What Dentists Want to Know – Listener Q&A #2 – Episode 114

Do you have burning questions about your personal or practice finances? In this episode of Dentist Money™, Reese & Ryan respond to three dentists who submitted questions about office retirement plans, annuities, and “backdoor Roth” accounts. Advice includes the bigger picture around retirement plan selection, questions to ask about your existing annuities, and how cash flow plays into investment account decisions.

Show notes:
Dentist Money™ Episode 53: Everything You Need to Know About Retirement Plans
http://dentistadvisors.com/podcast/retirement-plans/

Dentist Money™ Episode 106: The Truth About Annuities
http://dentistadvisors.com/podcast/annuities/

Dentist Money™ Episode 112: Why You Need to Know Your Liquid Term
http://dentistadvisors.com/podcast/liquid-term/

 

Podcast Transcript:

Reese Harper: Hey, everybody. It’s Reese Harper here, and thanks for listening again to the Dentist Money Show. We’re going to answer some questions today from real dentists who have questions about their own financial situations. We’re going to provide some advice to each other these doctors and try to offer some clarity, so that they can make smart decisions with their money. It’s pretty likely that you’ve had some of the same questions or that some day you will, or maybe you’ve never even thought to ask these questions, even though you should.

Reese Harper: There’s a question from a mid-career doc about an office retirement plan. Another dentist in his early 40s asked if he could get out of a certain investment product. And an early career dentist wants to know a little bit about a backdoor Roth IRA and whether he should just take money and put them in an after tax brokerage account or maybe use his qualified retirement plan. This type of episode is going to be a regular thing, so please send us your financial questions, and we’ll try to answer them on an upcoming show. You can send an email to Reese@dentistadvisors.com or Ryan@dentistadvisors.com.

Reese Harper: I also want to make sure you know how to get ahold of us at Dentist Advisors if you’re ready to have a conversation about your own financial situation. To schedule a call go to dentistadvisors.com and click the link at the top to book a free consultation. You’ll find a time on our calendar that works for you, and then we’ll have a discovery call to assess your personal situation and show you how to make work optional at an earlier age. If it’s easier for you, you can always just give us a call at 833-DDSPLAN. Thanks again for listening to the Dentist Money Show.

strong>Speaker: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Reese Harper.

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty old bearded co-host, Sir Ryan Isaac.

Ryan Isaac: Hey, and welcome.

Reese Harper: Welcome to you, sir. You’ve been through a little bit of a, what shall we say, the old, seasonal flu virus.

Ryan Isaac: Just the run of the mill, routine, multiple flus and colds.

Reese Harper: For all of you who look forward to this episode though, fear not. We have beaten him with a Nerf bat and given him a shot in the arm.

Ryan Isaac: Of?

Reese Harper: Water.

Ryan Isaac: You didn’t tell me what it was.

Reese Harper: It was just water.

Ryan Isaac: Yeah. You were like, just take this.

Reese Harper: It does something for you though.

Ryan Isaac: Water?

Reese Harper: And now you’re all perky.

Ryan Isaac: I am.

Reese Harper: And excited.

Ryan Isaac: I’m excited, feeling good.

Reese Harper: He was sick for the last three or four days. We had to haul him out of bed, put him in the back of my truck, and tie him down.

Ryan Isaac: Next to the deer?

Reese Harper: We had to tie him down next to my four wheeler and haul him in, which was actually in the back of my truck, so it made for not a lot of room. Anyway.

Ryan Isaac: It’s good to be here though, I guess. The moral of the story is I’m glad to be here. I am glad to be here.

Reese Harper: Today’s topic actually is another very important thing in our lives.

Ryan Isaac: Yeah. They are questions from our loyal listeners.

Reese Harper: Yeah, once a month we do an episode, this is our second monthly version of the Q&A podcast. We did one last month, and it was one of our highest downloaded episodes of the last probably six months. And so we thought, okay, let’s do it again. We made a little push for some more questions. We’re actually getting good responses from people on Q&A.

Reese Harper: Some come from people clicking our website and submitting the questions on the contact page. Some people are emailing them directly. That’s what we’re kind of requesting that people do. Just send your questions in to Reese@dentistadvisors.com or Ryan@dentistadvisors.com and give us a chance to answer them.

Reese Harper: The first one today I’ll let you kind of introduce the first question.

Ryan Isaac: Yeah. So, this comes from a general dentist, mid-40s. He’s in the Midwest in the country. He’s a single owner doc in the practice, one location. He says, “I’m thinking it’s time in life to consider financial planning. I’ve been going over options for an office retirement plan with help from your podcast, but not sure if I’m ready or what type of plan to use.”

