sign up for our newsletter under the WCI Plus tab on the main website. The URL is whitecoatinvestor.com/free-monthly-newsletter.
WCI: It includes a lot of great stuff including blog posts that don't show up anywhere else, a collection of the best stuff published on the web in the previous month for docs interested in personal finance and a market report without any BS predictions about the future. You can sign up, again, at whitecoatinvestor.com/free-monthly-newsletter. You can unsubscribe anytime if you don't like it, and did I mention it's free? All right. Today we have a special guest on the podcast, we have my daughter, Whitney. Welcome to The White Coat Investor podcast, Whitney.
Whitney: Do I get to do jazz hands?
WCI: You don't get to do jazz hands, but you have to talk because remember it's a podcast.
Whitney: Right.
WCI: So, you can't just wave at the camera, although this will be on YouTube. You have to actually talk, so welcome to the podcast.
Whitney: Thank you.
WCI: Can you tell she's a little bit nervous? We had a great opportunity recently. We went together down to Honduras in June. This was actually a trip put together by CHG, which is a healthcare staffing company. They're the folks behind loc*mstory.com, which is a longtime White Coat Investor podcast sponsor. Weatherby and CompHealth, Global Medical Staffing, all those companies are under the umbrella of one Salt Lake based company that's been sponsoring us for a long time. They decided to fund my trip down there, and I said, “Well, I'll go if I can bring my daughter, Whitney.”
WCI: They said, “Well, you can bring her. You've got to pay for her.” I said, “Well, she's going to pay for at least part of it herself.” She got to come along as well, and we had a wonderful time down there. We thought we'd use the first part of the podcast today to tell you a little bit about that trip. Whitney, what was your day to day like on your trip to Honduras? Can you tell us a little bit about it?
Whitney: Well, we woke up at like 6:00am and sometimes had to turn the AC back on because of power outages. Then we got dressed and we went downstairs and ate breakfast to be out of there by 6:45 to be at the hospital by 7:00. We had pretty traditional Honduran food prepared, and then we would go to the hospital and split up until lunch. Lunch is a big meal down there, so we'd go back to where we were staying for lunch to have this big meal and then go back to the hospital. We spent about eight hours at the hospital every day doing all kinds of stuff, depending on what kind of doc you were or what you were just doing that day.
WCI: What did you think flying into La Ceiba? What did you think of the plane we flew in on?
Whitney: It was about 15 people, and we had about 12 of the spots. There was no air conditioning. It was like 120 degrees and a little shaky, but it was interesting.
WCI: Were you surprised they had air conditioning in the hotel?
Whitney: I was hoping for it, so it was more of a relief than a surprise, but the air conditioning was still kind of faulty. It spurted water if it was too cold for too long or when the power went out consistently it would just turn off. We tried to keep our room pretty cold, but it didn't go so well.
WCI: What did you think about the mall down the street from your hotel? Was that a surprise to you?
Whitney: Yeah, he mall is almost as nice as an American mall. It has a Cinemark in it, and it has stores and restaurants and all kinds of stuff. It looks exactly like an American mall, and it's air conditioned, it's escalators, it's almost identical.
WCI: I want you to compare and contrast the mall you saw, with its food court and its AC and everything you could possibly want to buy, with the public hospital that you then spent your day working in. Was it surprising to you to see the difference?
Whitney: Yeah. You would think more funding would go into the hospital than the mall, but there seems to be two very different classes. There's private clinics and there's private education, and there's a lot of private versions of everything that cost money. Whereas the public hospital is free if they have it there, but stuff that they have is not a lot. Things like gloves, it seems very wasteful if you throw away a pair of gloves after having one patient even if they're covered in blood. You only change your gloves like two or three times a day, so it was a good thing we brought gloves with us because that was a little sketchy. Just things like that compared to … That would never happen in an American hospital, whereas the mall was identical to an American mall.
WCI: Yeah. It was a very interesting experience, because it gave us a chance to compare and contract two medical systems. In fact, in Honduras itself there are two medical systems. There is both a private medical system and a public medical system. About 70% of the three quarters of a million people that live in La Ceiba, the city we went to on the Caribbean coast of Honduras … About 70% of them have to use the Honduran public medical system, basically. They don't have the money to go to a private hospital or a private doctor, so they end up in this public hospital. Unfortunately, the government is not particularly efficient with regards to running its hospital.
WCI: For example, I was told an administrator there who had worked the previous year had not actually spent the entire budget for supplies in the hospital. The assumption from the central authorities was that they did not need all that money, and so they were dramatically under-supplied the next year and were missing lots of basic items that you would expect like gloves, for instance, as Whitney mentioned, but really short on all kinds of supplies. While the expertise and the people were fantastic, and there seemed to be plenty of staff to take care of people, the supplies were very, very limited and so you had to be very careful what you used. If you're suturing a laceration, you went right to the end of the suture. You didn't want to throw any of it away if you didn't need to.
WCI: While the staff there was quite knowledgeable and did the best they could with the resources they had, it was interesting to see how they worked with very limited resources. For instance, I watched a paracentesis in this lady with liver failure. It was done with nothing but some Betadine, an 18-gauge needle, IV tubing and a bucket, which is obviously dramatically less equipment than most of us use when we do a paracentesis in our hospitals today. Whitney, I understand your dad made you pay for part of the trip. How much of the trip did you have to pay for?
Whitney: Half of it.
WCI: How did you raise the money for your share of the trip?
Whitney: I did all kinds of stuff. I went to some neighbors and I was like, “Is there anything I can help you with? I'm trying to raise money to go on this trip.” A lot of them were just willing to give me some jobs. I cleaned blinds, I vacuumed, I did dishes for some people, I cat sat, I babysat. I ended up eventually getting a job towards the end, like closer to when we were about to leave on the trip, as a lifeguard, which I'm still working as, and to help raise all the money for this trip.
WCI: What do you like about your job as a lifeguard?
Whitney: It's really flexible, which I really like, and that you're just working with a lot of people your age. It's pretty fun.
WCI: Is it easier or harder than writing posts for The White Coat Investor?
Whitney: I feel like this is a trick question.
WCI: So, you're not going to answer it. You know all these people want to hear from you, right?
Whitney: Okay. Well, I'm not necessarily a bad writer, I just don't like to write, so it's easier to sit in a chair for a couple hours than it is to spend like two days writing.
