Due Diligence on Real Estate Deals

Transcription – WCI – 420

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 420.

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

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Welcome back to the podcast. We're recording this about a month in advance. I'm recording this on April 22nd. It's going to drop on May 22nd. And so, if something crazy happens in the markets in the last four weeks, and I don't mention on this podcast, that's why.

There's been a lot of excitement so far in April. And if that continues into May with all the craziness going on in Washington with tariffs, then there may very well be some huge thing that's happened over the last few weeks. But I want you to know why I'm not talking about it today. Mostly because I spent a great deal of that time in between recording this and when you heard it out of town.

I've got a couple of canyoneering trips in that time period. This is that time of year, the shoulder season, when it's great to get to Southern Utah. I've got a trip out to Wisconsin, and I'm talking to people out there about White Coat Investor stuff. And I'm going to Turkey. I'm pretty excited about that. And it should be a pretty good month. I don't know how many of these I'm going to be recording between now and when this drops, but probably another one or two.

But I did think it was kind of funny that this is episode 420. I feel like we should be talking about marijuana stocks or something today. But none of you have left any marijuana stock questions on the speak pipe. So we're going to be talking about real estate and some other stuff instead.

QUOTE OF THE DAY

Our quote of the day today comes from a Japanese proverb. It says, “Money grows on the tree of persistence.” And I think there's a lot of truth to that.

If you want to get started with your money right, and you're a resident or fellow, tonight is the webinar as you're listening to this. Not as I'm recording it, thankfully, because I'm prepared for the webinar yet. It's still a month away for me. But for you, it's tonight, 06:00 P.M. Mountain Time. Sign up at whitecoatinvestor.com/resident.

We're going to talk about how to have a great transition so you can hit the ground running as an attendee. So you know what to do with your student loans to minimize their costs and have the right insurance protection in place. Make sure you're saving and investing your money so you can spend the rest on whatever you want, guilt free, and let you get started building wealth ASAP.

We're going to bribe you to come. We're going to bribe you just to sign up. I don't think you have to come to win this. Even if you miss it, we'll send you a video of it and you can watch it later. We'll bribe you with some copies of the White Coat Investors resident version of the Fire Your Financial Advisor course. That's a $299 value and everyone who registers for the thing is automatically entered to win. Go ahead and sign up for that whitecoatinvestor.com/resident.

TOO GOOD TO BE TRUE RETURNS AND REAL ESTATE SYNDICATIONS

Okay, let's start with a question about too good to be true returns and real estate syndications. I think there's a lot we can say about that.

Speaker:
Dear Jim, I just received an email from the White Coat Investor inviting us to join for a chance to get to know the Mortar Group. When I looked them up, I saw that on their landing page, they're targeting returns of 16 to 22% annually. That was certainly attractive so I wanted to think a little more about it.

I searched the White Coat Investor for Ponzi schemes and went into “Don’t Invest in ‘Too Good to Be True’ – Lessons Learned from an Alleged Ponzi Scheme.” I'm certainly not suggesting that the Mortar Group is a Ponzi scheme, but in this article, you talk about being cautious of people promising returns greater than 16%.

I'm struggling to put this all together and make a decision about how to move forward. I love your blog. I've learned a lot from your information. I'm just trying to make a prudent decision. Appreciate your opinion. Thank you very much.

Dr. Jim Dahle:
Okay, great question. Let's talk about generalities. Let's talk about specifics. This particular question was prompted by an email from Mortar Group, maybe a webinar that we do with the Mortar Group. This is a paid advertiser of the White Coat Investor. Just like every specific real estate opportunity we talk about, maybe the exception of the Vanguard Real Estate Index Fund, I haven't been able to get Vanguard to sponsor the blog yet.

They're all paid advertisers. They pay us to introduce you to their company. With some of our product lines, we can vet them pretty well. Financial advisors, we spend a lot of time vetting them, make them fill out an application. Occasionally, we get a lot of complaints. Even after we've approved them, we throw them off the list and refund their money.

Other things, there are so many transactions that vetting is relatively easy to do in an ongoing way. Student loan refinancing. People are treating you badly, we throw them off the list. Same thing with insurance agents. If they're not treating you well, they're not going to be on our list very long.

Some things are much harder to vet in advance. Maybe the most difficult one is real estate investments, because a lot of these investments have holds of 3 to 10 years. I can't go round trip with them 10 times and then say, “Oh, we're going to recommend this one to you.” They don't exist anymore after they've gone round trip with 10 times, because it's been 50 years. They're much harder to vet up front.

I'm very careful, particularly those of you who know this who are on our real estate email list about real estate opportunities and real estate investing education, I'm very careful to point out these are introductions. This should be the beginning of your due diligence, not the end.

Keep that in mind. There's not some guarantee that because you learned about a company here at White Coat Investor, that any investment you ever buy from them is always going to make money. That's not always the case. Some don't do as well as others. Some can even lose money. So, keep that in mind.

A few other things that I think are worth covering. Two, if you're on that email list, that real estate email list, yeah, we send out a newsletter once a month. The point of being on that list as well is to learn about real estate investing opportunities.

How do you learn about that? Well, you learn about from marketing emails. Right? We look at them before we send them out. We try not to send anything out that's too crazy or anything. Because when you're marketing, sometimes you like to point out all the good stuff and none of the bad stuff, but you get a fair amount of marketing emails if you're on that newsletter list. Likewise, if you come to the webinars for real estate investing company, I'm going to ask them questions. I'm going to make them explain some of the things that may be difficult to answer, but most of the slides they put together, they're going to point out the best things they can about their company, about their potential investment, that sort of thing.

Okay. This investment is a private real estate investment. It's a syndication. The first thing you have to decide is “Do you want to invest in real estate?” The second thing, if the answer to that is yes, is “Do you want to invest in private real estate?” There's some pluses and minuses of investing in private real estate versus publicly traded real estate, like a REIT index fund or something.

Then after that, if you decide, yes, I do want to invest in private real estate, “How do you want to invest in private real estate?” You can buy the house down the street and rent it out. You can buy into a syndication, like the stuff that Mortar Group offers. You can buy into a fund. The benefit of a fund is instead of owning just one apartment complex, like you might with an investment with the Mortar Group or another syndicator, you might own 10 or 15 apartment complexes. If one of them doesn't do too well, that shouldn't sink your whole investment.

That's the benefit of using a fund rather than an individual syndication. Because if you're going to go this route and invest in individual syndications, you can't buy just one of them. You've got to diversify here. The same thing that is true when it comes to investing in stocks or bonds or anything else is also true with real estate. Don't put all your eggs in one basket.

And that can be challenging when it comes to private real estate, because the minimum investments tend to be relatively high. $50,000 to $100,000, sometimes as high as $250,000. If you cannot diversify a portfolio of real estate where the minimum investments are $50,000 to $100,000 or $250,000, you're not rich enough to be in this game. If you're putting half your portfolio into a $50,000 a year investment, and then that happens to be a syndication that didn't do very well and actually lost principal, you're not going to be very happy. But if you own 50 of these things, and one of them doesn't do so well, that's not a big deal.

You need to be a real accredited investor to invest in these things. That means, in my view, two things. I'm not just talking about the legal definition. The legal definition is an income of $200,000 a year for each of the last two years, or a million dollars in investable assets. That's the legal definition.

