Today, we talk about if it is reasonable to use 457(b) money to help fund your child’s college education, how to do a 401(k) rollover and then how to rebalance it, if it makes sense to do Roth contributions in your peak earnings years if you plan to retire early, and if it is ever a good idea to over-fund a Roth IRA. All of that and more of your questions are answered below.
Roth Contributions During Peak Earning Years
“Hi Dr. Dahle, thank you so much for your generosity and teaching. My family is first generation, and we didn’t know anything about financial planning in the States. You have changed our lives.
My partner and I are both physicians on W2 income without state income tax and with a very low cost of living. We save/invest 75% of our post-tax income every year, and we’re in the highest federal tax bracket. If our intention is to retire early and move to New York near family, does it make sense to make Roth contributions now to our 401(k)s during our peak earnings years to avoid state tax later with Roth conversions while living in New York?”
The tax-deferred vs. tax-free contribution thing, it can be incredibly complicated. You’ve all heard the rule of thumb: peak earnings years use tax-deferred money, and in non-peak earnings years, you do tax-free Roth contributions. But there are lots of exceptions to that. The main one white coat investors run into is if they’re supersavers. If they’re just saving a ton of money, they’re going to work a long career, they’re going to be in a higher tax bracket in retirement than they ever are during their career. Well, those people probably ought to be doing more Roth contributions and Roth conversions as they go along. But there are lots of exceptions, right? Maybe they’re planning to leave a bunch of money to charity. Tax-deferred money is the best money left to charity.
In this situation, she has kind of a unique situation. Not only do they save a ton of money, but they’re also planning to retire early and they’re planning to go from a tax-free state (let’s say Florida) to a pretty heavily taxed state (let’s say New York). In that case, that would make you want to do a little bit more Roth than you otherwise would because you’re getting out of that state tax. You’re getting a state tax arbitrage. I agree with that. I think I would do more Roth in that sort of a situation if I knew I was going to go live in New York later when I was withdrawing that money. Certainly, when you’re saving 75% of your income, that also makes an argument to put lots of savings into Roth. That makes you more like a supersaver.
But retiring early is just the opposite. That is a factor that should make you do more tax-deferred because you’re going to have more time that is not a peak earnings year, more time to do Roth conversions later in a low tax bracket. There are multiple factors we’re weighing here, but I suspect that they won’t regret doing a pretty high percentage of their money into tax-free accounts by making Roth contributions.
More information here:
Deliberately Over-Funding Roth IRA
“I have a question about deliberately overfunding a Roth IRA. I hear there is a 6% excise tax on any Roth funds over the contribution limit. Yet, if that tax is only on the over-contributed money the year it is contributed, then the tax-free growth of that money should overcome that penalty and do better in a few years than the same money if it was just put in an after-tax brokerage account. Am I missing something?”
I appreciate you calling in with this question. Yes, you are missing something. It is a 6% tax every year. Every year you leave the money in there, you have to pay 6%. Somehow you’ve got to magically outperform your taxable account by 6% a year in order for this to work out well for you. You’re almost surely not going to be able to do that. Don’t over-contribute to your Roth IRA. Bad idea. Just do the regular contribution. If you want to save more for retirement, just do it in a taxable account. Good question.
More information here:
Asset Protection and Individual 401(k)
“My question is regarding rolling over my prior employer retirement accounts to my individual 401(k). I have a governmental 457, a 403(b), and 401(a) with my previous employer, which I plan to roll over into my individual 401(k). My question is asset protection wise. Are employer-owned retirement accounts any different from an individual 401(k) in regards to asset protection? My other question is: is it state dependent? To give you context, I plan on moving to California.”
Yes, there are asset protection concerns here. The first one is that you live in Illinois. The second one is you’re thinking about going to California. Those are asset protection concerns above and beyond anything you do with your retirement accounts. There are other places to practice that might be a little kinder on the malpractice side than those two particular locations. But yes, this sort of stuff is state-dependent. As a general rule, you will have less asset protection on assets that are in an individual 401(k) than you will in an ERISA retirement plan. Of course, that 457 plan is accessible to your employer’s creditors but not to any of yours. That’s deferred compensation. But the 403(b) and 401(a) get some pretty serious asset protection. Basically, they’re 100% protected. If you had to declare bankruptcy, you get to keep everything in that 403(b) and in that 401(a).
Now IRAs and individual 401(k)s: these non-ERISA protected retirement accounts also get pretty good protection in most states. It’s not necessarily in your state where you have less protection, but this is a state-by-state thing, so you need to look these things up. Personally, the place I look this stuff up is what I consider to be the best book on asset protection for doctors out there. It’s called The White Coat Investor’s Guide to Asset Protection. Yes, I wrote it, mostly to answer questions like these. When I get these questions, I open the book and about half the book is a list of state-specific asset protection laws. I get in there, and I scroll down to Illinois.
Let’s go to Illinois and see what it says about asset protection with regard to non-ERISA retirement accounts. It says here that IRAs, as well as individual 401(k)s, get 100% protection in Illinois. So, no big deal there. As far as Illinois is concerned, I wouldn’t think twice. Go ahead and roll that over into your individual 401(k). Obviously, your individual 401(k) needs to allow these rollovers. Check on that first.
