What Is the 4% Rule? | White Coat Investor (2024)

In This Show:

• The 4% Rule
• Pensions and the 4% Rule
• Adjusting the 4% Rule
• Pay Down Debt vs. Invest
• Milestones to Millionaire Podcast
  • Sponsor
  • WCI Podcast Transcript
  • Milestones to Millionaire Transcript

Sponsor: WCI Insurance Recommended List

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 325.

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All right, welcome back to the podcast recording this on June 30th. It's not going to run for like a month though. I think July 27th, this one drops. Today's the day though, the Supreme Court just ruled on President Biden's administration's plan to forgive $10,000 of your federal student loans. $20,000 if you've ever taken out a Pell Grant.

And the Supreme Court, to no one's surprise, took that idea in the corner and dropped an anvil on it. This is not a surprise to any of us that the executive branch cannot unilaterally decide how Congress is going to spend its money. And that's essentially what they're doing with the student loan forgiveness plan.

So, no surprise that was knocked down. And payments are also going to be starting up again here in about a month. So, if you have federal student loans, it's time to start making decisions that you haven't had to make for the last three years. If nothing else, you're going to have to start paying on them.

But some of you have been putting off this decision of whether you're going to go for public service loan forgiveness or refinance your loans for years. And now it's time as those loans start accruing interest again, come this fall, actually starting September 1st. I guess that's technically still summer, whether you want to refinance or not.

And the downside, of course, is over the last year, interest rates have gone up. You may not be able to save nearly as much as you could of a year or two years ago refinancing, but it still may be worth the savings. You got to check it out anyway and at least know what your options are.

If you don't know about our refinancing partners, you should go to the website, go under recommended tab, Student Loan Refinancing. You can also go directly to whitecoatinvestor.com/student-loan-refinancing, and you can get all the links there. If you go through those links, not only do you get cash back that you wouldn't get if you went directly to the company, but we're still giving away at least through September, we're still giving away Fire Your Financial Advisor, our premier flagship online course. So, check that out if you are considering refinancing your student loans.

4% RULE

All right, what else can we talk about today? We're going to be talking about the 4% rule and a couple of questions related to it. So, maybe we ought to start just talking about 4%. What that is, where it comes from.

First of all, I wouldn't call it a rule, it's more like a guideline. You know that line from… What's the stupid pirate movie? Pirates of the Caribbean, whatever they call it. And they talk about the guidelines, the code is not really anything more than a guideline, I think they say in that movie. Well, it's the same thing with the 4% rule.

Where does this come from? This comes from a study done in the 90s down at a university in Texas called Trinity University. And they did the study because prior to this study, in similar studies like it, financial advisors were telling people that if their portfolio is averaging 8% returns or whatever, they could take out 8% a year and be just fine. It turns out that's not true due to what's called sequence of returns risk.

Even if your portfolio averages 8% over the course of a 30 year retirement, if all the crappy years happen early, you can run out of money because the portfolio is dropping in value at the same time you're pulling money out of the portfolio. And so, you have to take out some amount less than the average return of the portfolio.

And how much less? Well, that's what the study was all about. They decided to take 30 year rolling periods from 1927 to the present and look at whether you would have run out of money taking out a certain percentage of the portfolio adjusted upward with inflation each year and see how often your portfolio survived.

And what they found was that if you only take out about 4% a year, adjust it upward with inflation each year, your portfolio is very, very likely to last at least 30 years. Even if one of those terrible things happens, you get a bad sequence of returns, you retire right into the 2000 dot-com crash or the 2008 global financial crisis or World War II or the Great Depression or the 1970s stagflation, you're still highly likely to not run out of money in retirement. That's all they're saying. That's all the study was and it's most useful aspect is to reverse engineer it and use it to kind of give you an amount of about how much you need to retire.

So if you reverse engineer that equation, you'll see that you need about 25 times what you spend in order to be financially independent and no longer need to work for money. So, that's the most useful thing you can use the 4% rule for.

I don't think I know anybody who mechanically follows the 4% rule as a retirement withdrawal strategy. And most people do what Taylor Larimore, author of The Bogleheads' Guide to Investing calls the Adjust as You Go strategy. And that's worked very well for him. He retired in 1980 on like a million dollars and now he's 98 years old or something. He's doing fine, he's not running out of money and like most people, he has more now than he retired with. And so, that's what the 4% rule is all about.

With that introduction, let's take our first Speak Pipe question.

PENSIONS AND THE 4% RULE QUESTON

Speaker:
Hi Dr. Dahle, first of all, thanks for all that you do. I have a question about pensions and how to evaluate them along with the 4% rule. The example I'm thinking through is this. At first the pension will cover just about all expenses in retirement. Let's say year the expenses of $100,000 per year and a pension of $100,000 per year for simplicity and not taking taxes or social security into account.

This starts out great, but the pension doesn't adjust for inflation. So, over time there will need to be a draw from an investment portfolio. I'm trying to figure out how big that starting investment portfolio needs to be to supplement the pension for a safe retirement.

I have a couple ideas, neither of which is perfect but could possibly work, I think. One is to assume, let's say a 30 year retirement length, calculate the present value of the pension, assuming average inflation, add that value to the current value of the portfolio and see if 4% of that total is at least $100,000.

The other is to calculate what $100,000 of living expenses will be 30 years from now assuming average inflation, take the difference between that number and the $100,000 from the pension and see if 4% of the current investment portfolio is at least enough to cover that difference. Any thoughts on these ideas? Any ideas I haven't thought of or anything else I'm forgetting? Thanks again very much.

Dr. Jim Dahle:
Are you an engineer or just an internist? Because you put a lot of thought into something that I don't think a lot of people think a lot about. It's cool that you'll have a pension. Pension's great.

I typically don't try to fold a pension or social security into your asset allocation. I think the right way to think about that is to have it subtract from your need for retirement income so that you need a smaller portfolio because you have a pension or because you have social security or whatever, rather than trying to somehow monetize it and calculate its net present value.

Obviously, if this pension that you're going to get does not adjust to inflation, then you're going to need more. Even if you only need to spend $100,000 a year, you're going to need some sort of a portfolio.