My definition is, one, you can evaluate the merits of this investment without the assistance of an advisor, accountant, or attorney. Two, you can lose your entire investment and not have it affect your financial life in any significant way. If those aren't both true, you shouldn't be investing in anything that is an accredited investor-only investment. That includes investments into syndications via the Mortar Group.

I think they're a good sponsor. They've been with us for a number of years. If you want syndications in New York City, I think the Mortar Group is a great company to consider for that. Learning about them in one of our webinars or learning about them because they sponsored the podcast is the beginning of your due diligence, not the end. If we thought they were a Ponzi scheme, we obviously wouldn't be investing with them. Now, the Ponzi scheme sometimes fool lots of people. I suppose they do.

Is it possible for you to lose your entire investment with the Mortar Group? Absolutely, it is, just like any other private real estate investment. If you go out there picking individual stocks, you can lose all your money in that as well. That's why we like the option in the stock market to go buy all of them via a low-cost index fund.

You cannot do that with private real estate. You can't just go buy all of them. It doesn't exist. If it did, that's probably the way I'd tell you to invest in it. Instead, you have to buy individual investments if you want to be invested in that asset class.

Now, Katie and I invest in that asset class. About 15% of our money is in private real estate, 10% on the equity side, 5% on the debt side. We think it's worthwhile for us. Does it complicate our financial life? Yes. Does it make our taxes more complicated? Absolutely. Have the returns been good to us? Yes.

All right. Now, what should you expect out of private real estate returns? Now, bear in mind, on the debt side, you're probably looking at 7% to 11% returns. Frankly, I think that asset class is not looked at nearly as often as it ought to be. It's not terribly tax efficient, but the returns tend to be very stable. 7% to 11% is nothing to scoff at by any means. And your fund is in first lien position. If you have foreclosed on it, well, you get the property, you sell it off and get your principal back. It's very attractive.

On the equity side, obviously, if you can make 7% to 11% on the debt side, you expect to make more than that on the equity side, especially once you add a reasonable amount of leverage. So, what do I expect out of equity real estate? I expect something in the 10% to 15% range. That's what I expect to make.

Now, is it possible to make more than that on any given syndication? Absolutely. Even one of our debt funds, a diversified not debt funds, an equity fund, it was a diversified equity fund, made more than 30% in a year not long ago. But they don't tell you to expect 30% every year. They tell you their target returns 10% or 11% or 12%.

Lots of these syndications are targeting 16% or 20% or 22% returns. And sometimes, they get them. Sometimes, they don't. More often, they're in the 10% or 15% range. Sometimes, they make less than 10%, less than you could have made even in public real estate investment.

And sometimes, they lose money, especially if they're not managed very well, or they got crazy about how they did debt. Sometimes, they lose all your money. Sometimes, they're not very good at running syndications. There's a lot of risk there. So you better make sure you're a real accredited investor before you invest with them.

Will you get a 16% to 22% return out of any given investment with the Mortar Group? I have no idea. Time will tell. But I'd take a look and see what you think. And make sure you can diversify not only between investments, but between operators of those investments before you get into that space. If your only investment is an index fund and one syndication, you probably didn't build your portfolio very well.

ALL IN ONE LOANS FOR MORTGAGES

All right. Let's take a question about mortgages, somewhat related to real estate.

Ray:
Hey, Dr. Dahle. My name is Ray. Longtime listener. First time caller. I was wondering if you had any information, thoughts, or suggestions about this grou Loan for mortgages. I've been doing a little bit of research on it. I'd love to get your opinion. Thanks.

Dr. Jim Dahle:
All right. I have no idea what you're talking about. All In One Loan. All right. Well, let's look it up. If I Google it, I see allinoneloan.com pop up. It says it's a 30-year HELOC with an integrated sweep checking account. Okay, I know what this is.

This is a method people have to make a little bit more money on their cash. They basically, instead of having a checking account, they have a HELOC, a home equity line of credit. And so, the theory is all the cash that would normally sit in your checking account is actually being used to pay down the HELOC.

You see how this works? Instead of paying interest on the loan, your checking money actually has reduced the amount of the loan. So, it's kind of a clever idea. Are there some downsides to it? Well, yeah. You've got to have this HELOC, and your life gets a little bit more complicated.

And the way these things get sold is life-changing. It's like bank on yourself with whole life insurance. And I don't think it's nearly as good as the marketing for these sorts of things is. But there's a number of companies out there. I don't know anything about this All In One Loan company. Who knows? Maybe they're running a Ponzi scheme. I have no idea. Probably not, because there's a number of other companies doing the same thing out there.

It's not crazy. Just don't overestimate exactly how much it's going to help. If you've normally got $20,000 or $25,000 sitting in your checking account, well, it's basically like your mortgage owes $20,000 or $25,000 less on average than it would otherwise. What's the interest rate on that? Well, 6% on $25,000 works out to be what? Something like $1,500 a year or something like that. Maybe it saves you that.

But that's what we're talking about. That sort of savings is what a scheme like this could net you. And whether that's worth complicating your life for or not, I guess is up to you. But that's the way it works. Instead of pulling money out of your checking account that's earning nothing, you take money out of the HELOC and then pay interest on it while the money is out. And when the money is back in the HELOC, you're not paying interest on it. That's the idea behind it. It's all-in-one in that it's your mortgage and it's your checking account. I hope that's helpful.

Do I do this? No, I don't, because I don't have a mortgage. Would I do it? I'd think about it. Probably not, though. I lean more towards simplicity in my life all the time. This isn't going to be the thing that gets you rich. What gets you rich is by making a whole bunch of money, carving out a big chunk of it, investing it in some reasonable way, and giving it some time.

You don't get rich by playing games with taking out 0% credit card loans and rolling it to a new one 15 months later or doing All In One mortgage loan for your mortgage. These little games maybe move the needle a little bit. It's like sign-up bonuses for moving money between brokerage accounts. At a certain point, I hope most White Coat Investors kind of grow out of doing things like this.

INTERVIEW WITH ELAINE STAGEBERG OF BLACK SWAN REAL ESTATE

All right, let's talk a little bit with one of the folks that we work with in real estate. I'm going to bring her on the line and introduce her. My guest on the White Coat Investor podcast today is Elaine Stageberg, a physician and also the founder and principal of Black Swan Real Estate. Welcome to the podcast, Elaine.

Dr. Elaine Stageberg:
Thank you for having me today.

Dr. Jim Dahle:
You quickly in your career decided that the main way you were going to be investing your money was real estate. What advantages of real estate did you find most enticing at that point?

Dr. Elaine Stageberg:
Yeah, that's an excellent question. When I think about real estate, what I really like about real estate is all of the different wealth drivers that are available. The first one is cash flow. That's essentially all of the income from that property minus all of the expenses and how much is left over each month.

The next is debt paydown. As that mortgage gets paid down each month, that increases the equity in the property, which grows the investor's wealth. There's both market appreciation, which is how that property grows in value over time, and then also forced appreciation, which means an investor can acquire a property and improve its value through either physical renovations or management improvements to force that property to grow in value. Those are the four wealth drivers of real estate.

There's few other asset classes where you can get so many different types of investment return as there are in real estate. Then real estate is also very tax advantaged. The IRS encourages people to create housing, and they do so by writing the tax code such that dollars that are generated through real estate investment are tax advantaged. You have these multiple wealth drivers in real estate. You have big tax advantages. All of those things combined, as I was thinking about growing our own family's wealth, real estate was a clear choice.