Reese Harper: Great question.

Ryan Isaac: Yeah. Fantastic question. First of all, thanks for listening, and we’re glad this show has offered some direction in your decisions.

Reese Harper: Yeah. That’s cool you can listen to a podcast nowadays and get some help. Ultimately, from my perspective, the answer to this question has a lot to do with how much financial planning the person has actually done. I mean, if they’ve really not done anything and there is no liquidity in their bank accounts or there’s no investment accounts and it’s just kind of starting from scratch, I mean, they’ve paid off a lot of debt, and they’re sitting at a point where they’re really contemplating their first retirement plan. My immediate feedback would be, well, how much are you going to be able to save to put away into this account? Because if it’s $3,000 a month, that’s very different than if it’s five, or seven, or 11. Because if you’ve waited this long to kind of get started with financial planning, it’s likely that you’ve been paying a lot of your debts first. You’ve just been saying, look, the obvious thing for me to do is I’m just going to pay down all my debt. When I get that done, then I’ll consider financial planning. That happens quite often.

Reese Harper: So, I guess my answer would depend on the context of their savings. I would say if someone had between $3,000 and $5,000 a month to save, I would be using a simple IRA or a 401K plan, probably a deductible 401K, and I wouldn’t be putting all of the money I had into that type of plan. I would be putting it into an after tax account to build liquidity as well, and I’d want to have at least that three to six, maybe even as much as nine months worth of cash, of personal spending before I really started putting any more money into retirement, because I want to see somebody have a little bit of a fallback. That’d be my initial question. I don’t know what additional context questions you’d have, but-

Ryan Isaac: No. I think that’s great. I was going to point it to … But let me comment on what you just said. We actually had an episode, it’s number 53, called Everything You Need to Know About Retirement Plans. It kind of addresses what you’re saying, where based on your situation, how much money’s even left over, how to choose what retirement plan is going to work best for the office based on what is sitting around every month, you know, what you have. Do you have three? Is it 5,000, 10,000?

Reese Harper: I think the default is whatever I have I should put into retirement specific accounts.

Ryan Isaac: That’s what it seems like. Yeah. I’ve got three grand a month. It all should just-

Reese Harper: You know what? I’m kind of blown away. In my career I’m surprised at how often I come across someone at the latter point of the career and the only retirement money they have is what they’ve put into actual retirement specific accounts that are locked up until they’re 59 and a half.

Ryan Isaac: Yeah. The 401K or the simple they got set up.

Reese Harper: People just don’t think of retirement accounts as regular, after tax investment accounts as much. It’s not as common.

Ryan Isaac: Or needing to do that throughout a career.

Reese Harper: Yeah. It’s like if I’m going to put money away for retirement, I’ll put in what the retirement plan maximum is, but they don’t treat an after tax savings account with the same level of exactness. I mean, it’s not viewed the same.

Ryan Isaac: Yeah. Like your mortgage, you have to pay three grand a month towards it, so you pay it. The 401K requires $18,000, 18/5, and so you put 1,500 a month in, but your after tax account, since there’s not an actual, tangible number, for some reason people just don’t actually commit to that with the same-

Reese Harper: That’s where I play around with my stocks a little bit.

Ryan Isaac: It’s like I don’t know what I do with that.

Reese Harper: That’s where I play around a little bit. Got a little stock here.

Ryan Isaac: And when I need money, I sure know where to grab it from, and it’s always from that account.

Reese Harper: Because it’s easy to get to.

Ryan Isaac: I mean, which is part of the reason of having an after tax account. It’s liquidity [crosstalk 00:07:54].

Reese Harper: Totally.

Ryan Isaac: Yeah. Episode 53 will address what you’re saying though, how to pick the retirement plan based on what is actually left over for savings every month. When someone asked the question, “I want to start financial planning. What product do I use?”, I think it feels intuitive, and it’s the easiest thing to just jump to, “Let me tell you what product you should use, what account type, what retirement plan.”

Reese Harper: What insurance policy. Depends who you talk to.

Ryan Isaac: Depending on who you are asking a question to, the default answer is going to be the easiest to go jump towards the product. But I think you addressed that well. And then check out the episode 53 if you want more detail on it. If we backed up though and we looked at the first part of this question where he says, was the exact quote he said, “I’m thinking it’s time in life to consider financial planning.” I thought let’s talk about that for a minute because that’s kind of a whole other issue from the retirement plan that actually gets implemented. What product.

