Parents, Children, and Relationships When Money Gets Involved

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 422.

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TRUE STORY FROM A WHITE COAT INVESTOR

Dr. Jim Dahle:
All right, we're going to start off today's episode with a bit of a sad email. I got this email recently, and I'm going to anonymize everything, but basically it starts out, “Dear Dr. Dahle, I hope this email finds you well. My husband recently passed. He was in his late 50s and still practicing medicine. We subscribe to your emails and really value your advice and, in fact, frequently sent it on to our children.

I've looked through many of your posts seeking advice that would be applicable to me, but I can't quite find something specific enough for my situation. I talked to a couple of financial advisors who will charge me 0.9% on the value of my assets to $2 million, then 0.6% on the rest. I have around $4 million and won't negotiate.

I believe your expertise would be invaluable in my current situation. I'm hoping you will be able to help. I'd really appreciate your guidance, and I would structure my finances for long-term stability income, as well as an investment strategy that would be appropriate for my age, now in my mid-50s, not working, but with no debt, and our children are both financially independent adults.

I don't have experience in managing investments, as my husband always took care of that. I'll be managing brokerage accounts, retirement accounts, life insurance proceeds, and real estate investments. Thank you for all you do.”

Wow, that's where it really gets real. The first thing you say when you get an email like this is, “I'm sorry for your loss.” But man, there's a lot of good news in this email. This is a White Coat Investor who'd taken care of business, millions of dollars in assets, and still millions of dollars in life insurance.

This is exactly why we buy term life insurance, in case something happens to us before we're done earning. The life insurance has got to make up the difference between how much is enough for your spouse, and maybe some things for your kids, for the rest of their lives. It's about the same amount that it would take if you were still alive. So, if you figure $5 million is going to be enough for you, and you've got $2 million, well, you need $3 million in term life insurance. As you acquire assets, maybe you can cut that back a little bit. Maybe if you had $4 million already, you only need $1 million. But that's the way term life insurance works.

And thankfully, this White Coat Investor understood that and did not leave his spouse hanging. Those of you out there who have somebody else depending on your income, but aren't yet financially independent, you need term life insurance. You can get that at whitecoatinvestor.com/insurance. We've got some great agents we will refer you to, who will take care of you and help you get that in place.

Term life is way easier to do than disability. And frankly, it's much cheaper, as well. There's no excuse not to have it. If you have a need for it, you probably have a seven-figure need. So get a whole bunch of it.

One thing maybe this White Coat Investor could have done a little bit better with though, and don't get me wrong, he did 95% of what needed to be done. He took care of business. He was saving, investing and doing everything right and buying insurance and that sort of stuff. But maybe it might've been good to get his spouse a little more involved along the way. Because she's now feeling pretty lost.

She's feeling lost enough that she doesn't feel like she can do this herself. That's fine. I don't have a problem with people using a financial advisor. The issue is, I want those people to be getting good advice at a fair price. And a lot of times, if you need a financial advisor, you don't really know what good advice looks like.

But a fair price is not complicated. A fair price for a typical white coat investor is $5,000 to $15,000 a year for a full service financial planner and investment manager. And I don't care how you're paying that. Well, I do care. I don't want you paying in commissions.

The problem with paying in commissions is you get bad advice. I want you to pay in fee only. That means either an annual subscription of some kind, an hourly rate, or an AUM fee. But with an AUM fee, you have to do the math. For example, if you're paying a 1% AUM fee and you have $4 million, that's $40,000 a year. That's way more than $5,000 to $15,000 a year. You're dramatically overpaying. And in this situation, the person she'd run into was charging 0.9% on the first $2 million, that's $18,000 a year, and 0.6% on the next $2 million. And that's another $12,000 a year. $30,000 a year, the going rate is $5,000 to $15,000, and they're wanting to charge her $30,000. That's not a fair price.

Thankfully, if you go to the White Coat Investor recommended list, you can find people that will charge you a fair price. Now, there are some people on that list that charge AUM fees, and those AUM fees are very fair prices when you have $300,000. It might not be fair prices when you have $4 million.

So you have to do one of two things. One is either negotiate the price down, and if they won't do that, then you go to somebody that charges a flat fee. And that's just the way it is. If you've got $4 or $5 or $10 million and you're paying 1% of assets under management, you're being ripped off. That's just the truth. So keep that in mind as you go looking for financial advisors. You can find our list at whitecoatinvestor.com/financial-advisors. It's under the recommended tab on the website as well.

But do that math. If you're paying an AUM fee, do that math every year. And if you're getting outside that range of $5,000 to $15,000, it's time to negotiate or find a new advisor. Now, if you have some incredibly complicated situation and you have $30 million and all this other stuff going on in your life, well, maybe you have to pay a little more than $15,000, but you still shouldn't be paying $150,000.

When you start getting into those amounts, you can be in a family office kind of situation and you can be doing a whole lot more than just financial planning and investment management when you're paying that much. If I was paying that much, I'd want them to come by and walk the dog, too.

The other option, which it sounds like she's at least considering, is learning how to do this yourself. Either way, whether you get a financial advisor or whether you do it yourself, you need a written plan. And I emphasize that over and over and over and over again, yet on this year's survey, like 45% of White Coat Investors still don't have a written plan.

You know what? This WCI-er could have left his wife a written plan and told her exactly what to do if something should happen to him. It's very helpful. It's not just helpful for your spouse you leave behind, it's also helpful for you to have a written plan. So get a written plan. If you don't feel comfortable writing that yourself, get some help. We've got Fire Your Financial Advisor. Of course, the whole point of it is to help you write your own financial plan

We've got online communities. We've got the Financially Empowered Women. We've got the WCI Facebook group. It's got almost 100,000 people in it. We've got the WCI forum. And I think 30% of people on our recent annual survey have used the forum. We've got the WCI subreddit, which is our fastest growing community. It's about to pass up the Facebook group. I think it's going to beat the Facebook group to 100,000 members.

We've got all these communities you can ask questions on. You can take the online course and get your written financial plan. If you have some questions you can ask in the communities, you can even email me, [email protected]. I'm not going to be your financial planner, but if you've got some quick questions, I'll answer them. I answer five or 10 questions every day that WCI-ers send me. Don't send me 4,000 words in your question, but I'll try to answer your questions.

If you're not sure if you can do it yourself, there are a few firms on our recommended list that specialize in helping you learn how to do that yourself. And they have very low fees, often charge hourly fees, or just a flat rate or an hourly rate. And their goal is actually to help you fire them. And you know, you can also try those firms if you think you're almost there, but just want a little bit of professional help.

Again, sorry for your loss. All of you other WCIs out there, make sure you're taking care of the people depending on you. They're dependent on not only your earning ability, but also your financial expertise. If nothing else, it would be great for you to pick a financial advisor for them to go to should something happen to you.