How much do you need? Well, that's a great question. I think you can calculate that out relatively easily. In the first year, you're not going to need anything from the portfolio. The next year you'll need enough to keep up with inflation. Maybe it's 3% or 4%. So, you need that portfolio to provide $3,000 or $4,000. The year after that you're going to need the portfolio to provide $6,000 or $8,000.

And so, you can calculate this out and determine how big of a portfolio you need. I think that's what I would do. I would just assume a reasonable amount of returns. I tend to use 5% real in my long-term calculations and you can just add all that up and see what you'd need over 30 years and just run the numbers that way. I don't think I'd try to do what you're doing. I think I'd just look at it as a separate amount.Now, the truth is though, social security might rescue you there. It may provide the difference that you will need in addition to that pension. This is what my parents are doing. They've got a pension, they've got social security, they've got a nest egg. They're not even spending the stupid nest egg.

I'm just taking their RMDs out each year and reinvesting them in taxable. I keep trying to get them to spend more money. They won't spend more money. I suspect you will end up in a similar situation living on the pension, living on social security, occasionally touching the nest egg and your heirs will be very thankful.

But I think that's the way I would run the numbers if I were going to run them. I think that's the way most financial advisors would run them rather than trying to monetize the pension somehow.

ADJUSTING THE 4% RULE QUESTION

Okay, let's take another one about the 4% rule.

Alan:
Hello, this is Alan from Los Angeles. I was wondering how I should adjust the 4% rule if most of my invested money is in a taxable account and not so much in tax free or tax deferred accounts. I also note that I'm mostly invested in index fund and ETFs. Thank you.

Dr. Jim Dahle:
Well, good job on being invested mostly in index funds and on having tax deferred and tax free and taxable accounts. It sounds like you're doing a great job preparing for retirement.

I would make no adjustments whatsoever to the 4% rule based on the fact that you have a taxable account. Remember, the 4% rule has to include your taxes just like it has to include any financial advisory fees. If you're paying a financial advisor 1% a year, your 4% rule is now a 3% rule. That's just the way it is.

It's the same thing with taxes though. If you're going to have to be paying 25% of your income in taxes in retirement, your 4% rule is now a 3% rule. Most retirees are spending significantly less than 25% of their retirement income on taxes, however. So, keep that in mind.

If you're investing in a taxable account, it's possible that you will have very little of that money taxed. And I'll explain why. First of all, there's a long-term capital gains bracket of 0% that's pretty generous, especially for a married couple.

And same thing as the qualified dividends rate. You can get a lot of that out at 0%. Plus when you sell shares, you generally sell the highest basis shares. So, only 10% of what you're selling might be taxable income anyway. You're paying long term capital gains on $10,000 of a $100,000 withdrawal. And so, that could easily be 0% even if it's not and it's only at 15%. 15% of 10% is like 2%. So you just have this incredibly low effective tax rate withdrawing from a taxable account.

Now if you've nearly drained the taxable account and you're selling shares are almost entirely gains, then maybe you can get that up to 25%-ish or so, with state income taxes. But even so it's never going to be much more than that. So, you just got to pay for your taxes out of those 4% withdrawals. You wouldn't change how you do that based on what type of account it is. Just recognize that your tax bill will be less so you can spend more money because you're spending less on taxes. But it doesn't really change how the 4% rule works.

QUOTE OF THE DAY

Our quote of today comes from Gloria Steinem who said, “You can tell your values by looking at your checkbook stubs.” And in reality what financial planning is, is aligning your spending with what you care about, with what you value. So you're spending your money on the things that are actually going to make you happiest. That's all financial planning is. A budget is not a restrictive thing. A budget provides you freedom because it shows you what you can do with your money and how you can use your money to do those things that you care about most in your life.

RETIREMENT ACCOUNTS AND EARLY WITHDRAWAL QUESTION

All right, let's talk about tax protected accounts for those who want to retire early.

Luke:
Hi Jim, this is Luke, a physician spouse from Northern California. I understand the WCI doctrine is to maximize tax free growth retirement vehicles before turning to a taxable brokerage account in order to achieve your target savings rate.

My wife and I can achieve our target savings for the foreseeable future without ever opening a taxable brokerage account. As we develop our written financial plan, we contrast the WCI strategy with the flexibility centered strategy chosen by Scott Trench of the BiggerPockets enterprise whereby he prioritizes saving cash for real estate and investing in his taxable account.

Jim, what is your defense of the WCI tax efficient and net worth maximizing savings strategy despite the withdrawal restrictions of tax protected retirement accounts for folks interested in the retire early part of FIRE? Thank you so much for all you do for this community.

Dr. Jim Dahle:
Okay, good question. I don't know Scott, but I'm familiar with what you're describing. A lot of people that want to retire early are concerned about the age 59 and a half rule or for 401(k)s and 403(b)s, the age 55 rule.

In that, if you take your money out before those ages and it's not for an approved purpose a.k.a an exception, you have to not only pay any taxes due but you have to pay a 10% penalty. And so, they say, “Well, I don't want to pay a 10% penalty so I'm just going to invest in a taxable account.” And that for most people, most of the time is a mistake. Those withdrawal issues are not as big of a deal as most people think they are.

Now, I suspect what may drive Scott's philosophy is not so much the withdrawal issues, but the investment issues. When you're investing in a 401(k) or a Roth IRA or a 403(b), your investments are generally more limited than what they are when you can invest in anything you want. It's hard to go to your 401(k) and buy Bitcoin. It's hard to go to your 401(k) and buy an investment property. It's hard to go to your 401(k) and invest in an ATM syndication.

And so, if that is what you want to invest in and you don't have much of a taxable account and you don't have any way to get much of a taxable account, I can see why you might think about not maxing out your retirement accounts in order to have a taxable account.

And if truly you can earn enough with that investment that it's worth giving up those additional tax and asset protections that you can get from these retirement accounts, then more power to you, go for it. But as far as this withdrawal concerns, I think it's totally overblown. There are lots of reasons you can get into your retirement accounts before age 59 and a half or for 401(k)s and 403(b)s before age 55.

Let me go over a few of these just to give you some examples and there's more now since Secure Act 2.0 came out. But let me just go over what these are. And I've got a blog post on the blog you can go to. If you just search “The 59 and a half rule” you'll find it.

