How to Catch up on Retirement Savings | White Coat Investor

Transcription – WCI – 211

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 211- Saving for retirement with a late start.

Dr. Jim Dahle:
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.

Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage or get this critical insurance in place, contact Bob at drdisabilityquotes.com today. You can email him at [email protected] or you can call him at (973) 771-9100.

Dr. Jim Dahle:
All right. Thanks for what you do. Life is difficult. Your job makes it more difficult. And as you are listening to this, I’m off playing again in Southern Utah on a canyoneering trip with my buddies. And that doesn’t sound that difficult, I suppose, compared to what you’re doing.

Dr. Jim Dahle:
So, thanks for being so willing to be out there practicing medicine or practicing law or running your business or whatever it is that you do that earns you a high enough income that you’re interested in this podcast. It’s usually not an easy job, and it’s often a thankless one.

Dr. Jim Dahle:
Our quote of the day today comes from Paul Crafter, who said “The best approach is to act like a baseball team manager playing against a team you don’t know. You spread the defense across the field, not making any big shifts to right or left field because this strategy will help the players catch the most balls against players they don’t know. And most important when you’ve decided on a strategy, stay with it. Even when it looks like everyone is hitting to right field”. Some good advice there using baseball and analogy for investing.

Dr. Jim Dahle:
Lots of cool stuff going on right now. You may have noticed we’ve got some cool promotions going on this week. We have got a new store shop.whitecoatinvestor.com. You can get all kinds of cool swag there. But we are celebrating right now our 10-year anniversary here at the White Coat Investor. It’s been a long, crazy ride as we have undergone the last 10 years.

Dr. Jim Dahle:
For the first few years, it was just me, and Cindy came on. Katie started helping. We got Jill, we got Michelle helping. And now there’s 12 or 13 of us, working here at the White Coat Investor. And it’s been a really wonderful privilege to serve you over the last decade. And we hope you’ll join us by celebrating with us this week.

Dr. Jim Dahle:
In order to help us celebrate, we’re doing a couple of things. One, we’re offering 10% off everything in the new White Coat Investor store. So, this is good through May 24th at midnight. If you want to get some swag at a discount, you can do so there.

Dr. Jim Dahle:
There are also a few opportunities to win swag for free this week. You will notice, we’ve been running some promotions on the blog. Several of them are already over. But today’s promotion, the day this podcast drops, if you leave us a podcast review on Apple podcasts, you are eligible to enter the contest. In fact, that’s how you enter the contest. And we’re going to select three winners to get a WCI Yeti tumbler.

Dr. Jim Dahle:
On Friday, we got a promotion on Twitter. All you have to do is tweet about how WCI has helped you over the last decade and include the hashtag WCI Anniversary and that enters you for the opportunity to be one of three winners of a t-shirt.

Dr. Jim Dahle:
On Saturday, same thing on Facebook, but a post up there about how WCI has helped you include the hashtag WCI Anniversary and you might win a t-shirt. On Sunday, we’re doing it on the WCI subreddit, the WCI forum and the WCI Facebook group. There’ll be threads there. If you put a post in those threads about how WCI has helped you over the last decade, you are automatically entered to win a WCI t-shirt.

Dr. Jim Dahle:
And then on Monday, we’re going to do something similar on YouTube. There’ll be one of our Milestones to Millionaire podcasts that drops on YouTube on Monday. And if you subscribed to it and leave a comment on that video, then you’ll be entered for promotion and again, a chance to win a free t-shirt of your choice.

Dr. Jim Dahle:
And from all of these winners, we’re going to select a grand prize winner who gets their choice of a free WCI online course. So, help us celebrate by giving away all kinds of free stuff and maybe you can be a winner as well.

Dr. Jim Dahle:
Let’s talk for a minute about a correction to a recent podcast. This comes in from Zack who said, “I was enjoying your podcast in the car when I heard someone ask if you recommended, they participate in their company, ESPP program, basically a chance to buy their stock at a 15% discount.

Dr. Jim Dahle:
You said you recommended they do and sell after a year. I just want to let you know that the taxes for ESPPs are a little more complicated than that. You usually need to hold the shares for two years from the offering date to make sure the disposition is qualified. This ensures the way the 15% discount is taxed either as an income or capital gains.

Dr. Jim Dahle:
If the ESPP buying period is six months long, you need these to hold for 1.5 more years after the purchase date. If they’re bought quarterly, one needs to hold for 1.75 more years to make sure the disposition is qualified.

Dr. Jim Dahle:
My wife’s company offers one of these that we participate in. It’s bought in a six-month period so we are always carrying the minimum three lots of six-month ESPP purchases. And when we buy a fourth one, it’s time to sell the oldest lot”.

Dr. Jim Dahle:
So good advice there. Good practical stuff. I appreciate that correction, Zack. He also notes that he has stop-loss orders on those ESPPs share lots to sell them if they ever reached the break-even point. He figures there’s no point in holding them to ensure a more favorable tax treatment on a gain if there is no gain. So interesting strategy there as well to consider.

Dr. Jim Dahle:
All right, let’s take a question from Matt off the Speak Pipe who’s talking about savings rate glide paths here.

Matt:
Thank you for all that you do. I appreciate your straightforward advice that also includes many more advanced topics for those farther along in the financial literacy journey. My question is about any heuristics or recommendations for a savings rate glide slope as financial independence is approached.

Matt:
I’m 37 and gross $150,000 as an engineer with a stay-at-home spouse. I save about $40,000 a year. I have a net worth of about $800,000 with over 90% of that in retirement accounts. I expected this question to have many personal aspects. One of my goals is to be a millionaire by age 40. Many years ago, I was laid off and woefully unprepared financially, but fortunately I was able to immediately find a new job. I told myself that I never wanted to be in such a vulnerable position again. I also have two elementary aged kids and I’m considering spending a little more before they are all grown up.