Dr. Jim Dahle:
Now, your firm is unique in a lot of ways, Black Swan Real Estate. It's unique in that it's physician-owned. It's unique in that the majority of your investors are also physicians, approximately 80% of those. It's somewhat unique in that a big chunk of the properties you invest in are surrounding the Mayo Clinic in Rochester, Minnesota. In that way, have their fortunes somewhat tied to the Mayo Clinic. Tell our listeners a little bit about what's going on up there in Rochester because it's pretty unique, and I think it's worth hearing about.

Dr. Elaine Stageberg:
Yeah. I had the good fortune of training in my psychiatry residency at Mayo and just really came to love that organization and their values and, more importantly, their vision. What has been happening in Rochester over the last about 10 years is something called the Destination Medical Center Initiative. It's the largest ever public-private partnership in the state of Minnesota and the largest per capita spend on infrastructure anywhere in the entire country, which is saying a lot for a relatively small town in the Midwest. Rochester is about 150,000, 160,000 people.

The Destination Medical Center Initiative is exactly that. Mayo Clinic wants to be the destination medical center of the entire world. It's seeking to grow the population of Rochester, grow other ancillary services and adjacent opportunities, things like tech and biotech and pharma and research and other things that help to support the operations of Mayo, and to grow the population so that Mayo can grow its workforce.

Then about a year ago, Mayo announced their next big strategic project, which is called the Bold Forward Unbound, and it's a $5 billion expansion where Mayo is creating the hospital of the future. We've strategically positioned our portfolio. Five of our apartment buildings are directly across the street from where the hospital of the future will sit in about five years. The construction, fencing, and everything is already up. The cranes are there. They're drilling and digging.

We're really excited about Mayo, about its near-term future over the next five to ten years as the hospital of the future is built, its long-term vision over the next several decades in this community, and have just enjoyed living here and being trained here and now being the largest housing provider in Rochester in our portfolio.

Dr. Jim Dahle:
Yeah, awesome. Another unique thing about Black Swan is you have taken an approach that I love because it capitalizes on the biggest tax benefit of real estate, which is when you own it for a long time. Most passive real estate opportunities are three, five, seven, maybe ten if you're lucky, year holds. But in your legacy funds, your goal is to actually hold the property for 20 or 25 years, and that's pretty unique. Why did you decide to take that approach?

Dr. Elaine Stageberg:
When I think about real estate, my husband and I kind of joke, the name of our company is Black Swan Real Estate, and that was our biggest mistake. We should have named it Golden Goose Real Estate. We really think of our buildings, whether it's a single-family home or a large apartment community.

Our primary question is how can we create a Golden Goose? How can we acquire something, do a value-add plan for physical renovations and management improvements, go to the bank, get a cash-out refi with that new increased value on that property, return all of that capital to investors so there's no capital left in the deal because we've grown the value of the property.

And then hold that indefinitely and benefit from the cash flow, from the debt paydown, from market appreciation if there's an opportunity to do another round of renovation, an additional round of force appreciation, and then exactly like you said, to hold on to those tax advantages.

Depreciation is incredibly powerful in creating tax efficiency in people's income, but depreciation has to be recaptured at the time of sale, and so investors can kind of get on this hamster wheel of getting depreciation and then recapturing it kind of over and over. And in our model, we think how can we create a portfolio where all of these properties are generating the wealth drivers of real estate. We're holding on to those tax advantages for as long as possible, holding on to that real estate.

I love to say everyone is always so jealous of the person down the street that's owned a property for 30 years and bought it for what seems like pennies. I wish I had bought that property. Well, that's what we do is we acquire those properties and then hold them for a long time to benefit from all of those wealth drivers of real estate over the long term.

Dr. Jim Dahle:
Now for those who are not quite comfortable committing to a 20 or 25 year hold, you also have the Secure Freedom Fund, which it does require you to leave your money in there for a year, but you do lose your earnings if you don't leave your money in there at least a year. But it's dramatically more liquid for those who are concerned about that liquidity.

Dr. Elaine Stageberg:
Yep, exactly that. We created our Secure Freedom Fund largely in a way to be different from our Legacy Funds. Our Legacy Fund, the minimum investment is $100,000. In the Secure Freedom Fund, it's $25,000. The type of return is a variable rate of return in our Legacy Fund. In our Secure Freedom Fund, it's a fixed 10% rate of return. The Legacy Funds are a long-term wealth building opportunity. The Secure Freedom Fund is kind of more similar to say like a CD where you want to have that capital in for a relatively long period of time, but you have optionality.

Investors can add to their investment over time, they can take away from their investment, they can request a redemption from the fund altogether, they can request that their returns be paid out on a monthly distribution, they can request that their returns be compounded, and we compound those monthly.

The Secure Freedom Fund in a lot of ways is kind of a choose-your-own-adventure, and it's a way for investors to invest a smaller amount if that's what makes sense for them financially, to become more acquainted with our company over time, and to have more control over their liquidity.

The Legacy Fund and the Secure Freedom Fund, they both invest in the same types of properties, which is value-add real estate that's held for a long time, but the return structure is different so that investors can use their dollars however most makes sense for them.

We have plenty of investors that do both. They'll put some of their dollars into that longer-term wealth bucket in the Legacy Fund, and then keep some of their dollars in the Secure Freedom Fund so that they have more liquidity, more optionality, and they have that fixed rate of return that they can plan around.

Dr. Jim Dahle:
Now, BlackSwan also chose to use a little bit different fee model, in that they don't charge fees. Essentially, if the investors don't make money, you're never going to make any money.

Dr. Elaine Stageberg:
Correct.

Dr. Jim Dahle:
Instead of charging fees, you've elected maybe a little bit larger percentage of future returns from successful investments, but with no fees along the way to align interests. Why did you decide to go that no-fee route?

Dr. Elaine Stageberg:
As we were looking at private equity, and we really saw general partner fees, and things like PREFs, and waterfalls, and hurdles, and catch-up PREFs, it really seemed like there was just a lot of obfuscation in the industry that really was meant to protect the general partners, was not really designed, in our opinion, to protect the limited partners.

And we said, intuitively, as we were building our own portfolio, we make money off of the profitability of those properties. That's it, plain and simple. And that we should carry that ethos into our private equity funds. We should make money the way our investors make money, which is on the profitability of the properties, and we should only profit after our investors profit.

We have no general partner level fees whatsoever. We don't have a capital event fee, an asset management fee, a loan recourse fee, on and on and on, because we think that humans have behavior. I'm a psychiatrist. Humans do behavior based on incentives. And what we don't want is to make decisions in our investments that are based on fee income. “Oh, if we make this decision, we can earn this fee.”

Instead, we want to be incentivized to make decisions of how can we make these properties as profitable as possible, and then split that with our investors. And that is that alignment of incentives is really what drives our company. We think it's the right thing to do. And it's our hope that as people see our model, more private equity firms think about doing this model.

We still profit. In our legacy funds, there's a 50-50 split after a full return of capital to our investors. In our secure freedom fund, any return above and beyond that 10% return that goes out to investors is our profit. But we profit after investors, and we only profit the same way as investors, which prevents a situation like a general partner can say, earn fees for say, acquisition and loan recourse, the deal goes completely south, all of the investor capital is lost, and investors lose their capital, but the general partner has still walked away with hundreds of thousands or even millions of dollars in fees. That's completely impossible in our structure. Our investors come first, and then we share in the profits after that.