But you’re going to California, so we’re also going to care about California law. Let’s turn to California. Scroll down to that. What do we find? We find that IRA protection is not as good as in Illinois. It is to the extent necessary for support and actually no protection for Roth IRAs. IRA protection in California is kind of poopy as far as asset protection goes. What does that mean to you if you’re going to California? Maybe you don’t want to move the money into that individual 401(k) because it’ll have less asset protection. The extent necessary for support could be a very small amount, probably less than most doctors end up with in their retirement accounts. If asset protection is a big concern to you, you may want to leave that money right where it is right now or move somewhere besides California.
More information here:
If you want to learn more about the following topics, check out the WCI podcast transcript below.
- 401(k) rollover/rebalancing
- Spending 457(b) money to help with kids’ college
- Combining kids’ retirement accounts
Milestone to Millionaire
#141 — Doctors Pay Off Student Loans Before Even Finishing Training
This hospitalist and cardiology fellow couple paid off almost $400,000 of student loans before they were both out of training. They put their noses to the grindstone and put all of their money to their loans. They said they are naturally not big spenders but were not financially literate until a few years ago when they found WCI. Once they knew what they needed to do, they wrote a financial plan, made a budget, and reduced their spending even more. It took them less than three years to pay off all of their student loans.
Finance 101: The Importance of Saving
Dr. Jim Dahle recently wrote an article titled, “The Secret to Being Rich Is to Not Buy Anything.” While the title might seem extreme, the essence of the message is clear: true wealth is not about spending extravagantly but rather about saving and investing wisely. Many people aspire to become millionaires, but the real path to wealth lies in resisting the urge to spend every dollar earned. This means making deliberate choices to save and invest rather than giving in to immediate desires.
The key takeaway is that building wealth hinges on your savings rate, which is determined by how much money you save compared to your income. The goal should be a 20% savings rate for high-income professionals with any additional savings going toward specific goals like college funds or dream vacations. This approach encourages you to prioritize long-term financial security over short-term indulgence. By consistently saving and investing, you can secure a comfortable retirement and financial peace of mind for the future.
You should evaluate your spending habits and prioritize experiences and purchases that genuinely bring you happiness. Whether it’s choosing a reasonably priced mountain bike over an expensive one or finding joy in simpler, cost-effective travel options, the idea is to be mindful of spending and focus on what truly matters. It is far too easy to spend mindlessly on things that we do not value. When you add all of that up, the amount of money we waste on things we don’t need or care about can be shocking. Ultimately, the key to wealth lies in a balanced approach to spending and saving, enabling you to achieve your financial goals while enjoying life along the way.
To learn more about the importance of saving, read the Milestones to Millionaire transcript below.
As healthcare evolves, it means greater opportunities for you. You can learn about the growing need for locum tenens from the creators of the industry, CompHealth. These short-term assignments allow you to pay down your student loan debt faster or earn extra income. Locums also provide flexibility of schedule and location for better work-life balance. In addition to assignments across the US and abroad, CompHealth provides personalized, high-quality service—which means exploring additional options, such as a medical mission, telehealth work—or even a permanent position, and help with your CV, contract negotiations, and more. Connect with an expert at CompHealth.com.
WCI Podcast Transcript
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 338.
When you’re exploring career choices, consider locum tenens for the sheer number and variety of options. You probably know locums is great for short-term commitment, but do you know all the other ways it provides flexibility? The best way to research the vast world of locums is to talk to an expert.
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All right, welcome back to the podcast. It has been a podcast marathon this morning here at White Coat Investor Headquarters. This is the sixth podcast we’ve recorded today, which is pretty good considering I’m on two days in between canyoneering trips. I just got back from one leaving for another one tonight.
While you’re out there working hard, I’m canyoneering so sorry about that. But thank you for what you do. It does matter. I stopped by the ER last night, needed to get an X-ray on one of my kids who got checked from behind. Luckily it turned out to be fine, but it’s true. This goes on even when we’re on vacation or trips or adventuring, the medical system continues to function and I thank you for that.
SPEND 457(b) MONEY TO HELP WITH KIDS COLLEGE QUESTION
All right, let’s get into your questions. Our first one is not coming from a doc, it’s coming from a firefighter.
Good afternoon. My question is simply this. I was a firefighter for a government township position and had a 457(b), which now I own. I have retired and I have use of it. It’s in the $400,000 range. And I was wondering at age 58, I do have a pension, if you think it’s a good idea to use any of it for my children’s college tuition, taking disbursements over a period of time to help them with their burden and keep their loans lower, but still maintain a balance that I can invest in as I’ve left it with the township that I originated the 457 with. I have not rolled it anywhere. That’s my question. Let me know what you think.
Dr. Jim Dahle:
All right, good question. I need more information to really give the best answer, but let me just talk generally about this. First of all, with 457s, you can have a lot of different options for distributing that money when you leave. One of which is often just rolling it into an IRA where you have a little bit better control of it. It’s not under the control of that township anymore. Maybe your expenses go down, your investment options are probably better. So, that’s generally what people do.
Now, if you’re still working and trying to fund a backdoor Roth IRA each year, you wouldn’t want to do that. You’d want to use a different option, but leaving it there is probably not the right move unless you’re just still under 59 and a half and trying to avoid that rule or some other reason like that. Maybe consider rolling that over, number one.