Okay, so here's some exceptions. Unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income. That may not be that high if you're retired. That's acceptable exception to the 10% penalty.

Medical insurance. That's right. You can buy your medical insurance out of your 401(k), out of your Roth IRA when you're 45 years old and not pay the 10% penalty. If you get disabled, the penalty doesn't apply.

An inherited IRA. There's no 59 and a half rule in an inherited IRA. Qualified higher education expenses for you, your kids, your grandkids, whoever, doesn't apply. A first home. The IRS defines that as a home you haven't owned for the last two years, but it doesn't have to be your first home. It can be your kids' first home, it can be your grandkid's first home. See how that works? You can pull $10,000 out of that account and they gift you $10,000 for Christmas. Okay, well, that may not be ethical, but it seems to be legal.

New child. If you have another kid or an adoption, you can take $5,000 out. If you got to pay an IRS Levy, that's also an exception. If you are a military reservist, you can take money out. That's also an exception. And let's see, what were the ones with the Secure Act 2.0? There's some other ones like if you've been domestically abused now, you can take a withdrawal without paying that 10% penalty. Let me see what other ones there were. There are several others. Yes, the domestic abuse one and the terminal illness. If you get a terminal illness, you don't even have to die or be disabled. But if you have a terminal illness, starting in 2022, you can avoid the 10% early withdrawal penalty.

But you know what the biggest exception to this rule is? Early retirement. Early retirement is an exception to the 10% early withdrawal penalty. Now, in order to retire early, you got to follow a rule they have called the Substantially Equal Periodic Payments rule, which essentially allows you to take out 3% or 4% a year without paying that penalty. 3% or 4% is what it works out to be in your 50s. You have to continue that until you are 59 and a half or until for at least five years, whichever one is longer.

Those are all the ways you can get your money out without paying that penalty. But again, worst case scenario, all your money is in tax protective accounts and you got to pay an extra 10%. Heaven forbid, right? And it's not going to be on everything you ever withdraw out of there, it's only going to be on some of it because you're going to have exceptions for some of that stuff.

And the truth is, the extra tax benefit you get from it over those years is going to be more than the 10% you end up paying. So, don't skip out on using a retirement account to save for retirement just because you think you're going to retire early.

But the truth is, most people, and you might be an exception to this, but most people who retire early also have a taxable account because in order to retire early, you tend to have to save a lot of money. And that tends to be more than you can fit into retirement accounts.

Now some people have lots of retirement accounts where they're really frugal and that doesn't apply to them, but almost every doctor I know who retires early has a taxable account, not because they deliberately built it by skipping out on their tax protected accounts, but just because that's how life worked out.

Right now our taxable account is our largest account. And so, we're never going to have to even think about these exceptions. In fact, we're probably never going to spend any of our money in retirement accounts. It's probably going to be inheritances and going to charity as we're going to live the rest of our lives on our taxable account whenever we stop working. And that sort of situation is far more common among docs that retire early.

But if you're in that really unusual situation where everything you ever save is going to be in a tax protective account and the SEP rule plus the other exceptions just isn't enough for you and you don't think that 10% is less than what you'll save over the years, from that tax protected growth, well, I guess you can skip out on a few contributions to your retirement accounts.

But the main reason people do it, it’s not because of the distribution issues, it's because of investment issues. They just want to invest in their small business. They want to invest in a real estate portfolio. And while you can do that in a self-directed 401(k), you can do that in a self-directed IRA, it's a little bit more hassle.

Don't forget also the asset protection benefits and the estate planning benefits of retirement accounts. In most states, all that retirement account money is protected from your creditors in the event you have declared bankruptcy. That's not insignificant benefit. Plus those accounts can be stretched for 10 years by your heirs when they're inherited. You can just name a beneficiary, no will, no trust needed. So, they're pretty handy accounts.

For the most part, yes, taxable accounts are great. I have a taxable account, but I don't put money in it until I've maxed out my retirement accounts. I hope that's enough of a defense and an explanation of why I do that.

Let's talk about paying down debt versus investing. Every White Coat Investor's favorite question. Here's Mark's version.

PAY DOWN DEBT VS INVEST QUESTION

Mark:
Hey Jim, my name's Mark and I have another pay down debt versus invest question. I'm a 40 year old surgeon making approximately $500,000 a year, including $50,000 of 1099 income. I save approximately 18% to tax protected retirement accounts and another 5% to 10% in real estate syndications. I want to know how to best deploy some additional capital. I have no other debt than a $930,000 mortgage, which is a 30 year fixed at 3%. I would ideally like to pay my mortgage off in 15 years and have the option of going part-time. That requires me to pay an extra $35,000 a year in principal payments.

Because of the mortgage tax deductions on my personal and business income, it seems better to invest this money in taxable. My question is how to best invest this money while still having the option of paying everything off in 15 years.

My asset allocation is currently 65% stocks, 10% bonds, and 25% real estate with a slight small cap value tilt. If I invest in taxable and keep my current allocation, I risk not having the cash to pay the mortgage when I want it. On the other hand, I could invest this money in a side fund with an asset allocation of 60-40 or 70-30 total stock market in a UniBond fund for instance.

I'm not sure what the best plan is. Part of me wants to just keep it simple and maintain my overall asset allocation knowing that if I just stay the course, I'll have enough in taxable even if the market is down. Another part of me thinks I don't need to take this risk given my overall savings rate and I should just take the 3% tax free return.

At the end of the day, the more conservative side fund seemed like the best compromise. What do you think? If using a side fund, how would you invest in it? Anything else I'm missing here?

Dr. Jim Dahle:
Okay, great question. We all deal with this. We all deal with it. When are you going to pay down the debt? Most of us don't want to have debt in retirement. Lots of us would love to be mortgage free by mid-career, but we look at that and we go, “Shoot, if my investments can't beat the interest rate of my debt, I got bigger problems.” And it's true, you do.

When Katie and I were thinking about getting rid of our debt for a couple of years, we invested instead. We invested in taxable and said, “Okay, well, this will probably grow faster than our mortgage rate”, which I think was 2.75% or something. And so, we started that taxable account. And we invested in taxable, invested in taxable, invested in taxable.