Matt:
Finally, I am the saver in my marriage. My wife would like to loosen up a bit more. We already have enough saved to achieve coast FI. Any additional savings would only help us reach by sooner or increase the size of our eventual nest egg to even more than we need. Thank you very much.

Dr. Jim Dahle:
All right. Good question, Matt. Classic engineer kind of question, right? Wanting to engineer the problem. Here’s the deal. You don’t have to save anything else to reach your financial goals. That’s what coast FI is. It means that if you’re planning to work until the date you were planning to work to, you can assume that your portfolio is going to do the rest of the heavy lifting itself. So, congratulations on that. You’ve done an admirable job, and have essentially reached your goals assuming the returns that you’re counting on, actually materialize.

Dr. Jim Dahle:
Now, you never know if that’s really going to happen. So maybe it’s not a bad idea to continue to save at least a little bit, but clearly, it’s time to loosen the purse strings. Remember the worst possible thing you can do for your finances is a divorce, right?
Not only do you split your assets in half, you split your income in half. That’s a bad thing.

Dr. Jim Dahle:
So, the same goes, “If mama ain’t happy, ain’t nobody happy”. And there’s some truth to that. And obviously that works with both genders. You need to come to a compromise where you’re both happy with the amount you’re saving and your spending. It sounds to me like maybe you’ve turned the dial a little bit too tight and need to loosen it up a little bit. And the good news is you’re in a position that you can afford to do so. So I’d recommend that you do.

Dr. Jim Dahle:
As far as ways to think about this. I think it’s basically just “monitor as you go”. Remember, it’s not about winning a game against anybody else. It’s just you against your goals. And according to what you’re telling me your goals are, you’re pretty much there already.

Dr. Jim Dahle:
Now if you start thinking maybe I want to punch out earlier than I was already planning, well, now you need to start saving a little bit more money. And so, until your goals change or your life in some way, you’re doing okay for now. And it is probably time to dial back to saving a little bit and maybe spend a little bit more money. Remember you can’t take it with you when you go. Your hearse will not have a trailer hitch.

Dr. Jim Dahle:
All right, our next question comes out of my email box. This is a question about the pro-rata rule with regards to the backdoor Roth and 457 plans. “I recently discovered that my employer’s 457(b) plan accepts rollovers. I then performed a direct rollover. My rollover traditional IRA held a Vanguard to the 457 plans, about $170,000. I thought that by doing this, the 457(b) would shield me from having to be subjected to the tax implications of the pro-rata rule when I report my 2021 backdoor Roth conversion in next year’s tax filing.

Dr. Jim Dahle:
However, the money from the direct roll over to the 457(b) is now listed as a separate line item labeled IRA rollover within my 457(b) account. I found the IRS rollover chart after the fact that it states the traditional IRA to 457(b) rollovers are allowed, but there is a footnote saying that rollover money must be held in a separate account from the payroll contributions.

Dr. Jim Dahle:
Was my initial logic wrong in thinking that the 457(b) will shield me from being subject to the pro-rata rule or was I wrong? We’ll have to include the money rolled over to the 457(b) plans on IRS form 8606. I haven’t performed the Roth conversion yet because I’m not sure what to do. My wife and I are pretty close to the 35% federal tax bracket in terms of combined annual income. So, I’d like to avoid paying extra in taxes when I file next year”.

Dr. Jim Dahle:
Wow. This is the first person I’ve ever had ever had come to me that said they rolled their IRA into their 457(b). I never had that happen before. But after a few more emails back and forth with this particular person, it turns out they don’t actually have a 403(b). They have a 401(a) and they have this 457(b) and indeed the 457(b) does take IRA rollovers.

Dr. Jim Dahle:
I guess it shouldn’t be a surprise. A governmental one should be able to do that. I mean, you can roll it out into an IRA. So, why can’t you roll an IRA in there? If the plan allows it, you can.

Dr. Jim Dahle:
But just because they mark it as coming from an IRA, which is what the 457(b) is doing, does not mean it’s in an IRA. This is not in an IRA. So, when you go to do your 8606 on line six, I would still put zero. That’s 457(b) money, not IRA money. So, I think you’re okay. I think this is a good way that you will be allowed to do a backdoor Roth IRA process without getting prorated.

Dr. Jim Dahle:
All right. We got another question on the Speak Pipe from Matt. Let’s take a listen.

Matt:
Hello. I’m considering a change to my investment policy. Currently I save about $40,000 a year and I’ve access to Roth IRAs and a mega backdoor 401(k). So, I can put all of it into tax advantage accounts.

Matt:
I’m an engineer and see personal finance as numeric puzzle to be optimized. Perhaps I’m also just craving more complexity. The change would be to invest a relatively small amount of money in a taxable account. The goal would be to have appreciated holdings for charitable contributions and enough tax loss harvesting to offset $3,000 of earnings per year.

Matt:
In order to maximize the benefit and completely eliminate any capital gains tax, I would create my own index fund entirely from zero dividend stocks. I would own about 10 stocks to have a minimum level of diversification. The selection and ratio of which companies to own is based purely on minimizing the tracking error relative to a total market index.

Matt:
Since the stocks have no dividends and I would never sell, there will be no tax generated. I would harvest the losers and donate the biggest winners. If a company were to add a dividend, I would prioritize it or do a donation. Since I have individual stocks, I would have more winners and losers instead of just the average of all securities in an index fund.

Matt:
What are your thoughts? Is this worth the complexity? This would only amount to a few percent of my net worth. So, I doubt it’s going to move in the needle all that much regardless. One reason why I’m considering doing it is for my own personal learning. Thank you.

Dr. Jim Dahle:
All right, it’s Matt the engineer. Is this a bad idea? No, this isn’t a bad idea. Is it a bad idea for you? I think it probably is. I don’t think you need this. As you mentioned in your previous call, you don’t need this to reach your financial goals. You’re already essentially on track to do that.