Number two, whether you should use that money to help your kids or different money, it really doesn’t matter all that much. It’s all kind of the same. If you had a big taxable account maybe I’d tap that first rather than getting into the 457 money just because it doesn’t grow tax protected. But if you don’t have other money, then sure, there’s nothing wrong with using the 457 money.
Now, whether you should help your kids with their college is a different question and that depends on how wealthy you are. If you have enough and to spare, sure, help them out. But in general, you need to take care of your retirement first and then help your kids with their college. I don’t really get a sense for where you’re at, whether you can afford to help them a lot. If you can, sure, help them. And if you want to use the 457 money to do that, that’s okay, too.
What’s the alternative? The alternative is them taking out loans or going to a cheaper school or them working themselves or applying for scholarships. Well, obviously encourage all of that stuff, but it’s okay to use 457 money to pay for college. There’s nothing wrong with that.
401(k) ROLLOVER/REBLANCING QUESTION
The next question comes from Mike.
Hi Jim, this is Mike in New York. Thanks for all your content. We really appreciate it. It’s mid-August now and I’m in the midst of a 401(k) rollover/rebalancing process. Currently, I have a chunk of money sitting in Vanguard Settlement Fund or Federal Money Market Fund that per my investing plan should be invested in a total bond fund.
Currently, however, the money market yields are higher than those of the bond fund and the risk is lower. Do you see any problem in this environment leaving this “safe money” in a money market fund rather than bond fund? Thanks for all you do and take care.
Dr. Jim Dahle:
The question I have for you, Mike, is what does your written investing plan say? Does it say look at the yields between cash and bonds and choose the one that yields the highest and put your money in there? Or does it say put your money in a total bond fund? Whichever one it is, that’s what I’d do. I think it’s far more important that you follow your plan than what the plan necessarily is.
Now, right now we’re operating under an inverted yield curve, meaning that the shortest term fixed income securities have higher yields than the medium and longer term securities. And so, that’s why cash is paying more.
Now, when that happens basically the market is telling you that this is not a long-term situation. It doesn’t make sense in the long run for you to be able to get paid more on cash than to take more term risk. Lock your money up for 10 years in a 10 year treasury bond or something. That doesn’t make sense. And so, the market is basically saying, we don’t expect this situation to last very long.
So, how can it resolve? It can resolve in two ways. One, short-term yields can go down and long-term yields can go up. One or the other is going to happen eventually because this isn’t a normal situation. Now which of those is going to happen? I don’t know. But the answer to your question requires knowing that.
If the short term yields are going to go down, or if bond yields in general are going to fall, interest rates are going to fall, then you’re better off being in bonds just before they do. Because you get a little kicker increasing the value of your holdings when interest rates fall and you own bonds. That doesn’t happen with cash. So that’s one reason why you might want to own bonds.
On the other hand, if it’s going to resolve the other way in that long-term yields are going to go up, that’s going to hurt the value of bonds. You would be better off sitting in cash. I don’t know which one of those things is going to happen. I’m really not sure. And so, that’s why I tend to stick to my plan. Sometimes it’s going to work out well for me, sometimes it’s not. But over the long term it’s going to work out just fine. I don’t try to time that little sort of stuff.
Now as far as your cash goes, money that you have in short term accounts for whatever reason, whether it’s an emergency fund or short term savings or whatever, I’m perfectly fine with you bouncing that around. If you can make more in a Vanguard money market fund, stick it there. If you are going to come out ahead after tax using a municipal money market fund, fine, stick it there. If you’re better off at a high yield savings account at Ally Bank or Discover Bank or those sorts of places, fine, put the money there. That’s all okay.
But now we’re talking about changing your investment plan and going from bonds to cash. They’re not the same thing. They don’t act the same. And while you might be able to time the market fine and get into cash when cash does better and get back into bonds when bonds are doing better, chances are you’re not going to be able to do that and shouldn’t bother spending the time trying and that’s what you’re talking about doing.
So, I would follow your plan. If you want a different plan, rewrite your written financial plan, but I thought your plan was fine so I’d probably just stick with that one. I am not taking all my money out of bonds and putting it in cash right now. I can tell you that.
All right. Our quote of the day today comes from Robert Kiyosaki who said “Financial freedom is available to those who learn about it and work for it.” Well, I don’t agree with everything Robert Kiyosaki’s ever said. I certainly agree with that.
ROTH CONTRIBUTION DURING PEAK EARNING YEARS QUESTION
Our next question comes off the Speak Pipe. By the way, if you’d like to leave a question on the Speak Pipe, you can do so, whitecoatinvestor.com/speakpipe. You can leave a question of up to a minute and a half on there. Don’t feel like you have to use all the time and we’ll get it answered on the podcast. But this one comes from Sarah.
Hi Dr. Dahle, thank you so much for your generosity and teaching. My family is first generation and we didn’t know anything about financial planning in the states. You have changed our lives.
My partner and I are both physicians on W2 income without state income tax and with a very low cost of living. We save/invest 75% of our post tax income every year and we’re in the highest federal tax bracket.
If our intention is to retire early and move to New York near family, does it make sense to make Roth contributions now to our 401(k)s during our peak earnings years to avoid state tax later with Roth conversions while living in New York? Thank you so much for the opportunity to ask my questions and for all you do.