Dr. Jim Dahle:
All right. Well, thank you for your time and for coming on the podcast. Anybody interested in learning more about Black Swan, you can go to whitecoatinvestor.com/blackswan and learn more about the opportunities to do private passive real estate investing through them. Thank you so much.

Dr. Elaine Stageberg:
Thank you for having me today.

Dr. Jim Dahle:
Okay, I hope you enjoyed that interview. It's always fun to talk with them and let you get to know them a little bit more personally. It's interesting, we had a question earlier on about one of our advertisers about Mortar, and obviously that was an introduction to another one of our advertisers, that if you're interested in that sort of an investment, we think you ought to start your due diligence there and look into it a little bit more.

REAL ESTATE INVESTING DONE RIGHT

Dr. Jim Dahle:
Okay. Next question comes in via email. And this was in response to a blog post I had about how to do real estate investing correctly. I think it was Seven Ways To Do It Wrong is what the post started with. Of course, it's a little bit clickbaity because I want you to actually read it. Clickbait is a compliment around here. If we can get more people to read our stuff and become more financially literate, that's a good thing, not a bad thing.

But this email said, “I read your article about real estate investing done right. As a Muslim, my issue is that I cannot invest in real estate syndications unless I take on leverage or a mortgage, which I would like to avoid. The passive income options listed on your website all involve taking leverage. Is there any real estate syndication or website that does all cash deals? I have yet to find one. If not, what do you suggest? Just stay invested in the stock market long-term versus trying to find some house on cash and try to rent it out myself? It can be a lot of hassle.”

All right, good question. We don't have a real estate advertiser that does private funds or syndications that are Shariah-compliant in the way that most people view Shariah-compliance. I'm sorry. I don't know if there's one out there that does that. Every one I've ever seen uses some leverage.

You can learn more about this by going to whitecoatinvestor.com/halal-investing. I've got a whole long post about Islamic investing and what that means. How it's different for some people and other people and what some of your possible options may be if you wish to invest in a Shariah-compliant way.

But if you want to invest in real estate in a Shariah-compliant way, that basically means that you either need a mortgage substitute, and that post talks about some mortgage substitutes that some people think are okay, or just buy it with all cash. That's totally an option. You can just build a real estate empire with all cash deals. You save up the whole price of the property you want to buy, and then you buy it.

In fact, you could do that with at least one of our sponsors. We have a turnkey company called Southern Impressions that will help you be a direct investor of a turnkey property. By turnkey, it means you don't have to do anything. I could live here in Utah. I could buy this place in Florida without ever going to see it. They would build the house to rent. They would put the renter in there. They would manage it for me. If I ever wanted to sell it, they would sell it for me. Yes, obviously, I pay them some fees to do that, but I could do that with all cash. You don't have to take out a mortgage to do that. That would be one option. You can check out our real estate investing partners, our advertisers there at whitecoatinvestor.com under the tabs there at the top and check that out.

The most passive way to do a Shariah-compliant real estate investment would be an all-cash deal, would be a turnkey company. That's probably what I'd check out if you really want to invest in real estate.

But there's a lot that goes into Shariah-compliant or halal investing. Bear in mind, a whole lot of the companies in the S&P 500 have debt. You've got to be okay with that if you're going to invest in them or else you got to use a Shariah-compliant mutual fund that doesn't invest in any companies that have debt. The more you do that sort of thing, the more actively managed it becomes, the more expensive it tends to become, the lower your returns tend to be. I'd start with that blog post, it's whitecoatinvestor.com/halal-investing to learn more.

All right, let's take a question about some universal life insurance.

GROUP VARIABLE UNIVERSAL LIFE INSURANCE AS A WORK BENEFIT

Sean:
Hello, my name is Sean. I'm a new attending in Ohio. I can contribute to a 403(b) Roth or traditional with a match, a 457(b) and a 401(a) employer contribution. We're going to be maxing my contributions. My benefits also include a group variable universal life policy that the employer pays the premiums on.

I can buy down coverage to 75% or 50% with the resulting 25% or 50% going into the policy's cash value. Is this free money as part of my compensation? Is there any reason to not buy down as much as possible since I have term life insurance? If I leave the employer and have to take over the premiums, should I just follow the logic of your “How to Dump Your Whole Life Policy Blog Post?” Thank you.

Dr. Jim Dahle:
I think most of you listening to this will understand why the blog post that I wrote on this subject is titled what it is. The title of that post is Why I Hate Split Dollar Life Insurance. And the reason I hate it is because it gives you this dilemma or these dilemmas that you have of what to do with this benefit you're being offered by your employer.

So, let me explain very clearly what happened here. Your employer was sold a permanent life insurance policy. That's what happened. And what this usually comes in a form of is a split dollar policy, meaning you pay for some of it and the employer pays for some of it. And if you leave the employer and you want to keep this thing, then you've got to keep paying the premiums at that point.

I'm not a huge fan of investing in permanent life insurance. If you have a need for life insurance, I'm a big fan of you buying life insurance. But very few people have a need for a permanent death benefit. If you die when you're 80 or 85 or 95, it's going to pay something to your estate. Do you really have that need? Probably not. Most of us have a need for life insurance to last until we become financially independent.

For me, that was my mid-40s. So, if I bought that when I had my first kid at 29, that's 15 years or so, I had a need for life insurance. And if that's your need for life insurance, the cheapest way to buy that, the way to use your money to get the most amount of that that you can is a term life insurance policy. It's not any sort of a permanent life insurance policy like whole life insurance or universal life insurance or variable life insurance or variable universal life insurance or index universal life insurance or any of the other plethora of combinations and possibilities and structures that a life insurance policy can take on.

What happened here is some insurance agent came into your employer and convinced them that your employees will love this benefit if you provide it for them. It'll make them want to stay with you long term and not quit. And they'll look at it as super valuable and that you're the best employer ever and they'll take the job.

Your employer was convinced, probably because they're not very financially sophisticated. Because the truth is, you'd rather get paid more salary, and it costs the employer just as much to give you this as it does to pay you more salary or to give you a bigger match in your 401(k) or some other benefit that you would appreciate. Instead, they were sold this thing.

Okay, that's what happened. Now, you're not the employer. If you are, hopefully you turn this thing down. But you still got to decide what to do with it. And the real question is, “Well, what happens when I leave? Can I leave and just cash this thing out and walk away? And how much will I walk away with?” And you got to look at that when you're likely to leave. And look at how much of it you're paying for versus your employer paying for.

If your employer is paying 90% of this premium, you're probably coming out ahead, even if a whole bunch of it goes away when you cancel it. If they're paying 25% of it, and you're paying 75% of it, you're probably getting ripped off.

And so, you got to look at the details. You got to figure out who's paying for what. And if it really is free money your employer's giving you, take it. Sure. If someone else is going to buy me a whole life insurance policy, I'm going to take it. I might cash it out at some point and just take the cash and put it into what I think is a better use for my money than that policy. But I'd take it if somebody else is going to buy it for me and give it to me.