And a couple of years later it became silly for us to have a mortgage. It just didn't make sense anymore. It was a trivial part of our life. And we were making more money. White Coat Investor was starting to make money. So over the course of six months we wrote two big checks and paid off our mortgage.

I suspect something like that will happen to you at some point down the road. You may never use this taxable account to pay off your mortgage. You may have a windfall from something else. Maybe you inherit some money, maybe your income goes up. Maybe you end up investing in a surgical center and end up selling it and that's what you use to pay off your mortgage and you never actually touch this taxable account.

I don't think I would have a dedicated taxable account just for this goal. You could if you wanted to, but I think I would just fold it into my regular asset allocation, invest it in my taxable account until such a time that paying off that mortgage becomes a bigger priority for you.

And I suspect at 50 it'll be a bigger priority for you than it is at 40. And maybe you choose to liquidate some of it and pay off the mortgage. Or maybe you just decide to start directing new money toward that because in 10 years’ time, maybe instead of making $500,000, maybe you're making $900,000 and all of a sudden you're looking at that mortgage and the mortgage is down to $400,000 and you're like, “I can just wipe this out” and you choose to do so.

But I think it's reasonable for now for you to continue to essentially invest on leverage. You got a mortgage and you got investments and that's okay. It's okay to have debt, it's not the end of the world. You want to manage it, you want it to be a reasonable amount, you want to have a plan for it but it's not the end of the world to have a little bit of mortgage debt.

I think that's what I’d do. I don't think I'd have a dedicated 60-40 fund on the side. I think I'd just fold it into my overall asset allocation and what that works out to be, even if it's all stocks in there and even if maybe it's down on that date when you want to be mortgage free, heaven forbid, you got to push that date back a year or something.

Chances are you're probably still going to come out ahead. So, that's what I'd do. Good luck with your decision. There's no wrong answer here. And if you're really not sure what to do, split the difference. Put half towards the mortgage and invest the other half.

Okay. Some doctors buy WCI books for new classes of residents or people rotating through their clinic. Thank you if you're one of those who's done that and thanks for spreading financial literacy.

If you would like to do something like that, you should be aware that we offer bulk book pricing for orders of 25 plus books. All orders include the shipping costs and it takes about two weeks to arrive once they're ordered. These aren't coming out of the Amazon warehouse downtown. They're printed after you order them. So, it takes a couple of weeks.

But we sell the original White Coat Investor book, A Doctor's Guide to Personal Finance and Investing for $15.99 each for 25 plus copies. Financial Bootcamp is $16.99 each. The Guide for Students is $17.99 each. And the Guide to Asset Protection is $18.99 each. So, these are significant savings off the list price.

Now there are times when Amazon's selling it for real discounts. You got to look at that and see if they're selling it for even less than our bulk book offering, but most of the time they're not. Most of the time this is a significant savings. And if you want to buy a hundred or more books, we'll give you an additional discount. Just email us [emailprotected] and we'll help you to do a bulk book order.

USING LONG-TERM CAPITAL LOSSES TO OFFSET SHORT-TERM CAPITAL GAINS QUESTION

All right, the next question is from Michael. Let's take a listen.

Michael:
Hi Dr. Dahle. I have a question that seems simple but I haven't been able to get a satisfactory answer by looking at the IRS website or elsewhere. And basically it's to what extent can you use long-term capital losses to offset short-term capital gains? And let's assume that the difference is greater than $3,000. So, it's not in the exempt category for writing off losses. If I had a capital gain of $50,000 for example, could I use that to write off $40,000 of losses? Your help on this would be greatly appreciated. Thanks so much.

Dr. Jim Dahle:
All right, great question. This might be a better question for a blog post than a podcast, but I don't know if you read the blog and you asked it on the podcast. So let's talk about it.

The way to answer this question is to go to Schedule D. Schedule D is the capital gains and losses scheduled on your 1040. If you go there, you'll see that part one talks about your short term capital gains and losses. Part two talks about your long-term capital gains and losses.

In your question we're talking about short-term gains. So you're going to get to the end of part one and you're going to have a gain on line seven of Schedule D. And then you're going to do part two and you're going to go through all that, and by the time you get to the bottom of that, you're going to have a long-term capital loss on line 15.

Then you move into part three and that's the summary. And the first step there is you add 7 and 15 those, two lines, you combine them and enter the results. Essentially you're putting the results together. For the most part, schedule D is treating them as the same. But you got to work through all the fine print here in this entire part three. It says if line 16 is a gain, go to line 17 below. If it's a loss, skip line 17 through 20 below and then go to line 21 and complete line 22.

There's lots of stuff to work through there, but this is where you would work through it is on Schedule D. I can't remember your example, let me pause this for a second and listen to that again and we'll try to use your actual numbers here.

Michael:
If I had a capital gain of $50,000 for example, could I use that to write off $40,000 of losses?

Dr. Jim Dahle:
Okay, you are using $40,000 of long-term capital losses and $50,000 of short-term gains. So, when you combine those, you're going to have $10,000 of short-term gains left. That means line 16 is a gain. So, you put that on line 7 of your 1040. Lines 15 and 16 are both gains. You go to line 18, if you are required to complete the 28% Rate Gain Worksheet, you're not, because that's not a collectible, I assume. Line 19, you don't have to do Unrecaptured Section 1250 gains. Lines 18 and 19 are both zero. Yes.

Then you complete the qualified dividends and capital gain worksheet and the instructions. Presumably you don't have any qualified dividends. You probably do actually, and then you work your way through that worksheet. You don't hit 21 and 22.

Basically what that is telling me as I work my way through there is that yes, you can use your long-term capital losses to offset your short-term capital gains. Straight from Schedule D. If you don't believe me, just pull out Schedule D and work your way through it. And I think you'll see that they will work just fine. Hopefully I didn't miss anything there. I'm sure I will hear from the CPAs listening to this if I messed it up.

WHERE TO FIND THE AMOUNT YOU TAX LOSS HARVESTED QUESTION

All right, another tax question. This one about tax loss harvesting from Adam.