Dr. Jim Dahle:
All right. Well, the tax deferred versus tax-free contribution thing, it can be incredibly complicated. You’ve all heard the rule of thumb, which is peak earnings years use tax deferred money and in non-peak earnings years you do tax free. Roth contributions.
But there are lots of exceptions to that. The main one White Coat Investors run into is if they’re super savers, if they’re just saving a ton of money, they’re going to work a long career, they’re going to be in a higher tax bracket in retirement than they ever are during their career. Well, those people probably ought to be doing more Roth contributions and Roth conversions as they go along. But there’s lots of exceptions, right? Maybe they’re planning to leave a bunch of money to charity. Well, tax deferred money is the best money left to charity.
In this situation, Sarah’s got kind of a unique situation. Not only do they save a ton of money, but they’re also planning to retire early and they’re planning to go from a tax-free state, let’s say Florida to a pretty heavily taxed state, let’s say New York. In that case, that would make you want to do a little bit more Roth than you otherwise would because you’re getting out of that state tax. You’re getting a state tax arbitrage.
And I agree with that. I think I would do more Roth in that sort of a situation if I knew I was going to go live in New York later when I was withdrawing that money. Certainly when you’re saving 75% of your income, that also makes an argument to put lots of savings into Roth that makes you more like a super saver.
But retiring early is just the opposite. That is a factor that should make you do more tax deferred because you’re going to have more time that is not a peak earnings year, more time to do Roth conversions later in a low tax bracket. And so, there’s multiple factors we’re weighing here but I suspect that they won’t regret doing a pretty high percentage of their money into tax-free accounts by making Roth contributions.
DELIBERATELY OVERFUNDNG ROTH IRA QUESTION
Let’s take a question from Andrew.
I have a question about deliberately overfunding a Roth IRA. I hear there is a 6% excise tax on any Roth funds over the contribution limit. Yet, if that tax is only on the over contributed money the year it is contributed, then the tax free growth of that money should overcome that penalty and do better in a few years than the same money if it was just put in an after-tax brokerage account. Am I missing something?
Dr. Jim Dahle:
Andrew, good thought. I appreciate you calling in with this question. Yes, you are missing something. It is a 6% tax every year. Every year you leave the money in there, you got to pay 6%. So, somehow you’ve got to magically outperform your taxable account by 6% a year in order for this to work out well for you. You’re almost surely not going to be able to do that. So, don’t over contribute to your Roth IRA. Bad idea. Just do the regular contribution. If you want to save more for retirement, just do it in a taxable account. Good question.
All right, for those of you who are not aware, you can be a White Coat Investor champion, but only if you’re a first year medical or dental student. This is our White Coat Investor Champions program. Basically we’re trying to give away a free copy of the White Coat Investors Guide for Students to every first year medical and dental student in the country.
Now we’ve had 407 different schools participate in this program. Since its inception in 2021, we have distributed 56,718 copies of that book so far. That’s over a million dollars’ worth of books that we have given away. And we think it’s a worthwhile thing to do because it contributes to our mission to help those who wear the white coat get a fair shake on Wall Street, to help you stop doing dumb stuff with your money. We figure what better time to give you this information than right at the beginning.
But we need people to help us with this program. We cannot afford to send out books individually to every single one of these students. We must send them out in bulk and have somebody in the class distribute them to the rest of the class. That person is the champion.
All you have to do is pass out books. It’s super easy. You’ll get two or three boxes of books on your doorstep. You take them to class, you pass them out. That’s it. If you’ll do that, not only will you be a hero to your classmates because you’re probably on average save them like $2 million a piece over the course of their career. But we’ll also send you some swag, we’ll send you some WCI specific items and you’ll get some cool stuff, you’ll be the champion for that year.
So thanks so much for those who have already volunteered to do it. For those who have not yet volunteered to do it and don’t have another champion in their class, please apply, whitecoatinvestor.com/champion. Once this year goes by, you’ve missed your chance. We’re not sending them to second year and third year students. We’re only doing this for first years. Somebody in your class needs to do it this year. Why not you?
If you know a first year student, please forward this to them, encourage them to be their class’s champion as well. I think last year we got it to like 70% of medical students and we’d sure love to get that number up closer to 100%. So let’s do the best we can this year and help boost financial literacy throughout medical and dental schools and do the best we can.
COMBINING KIDS RETIREMENT ACCOUNTS QUESTION
All right, the next question comes from Shareen again off the Speak Pipe. Let’s take a listen.
Hi Jim. This is Shareen from Florida. My 18 year old daughter had about $1,500 in a Roth 401(k) plan from her high school job at a chain restaurant. She is now in her first year of college and is not working at this time.
I helped her roll the Roth 401(k) money into a rollover IRA at E-Trade. I chose E-Trade because of their low fees. She also has a Roth IRA with Vanguard that she contributed earned income to before she was eligible for the 401(k) through her previous job. I would’ve liked to transfer the Roth 401(k) money directly to her Roth IRA, but I couldn’t find an option online at Vanguard to do that.
Assuming that she’ll eventually be a high income professional and assuming the backdoor Roth process is still around when she gets there, what do we do with the rollover IRA money now to avoid a future pro rata problem? It’s a small amount now, but since she’s only 18, I imagine if we just left it in the rollover IRA account at E-Trade, it will eventually have significant gains and the account will grow.
