PSLF, Insurance, and Bonds | White Coat Investor

Transcription – WCI – 424

INTRODUCTION

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 424.

Today’s episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn’t easy. That’s where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. That could end up saving you thousands of dollars, helping you get out of student debt sooner.

SoFi also offers the ability to lower your payments to just $100 a month while you’re still in residency. And if you’re already out of residency, SoFi’s got you covered there too. For more information, go to sofi.com/whitecoatinvestor.

SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions apply. NMLS 696891.

All right, welcome back to the podcast. This one drops on June 19th. I am recording it the week of Memorial Day though. It’s been a heck of a month for me. I’ve been having a lot of fun trying to see if my wrist still works mostly. I’ve done some traveling, got to do some paddling, went and rode a river actually this week, did 117 miles on a river in two days. Let’s just say it was pretty high water on the middle fork of the salmon this last week. And I’ve been on a couple of canyoneering trips.

I’m pleased to say that my wrist still functions. It’s not quite the same as what it was before, but I’m still able to do most of what I love to do. So, that’s been good news for me and it definitely has me in some better spirits.

Also I’m excited because it’s graduation time. By the time you hear this, it’ll be well past this, of course, but my daughter graduates from high school tonight. So we’re thrilled about that. She’ll be speaking, as well as my wife, who’s now on the school board. I’m thrilled to be able to hear both of them speak at high school graduation tonight. So lots of fun stuff in our life.

 

UPDATE FROM EPISODE #417 RE: HOME OFFICE DEDUCTION

Dr. Jim Dahle:
Okay, let’s do some updates. First is an update from Chris Davin. You’ll recall we had him on talking about some pretty out in the weeds stuff on taxes a few weeks ago. Well, he did write back to make sure he gave this update. He said he was going to do this about the home office deduction.

You’ll recall the home office deduction is something that some doctors take and we had a discussion on the podcast about whether you had to actually do work at the home office before and after work at your other place of business if you were going to deduct the mileage from your home office to your other sites of work.

And Chris’s conclusion after he did his homework assignment was that if one has a legitimate home office, there is no need to use it before and after each trip from another work site. You don’t have to send an email after getting home from the hospital to deduct the trip.

He went to IRS publication 463, which is about travel, gift, and car expenses. And this is what it says. It says office in the home. If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business.

Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally non-deductible community expenses. However, there may be exceptions to this general rule. You can deduct daily transportation expenses incurred going between your residence and a temporary workstation outside the metropolitan area where you live.

Also, daily transportation expenses can be deducted if you have one or more regular work locations away from your residence. Or two, your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business regardless of whether the work is temporary or permanent and regardless of the distance.

Neither of those, he says, mention a requirement to use the office on the day of travel to make the trip deductible, which leads me to believe there isn’t one. He also went to IRS publication 587 about a qualifying home office, which applies to many White Coat Investors.

This is example three there, which is that Taylor is a self-employed anesthesiologist. Taylor spends the majority of the time administering anesthesia and post-operative care in three local hospitals. One of the hospitals provides a small shared office where Taylor could conduct administrative or management activities. Taylor very rarely uses the office the hospital provides, but instead uses a room at home that has been converted to an office.

Taylor uses this room exclusively and regularly to conduct all of the following activities, contacting patients, surgeons, and hospitals regarding scheduling, preparing for treatments and presentations, maintaining billing records and patient logs, satisfying continuing medical education requirements, reading medical journals and books.

Taylor’s home office qualifies as the principal place of business for deducting expenses for its use. Taylor conducts anesthesiologists related administrative and management activities there and in no other fixed location where substantial administrative or management activities for this business are conducted.

Taylor’s choice to use the home office instead of the one provided by the hospital does not disqualify the home office from being the principal place of business. Taylor’s performance of substantial non-administrative or non-management activities at fixed locations outside the home also does not disqualify the home office from being the principal place of business. Taylor meets all the qualifications including principal place of business, so the expenses can be deducted for the business use of the home and apparently that mileage as well.

Okay, I hope that’s helpful in clearing that up for those who are wondering about that. It’s not a huge deduction, but it’s not an insignificant deduction. It’s close to 60 cents a mile last time I looked it up and so business mileage can be a pretty awesome deduction if you legitimately qualify to use it.

 

S CORP IN CALIFORNIA

Dr. Jim Dahle:
Also I think Chris mentioned during that podcast that physicians in California are required to be S Corp. And that sounded a little odd to me and somebody wrote in and said, “I don’t think that’s the case. My large group in California has a significant percentage of sole proprietors and I’d be curious to hear if there’s something I’m missing.”

Well, I decided I better look it up. California has kind of a unique no corporate practice of medicine law and basically what that means is that a doctor cannot practice as a simple LLC or a simple corporation. If they’re going to be an LLC or a corporation, it has to be a medical corporation or a professional LLC and some other states have the same law. It’s not a huge difference between the two. They’re basically the same, but it has to be this medical or this professional version of those.

But that doesn’t mean they can’t be a sole proprietor. They can still be a sole proprietor. They don’t have to form a corporation to practice medicine, but if you do form a corporation, it needs to be a special California medical corporation or if you form an LLC, it needs to be a special California professional LLC. I hope that makes sense.

By the way, those of you out there looking for a relatively simple and very flexible but potentially profitable side gig, you should go to whitecoatinvestor.com/survey. If you’re a doc, people want your opinion and they’ll pay you for it. These companies are treating doctors better and better and better all the time.

In fact, we update our list. We take people off that don’t work well with doctors. We put people on that are new. And so, let us know your experience with these various companies. But if you go to whitecoatinvestor.com/survey, you can apply with all of them and some specialties, this can work out very well for particularly if you tend to prescribe expensive medications if you’re a rheumatologist or a neurologist or those sorts of specialties, your opinion is pretty darn valuable to a lot of these big pharma companies. And so, they’ll pay you for it.

But check that out. That extra money helps you do whatever, save for retirement, have more to spend. It’s technically self-employment money. So if your business is doing surveys, you can open a solo 401(k) for that business. That might give you somewhere to roll over some big SEP IRA you want to roll over so you can do backdoor Roths or something, but check that out.

Okay, let’s do some Speak Pipe questions. This one is what’s on everybody’s mind, at least if they have federal student loans, which is “What is going on in Washington?” Let’s listen to this version of the question.

 

WHAT TO DO ABOUT PSLF WITH EVERYTHING HAPPENING IN WASHINGTON

Speaker:
I hope this finds you well, Dr. Dahle. The Trump administration has blocked IDR applications this past week. You stated Trump could not block PSLF without an Congress, but if this persists, effectively no borrowers will be able to pursue PSLF. Is this true? It also does not seem readily apparent how recertification of income will be impacted, which I do this fall. I have approximately three years left until forgiveness on my loan and will end up on the max payments this year anyways once my recertification ends. Will I be impacted? Thank you.

Dr. Jim Dahle:
I understand the anxiety that people have when they have been counting on public service loan forgiveness, income-driven repayment programs to be their student loan management plan. And then things in Washington start happening. A different political party gets elected to the White House. A different political party gets elected to the Senate. A different political party gets elected to the House. Chief justices change. Supreme Court justices change. We wonder what’s going to happen.

As a general rule, don’t panic when you hear stuff might happen in Washington. Wait until something actually happens. At that point, evaluate if you need to adjust your plan. Ideally, you’ve incorporated a lot of flexibility in your plan.

For example, one of the things I’ve been telling people for years about public service loan forgiveness is to have a PSLF side fund. When you come out of training, you still got to live like a resident. You still got to make these huge payments to your lender, except if you’re going for PSLF, you make those payments into your brokerage account. You still have the same money that someone saved up and paid off their student loans in two or three years has. It’s just in your brokerage account because you’re hanging on to see if PSLF is going to pay off for you.