Dr. Jim Dahle:
So, you got to start asking yourself “Is optimizing really the right step for me? Should I be focusing on other stuff in my life rather than spending my limited time, limited effort here?” And I suspect you probably should.

Dr. Jim Dahle:
Next week, we’re going to have Bill Schultheis of The Coffeehouse Investor on the podcast. And he’s going to talk a lot about spending your time on the stuff you really care about, which is a big part of the Coffeehouse philosophy and I think that probably applies in your situation.

Dr. Jim Dahle:
But there’s nothing wrong with your reasoning here. This does work. I mean, zero dividend stocks that you never realize a gain on are incredibly tax efficient, but I don’t know exactly how much money you have or make. I think you mentioned earlier you had about $800,000 and I want to say, did you say you made $150,000 or something like that? So, you may be in retirement in the 0% capital gains bracket anyway. And so, it may not be nearly as beneficial to you as you think.

Dr. Jim Dahle:
At that tax bracket, you’re married with children, as I recall. Your marginal tax rate is not that high. So even that $3,000 a year of tax losses that you harvest aren’t worth that much. I mean, maybe it’s worth what? Something like $700 a year. And you got to ask yourself, “Is that a good use of my time and taking on additional investment risk and additional complexity in order to get a $700 a year worth of a decrease in my taxes?”

Dr. Jim Dahle:
But the strategy itself works fine, right? I’m doing essentially this without the individual stocks. I donate all my appreciated shares to charity and I take my losses anytime I can get them. And so, I save up those losses to use for any capital gains I might have to take. For example, if I ever sell the White Coat Investor, I’m going to have a big old capital gain. It’d be nice to offset some of that. And then of course, I never have to pay the capital gains because I’m using those shares for my charitable donations.

Dr. Jim Dahle:
So, there’s nothing wrong with the strategies you come up with. I question whether it’s worth the additional complexity, especially the messing with the individual stocks. That adds dramatically more complexity than if you just bought a few shares of the total stock market or something like that in taxable.

Dr. Jim Dahle:
The underlying question, however, is whether you should pass up on a tax protected account in order to invest in taxable? And the answer to that is almost always “no”. Tax protected accounts are worth a lot. You get additional asset protection benefits. You get easier estate planning and your tax bill goes down so your investment returns go up.

Dr. Jim Dahle:
These are all good things. So as a general rule, you don’t want to do that. Even if you’re talking about early retirement, even if you need to get to that money before age 59 and a half, there are just so many loopholes through which you can take that money out without paying the penalty. That’s generally what you want to do. I hope that’s helpful.

Dr. Jim Dahle:
All right. Our next question also comes by email. A lot of them today are actually email questions. This one says, “Traditionally, I estimate how much tax I expect to owe in January and just set equal amounts to be withheld from each of my W2 paychecks.
I do the same thing to fully fund my 401(k) during the year”. I guess you can do that if you know what your income is going to be all year. Mine is not nearly that predictable, for better or for worse.

Dr. Jim Dahle:
“However, I’m questioning if this is the optimal approach. Wouldn’t it be better to fully fund the 401(k) as early as possible? Say by February, in order to take advantage of the time value of money?”

Dr. Jim Dahle:
Well, yes, the earlier you get the money in there, the more likely it is to go up. And so, that’s what I do with my retirement accounts as much as I can. I fund my Roth IRAs, I fund my HAS. I often fund the 529s in January. By February, March, I’ve funded all my defined benefit plans and 401(k)s if I can. For a lot of people, you just need more months of the year in order to come up with that much money. But if you’re able to, sure, front load them all if you can.

Dr. Jim Dahle:
A lot of people are doing their backdoor Roth IRAs the next year. And just moving those into the current calendar year would make their paperwork hassle a lot easier and give them a better chance of higher long-term returns.

Dr. Jim Dahle:
All right. So, he goes on, “To do so I would set my tax withholding amounts to near zero early in the year, but greatly increased them later in the year to ensure I meet the IRS Safe Harbor. 110% of the previous year. My understanding is that it doesn’t matter when during the year you withhold taxes and as it is all summed together on the W2 issued by the employer for the calendar year. Obviously, this takes discipline to manage, but it only takes a few minutes of my time every few months. Am I missing any other considerations?”

Dr. Jim Dahle:
Well, you’re not supposed to mess with your withholding like that. It’s supposed to be a pay as you go tax system. So, they’re supposed to take money out as you earn it. But he’s right. The IRS isn’t looking at that. If you had all your withholdings done in December, that’s okay with the IRS. It’s all the same. Whether you have it withheld evenly throughout the year or all withheld in the last three months of the year.

Dr. Jim Dahle:
But that is not the same when you make quarterly estimated tax payments. If you are self-employed or you have other sources of income and you’re making quarterly payments, they do care and the money needs to be paid evenly, or at least in alignment with when you earn the money. So, if you’re in the more and most money in the first quarter, you better either pay it evenly or pay most of it in the first quarter. And that’s just the way it is. If you want to pay most of it in the fourth quarter, you better be able to show that you earn most of your money in the fourth quarter.

Dr. Jim Dahle:
So, I generally try to make equal quarterly estimated payments, throughout the year. But as far as your withholdings it’s pretty wise to have most of your withholding done toward the end of the year. And then maybe you have a little more money early in the year to put into your 401(k).

Dr. Jim Dahle:
All right, next question comes up off the Speak Pipe. Let’s take a listen.

Boise:
Hello from Boise. I’m trying to follow your advice, Dr. Dahle and do my taxes on my own. I had a question about Schedule D. If I’m listing my short-term capital gains and then my long-term capital gains in part two, it makes me lump them together on line 16. And then that gets reported all together as income on my 1040, which obviously raises the amount of my adjusted gross income.

Boise:
So, I’m just wondering how to basically double check my own work and also double check the government. I know that long-term capital gains should be taxed at a much lower rate, 15% for me, but just looking at the paper, it’s kind of hard to do the math. Maybe it’s time I start paying a professional. But if you have any good resources to point me where I could learn this a little bit better, I appreciate it. And maybe some listeners would too. Thanks.