TALKING TO YOUR PARENTS ABOUT THEIR BAD FINANCIAL ADVISOR

Dr. Jim Dahle:
All right, let's take another email question. This one's also about some family issues, some parental issues in this case. The email says, “I'm hoping for advice on speaking with family about financial advisors. I'm a second year resident. My wife's family have several successful businesses to the point where she's got hundreds of thousands of dollars in brokerage assets from previous UGMA accounts.” So it sounds like you're married into a very wealthy family.

“The problem is all the money is with high fee advisors who her parents trust since they have either worked with them for decades and/or are family friends. On top of the 1% AUM fee, they're constantly pushing whole life insurance policies for me and my daughter. And I've chosen an array of 15 plus actively managed mutual funds with expense ratios ranging from 0.25 to 2%. Unsurprisingly, their funds underperformed the overall market over the past decade.

We meet once yearly with the advisors to discuss the plans as I've become more financially literate over the past two years. And investing is relatively simple at this stage of our lives. My wife and I never have questions during these meetings. Overall, these advisors seem to be serving no purpose to us currently. And I hope to move to Vanguard or Fidelity and invest in a simple low cost three fund portfolio.

The problem is my wife trusts me to handle our finances and is on board. But despite this technically being her, our money, I think it's important to discuss this and get approval from her parents first, since they built this nest egg, as well as the relationships they have with these advisors.” And advisors should have been in quotes, it was not.

“We haven't had the conversation yet, but they likely will strongly discourage this change. So much so that I'm considering just continuing to ignore this money to avoid money becoming a strain on our good relationship. Do you have any experience or recommendations for gently showing the downsides of working with these types of financial “advisors?” And now it's in quotes, thankfully. “Especially when talking to people who have been convinced they're acting in their best interest, despite investing in expensive, complex portfolios and whole life.

I know this is an incredibly fortunate problem to have, but it feels stupid to be paying thousands of dollars per year for bad and expensive advice. Additionally, if her parents are against moving the money, do you have any recommendations for smart retirement uses of this money? For example, currently being in the 0% long-term capital gains bracket, we sold $23,000 to live off of for the year and I'm maxing my work 401(k). I'll also be maxing our HSA and Roth IRAs at Fidelity. Sorry for the long question.”

Okay, this is a WCIer that's only a resident and is clearly already very financially literate. He's even done a little bit of tax gain harvesting here in order to get money into the 401(k), probably the Roth 401(k), I guess, but he didn't say.

This is pretty cool, cool stuff, but it's not a financial question. This is a relationship question. The emailer clearly already knows the right answer financially. It's his and his wife's money, it's not her parents' money, and you get to do with it whatever you want, and you don't have to ask permission. If they do ask, you can discuss why, or you can give them a book, or whatever.

Certainly tax gain harvesting was a good move, especially in the 0% long-term capital gain bracket, and with the market down when this email was sent to me, it's not down now, it's actually jumped back, that would actually maybe not be a bad time to dump some of these legacy investments that they don't really want.

I sent him some posts that talk about legacy investments on the website, as well as long-term capital gains and tax gain harvesting. But I mostly just wished him luck sorting through the relationship issues. But done well, there's the possibility that not only does he save himself thousands of dollars in fees, but he might save his in-laws the equivalent of millions.

But what I've found is that you have to wait till they come to you. When the student is willing, when the student is ready, the teacher will appear. That's the approach to take. It's very hard to get wealthy people, especially your parents, to do something different with their money. They've have to really trust you a lot.

It's the diaper syndrome. If they've ever changed your diapers, they're not going to take your advice. And so I wish him great luck in this. It's even more challenging because they're not his parents, they're her parents. But the way to do it, I think, is to go gradually and maybe discuss things like fees and investing, and how investing can be very simple, and leave books laying around like The Simple Path to Wealth and things like that.

But don't get all preachy. The last thing you want to do is something like this, wreck a relationship. The relationship matters more than the fees. And the truth is, if they're really financially illiterate enough to be using an advisor charging in this manner and this much, they might have made a much bigger mess themselves.

So yes, it'd be better to get them to a real advisor. Yes, it'd be good to reduce their fees and get them some better investments, and at least help them stop buying new whole life policies, assuming they don't have some great estate planning reason to have them or something. But the important thing is the relationship. So preserve the relationship first. And you might be surprised what happens over a matter of years. Both my parents and Katie's parents have very low cost, very simple portfolios, and it didn't take a lot of preaching to get there.

QUOTE OF THE DAY

Dr. Jim Dahle:
Okay, our quote of the day comes from Jack Bogle, who said, “Learn every day, but especially from the experience of others. It's cheaper.” A lot of truth to that. And Bogle was certainly a big fan of “It's cheaper”, as you can tell from Vanguard's priorities.

All right, let's take a question off the Speak Pipe.

DEALING WITH THE CAR WHEN YOUR KID GOES TO COLLEGE

Casey:
Hi, Jim. This is Casey in Texas, but soon moving to Wisconsin. For my college-age daughter who drives her own car at college, what are the pros and cons to keeping her car's title in my name versus transferring ownership to her? Or is there a benefit in having us both on the title?

Similar question about auto insurance. That is, should my college-age kid remain on my auto insurance policy or should she have her own? And I guess I might ask similar questions about title and insurance for high school-age kids. Does anything change when they hit age 18?

The last thing on that note is that I have a $2 million umbrella policy. Would that cover issues that arise if my kids have a car wreck, injury issue? And does having this policy change the answer to my previous questions? Thank you.

Dr. Jim Dahle:
Okay, what a great question and a timely one for us. We have one kid in college, another one literally graduating from high school this week, and this is the approach we've taken. But I should also tell you it is not the most common approach.

We get no benefit due to our income from our kids being dependent on us. If your kids are dependent on you, you may get some sort of a child tax credit. We do not. We are phased out of any sort of benefit from having additional dependents on our tax return.

Knowing that, we want to make them not our dependents as soon as possible. Now, just in general, that's kind of our philosophy about life as well. As most of you who have listened to this podcast for a long time know, our children receive a substantial amount of money from us basically upon leaving home or within a few years of leaving home.

We call this the 20s fund. And it consists of a Roth IRA we've been matching for them during their teen years. It consists of a UTMA account. It consists of a 529 for their college expenses. And it now also includes some HSA money.

They're no longer dependent on us. They've got all this other money. So they're truly not our dependents. And because of that, that not only allows us to put in a family size contribution into their own HSA, once they're not your dependent, but it also allows them to at least have the option of not being on our insurance.

So here's the upsides of having the title in your name. It may be cheaper. Mostly the insurance is what's cheaper, but it might be a little bit cheaper to have the title in your name depending on your state. Probably not. It's probably the same for you either way.

But the big risk of having the title in your name, having your name on the title is that you're responsible. They could sue not only your child, but you in the event of some terrible crash where your child maims a CEO and they lose 10 years of earnings or something. Hopefully either way, you've got some decent insurance on it that would cover most things.