But that's not how these usually work. Usually, you're paying for at least part of it. And you've got to figure out at least for the part you're paying, whether this is a good move. And if you're paying 25% or less, it's probably a good move to keep it as long as they're paying the other 75%. And you're probably coming out ahead. But I just wish the employer would have given me the option to take it in some sort of a different benefit or just as more salary, I think would have been more useful to you the vast majority of the time.

All right. Let's take another question about an insurance product also off the Speak Pipe.

WHAT TO DO WITH A DEFERRED ANNUITY

Speaker 2:
Hi, Jim. Listener from the West Coast. I've been to your conference once or twice. Excellent conference. I have an annuity bought from Fidelity. It's a deferred annuity. I bought it in 2014 for $1 million. I think I'd like to annuitize it now. It's about more than doubled in value. I'm debating whether to annuitize it or to cash it out and pay the ordinary income tax on it. I'd like to have some income in the next 10 years between retirement and RMD. Any advice appreciated and any referrals to any specialists who can assess the situation? Thank you.

Dr. Jim Dahle:
Okay. Great question. I don't know that I have all the information I need to actually answer your question, but let's talk about annuities for a bit. I don't know why you bought this annuity. In general, if somebody asked me, “Should I invest inside an annuity?” the answer is usually no.

There's a few downsides to an annuity. One is that there's some additional expenses associated with it. Now, Fidelity is known for at least having the possibility of a relatively low cost variable annuity that sometimes people use when they're dumping whole life policies and they want to let it grow back to basis. They can get a little bit of tax-free growth there before they dump the whole thing. I don't know with their other annuities how well they're priced. I'm not an annuity agent by any means.

Sometimes people buy annuities, hopefully not as an investment, but as a method of spending their money. The most common type or the most common type advocated for, maybe not the most common type, is a single premium immediate annuity. Single premium means you just pay one price upfront. That's it. Immediate means it starts paying out immediately. Annuity means it pays until the day you die.

Single premium immediate annuity or a SPIA. What that is, is it's a pension. You're buying a pension from an insurance company. Not a lot of people have pensions anymore. If you want guaranteed income until the day you die, you can give a lump sum of money to an insurance company, $250,000 or whatever, and they will make a payment to you every month until you die.

A lot of people find that attractive because it gives them permission to spend some of their assets. They know they're not going to run out of money. The downside is you really can't buy one indexed to inflation anymore. Yes, it'll pay you something every month until the day you die, but it might not be worth much in 30 or 40 years from now. Keep that in mind that you really can't get these indexed to inflation.

It turns out the best deal out there as far as annuities goes, is delaying your Social Security to age 70. Not only is that particularly a good deal, because healthy people buy annuities, but everybody gets Social Security, so you get a better deal on that delay, but you also get something that's indexed to inflation. If you're thinking about annuities, if you're thinking about SPIAs, you better be thinking about delaying your Social Security to age 70. Because if it makes sense for you to buy a SPIA or some other type of annuity, it almost surely makes sense for you to delay your Social Security.

Now, this thing you've got is presumably a big part of your financial life now. There's a million dollars you put into this thing in 2014, so you must have been doing pretty well back then. I don't know, maybe somebody sold this to you and suckered you into it and all your money's in there, I don't know. Now, it's worth a couple million dollars. This is a big piece of the financial life of most retired White Coat Investors.

What are your options? Well, you can dump it, you're going to pay ordinary income taxes on all the gains. This is the other downside of investing in annuities. Not only do you pay more fees, but when you take the money out, you don't get long-term capital gains treatment on it. You don't get qualified dividend treatment on it. You pay ordinary income tax rates on the gains. It just takes a long time of having money in an annuity where it grows in a tax protected way like a retirement account to make up for the fact that in the end, you're paying ordinary income tax rates and not capital gains rates on those gains.

That's one option. You just cash it out and get away from the fees and get away from the product and use the money to spend on whatever you like or invest it in something else. That is an option, maybe not the best one.

You sound like you actually want some guaranteed income, the equivalent of a SPIA. A deferred annuity, you can annuitize it anytime usually, but maybe there's some rules on some annuities, but you could annuitize it into essentially what is a SPIA now.

What you would do is you would look at the deal that this annuity is offering to annuitize it now and compare that to what you could buy with $2 million in a SPIA right now, because you can always exchange from the annuity you have into a new annuity that pays you a better rate. You have to shop around a little bit before you just annuitize the one you have. You might be better off rolling it into a different annuity that is going to be annuitized, but surely, that's probably the solution for at least some of this money.

Maybe some that you leave in the deferred annuity and plan to annuitize it later in 5 years or 10 years or 15 years to hopefully help with some of that inflation problem as time goes along, and maybe annuitize some of it now, which helps you delay your Social Security or helps you get to RMD age, although you don't have to get to RMD age.

Once you're 59 and a half, you can pull money out of your IRAs without having to pay any special penalty. You just pay the regular tax on it that might be due if it's not a Roth account. You don't have to wait for RMD age. There's no reason to feel like you have to spend the annuity money now and spend the RMDs later. You can do it in reverse order or you can do it however you want, but it sounds like you want some guaranteed income. That would be one option.

Annuities have all kinds of other options. They would probably give you an annuity that just paid out over 10 years. You just wanted something that's going to pay you as much as it can for 10 years guaranteed. You could probably buy that with an annuity, maybe this annuity you already have, or you might have to exchange it to another one. That would get you to age 70 when Social Security kicks in or age 72 or 73 or 75 or whenever your RMD age is until you start taking those.

There's all kinds of things you can do with an annuity. You're not coming to me asking if you should buy this annuity originally. I probably would have told you not to buy it and just invest in a more typical way. But you've already got an annuity and now you get to decide what to do with it.

I suspect you'll probably annuitize some of it. Maybe you leave some of it in there, especially if the costs are low at this point, just let it continue to grow in there, and maybe annuitize some more in 5 years or 10 years or 15 years. That's probably going to be one of your better options, I suspect.

But taking it all out and just paying the taxes is an option. This is a terrible annuity with terrible options, terrible investments, terrible interest rate, terribly high expenses. Maybe you don't want it at all, but I'll bet you do something with it, whether it's annuitizing part of it or rolling it over into a different annuity or something like that is probably what you're going to end up choosing. I hope that's helpful.

SPONSOR

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Don't forget about the resident webinars tonight. If you're listening to this, the day this podcast drops. That's May 22nd at 06:00 PM Mountain, that's 05:00 Pacific, it's 08:00 on the East Coast. We'll be doing it live. I'll be taking your questions afterwards.

Feel free to come in even if you got to come late. If you can't make it at all, you should still sign up. We'll send you a video copy of it. whitecoatinvestor.com/resident is where you sign up for that. You'll be entered to win a copy of the resident version of the Fire Your Financial Advisor course.

Thanks for those of you leaving us a five-star review. A recent one said, “What a great podcast. I recently started listening to the White Coat Investor podcast and it quickly became my go-to source for financial advice. The host, Dr. Jim Dahle is a real asset to the show.” Thank you very much. “His expertise and insight are invaluable and he delivers the information in easy to understand format.” Apparently, I don't talk fast enough though, because I hear most of you are listening to this at 1.5 speed. So I'm not going to feel bad anymore about talking too fast on the podcast.

He goes on, “The topics covered are so varied and relevant that I never get bored listening from investing advice to personal finance. Dr. Dahle covers it all. He also interviews some amazing guests to bring even more value to the show. I'd highly recommend the podcast to anyone looking for sound financial advice, no matter where they are in their journey.” Five stars.