Dr. Jim Dahle:
Hello, Boise. Thanks for calling in. It’s a great question. It’s a question I’ve had myself in the past and it took me awhile to figure it out. Go back to that Schedule D part three. Scroll down there, keep going, keep going, get down there to line 20. And it asks you “Are lines 18, 19, both zero or blank and are you not filing form 4952?” And you’re probably checking “yes”.

Dr. Jim Dahle:
But either way, whether you check “yes” or “no”, you’re going to another worksheet. If you checked “yes”, you’re going to qualified dividends and capital gains tax worksheet. And if you checked “no”, you’re going to the Schedule D tax worksheet in the instructions.

Dr. Jim Dahle:
And I hope that’s helpful because when you go there, that is where the lower tax on long-term capital gains gets applied. And then that rolls over onto your form 1040. If you look at form 1040, you’ll see where the Schedule D plugs in there. You will see a capital gain or loss attached to schedule D if required. In your case, it sounds like it’s probably going to be required. And you put that amount in there.

Dr. Jim Dahle:
Now, most of the time you’re doing your own taxes using tax software, and it takes care of all of this for you. But if you were literally doing them by hand, then you got to just work through those worksheets and it will help you to get that sorted out. I hope that’s helpful to you. I’m not an accountant, but I’ve certainly dealt with this issue before.

Dr. Jim Dahle:
And in my experience the IRS is not hosing you and making you pay short-term capital gains on what should actually be long-term capital gains, just because you see those combined on line 16 schedule D. That’s just combined for other calculations necessary in the process.

Dr. Jim Dahle:
For example, if it’s a loss, your loss is offset by both your short-term capital gains and your long-term capital gains. And so, that goes straight to line 21 on that form. And that’s what you’re hoping for is to have some losses, but if you actually have gains, you usually end up going through one of those two tax worksheets. Sorry it’s so complex. I wish it could be simpler, but that’s the tax system we have.

Dr. Jim Dahle:
All right. Our next question comes in via email. “It seems that some of the opportunities or strategies you discuss may benefit an early career or mid-career doc rather than those of us who are late to the game. For example, the backdoor Roth IRA. It appears to benefit those who are starting out with a lower salary and a long horizon. However, it does appear to be a good strategy for a hospitalist with retirement 10 years out, maybe it does not appear to be a good strategy.

Dr. Jim Dahle:
However, I questioned myself on this every time I hear people talk about it. I’m afraid I might be missing opportunities, or in fact, make other mistakes that would hurt my short timeline. In fact, I raised this on the Women’s WCI con panel tonight, and several lack of my comment. In fact, one said, I’m not a second career doc, but I made financial mistakes so I feel like I’m starting over.

Dr. Jim Dahle:
But there’s due to raising kids, being a single parent, a second career, there are a lot of us who fall into this boat, and we’re trying to catch up with everything at once. Buying a house, saving for retirement and living our lives meanwhile. If you could build a podcast around what the second career or late savers should be prioritizing, many of us would greatly appreciate it”.

Dr. Jim Dahle:
It’s a common sentiment. It’s amazing that I get it from people who I consider pretty young, oftentimes docs who were in their thirties or forties. They’re quite young. I mean, there are doctors who don’t come out of training until their early or even mid-forties.

Dr. Jim Dahle:
And so, let’s be honest. A lot of people who think they’re late or think they have a late start, really aren’t. Just because you didn’t retire from medicine at 43, like the Physician on FIRE does not mean you are late to the game, right? You’re probably still well ahead of the vast majority of not only Americans, but of your peers.

Dr. Jim Dahle:
Remember, the median American retires with a net worth of $250,000. That’s home equity, savings, all their goods, all their assets, all their retirement, everything $250,000. So, chances are, you’re not really as behind the game as you think you are, but lots of people feel that way.

Dr. Jim Dahle:
The truth is a 35-year-old doc probably has another 50, 55 years in their life, right? That’s a long time that you can benefit from a backdoor Roth IRA. But a 50-year-old doc still has 35 or 40 years, which is also a very long time. There’s a lot of things that can help you in your later career to catch up. One is the fact, if you look at the vast majority of people, and I don’t know whether this necessarily applies to docs, because sometimes docs are working really hard in their 30s and 40s.

Dr. Jim Dahle:
But in general, your highest earnings of your career are in your 50s. So, when you are earning more, it’s easier to save more. Plus, you oftentimes have some expenses taken care of, maybe the kids are already into college, maybe they’re through college. Maybe you’ve already got a house. You’ve already got a car or whatever. You already have some things taken care of that that doc coming out of residency doesn’t have. So maybe again, you’re not quite as far behind as you think you are.

Dr. Jim Dahle:
There are also all these great catch-up contributions that allow you to use a tax protected account where a younger doc might be forced to invest more in a taxable account, right? Your 401(k) or 403(b) for instance. You get an extra $6,500 in 2021 that you can put in there as an employee contribution. That also increases the $58,000 limit on that account. If this is a solo 401(k), now all of a sudden you can put, what is it? $64,000 into it, or is it $64,500? Whatever it is for 2021, you can put more in there than somebody that’s under 50.

Dr. Jim Dahle:
Same thing with your backdoor Roth IRA. Instead of putting $6,000 in there for you and your spouse, it’s $7,000 each. So, there’s another couple of thousand dollars that can go into a tax protected account. It doesn’t have to be invested in a taxable account.

Dr. Jim Dahle:
HSAs, the catch-up age is 55, but again, for a family plan, it’s another thousand dollars that you can put in there each year. And these contributions really do help you to build wealth a little bit faster.

Dr. Jim Dahle:
But the truth is that no doctor is ever really more than 10 years away from financial independence. Whether you’re 30 and you’ve become financially independent at 40, or whether you’re 50 and you’re going to become financially independent at 60, or whether you’re 60 and you’re going to come financially independent at 70. The truth is that no doctor, making any sort of a doctor income, $180,000, $220,000, $300,000, $400,000 a year.