But most children don't have that much in assets. And so, their main asset protection technique is to declare bankruptcy. They can carry insurance and they can take care of reasonable stuff, but if someone gets a $4 million judgment against them, they're going to declare bankruptcy. And if your name's on there and you've got a $4 million taxable account, they might be coming after that. From an asset protection standpoint, getting the title in their name is a huge win.

So, what's the downside? Well, the downside is on the insurance. It's generally going to be cheaper to have them on your insurance. And that means it's got to be your title as well. And so, that's the approach that a lot of people take. It's pretty frightening just how much insurance costs.

My daughter bought a car this last year and she's not our dependent. And I said, “You know what? I don't want the liability. This is going to be your car. Your name's going to be the only one on the title and your name's going to be the only one on the insurance policy here. Here, call USAA and see what it costs.”

And you know what it costs? A lot. It was close to $300 a month. It's $10 a day for her to have insurance on her own car given her age. Now that'll go down as she gets older. As she gets closer to 25, that price will go down. She shopped around. It didn't get a lot better, but she did get a little bit better. I think she's still paying $240 or something. $240 a month for insurance. Whereas she could probably get it for about half of that if she were on our policy. There's substantial savings available to keep them on your policy. And for that reason, I think a lot of parents do.

Now, hopefully most White Coat Investors have got a big fat umbrella policy anyway that's going to cover that additional liability. You're not going to get into some sort of above policy limits asset protection situation, but that is an area where you can reduce your risk. And frankly, we think with the 20s fund we gave our kids, they can afford to take that risk on themselves. I think it's a big step in them becoming financially independent, becoming adults, et cetera.

In fact, I think we threw her off our cell phone plan too. At least our 20 year old. Our 18 year old is still on that. So unless you want them living in your basement, at some point you got to start cutting strings and it's up to you when you decide to do that.

But if they're still in high school, if they're still living at your house, in fact, if they're within 40 miles and they're still your dependent, you probably have to keep them on your policy. The college has got to be a certain distance away before you can take them off your policy. And there would be some savings in that situation.

And of course, if they're on your policy, they're covered by your umbrella coverage. That was the other issue, partly why my kid was so expensive when she was living at home, even not being our dependent, she was at home for a few weeks, they wouldn't let her not be covered by my umbrella policy. And so, it was a little more expensive in the beginning. And then she saved a little bit of money when she actually went back to college.

So, dive into it. You can go to whitecoatinvestor.com/insurance. And you can even look into auto and property. We've got some people who do auto and property kind of stuff there, umbrella policies that you can price out and see if you're getting treated fairly there as well.

Hopefully that's helpful. Like I said, most people do keep their kids in college on their own policy because it's so much cheaper. We decided not to. One of the things I guess you can do when you're wealthy is make decisions not based on the very best financial outcome. And we chose to do so. So, good luck with your decision.

Okay, let's take another parental gift kind of question off the Speak Pipe.

GIFTING A DOWN PAYMENT FOR A HOUSE

Steve:
Hi, Dr. Dahle, Steve from the Midwest, longtime listener, first time caller. My question pertains to gifts as a down payment for a house. My wife and I are both physicians. I'm about one and a half years out from fellowship. We've begun saving a down payment for a house and have about $100,000. My father-in-law recently read “Die With Zero” and offered my wife's inheritance early as a down payment. This is roughly $100,000 itself.

Will he owe gift taxes on the money if given as one large lump sum? I know the annual gift tax exclusion for 2025 is $19,000 per person per year. Theoretically, he could give me $19,000, my wife $19,000, as well as her mom repeating the same process, bringing a grand total to around $76,000 and still remaining under the exclusion limit.

I was reading some random financial blogs recently by “financial advisors” who mentioned that the annual gift tax exemption is actually overridden by a lifetime gift tax exemption, which I believe in 2025 is something ridiculous like $27 million. Seeing as my father-in-law is not a billionaire, this will not come into effect.

Just wondering if my in-laws will owe gift tax on the remaining $24,000, which I think would be around 20 to 22%. Thanks in advance.

Dr. Jim Dahle:
All right. Thanks for what you're doing out there. The reason White Coat Investors generally have high incomes is because they do hard work and it never feels harder than when you're in training or shortly out of training. Thanks for what you're doing out there to start with.

Secondly, it sounds like you understand almost everything about this issue very well. And in fact, I think this sort of thing is going to become more common. It used to be that the thing your kids really needed help with was their educations. That's no longer the case with home price appreciation over the last few years. What people need help with is housing.

There's a realtor in our local area that comes around, looks at all the houses in our zip code or whatever, and the one's under contract, the one's up for sale, and puts the flyer on a door and hopes that we'll hire him to sell our house.

I went down the list. And I think the cheapest one I saw was $800,000. And there are plenty of seven-figure homes on that list. And that's here in Utah. We're not in the Bay Area. We're not in DC. We're certainly not in Manhattan.

And so, I know there's a lot of other areas out there in the country that have really expensive housing. And even small towns, sometimes White Coat Investors are surprised just how much it costs to buy a house in a small town.

And so, I think it's going to be more and more of a trend where parents are helping their kids with down payments. And by the way, if your parents are fairly well-to-do, this is an exceptionally good Christmas or birthday gift to give them “Die With Zero.”

“Die With Zero” is my favorite book for those of us that have trouble spending. The book's not perfect. I've got a few little problems with it. But for the most part, I love it. I think it's a great book that helps those who are having trouble spending their money realize that they're not immortal and that they can probably do more good, generate more happiness by spending now and giving now than they can by doing so later.

One of the things the book talks about is it talks about the average inheritance is actually received at about 60 years old because that's when your parents die. But people think an inheritance would be most useful between ages 26 and 35. Now, you might think 26 is a little early, that maybe it'll screw them up by getting a bunch of money then, well, fine. Make it 38, make it 42, whatever, it's better than 60. A great gift to give to your wealthy parents or your wealthy in-laws, if only for self-interested reasons, but it might help them be happier too.

Okay, let's talk about gifts. You can give $19,000 a year to anybody you want, to everybody you want without having to file any paperwork with the IRS and without having to pay any sort of taxes. That is the annual gift tax exclusion amount, it typically goes up most years, it'll probably be $20,000 next year. And you and your spouse can each write that amount.

And if you're giving it to a couple, you can write that amount to each couple. So it's $19,000 from dad to junior, it's $19,000 from mom to junior, it's $19,000 from dad to junior's wife, it's $19,000 from mom to junior's wife. So that adds up to $76,000 that a couple can give to another couple every year, no paperwork required, no taxes due. That's the way the gift tax exclusion works.

It's a pretty cool thing, helps keep things simple. And truthfully, I'm not sure that the IRS keeps very good track of any of this. If you cut somebody a check for $150,000, I don't think the IRS has a real good way to find out about it, let's be honest.

I think people probably don't follow this law a lot and get away with it. But the way the law is written, if you give more than $19,000 in a year, you have to file a gift tax return. And we've had to do a gift tax return one year when we funded our trust and used up a bunch of my exemption.