WCI: Tell us about the medical training you got as a lifeguard.
Whitney: It's like basic CPR, AED. Actually, it was pretty in depth things from what to do if someone did something to stabbed in their eye or they taught us about knife wounds and stuff like that, which you would think you would never use at a public pool, but apparently you do. It just went in depth. It's kind of skimmed the surface on basic medical training about all kinds of stuff, but mostly CPR, AED use and just use of the equipment that we had there already.
WCI: How did that training prepare you for what you did in Honduras?
Whitney: I really don't know that it helped a lot. It was pretty basic of like what kinds of Band-Aids to use and stuff, but in Honduras this is what they have, and so you leave it or use it. It wasn't super helpful, but you got the basics. The most helpful stuff were the stuff I learned in my biology class about sanitation and stuff like that.
WCI: Now, you were actually allowed to provide a little bit of medical care in Honduras, maybe more than you expected going into the trip. While you were pretty closely supervised the whole time, tell the listeners a little bit about what you got to do down there from a medical perspective.
Whitney: I did all kinds of stuff. I helped a lot in the L&D with some of the docs that came with us, and just taking care of some of the newborn babies. I watched a few C-sections and things like that. I helped deliver a placenta.
WCI: You delivered a placenta?
Whitney: Yeah.
WCI: Something that usually you've got to wait until you're a third-year medical student to do.
Whitney: Right. There was a lot of stuff like that. Yeah, I helped a lot with a lot of that stuff, and I gave the babies vaccinations. The lady who was explaining how to do it spoke Spanish, which I don't speak, so it was a little probably not incredibly safe, but after the fourth or fifth one, she was like, “Oh, you know how to do it. Have fun.”
WCI: You gave some vaccinations, you got to start some IVs.
Whitney: Yeah. I put a cast on a kid, and it was the same plaster material we used in my art class. You guys use fiberglass here, so they're less familiar with it, whereas I used it a lot in my 3D art class so that was interesting. It was kind of fun to be the person who knew the most about something.
WCI: Now, it's interesting that you have talked in the past about becoming a doctor.
Whitney: Yes.
WCI: Did this trip make you more likely or less likely to want to go to medical school?
Whitney: Probably more likely, but I always thought I would maybe want to be an ER doctor. I don't think I want to do that anymore.
WCI: Great, we talked you out of being an ER doctor. Wonderful. What was it about being an ER doctor that you decided you didn't like after going on this trip?
Whitney: I don't know. There's a lot of jobs that aren't happy, obviously, as a doctor, but especially the ER stuff. It's hard, especially in Honduras, when you knew there was stuff that could be done that you couldn't do and just having to be like, “Well, that's all we can do for them.”
WCI: Yeah, for sure, it was a heartbreaking emergency medical practice. This facility served as a trauma center for this city of three quarters of a million people. We had gunshot wounds to the head coming in. We had multiple motorcycle accidents a day coming in. These are real trauma patients, and we're trying to take care of them without a functioning X-ray machine, labs are often send-outs and don't come back for hours. That's assuming the family can carry the vials to a lab and bring back the results.
WCI: When a patient needs an X-ray, the family has to raise the money for an ambulance, take the patient over there in an ambulance to get the X-ray, get it read by the radiologist and bring the patient, and the read, back to the ER for the patient to receive further care. It was a very fragmented system, and obviously not ideal for trauma. I imagine ATLS in this sort of a situation is just almost silly, right, to be able to do the imaging that we traditionally do in a trauma patient.
WCI: A typical trauma patient that comes into my ER might get pan scanned. They have a CAT scan done from the crown of their head to the bottom of their butt, looking for every possible injury. The only CAT scan in this hospital gets fired up once or twice a week. They don't want the last of their remaining filter of some kind to go out, and so they batch CT scans for everybody in the hospital that needs one. There's no way you're getting one stat for someone with a head injury. You really get used to practicing with a lot less resources than you usually have, and that's hard to watch sometimes when you know other things can be done. Okay, Whitney. What did you like best about the experience? What was the best part of it?
Whitney: I don't know. I really liked … There were a lot of stuff that was just learning, that was really cool to just see and experience how things happened in a hospital, but as well as some of the other things. Culture wise, the food was really good and things like that, and that was really cool.
WCI: What did you like the worst? What was the worst part of the experience?
Whitney: The temperature and the humidity. It was so hot and so humid.
WCI: A little more humid than Utah.
Whitney: It's like 2% humidity in Utah, and it's like 99.9% humidity in Honduras.
WCI: What was most surprising to you? What was the biggest surprise about the trip?
Whitney: The mall. One of our hosts, she said, “Well, there's a mall down the street. We can go run down there and grab something.” We walk in, and I was just shocked. We were just at this hospital that …” We went to a different one, one of the days, that had some dirt floors in places and the walls were falling down. Then you walked into this mall that had escalators and looked like an American mall.
WCI: Yeah. It was pretty interesting, the contrast between the haves and the have-nots in the country, for sure. Did the trip make you more grateful to be an American?
Whitney: Yes. There's a lot of things that you would see in the hospital, quality of medical care and things like that, the traffic control. There was no kind of … I don't know. If you walked out into the middle of that street, you probably would have gotten hit. If it was by American traffic laws, you would have been fine, or people yield to pedestrians. It was just like, “Honk-honk, get out of my way or I'm going to run you over.”
WCI: It's interesting that you comment on the traffic. I've been to obviously a lot more foreign countries than you, and I thought Honduras was one of the better sets of drivers that I've run into. I've definitely seen worse. It's far easier to drive around in Honduras than it is in Rome, for instance, but it wasn't quite American standards in anything you did. It certainly always makes me grateful anytime I go to a developing country. It makes me grateful not only for the lifestyle I enjoy, but also the freedoms I enjoy.
WCI: While we were there, the embassy was firebombed. The American embassy was firebombed. Now, that was eight hours away from where we were, but there was a nationwide strike going on among teachers and healthcare workers while we were there. It certainly wasn't a time of perfect political peace. There was some economic unrest, for sure, during the time period we were there. Would you do something like this again?
Whitney: For sure. It was a really cool experience. I don't know that I'd necessarily go back to Honduras again. I definitely would love to, but there's a lot of other cool places that you could go and see even different perspectives. I'm sure some countries are not as developed as Honduras, especially medically wise, so it could be really interesting.