Thanks for that very kind review. We appreciate it. It does help get the word out about the podcast. And that's really what I care about most is I want this information in the hands of as many doctors and other high-income professionals that we can get into, because I think it'll make their lives better. I really do.

All right, that's it. Keep your head up and shoulders back. You've got this. We're here to help you here at the White Coat Investor. See you next time on the podcast.

DISCLAIMER

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

Transcription – MtoM – 223

INTRODUCTION

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

Dr. Margaret Curtis:
Welcome to the Milestones to Millionaires podcast, episode number 223. I'm Dr. Margaret Curtis. I'm filling in for Dr. Jim Dahle.

This podcast today is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at www.whitecoatinvestor.com/protuity by email [email protected] or by calling (973) 771-9100.

There is a Financially Empowered Women's event tomorrow night at 06:00 P.M. Mountain Time. Come learn about tax planning with Alexis Gallati. You can sign up at whitecoatinvestor.com/few.

There's also a resident webinar this Thursday, May 22nd at 06:00 o'clock. You can sign up for that at whitecoatinvestor.com/resident. You can learn from Dr. Dahle and Andrew Paulson of studentloanadvice.com, and they're going to be giving away five free copies of the Fire Your Financial Advisor course, which is a $299 value. Everyone who registers is automatically entered to win.

INTERVIEW

Dr. Margaret Curtis:
Now let's get started on our interview. Our guest today is Dr. Chris Ryba, an emergency medicine physician who's going to tell us all about how he got his financial life in order. Welcome to the podcast, Chris. Very nice to meet you.

Dr. Chris Ryba:
Hi. Thanks for having me.

Dr. Margaret Curtis:
Tell us a little bit about, just give us the background of your story. How did you end up in emergency medicine? Tell us more about your story.

Dr. Chris Ryba:
Essentially, I came from a non-medical family. I grew up in the Chicagoland area, Midwest, kind of born and raised. Like most people, didn't really know what I wanted to do, but nobody in my family was medical professionals, and so I really had no medical guidance, had no interest in medical field.

I had some financial, my dad was in business, my mom was an accountant, so I was really good with math, and I thought that it was the direction that my life was going to take me. But then, just kind of by stroke of luck, I ended up, quite frankly, it was because I didn't want to be in high school anymore, and I was bored with what I was doing, and I ended up in a tech school half the time my senior year, and ended up first in fire science, and then doing my EMT, and ended up falling in love with the emergency medicine and emergency medical services.

From there, I ended up not going to college initially. Went and became a paramedic, and worked as a paramedic for several years before finding my way back by mentor advising to Loyola University in Chicago to get my bachelor's degree, and ended up having a pre-med focus at that time, which was never the plan. Took my MCAT, gave med school a shot, but was really looking full-time at Chicago Fire Department, working in EMS for the rest of my life.

But luck had it, and I was actually accepted to Loyola's medical school, so decided to go the physician route, which was, again, never really the plan, and kind of was a major kind of shock on my life to kind of go from making money, although not as much as a paramedic, but making money and being a fully functioning adult, and then suddenly dropping all that to go back to medical school.

And so, medical school, did that Loyola, still ended up loving emergency medicine, just from that, just from my background, EMS was always something I loved, and the emergency side of things. Ended up at University of Wisconsin for residency, and then came out to University of Utah for a fellowship in EMS, and then ended up staying.

Kind of worked a little bit more community, so I'm up in Rock Springs, because our group, the University of Utah group covers it. And so, I worked for the University of Utah. But I found my way in the EMS side of things, and so now I'm an associate medical director with Salt Lake City Fire, and currently, I'm a medical director with event medicine, with the Delta Center, and then one of the team physicians, the ER team physician for the Utah Mammoth.

Dr. Margaret Curtis:
Oh, that's so cool.

Dr. Chris Ryba:
Yeah, yeah. The NHL requires an ER physician for the ice for every game, and so I found my way through relationships that I had formed, working the last three years with the Delta Center and the Utah Jazz and everything, I found my way in a formal position of the lead ER physician for the Utah Mammoth now, a hockey club.

Dr. Margaret Curtis:

That's amazing.

Dr. Chris Ryba:
Yeah, it found me, I was not looking for it, but as with most of my story, I just stumbled upon it, and it worked out. Currently I'm a full-time ER physician at the University of Utah, and then also working EMS in the community in Salt Lake City.

Dr. Margaret Curtis:
Wow, that NHL doctor is a lot of people's dream job.

Dr. Chris Ryba:
It would have been my dream job if I knew it existed, but I didn't know it existed until it was suddenly in front of me.

Dr. Margaret Curtis:
That's really cool. Well, I'm sure your background as an EMS has been hugely helpful to your patients and your colleagues as a physician, because most of us don't have that background, and that's really, really valuable. You said you had a parent who's an accountant, is that right? And you're good at math and probably familiar with money when you're growing up?

Dr. Chris Ryba:
Yeah, to the point where she was an accountant, I don't think she was a full CPA, but she got her degree in accounting and worked as an accountant. But I think then she chose motherhood over pursuing a full career into it. But she always was very good at teaching me when I was a kid.

I learned how to balance a checkbook before I think I even had a checking account, which is one of those things that's like a weird thing that I look back on, and I'm like, “Why did she do that?” But school didn't teach me that, so it was helpful that she did.

Even though I'm young, I'm still the old school way, I do a lot of stuff by hand and paper still, just because that's how I was taught. And so, it took me a while to even get into online banking, because I just did everything by hand. I was so used to balancing a checkbook and making sure that that was all settled. That's actually how I learned initially how to do all that, was through her.

Dr. Margaret Curtis:
Do you think you had some financial literacy when you finished residency? Where would you say you were?

Dr. Chris Ryba:
I would say, despite all that, I was pretty illiterate. I will say that I did find the White Coat Investor when I was a med student. A buddy of mine introduced me to it and was like, “Hey, I found this book.” And so me and him really dove deep into the White Coat Investor book, not to make it a sales pitch, but we truly found it and we're reading through it and we're really getting big into it.

And so, as a med student, I got disability insurance and life insurance based on what was recommended on the White Coat Investor. I would say I was pretty limited in my financial knowledge, but I read a lot about it to try to figure it out. But even still, I was pretty limited.

Dr. Margaret Curtis:
And what made you decide to get an advisor?

Dr. Chris Ryba:
I knew that I did not know enough about it. I honestly thought the reason to get an advisor was to learn how to invest my money. I did not realize that I was very deficient on even just the basics. And so, I really was like, “Oh, I need to find somebody to manage my money for me.”

Dr. Margaret Curtis:
That's great. And when you started working with Tyler, did you have specific financial goals or was it just kind of a “Help me figure this all out?”

Dr. Chris Ryba:
Honestly, I think I came into it thinking I was going to have financial goals. And then in the end, when he was explaining stuff, I was like, “No, I just need help figuring this all out.” And it ended up being pretty simple. It was just once it was broken down, it started to really make sense.

And I think that was the hardest part, we were just talking about this on a meeting just not too long ago about how it's unfortunate that it's so difficult because in the end, it actually is pretty simple and straightforward, but you just have to have the either the language deciphering or just the knowledge of where to find stuff to be able to break it down. But once you do, it's pretty straightforward.