But what that gift tax return does is it starts burning your lifetime estate tax exemption amount. And you're right, that amounts like $13 or $14 million a piece, you double it if you're married. And it's portable between spouses if you're married as well.

That's what you start burning into. And it's not until that is all gone, until you've literally given away more than $14 million during your life, that you have to start paying gift taxes. Now, gift taxes are pretty expensive. The first million kind of ramps up. But after you've given away a million, it's like 40%. That's federal.

Now, there may be also state estate taxes. So, check and see if your state has an estate tax. And maybe they have a gift tax thing going on as well in your state. Mine does not. My state does not have an estate tax. We didn't have to worry about that. We just had to worry about the federal estate tax when we had to do a gift tax return.

The gift tax return is not terribly painful. Our estate planning attorney took care of it. So I've never actually filed one. But I've looked at them. They're not terrible. It wouldn't be the end of the world to have to file that yourself. And certainly, if you're giving away that much money, you can afford to pay somebody else to file it for you. But that's the way it works.

To answer your question, no, the parents will not owe any taxes. Yes, they will have to file a gift tax return if they give you more than $76,000. One way to do this is just do it at year end. So you get $76,000 in December. You get $76,000 in January. And nobody has to file any gift tax return. So you might consider that as well if the timing works out for you.

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So, it's actually worth more than the consult even costs you. If you're interested in the course, you probably ought to just pay for a console. It's cheaper than buying the course itself. But you can save hundreds of thousands of dollars with your own customized student loan plan. Just go to studentloanadvice.com, book it during June, and you get the free course.

HELPING YOUR PARENTS GET THEIR FINANCES IN ORDER

Dr. Jim Dahle:
All right, our next question comes in via email. It says, “My spouse is an emergency doc six years out of training. Two of us recently reached the millionaire milestone thanks to what we learned from you and are now able to focus on our kids.” That's great.

“The question I have for you is how best to help my parents get their finances in order.” Oh, good luck with this. I think this is a common theme in this episode, isn't it? “Growing up, my parents gave me a good start managing money.” Awesome. “They helped me open a bank account in elementary school.” Great.

“Taught me to work hard, live within my means, and save for the future. As my dad climbed the corporate ladder, they continued to build their wealth and hired a financial advisor. The plan was working well enough for them to completely pay for undergrad for my sister and I. But shortly thereafter, the train jumped the tracks.” Oh, this is not going well.

“A few years ago, they got divorced. It was messy. Thankfully, they didn't drag my sister and I into it. But it was a stressful and scarring time for the entire family. At the time, my wife was finishing her training, and we were about to become parents. And I was drafting our written financial plan. I tried to sit down with each of these divorcing parents and create their own financial plans, but didn't get very far. Reflecting back on it, everything was just too raw for that to have ever been successful.

Today, both of my parents have new partners, are in a much better mental space. In the last few weeks, both have sought me out to help them get their finances in order. They're nearing retirement, haven't had any guidance for the last eight years, and don't know where to start. I feel confident in what I've learned as a DIY investor, but I don't know the first thing about retirement and the decumulation phase.

I want to help them each find a good advisor. I started to look through the list of recommended advisors on your website, but a lot of them seem to target my demographic, early career, high income.

Neither of my parents are doctors and their peak earnings years are behind them, so they're skeptical and I forwarded the link to them. Are there any in particular that you think would be a good fit? My mom is a validator. My dad is definitely a delegator.

I know that you've mentioned in your podcast before that you help your parents to some degree with their finances. As someone who's walked this path before, is there any other general advice you can pass along? I really want to help them stop doing dumb things with their money. My dad has a bad habit of buying boats that rarely make it to the water. And my mom is writing offers on houses close to us with thoughts of borrowing from a retirement account.”

All right. Well, first of all, sorry you had to go through that. Relationship issues, family issues are the hardest things in personal finance. It's 90% personal, 10% finance, and that 90% is certainly the hard part.

A few things to consider as you think about this. First, financial planning is hard. Investment management is easy. I am my parents' investment manager. I literally spend less than an hour a year managing their portfolio. But if you're going to be their financial advisor, you've got to think about more than just investment management. You've got to think about stuff like insurance and estate planning and asset protection and budgeting and withdrawal rates and strategies and that stuff too.

The second thing to consider is you need to be sure that this is okay with your siblings and any other interested party, particularly anybody who's likely to receive an inheritance from your parents. You can avoid a lot of blame by telling them they have to get someone else to be the financial advisor rather than you doing it.

Third point, it's relatively easy to find a good advisor for delegators. It's much harder for validators. On our list, we have a few people that are pretty good for validators, which I recommended in this email to this person, but just about everybody on the list can work well with delegators. And almost all of them, a lot of them do have people that are White Coat Investors. A big chunk of them, some of them, the vast majority of their clients came from the White Coat Investor, but pretty much everybody on the list has people who came to them who aren't docs.

I don't think that's a big issue to worry about. Yes, they like having doctors, doctors have high incomes and usually become wealthy eventually. And there's a little bit of specialization on the list and people that work with doctors, but they've all got people that aren't doctors. I wouldn't worry about that too much.

Fourth point, if you're going to do their investment management, you better make sure they bought into your preferred strategy. If you end up putting money into bonds and REITs and international stocks and then they have years like 2023 and 2024, and they're really PO'd at you because you trailed the S&P 500 so much, that isn't going to be very good for family harmony.

Whatever asset allocation mix you use, whatever investing strategy you use, they've got to be bought in. If they're not bought in, you don't want to be involved. Because the last thing you want is for them to bail out of the strategy when it's not performing awesomely and they end up buying high and selling low.

But if you want to function as their advisor, you're going to have to read up on withdrawal strategies. We've been publishing lots of this stuff over the last year or two. And in fact, I just published one a few days before I got this email and sent them a link to that.

We have more coming on it. It is a little more complicated in the decumulation stage. It's not dramatically more complicated, especially for a lot of White Coat Investors that have more than what they need. They can just spend what they want and they're going to be fine.

But if you're going to be functioning as your parent's financial advisor and they're in the decumulation stage, you're going to need to know something about the decumulation stage. But I think you're probably better off in both of these situations, most of the time hiring somebody else to help. Just make sure they're getting good advice and are paying a fair price and leave that relationship up to the advisor.

HOW TO MERGE FINANCES AFTER SEVERAL YEARS OF MARRIAGE

Dr. Jim Dahle:
Okay. We've got another email. This one refers to a Milestones podcast we did recently. “I appreciate the married finances talk on the Milestones podcast this week. My question is how to merge finances after a long time. The military separated me and my spouse for our first six years of marriage with two incomes and two households. It didn't make sense to combine finances, but we had a general awareness of each other's situation. Now it's the logistics of merging accounts and the like that seems to be the obstacle. We're aware of the nitty gritty day-to-day finances now, but there's an inertia after six years as well. Any thoughts on how to start tip-toeing things together?”