Adam:
Hi Jim. Thanks for all you do and thanks to you and the Physician on FIRE for writing step-by-step guides on how to do tax loss harvesting. I recently put on my adult DIY investor pants and did some tax loss harvesting for the first time at my taxable brokerage account at Vanguard, but at the end I forgot to write down the grand total of the losses I harvested. Now I can't seem to find it. How am I supposed to report this amount to my accountant at the end of the year if I don't know where it is? Perhaps you could explain where on Vanguard's website we find this information. That would be awesome. Thank you.

Dr. Jim Dahle:
Okay, Adam, great question. Good news, you do not have to find it. Vanguard will send you a consolidated 1099 at the start of next year that has that information on it. And all you have to do is send that 1099 to your accountant and they will have all that information so you don't have to find it.

However, you're a White Coat Investor and you're probably interested in finding it. So let me see if I can tell you where you can find that. Go to vanguard.com, log yourself in. I'm doing this as we speak so I can walk you right through it. I'm logging in. Now, it wants to text me a number. All right, so we're going to have text me a number. All right, there's the number, my two factor authentication. All right, I put that in.

I am now logged into my Vanguard account. Now let's pick one of… Well first of all, I got to tell them I don't want to enroll something in eDelivery. All right. And here we go. Let's pick one of my taxable accounts here. All right, now I've clicked on that taxable account and at the top it gives me all kinds of options on a dropdown menu. The first one is Summary Information, but if I go down there, one of those options is realized gains and losses. So let's click on that.

Realized gains and loss. Again, click on that taxable account and it tells me I don't have any. Very unfortunate. Well, that's the way it is. In the last 90 days I don't have any. I don’t know if I've done any tax loss harvesting in 2023. Let's look at 2022 and it will show me once it gets done with the circle of death here, it'll show me that my internet connection is very slow or the Vanguard website is very slow today because it's still giving me the circle of death.

But anyway, once you click that, you select the appropriate dates. It will tell you what all of your realized gains or losses are, and that's what you're looking for. So, if you wanted to find that, you can. I'm not sure why the website's working so slowly for me today. Hopefully it doesn't do that for you. There it is. It came up and it shows me all these great tax loss harvesting I did last year. I got lots of them last year. Yeah, wow. 2022 is not a good year, but at least I got a whole bunch of tax loss harvested that I can carry forward.

So hopefully that's helpful to you walking you through that on the website. But seriously, you don't need to worry about this. You'll get it on your 1099 at the end of the year.

STOCK YIELD ENHANCEMENT PROGRAM QUESTION

All right, the next question is from Tim. Let's see if it's Tim that used to be in San Francisco and now lives in Salt Lake or a new Tim.

Tim:
Hi Jim, this is Tim in Salt Lake City. I have a question about programs through brokers that pay you to lend out your shares to short sellers. In particular, Interactive Brokers has a program called the Stock Yield Enhancement Program that does just that. If you read the fine print, they have caveats including that the shares are not SIPC insured or they may not be protected. Also it can mess up qualified dividends because you get payments in lieu of dividends if they're loaned out. I'm wondering what you think about these programs and whether they're worth the risk and complication for the yield they provide. Thanks.

Dr. Jim Dahle:
Man, we're really out in the weeds now. Funds do this all the time, but anybody can do it. The Vanguard Mutual Funds will lend out securities to short sellers. And when you're shorting something, you have to borrow a security and then you pay for it later essentially. You're hoping you can pay for it at a lower price than what you originally bought it at and it's essentially lent out to you that way.

So, whether you should do this is optional. Can you make some additional money doing it? Yes, you can. Are there downsides? Yeah, while it's lent out, you don't have that SIPC protection. Let's be honest though, that's not worth all that much. And it may affect your dividends as well.

I think Vanguard has one of these programs, as well. I think it's relatively new, but I recall seeing something about it on either a forum or an email that Vanguard sent me. I haven't bothered with it, but Interactive Brokers, which this is a brokerage account that a lot of people use that want to use a margin account because their margin rates tend to be relatively low.

Let's see what their website is saying about it. If you pull it up here at Interactive Brokers, they have their stock yield enhancement program. Basically advertise it as a way to earn extra income on the fully paid shares of stock held in your account by allowing interactive brokers to borrow shares from you in exchange for collateral, US Treasuries or cash, and then lend the shares to traders who want to sell them short and they're willing to pay interest to borrow them.

So, while your stocks on loan, you'll be paid interest on the collateral. For the loan based on market rates Interactive Brokers pays you 50% of a market based rate. And if you've been approved for a margin account there or you have more than $50,000 with them, it lets you do that.

I think it's fine to do, it earns you a little bit more income. This is not the way you get rich though. This is like some little thing on the side. It's like playing games with your credit cards and trying to get some extra rewards. It's going to take a little bit more hassle. Maybe there's a little bit of risk in there, but for the most part it's a little bit of hassle and a little bit of risk for a little bit of reward. Not something I plan to start doing. But it's something that is not crazy to do. This is not a scam. This is not insanity to do this. You can do this if you want.

And they go through the risks and downsides of it. That the loan rates can change, that the shares loaned out may not be protected by the SIPC. That the loans can be terminated any time by interactive brokerage.

That just because you tell them you want to loan it out doesn't mean they will. That the borrower actually has the voting rights on the shares if you care about that. That if you sell your shares or you borrow against them or you withdraw cash from your margin account, then that'll terminate the transaction. But those aren't huge risks. I think that's fine to do if you want to do this. Don't count on it saving a retirement that otherwise is unsavable.

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

Transcription – MtoM – 128
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 128 – Podiatrist pays off his student loans.

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You can do this and the White Coat investor can help. Again, whitecoatinvestor.com/insurance.

All right, we have got a great episode today. We have a doc who has paid off his debt. Stay tuned afterward. We're going to talk about the Dave Ramsey baby steps and maybe how to think about those and how to think about Dave Ramsey and what's going on over there. So, stay tuned after the interview.

GUEST INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Jeffrey. Welcome to the podcast.

Jeffrey:
Happy to be here, Dr. Dahle. Thank you for having me.

Dr. Jim Dahle:
It's wonderful to have you here and we're excited because you have accomplished a not insignificant financial goal. Tell us what you've done.

Jeffrey:
Yeah, main one has paid off $209,000 in 69 months.

Dr. Jim Dahle:
Wow. That's just awesome. So, congratulations. And you said in how many months?