Dr. Margaret Curtis:
Yeah, that's great. I think that's so true that once you dig into it, you realize it's not as complicated as what we do all day, even, and it's very manageable. It's great to have an advisor or some other trusting source of information. But that's great.

What would you say were the biggest changes you made or things you learned when you started working with an advisor?

Dr. Chris Ryba:
Well, there's several things I learned, but I think one of the biggest things was taking all of what I had and being able to put it away before it even reached me. I think that was the thing that I think I really took home. What I mean by that is mainly like retirement. I always thought it was so cumbersome to have to try to figure out how I was going to take my paycheck and invest it into certain things and take this paycheck I had, which I'd worked so hard for, and then watch it all go away to different avenues.

But then when I started working with him and realizing most of the stuff that we do for our future actually comes before we even see the money, it became a lot easier to not only swallow that pill, but also to manage it, because it was all going away before I even saw it.

And so, once you stopped realizing that, you started just looking, “Okay, this is my paycheck, this is what I can live by”, and you no longer had to worry about everything else. But then when you looked at it in depth, you're like, “Oh, wow, I can't believe how much money is actually going towards my savings and how much in my retirement and everything like that without even me doing anything.”

And so, I think that was the biggest shock when I started doing what he recommended. And in full disclosure, the University of Utah has a very good match and employee compensation package. So this isn't all 100% on me. But I think when I started making sure I was maximizing all of my retirement accounts and making sure I was kind of getting my finances in order before I even saw the money in my paycheck, and then I was looking at my retirement account, and I was a year into this, and I was already like quarter of a million dollars in and I was like, “I can't believe it.”

And so, it made me feel a lot better to about some of the expenditures I was doing being like, “Well, most people have to worry about saving up for retirement, but I've already done that. I've already maximized that as best I can. And now a lot of this is just making sure that I live comfortably.”

Dr. Margaret Curtis:
That's amazing. Well done. That's great. You said the University of Utah match isn't you're doing, but it kind of is you're doing because you knew about it and you went and signed up for it. And you're maximizing your accounts and your contributions to your account. You're getting the full match. So good on you.

Dr. Chris Ryba:
Just yesterday or two days ago, I was talking to some of the nurses up in Rock Springs because they were getting all their open enrollment and retirement figured out. And I was talking to one of the nurses and she's like, it's amazing how everybody focuses so heavily on their paycheck and how they're going to divvy up their paycheck. But if you focus on getting all that stuff taken care of before that paycheck even hits your account, you just adjust your lifestyle. And so, you're no longer, say I have a $5,000 paycheck or something. And I'm like, “Okay, now $1,000 has to go here, $1,000 has to go here.” Well, all that's happening beforehand. So once you get that paycheck, it's kind of yours to just be responsible then.

Dr. Margaret Curtis:
It's so important to get that early saving in to your age of your stage. And like you said, to have it taken out of your paycheck early, and then you can relax and enjoy the rest of it. You can use it for essentials, obviously, your housing and your insurance, but it's okay to have a section of it that you just spend and enjoy. And you can do that knowing you've put it away where it needs to be.

Dr. Chris Ryba:
And that's the thing is then you feel less guilty than if there is like, “I'm going to take that trip to Mexico.” And I'm like, well, for somebody that's not doing all that, then they're like, “Well, that sacrifices. Do I have to sacrifice something that I'm putting towards retirement or my investment?”

With this it's like, yeah, I shouldn't do that every day, but I just took a New England trip and I was able to do that because in the end, I've set up everything else to work. And so, now this money, even though I should be responsible with it, I worked hard to get here. I can treat myself and I don't feel as guilty doing so.

Dr. Margaret Curtis:
Absolutely. Now, did you have student loan debt coming out of residency?

Dr. Chris Ryba:
I do. Unfortunately, I had a pretty hefty amount of student loan debt. I went to a private school in Loyola in Chicago, which was not cheap, although I don't think any medical schools are cheap anymore, even if it's private or public.

I had the fortune of having two working, my mom is working now, so two working parents. That made it so that I did not get a lot of government assistance. And so I pretty much had to fund most of med school. I did get help by the fact that my parents helped a little bit, but I also had a lot of scholarships for undergrad having done my paramedic.

And so, I didn't really have a hefty amount of undergrad loans. And I actually had zero by the time I started med school. But then med school was pretty much 100% funded by loans. I did graduate with $300,000, $320,000 in medical school loans, which is about the average for somebody that doesn't get any sort of assistance. I did get a little bit, but I shouldn't say none, but I didn't get much.

Dr. Margaret Curtis:
Yeah. Where are you paying those off?

Dr. Chris Ryba:
Well, during COVID, I personally did not think I was ever going to work at an academic institution in which I would be eligible for PSLF, but here I am. But during COVID, when government rates were at zero, I was able to capitalize on refinancing my loans with, I think it was Laurel Road maybe. They gave me a tremendous rate because the rates were so low during COVID because government rates were zero. And so, they were desperate, I think for people to refinance. And I got really low rates with them. I refinanced and I think I'm in year four of 10 in paying them off.

Dr. Margaret Curtis:
That's great. That's great. Sounds like a great plan and a great timeline.

Dr. Chris Ryba:
And that's where I wish I would have had a financial advisor because I just did that on my own. And I look back on it and I'm like, I don't know if that was the right decision. I think it turned out to be okay, but I really shotgun that one and maybe I should have thought about it a little bit more, but COVID was a weird time. So I blame it on COVID.

Dr. Margaret Curtis:
That's very fair. Chris, what are your next financial goals?

Dr. Chris Ryba:
I'm getting married in like three months.

Dr. Margaret Curtis:
Congratulations.

Dr. Chris Ryba:
Thank you. We were just trying to come up with our plan for combining. So we're just trying to figure out how to combine our finances, how to maximize our retirement savings while it won't be combined, it'll be separate, but how to maximize as a combined. There is a discrepancy in income. And so, how to make it so that we're maximizing everything we can while also making it comfortable for my fiancé, soon to be wife, to understand the long-term goal of finances. How she may feel heavier on her paycheck because of it. But in the end, the goals that come from it and why it's beneficial to do that.

And so, we were talking about that and then I'm actually in open enrollment now. And so my goal is to actually transfer over to a high deductible account within HSA and start saving there. I was not able to do that when I initially started with Tyler, this is the first opportunity.

That's my goal right now is to make sure that I'm maximizing both my backdoor Roth IRA as well as my HSA, which are the last two pieces of the puzzle. I get a 457 and a 403(b). I'm maximizing both my 457 and my 403(b). We've got an ally account set up for high interest savings account that money's going into.

And so, right now the final step is getting the HSA and the backdoor Roth settled and then I should be all set on the key things that he wanted me to do. And then now comes the fun of just saving and getting ready, and just getting to use my money for fun sometimes too.

Dr. Margaret Curtis:
Yeah, that's great. That's amazing. It sounds like you're doing great. And good for you and your fiancé for having these conversations early so you're on the same page. There's no one right way to do it. But it can be tricky between married couples to match their finances, especially if their backgrounds are very different. And so, good for you for doing that now. Sounds like things are going really well and congratulations on all your achievements and what's coming up.

Dr. Chris Ryba:
Thank you so much. I do appreciate everything. Yeah, it's not a sales pitch, but like I said, the White Coat Investor, definitely I knew about it as a med student, found the book and then I was reading it and then ended up kind of getting through here.