Since the money in the E-Trade account is after tax Roth money, can I simply transfer to her Roth IRA at Vanguard? Should we do something else with it? Your help and advice is appreciated. Thank you.
Dr. Jim Dahle:
All right, good question. I think you’ve unnecessarily complicated your life by getting E-Trade involved here. I think you said it was a Roth 401(k), the money was in. So this is already post-tax money. If somehow that ended up in a traditional IRA, there’s a problem. There’s been a mistake made and it needs to be corrected.
Even if you rolled that money into E-Trade, it should be in a Roth IRA, not a traditional IRA. So, get that problem fixed first. And of course, you can then transfer that over to Vanguard. You mentioned you like the low fees at E-Trade. Well shoot, Vanguard basically doesn’t have any Roth IRA fees and their expense ratios are super low. If you like low fees, Vanguard’s usually where most people end up.
But in this case I would put those accounts together just for simplicity’s sake. Who wants to have some random $1,500 retirement account sitting out there? Get it combined, just get it into that Roth IRA at Vanguard. If you can’t figure out how to do it online, pick up the phone. Yes, sometimes there’s a bit of a wait on the phone at Vanguard, but I think they’ve done a pretty good job hiring over the last year. They seem to be picking up the phone faster and faster and have them show you exactly how to do it. There’ll be some paperwork to fill out, you might have to fill it out and send it back in by snail mail or something. That’s no big deal.
But get that money all together. You don’t want to be managing these multiple retirement accounts all over the place. And if for some reason I was wrong and that wasn’t Roth 401(k) money, it’s all tax deferred money. This is a great time to do a Roth conversion, so I’d still move it into that Roth IRA at Vanguard. Probably not going to be any tax due anyway. Your daughter probably doesn’t have enough income that she has to pay tax. So, a great time to do a Roth conversion. I hope that’s helpful.
ASSET PROTECTION AND INDIVIDUAL 401(k) QUESTION
All right, our next one comes from Kalian. I hope I’m saying that right, and we’re going to find out I guess.
Hi Jim, this is Kalian from Illinois. My question is regarding rolling over my prior employer retirement accounts to my individual 401(k). I have a governmental 457, a 403(b) and 401(a) with my previous employer, which I plan to roll over into my individual 401(k). My question is asset protection wise. Are employer owned retirement accounts any different from an individual 401(k) in regards to asset protection? My other question is, is it state dependent? To give you context, I plan on moving to California.
Dr. Jim Dahle:
Okay, good question. Yes, there are asset protection concerns here. The first one is that you live in Illinois. Second one is you’re thinking about going to California. Those are asset protection concerns above and beyond anything you do with your retirement accounts. There are other places to practice that might be a little kinder on the malpractice side than those two particular locations.
But yes, this sort of stuff is state dependent. And as a general rule, you will have less asset protection on assets that are in an individual 401(k) than you will in ERISA retirement plan. Of course, that 457 plan is accessible to your employer’s creditors, but not to any of yours. That’s deferred compensation. But the 403(b) and 401(a) get some pretty serious asset protection. Basically they’re 100% protected. If you had to declare bankruptcy, you got to keep everything in that 403(b) and in that 401(a).
Now IRAs and individual 401(k)s, these non-ERISA protected retirement accounts also get pretty good protection in most states. And so, it’s not necessarily in your state where you have less protection, but this is a state by state thing, so you need to look things up.
And personally, the place I look this stuff up is what I consider to be the best book on asset protection for doctors out there. It’s called The White Coat Investor’s Guide to Asset Protection. Yes, I wrote it, mostly to answer questions like these. So, when I get these questions, I open the book and about half the book is a list of state specific asset protection laws. I get in there and I scroll down to Illinois.
So, let’s go to Illinois and see what it says about asset protection with regard to non-ERISA retirement accounts. And it says here that IRAs and as well as individual 401(k)s get 100% protection in Illinois. So, no big deal there. As far as Illinois is concerned I wouldn’t think twice. Go ahead and roll that over into your individual 401(k). Obviously your individual 401(k) needs to allow these rollovers. So, check on that first.
But you’re going to California, so we’re also going to care about California law. So let’s turn to California. Scroll down to that. And what do we find? We find that IRA protection is not as good as Illinois. It is to the extent necessary for support and actually no protection for Roth IRAs. IRA protection in California is kind of poopy as far as asset protection goes.
So, what does that mean to you if you’re going to California? Maybe you don’t want to move the money into that individual 401(k) because it’ll have less asset protection. The extent necessary for support could be a very small amount, probably less than most doctors end up with in their retirement accounts. If asset protection is a big concern to you, you may want to leave that money right where it is right now or move somewhere besides California. I hope that’s helpful to you.
All right. Locum tenens is a smart way to pay down student loan debt or make extra income. It also gives you freedom and flexibility for a better work-life balance. If you’re at the start of your career, you can test out different practice settings before making a long-term commitment.
CompHealth is a leader in the locum tenens industry and can help you navigate a myriad of career options. They have access to thousands of jobs, including telehealth, medical missions, and even permanent placement comp.
CompHealth experts give you personalized high quality service and help with your CV, interviewing, contract negotiations and more. Find out more or search jobs now at comphealth.com.
All right, don’t forget I mentioned the Champions program. If you want to be a champion, whitecoatinvestor.com/champion is where you can apply for that.