Okay. I don't buy this one. I am a big fan of managing money together. I think separate finances is usually a bad idea. Certainly completely separate finances is pretty much always a bad idea, but there are some situations where it can make sense.

For example, let's say you're worth $10 million and you get married to a new spouse at age 62 who has nothing. You probably need some sort of prenup. You probably may manage finances a little bit differently than a couple that got married at 22 and they were both flat broke.

There are some times I think where having finances separate, at least partially separate, you probably ought to both be putting something into some sort of combined account, can make sense.

But I'm not hearing any reason why this couple ought to have separate finances. In fact, I don't even think the military having you live in different places is a reason to have separate finances. There's two mortgages or there's a rent check and a mortgage check. There's two sets of utilities. That's not a reason to have separate finances.

I guess if you were living completely separate lives for some reason, maybe you have separate finances, but it makes me wonder why you're married if you're living completely separate lives. Presumably you're still working toward the same goals. You have the same children. You see each other every now and then. I think you can manage money together, even if you're not living together. I think getting this together now is a wise thing to do.

The first thing to do is convince both of you of the merits of doing it. You have to both be on board and going, “Oh, okay, we should do this. This will be a lot simpler. Instead of having two sets of credit cards and two bank accounts and all this other stuff, we're just duplicating. This'll be way better.”

Just bite the bullet. Do this all over the course of a month or two. Ditch one checking account, put the other person's name on the other checking account, move over anything that's being paid out of that account, move over anything that's paying into that account. And get another debit card for the person whose name wasn't on that account. Get another checkbook. Combine any taxable accounts with in-kind transfers and start looking at your portfolio as one big portfolio. You probably ought to get on the same cell phone plan, too, and those sorts of things. Get on the same insurance plan, as well.

But I don't understand why you haven't been doing this for a while, number one. And number two, I think you're right. I think it's just inertia. Just go do it. If for nothing else, it's going to simplify your financial life. And just imagine that one of you at some point in the future becomes disabled or heaven forbid, dies. You don't want to be having all these accounts to keep track of. Simplify now and don't leave it to your kids.

Okay, let's take a question about this newfangled thing, the 529 to Roth IRA conversions.

529 ROTH CONVERSION

Speaker:
Hi, Dr. Dahle. I am a physician, a parent of a recent college graduate who has a 529 account that still has some money in it. The recent changes for 529 conversions to Roth IRA has come up. And if my son gets a job with a 401(k) plan and a match from his employer, does this affect how much money he can put in the 529 to Roth IRA conversion period? Thank you very much for your help.

Dr. Jim Dahle:
Okay, there's not even that reason now. It's been a few years since this law was passed, but people are still kind of clarifying how this is going to work. If you've only overfunded your 529 a little bit, one of the best ways to take care of that is to use money from the 529 for the beneficiaries' Roth IRA contributions. A junior gets out of college, there's still $18,000 in that 529. Junior's making $50,000 a year or whatever. And now his earned income can make Roth IRA contributions, but doesn't have that much money because he's only making $50,000 a year.

Well, you can take the $7,000 that junior now can contribute to a Roth IRA, and that can come out of the 529. Totally tax-free. No penalty, no taxes. It goes in the Roth IRA, never gets taxed again. It takes the place of any other contribution and is subject to the annual contribution limits. And the total you can do over the years of this is $35,000. And that's not indexed to inflation. As the years go by, it might only be four years worth of contributions eventually, that $35,000. But that's how it works.

Now, I suppose if junior was making so much money that he can't make direct Roth IRA contributions and has to do his Roth IRA contributions via the backdoor Roth IRA process, I don't think this is an option. I don't think you can go through the backdoor Roth IRA using a 529 to a Roth IRA method.

I'm not 100% sure you can't do this if you're high income, but I think that's because nobody's actually said. I don't think it's been clarified by the IRS whether high earners can do it, but I'm presuming they cannot. They've got to do regular backdoor Roth IRAs. So, if you're going to do this, get it done before junior becomes an attending physician or something and can't make Roth IRA direct contributions. I hope that's helpful.

Other issues people have, this is becoming a bigger and bigger problem. Because all of you White Coat Investors out there think junior's going to go to Harvard and then he's going to go to dental school and junior ends up going to state U and doesn't go to dental school. And now all of a sudden you got $200,000 extra in their 529.

Well, this conversion isn't going to fix that problem. You're going to have $200,000 in there. And even after you take $35,000 out, you probably still got $200,000 in there because it grew over the years as you took that $35,000 out.

The best way to deal with these overfunded 529s, in my opinion, is change the beneficiary to the grandkids. You can change it to siblings as well, but presumably your kids is going to have some kids. And now you basically are done their college savings because by the time they're born and they get to college age, it's going to have been 25 years. That money's going to compound.

And even if there was only enough for one kid to go to college part of time, after 25 years of compounding, it might be a whole lot more. I think that's the best option. You can always just pull the money out and spend it as well. You got to pay a penalty. I think it's 10% and you got to pay taxes on the earnings, but that's also another option.

Our next call, I think, is going to be talking about another way to get money out of a 529 if you don't end up needing to use it to pay for college. But before we get to that, I want to make sure those of you out there who are interested in this opportunity have heard about, we have a conference every year called the Physician Wellness and Financial Literacy Conference, a.k.a WCICON.

We need a number of speakers every year at this conference. And we try to bring back really popular speakers that did a great job from time to time. But we also try to have new speakers every year. So this is your call for speakers. If you would like to come speak at WCICON, we pay you a little bit and you get an all-expenses paid trip to WCICON.

It's a lot of fun. You get to come to the premium / speaker dinner and meet the premium attendees and they get to meet the speakers. It's a lot of fun to be a speaker. But you can sign up now for that at wcievents.com.

Be aware it's a competitive process. So not everybody who applies gets chosen. In fact, I think we turn down like 80% of the applicants every year. Keep applying give us multiple options for your topic. And hopefully we can eventually bring you there as a speaker at WCCON. wcievents.com is where you sign up for that.

Okay, let's get to this question about scholarships and 529s.

WHAT TO DO WITH YOUR 529 WHEN YOUR KID GETS A SCHOLARSHIP

Marcy:
Hi, Dr. Dahle. This is Marcy from the Midwest. My husband and I have a relatively good problem to have in that our high school senior who just graduated received a full ride scholarship to the college of her choice.

She has a fully funded 529 with over $200,000 in it, with no plans for moving that over to her brother because he also has a fully funded 529. I'm interested in learning about the “scholarship loophole”, where you may be able to at least move some of the money from the 529 over to UTMA accounts potentially, while not paying the penalty for withdrawing from the 529.

Can you explain the nuances for doing that and timing? Do we have to do all of that year by year that the scholarship is used? Or do we do that all at the end of her schooling assuming that she uses the entire scholarship? Thank you.