WCI: Very well. Well, thank you very much for sharing your experience. We're going to also insert at this point an interview that I did with a Honduran doctor down there, Dr. Annette Dyan, who will tell you a little bit more about what it's like to be a doctor down there.
WCI: Hi, this is Annette. She's one of my friends in Honduras. She is a doctor down here, and I'm going to ask her some questions about Honduran medicine being down here. First of all, can you tell us about what the training of a doctor is? At what age did you start medical school, and how long did it last? Tell us about the process of becoming a doctor here in Honduras.
Annette Dyan: I started my career at 17 years old, so I was quite young. The career here is eight years long. We have six years of studying here in La Ceiba, and we only can study like outside from La Ceiba, which is either Tegucigalpa, which is the capital city, or San Pedro Sula, which is three hours away from here, so it's kind of long distance. We take the first six years of training, all the theory stuff. Then we have a year of internship, and we have then a year of community service.
Annette Dyan: It's an obligatory, community-service year in which you are sent off to different towns or really remote little towns in a rural area or we can stay in the hospital. Not actually stay because I always joke around that it's like the Hunger Games. You have to take a paper … You literally have to got a paperweight. It's like a huge raffle. You do as much as possible to try to get as much close to home as you can.
WCI: How many students were in your class?
Annette Dyan: The first years because it's usually the science, biology kind of classes, those were really big classes like up to 100 students. Then there were other times … In Tegucigalpa, we almost had up to 130 students. It all depended on which class you were taking and how many teachers, how many people were available to give that class there. We had classes in which we only had 20 students, but we also had classes where we had up to 120 students in a little classroom, cramped up classroom.
WCI: When you graduated, how many people graduated with you?
Annette Dyan: Right now, I'm going to graduate in September, and it's a group of approximately 400 students who are going to graduate in this promotion.
WCI: How many medical schools are there in Honduras?
Annette Dyan: There's two private medical schools, which is a little bit on the expensive side for here, which is the Catholic school and there's UNITEC, which is kind of new. It's been on for about four years now. Then there's the public school, which is Universidad Nacional Autónoma Honduras, which is where I'm at. That's the only medical schools we have here in Honduras.
WCI: Which one's the best school?
Annette Dyan: Ours of course. The public university is the best one.
WCI: How much does it cost to attend the public university?
Annette Dyan: People always say it's free, but at the end, the cost, you always have to pay for your , which is your initial payment. You always pay … It's a little amount of money. It's about 600 lempiras now, which is about 25, $28, but then you have to do all the expenses on books. Then you have to do all the expenses on buying your materials because you don't get those here. You have to get your own stuff. That's where all the expenses go. We always have to move out because if you're from La Ceiba, from here, and you have to move out to another city, you have to be paying on where you live, what you're going to have to eat, everything else that that includes.
WCI: How much does it cost to go to the private medical schools?
Annette Dyan: I'm actually not aware, but the last time I heard, they were paying approximately 8,000 lempiras, which is about $400 a month.
WCI: In tuition?
Annette Dyan: Yes. That's what they have to pay for that.
WCI: And they pay that for six years?
Annette Dyan: Yeah. For eight years because they'll pay on their internship and they still pay on their community service.
WCI: They still have to do community service even though they went to a private university?
Annette Dyan: They still have to do community service, yeah.
WCI: Do you get paid as an intern?
Annette Dyan: Yes, we get paid.
WCI: You get paid, but they don't?
Annette Dyan: No, they don't get paid. Private schools don't get paid. We get paid. We get paid four months. We get paid 5,000 lempiras, which is about $220 a month. We have to be waiting on that payment up to six months at first, and then it's a monthly payment. Then we get paid also in our community service. That one's a little bit higher. That's 7,000 lempiras, which is about $300 a month. There are times in which … I was lucky enough that I stayed in my hometown, so I didn't have to pay on home or food expenses, but there's other people who aren't as lucky as I was. They had to move over other places. They actually spent all their money on living, food and transportation.
WCI: You made $220 a month?
Annette Dyan: Yes.
WCI: As an intern?
Annette Dyan: Yeah.
WCI: Was it easy to save on that amount of money?
Annette Dyan: No. I didn't save a penny when I was in my internship because we have hour shifts, night shifts. We had to buy our food on night shift. We had to pay our transportation. We had to pay for whatever was needed and we always try to help patients because they patients don't have any money. We ended up with no savings at all.
WCI: If an intern making $5,000 a month in the United States tells me they can't save money, what would you say to them?
Annette Dyan: Yes, you can. I'm pretty sure you can because I've lived on $200 a month. I'm pretty sure you can't do that, but that's a huge amount of money here.
WCI: Tell us about after you finish your social service here. What happens then? Do most people go into general practice?
Annette Dyan: Yeah, most people go into general practice because they don't have a chance to go on with a residence or taking on any specialties. Usually, people at this point of their lives, they're trying to make a family or they already have some sons or daughter. Usually people are trying to make money as fast as possible. There's people who aren't lucky to pay for the tests for the residence or there's people who aren't capable to pass the test too. There's a lot of unemployed general doctors here.
WCI: Unemployed?
Annette Dyan: Yeah.
WCI: They can't get work at all?
Annette Dyan: Yes.
WCI: Do they open up their own practice?
Annette Dyan: They mostly try to open up their own practice. What they try to do is go to the rural areas and try to get a little private clinic, so they can help the community and try to live with what they make.
WCI: What percentage of the medical students are men versus women these days?
Annette Dyan: We have a high number of women studying medicine here in Honduras. Our teachers told us that at first they only had eight students, eight people studying medicine. There were seven men and just one woman, but now it's approximately 60% of the medical population is women.
WCI: Why do you think that is?
Annette Dyan: There are really smart women here. I don't know. Women are attracted to the medical side of here. They don't take it as much hard work as engineering and the stuff that includes too much physical work.
WCI: What kind of money can a generalist that can get a job … can a general practice physician expect to make in Honduras? What's a typical income?
Annette Dyan: Depends on the area and depends on where they're working. There are people who get lucky and they can actually get a place in the public, government side. That's the one that pays or a little bit more. That's more on the 30,000 lempiras per month or up to 40,000 lempira, but then there's people who are-
WCI: Which is about 1,000, $1,500 a month as an attending physician?