That allows for a few things. One, it allows your career to change. If you decide, I just don’t want to work for a PSLF qualifying employer anymore, it allows you to go get a new job and use that lump sum of money to pay off your loans.

On the other hand, if something changes in Congress or something changes by executive fiat, it enables you to go, “You know what? This isn’t the right plan for me anymore. I’m just going to pay off my student loans. Luckily, I’ve got this $180,000 I’ve been saving up for the last year and a half that I can use to pay off my student loans.” And you can move on.

That is the solution to uncertainty is just be patient, let things work their way through the courts, let things work their way through the halls of Congress and see how it really all boils out.

I’m hesitant to even answer this question because right now it’s the last week of May and when this podcast drops on June 19th, well, Congress has probably done something with the big beautiful bill that has passed the House now and is sitting in the Senate last time I checked.

I don’t know what that’s going to do. I don’t know what the final form is going to look like if it goes through the Senate and then they reconcile it with the House version. If it gets out of the House and the Senate, I’m sure President Trump’s going to sign it and it will have some effects on student loans.

But if I had federal student loans, I wouldn’t do squat with them until this thing works its way through Congress and is signed by the President. And then once you know the rules of the game, you can start playing the game. I certainly wouldn’t bail out a PSLF if that was otherwise my plan to refinance my loans. Because once you refinance, you can’t go back into public service loan forgiveness.

Now, getting into any more than that is just speculation on what these policies are actually going to look like a month from now when you’re hearing this podcast. And I don’t think doing that is going to do you any sort of real service, number one. Number two, I’m going to have to issue a correction in another month and then you’re not going to hear that for a month after that because something I say is going to be wrong because Congress did something differently.

A few things you can do. If you are really trying to get as many payments in toward PSLF as you can, but your payments are currently in a program that’s under forbearance, you can get in a different program. We see people going from SAVE into IBR lately, just so they’re continuing to make payments where their payments are relatively low. That might be worthwhile to do while this is all being sorted out.

But for the most part, let it be sorted out. Let’s figure out which IDRs there are going to be. Let’s figure out if any of the rules with PSLF are really going to change. I think this is all going to be ironed out by mid-summer and you’ll have a pretty good idea of what things are going to look like, at least for the next couple of years, if not for the next four years.

Please be patient with the federal student loan advice coming out of WCI. We don’t know what’s going to happen. Our crystal balls are just as cloudy as yours. If you need personalized advice, need someone to help you run the numbers, go to studentloanadvice.com. Nobody keeps up with this stuff as much as Andrew, the principal over there, and I hope that’s helpful.

Here’s another PSLF-related question.

 

PSLF PAIRED WITH LOAN ASSISTANCE FROM EMPLOYER

Speaker 2:
Hi, Dr. Dahle. I thank you for everything you do, the advice you provide, and the encouragement you provide helps reduce physician burnout. I’m currently a family medicine and geriatrician physician practicing in Illinois. I have been in practice for the past three years, currently working for a not-for-profit organization.

My question is that I am currently part of the Loan Forgiveness Program, PSLF, and plan to provide the 10 years of service. However, my current employer is also providing me with additional loan allotment of $25,000 per year. They stated that in order for them to reimburse me, I have to make a payment. However, due to the Supreme Court rulings, I have not been able to make a payment, and therefore, they stated they can no longer continue to provide that amount.

I wanted to ask you if there are any suggestions you can make in the conversation that I could have with them as alternative ways so that I do not lose the $25,000 of student loan assistance that was part of my contract. I appreciate any thoughts, and I appreciate all the things you do for all the physicians out there.

Dr. Jim Dahle:
Okay, a few thoughts. First of all, as I mentioned earlier, don’t give up on PSLF. PSLF is almost surely going to be available in some form when this all goes through. We had a guest columnist write a post. There’s people out there that maybe aren’t totally pro-PSLF in the world. It was basically what the article said, and we got a bunch of feedback on it that people couldn’t believe that we weren’t advocating more strongly for PSLF to continue on.

Well, I haven’t really taken a position of advocating for or against PSLF. There are White Coat Investors that are totally for PSLF in its current format. There are White Coat Investors that are totally against PSLF in its format. How it works is very much a political question. That means reasonable people can disagree about it.

In its current form, PSLF is still basically unlimited. No matter if you have $800,000 in federal student loans, you can get them all forgiven via PSLF by following the rules and making those payments. So that’s your plan. You’re working for a qualified employer. I would stick with the plan for the most part.

And truthfully, this $25,000 employer assistance thing doesn’t matter that much, assuming that your plan is still PSLF and all your loans are federal. It doesn’t really matter if they give you the $25,000 and you send it to them or not. You don’t have to make payments, you don’t have to make payments. The problem with not making payments is actually that it takes longer to get to PSLF. It may be worth going into IBR if you’re in SAVE now, for instance, going into IBR so you can actually make the payments. Then not only do your payments count toward the 120 payments you need, but you get that $25,000.

I would also have a discussion with the employer. This probably isn’t going to work, but I would have the discussion of changing the contract. $25,000 to the employer is $25,000 to the employer. They don’t care if they send it to your student lender or if they send it to you. It costs them the same. If my employee came to me and said, “Hey, I’d rather have my pay in this sort of a form.” I don’t care, whatever. We’ll give you that. So have that discussion. It’s probably not going to work because there’s probably a bigger employer and this is too much of a hassle for them to do that for you individually, but I’d probably try in this sort of a situation.

You should also check to see if you can make payments because even those people in forbearance can make payments. And if you make payments, well, then you can get that money to make those payments with in case, heaven forbid, something happens to PSLF or you go to another employer, then at least your student loans are that smaller amount from making these payments.

Those are the things I would try. But otherwise, it may be until your student loans come out of forbearance, you’re not getting your share of that $25,000 a year to make these payments with.

So, what happens when they change the policy so quickly? It’s very hard for anybody to figure out what to do with their own finances. Let’s try to get some stable policy. I don’t even care so much what the policy is, but let’s try to make it a little more stable, can we?

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from Morgan Housel who said, “We think about and are taught about money in ways that are too much like physics with rules and laws and not enough like psychology with emotions and nuance.” And that is the truth. Personal finance is 90% personal, 10% finance. It’s 90% behavior, 10% math. So, controlling your own behavior is probably the most important part of personal finance.

All right, let’s take a question about disability insurance.

 

DO YOU NEED DISABILITY INSURANCE IF YOU HAVE A TWO DOC HOUSEHOLD?

Speaker 2:
Hello, I am a female EM resident about to graduate and I’ve been looking for disability insurance. I’ve been looking at your website and podcasts a lot. I have a specific question for our situation. My husband is an EMI, I’m a critical care resident and will not complete training for another three years. I feel like I need disability insurance while I’m going to be the income, but in three years when we have a double attending income, I feel like I may not need it.

My question is one, do I still need disability insurance? Should we both get it? And if we don’t need it at that point, do I really need a future purchase rider? Which it seems is normally recommended, but may not be for our situation. Thank you.

Dr. Jim Dahle:
What a great question. First of all, thanks for what you’re doing. It’s interesting. I was just looking at statistics this morning about emergency medicine, which over the last six or seven years has gone from being a pretty competitive specialty that nobody could ever scramble into to kind of lower tier as far as competitiveness in the match. A lot more DOs now can match into emergency medicine. A lot more international grads are matching into emergency medicine. A lot more people are scrambling into emergency medicine.

Lots of things that went into play for that. One of which was a paper that came out in the Annals of Emergency Medicine projecting that there were going to be too many emergency docs in a few years and medical students see that sort of stuff and they react to it. If they’re on the fence between anesthesia and EM, well, maybe they’re more likely to go into anesthesia. So, it’s been an interesting last few years for emergency medicine. But I tell you what, the world still needs emergency docs. So thank you to both of you for what you’re doing.