Thanks for those of you who have left us five star reviews and told your friends about the podcast. A recent one came in in September from Bodybybrisket2. I don’t know what to make of that, but I do like brisket. This person says, “Saved me thousands. Lord knows how many millions Dr. Dahle and his team have saved physicians with his insight into finance. Personally, his advice helped my family get rid of a financial advisor who was charging high AUM fees and also develop a solid financial plan. I also started listening to other finance podcasts and found he’s well thought of in the investing community.” Five stars.
Thanks so much for that. We appreciate those reviews. They do help get the word out about this important mission we have with the White Coat Investors to help you be financially successful so you can be a better parent, so you can have better wellness, so you can be a better practitioner. Really truthfully, getting your financial ducks in a row will help you be better at lots of things in your life.
All right, our time is now up. Keep your head up, your shoulders back. We’ll see you next week on the White Coat Investor podcast.
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
Milestones to Millionaire Transcript
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 141 – Doctors pay off student loans before even finishing training.
Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don’t have the ideal policy for their gender, specialty, state or health status and one in seven doctors gets disabled at some point during their career.
Because these policies can only be purchased through brokers, we have put together a list of vetted agents who are experienced with working with the specific needs of medical professionals who have your best interest at heart.
If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list at whitecoatinvestor.com/insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this. The White Coat Investor can help.
All right, welcome to the Milestones to Millionaire podcast. This is the podcast where we use your accomplishments to inspire others to do the same. We call those accomplishments milestones, and they can be highly variable. Sometimes it’s as simple as getting on a retirement committee. Sometimes it’s paying off some student loans or becoming a millionaire, or just getting back to broke. I think we even celebrated somebody that just bought a car with cash. We don’t care what the milestone is. We will use it to inspire others to do the same and to reach their own milestones. So, if you’d like to apply, come on whitecoatinvestor.com/milestones.
All right, our guests today have taken their student loans into a corner and dropped an anvil on them. You’ll love the story. Let me bring them on. Stick around afterward. We’re going to talk about the importance of saving and really what the secret to being rich is.
Our guests on the Milestones to Millionaire Podcast today are Vivek and Kinjal. Welcome to the podcast.
Thank you, Dr. Dahle.
Dr. Jim Dahle:
Tell us a little bit about you, what you do for a living, where you’re at in your career, what part of the country you live in.
Okay. I’m currently a hospitalist. I’m three years out of residency, and we live in Central PA.
And I’m a second year cardiology fellow.
Dr. Jim Dahle:
Okay. Very cool. Tell us what you’ve accomplished.
We have paid down our student loan debt, both of ours, total of $400,000.
Dr. Jim Dahle:
Dr. Jim Dahle:
And you’re not even out training yet. That’s awesome. This is so cool. So, I’m guessing your salary Vivek is not the one that paid off these loans for the most part.
Dr. Jim Dahle:
Okay. Well, for the last three years, Kinjal, since you’ve been out of training, what’s the combined household income we’re talking about here?
Kinjal’s income has been around $250,000. For the last three years my fellowship income is ranging between $60,000 to $70,000. So, our family income has been around $300,000 to $320,000.
Dr. Jim Dahle:
Okay. $300,000 and somehow in the last three years you carved out $400,000 to send to your student loans. How did you do that?
Basically, what we did coming out of med school, our student loan was around $400,000. And then during residency we paid some amount of it off. Coming out of residency it was around $350,000. And then thankfully because of COVID, I had the government loan, so I was on a pause, the interest rate pause. I kind of put all that money that I was making into a high yield savings account. And then Vivek, his was a private loan, so we paid off his first and then we paid off my $180,000 that was left over just in August.
Dr. Jim Dahle:
Wow. So, you took advantage really of that student loan holiday, earned a little bit of money in a high yield savings account, but let’s be honest, that’s not where most of that money came from. Most of that money you just carved out of your earnings. It’s money you didn’t spend.
Dr. Jim Dahle:
This is really hard for a lot of docs, not to grow completely into their income. Because when you finished residency, you had a pretty significant raise, but it sounds like most of that raise at least was carved out and sent into the savings account first, but eventually to the lender.
Dr. Jim Dahle:
How did you keep from inflating your lifestyle?
Well, it was partly intentional and partly accidental. We were not big spenders to begin with, so our savings rate was high when we came out of residency, but we were not financially savvy. We didn’t have a real plan to pay down the student loan debt fast. But then we read your book, we read your blogs and listened to your podcast. We gained some financial literacy and we realized that the student loan debt can be a huge burden. It can be a huge obstacle if we want to build wealth going forward.
We got our acts together, we wrote down a financial plan, we put down a budget on paper. We reduced our spending even more. And so, that increased our savings rate. And that allowed us to have the cash flow to pay down the student loans. And I think it happened faster than we anticipated.
Dr. Jim Dahle:
Did you feel deprived during the last three years? Or do you feel like your lifestyle was fine?
I think our lifestyle was okay. Thankfully, I think the biggest contributor to paying off our student loan in three years was that we lived in a low cost of living areas. Being in Central PA, we didn’t spend a lot of money. And then we were still able to travel a lot in the past three years.