Dr. Jim Dahle:
The truth is if you will live like the average American household, which is about $60,000 a year, if you will live like they live, even if you have nothing right now, even if you have a bunch of student loans right now, within 10 years, you can reach financial independence.

Dr. Jim Dahle:
Yes. You’re not going to be driving Tesla’s. No, you’re not going to be vacationing on the French Riviera. You’re going to have the average American life as you reach there and in retirement. But the truth is if your goal is to get to financial independence, you’re never more than 10 years away.

Dr. Jim Dahle:
So that means even if you want a relatively robust retirement, maybe you’re only 15 years away. And so, you got to keep that in mind that this isn’t a terribly long game when you’re making as much money as most doctors make. You can make it pretty quickly. You can also, if you really are in a rush and you really don’t want to cut your lifestyle, you can take on more risk.

Dr. Jim Dahle:
Maybe you have more stocks to bonds in your portfolio than you otherwise would. Maybe you tilt to small and value stocks. Maybe you carry a little bit more debt than you otherwise would and use that to leverage your investments. Maybe you have more of a side hustle. Maybe you’re doing a little bit of direct real estate investing, where you can put a little bit more of your time and expertise into boosting your return. You’re taking on more risk and doing more work in order to catch up. Those are all options you can do to try to catch up if you really are behind.

Dr. Jim Dahle:
You also get to avoid some of the early retirement issues, right? There’s lots of people that worry about the age 59 and a half rule. It’s not that big a deal. There are so many loopholes that you can drive a truck through them. But if you are late to the game, you don’t even have to deal with that rule, right? You might be 60. Well, if you’re 60, you can start taking money out of your IRAs or Roth IRAs, as much as you want no penalties whatsoever. You just have to pay any taxes that might be due on a tax deferred withdrawal.

Dr. Jim Dahle:
But a lot of this comes down to comparison. You’re comparing yourself to somebody who came out of residency and had already been reading the White Coat Investor for two years. Yeah, they hit the ground running. I encourage them to do that. We shouldn’t hold that against them.

Dr. Jim Dahle:
But if you didn’t find out about any of these financial principles till you were 45, of course, you’re going to be behind that person. But the truth is you are not playing that person. This is not a game of you against them. It is not a game of you against the market. It is a game of you against your goals. It’s a single player game, and you only win when you reach your goals. You don’t win by beating somebody else or by beating the market or anything like that. So, keep that in mind.

Dr. Jim Dahle:
I hope that’s helpful. If there are a couple of blog posts on the White Coat Investor blog that might help with this, one is called “Behind and the retirement savings game”, the other one is called “I forgot to save for retirement”. And both of those will walk you through some of the numbers of how this works out. If you’re starting at 45 or 50 or 55 or 60 years old.

Dr. Jim Dahle:
I hope that’s helpful. Let’s take our next question from Les off the Speak Pipe. This is a question about collective investment trusts.

Les:
Hi, Jim, thanks for all that you do. My workplace plan recently changed, its investment options to collective investment trusts rather than the previous Vanguard mutual funds. I’m not familiar with these and have not easily located information about the various offerings from Fidelity.

Les:
My question is what you may know about them and whether or not it is a reasonable to invest in these, or if we should just use the T. Rowe Price for retirement of funds instead, which are now an option and do have reasonable expense ratios. Thanks again.

Dr. Jim Dahle:
All right. Great question, Les. The short answer is they’re fine, go ahead and use them. But the long answer, a collective investment fund or collective investment trust, sometimes called by other names as well. Common trust funds, common funds, collective trust, commingled trust. Lots of names for these. Basically, they’re slightly different structure than a mutual fund. A bank is usually the trustee of these and you don’t own them like you do a mutual fund, but you are the beneficiary of them. Bottom line, it doesn’t really matter much.

Dr. Jim Dahle:
Now you’re not going to be able to roll these things into your IRA, just like you can’t buy them in your IRA or your taxable account. But usually when you’re doing rollovers, you’re rolling cash over anyway. You liquidate the investments and you roll the cash over and you buy new investments in the IRA when you do the roll over. So, no big deal there.

Dr. Jim Dahle:
The truth is, these collective investment trusts or collective investment funds usually have slightly lower expense ratios than mutual funds. They have a few less expenses, because they don’t have to comply with some of the SEC requirements that a mutual fund does.

Dr. Jim Dahle:
And the truth is they often go to a mutual fund manager anyway and hire them to manage the assets. So, it might be technically a collective investment trust, but they might go to Vanguard or Fidelity and basically have the same group of people running one of their index funds, run their trust. And so, in reality, it’s really not a big deal. Go ahead and use them. Don’t spend any time worrying about this issue.

Dr. Jim Dahle:
All right, our next question comes in from email. This one’s a little bit more complicated. “What advice would you have for a physician who decides to go into fellowship later in his career and experiences a drop in income due to this? I’m an internist about eight years out of residency. Our financial situation is good. I was fortunate not to have student debt. Our house will be paid off in a year. I have around $300,000 in a 401(k) and backdoor Roth. In target date funds about $100,000, a taxable investment account with Vanguard.

Dr. Jim Dahle:
I’m currently making about $200,000 a year and considering doing a fellowship. Of course, my income will drop significantly for three years. I’m wondering what advice you have in this situation? I’ll still try to contribute as best I can to whatever retirement I can get.

Dr. Jim Dahle:
Other than the opportunity for doing a Roth conversion. My income is lower. I’m guessing I should just stay the course in regards to my investment allocation. It probably doesn’t make sense to switch to a lower risk investment for a few years and into a higher risk when I start earning more”.