I love your question. Not every doc needs disability insurance. What every doc needs is a plan, a financial plan in the event they get disabled. Now in my case, when I came out of residency, I was the only one working. Katie was home taking care of our oldest, was pregnant with our second. Mine was the only income. Disability insurance was very important for our family. We were not wealthy and we had a sole income that was completely dependent on my ability to turn time into money. And so, disability insurance, super important for us at that point in my career.

Now some couples, maybe they’re already financially independent. We’ve since dropped my disability insurance policy. I don’t have any disability insurance anymore because we’re financially independent. We don’t need it anymore.

Other people have a plan to rely on their spouse. This is common for dual doc couples. And there’s no right or wrong answer here. Some of those couples decide to each buy a small policy on each of them. Some of them just say, we’re not going to have a policy at all and we’re going to rely on our spouse in the event that we become disabled.

Obviously there’s some risk there. First of all, you got to be okay with half the income. You also have to be okay with the possibility that both of you get disabled or the possibility that you get divorced and then don’t qualify by disability insurance or just have to pay a lot more for it. So there’s some risks to that plan.

And other dual doc couples decide we’re just going to buy a full policy on each of us because we want the coverage and frankly, we don’t want to spend less money in the event we get disabled. And so, they buy two full policies.

All of those are reasonable things. You just need a plan. This is what we’re going to do. Write it down and do that. But the nuance in this question I really like. Because one is going to be the main earner for a few years. And then the other one’s going to come online when they come out of training. And so, yeah, it’s totally reasonable to just buy insurance for a few years. And you’re graduating now. I would have told you to buy disability insurance a few years ago. In general, the time to buy it as an intern, not as a graduating resident. But maybe you’re saying we’d just live off the other dock back then. I don’t know what your plan was back then. More likely, if you’re like most White Coat Investors, you just didn’t think about it. You were busy being an intern.

I like your plan. I like the plan of not buying additional purchase rider. But truthfully, the time you usually buy that ability to increase coverage without being able to prove your insurability is for the policy you buy as an intern. Then you exercise it or buy another policy as you graduate from residency.

For someone who’s buying it as they’re graduating from residency, you already make enough money that you can buy as big of a policy as you want to buy. And so, I don’t know that you need it at that point anyway. But certainly if you’re planning on dropping this thing in two or three years, you don’t need the ability to buy more coverage down the road.

Another thing to consider is there’s at least one company out there that will let you do a graduated premium, meaning the premiums are very low in the beginning and then higher later rather than a level premium throughout your career.

I think most people choose level premiums. I think most companies only offer level premiums, but there’s at least one company that will offer graduated premiums. And this is worth talking to your agent about, your independent agent that can sell you a policy from any company like the ones we recommend at whitecoatinvestor.com/insurance.

You simply go, “Hey, I think I’m only going to have this thing for three or four years or whatever. So how can we save money? Can we drop the future purchase option? – Oh yeah, you should drop that. – Can we get the graduated premiums and just make low premiums for four years and then just cancel the thing? – Yeah, you can do that as well. That’s probably a great deal for you. Let’s look into that policy.”

Just have this discussion with them. And I think those two changes are very reasonable for somebody in your situation. But the first thing is have this discussion with your spouse. “What is our plan if you get disabled? What is our plan if I get disabled? What is our plan if both of us get disabled? What is our plan if we get divorced.” Work through all that, have a plan, and then buy insurance as needed to fulfill that plan. I hope that’s helpful for you.

Okay, let’s talk a little bit about bonds. We’re going to change gears a little here. Another question off the Speak Pipe.

 

BONDS AS YOU APPROACH RETIREMENT

Srdjan:
Hey Jim, this is Srdjan from New Hampshire. Glad to hear that you are doing well and I’m very thankful for all that you do. I’ve learned a lot from your show. I have a question about bonds as you get closer to retirement. I understand that during your 30s, 40s, 50s, bonds are a good diversifier based on their correlation with equities.

But what I’m wondering is when you’re about to retire, are you in bonds for those same diversification reasons? Or is it because you want to have that predetermined cash maturing or coming in at a given time? I’m trying to help out my dad who might retire in about five years. We’re trying to decide what to do with new money coming in this year for the bond allocation.

Initially, we were thinking to go 50-50 to TIPS and nominal bonds. For the TIPS, we were just going to buy them on Fidelity. And for the nominal bonds, I was doing some research and thinking to do either a bond fund like BND or just buy an individual five-year treasury note.

Now, what I noticed is that the total inflation adjusted return for a fund like BND is pretty close to zero, which got me thinking, why even invest in nominal bonds in the first place? Any advice would be greatly appreciated. Thank you so much, Jim, for all that you do.

Dr. Jim Dahle:
Okay, let’s talk about bonds. Bonds are one of the two main asset classes out there. Stocks and bonds. Stocks tend to have higher returns in the long run. Bonds tend to have more stable returns. Both have their advantages, both have their disadvantages. It’s worth understanding both of them.

Now, there’s other asset classes. You can get into real estate and there’s lots of speculative asset classes out there, art and collectible cars and cryptocurrency and empty property. There’s lots of things out there that you can invest in, these alternative investments if you want.

But everyone ought to at least consider owning some stocks and some bonds. Pretty much I think everybody ought to own some stocks and most people ought to own some bonds in their portfolio.

There are a few benefits of bonds. One is the returns are much more stable than stocks. Now, I know the last few years, it didn’t feel like that because 2022 was the worst year ever for bonds. In all recorded history, 2022 is the worst year for bonds. Why was that? Well, because interest rates went up 4%, like six months. Rising interest rates are very tough on bonds. Because now you can buy a bond that pays 4% higher, why would you buy the old bond? So of course, that one has to be discounted enough until the yield on the two bonds are equal.

When you look at recent returns for bonds, if that period includes 2022, it’s because the returns are going to look terrible. So, if you’re looking at returns over the last five years, over the last 10 years, bond returns do not look awesome. Take 22 out of the mix and they don’t look so bad.

The other thing to keep in mind is you don’t want to invest looking in the rear view mirror. The best projection of your future bond returns is the current yield on the bonds. This is for high quality bonds like tracery bonds. If they’re yielding 4%, that’s about what you should expect as a return out of those bonds. You shouldn’t expect whatever they returned in the last five years and project that into the near future. That’s not the way you invest.

Now, if interest rates fall dramatically, your returns are going to be higher. If your interest rates rise some more, your returns are going to be lower. And that’s just the way bonds work. They’re very sensitive to interest rates.

Now, why do people include bonds in their portfolios? Well, a couple of reasons. The first one is that uncorrelated assets are generally a good thing in your portfolio. And the correlation between high quality bonds and stocks is about zero. That’s a good thing.

For example, the correlation between US stocks and international stocks is like 0.8. That’s dramatically higher than zero, which is what you get with the bonds. So that correlation is a good thing. When stocks zig, bonds are much more likely to zag. So you get that benefit of a diversified portfolio.

You also get a less volatile portfolio because bond returns, whether positive or negative, tend to be much more muted than stock returns. Adding some into the portfolio of stocks decreases volatility. That makes it easier to hold the portfolio in a nasty market downturn. And you simply become better at buying and holding and staying the course.

And so, it’s really important. The worst thing you can do is put all your money into stocks and then panic sell in a bear market. Because most bear markets will resolve themselves in a year or two or three or five or whatever. And if you panic sell and you sell at the bottom, especially if you do this late in your career, it’s very, very hard to recover from that financially.

The key is to not overestimate your own risk tolerance. And until you know what your risk tolerance is, you’re probably better off erring on the side of too conservative of a portfolio. Heaven forbid you start out your life with a 60/40 portfolio. You go through a bear market or two and you’re like that’s really no big deal for me. I totally get this long-term thing. I’m going to now bump it up to an 80/20 portfolio.