Jeffrey:
Yeah, 69.

Dr. Jim Dahle:
69 months.

Jeffrey:
Yeah. So, just short of three years out of training.

Dr. Jim Dahle:
Okay. That doesn't add up in my head.

Jeffrey:
Oh. Five and a half months of paying it off. But we finally completed two and a half years out of training.

Dr. Jim Dahle:
Two and a half years out of training. Ah, I got it. So you're paying on it during training?

Jeffrey:
Yeah, I was.

Dr. Jim Dahle:
Ah, got it. Now it all makes sense.

Jeffrey:
Sorry about that. I should’ve clarified.

Dr. Jim Dahle:
Yeah. The way I guess I think about it is, yeah, you paid something during training, but it's hard to pay a lot during training. Did you pay off a lot of your debt during training?

Jeffrey:
Yeah, I did. I think a significant chunk. In the first six months when I started with my salary, my wife was still working. She was making around $70,000. And we decided that that first six months of salary would go towards the debt. So, I paid off my federal undergrad loans, which was like $26,000 in that six months, and then just kept going from there.
Dr. Jim Dahle:
Very cool. How did that feel coming into podiatry school with a bunch of undergraduate debt, knowing you were going to borrow more? Do you remember that moment when you're like, “Oh man?”

Jeffrey:
Oh, absolutely. And I don't think I appreciated it at the time, but we were fortunate with the setup between my wife and I as far as trying to be as conservative as possible with borrowing this debt because we luckily had her salary that helped us out. But we certainly didn't want to take more than we needed.

Dr. Jim Dahle:
But still, when you left, when you walked out of podiatry school, how much did you owe?

Jeffrey:
Yeah, with undergrad it was $209,000.

Dr. Jim Dahle:
$209,000. Okay. Wow. Obviously there's people that have more and there's people that have less, but it's a lot of money when you owe it, isn't it?

Jeffrey:
Yeah, absolutely. Absolutely. It kind of hangs on that over your head and there was definitely a behavioral component to trying to get this paid down as quickly as possible.

Dr. Jim Dahle:
Yeah. A lot of people have trouble figuring out how much to pay toward their debt and how much to invest. How did you solve that riddle?

Jeffrey:
Well, unfortunately I didn't find you till about mid-2020. So, there were three years we were advocates of following a Dave Ramsey plan. So, it was a behavioral side of things of just paying it down as quickly as possible. We kind of put savings aside and threw a lot of it at debt. Certainly my wife was saving to her 401(k) so we have a little bit of that left over when she fully stayed at home. But it was all going towards that.

Dr. Jim Dahle:
Very cool. Very cool. And how's it feel now that it's gone?

Jeffrey:
I guess I could share this story now. It was very monumental. I feel like at least in my financial life when it did happen, because it was a large chunk at the very end, it was actually during tax season this past year that had happened. So, there was an unknown, and obviously I'm correcting this as I go on, but unknowingly large check during tax return that just paid a lot of this off which was exciting.

Dr. Jim Dahle:
You made an interest free loan to the government for a while, you said?

Jeffrey:
Yeah, and I don't want to do that again.

Dr. Jim Dahle:
Okay. So, was this whole thing easier or harder than you thought it was going to be?

Jeffrey:
Yeah, it was easy when I wrote those two checks. Actually, we paid off my student loans and we also paid off our car at the same time. And that was a pretty significant chunk too. We had a forerunner, our family grew up, we had two girls and we needed a bigger SUV. So, we paid that off, but it was hard looking back at it because of just some of the sacrifices.

We certainly didn't live on rice and beans, but we certainly enjoyed ourselves throughout the process. But then becoming awakened in 2020 with the help of you, I feel like I could have done things a little bit differently as far as savings and things like that and had a better plan. But now we have a good written plan in place and that makes it a little bit easier than to deal with the debt.

Dr. Jim Dahle:
Yeah. The nice thing about this riddle, however you solve it, you put some toward investments and you put some toward debt or whatever, is that when you're done with the debt, you can then go all toward investments. So it's not like you really lose either way. It's just different strokes for different folks.

Jeffrey:
Exactly.

Dr. Jim Dahle:
Tell us about your income over these 69 months. Part of it you were in training still, I assume. You had some sort of a residency fellowship. You weren't getting paid that much, but tell us about your range of income over that 69 months for your household.

Jeffrey:
Yeah, sure. I was in residency for three years. So, 2017 to 2020 and it ranged from $55,000 to $60,000. My wife was in the technology business and she ranged from $70,000 to $100,000. So, combined, looking at that range. And through that time we were again, just trying to save or put that money towards debt as much as possible. But it was a significant chunk. I was happy that my wife was able to find a good career for herself and work during that time period.

Dr. Jim Dahle:
So you were paying off debt. Were these federal loans or had you refinanced them?

Jeffrey:
My undergrad was federal loans. My medical school was actually private loans. It was like a family loan.

Dr. Jim Dahle:
You were done the federal 0% plan, like a lot of people have been in the last three years.

Jeffrey:
No, and even though the interest rate was extremely reasonable, it was still a behavioral component of getting that paid off and I didn't want that hanging over our head.

Dr. Jim Dahle:
Very cool. Any family money? Did you get an inheritance? Did your parents help you pay for school or was this all on you first generation wealthy person?

Jeffrey:
Yeah, the undergrad loan was help from my parents a little bit. They took out some federal loans as well. And then I had academic loans going into undergrad.

Dr. Jim Dahle:
They borrowed money and they paid off the money or they borrowed the money and you paid off the money?

Jeffrey:
No, it was 50-50. They borrowed a little bit, paid it off. That was their gift to us. But certainly looking at that scenario and what I want to do for my kids, trying to be more proactive and hopefully not being in that scenario where we may not have to borrow. Hopefully we have a UTMA or we already have our 529 set up and then being able to cash flow hopefully some of it too.

Dr. Jim Dahle:
You say you're the last generation that's going to borrow for school.

Jeffrey:
I don't know about that because we don't know what the future holds for us. It's crazy talking to these high school students going into undergrad and what they're paying for school too. I'm in private practice, so we do get some high school students that come in and learn a little bit about podiatry and I give them the financial talk too. Give them that right mindset and hopefully inspire them to think about that as they move forward into undergrad and eventually into medical school.