Ryan Isaac: I thought, what is it like, maybe get to just chat for a little bit, tell him what is it like to be mid-career, mid 40s, and then start financial planning. What are some of the questions that we’re going to … I would say first it means getting organized. It’s really similar to doing your exams, and your x-rays and taking your pictures and then your hygiene, your cleaning before you do diagnosis or treatment plan.

Reese Harper: Yeah.

Ryan Isaac: So in this case it means understanding things like what is your net worth, what do you own, what are the assets, what are the things your own, what are they worth? What are your debts? Where does your money go? The middle row of our elements subtracts, how much do you save, how much do you spend, what goes to taxes, what goes to debt? Where does your money go? What kind of risks are you taking? What are your main goals? Are you trying to buy more practices? Are you trying to buy a house? Are you going to buy a building? Are those things behind you and you just need to accumulate money? What are the main goals you’re trying to accomplish?

Reese Harper: I think what you’re highlighting right here to me is the most kind of misunderstood part of financial planning. And it’s amazing, like, so good financial planning is being able to clearly understand your personal net worth at the drop of a hat and really understand what that means to you. Net worth is a measure of what you are, it tells you everything about when work will be optional for you. How secure you are. How hard you’ve been, if the hard work you’ve been putting in has resulted in more financial security. It’s not just like a fancy word that makes you sophisticated. It’s like just a simple, it’s like taking your blood pressure and your cholesterol at different ages of your life and determining if they are out or range.

Reese Harper: It should be as easy as saying, I’m 47 years old and my net worth is 1.7 million dollars. And in our office we’re actually getting to the point where we can say, that’s $300,000 below the mean. Or that’s $500,000 above the mean. We have hundreds of samples to look at and say, in your age band for your specialty, what is the net worth that you should have for the amount of money you’ve earned in your life?

Reese Harper: Not like just your age comparing like a 44 year old orthodontist to a 44 year old GP who has very different incomes. I mean that won’t be a fair comparison, but we can compare people that have had the same lifetime earnings and we can say, “This person’s earned 2.2 million dollars worth their lifetime up to this point in time.” And there is another sample of 40 people that have earned that same amount of money by this age, or, not by this age but just to have earned that amount of money in their lifetime in dentistry. And what should your net worth be? Like what’s the average person’s net worth if they’ve earned this much money?

Reese Harper: Because some people might earn … Let’s say the average lifetime earnings of someone is 2 million dollars. And that’s what they’ve earned up to this point in their life. If you add up all the profits and distributions and salaries that someone’s earned, they’ve earned 2 million. Someone might have earned that by the time they are 38 and someone else might have taken until they’re age 50 to earn that. It doesn’t matter what age you are necessarily, but you have this amount of earnings that you’ve earned in your lifetime, you should have a net worth that is somewhere around the average of what other people who have earned that same amount of money have had. If you don’t that means you either spend way too much money and are really frivolous with your expenses or it means you’ve made some big investment mistakes where you’ve had massive losses.

Reese Harper: That means there’s been embezzlement or fraud. It means you haven’t invested your money as maybe successfully as your peer group. But as a financial advisor and as a, like if you go to a doctor, the doctor is able to at least tell you your blood pressure and cholesterol for-

Ryan Isaac: Your height and your weight.

Reese Harper: Your height and weight.

Ryan Isaac: Measurable things.

Reese Harper: Yeah. Your BMI. Like these are … You’re in an okay spot. And that gives you a lot of closure as a patient because you’re like, “Okay, I know I’m not the healthiest, but like I’m-

Ryan Isaac: It’s comparable data.

Reese Harper: I’m making improvements or I’m kind of within the median for where I should be.” And with financial planning I swear it’s like so speculative with most advisors. You go meet with someone and it’s like you said, they literally just jump to a product recommendation.

Ryan Isaac: There is no planning.

Reese Harper: There’s no planning being done. It’s just, you ask me a question about a retirement account, I just give you a retirement account, we move on.

Ryan Isaac: Or you want a retirement account? I don’t know. You want a 401K?

Reese Harper: Yeah, sure I’ll give you one.

Ryan Isaac: I got you. I’ve got 401Ks, I’ve got simple, I’ve got-

Reese Harper: Doctors don’t do that. Like you go to a doctor and you’d be like, “You know what, I’m kind of depressed.” He’s like, “Well, have some Prozac.” It’s like we need to kind of go through a little bit of diagnosis to determine if that’s really a helpful medication.