Dr. Jim Dahle:
Okay, this is a perfect example of what I'm talking about. So many of you people out there are putting a gazillion dollars into 529s. Quit doing that. It's unbelievable. People think they need to max these things out. Well, the maximum for a 529 is two billion dollars. You can open one in every state. The other parent can open one in every state and you can put four or five hundred thousand dollars into these things.

There is no maximum on how much you can put in a 529. But any maximum there might be is certainly way more than any kid can spend. So realize that you don't have to save up entirely for college in advance. Your kids are smart like you. They're probably getting some scholarships. They're probably intelligent enough not to pick the most expensive college in the country. And you probably don't need a bazillion dollars in your 529.

They can work during the summers. They can work a little during the school year. They may get some scholarships. You can pay a little bit out of your current cash flow while they're in school. Heaven forbid, they have a student loan. You all paid for your school with student loans but you think your kids can never have one even if they go to dental school. No. Use a multi-pronged approach so you don't end up with $200,000 too much in a 529. Heaven forbid, you have to use a little bit of your taxable money to pay for school instead of a 529. It's not that big of a deal.

So, what are your options here? Well, there is a scholarship loophole. That allows you to take money out of a 529 in the amount of scholarship they receive without paying the 10% penalty.

But guess what you have to pay? The taxes on the earnings at ordinary income tax rates, which for you is probably more than the 10% penalty is. This is not a great option for them getting a scholarship. It's like an okay option.

There are a few ways you can work around it. There's not like a 529 UTMA rollover that's somehow tax-free. No, that's the Roth IRA rollover. It doesn't go to UTMA tax-free.

But here's something you might consider doing. You can change the owner of the 529 from you to the kid. And then the kid might be in a much lower tax bracket than you. So when they pay taxes on the earnings, it might be taxed a lot less. Maybe what you ought to do is change the owner to them. And then every year during college and for a few years after, they can take a little bit out each year in amount equal to that scholarship.

I don't think it has to be the same year they got the scholarship, but it might be. It might have to come out in the same year they got the scholarship. So, look into that and then move that into whatever. If they want to invest it, they can do that. I guess if they're young enough, it could be a UTMA account.

But by the time they're done with college, it's just going to be their taxable account they're investing it in. Or maybe they can use it to fund a 401(k) or Roth IRA if they've got some earned income and have those plans available to them. But maybe they just need to spend the money. Maybe that becomes their 20s fund, that instead of putting it in a UTMA like you should have, you're putting it into a 529. It's really up to you.

Other options, of course, rolling it over to cousins, rolling it over to nieces and nephews, rolling it over to yourself and going to cooking school in Italy, changing it to their kids, which I think is one of the best options out there for overfunded 529s. But that's the way the scholarship loophole works.

All right. I think we've answered all the questions we got for this episode. I hope you guys have enjoyed that. Lots of family stuff today. Kids with overfunded 529s, parents that need help, people dying, unfortunately, lots of relationship issues today. I hope this episode has been helpful to you.

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We had somebody email us recently who said, “I'm a practicing Durham PA for the last 11 years. I've been an avid consumer of all your content since 2019. Prior to discovering WCI, my financial literacy was far from sufficient. Through study of your content, increasing my income and lots of hard work, I've almost reached $2 million net worth at the age of 35. I would have a fraction of this if not for you.

Unfortunately, just several days ago on Easter, my family's home was directly hit by a tornado. No warning at all. In 60 seconds, our lives changed dramatically. Praise be to God that my family, a wife who is seven months pregnant and a three-year-old son, were unharmed. The same cannot be said for our house. It sustained significant damage and will be uninhabitable for the next three to four months while under construction.

The reason I send this email is to say thank you. Despite the terrible circumstances and few obstacles to overcome, financial concern is not one of them. My wife and I have put ourselves in a financial position that removes this worry completely, and I owe that to the White Coat Investor. I pray for your continued physical recovery from your accident and continued growth to the White Coat Investor that may positively impact the lives of others like myself.”

What a nice email. Thank you for sharing that. We wanted to share that with WCI podcast listeners as well. This stuff does matter. It matters when the excrement hits the ventilatory system in your life. And if you're like most of us, that's going to happen at some point.

Keep your head up. Keep your shoulders back. You've got this. The entire WCI community is here to help you. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

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

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire number 225 – Couple leverages a dental practice to reach financial independence in nine years.

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If you're eager to achieve success as a private real estate investor, DLP's impact-focused sponsored funds offer the potential to earn double-digit returns while making an impact on America's affordable housing prices. Interested in learning more? Head to whitecoatinvestor.com/dlp today.

All right, we got a promotion going on here at WCI as well. If you will book a consult at studentloanadvice.com between June 1st and June 30th, you will get a copy of one of our online courses, our Continuing Financial Education 2024 course. This is like 50 hours of material. We're giving it away free to anybody who books a consult at studentloanadvice.com.

If you've been following news, it's like there's a change in student loans every week all spring. And so, if you're not sure if your student loan plan is still the right plan, now is the time to have a consult with a professional who can guide you through it.

No, PSLF is not gone. No, not all IDRs are gone. They still exist. Are there changes that you need to know about? Yes. Do you need to have backup plans and things like that in case Congress or the White House decides to make some additional changes? Yes, but we'll help you walk through it so you have a plan that's going to work for you, that you don't have to lie awake at night worrying about your student loans.

Whether you owe $80,000 or whether you owe $800,000, it can be worth your time and a few hundred dollars to chat with an expert at studentloanadvice.com. And to bribe you to do it, we're going to give you a copy of CFE24 to go along with that.

We got a great interview today. We got a couple who have become financially independent. So I thought after we chat with them, we're going to talk about the concept of FIRE and learn a little bit more about that.

All right. We have two guests today on the Milestones to Millionaire podcast who are going to remain anonymous, which isn't unusual. What I've found on this podcast over the years is the further along the milestone is, the more people want to remain anonymous. And we grant them that opportunity because we like the details. And when people are anonymous, they share a lot more details. We know you guys like the details as well. And frankly, you don't care what their names are or whether they live down the street from you. Although somebody out there may recognize their voices, we're going to allow them to stay anonymous.

INTERVIEW

Dr. Jim Dahle:
But let me introduce them to you very briefly. She is a dentist. He is a business person, an entrepreneur. And they have recently achieved a milestone. So welcome to the podcast, guys, first of all. And secondly, why don't you tell us what milestone you've achieved?

Speaker 1:
Well, thank you. Thanks for having us. We reached FIRE. We reached financial independence. We're still working on the retiring part and winding things down. But it's safe to say we could just kind of hang out and do what we want for the rest of our lives.

Dr. Jim Dahle:
Very cool. You've hit financial independence. Tell us how far you are out of dental school.

Speaker 2:
Well, I graduated in 2016.

Dr. Jim Dahle:
2016. So that puts you nine years out of dental school. That's pretty awesome to already be financially independent nine years out of dental school. That is not common. It's very unusual. So you guys got to tell us the story. How'd you get from coming out of school just nine years ago to now never needing to work again?