I think that’s a much better way to do it than to start out as 100% stocks. If somebody told you you should be 100% stocks and then you panic in your first nasty bear market and you don’t even invest anything in stocks for the next 20 years. That is a much bigger tragedy than if you just held a little bit too much in bonds in the beginning.

I generally counsel people, figure out what you think you ought to be, dial it back just a little bit until you go through a bear market. It really doesn’t matter what your returns are the first two or three or five years anyway. It’s all about how much money you’re putting into your accounts at that point. If you get a little lower return, it’s really no big deal. And figuring out your risk tolerance is far more important in those situations.

Okay, another reason why bonds can be good is because it’s possible for bonds to outperform stocks, even in the very long term. Now historically, if you look back in the US, I think there still hasn’t been a period of 20 plus years where bonds outperformed stocks. That’s not necessarily the case in other countries.

And even in the US, I think there’s been a 10 or 15 year period or two where bonds did outperform stocks. For example, look at the quote unquote lost decade of the 2000s. The return on the S&P 500 in the 2000s was pretty darn close to zero. I think it was slightly over zero, but from 2000 to 2010, that’s basically what it was.

Now, part of that is because that included the tech meltdown of 2000 to 2002, and it included the global financial crisis in 2008, 2009. You get two big, huge bear markets in a 10 year period. And well, guess what? Stocks didn’t do that awesome.

Well, bonds did a lot better over that 10 year period. And that can happen for longer periods of time. There’s no guarantee that stocks will outperform bonds in the long run. That is not a guarantee. And so, that’s another benefit of bonds.

Something else that’s available with bonds is they can be indexed to inflation. With I bonds, you can do that. Tips, you can do that. You can’t really index other asset classes to inflation. In the long run, gold seems to keep up with inflation more or less. Your ounce of gold bought a nice man’s suit 800 years ago, it buys a nice man’s suit today. It basically keeps up with inflation. But not in any sort of short term way. Although to be fair, TIPS don’t necessarily correlate perfectly with inflation either.

Now people go back and they look at 2022 and they see, “Oh, wait, TIPS went down in value in a year when inflation was really high.” Well, that’s true because real interest rates went up and interest rates have a much bigger effect on the value of your TIPS than the inflation adjustment each year does. And so, that is true.

Now, did TIPS do better than nominal bonds that year? Yes, they did. But they certainly didn’t do awesome in a year with pretty high inflation. So, keep that in mind as you buy bonds.

Now, you can buy individual bonds. I generally only recommend people do that with treasuries. And if you’re buying municipal bonds, you’re buying corporate bonds, you’re buying mortgage-backed bonds, I think you need a diversified portfolio of them. I think you probably ought to use a bond fund.

But there are some benefits to just buying individual bonds. You know when it’s going to mature, you’re not going to have a loss of principal, at least on a nominal basis, if you do that.

Some people make a bond ladder, for example, they want to have a certain amount of money to spend every year. And so, they start building this ladder of bonds that mature every year for five years or 10 years or 30 years. A lot of times they’ll even use Treasury Inflation Protected Security, a TIPS, to do this. And then they know they’ll have that amount of money in real dollars at that date. And that allows them to have some guarantees in their income and what they can spend throughout their retirement. And they like that.

It’s also fine to just use a bond fund. It’s a very simple way to do it. But bear in mind, there is a possibility that you get hosed if all the other investors bail out of a bond fund and they end up having to sell bonds low. And that can hurt you as the remaining person in the fund. And of course, there is also the possibility to lose principal in that bond fund because the fund itself to maintain its plan, its method of investing, maybe it’s trying to hold bonds of a certain maturity, they may end up selling bonds low as well and buying new ones to replace them. The managers can cause you to lose principal in a bond fund, which you wouldn’t if you held an individual Treasury bond to maturity.

For those reasons, some people would prefer to have a little more complexity in their life, manage their portfolio bonds themselves, individual bonds, rather than having a bond fund and having the manager do it. I think most people just lean toward keeping it simple and using a bond fund like BND.

I think that’s a perfectly fine bond fund. It owns all the corporate bonds in the U.S., all the Treasury bonds in the U.S., all the mortgage-backed bonds in the U.S. It’s a very diversified bond portfolio. I think it’s perfectly reasonable to have it be part of your or your parents’ portfolio.

Now, in general, most people reduce the volatility, the risk of their portfolio as they approach retirement. Those are the most important years for your returns. If you’ve heard of the phrase “Sequence of returns risk”, that’s what we’re talking about. The last few years before you retire, your first five years or so in retirement, having bad returns then, especially while you’re also withdrawing from their portfolio, can have a big impact on how much you can spend in retirement, whether you run out of money in retirement with a certain level of spending.

A lot of people do dial back the risk in those last few years before retirement and the first few years in retirement. And some people continue to dial back that risk throughout their retirement. There are some good arguments for and against that practice, but for the most part, that’s the time to be thinking about some way to deal with sequence of returns risk. And for a lot of people, the way they do that is just by having a little bit more money in bonds or by building a bond ladder, like I discussed.

I hope that’s helpful to you. You probably ought to get some bonds into your parents’ portfolio if you’re helping them to manage it. You never know when a big nasty stock market crash is going to come that isn’t going to come back for a decade. It could happen. And you’re having some bonds in there that aren’t necessarily going to do that. Maybe a good way to continue to survive financially in the event of something like that. I hope that’s helpful.

The next question comes in by email. It says, “I’m a longtime follower of 10 plus years and a fellow emergency physician now turned intensivist. Is bond interest for a high earner, a modified adjusted gross income of greater than $250,000, essentially taxed at a higher rate than ordinary income due to the additional NIIT.”

Let’s talk about NIIT. This is Obamacare tax, for lack of a better term, PPACA tax. And the way it works is that if you go earn money, and it’s more than $250,000 a year, you pay 2.9% Medicare tax on that money, plus 0.9% in Obamacare tax for a total of 3.8%.

If the money is unearned, like from bond interest, you pay 3.8% in NIIT. It’s the same. Whether the money is earned, whether the money is unearned, if it’s ordinary income, you’re going to pay the same amount of money.

So no, bond interest is not taxed higher than your ordinary income is. That said, if you’re in a higher income tax bracket, you probably ought to look into whether it’s worth investing in municipal bonds.

Municipal bonds are federal tax free. If it’s a municipal bond from your state, it’s also state income tax free. And for those in higher brackets, a lot of the time, the after-tax yield on municipal bonds is higher than you will see from non-municipal bonds. I hope that’s helpful to you.

 

KNOWING WHAT YOUR RETIREMENT NUMBER SHOULD BE

Dr. Jim Dahle:
Okay, another question comes in by email. A couple of questions, actually, about retirement numbers. “I understand picking a number to aim for retirement and the rough calculations on how to achieve it, what my income would be based on that target, but I’m lost as to how to best estimate what the target should be.

Sure, I can do 25X, but I am early career, earning $400,000 on a W-2 a year and have trouble imagining what I will need or want to live on when retirement ultimately hits. So, any help or tips or tricks would be greatly appreciated.”

This is what happens when you start planning for retirement early. I’m a big fan of you planning for retirement early. I’m a big fan of you starting to save for retirement early. I’m certainly a big fan of you becoming financially literate and learning how all this money stuff works.

The problem is some of us by our very nature are super planners, and we want to plan out every detail of what our life’s going to be like 30 years from now. And we got to just relax. We got to just relax and realize things can be adjusted as you go along. Pick something you think is reasonable and change it when you think change is warranted. Expect your tastes and your spending to rise a little bit if you’re like most people.