Annette Dyan: Yes. There are people who work at private clinics or they just work at part-time jobs like on attending surgeries and stuff in which they can get as little as 8,000 lempiras a month or up to 15,000 lempiras a month, which is about $400 a month.
WCI: Is that enough money to support a family here, buy a house, have a life?
Annette Dyan: People do what they can. Usually, if it's 8,000 lempiras a month, they can live, but it's very limited just to basic stuff like just paying for their rent, getting some food and for transportation, paying for their kid's education, little … Not try on fancy schools, but little stuff. That's about it.
WCI: Tell me about becoming a specialist.
Annette Dyan: In order to become a specialist here, you only get the public system. Even though you took the private school, you have to be on public education to get your specialty. It's in base of credit score, so you get a test and you can try to earn some credits scores from before like working on different areas of the country and try to do as much conference as possible. Actually, it's kind of on a business side, in which you have to pay for conference to get some points. All this conferences are … They are paying to the Colegio Médico de Honduras, which is the association of doctors in here. Actually, you have to pay a certain percentage in order to get your residence.
WCI: How long is an internal medicine residency here?
Annette Dyan: Three years.
WCI: How long is a surgery residency here?
Annette Dyan: General surgeon is three years. Plastic surgery is six years. We opened up a peds surgery, and it's six years.
WCI: What if you want to be an obstetrician?
Annette Dyan: It's three years also.
WCI: What other specialties are available for training in Honduras?
Annette Dyan: Here in Honduras, we have psychiatry. We have OBGYN. We also have internal medicine. We have dermatology, radiology. They just opened cardiac surgery, and we have peds surgery. That's all we have available here.
WCI: What if you want to something else? You want to be a neurosurgeon or a vascular surgeon or a rheumatologist, where would you go for training?
Annette Dyan: We also have neurology and neurosurgery, but if you want to be a vascular surgeon, you have to go to other countries.
WCI: Where would people typically go?
Annette Dyan: They have some available specialties in Guatemala. They're still a little high on the price because you have to pay on their private school and you have to pay for living and everything else.
WCI: So you pay tuition as a resident?
Annette Dyan: Yes.
WCI: You're not paid a salary?
Annette Dyan: No. You pay tuition. You're not paid once you're out of the country. People choose Guatemala. They also choose Costa Rica. There are chances you can get to go to Mexico or also Spain. There's a program with Spain that you get a lot of specialties.
WCI: Are you obligated to do more social service here if you do a residency or are you free to go practice as you see fit?
Annette Dyan: We are free to go practice. Once we're done with our general medicine, we can work .
WCI: What does an internal medicine doctor get paid once she's done with her training?
Annette Dyan: It depends on where she's working, where he or she is working. If she is working in a private clinic, the doctor can get paid per patient. The more patients you get in your clinic, the more you get paid.
WCI: Let's say you have a full schedule, you work 40 hours a week and see as many patients as you can during that time, what would you expect to be paid as an internist?
Annette Dyan: I've heard … I'm not much aware with amount of money, but it can be up to 70,000 lempiras if you have-
WCI: 70,000 lempiras, so about $3,000 a month?
Annette Dyan: Yes.
WCI: Do surgeons make markedly more or about the same?
Annette Dyan: No, surgeons make more money because usually it's up to … A surgery in a private clinic can be up to 80,000 lempira, so they get most of the money per surgery. Surgeons get more money here.
WCI: 3,000, $3,500 a month or so as a surgeon?
Annette Dyan: Yeah.
WCI: What do you think about changing countries? Have you thought about going to another country to practice?
Annette Dyan: My dream is to go to practice medicine in other countries to see how medicine works in other countries. A volunteering experience would be awesome. I would love that. Working in another country would be awesome too. That's been my dream.
WCI: Annette, thank you for your time. Appreciate the interview. Let's go onto our SpeakPipe questions for today. I thought I would keep Whitney around for our first one that comes from Mark.
Mark: What's up, Jim? This is Mark down in Arizona. I want to know what you did and what you're doing to teach your kids about money, if you've got any general tips or resources, be it books or other video series. I'd love to know what you're doing. Thanks.
WCI: Basically, what Mark's asking here is what are you doing to teach your kids about money. I thought I would pass this one onto Whitney to let her tell you in her own words what I've been doing to teach her about money.
Whitney: Oh what you've been doing, not what I'm going to do?
WCI: Mm-hmm (affirmative).
Whitney: I think one of the biggest things is having to do some of the stuff yourself. I have a debit card, and I have a bank account that I manage basically by myself. The money that I earn goes in there, but I also get to spend that money. There's some restrictions obviously, but I think the ability to give a little freedom helps you learn. Even if you buy something that may not have been worth it or something, you realize that, so you learn from your mistakes more. It's worth a lot more to you if you personally have the freedom over it instead of more rules and restrictions over it. I think that helps prepare you more for when you're doing it completely by yourself.
WCI: That reminds me of a chapter from Alan Roth's book, How a Second Grader Beats Wall Street. I think the title of the chapter is The Claw Takes Your Money. It's talking about that claw game where you pick up the stuffed animals in the machine and how you never actually win anything in it and it just takes your money. I had an interesting experience with that yesterday with another kid when I explained to him … This was a nine year old, I believe. “The claw's just going to take your money.” He didn't believe me, didn't believe me, didn't believe me. Finally got his dad to give him a dollar, and he went and put it in the machine. Of course, he didn't get the stuffed animal, and the claw took his money. Sometimes losing money is a better teacher than doing the right thing with money, right?
Whitney: Right.
WCI: What have your parents taught you about saving money?
Whitney: We do a lot of saving. There's a certain percent that we save for charity and certain percent that … I don't know. One thing I've noticed a lot with teenagers is if we're making plans or something, people will be like, “Oh, I only have like $10 left in my account,” or something like that. That always shocks me because I have this safe zone for whatever reason, where I'm like, “Oh, this is a good amount. I should always have this amount in savings in case something comes up or something happens.” It was helpful for Honduras, where I could pull a little bit out of savings to help pay for that.
Whitney: Saving money has been important to me because then I have it for when I need it in the future. I have accounts that have it invested so it makes you more money in the future just for not touching it. I think a lot of teenagers could use that instead of just, “Oh, I have money. Now, I need to spend it.” It's more of, “What's going to be most beneficial with this money?”