Dr. Jim Dahle:
Yeah. Hopefully you don't talk them all out of medicine and into going into business and finance.

Jeffrey:
It's up for debate.

Dr. Jim Dahle:
Yeah. That's what happened to at least one of my nephews and one of my kids. They're like, “Wait a minute, dad, you have two jobs and one of them seems better than the other one.”

Jeffrey:
Yeah. I do have to say now that we got this taken care of, a lot of things happened in the past three years. I had two kids, I got board certified and we paid off the debt and I just feel like I'm on the top of the world right now, being able to feel free to make my schedule and being in private practice. And that's one of the things that I would advise is considering private practice or at least a group setting versus a hospital setting. But it's been freeing for sure.

Dr. Jim Dahle:
Tell me nuts and bolts, how'd you do this? It sounds like you're working pretty closely with your spouse, but tell us how you actually did it. You managed to carve out a pretty good chunk of your income and throw it towards debt in the last five years. So tell us how you managed to do that because it’s hard for a lot of people.

Jeffrey:
Yeah, absolutely. The very first thing was getting on the same page with my wife and at the time we were still dating and then eventually married. But we had the same mindset. We came up from a similar upbringing. So we verbally had this idea of wanting to pay down the debt as much as possible, but there was nothing concrete of course following some of the steps of Dave Ramsey.

But it didn't come to a good solid written plan until 2020. But the majority of the debt being paid off, or I should say half of it was those first three years. But just behaviorally just hating that hanging over our heads. So month to month we would budget and we did do a written budget and that certainly was extremely helpful. And seeing those large chunks just being thrown at the debt and seeing that go down.

Since 2017, 2018, we had a paper written list of the $209,000 debt and it hung on the refrigerator amongst our various rentals and we would just cross off every time we would pay off those big chunks and just see that number drop and drop.

And another fun thing that we did, my wife and I, we love wine, so every $25,000 we would have a nice bottle of wine picked out to enjoy together. So, it was definitely a team.

Dr. Jim Dahle:
And now looking back, you're thinking you should’ve done it every $5,000, huh?

Jeffrey:
Yeah, exactly.

Dr. Jim Dahle:
Yeah. We don't celebrate milestones as much as we should. All of a sudden, all the milestones are gone and you're like now we have nothing to celebrate.

Jeffrey:
Exactly. So, it was the little wins. You definitely have to appreciate those little wins to get through it.

Dr. Jim Dahle:
Yeah, for sure. Okay. Advice for someone that wants to do what you did. Let's say they're sitting there coming up at the end of medical school or dental school or podiatry school or pharmacy school or whatever. They know they got a big chunk of debt, they hate it, they don't want to have it, they want to wipe it out relatively quickly. What advice do you have for them?

Jeffrey:
Yeah, absolutely. I definitely took time to think about this because I wish I could tell myself some of these things back when I first started just to be a little bit more well-rounded. But definitely the team approach, like being on the same page with your spouse and going through a specific written plan. And I am definitely the one who's the Excel spreadsheet guy and my wife is not, but she's also the one who introduced me to Dave Ramsey.

So, luckily we had coming from a similar area, but working that out, having conversations, having an open line of communication throughout the entire time, minimizing unnecessary debt. I'm sure you had classmates too who maybe took out more than what they really needed and they're enjoying it, nice restaurants, trips and things like that. But I feel like we stayed pretty modest throughout schooling.

And then frugality. That's going the same lines, that's going throughout all of paying off the debt, enjoying yourself, enjoying the little wins.

And don't put your life on hold. There was a time when after my wife and I got married as far as when we were ready to have kids and things like that, that huge amount just looming over your head and that can sometimes cloud your judgment of the big picture of you living your life. And of course, it's easier now that that's gone. But putting that in perspective you really got to think about that. So, whoever you're with or if you're by yourself, have a game plan for yourself to be able to get through this.

And one thing at least in my field is ownership. That has become a big thing for me. During these three years I also became partner at my practice too, and that opened up my eyes to ownership. And I know you're a big proponent for ownership too. So those are on the horizon moving forward for other things. And I'm so glad that I did that because I loved your recent blog about it's not a vacation, it's a lifestyle and that it was just eye-opening.

And even though not necessarily traveling as much, but I have no problem looking a month in the future, blocking that day off and just let's go down to the Baltimore Aquarium or let's go here, there or there and not think twice about it. Certainly we got to keep the lights on in this practice, but we still need to worry about ourselves and take care of ourselves.

And that's the final thing that I would say is through this journey of financial wellness, I found personal development and putting time and effort into reading books and listening to podcasts. I then looked into more personal development things and just trying to have a good flow through the day, through the months and really working on relationships, making our family stronger and moving forward that way.

Dr. Jim Dahle:
Awesome. Well, congratulations. This is really significant. You should be proud of yourself and what you've done. You have started your career on the right financial foot, you're going to be incredibly successful financially in your lives. You have basically changed. In the words of Dave Ramsey, you've changed your family tree.

Jeffrey:
I appreciate that.

Dr. Jim Dahle:
Your kids certainly, almost surely aren't going to be borrowing for their education and this sort of stuff gets carried forward, generation to generation and you've done this. So, you should be really proud of that and I hope it inspires others to do the same. But thank you so much for coming on the Milestone podcast.

Jeffrey:
Yeah, thank you so much Dr. Dahle. I appreciate it.

Dr. Jim Dahle:
All right. I hope you enjoyed that. It's always beautiful to see someone pay off student loans. I always feel like you're not really done with school until you've paid off the loans and it feels like you just have a whole lot more, not just financial freedom but career freedom once that has taken place. You got options to take different jobs, lower paying jobs, take a risk on a business or an entrepreneurial venture that maybe you couldn't before when you had these big fat student loan payments. I always liked seeing those gone.

FINANCE 101: DAVE RAMSEY BABY STEPS

All right, I promised you we were going to talk about the Dave Ramsey baby steps. Now for those who have no idea who Dave Ramsey is, there's probably not very many of you, but there's probably some of you out there.