Let me give you an example. Katie and I wrote up a financial plan in 2004. I was finishing my PGY-1 year, maybe this is the start of my PGY-2 year. That’s when we wrote our financial plan up. The amount of money we thought we needed at that point in order to have enough to never have to work again was about $2.7 million in 2004 dollars. That works out to be like $4 million today with inflation.

Well, as we got close to that and exceeded that, we realized, you know what? We kind of do like spending a little bit more money. And so, our number using the 25X rule of thumb had to necessarily go up as we decided we liked spending more money than that. And that’s probably the case for lots of people. So, pick something reasonable and change it when you think change is warranted.

The second question says, “My spouse is a stay at home right now. I plug some random incomes into the social security calculators and it seems that even with a modest income, arbitrarily picked at $5,000 a year, you can pay minimal self-employment taxes and collect over $3,000 a month in social security assuming you wait the full retirement years. Is it worth it for my wife to create a solo gig that she makes and reports a minimal income to collect social security payments when we retire? Any magic minimum numbers to hit?”

Well, the problem with this plan, which is not a terrible plan, but there is a big problem with it. The problem is that the alternative is pretty good and takes zero work. It appears that this questioner did not realize that your stay at home spouse qualifies for half of your benefit at full retirement age, just based on being married. So, if you got a doc working and a stay at home spouse, the doc’s going to get 100% of their benefit, the stay at home spouse is going to get 50% of the doc’s benefit. That’s pretty darn good.

A doctor that works for 30 years is going to have a pretty high social security benefit. And half of that is still better than a whole lot of people have. And if the doc dies first, well, the spouse gets the doctor’s benefit, not the half of the doctor’s benefit. And so, it goes down from 1.5 of the doctor’s benefit to 1 of the doctor’s benefit. But that’s pretty good. That’s the alternative for the spouse, never going to work, never earning anything, not starting this minimum solo gig thing. And that much is true.

That said, social security is somewhat progressive. The return on your investment in the beginning is pretty darn good. They talk about bend points with your social security benefits. And I think I’m just now passing the second bend point in my career. Katie’s nowhere near the second bend point in her career, but she’s now got a benefit that’s more than half of my benefit projected out. And so, the amount of work that she’s done has earned us a little more money than what we would get if she were just getting half of my benefit.

This can make sense, especially if your spouse actually wants to work. He wants to work a significant amount. But if your spouse just works a little bit and gets that kind of minimum social security benefit, just barely gets the 40 quarters in, this is probably not going to be more than 50% of your benefit. So I think I probably wouldn’t bother. That said, if your spouse wants to go work for other reasons, this could be one of the benefits of doing that. I hope that’s helpful.

 

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All right, thanks for those of you leaving us five-star reviews and telling your friends about the podcast. A recent one came in that said, “Jumpstarted my financial education. I love the show. Only wish I found it sooner. Great primer to stimulate learning about finances for a doc, especially for someone who isn’t quite ready to dive into reading a few financial books.” Five stars. Great, I appreciate that review. That does help get the word out to others about this podcast.

Don’t forget, if you’re interested in doing paid surveys, go to whitecoatinvestor.com/survey. Heaven forbid you don’t have any surveys for you. It’s not like it takes you a lot of effort and trouble to apply for these things and see if you get screened out of them.

Some of them are even starting to pay you a few bucks when you do get screened out of the surveys, which I think is a nice change we’ve been pushing these companies to make for doctors because people get really bitter when they spend five minutes trying to see if they qualify to actually take the survey and then they don’t and they don’t get paid for their five minutes of time. So now you get a few bucks at least for those five minutes of time with some of the survey providers.

Let us know if you’re having a good experience with them. Let us know if you’re having a bad experience with them. We’ll take them off the list and replace them with people that are going to treat White Coat Investors right.

All right, thanks for being here. Keep your head up, your shoulders back. You’ve got this. We’ll see you next time on the White Coat Investor podcast.

 

DISCLAIMER

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

Transcription – MtoM – 227

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 227 – Orthopedist becomes a multi-millionaire seven years out of residency.

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Okay, let’s get our interviewer on today. We’ve got a great interview coming up. This is with a fellow that really got into financial literacy and has not only done well in his career, but has done well in some of the financial side pursuits that he’s been doing. Let’s get Kyle on the line.

 

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is Kyle. Kyle, welcome to the podcast.

Kyle:
Thank you very much, Jim. I appreciate you having me on.

Dr. Jim Dahle:
Let’s start out by introducing you a little bit to the audience. Tell us what you do for a living, how far you are at a training, and what part of the country you’re in.

Kyle:
Yeah, my name is Kyle Stevenson. I am an orthopedic surgeon, sports medicine trained, and I am in Indianapolis, Indiana. I’ve been in practice since 2018.

Dr. Jim Dahle:
Okay, about seven years out, it sounds like. And you recently accomplished a significant net worth milestone. Tell us what that is.

Kyle:
Yes, sir. Yeah, I hit the $2 million net worth milestone. I was pretty proud when I hit that.

Dr. Jim Dahle:
Very cool. Congratulations. You are a multi-millionaire. When you were a kid, what did that mean to you, to be a millionaire, to be a multi-millionaire? Was that something you ever imagined you would be?

Kyle:
No, not really. Growing up, and it sounds a lot sweeter now that you say that, but growing up, no, not really. I knew I wanted to be a doctor. I knew I wanted to be a sports medicine doctor. I wanted to take care of athletes. And then honestly, reading your book, and not to give you a plug or anything, but in residency, we all read it. And I just remember the chapter, “Millionaire by 40.” And here I am, 40 in a couple of months.

Dr. Jim Dahle:
You doubled me. You made it just before 40.

Kyle:
You got inflation and other things.

Dr. Jim Dahle:
I run into people all the time and talk to them like, “You are more financially successful than I was. You’re doing great.” They feel like they’re behind because they hear these people that have done incredible things.

Kyle:
Right.

Dr. Jim Dahle:
And the truth is that it takes time. It takes time. You start out in a big hole and you start relatively late, especially if you’ve done something with a long residency like ortho. It just takes time for that money to start compounding, even when you make a lot of money every year.

Tell us the journey. Where were you at when you came out of medical school? Where were you at when you came out of residency? And what have you been doing for the last seven years?

Kyle:
Okay. Yeah, in residency, I was obviously reading your book like I said. I was also reading Robert Kiyosaki’s books. The Rich Dad Poor Dad and Cashflow Quadrant. And I knew at some point I wanted to buy assets, cash flowing assets. And saying that, when I got out of fellowship, we moved to Indianapolis, started practicing. And I really just maxed out my Roth IRA in residency and fellowship. I just really put money into the S&P 500. I put about 30% of my income early on into the S&P and index funds and just built that up. I did that for a couple of years, really. And then I finally got to a point where I was like, “All right, I got a tax problem. I think a lot of people hit that point.”

Dr. Jim Dahle:
It’s amazing when all of a sudden you’re paying more in taxes than you made as a resident, isn’t it?

Kyle:
That’s right, exactly. My CPA didn’t know what to do. He was like, “You make too much money. Sorry, man.” If you do enough research, you realize real estate is a great place. I did get into real estate. And with that being said, I used my asset line of credit to start buying some real estate. I used some cash, but a lot of my asset line of credit and really built that velocity of wealth using my dollar in multiple places. And that’s really helped push that trajectory. I started, like I said, index funds mostly and then got to a point to where I could start buying real estate. And now I’m doing both.

Dr. Jim Dahle:
Tell us what your real estate empire looks like.

Kyle:
It’s pretty solid. I started with the Burr Method. I bought a single family home in 2022. In 2022, I finally was like, “All right, I’m done being a limited partner. I want to start being active, more general partner.” And so I gave myself five years. And at this point, it’s not even three years yet. I did my first one with a single family home, then Airbnb, then a Triplex, another Airbnb. Started small. Then I started joining teams of apartment multifamily units. I have a multifamily, 176 units, Savannah, Georgia, two hotels in Louisiana. Just raised on a new development here in Westfield, Indiana. Really started to build that empire.