WCI: You say you have investments. What kind of accounts do you invest in?
Whitney: I have a 529 education account. I have my Roth IRA. I have my regular checking account. I have …
WCI: You have a UGMA account?
Whitney: Yeah. I don't know what it's called. I know what it is, though.
WCI: What is it?
Whitney: That's like the stocks and bonds, right?
WCI: There's stocks and bonds in all of those accounts, right? You said you had a Roth IRA. What's the Roth IRA for?
Whitney: That's the retirement account.
WCI: Okay, so what money goes in the Roth IRA?
Whitney: Only money that I make. Technically, in our family at least, my dad will do a match for my Roth IRA. I have the same amount of money that I earn, but I give the money that I earn to my dad and he puts it in there. Then he'll match it by giving me the same amount back.
WCI: The Daddy Match.
Whitney: The Daddy Match.
WCI: Why is it important to save for retirement? Why does that matter?
Whitney: If you start saving now, it's so much easier than having to worry about it in the future. If I save $100 now, then it's worth so much more in the future because it has more time to accumulate and grow interest.
WCI: What is that money invested in inside your Roth IRA?
Whitney: I believe there's a Vanguard. There's a couple of different stocks and bonds, but it's a little piece of each company. It's just a Vanguard, a stock or bond. It has-
WCI: It's a mutual fund, right?
Whitney: A mutual fund. I don't know the word.
WCI: A mutual fund buys what?
Whitney: It has a teeny little piece of all the companies and so you get a little bit of money from all of the accounts.
WCI: So your Roth IRA's invested in one of the Vanguard Target Retirement Funds, which is an investment that a lot of the listeners use in their accounts as well. Then you have a UGMA account that we call around here your 20s fund. What is that? What's that money for?
Whitney: That's for all kinds of stuff. In your opinion, it's much more helpful to have money in your 20s than it is in your 70s, things like that.
WCI: It's your inheritance.
Whitney: Right, it's my-
WCI: It's all the money you're going to get from me.
Whitney: It's my inheritance, but it's a lot more helpful for college or a wedding or a car or a first house than it is for some cruise when I'm 65.
WCI: Then you've got a 529, which is for what?
Whitney: 529's the education fund. It's for college. It's the money for college.
WCI: Right, so you've got all these savings accounts. How do you learn about these accounts? What are your parents doing to help teach you about investing and these different types of tax-advantaged accounts?
Whitney: Other than listening to Dave Ramsey on repeat … We turn on Dave Ramsey and you just hear a collective groan, and then we have to answer so many questions correctly before we get to turn it off.
WCI: Is that helpful? Do you feel like you're more financially literate than your peers are?
Whitney: Problem is if I say yes, then you're going to keep doing it.
WCI: Clearly, I'm raising a teenager here, as you can tell, but she has been noted at school on at least one occasion to be the only child in class who could tell the instructor what a 401K was. Clearly, what we're doing is working. I'm not sure that we're perfect at doing it. We try to have an allowance. We try to talk about money. It's not a taboo subject. We let them manage their own money as much as is reasonable and gradually introduce more and more concepts as we go along. How have your parents taught you to give money? What have you done to learn how to give money?
Whitney: Every year, we have a set amount that we're going to donate to charity. We have a big meeting and everyone comes up with some charities they'd like to donate it to. Then we end up narrowing it down a little bit and deciding how much money we should give to each charity based on what each family member wants. We decide these charities that are things that are most important to us and then decide how much money we can give them to help them. It shows that it's important in our family to give, but also give to things that are important to us.
WCI: Do you have as much say as your mother or your father in what charities are supported in any given year?
Whitney: Yeah.
WCI: Do you feel like you have some power, that you actually can make some decisions here?
Whitney: In some things like where we're going to go eat or what we're going to go do for the day. We don't get to say on like … One parent vote is worth like four kids' votes, but when we're sitting down in this meeting and we decide where it goes, it's worth just the same amount as every person's opinion is.
WCI: Thank you Whitney for going to Honduras with me. Thank you for being on the White Coat Investor podcast.
Whitney: You're welcome.
WCI: We're going to take on a few more SpeakPipe questions in this podcast. I hope, Mark, that Whitney answered your question well about what we're doing to teach our kids about money. Whitney's 15. She's got three more years before she has to get her own car, her own apartment and her own job. Hopefully, by the time she leaves our nest, she will be far more equipped than the average American to manage finances. Our next question comes from an anonymous MS4 asking about a financial advisor.
MS4: Hi Jim, you asked for more questions from women, so here goes. I'm a fourth-year resident with four more years of training to go, including my fellowship. I've been reading your book and a few of the books you've recommended as well as listening to the podcast in an effort to become financially literate. I have no debt, and I am saving 15% of my resident salary into tax-deferred accounts. I also have a reasonably large taxable account as the result of a UGMA from my admittedly fantastic parents, which is managed by the family's financial advisor.
MS4: During my most recent phone call with him, I had a lot of questions as a result of all the reading I've been doing, specifically about how he was paid. He said they charge a 1.15% assets under management, but as an all-in fee, meaning that the account management fees, as well as the expense ratios and costs of any trades or anything else that they do, all have to be contained within that 1.15%. This seemed like a pretty reasonable incentive structure to me, but I wanted to hear your thoughts. Have you heard of a fee strategy like this before?
MS4: I really like this financial advisor because he takes a lot of time with me even though I must not be a big account. I don't think I have the time or the right personality to manage my own money. Thanks so much again for all that you do and all of your teaching. I've been spreading the word about the White Coat Investor blog and podcast to my female co-residents. I've been getting a lot of thank-yous that I feel like I need to pass onto you.
WCI: Obviously, 1.15% is higher than it has to be. I have a whole list of financial advisors under the recommended tab at whitecoatinvestor.com that charge less than 1.15%. There's no doubt you can find a lower priced financial advisor. Also, the likelihood of that 1.15% including the expense ratios seems extremely low. That generally is not included in advisory fees even if commissions and other fees might be.