So, I refer a lot of my friends who are in the same boat to me that are just shocked at where I'm, we have all these conversations and we always laugh because it's like a bunch of ER docs come together and we do a ski trip every year out here in Salt Lake and we sit in the hot tub, have beers and we started talking about financial stuff this past year and we were laughing at where our life's become. But it's amazing where I'm at compared to where a lot of my colleagues are at. And so, it's awesome to be able to try to help point them in the direction as well.

Dr. Margaret Curtis:
That's great. Good for you. Wait till you're my age and you're going to sit around and talk about how your teeth hurt and how much fiber you're eating.

Dr. Chris Ryba:
Yeah. Well, I'm getting out of my dentist appointment tomorrow, so I might be told that tomorrow.

Dr. Margaret Curtis:
Yeah, you might. It doesn't get better. I'm sorry. But that's great. And good for you for spreading the word. Congratulations again.

Dr. Chris Ryba:
Awesome. Well, thank you so much.

Dr. Margaret Curtis:
Thanks so much. All right. Bye.

Thank you, Dr. Ryba. I hope you all enjoyed this interview. We're going to turn this back over to Dr. Dahle now. He's going to give us a little finance 101.

FINANCE 101: DONOR ADVISED FUNDS

Dr. Jim Dahle:
Let's talk about donor advised funds or DAFs. What is a DAF? This is a vehicle where you can take money and put it in the vehicle and the moving of the money from your brokerage account to this donor advised fund is permanent. You can't take the money back out of the donor advised fund and spend it on whatever you want. But it's also considered a charitable contribution.

If you're taking charitable contribution deductions on your taxes, just putting the money into this vehicle gives you that same deduction. Whether you actually give it to a charity or not, you basically committed to give it to a charity eventually so you get the deduction now. That's a donor advised fund.

While it's within the donor advised fund, the money can be invested because it's a charitable thing. You don't pay any taxes and neither does the DAF or the future charities pay any taxes on the earnings while it's in that account. And then whenever you want to take it out of that account, you can recommend a distribution, a grant to the manager of the DAF. “Please give this to the United Way or some other charity.” And they generally follow your instructions. As long as it's a legitimate charity, they'll just give whatever money you say out of the DAF to your favorite charity. Now, you don't get another tax deduction when it's distributed from the DAF, but you get the original one.

Now, like any donation to charity, the best thing to donate is appreciated shares you've owned for at least a year. And the reason why is because when you donate it to charity, including a DAF, you don't pay taxes on the capital gains. And when it's sold by the charity or the DAF, neither does the charity or the DAF. Nobody pays the capital gains, the government just doesn't get them. So, there's no capital gains taxes. Plus you get the entire value of the contribution as a charitable deduction. This is really powerful tax wise.

Now, should you do this just to lower your taxes? Absolutely not. You do not almost always, it's possible to come out slightly ahead depending on how much you're going to end up paying in capital gains, but you generally don't come out ahead donating to charity. If you give $100 to charity, you might get a tax deduction that ends up being worth $35 off on your taxes. You're not coming out ahead that way.

So, don't do this just to lower your taxes. You've got to actually have some sort of charitable desire to donate to charity. If you don't want to support the mission of a charity, don't give money to a charity, including via a DAF.

But if you do, a DAF is a super convenient way to do it for several reasons. The first one is you don't have to distribute it to the charity at the same time you get the charitable deduction. I've called this the jerk move in the past. You get all the benefit of donating to charity, the charity gets no benefit. Hopefully you don't leave it in the DAF too long before the charity starts getting that benefit.

But that is one thing that people really like about DAFs, that can be really useful. If you're in a super high tax bracket this year and you're going into retirement or you just sold a big business or something, super high tax bracket, you can get your deduction while you're in the high tax bracket, even though the charity gets the money later. That's a real benefit there.

The bigger benefits I see and why pretty much all of our charitable giving is done through a DAF now is convenience. All I have to keep track of tax-wise is usually one donation a year to one charity. That's it. That's all I have to keep track of for my tax paperwork. That's way easier than what we used to do when we donated money to multiple charities. And especially if we're donating appreciated securities, in-kind donations, we would have to keep track of those and every one of them was a little bit different, how they work with them. Some small charities couldn't handle that sort of a donation. Well, your DAF can handle that donation. And they can handle the small charities as well. That's a real benefit.

The other benefit is anonymity. And until you've given a lot of money to a lot of charities, you don't realize what a benefit this is. But if you give money to somebody, say Doctors Without Borders, for the next 10 years, four or five times a year, you get a glossy pamphlet in your mailbox from Doctors Without Borders, trying to get you to give more money to them.

I'm not going to give any opinion on this particular charity and its mission, but I do know it spends a lot of money on marketing to get more donations. I don't want to do that if I'm giving it money to support medical care for people in war zones. I want the money to go to medical care for people in war zones. I don't want it to go to marketing to me. I know about the charity. If I want to give more money to them, I'm going to give more money to them.

With a DAF, you can give anonymously. They don't know I gave the money. I don't get on their charity porn list and they don't fill my mailbox with these glossy $5 pamphlets five times a year. And so, that's a real great benefit of a donor advice fund. More convenient, simpler paperwork, anonymity, potential delay between getting your charitable deduction and giving the money to the charity. Those are the main benefits.

Obviously, if you're not itemizing your deductions, if you don't use Schedule A, if you just take the standard deduction, donating to charity is not helping your tax situation. And donating to a DAF isn't going to help your tax situation either in that sort of a situation. But if you are itemizing, you're going to get a tax break just like you would if you give it directly to the charity and probably a lot less hassle.

What DAF should you use? Well, we've used the Vanguard Charitable, which is Vanguard's DAF. It's relatively low cost. I think they charge something like 0.6 or 0.7% for the first few hundred thousand dollars’ worth of assets. It's an AUM fee. But the truth is that's probably lower than what you'd be paying on taxes if that money was sitting in your taxable account.

So, even if the money is sitting there for a while, you shouldn't feel like you're getting ripped off. Plus, if you do what I do and just leave it in cash while it's in the DAF, at least you're making good interest on it. Vanguard's money market funds are typically paying higher interest than anybody else's, a higher interest rate. And so you might be paying a 0.6 or 0.7% expense ratio, but you're also earning 4.5, 5%, etc. You're definitely coming out ahead in that sort of a situation.

The downside of using Vanguard is it's very convenient if you have a Vanguard account already. The downside is it's got a high minimum initial contribution. It's $25,000. If you're not ready to give $25,000 to charity, this is not an option for you. It also has a relatively high donation minimum, which is $500. You can't give less than $500 as a grant out of the DAF to your favorite charity. If you like giving $20, $50, $100, this might not be the DAF for you. It's for big contributions, big grants, and it's really convenient.

Some people find they like the Fidelity DAF a little bit more. And it does have lower initial investment. I think it's $5,000. I think it has lower grant amounts. I think they're $50. So much better if you're using smaller amounts of money.

Another new one on the scene is called DAFI. And we've had that CEO on the White Coat Investor podcast and talked about it. And it seems like another great option, relatively low fees, relatively convenient, and I've heard good things about them. I think you can probably find a DAF that's going to work for you between one of those three, Vanguard, Fidelity, or DAFI. I would check those out.

I hope that's been helpful to you to learn the importance of donor advised funds and help you decide whether you want to use one and which one.

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