Speaker 1:
Yeah. Okay, I guess let's start from the beginning. When we got out of school, I was working on my MBA, and she was going to dental school at the same time. We both got out the same year in 2016. And at that time, we were pretty much flat broke. We didn't have any money, just a bunch of debt. And we both went to work for normal jobs. Hers was an associate. I worked in a big tech company for a while.

A couple of years down the line, my wife said, hey, I want to start my own office. And so she was working on that. And she dragged me into it a little bit. And then COVID also happened. So I went from working on the sidelines to working in the office. And fast forward five years, we built a really successful mid to large size dental office. And finally partnered with a larger organization this year, which led to a pretty good, I guess, cash payment for a portion of that business. And now we're able to scale things down, and we gain financial independence.

Dr. Jim Dahle:
Very cool. Well, first of all, let's start with the year you came out of school, 2016. What was your net worth? How much debt did you have?

Speaker 1:
It was pretty evenly split between us. I did the research for this. So my wife had $180,000 coming out of dental school. And then I had $120,000 coming out of business school. We had $300,000 total. That was pretty much our net worth. We had kind of nothing except debt at that point.

Dr. Jim Dahle:
Okay. So what did your income look like over the last nine years? Not counting this recent payment for part of the practice. What did your income look like year to year?

Speaker 1:
Yeah. It ranged in the beginning years, it was as low as $250,000 when we started. And in our highest earning years, which was kind of last year, we hit $975,000.

Dr. Jim Dahle:
Okay. And is most of that from the practice and its success? Or was there a pretty significant contribution coming on the entrepreneurial side, the business side, your side?

Speaker 2:
I think most of the $975,000 is just from the business.

Speaker 1:
Yeah. I think we got to say we're working kind of together. We work together in the business.

Dr. Jim Dahle:
Okay. So you say you're also working in practice. All right.

Speaker 1:
Yeah. There's a portion of that, probably about $200,000-$300,000 comes from working as a dentist. And then the remainder of that comes from developing that office into a large office, seeing a lot of people with multiple doctors working in it. A lot of that is, I guess, the entrepreneurial profit of the office.

Dr. Jim Dahle:
Okay. So not counting the recent cash payment for the sale of the business, approximately what would your net worth be without that cash payment?

Speaker 1:
Okay. That's a good question. It would be about $5 million before that.

Dr. Jim Dahle:
$5 million. And then you add another, what, million, million and a half or so from that cash payment?

Speaker 1:
Another three.

Dr. Jim Dahle:
Another $3 million. Okay. We're talking about $8 million net worth now, which would make most White Coat Investors financially independent. That's when people define enough, that number is usually less than $8 million. So congratulations to you on that success. That's pretty incredible. It's not quite a million dollars a year, but it's pretty darn close of wealth that you've built over the last nine years. So, pretty cool. Tell us how that wealth is now divided up. What do you invest in it?

Speaker 1:
Of the $8 million, we have about $600,000 in cash and just high yield savings accounts, about $300,000 in real estate. That's really just equity in our own house. $6 million in investments. Equity investments were mainly 100% buy for the most part.

Dr. Jim Dahle:
That worked out really well in 23 and 24, huh?

Speaker 1:
I know, and it made me want to throw up just about a month ago. But yeah, and then a million in private stock.

Dr. Jim Dahle:
Okay. Very cool. Well, if we go back and we add up all the money you made, it would add up to something close to the $8 million you still have. So, what the heck? How much did you spend over the last eight or nine years?

Speaker 2:
Our saving rate is about 80% to 90%.

Dr. Jim Dahle:
80% to 90% net, I assume, because you're paying a significant amount of taxes.

Speaker 1:
Well, that was pre-tax. Net, it would probably be around like 60% or 70%. But from a spending perspective, we only spend maybe like $8,000 to $12,000 a month. So about $144,000, $145,000 a year.

Dr. Jim Dahle:
Yeah. That leaves a lot of money to build wealth. I mean, it was leaving money to build wealth when you're making a quarter million dollars. Certainly, as you get closer to a million, that's a lot of money going toward wealth building.

Speaker 1:
I think that's something that we really did well. And I give her all the credit for that because I am the spender. And she keeps me controlled in spending money. So I give her all the credit for getting a high savings rate.

Dr. Jim Dahle:
How did you guys resist the siren call to spend more? I mean, for most people, when they have more income, they spend more money. You guys didn't do that. Why not?

Speaker 2:
We had been told, once you get a lot of money, you should wait about a year before spending a large chunk of it. That's what I was thinking. It's not been easy. Just the other day, I was telling not to buy a $1.5 million house because it would just set our retirement plan completely back.

Speaker 1:
She's super forward thinking. I'll say that. She's always got the goal in mind and keeps me from getting off track, for sure. The other thing about this is it's really hard to make a million dollars a year of profit in a dental office. So both of us were just there, just working all the time. And that really helped us not spend money as well.

Dr. Jim Dahle:
Yeah, it's hard to spend when you're at work.

Speaker 1:
Yeah.

Dr. Jim Dahle:
Okay, now I can see you because I've got a video while we're chatting. Other people won't be able to see you. But you guys are 40s, I would guess, or early 40s. Not even that yet. Late 30s?

Speaker 2:
I'm 35.

Speaker 1:
Yeah, I'm 36.

Dr. Jim Dahle:
Okay, yeah. So you're young. I guess the question for me, when I see somebody FI at such a young age, whether that's 35 or 45, is what does your financial life look like going forward now? Now that you don't have to work, how much are you going to work? Now that you have enough money to spend more than the $140,000 or $150,000 you've been spending, what do you expect your spending to look like going forward? Tell us what your vision, what your plans are going forward for your financial life.

Speaker 2:
My plan is to really just stay at home and take care of my child. And I'm another one on the way.

Dr. Jim Dahle:
Congratulations.

Speaker 2:
Thank you.

Dr. Jim Dahle:
So you're going to FIRE. You're done. You're punching out. You don't expect to go back to dentistry at all?

Speaker 2:
Hopefully not for a couple of years.

Dr. Jim Dahle:
All right. And how about on the other side? What's work look like for you going forward?

Speaker 1:
I always have the goal. I think both of us always have the goal to retire at 40. Now that we're getting closer and we've achieved that success, it actually becomes super scary in terms of what are you going to do afterwards? And then what I'm realizing is actually, I really like working. I really like putting things out into the world that give people a lot of value.

But what financial independence gave us is that freedom. To decide what that is for ourselves and not worry if it fails or makes any money. So yeah, I think I'll probably just build another product and put it out there. But probably really, really slow.

Dr. Jim Dahle:
Yeah. Now, 3 or 4% of $8 million is something like $300,000 a year, about twice what you're spending now. Do you expect your spending to change or do you think you're going to keep spending about $150,000 a year?