WCI: That said, if you only have a small balance, 1.15% times a small balance isn't a huge fee. If you like the advisor and you feel like you're getting good advice, feel free to use him for now, but as your assets grow, you may want to negotiate a lower fee or find a new advisor once you start acquiring assets as an attending physician. It's not necessarily a deal killer I think at this point, but you don't want to be paying 1.15% when you have a $5 million portfolio. That's a very expensive financial planning and investment management fee. Our next question comes from someone who calls himself Fan of the WCI.
Fan of the WCI: Hi, Dr. Dahle. I noticed your portfolio has 10% invested in Treasury Inflated-Protected Securities. I've also seen TIPS included in a portfolio for the middle-late investor described in the book. Guide To Investing. However, many portfolios, like the Vanguard Targeting funds, don't include TIPS. What are the reasons to include or exclude TIPS from a portfolio? Thank you.
WCI: He's basically asking why include TIPS or not include TIPS. TIPS, for those who don't know, are Treasury Inflated-Protected Securities. These are special bonds issued by the United States treasury that are not only pay a yield, like most bonds, but also have an inflation-protection component. The idea behind this is that they protect you against one of the most important risks of bonds. That is unexpected inflation. If inflation spikes all of a sudden, TIPS are actually adjusted upward in value and provide some significant protection against what is perhaps the most significant risk that investors face, which is inflation.
WCI: Obviously, you get some inflation protection in the long term from stocks and real estate because in the long run, the returns tend to out pace inflation. As those companies can raise their prices with inflation and landlords can raise rents, so they tend to keep up with inflation in the long run, but not necessarily in the short run like TIPS do. TIPS are a different asset class. They provide some different characteristics and I think have a reasonable place in a reasonable portfolio. They make up 10% of my portfolio, which is half of my bonds. I think that's been good for me. Obviously, there hasn't been a lot of unexpected inflation in the last 10 years.
WCI: They haven't performed awesomely, and I think because of that, I think they've fallen a little bit out of favor in a lot of portfolios out there. I think a decade ago, a lot more people were including them in their portfolios that aren't necessarily including them now. You mentioned the Target Retirement Funds from Vanguard that they don't include TIPS. That's true in some of the higher-date funds, but if you look at the 2020 Fund and the Income Fund, you'll see that they've added TIPS into those funds. It seems that the smart folks at Vanguard believe that TIPS have a place for the investor that has a higher percentage of their portfolio in bonds and/or is closer to retirement.
WCI: You can take from that what you will. Maybe you don't need TIPS now and you need them later. You need them later if you believe what Vanguard's telling you with their Target Retirement Funds. As for me, I think splitting my bond portfolio 50% nominal and 50% inflation indexed is a reasonable strategy that I've stuck with over the years and plan to keep sticking with. Certainly, they're not a mandatory class to be financially successful. Just because they've done poorly in the last 10 years … To me, that's a sign of a diversified portfolio. I always expect that when something is not doing well … If everything you own is sky rocketing, you may not be diversified, not as diversified as you should be anyway. Our next question is from Xavier on SpeakPipe.
Xavier: Hello Dr. Dahle. This is Xavier. From listening and reading your materials, I understand each mutual fund and its related ETF to be essentially similar. For example, VTSAX and VTI are often noted as similar enough with the slight preference for VTSAX's broader holdings. Recently, Vanguard has been pressuring me through repeated communications to divert my final holdings such as VTSAX to VTI all to save 0.01 in expense ratio.
Xavier: If I convert, do I risk ever getting back into VTSAX? If they close the fund to new investors, what if they close VTSAX and then change the index that VTI tracks to one I don't prefer? Should it worry me that Jack Bogle did not like ETFs and their marketing trading characteristics and now Vanguard wants everyone to convert from traditional mutual funds to ETFs? If I'm just chasing a 0.01 expense-ratio savings, why not shift out of Vanguard to Fidelity's Zero Funds? Thank you for your time.
WCI: Basically, they're talking about two share classes of the Vanguard Total Stockmarket Fund. VTSAX, VTSax, whatever you want to call it, this is the mutual fund version. VTI is the exchange-traded fund or ETF version. It's the same fund though. The expense ratio is nearly identical. It's literally 0.01% less for the ETF, but you don't want to obsess about express ratios. I wrote a blog post a few months ago called Don't Obsess About Expense Ratios. It was actually talking about Fidelity's new 0% expense ratio funds, but the same principle applies here. If you're worrying about 0.01% in expense ratios, you're worrying about all the wrong things when it comes to these mutual funds.
WCI: There really is no significant difference between the ETF share class and the mutual fund share class. Use either one. It's fine. When I buy it Fidelity or Charles Schwab, I buy the ETF because the commissions are lower there for ETFs than they are for mutual funds. When I'm at Vanguard, I buy the mutual fund just because I prefer mutual funds, and it's the same cost at Vanguard.
WCI: I wouldn't necessarily take any pressure that Vanguard's given you to convert. That's something you have to do. If you prefer mutual funds, stay there. If you want to convert, that's not a bad thing either. Jack Bogle was far more worried about what investors tend to do with ETFs, which is speculate and trade them hour to hour and day to day rather than holding them for the long term. I don't think he really cared if you're going to buy and hold for the long term an ETF that's broadly diversified and low cost versus a mutual fund that's broadly diversified and low cost. He really didn't care. Both are fine.
WCI: I own both. Don't expect much difference in performance between them. If you want more information on that subject, see my blog post called Don't Obsess About Expense Ratios. The next question comes from Adam on the SpeakPipe.
Adam: Hi Jim. Thank you for everything you do. I know you've answered the question of investing versus paying down debt many times. I understand both sides, and I'm trying to do some of both. I have $100,000 in student loans at 6% and a $600,000 mortgage at 4.38% that I'm trying to pay down, but I'm also investing in a taxable account after maximizing my retirement savings. I know you're an advocate of bonds making up some of your portfolio, but it seems to make no sense to buy bonds in my situation because that money would be better spent getting a guaranteed 4% paying down my debt. I'm therefore putting 100% of my investment in stocks. Do you think this is a reasonable thing to do? Thank you again.
WCI: Okay, Adam's asking about 100% stock portfolio. Adam's got a bunch of loans. He's got $100,000 in student loans at 4%. He's got $600,000 in mortgage debt at 4.38% and he's investing in a taxable account. The way a lot of people look at loans is that since they're also guaranteed return instruments, at least paying them down is, they're kind of negative bonds. Rather than investing in bonds, you could pay down your loans and call that the bond component of your portfolio.