Ryan Isaac: The dentist isn’t like, “Yeah, I’ve got implants, I’ve got crowns, I’ve got a whole bunch of stuff we can do.” Like, no I’m going to check first. I’m going to measure everything. I’m going to take pictures. I’m going to spend some time, then I’ll tell you specifically what you need to address all the other things we just [inaudible 00:14:05].

Reese Harper: Yeah. I just think it’s really healthy and I wish that more dentists could understand that the first thing you really should do is understand what your net worth is and whether that is healthy for how much money you’ve earned up to this point in your life and then how much progress you should be making each year. And that way you can hold yourself accountable every calendar quarter to the amount of savings you should be putting away, the amount of debt you should be reducing and know that, “Hey, you’re right on track.” The average dentist at your point in time is actually a little behind where you’re at and good job, you’ve been making more.

Reese Harper: In that way I just feel like it lets you live life with a little less stress around your money because you feel like you’re on track and things are okay.

Ryan Isaac: All right, question number two. This is a good question, question number two comes from a general dentist in his early 40s. Kind of a West Coast region area. He is a 50-50 partner in one practice location. So that’s some background here. He says, “Hi, I’m a dentist of about 12 years and want to do something different from what I have been doing. I’m interested in what your fees are and whether you think I should get out of the product I’m in.” So those are two questions.

Reese Harper: I thought you were going to go into I want to do something from what I’ve been doing like, am I ready to pivot into a new career?

Ryan Isaac: I’ve always enjoyed acrobatics, I want to join [crosstalk 00:15:25].

Reese Harper: That’s where we end. When it gets to-

Ryan Isaac: But you can give career advice.

Reese Harper: Only if you wanted to pivot into something we understand. It can’t be the circus.

Ryan Isaac: Do you want to coach a cross fit class or a [crosstalk 00:15:35]?

Reese Harper: Here’s what it was. I just saw, what’s that new musical about the circus? It’s out-

Ryan Isaac: The Greatest Showman.

Reese Harper: The Greatest Showman. I just went to The Greatest Showman and they actually want to start a traveling circus.

Ryan Isaac: You do?

Reese Harper: No, but I’m just saying, that’s what I was actually thinking when you read that first line. It was in my sub-conscious. I was a little worried that we were going to go there.

Ryan Isaac: I want to do something different, what career should I pivot to? Trapes.

Reese Harper: Yeah. I love the trapes.

Ryan Isaac: The Greatest Showman. The second part of this question that’s a little more specific, okay. Was he says, “I have a variable annuity that I have contributed to for about a decade. I’ve about 300,000 in it, but it hasn’t been performing very well and there is a lot of fees. I’m just wanted to do something different moving forward for the final years of my career and see if it be worth it to convert that old plan into something better.”

Reese Harper: Okay.

Ryan Isaac: So that’s the more specific question.

Reese Harper: But we kind of touched on this in episode 106 of The Truth About Annuity.

Ryan Isaac: Yeah, so push pause. Go download 106, The Truth, The Stark Truth About Annuities. Nothing but the truth.

Reese Harper: There is a little bit of upside, but I will be honest with you and save some of you the time and say for most 41 year olds you should not own one.

Ryan Isaac: Probably not a reason.

Reese Harper: Yeah. This is a 41. The reason I’m referencing that the person that asked this question was in their early 40s. Usually the reason people own this is not because it’s a consciously good decision, it’s because someone got paid a lot of money to-

Ryan Isaac: Instill fear.

Reese Harper: … sell you one of these. Now, that doesn’t necessarily mean that all is lost and everything about it is horrible. Let’s go into that a little bit, but I would just generally say, this isn’t something you need to learn about because you’re missing out on it, it’s something that you want to cautiously avoid until the very late stages of your career. And only when recommended by someone who thoroughly knows your situation. And it would be recommended under very rare circumstances.

Ryan Isaac: Can you think of any. Someone might be wondering about this. Then when you say, not at 41, that implies maybe older. Do you want to go into what the rare circumstance might be in case anyone’s wondering?

Reese Harper: I think that there are certain situations where an annuity can be a reasonable consideration. One of those being if you are at the latter stages of your career meaning you are at the point where you are approaching or already in retirement and you want to start withdrawing money from your accounts and you have some money and it’s close to being enough, but it’s kind of tight. And you’re not planning on really having anything left over at the end of your retirement to pass on for inheritance.

Ryan Isaac: That’s not a big concern. Legacy. You have to-

Reese Harper: You’re just ready to spend it all down. An annuity, an immediate annuity is something that allows you to put your money in it and an insurance company will guarantee a payment to you for the rest of your life.

Ryan Isaac: Immediate being the differentiator between as opposed to [crosstalk 00:18:48]?