Dr. Jim Dahle:
Yeah, you’re having fun with this. I can tell you enjoy this.

Kyle:
I love it. I love it.

Dr. Jim Dahle:
What would you say to somebody else that wanted to get onto the general partner side that wanted to run a syndication?

Kyle:
Yeah. A couple of things. Have high integrity because we’re learning these last four years that the market is not as good as it was, from 2010 basically to 2019. Find trusted partners, gain financial intelligence. I tell most people, if you read books to learn information, you’ll get ahead of 98% of people. Really just start educating yourself, financially educate yourself on real estate investing, partnering up with the right people, find mentors, reach out to them and say, “Hey, what can I do to learn this stuff?”

And start doing as opposed to just throwing your money in. I think that’s where doctors get burnt. They throw their money in, expect a big return, where in fact they get taken advantage of because they didn’t understand the deal.

Dr. Jim Dahle:
Yeah. Tell us a little bit about leverage in your life. How much do you borrow against your real estate properties, for instance?

Kyle:
We do use leverage, of course. I keep it small on my personal ones. I definitely keep it small. I’ve bought the properties with asset line of credit. So not really using my own cash. And then I do a cash out refi. After I do forced depreciation, excuse me. Once I do forced depreciation on the property value add, then I do a cash out refinance, pull most, if not all of my money out. Now I have no money in the deal. So, the risk is really low.

Leverage is important. And that’s why real estate is great as opposed to the stock market. Because in the stock market if you put in $10,000, it’s $10,000. In a house if you put in $10,000, it’s it could be worth $50,000. Five times. So I do use leverage, but you got to be smart with not being over leveraged. And I think that’s the big thing.

Dr. Jim Dahle:
Yeah, for sure. Over leverage is how a lot of people get in trouble in the real estate world. It’s one of those things, it’s kind of like the price is right. More is better. It is better. You’re closer, you’re closer until you go over.

Kyle:
Exactly.

Dr. Jim Dahle:
Then all of a sudden your property is not cash flowing and your life’s falling apart and it becomes really messy. In reasonable amounts, it can work. And there are ways you can apply some leverage. Even to a portfolio that’s primarily invested in the stock market. You mentioned your asset-based loans, for instance. If you have a mortgage and you’re also invested in the stock market, you’re technically investing on leverage there as well.

Very cool. So you got interested in financial literacy when? During residency or what was it that made you decide, “I want to start learning this stuff?”

Kyle:
Great question. During residency, for sure. I would say medical school, I was focused, I’m going to be a successful orthopedic surgeon. I don’t need to worry about this stuff. And then I was in residency reading books, started to get more curious. And you talk about this, once you understand it enough, your financial advisor really can’t help you to a certain point.

I did have a financial advisor when I got out. He was one of my dad’s buddies and he did great for me. But I started learning myself that he can’t make more money for me than I can in the S&P 500, or the stock market index funds.

And so, I started realizing that, doing my own due diligence, learning real estate on my own, and finding mentors that would help me along the way. But I was always just very curious. I have older brothers who are businessmen. A lot of things they’ve told me, I appreciated, but I also want to figure it out for myself. Like, is that how it really is? Instead of just taking people’s word for it. So, just curiosity has always been there.

I have a podcast now where I do try to educate on real estate investing and other entrepreneurial mindset shifts. But yeah, I think the biggest thing is just being curious and trying to figure it out for myself.

Dr. Jim Dahle:
Yeah, very cool. What did the start look like? Do you end up paying for medical school with loans or what did you do to get through medical school?

Kyle:
No, my parents, they did well in their careers, but they were not going to pay for my medical school. Undergrad, I had full-ride scholarships, played baseball and football. And then medical school I had to pay for. And I actually still have the loan, unfortunately. And obviously that’s a ding on my net worth, but this is crazy. I’m doing the public service loan forgiveness program. And I’m about six months beyond those 10 years of what it should be. So it really should be forgiven.

Dr. Jim Dahle:
You’re in that safe forbearance trap that a bunch of people are in right now.

Kyle:
Exactly, yeah, you got it. We’re in the trap. And unfortunately for me, what I did is, “Oh, post COVID, I was feeling really stuck.” And that’s really helped push my real estate financial stuff as well. But we moved to Charleston, South Carolina, my wife and I, we had our first son. And we were feeling stuck. We’re like, we need a change of scenery. Let’s go to the beach.

We did that. And when we did, we went from a nonprofit to a for-profit for two years. We would not have had to pay those loans. We would have been forgiven if we didn’t do those two years sent. But it was worth it on one hand, because it changed my whole mindset. Now we’re back with three kids. And we’re glad we did it. We love it. But now my loans are stuck. I thought in January, I was going to be scot-free, like good to go. And then you already know what happened.

We’ll see what happens. There’s a possibility they’ll buy, they’ll let us buy back those forbearance months. You’ll know more than me. I try to keep up with it.

Dr. Jim Dahle:
Yeah, give it a month. I think it’s going to be a lot more clear exactly what’s going on in this space. Stay the course for now. I think those going for PSLF, especially somebody as far along as you are in it, it’s still going to work out just fine.

Kyle:
I appreciate that.

Dr. Jim Dahle:
Yeah, very cool. Well, I think people might be interested in hearing about how you balance your life as an orthopedic surgeon with kind of these side hustles. You’re doing a podcast, you’re running syndications, you’re buying properties, you’re making deals. Tell us how you balance all that without feeling like you’re working all the time.

Kyle:
Yeah. Intention, I would say, is the biggest thing. Setting my day with intention. I have a wife, beautiful wife, and three young kids – four, two, and 11 months. And so, that keeps us busy, as you can imagine. But my day starts at 05:00 A.M., get my workout in, and then it gives me a good buffer of a couple hours before my kids get up so I can get some work done.

And then it’s orthopedics. Luckily, I have two half days of orthopedics, Monday and Friday. So I do get some real estate stuff done during those days. And then also, a big part of it is teamwork when it comes to surgery. Not only that, but also in real estate, I would say teamwork.

Having trusted partners goes a long way to help me out. Who Not How by Dan Sullivan, classic book. And then really carving out time in the day for my kids and my wife and keeping the phone away. That’s the hardest thing to do because you come home as a physician, you’re on call or whatever it is, your phone’s always available. Same thing with real estate investing. Same thing with podcasts. There’s always screens and always things that can get in the way.

Setting that time for your wife and kids, set up date nights with your wife, set up time with my kids where the phone is away and I have to hang out with them because I enjoy doing that. But I also want them to know, hey, you’re more important than my cell phone.

And so, being intentional with all that stuff. And then I’m in bed by 09:00 P.M. If I have a podcast recording, we’re doing that 07:30, 08:00 o’clock, kids are in bed. I can knock that out quick and I’m in bed by 09:00 P.M. I love it. 09:00 P.M., get sleep until 05:00 A.M. and feeling good and rested.

Dr. Jim Dahle:
Very cool. Well, congratulations to you, Kyle, on your success. And thanks for being willing to come on the Milestones to Millionaire podcast and inspire others to do the same.

Kyle:
Absolutely. Can I just say one thing real quick? Really a shout out to you just for what you’ve done with everything. You’ve inspired obviously a ton of people. We appreciate you and keep going and getting these things out there.

Dr. Jim Dahle:
Very welcome.

I hope you enjoyed that discussion. The fun thing about medicine and finance is you can pick any ratio you want of medicine to side hustles to real estate investing and build your ideal life. For some people, they’re going to go, “I do not want to do any of that. I just want to go to a clinic and I want to see patients and I want to come home and I want to enjoy my time doing other fun stuff.”