Yeah. Yeah. I don’t think we felt deprived. We did a few really long trips. For our honeymoon, we went to Bali and Australia. It was a good two week vacation. We also went to Europe. Yeah, I don’t think we felt deprived. We didn’t spend much on materialistic stuff, because we’re not into it. So, we didn’t feel deprived, but we still have a good lifestyle.
Dr. Jim Dahle:
No designer scrubs, huh?
Nope. Just the hospital scrubs.
No. The hospital scrubs.
Dr. Jim Dahle:
Were you saving for retirement at the same time or is pretty much all your wealth building activity for the last three years has been paying off debt?
We were maximizing our 401(k), but that’s about it. I think $20,000 to $22,000 for each of us, we were putting it on in our 401(k). We were maximizing it, but outside of that, no, we were not doing much else. We would not be doing the backdoor Roth or the mega backdoor Roth, which is available to us. We were not putting much in the taxable on brokerage accounts. Basically maximizing our 401(k) and rest of it all just went to paying off student loans.
Dr. Jim Dahle:
Was there anything else? Did you get a big inheritance? Did you win the lottery? Did your parents give you a bunch of money or was this just all you guys?
No, no, no, not really.
Just for me, during residency, my parents helped out a little bit with a little bit of a small lump sum of money. And then that was kind of it.
Dr. Jim Dahle:
Nothing big though.
Yeah, nothing big.
Dr. Jim Dahle:
Yeah. Very cool. So, what’s your net worth now? Have you added it up at all lately?
Yes, we have. I have an Excel sheet, so I keep a track of it and then I update it every few months. Right now our net worth is negative $130,000, and it’s mainly because of our mortgage.
Dr. Jim Dahle:
Okay. But the house is worth something, right? It’s worth more than the mortgage.
Yeah. We did a doctor loan. We didn’t put down anything when we bought our town home. We don’t have much equity. I think we have $50,000 equity and the mortgage is around $360,000.
Dr. Jim Dahle:
Okay. So, you owe $360,000 on a mortgage, but what’s the house worth?
The house is worth about $410,000 – $420,000.
Dr. Jim Dahle:
Okay. And do you have any other debt?
Not really. We have a small car loan that’s like $18,000 left on the car loan. So, we have that debt. In terms of our assets, I think we have around $300,000 to $320,000 in assets. And out of that $200,000 is in our retirement accounts.
Dr. Jim Dahle:
Yeah, it sounds to me like you’ve got a net worth of several hundred thousand dollars already. Coming out of med school, what was it? Negative $400,000? Did you have any assets coming out of med school?
Not at all.
Dr. Jim Dahle:
So, you’ve gone from something like negative $400,000 to something like positive $300,000. That’s pretty awesome. You guys are doing great. You’re going to be so successful.
Dr. Jim Dahle:
What’s next for you? What’s your next financial goal?
Well, we want to beef up our emergency savings. We have like three, four months of emergency fund. We would like to make it into a six to seven month good emergency fund. So, that’s next. We’re expecting our first baby in six weeks.
Dr. Jim Dahle:
Yeah, our family is growing. Eventually we’ll move out of this town home into a bigger house, not anytime soon, but maybe in the next four to five years. We want to save up a good amount of down payment for our future house. So, that’s next. And then just stick to our plan. We already have a written financial plan. We know our financial freedom number, so we want to stick to our plan, grow our portfolio, and then hopefully reach that financial freedom number in the next 12 to 15 years.
Dr. Jim Dahle:
Yeah. That’s pretty awesome. I have no doubt you’re going to be able to do it. You guys have got something pretty significant happening in about another year and a half. Somebody’s coming out of a cardiology fellowship and your income’s going to go up dramatically and your ability to build wealth, especially with your ability to control your spending is just going to be off the charts.
You guys are going to be super successful and be able to accomplish great things financially as well as help a lot of other people along the way. So, congratulations to you on what you’ve accomplished and you should be proud of yourselves and I appreciate you coming on the Milestones podcast to inspire others to do the same.
Thank you so much.
Thank you. Thank you for having us. I just wanted to thank you personally because we’ve learned a lot from you and it wouldn’t have been possible if we didn’t have the resources on your blog and your podcast.
Dr. Jim Dahle:
It’s our pleasure. Thank you so much.
Dr. Jim Dahle:
All right. I enjoyed that interview. I love the fact that they didn’t wait until they were both out of training to really get going financially. They admitted that they’re not particularly financially literate even. But now they’ve got a plan in place and they are really moving forward. It’s pretty awesome. One of them came out of residency and they go, “We’re going to get rid of these student loans.” So they just took them in the corner and dropped an anvil on them.
You look at what percentage of their after tax income went toward those student loans, it’s like 50% of it or more. They didn’t inflate their lifestyle, they didn’t feel deprived, still traveling to Australia and all that, but they’re able to get those out of their lives. He’s not even out of training yet, and the student loans are gone. She’s only been out three years. Student loans are gone and now they’re free to do whatever they want financially for the rest of their lives.
And the best part about it is they’re coming into another huge boost to their income in the next year and a half. So, that’s just going to provide so many opportunities for them to have the perfect career they want and maybe even be part-time. One of them might want to stay home with that kid that’s coming, whatever, just so many options you have when you get rid of that debt early on in your career.