Dr. Jim Dahle:
Yeah, I think you’ve got it. That’s essentially it. You’re in low earning years. So, if you are contributing to retirement, it’s all about Roth contributions for these years when you’re in fellowship. You might want to consider Roth conversions. It’s an opportunity to basically move that taxable account. And maybe you can sell things at a 0% gain in that account during these few years and use that to pay the taxes, which will be at a relatively low rate of some of your tax deferred accounts and move that money into a Roth account.

Dr. Jim Dahle:
That would be a great use of your money during those years, but mostly this is not going to be a positive overall for your finances to go back to earning less money, unless you come out of this fellowship making a whole lot more money than you’re otherwise making. And I think as we’ll learn in his follow-up question, that’s not necessarily the case.

Dr. Jim Dahle:
He goes on to say, “The fellowship I’m considering is in Germany. I’m a US citizen. I grew up in Germany, I did med school there. I went to the US for residency. I had been working as an internist for the past eight years. I’ve always wanted to do GI”. Well, that’s going to pay more than basic internal medicine.

Dr. Jim Dahle:
“But live and practice in Germany and have the opportunity to do both with a fellowship in Germany. Unfortunately, I didn’t get into a GI program in the US after trying twice. I’m not very keen on doing this again. The salaries as a fellow are fairly comparable between the two countries, but after fellowship, there is little income increase in Germany. It would be difficult to attain the same salary I have now. Even as a trained GI doc in Germany, I’d make $100,000 – $150,000 a year as a hospital employee. Possibly get close to $200,000 in a good year in private practice”.

Dr. Jim Dahle:
He says, “Money isn’t everything, of course. I’m working for the US military. I know many military docs make salaries that are pretty comparable to German salaries. You certainly had people on the podcast who are military docs who made million dollars quickly. So certainly, it’s possible. Am I completely mad to throw away a good high US salary and move to a place where the earning potential is about half what I’m making now?”

Dr. Jim Dahle:
Well, life’s about more than money, right? It doesn’t sound to me like going to practice in Germany, even if you become a GI doc is really a great financial move. But we do lots of things in our lives that aren’t great financial moves. Buying a boat is not a great financial move. Driving a Tesla is not a great financial move. Despite what those who attend the church of the Tesla would have you believe.

Dr. Jim Dahle:
But life isn’t all about money. If what you want to do with your life is go be a GI doctor and what you want to do with your life is go practice medicine in Germany. Well, $100,000 – $150,000 a year is probably plenty to have a good life. So, I would encourage you to go do that if that’s what you want to do with your life.

Dr. Jim Dahle:
But if that isn’t really big on your life list and reaching financial independence five years from now is your major priority so you can go spend time as a Grand Canyon rafting guide or something, then this would be a very bad move if that is your life pathway. So really it comes down to what do you want to do with your life. It sounds like you’ve at least investigated the financial ramifications of your decisions. And now it’s time to weigh all the factors and make a decision. I can’t do that for you.

Dr. Jim Dahle:
He had one follow up question about his retirement accounts. I mean, you can leave your retirement accounts alone, let them continue to grow until retirement. Obviously, he’s going to owe US taxes on any withdrawals of tax deferred money. If you do stay in Germany, maybe you might want to consider renouncing US citizenship. That can get pretty complicated tax wise as well. So be sure you look into that before doing any sort of thing like that, but most people end up just keeping both citizenships and paying taxes in both countries.

Dr. Jim Dahle:
All right. Our next question comes up off the Speak Pipe about 403(b)s and 401(k)s and how they mix. Let’s take a listen.

Speaker:
Hey, Dr. Dahle. Thanks for all that you do for us. I was wondering if I could max out a 403(b) at the hospital I work at as an employee and also max out an individual 401(k) at a totally different hospital I work at as an independent contractor. I read your blog post on multiple accounts, and it seems I cannot. Would this change if I had a SEP IRA instead of an individual 401(k)? Thanks again.

Dr. Jim Dahle:
All right. 403(b), 401(k). It sounds like you read the rules and you understand them. You get one $19,500. This is assuming you’re under 50. $19,500 employee contribution. No matter how many 401(k)s or 403(b)s you have. You could have 20 of them. All you get is $19,500 as an employee contribution.

Dr. Jim Dahle:
However, each of those plans that belongs to an unrelated employer has a $58,000 limit. And so, you could get $58,000 into all of them as long as they have unrelated employers. But as you can see, most of that is not going to be able to be an employee contribution. It has to be an employer contribution. So, you have to look at the plan and what it allows you to make, or what they’ll put in for you as an employer contribution. And you will find if you’re in each of these are jobs or employees as a hospital that most of them aren’t going to put any money in there, unless you put money in there. Maybe you get a match to some of the money you put in there and that’s about it.

Dr. Jim Dahle:
Where this really works out well is somebody that has an employee job and a side gig. So, they put their $19,500 into the employee job. And maybe they get a $10,000 or $20,000 match in that employee job. Then they turn around with their side hustle or their side gig or their moonlighting or whatever and they get paid on a 1099. They open an individual 401(k) and they make only employer contributions because they’re the employee and the employer. They make only employer contributions in that individual 401(k). So, that’s essentially 20% of your net profit from that side gig.

Dr. Jim Dahle:
Now, obviously to get $58,000 in there as your net income from your side gig, you got to be doing it a lot, right? We’re talking about $250,000, $300,000 worth of profit from the side gig in order to max that out. But that’s generally the way people use multiple investment accounts like that. Multiple 401(k)s.

Dr. Jim Dahle:
There is a special rule you read about in that blog post, which if you’re in this situation, I highly recommend you read this blog post. It’s called “Multiple 401(k) rules” on the White Coat Investor blog. If you’ll read that, you’ll see there’s a special provision with 403(b)s. Your 403(b) for whatever crazy reason counts toward that $58,000 limit on your individual 401(k), because they’re both looked at as the same kind of account, whereas a 401(k) at your employer would not be. And so, you have one $58,000 limit for both of those accounts. So, if you put $19,500 into that 403(b), you’re only going to be able to put another $38,500 into the individual 401(k).