Totally understand that. I spent most of this week that I’m recording this rafting on the middle fork of the salmon. It was incredible. I didn’t think about medicine while I had to treat one of the other people on the trip, actually with my portable ER. But I didn’t think about finance other than talking with one of the first year medical students for a few minutes that was on the trip. But mostly we talked about life and we talked about rafting and we talked about fun times.

So, I get people that don’t want to spend a lot of time doing side hustles, but you get to choose how much. And some people are like, “I want out of medicine as fast as I can. I’m building this real estate empire so I can punch out.” And that’s great for them. Find the balance for you when you’re looking for these things.

 

FINANCE 101: LEVERAGE

Dr. Jim Dahle:
Now, I wanted to talk a little bit today about debt. Leverage, it’s called sometimes. It’s commonly discussed among entrepreneurs, among people that are into real estate investors. Certainly people running syndications talk a lot about the velocity of money and leverage and other people’s money. All they’re really talking about is debt.

There are benefits to debt. There are dangers to debt. So, let’s spend a few minutes talking about debt. It’s a bad rap in the world’s great religious books as well as most the financial media and the blogosphere. And it’s true. Debt is in large part responsible for lots of good things. The wonders of the world around you, our economy, our lifestyles. The best the world has ever known are in large part fueled by debt.

In many ways, this consumer culture is the strength of America. And so, let’s be honest. What is money? Money is debt. When a government issues currency, it’s simply a note backed by the government’s ability to tax. But most money is not created by the government. Most of it’s created by banks. It’s called fractional reserve banking. You put money in the bank, they pay you 0.6% on that money. It loans out money to others at 6% and basically creates money in the process. It can loan out more than it’s actually taking in. And so, that’s how a lot of money gets created. This has made a lot of really cool things in our lives that we enjoy that are really due to our financial system and to debt.

On the other hand, debt has ruined lots and lots of lives out there. Years ago, the consequences of defaulting on your debt were much more severe. You go to debtor’s prison. It was a real thing. In the 1840s, if you didn’t pay your debts, you literally went to prison until you or someone on your behalf paid them. There were no corporate or personal bankruptcy protection. Those are relatively new in the history of the world.

You can imagine why the Old Testament or the Quran or the Talmud or New Testament, whatever, will talk about debt being bad. You end up in prison for it. It’s a real problem.

But even if you’re not religious, there are a lot of disturbing statistics out there. Just a few years ago, I looked some of them up. The average American credit card debt was $6,300. The total amount of credit card debt, and this is a few years ago, it’s more now, was $807 billion. The total in consumer debt is like $4.2 trillion. That’s close to the government’s budget for the year. It’s a huge amount of money.

45% of families carry credit card debt. Carry it. I’m not talking about pay it off every month. 45% of families are carrying it. In the lowest quartile by net worth, the median net worth is $310. And the average credit card debt is $4,830. That’s a quartile. That’s 25% of the US population has on average a net worth of $310 and a credit card debt of $4,800.

And the average credit card debt isn’t just among poor people. It goes right up when your income increases, when your education increases, your average credit card debt goes up. And more than 775,000 people a year file for bankruptcy. So, if you don’t know someone whose life’s been ruined by their financial debts, you just don’t know enough people. That is clearly something to be a little bit cautious about.

Some guidelines about debts. One thing to learn early on is credit cards aren’t for credit. They’re for convenience. You probably spend more money if you’re using credit cards. If you don’t believe that, you’re probably wrong. If you need help spending, using a credit card might help you to do it. But if you’re not saving as much money as you need to reach your goals, maybe it’s time to get rid of the credit cards.

People also don’t like that I tell them to buy cars with cash. Now, I’m amazed that people borrow money for seven years to buy a car. I find it absolutely amazing. Fine, if you got a three months of car loan, whatever, I don’t care. Frankly, most doctors can afford to make plenty of financial mistakes. They make $200,000 or $300,000 or $400,000 a year. It really doesn’t matter if they buy a $60,000 car on credit or save up for an extra eight months and pay cash for it. It doesn’t matter that much.

But the attitude toward debt and the attitude towards saving up to buy things you want, I think does have an effect on how people build wealth. And frankly, I really don’t think anybody ought to ever have a car loan that’s more than $10,000 because you can get a pretty darn reliable car these days. It’ll get you everywhere you need to go for $10,000.

So, if you combine that with whatever amount of cash you have, there’s little reason to ever have a car loan for really more than that. The first car I drove as an attending cost me $1,850. It was extraordinarily reliable. I bought it at an auction. I had to put four used tires on it, a new battery and some new windshield wipers in four years. And then I basically sold it for the same price I bought it for. You don’t have to spend a lot of money to get reliable.

Now it wasn’t flashy. It wasn’t nice. In fact, the AC didn’t even work. But luckily I wasn’t commuting in the afternoon most of the time. And so you realize that you don’t have to have super fancy cars paid for with debt to be a doctor.

Student loan debt. Lots of you out there have student loan debt. And you need a plan to deal with it. Does medicine still make sense? Yeah, it mostly makes sense. Even if you had to pay for the whole education with borrowed money, it still makes sense. Number one, like half a doctor’s jobs out there qualify for public service loan forgiveness. And even for those that take a job that does not, if you will just live like a resident for two to five years afterward, you will be able to pay off those student loans.

But I suggest you actually go ahead and do that. Dragging student loans out for years and years and years and years and years is generally regretted. Have a plan for your student loans.

You’ve heard my general rules for mortgages. Limit the size of your mortgage if you can to no more than twice your gross income. Now that’s getting harder and harder these days with our housing crisis and the price of houses going through the roof. I think my house now is far more than two times what my physician income could be. I don’t know who’s going to be able to afford to buy houses in this neighborhood when they get sold by their current owners, but people keep buying them. I don’t understand it.

But be careful. You can become house poor to where your house dominates your financial life. When I say if you’re in a high cost of living area, maybe you can stretch that guideline a little bit. I’m talking about stretching it to three, maybe four times your gross income, not 10 times your gross income. That’s a recipe for disaster. Don’t do that.

Other consumer loans. You don’t buy stuff on credit. Save up the money, then go buy it. Whether it’s a boat or a snowmobile or furniture or rugs or paintings or anything else. Those things are much more enjoyable when you can pay for them once and know it’s paid off.

There’s this idea out there that there’s good debt and there’s bad debt out there. That’s pretty superficial. There’s a lot more nuance to it. For example, tell me which one of these is the good debt and which one is the bad debt? An $800,000, 6.8% student loan or a $4,000, 2%. Which one’s the good debt? Which one’s the bad debt? I can tell you which one I’d rather have, but there’s no such thing as good debt and bad debt. There’s just debt.

And the fact is most of it’s fungible. Once you have it, it’s debt. And if you have some debt, everything you’re buying, you’re buying with borrowed money. You got a 4% mortgage. Well, unless you’re paying off that mortgage and you’re buying something else, you’re buying food. Well, you’re borrowing 4% to buy that food. And that’s probably fine if you need to feed your family, but keep in mind that leverage is leverage. Debt is debt. Whatever it’s borrowed on, it can be used for other things.

Okay, let’s talk a little bit about investing on margin or investing with debt. Lots of people out there advocate for 100% stock portfolio. They’re like, bonds are stupid. They don’t return very much in the long run. Stocks have always done better than bonds, blah, blah, blah.

My question for them is why would you stop at 100% stocks? If 100% is good, why wouldn’t 120% or 150% be better? Now, how do you get to that? By borrowing money and investing the borrowed money. Debt is essentially a negative bond in that way, and you can borrow against your portfolio. Sometimes it’s surprisingly low rates. They’re typically variable rates, but you can generally borrow up to 50% of the value of your portfolio.