WCI: That works fine. It really does work that way. The only issue with doing that is a lot of people fail to remember that when the stock market's dropping and they don't tolerate the stock market losses. In a big nasty, bear market, you might lose 50% of the money you have in stocks. You're not really going to be thinking about the fact that, “Oh well, at least I paid down a bunch of my student loans,” at that point. You're just going to be going, “I lost 50% of my money I've got to bail out.”
WCI: I think it's probably worthwhile to still carry a few bonds in your portfolio, at least to help remember how bonds work and to decrease the volatility of the portfolio a bit in a market downturn, especially if you're a young investor and have never been through a bear market before. I always think you ought to air on the conservative side until you go through your first bear market, but it's true. Paying down loans is the equivalent of investing in bonds.
WCI: Obviously, at 4.38% or 4%, you're not going to find high quality bonds that are paying that these days. At best you're getting 3, 3.5%. It's a great use of your money I think to pay down your loans in that sort of a situation. In fact, I didn't really have much of a taxable account while I had any sort of debt other than a mortgage. Even that, I ended up paying off before I had too much of a taxable account. I'm a big fan of maxing out retirement accounts and taking advantage of all those asset-protected and tax-protected accounts that are available to you and then once you have additional money, above and beyond that, using that to pay off your debts.
WCI: If you want to carry a little bit of debt at a low interest rate for a while and invest in a taxable account, hoping to beat that, I don't think that's crazy, but don't get too carried away with it. Most stocks are far more comfortable with debt than they really should be. Next question comes from Andy on the SpeakPipe.
Andy: Thanks for all that you do. I'm in the Midwest, and I recently invested in a private real estate fund. Its past returns have averaged about 12% a year, and the first couple of months have been comparable. I've just received notice that it's considering going into the public sector. I have two questions. One, would you be hesitant to continue investing in the fund knowing that it might be switching from private to public? Two, since all of your recent podcast interviews have had experts discussing their hesitance to investing in the private real estate funds, is this something that you're reconsidering in your investment portfolio? Thanks again.
WCI: He asked what should I do about my private real estate fund that is now going public. I know exactly what fund he's talking about because I'm invested in it as well. I'm not sure I should name it specifically on the podcast, but a lot of you who are invested in it know exactly what I'm talking about. It's a real estate fund that become a REIT, a real estate investment trust, and is now probably going to end up going public, meaning there'll be an initial purchase offering and then it will be traded on a daily basis on the stock market.
WCI: I'm not a big fan of individual stocks, so I will probably end up getting out of this fund at some point after it becomes publicly traded. I will be surprised if this particular fund, which is very well managed, does not go up in value significantly in the weeks and months after it goes public. It wouldn't surprise me to see it go up 30% in value. At that point, obviously the yield, the expected return on this investment is going to be lower after that run up.
WCI: The fact that I don't like buying individual stocks and at that point, I'll expect a lower return going forward, I will probably get out of the investment at that point. I'll make sure I qualify for long-term capital gains on any gains I may have, but I may move that money back into another private real estate fund. In this case, it's a debt fund. I wouldn't necessarily have any concerns buying into it at this point. I think it's a great fund. I wouldn't necessarily have any concerns that it's going to tank in value as soon as it becomes publicly traded. It's a well-run fund with good investments. It's not going to tank, certainly not in any short-term fashion.
WCI: I try not to buy investments that I'm not willing to hold onto for years, and that's the case for this fund as well. I'm willing to hold onto it for years, but as it becomes publicly traded and subject to the whims of the stock market, I may disinvest and look for another fund, hopefully with a nice capital gain to show for my efforts.
WCI: And the follow-up question, are you going to stop investing in this asset class because several podcast experts we've had on don't really like them? It's true. Rick Ferri and Bill Bernstein and Alan Roth, I asked them all that same question. If you've been listening to the podcast, I asked, “What do you guys think of these private real estate investments?” To be fair, several of them said, “I don't know much about them.” That's not something they invest in. To be fair, none of these are mandatory investments, but I knew their positions on them when I invested in them. This isn't a revelation to me.
WCI: I've read their books. I've talked to them all in person. I know how they feel about private investments. That's part of the reason why 85% of my portfolio is in mutual funds and index mutual funds at that. That said, I think there's still a place for real estate in a portfolio. I'm not a huge fan of direct real estate investing for me because I don't think like landlording. I don't like the second job aspects of it. I don't think I'm all that good at it, but I like real estate as an asset class.
WCI: I think that private real estate investments are a reasonable way to invest in it, but it is definitely a caveat mTOR space. Buyer beware, the due diligence here is far more difficult to do than it is on a typical index fund. You don't have to invest in them. I don't think it's crazy to invest in them. If you do, really do your due diligence and be careful how much you invest in any given investment and how much of your portfolio you put into them, but yes, I expect to continue to invest in some private real estate investments. As I have on the blog for the last few years, I'll continue to update you a couple of times a year on how my investments are doing. So far, they've done great, so I'm really happy with them. Hopefully, that will continue.
WCI: Another question comes from James by email. “I would love it if you were able to do a podcast interview on a CPA or a tax law attorney on what an S-corp is and why becoming one can be advantageous for physicians. It would be incredibly useful to also talk about the steps needed to become an S-corp, what deductions are acceptable and other strategies to use within the S-corp to minimize taxes. Thanks so much. My private practice is switching to each individual physician becoming an S-corp starting in 2020.
WCI: I don't know that I necessarily need a CPA or a tax law attorney for this one. I've got an S-corp. I've written about S-corps for years. The benefit of an S-corp is you don't have to pay Medicare taxes on the portion of your income that you call distribution. When you are a sole proprietor, all of your income, all your profit from this business, is subject to Medicare taxes. If you elect S-corp taxation, whether you were previous a sole proprietor or a partnership or an LLC or a C-corporation or whatever, if you elect S-corp taxation, whether or not you actually form a corporation, you get that benefit that you can now call part of your income salary on which you pay all your regular income taxes plus your payroll taxes like Social Security and Medicare.