Dr. Jim Dahle:
So, be aware of that little complication. Other than that, it’s pretty straightforward. $19,500 total as an employee contribution and $58,000 per 401(k) as a total of employee plus employer contributions. Sorry it’s so complicated. I don’t write the rules. That’s honestly the way they work.

Dr. Jim Dahle:
I wish they would put in a system where there are no 401(k)s, no 403(b)s, no 457(b)s or 401(a)s and they just gave everybody a $100,000 Roth IRA or traditional IRA account with no maximum income limits on contributions and conversions. It would just be really straightforward. All you had to decide was whether to put it in pre-tax or after-tax money, you could put in more than most people make and no more hassling with your employer’s retirement accounts. It’s kind of dumb like health insurance.

Dr. Jim Dahle:
Why are we buying our health insurance through our employers? Why are we buying our retirement through our employers? Well, the reason why is the 1940s. This was part of the issue. They put in wage limits to try to curb inflation in the 1940s during World War II. So, what did employers do? Well, the same thing that they did in the 1970s, that bank accounts did. When they weren’t allowed to pay you more interest, even though inflation was really high, they gave you free toasters, right?

Dr. Jim Dahle:
Well, in the 1940s employers weren’t allowed to pay you any more wages. So, what’d they do? They gave you benefits. They started providing health insurance. They started providing retirement plans. Actually, I think the 401(k)s came a little bit later, but they started looking at benefits like that to provide you in lieu of salary. And in reality, we’re all probably better off just getting more salary and buying the benefits on the side ourselves. But this is a system we’re stuck with. So, I guess I’ll have a blog explaining all the rules to you.

Dr. Jim Dahle:
All right. Next one comes in from email. “I’m wondering if you would consider doing a podcast and financial implications and benefits of deciding to live child-free”. Well, benefit number one is you don’t have to change any poopy diapers. So that’s a huge benefit right there. I mean, anybody who’s going through the throes of early parenthood can attest that not being woken up in the middle of the night to feed a baby or to change poopy diapers or to deal with a toddler throwing a tantrum or a teenager who’s staying out late. I mean, those are the real benefits of deciding to live child-free.

Dr. Jim Dahle:
But I’m sure there are some financial benefits as well. Kids are really expensive. When you look at these estimates that they make of how much a kid costs, it’s usually $200,000 or $300,000 or $400,000 over the course of their 18 years. I run into White Coat Investors who have $400,000 saved in their kid’s 529s. That alone is a massive sum of money that you could use to invest for retirement or use to get a nice Audi or whatever. And so, obviously the saved money is the main benefit there.

Dr. Jim Dahle:
This person goes on to ask “Where to put the amount saved, besides throwing it away all in taxable?” What’s wrong with taxable? I like taxable. My largest investing account is taxable. Whether you’re investing in real estate, whether you’re investing in stock index funds, whether you’re investing in a municipal bond fund, there’s nothing wrong with investing in a taxable. Once you fill up all your tax protected accounts, if you want to invest more money, you invest in a taxable account and that’s okay.

Dr. Jim Dahle:
What happens is people get this idea that they can’t invest in a taxable account, or they’re just going to get creamed on taxes so they get suckered into buying things like whole life insurance. When in reality, that would have been far better off just opening a taxable account, investing there, paying the taxes and coming out ahead of what they would have had if they had invested in whole life insurance or something like that, or an annuity. They get a lot of annuity sold this way as well.

Dr. Jim Dahle:
What are the asset protection implications? Well, taxable money usually does not have much asset protection. You got to look at your state rules, right? The state law dictates how asset protection law works. If you’re in Texas or Florida paying off your mortgage gives you significant asset protection because you got pretty strong homestead laws. In Utah our homestead laws are pretty weak. They’re only about $40,000, if you’re married, of your home equity, this is protected from your creditors.

Dr. Jim Dahle:
So, in Utah, you’re better off maxing out retirement accounts. And even I think they protect cash value, life insurance and annuities in Utah pretty well, but they don’t do much for your 529s. It’s not a tenants by the entirety state.

Dr. Jim Dahle:
So, what are the asset protection implications of not having kids? Well, your risks are probably lower. So, you don’t have to worry about your teenager running over somebody. That’s about it.

Dr. Jim Dahle:
How do you set up wills and trusts, et cetera? Well, the same way anybody else would set them up, you just don’t have kids that are going to be your beneficiaries. A lot of people don’t use their kids as beneficiaries anyway. They’re leaving money to charity or they’re leaving money to somebody besides their estranged children. So, that’s not particularly complicated.

Dr. Jim Dahle:
One area you might want to spend a little more time focusing on is who’s going to make your end-of-life decisions. Who’s going to be your power of attorney? Who’s going to be your healthcare power of attorney? Maybe you want a living will in place whereas other people might rely a little bit more on their kids.

Dr. Jim Dahle:
Another thing to be thinking about is how you’re going to pay for your elder care? That’s these decisions you make of how you’re going to pay if you have declining capabilities, how you’re going to get healthcare in your home or pay for a long-term care facility? Those sorts of things. When you don’t have kids to take care of you and not the kids always do take care of you, but when you don’t have kids to take care of you, there’s probably a little more emphasis in your financial plan on that.

Dr. Jim Dahle:
Maybe you’re more likely to spend all of your assets. So, maybe you’re more likely to get some sort of a single premium immediate annuity since you’re not planning on leaving any money behind than someone that has kids. But that really comes down to you. Just because you don’t have kids, it doesn’t mean you don’t want to leave money behind somebody.

Dr. Jim Dahle:
This person also asks, “Can I make use of a 529 for my own education?” Yes, you can. You can use that for an MBA. You can use that for pilot training. You can use that for whatever you want, but in general, most people, without kids, aren’t putting a lot of money into 529s. But that’s about all the implications I can think about there.