Speaker 1:
Oh my gosh. That's the hardest thing is trying to learn how to spend more money and break those habits. We were just talking about this last night as we were prepping for this. We got to learn how to do that.

Speaker 2:
Yeah. Our spending hasn't changed. I think the only reason it would change is if we had a higher mortgage payment.

Speaker 1:
Yeah.

Speaker 2:
And our lifestyle, we already take vacation.

Speaker 1:
Yeah. That's another thing. I don't think we want for anything. We just live in a medium or low cost of living area because we're kind of out, we're out on the outskirts of a large city, but close to the farm area. It doesn't cost as much to live here. We take a lot of vacations. We buy whatever we want, I guess. But yeah, I think the two things that we could really work on is maybe upgrading our lifestyle just a little bit and not delaying gratification, I guess.

Dr. Jim Dahle:
Yeah. One of the best books out there that we've mentioned in the White Coat Investor Podcast before for people with your challenge. And it's a great problem to have. There's no doubt about it. This is the ultimate first world problem. It’s “Die With Zero”, which is a great book for people like you and me that maybe of the five money activities, the one we're not the best at is spending. And I know of no other book that's as good at making you really think about ways you can use your money in a manner that'll bring more happiness to your life and that of others.

Okay. Well, very cool. You got to tell us a little bit about the discussion, maybe an ongoing series of discussions between the two of you and how you got on the same page to work so hard and so aggressively toward early financial independence.

Speaker 2:
I think the hard work and ethics of that really just comes from our parents and watching them work hard as they're immigrants.

Speaker 1:
Yeah.

Speaker 2:
Seeing them work, over time, over so many hours, working night shifts constantly, really made me feel like I owe it to them for making them since they came to another country and work so hard. I think it's something that we should do.

Speaker 1:
Yeah, I think I agree with that completely. Both of our parents are immigrants. They both came from different countries, but that hustle, that working, building a better life, that was instilled in us from, I can't even remember a time when they would take vacations. I think that became innately part of our personalities and it's just something that we knew about each other when we met. Both of us would do this in graduate school and we do the same thing today.

Dr. Jim Dahle:
Yeah. But there was never a time where one of you came to the other and said, “Why are we saving three quarters of our income? What the heck are we doing?” There was no big disagreement like that along the way.

Speaker 1:
My gosh, I did that yesterday.

Speaker 2:
First of all, I don't even know the financial background of our income. I don't know how much we save. Most of it's handled by my husband. I'm always frugal because I don't know my finances. I don't really look at my net worth or my stocks. I'm just like, “Hey, I'm in the same mindset as I was when I graduated.”

Speaker 1:
Yeah.

Speaker 2:
That helps.

Speaker 1:
Yeah. When we got married, she basically handed all that responsibility to me and then never looked back. But yeah, we definitely have those conversations. We had one last night as we're planning to do this podcast today. And like you said, it's just something that we need to learn, something that we need to grow into.

There's going to be a balance. I think we're blessed to have the opportunity to grow our lifestyle and enjoy it a little bit more without having to worry about it for the most part. And now we both need to work on making sure that we take hold of that opportunity, but not also waste it on frivolous things.

Dr. Jim Dahle:
Well, congratulations to both of you. You've been very successful. Thank you so much for being willing to come on the podcast and share your success with others and hopefully inspire them to reach their own financial goals. I wish you continued success in all your endeavors, both financial and non-financial.

Speaker 1:
Thank you so much, Jim. Thanks for letting us on this podcast.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview as much as I did. I love seeing people that are way more successful than me. I was telling them after we stopped recording, it took us seven years to become millionaires out of medical school. Lots of people are inspired by that. I wrote a book with basically talks about how we did that and how they can do that and so on and so forth. Yet these guys got to 8 million in just eight or nine years. Dramatically more successful than Katie and I were. And so, it's super impressive.

FINANCE 101: FIRE

Dr. Jim Dahle:
But I think it's important to understand the concept of FIRE. FIRE is Financially Independent Retire Early. And the most important concept to understand here is that retirement is not an age. It's a number. It's the number at which you're financially independent. And you can quibble about the 4% guideline, but it's pretty useful to determine about how much you need to be financially independent.

The equation is very easy. You just reverse engineer 4% into 25X. 25X what you spend every year, including taxes and any advisory fees, is how much you need to be financially independent. So, if you spend $100,000 a year, you need $2.5 million to be financially independent. You spend $200,000 a year, it's $5 million. You spend $300,000 a year, it's $7.5 million. You spend $400,000 a year, it's $10 million. And that'll get you in the ballpark about how much you need to be financially independent.

Now, how do you get there? Especially with getting there rapidly, but anytime, it basically boils down to your income and your savings rate. The more you save, the less you need in retirement, and the more you have to put into your investment accounts where that money can compound.

So, you can make a chart. If you're saving 0% of your income, you're never going to be financially independent. You're going to work until the day you die, unless maybe you're living on social security or something. If you're saving 100% of your income, you're already financially independent. Because you don't need any of your income to live. I don't know what you're living on, but you don't need your income to do it. Everybody else is somewhere in between, between 0% and 100%.

Now, the recommendation I make to most doctors is that they save about 20% of their gross income for retirement throughout their career. And over the course of a 30-ish year career, that'll get most doctors to the point where they can maintain their standard of living during retirement. If they'll save 20% of their gross throughout their career, they ought to have enough by the time 30 years have passed that they can maintain that standard.

Now, if you want to retire earlier than that, you've got to save more. You save 25% or 30% or 40%, and you start seeing the years being knocked off to the point where you do what this couple did, and you're saving 50% and 60% and 70% of your gross income, you get to financial independence pretty quickly.

Now, obviously, income matters. It's just way easier to save a lot of money when you make $800,000 a year than when you make $150,000 a year. And frankly, the vast majority of people dramatically overestimate the difficulty of doubling their income.

There's lots of ways to increase your income. It's harder the more you make, of course. But when you have a $30,000 a year job, just doing a little Uber in the evenings might double your income. But for other people, it's getting an additional certification. It's getting an additional degree. It's negotiating better your next job opportunity. It's changing jobs. It's asking for a raise. It's starting a side gig. Those are the ways you increase your income. When you increase your income, yeah, you're going to pay more in taxes, but you also have more income available to save to get you toward financial independence.

Now, you may not value becoming financially independent at 35 or 45. That's totally fine. There's no reason you have to be financially independent early. You're not like a failure if you don't FIRE by any means. In fact, I would love for doctors to be so happy with their work that they'll stick with it until they're 55 and 60 and 65 and 70.

But I want them to be doing it because they love it and I want them to be doing it on their own terms. And financial independence allows you to make the decisions and the changes in your career and your job that allow you to do that. Even if you don't retire early, moving toward financial independence and becoming financially independent will open up those options for you. I hope that's helpful in understanding the concept of financial independence.

SPONSOR

Dr. Jim Dahle:
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Until next week, keep your head up and shoulders back. You've got this. We're here to help. See you next time on the Milestone 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.