WCI: Then the other part is distribution on which you don't have to pay payroll taxes. If you're like most docs, you've already maxed out your Social Security taxes, so what you're saying is the Medicare tax, 2.9% of everything you call distribution. If you have an income of 400,000 and you call 300,000 salary and 100,000 distribution, you just saved 2,900 in Medicare taxes. Obviously, you're going to get the same Medicare benefit as everybody else, so that's pretty clean savings right there.
WCI: If it's worth the hassle and the expense of becoming an S-corp to save that money, then it's usually worth doing. Don't expect any additional malpractice protection from incorporating in that practice. It doesn't really give you any. Malpractice is always personal, but you may save some taxes. A lot of people think you have to incorporate to have a bunch of deductions, though. That's not generally the case. Almost all business deductions that are available to an S-corp are available to a sole proprietor. You can still write off your CME. You can write off your scrubs. You can write off your stethoscope. You can write off your business miles.
WCI: All of your work-related expenses, you can write off just as easily as a sole proprietor as an S-corp, so don't kid yourself that there's some huge savings there. What there is a big hassle. You've got to now start filing a bunch of extra tax forms. You've got to be filing W2s and W3s for your employees. You're now an employee of your own S-corp, so you've got to do all that employee paperwork that your employer used to do for you. That can be a big pain. You've got to file a 941 form every quarter with the taxes that you withheld from yourself as an S-corp. There's a fair amount of paperwork, and if you don't want to do it … Which I can't blame you, having done it now for the last couple of years … you're going to pay an accountant to do it. It's going to cost you a little bit of money there. You've got to weigh that against the additional tax savings on the Medicare taxes.
WCI: There are a few strategies you can use with a C-corp, but in general, docs don't use that just because they lose that big advantage of the S-corp. Most docs in this sort of a situation that want to become a corporation become an S-corp. I think that's a reasonable thing to do as long as you can declare a significant portion of your income as distribution. Remember that the IRS requires you to pay yourself a fair salary.
WCI: You can use a salary survey to determine what that is or some other reputable source or argument to determine it, but if you're going in there and trying to convince the IRS that a full-time doctor's only getting paid $60,000 as salary and $350,000 as distribution, you're probably going to lose that. You're going to end up paying a bunch of taxes and penalties to the IRS when they audit you on that point. As a general rule, you want to make sure you are paying yourself a fair salary and you have a good method to justify the salary you are paying to yourself. Another question coming from Rick on the SpeakPipe, who asks is it reasonable to use Vanguard Target Date Funds for a taxable account?
Rick: Jim, I'm a very loyal listener to your podcast. I have a question for you. I utilize the Vanguard Target Date Retirement Funds for my retirement account. I don't like to move money around too much, nor to make a lot of changes. My question is is it reasonable to utilize the Vanguard Target Date Funds for my taxable account. Specifically, is it tax efficient and is it reasonable to utilize it in a taxable account. I appreciate you responding to my question. Thank you for everything that you do.
WCI: If really really want to keep things simple, it's an option. It's a one-stop shop for a mutual fund, especially if it's available in your 401K and your Roth IRA and your taxable account. You can just put it all in one fund and forget about it. There's some value in just keeping it simple there. The downside of using a target date fund or a target retirement fund or a life cycle fund, whatever you want to call them, in a taxable account is they generally have fully-taxable bonds. If doctors are going to own bonds in a taxable account, which many would rightfully argue that they shouldn't, the bonds they should own are generally municipal bonds. I have yet to see a target date fund with municipal bonds in it.
WCI: It isn't that tax efficient plus you're kind of stuck with it if you later decide you want to have a more complex portfolio. Now, you've got this fund with all these capital gains that you're going to have to pay capital gains taxes on if you want to change the portfolio. You're stuck with this tax inefficient holding in the account. As a general rule, I recommend against target date funds inside taxable accounts, but obviously if you're really trying to keep things simple and you're willing to pay some extra taxes in order to keep them simple, it is an option. Next question comes from Zack. This'll be our last question on this podcast. Zack is a resident with no match going into primary care. Here's his question.
Zack: Hey, Dr. Dahle, thank you for everything that you do. I'm just starting my PGY3 year in internal medicine and I had a 401K-related question. I currently have both a pre-tax and Roth contribution option in my 401K as a resident with no offered match by my employer. After graduating next June, I will be joining a primary care practice and starting work with them in August of 2020. For my 401K with them, they're offering 100% match for the first 3% and 50% match on the next 2%.
Zack: My question is primarily how to allocate my $19,000 worth of 401K contributions for the 2019/2020 year. My concern is that contributing to my 401K as a resident between January and June would potentially prevent me from obtaining the full match amount during the August through December months with my new employee as an attending. That being said, everything I contribute as a resident, I can do as Roth contributions, but once I start as an attending, I only have the option of pre-tax contributions. My thinking was to not contribute at all to my 401K between January and June as a resident, then between August and December contribute the $19,000 maximum and obtain approximately $8,500 in matching funds with my new employer. Just wanted to hear your thoughts on what to do with these different options. Thanks again for everything that you do.
WCI: This is a really insightful question. Most residents aren't thinking about this stuff as they go to graduate. He's trying to maximize his benefits in that year when you transition from resident to attending. Obviously, you want to get as much of the match as you can from this new employer, so you'd better talk to them carefully. A lot of new employers don't let you use the 401K for the first year or year and a half after you start with the company. Make sure they're actually going to let you use it when you go to the new company. If they're not, you're better off maxing out the residency one.
WCI: Obviously, for most residents, in a Roth type account, but if they will actually, truly let you use the 401K and actually truly will give you a match, you want to save enough of that $19,000 contribution to get the entire match. That's free money. That's part of your salary. You don't want to leave that on the table. If you've got to put in all 19,000 to get your $8,500 max, don't put anything in the residency 401K. If you've only got to put in 8,500 in the new 401K to get that $8,500 in match, that leaves you what? 9,500?
WCI: I think I'm doing the math right. Yeah, I think that's right. 9,500 into the old 401K, into the Roth 401K at the residency. Then you can put your $8,500 into your new 401K at the new employer and get that entire match. If that's an option, that's what I would do, but you just really need to nail down the details of how this new 401K is going to work so you can plan out what to do with your old 401K. Hope that's helpful Zack.
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WCI: Head up, shoulders back, you've got this or we can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer: My dad, your host, Dr. Dahle is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial adviser, so this podcast is for your entertainment and information only. It should not be considered official, personalized, financial advice.