Dr. Jim Dahle:
The main one is you just build wealth a lot faster. You can retire earlier, and you need to make sure you have a plan for the things that kids usually help with in your older years. You need another way to take care of those things.

Dr. Jim Dahle:
I’ve got a post out there, whitecoatinvestor.com/dinks. Dual income, no kids – DINKS. That talks about a lot of these issues as well.

Dr. Jim Dahle:
All right, our next question and last question on the podcast today comes from Ben who’s got a question about the TSP. Let’s take a listen.

Ben:
Hi, Dr. Dahle. I have a question in regards to TSP transfers. I am currently an active-duty physician in the United States Air Force, but I will be separating from the military later this year. Currently I have investments in the Roth TSP, Roth IRAs at Vanguard and a taxable account at Vanguard.

Ben:
My plan is to transfer my Roth TSP into my Roth IRA at Vanguard. Do you see any particular advantages or disadvantages to this strategy? My main reason for the transfer is primarily to simplify my investment accounts so that I can access all of them in one place. Thank you for all that you do.

Dr. Jim Dahle:
All right, Ben. Good question. TSP situation I was in. I had a TSP when I finished my military service in 2010 and I had to decide what to do with it. And I had a more interesting issue. I had a bunch of tax-exempt money in there that I had contributed while I was deployed. And I was trying to figure out a way to get that into a Roth IRA.

Dr. Jim Dahle:
I was actually able to do that. I essentially rolled out almost all of my money out of the TSP. Once I separated, I rolled almost all of it out and I then rolled the tax deferred money back into the TSP, leaving behind just the tax-exempt money. And then I was able to convert that to a Roth IRA with no tax costs. So that was a pretty cool trick. It doesn’t sound like you’re dealing with that issue.

Dr. Jim Dahle:
You got a bunch of Roth money in there already and you’re trying to decide, “Do I leave it or do I pull it out?” Well, it used to be the TSP had lower costs than anyone else. The truth is now you can go to Schwab, Fidelity, Vanguard, and all the costs are about the same. TSP is still a great investment, great funds in there, but it’s not dramatically cheaper than anybody else. And so, you don’t get that benefit.

Dr. Jim Dahle:
You really are left with only one benefit of the TSP as near as I can tell. That’s not necessarily true, but one main one. The TSP offers the G fund. The G fund is one of my main holdings. It basically gives you treasury bond returns or treasury bond yields with a money market risk. So that’s pretty cool. It’s like a money market fund on steroids and you can’t get that anywhere else.

Dr. Jim Dahle:
Some 401(k)s offers something similar called the stable value fund, but for the most part, this is a TSP unique investment. And so, that was why I kept money in the TSP. I wanted to be able to use the G fund. And indeed today, all of my TSP money is in the G fund. In fact, I can’t even get all my bonds in there because, luckily, I’ve got more money than my bond allocation will fit into the TSP. So that’s a good problem for me.

Dr. Jim Dahle:
But if you are very interested in keeping the G fund in your portfolio, that might be a reason to keep the TSP, otherwise roll it into a Roth IRA. You got again, low costs of Vanguard. You got lots of investment options. The only real downside aside from losing the TSP G fund is you get a little less asset protection in some states. Some states offer a little more asset protection for a 401(k) like the TSP than they do for an IRA.

Dr. Jim Dahle:
So, I guess that’s potential risk there. But for the most part, it’s simplified, there’s more investments, there’s less hassle and most people would probably roll their money into a Roth IRA in your situation.

Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at drdisabilityquotes.com, a long-time White Coat Investor sponsor. One listener sent us this review, “Bob and his team were organized, patient, unerringly professional and honest. I was completely disarmed by his time and care. I’m indebted to Bob’s advocacy on my behalf and on behalf of other physicians and to you for recommending him”.

Dr. Jim Dahle:
Contact Bob at drdisabilityquotes.com today by email him at [email protected] or just call him at (973) 771-9100 to get your disability insurance in place today.

Dr. Jim Dahle:
Don’t forget about our sale. 10% off all items at shop.whitecoatinvestor.com through May 24th at midnight. Remember our anniversary celebration is this week. Leave us a review of the podcast today, the day this video drops, which is Thursday, or this podcast drops, and you may win a WCI Yeti tumbler.

Dr. Jim Dahle:
In fact, of all the promotions we’re running this week, we’re running eight of them this week, I think this is the easiest one to win because it takes the most effort. To go and leave a review at Apple podcasts. And so, I suspect we don’t get three reviews a day. We might only get one review a week. So, if you go on there and only six or eight other people do it, you’ve got a pretty good chance of winning one of those Yeti tumblers. So, go put a review on the podcast.

Dr. Jim Dahle:
Our most recent one comes in from Oye who said, “Mandatory listening. If you want to survive in our society, capitalism is fundamentally exploitative. You do all the work, but the owning class gets all the profits. If you own shares in companies, you are tangentially participating in stealing profits from their workers, which is immoral. However, you have no choice but to participate in this system if you want to survive and actually have a semi-decent retirement, and this excellent podcast will help you do that.

Dr. Jim Dahle:
After becoming a fan of WCI content and consuming a lot of the content across multiple mediums, I’ve learned to become mindful with my spending, saving, and investing. I’ve learned how to invest for the long term with cheap index funds, and have a sensible asset allocation. I’ve asked both stupid and less stupid questions on the Speak Pipe, all of which Dr. Dahle has been kind enough to answer. Hats off to you, thank you, and you’ve earned a permanent fan”.

Dr. Jim Dahle:
Well, that’s really nice. I don’t really care what you put on the podcast reviews. As long as you put a five star review up there, it’ll help other people to find us. So, I appreciate that.

Dr. Jim Dahle:
Please keep your head up, your shoulders back. You’ve got this. And here in the White Coat Investor community, we will help you. We will help you be successful. We’ll help you find the resources you need. We want you to be successful financially so that you can concentrate and become a better partner, a better parent, and a better physician. Thanks for listening.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.