Now, you probably shouldn’t borrow quite that much because you might get margin calls if the value of your portfolio falls, but borrowing 20% or 25% of your portfolio, you could get to 120% stock portfolio pretty darn easily. And debt works. If you’re borrowing money, especially at a low rate and earning money, especially at a high rate, you do come out ahead. The math is undeniable. That is the way it works.

The problem is it works in both directions. When the value of your investment falls and you paid for it with borrowed money, it doesn’t take much of a fall to wipe out your entire investment. Typically, when you are investing with borrowed money, and often this is done in real estate, the main, most important thing is to make sure that real estate investment, that property still cash flows.

Because even with the doctor income, you can only carry so many properties with a negative cash flow. If you’re having to go to clinic and see patients and operate in order to fund these properties, you can only carry so many. But if they all have positive cash flow, meaning they’re all paying you, you can own an infinite number of them. So you ought to run the numbers. And figure out how big of a loan can you have and have it still cash flow.

I’ve done this before. And typically it works out to where you’ve got to put down 25, 30, 35, sometimes 40% to make sure that property is cash flowing. Now the cap rate matters and the interest rate matters and those sorts of things matter in this calculation. But in general, the way you get a property that cash flows is you put down more money. You use less leverage, less debt. That’s how you make sure that the property cash flows.

There’s three factors. There’s the interest rate, there’s the capitalization rate on the property and there’s the down payment. If you have a 5% interest rate and a 4% cap rate, you need to put down a lot of money, maybe 40% to ensure a positive cash flow.

When the interest rate and cap rate are equal, say they’re both 5%, you might be able to get it to cash flow with a 25% down payment. And sometimes you get a really great deal, a really low interest rate, you can put down as little as 10%. Still have a positive cash flow. But in general, putting down 25% to a third, 33% as a down payment is the way to stay cash flow positive. In some areas of the country, you got to put down a lot more than that.

Okay, let’s talk a little bit about characteristics of debt. Because if you’re going to use some debt, it’s important that you use the best debt you can get. Debt can be short-term or long-term. In general, long-term is going to be better. You don’t want to purchase a long-term investment with a short-term loan. You’re buying, let’s say a property, you’re planning to hold for 25 plus years and you’re putting a 5% mortgage on it. Does that make sense to you? No, try to get as long of a term as you can.

Interest rate matters. Low interest rate is better than a high interest rate. It’s just much easier to out-invest a loan interest rate when that rate is low. There’s fixed debt and there’s variable debt. Fixed debt is generally better than variable debt. Now variable might have a lower interest rate, so you got two factors your way in there. But when rates go up dramatically like they did in 2022, the people with the fixed debt are very grateful they have fixed debt.

Debt can be secured versus unsecured. An unsecured is better. If your debt is secured by your home and you for some reason can’t pay it, they come take your home. If it’s unsecured, it’s your credit card debt, you just thumb your nose at them. Yeah, they ruin your credit report, but they can’t take your home. So, in general, an unsecured debt is better than a secured debt. Again, you usually get a better interest rate if you’ve got some security behind it, but there’s multiple factors to weigh.

Deductible debt is generally better than non-deductible debt. For example, on an investment property, your mortgage interest is a deductible expense. And so that lowers the effective interest rate on it. Same thing with margin loans. You can deduct that as an expense on your taxes. Up to $2,500 a year of student loan interest can be deducted if your income is low enough. Most doctors that are practicing as attendings don’t qualify for that, but deductible debt is a little bit better than non-deductible debt.

And non-callable debt is better than callable debt. If you have a debt that the lender can call in any time, it’s very hard to take a lot of risk with that money. A non-callable loan is much more attractive for long-term investment purposes.

All right, so if you’re going to take out debt, try to get the very best debt you can get. A mortgage debt tends to be long-term, low interest, tends to be fixed, tends to be deductible, tends to be non-callable, but it is secure. A margin loan is long-term, low interest, it’s deductible, but it’s generally a variable rate and it’s callable and it’s secure.

Student loans can be long-term, they can be fixed, they can be non-callable, they can be non-secured, but they’re mostly non-deductible for this audience and they may have high interest rates. So, keep that in mind, try to use the right kind of debt if you’re going to use debt. Good debt or bad debt, there’s just that some debt is better than other debt.

How much should you take out? Well, those who really look deeply into this, come up with a number between 15 and 35% of your assets. If you look at everything you have, the value of your house, the value of your retirement accounts, the value of your taxable portfolio, the value of any investment properties you have, they suggest that carrying no more than 15 to 35% of that as debt is probably the amount to have if you want to use margin in your life, if you want to invest with debt.

Now, lots of docs have way more than that. If you’re a dentist and you just came out of dental school and you owe $500,000 in student loans and you have a $500,000 mortgage and you have a $500,000 practice loan and you have hardly any assets at all, your ratio is probably much higher than 35%.

People that are completely debt-free like we are, their ratio is going to be much less than 15%. The ideal ratio of the people that study using debt to invest suggests that’s between 15 and 35% of debt. But I suspect there’s plenty of docs out there that are way more than that. And maybe I’ll think about deleveraging a little bit.

All right, I think that’s probably enough to talk about debt, but a few things to think about, a few rules to use when you’re thinking about how much debt you want to use. The first question is, “Do you have a religious or moral or social issue with debt?” Lots of people do. And if you do, you probably don’t want to have 15 to 35% of your asset value in debt.

The second thing to ask is about your own psychology and behavior. Are you psychologically capable of handling debt? Most Americans are not. 45% of Americans are carrying credit card debt month to month. This is not a good idea. And so, ask yourself, can you handle that?

Do you actually have a method to get enough high quality debt to do what you’re doing? If the only debts available to you are terrible debts, you probably can’t invest with a lot of leverage.

Fourth one is, are you overextended or can you handle the worst case scenario. If you have variable interest rate or something happens to your income, can you handle it? Are you still okay if your home value drops 40%. Are you still okay if your stock portfolio drops 50%? If you’re not, your debt ratio is too high, even if it’s in that 15 to 35% range.

Another question to ask yourself, “Is the debt actually part of your plan? Do you need this debt to reach your financial goals?” As humans, we get tempted to buy stuff we shouldn’t buy with money we don’t have to impress people we don’t even like. And you might have an opportunity to take on a high quality debt, but you might already be at your goal of a 20% debt ratio or you might not want any debt as part of your plan. So if this isn’t part of your plan, don’t do it.

And lastly, ask yourself, are you improving the quality of your debt? You’re trying to get rid of low quality debt. High interest rates, short-term, non-deductible debt, while building an optimal debt ratio of high quality debt. So, it might make sense to borrow against your portfolio or your house, pay off credit card debt in order to save on interest, but you have to stay within your ratios or you could get in trouble. It would really be terrible to lose the ability to service the debt right after you convert an unsecured debt to a secured one.

Bottom line, do you have the ability to do this? Morally, psychologically, temperamentally? Do you want to do this? Do you have the means, meaning the access to high quality debt to do this? If the answer to any of that is no, I would recommend the pathway I took. Pay off all your debts rapidly in a methodical but rational way and live debt-free the rest of your life. If you can say yes to all of those questions, well, maybe it’s reasonable to leverage up your life 15 to 35% or so.

Okay, that was a long, long spiel about investing with debt and debt in your life in general. But don’t forget, if you have got some student loans and you’d like to get rid of those at some point, you can book a consult with studentloanadvice.com. We’re giving away a free online course, the CFE 2024 course with that. And not only do you get to save lots of money on your student loans, but you get to have that peace of mind, you’re doing it well, and you get to get a whole lot of financial literacy education through that online course.

 

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Dr. Jim Dahle:
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All right, that’s the end of this podcast. If you’d like to be a guest on the Milestones to Millionaire podcast, you can apply at whitecoatinvestor.com/milestones.

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

 

DISCLAIMER

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