Dave Ramsey is a TV radio host. I guess more radio than TV who's been kind of dispensing financial advice over the airwaves for the last 25 years or so. He was kind of at the tail end of his career, trying to figure out how to pass his empire on to his daughter, it sounds like.

But over the years he's come up with a relatively simple plan. Some might describe it as simplistic or overly simple, but a simple plan to help people to make some progress in their finances.

And the nice thing about a simple straightforward plan is it's easy to remember, easy to implement and relatively easy to do. The problem is when it comes down to something like this is kind of what Einstein said, that you want to make things as simple as possible but not simpler. The problem with the baby steps, sometimes it makes things maybe simpler.

There's always this issue of trying to decide between the proper behavioral solution and the proper mathematical or intellectual solution. Because the truth is, most people that get into debt trouble have got a car loan and four credit card loans and a personal loan and a mortgage and a HELOC.

And the reason they have debt is not because they can't do math. The reason they have debt is because they have bad financial behavior. And so, I think Dave recognizes this, that there's a whole lot of people out there with just bad financial behavior.

And the nice thing about these baby steps is they're pretty good at correcting bad financial behavior. If you follow them, you will get wealthy eventually. It might not be the very best way, it might not be the most mathematically correct way. You might leave a little money on the table following the baby steps, but they're going to work. It's not like doing this doesn't work for doctors. It absolutely does.

So, let's talk about his baby steps. His step one is to save $1,000 for what he calls a starter emergency fund. This is something you could use to replace a dryer that goes out or you blow a tire and you need to replace the four tires on your car. That keeps you from having to borrow more money. You can now use your emergency fund to pay for that and then rebuild your emergency fund.

Once you have $1,000 sitting in your checking account, he moves you on to step two where he wants you to pay off all of your non-mortgage debt, everything. Student loans, personal loans, car loans, credit cards, whatever. Anything that's not a mortgage he wants you to pay it off in step two before doing anything else. That's right, before investing, before putting money in your 401(k), before getting your 401(k) match, before doing anything else.

And the nice thing about doing it this way is you have this intense focus on the goal. Every spare dollar you can get, this is kind of his beans and rice stage. He doesn't want you eating out, he doesn't want you to see the inside of a restaurant unless you work there and everything is going toward your debt. And that's great. Does it work? Yes. Is it more harsh than maybe you need to be if you're making $375,000 a year? Probably, but it works.

Once you've paid off all that debt, you move on to step three and this is where you get a real emergency fund, which is the classic three to six months’ worth of your expenses sitting in checking or savings or a money market fund, et cetera.

Once you've got that emergency fund in place, you've paid off all your debt, you've got your emergency fund in place, now you can invest. And he recommends you save 15% for retirement. 15% works for the average American for a couple of reasons. One, their career is relatively long. If you start working at 18 and you work till you're 65, that's a lot of years. That's 47 years, that's a long time. And so, 15% works for that.

The other reason 15% works for the average American is because social security will make up a bigger portion of the retirement spending than it will for most high income professionals.

My recommendation on retirement savings is 20% because you are starting later. Most of you aren't starting saving for retirement until 30 to 35. That first 12 years, gone. You spent that in undergrad, medical school, residency, fellowship, et cetera. It's gone.

And social security, while it's going to be there for you in some form or another, isn't going to make up as large of a percentage of your retirement income as it will for the typical American. And so, 20% is the number.

And if you do that, if you carve out 20% of your income from the time you get out of your training and you work a typical career, you work 25, 30 years, you will have enough money to maintain your lifestyle in retirement. Same lifestyle you had before you retired, you'll be able to maintain in retirement. 20% is the number there.

Dave Ramsey's step five is to start saving for your children's college. And I like that this comes after step four because it's true. You should prioritize retirement before college. You got more options for college.

If you don't have any college savings for them, what can they do? Well, they can work in the summers, they can work during the school year, they can get scholarships, they can go to a less expensive school. They can even borrow. You're not going to get student loans for retirement. But they can still get student loans for college to pay for an inexpensive private or state university. You can still borrow for that. I like where that step comes in after you've got kind of retirement on track. Not your retirement fully funded, but your retirement on track.

Step six for Dave is paying off your home early. This is where the mortgage debt comes in and he likes to see you free and clear. I kind of feel similarly. Our mortgage was paid off after seven years after we got in the house. We had it on a 15 year. I just don't like carrying mortgage debt into retirement.

Yes, I know how leverage works. I know that if you're borrowing at 2% or 3% and earning it 10%, you're coming out ahead. But you know what? You just have a lot more ability to take risk in your career, in your finances when you don't have that mortgage debt sitting over your head.

So, I don't have a problem with that one coming in at this point because step seven is where it gets all vague. He calls it build wealth and give. Well, okay, that's just everything else in your financial life. Maybe you're mixing some of that in with the other steps. Life can be a little bit more complicated. You don't have to follow this exact formula to become wealthy. Will it work? Yeah, it'll work.

And if you're having trouble with debt, if you keep finding yourself getting into debt over and over again, maybe you need this rigid of a plan. But most doctors, most dentists, most podiatrists, whatever you are, attorney, small business owner, tech worker, whatever, high income professional of some kind, you're going to be able to take care of this stuff. You can just afford to make more “mistakes” if you will and still be successful.

So, if you've never heard of that, I think the baby steps are useful to know. But you don't have to treat Dave like he's some sort of guru or somebody that can do no wrong. Lots of people criticize Dave and his business practices for various reasons.

I don't like the fact that he refers you to financial advisors that are really commissioned salesmen, for instance. There are people who don't like the way he runs his business with a bit of an evangelical focus.

I think he got into some trouble recently with one of his partners that was helping people to get out of timeshares. And it turned out this timeshare exit team was kind of a scam too, which was unfortunate because lots of people don't want to be in their timeshares and they can't get out of their timeshares and anybody that will help them seems like doing a good deed, but maybe not always.

There's plenty of things you can criticize Dave about, but I think it's worth learning the baby steps. Take what you find useful, leave the rest like anything else in personal finance, including everything I say.

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All right. If you want to come on this podcast, the Milestones podcast, you apply at whitecoatinvestor.com/milestones and we'll celebrate what you've done and use that to inspire somebody else to do the same.

Till next time, keep your head up, shoulders back, you've got this and we can help.

DISCLAIMER

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