FINANCE 101: THE IMPORTANCE OF SAVING
A few weeks ago I published a blog post that was titled “The Secret to Being Rich Is to Not Buy Anything.” And that sounds a little bit extremist, obviously you’re going to buy stuff, but that really is the secret to being rich. Everybody thinks they want to be a millionaire, but if you really talk to them, what they want is to be able to spend a million dollars. And those two things are polar opposites. You become a millionaire by not spending a million dollars that you could have spent.
And so, the real secret, the real secret to building wealth is not what your retirement account is. It’s not what the investments you choose in the retirement account. It’s how much money you put into the stupid thing.
And the more that you save, the faster you build wealth and the more you eventually have. Now, there’s got to be moderation in all things. You don’t want to save 95% of your income for the next 40 years. That’s kind of just silly. But when you’re getting started and you want to build wealth in a hurry, and you want to swing your net worth from minus $400,000 to $300,000, the secret is not go buy a bunch of stuff.
The less you buy, the more you have. It seems obvious. It is obvious when you think about it, but nobody does it. They go out and they buy a truck. I just bought a truck. Trucks can be really expensive. You can easily spend $75,000 or $100,000 on a truck these days.
But if you don’t buy the truck, what do you have? Well, you have the beater you’re driving, but also you have $75,000 to $100,000 that is now compounding. That’s after tax money, it’s now compounding. And by the time you retire, that won’t be $75,000. That might have doubled three times since then. It could be $600,000.
So, instead of getting that truck now, you put it off a couple of years, two, three years, then you buy your dream truck. In exchange for that, you’ve now got hundreds of thousand dollars more in your retirement account. You do that with everything in your life for a few years, and all of a sudden you’re sitting very, very pretty.
The truth is that spending more money doesn’t necessarily make us more happy. Let me give you an example I used in that blog post. I was visiting some friends in California and we were near the Santa Cruz factory, and we decided to go mountain biking. We went into the Santa Cruz, that’s a brand of mountain bikes, and actually rented bikes from. I don’t know what it costs, $50 probably. But I rented a $12,000 mountain bike. It’s dramatically more expensive than the seven year old one I’ve got.
And you know what? I really didn’t notice the difference. And some people out there are upgrading their mountain bikes every year. Getting a new $12,000 bike and a $13,000 bike and a $14,000 bike every year. If you can just ride your $5,000 bike for seven or eight years before you swap them out, all of a sudden you’ve got thousands of dollars more that you can use to build wealth.
It’s even the same thing with traveling. Sometimes, and I hope everybody has this opportunity to travel until they’re sick of traveling. That’s happened to me a couple of times in my life, and I’m like I just want to go home and stay at home.
But the truth is, sometimes you can have just as much fun and just as much happiness going on a road trip to someplace that’s three hours away as you can flying across the planet. It’s probably better for the planet too, if you would do that.
But you got to look at everything you spend money on and evaluate it. Well, how much happiness did that bring me? And if the answer is not that much, don’t make that mistake again. You got to really evaluate your spending and spend your money on those things that you care about most.
But if you want to become wealthy, the secret is to have a high savings rate. And what’s your savings rate? It’s the money you save, divide it by the money you make. That’s all it is. Take your gross income, take everything you saved toward retirement last year. What you saved is the numerator. Your gross income is the denominator. That’s your savings rate.
And my general recommendation for docs and other high income professionals is that you save 20% of your gross income for retirement. If you want to save for your kids’ college, you want to save for a new truck or house boat or fancy vacation in New Zealand, that’s all above and beyond that 20% for retirement.
And if you do that, you’ll retire very comfortably and you will not have to worry about money for the rest of your life. If you want to retire early, you might have to save a little bit more than that, but 20% is good if you have a typical doctor career.
All right. Enough of that. I don’t want to beat you over the head telling you to save money, but it’s true. If you don’t save money, you don’t have anything to invest. It’s a required step to build wealth as you have to carve something out of your income to put away for later. You’re investing by passing up on spending now in order to be able to spend more later or give more later, whichever your priority may be.
All right. I mentioned at the beginning of the podcast that there’s a lot of White Coat Investors out there who still don’t have appropriate disability and term life insurance. These are really the first financial chores that you need to complete.
Policies like these can only be purchased through brokers. So, we put together a list of vetted agents. They’ve been vetted by us, they’re vetted continually by other White Coat Investors. They’re experienced in working with the specific needs of medical professionals, and they have your best interest at heart.
If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list at whitecoatinvestor.com/insurance and feel the peace of mind that comes with knowing you have the optimal policies in place. You can do this and the White Coat Investor can help.
All right, that’s it. That’s another episode of the Milestones to Millionaire podcast. We’d love to have you on it. You can apply at whitecoatinvestor.com/milestones.
Thanks to those of you leaving us five star reviews. They do help spread the word to other White Coat Investors. They might not even know they’re White Coat Investors yet, and help them to become financially successful, financially disciplined, financially literate, whatever you want to call it. But I truly believe that a financially successful, financially secure doctor is a better doctor. They’re better partners, they’re better parents, they’re better practitioners.
Let’s get our financial ducks in a row together as the White Coat investor community. We can help a whole lot more people, whether they’re our family, whether it’s our own wellness, whether it’s our patients, when we don’t have to worry about our own financial ineptitude and have all this financial stress hanging over us in the exam room.
Keep your head up and shoulders back. You’ve got this. We’ll see you next time on the Milestones podcast.
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.