Reese Harper: Yeah, this person that’s asking the question has a deferred annuity where they’re accumulating money in it.

Ryan Isaac: And they could get their principal back minus some fees and penalties.

Reese Harper: And the reality is there is less expensive ways to accomplish lifetime income planning, but it won’t have the same amount of guaranteed closure that you’ll get from an annuity. For example if you had $100,000 principal, and you were going to invest it in liquid mutual fund in tax free or taxable bonds, in today’s environment you might only make 3% or 4% in interest on that and in order to get … And maybe that’s not enough income off your $100,000. Maybe you’re trying to get 5% or 6% or 7%. Well, if you give that money to an insurance company and say, you can have the 100,000, just promise me that you’ll pay me a payment for the rest of my life.

Ryan Isaac: And that might be closer to 5% or 6% withdrawal [crosstalk 00:19:51].

Reese Harper: Yeah, it could be as high as 7. And so you might be able to have an insurance company guarantee you a larger payment and psychologically that might feel better. The alternative would just be, “Hey even though your 100,000 is only paying you 3% or 4%, you can yank out an extra 2 or 3 to make it be the same and most likely you’ll have more money at the end of your career because you are maintaining control of your own principal.” And it gives you more flexibility and a little bit more liquidity.

Ryan Isaac: But even if you don’t you could still do the same thing just knowing that it might be gone at the end just like it would be in an annuity. As soon as you annuitize and start taking payments, it’s gone. You can’t get your principal back. It might be the same, but during that period of time you have more control to say, “One month I don’t need as much or the next month I need more because I’m going to take a trip or something.”

Reese Harper: Yeah. I think you’re being the bank instead of giving your money to a bank.

Ryan Isaac: Be your own bank?

Reese Harper: You’re the insurance company instead of giving it to an insurance company. You’re going to create the opportunity for yourself to withdraw funds at a time of your choosing.

Ryan Isaac: So what about this person who already has one?

Reese Harper: Yeah. The question, you mean? The question we started with? That was the second alternative we were mentioning. The reason you’d want to go listen to this truth about annuity is if you are this person or if you are someone who is contemplating buying an annuity and you are at the latter stages of your career. In this case, the problem with, I don’t want to say the problem, but there is a lot of fees inside of this annuity, and it’s probably important to understand them briefly.

Ryan Isaac: Yeah. I was going to take this from an angle of, you could apply some questions to any product that you’re thinking about getting into. It could be a 401K, an annuity or a life insurance policy, a real estate investment, something. I thought this is a good question for people to ask as they’re getting into something or maybe they already are and they want to think through the process of do I keep going or do I get out of it. I was thinking, if you ask yourself, what are the expectations that you had when you bought this product? Or what are the expectations you have before you buy this thing? Is it tax deferral? Are you looking to get into a certain product for that or do you already have one because that’s the reason you bought it? Was it safety and security? Was it guarantees? Was it the type of investment? Was it something about cost or diversification? Did you buy it under pressure?

Ryan Isaac: Did someone pressure you to buy it? Was it a friend who sold it? Was it someone you felt that you just had to? Did you buy it under a lot of uncertainty? And so I think those are just good questions to ask in the beginning regardless of what the product is and in this guy’s case, how did those expectations hold up? Did you, and he’s kind of answering that. He might have bought that under maybe some pressure, maybe I don’t want to lose money in the market, I want to defer taxes, something, but now he’s saying, I think this thing is kind of expensive. I have money I can’t get at. And so, I think it’s important to ask like what are the expectations you have and then weigh that against if you already have the product how those held up. Or can they be fulfilled? Have the right expectations coming into it.

Reese Harper: And why are you saying that’s important to ask those questions?

Ryan Isaac: Yeah, to really understand why you’re actually doing this. Because someone might feel like, I’m buying the annuity because, I mean of course it’s the safety, security, and tax deductions whatever. But it might really be because they just don’t understand how a market works and it seems really scary. Or it might be because of that plus it’s a friend or a patient who sells the annuity.

Reese Harper: So what you’re saying is you have a lot of conversations with people that don’t really know why they have what they have?

Ryan Isaac: Yeah.

Reese Harper: Especially when it comes to annuities. And a lot of times it sounds like one of the motivations was, I don’t really want to invest my money in this thing that’s wild and crazy.

Ryan Isaac: That’s usually a part of, a really important part of a sales pitch for an insurance product. Is avoid the volatility of a market, but still get returns.

Reese Harper: Breaking it down, people buy this because they typically want more stability. They want less volatility and they feel like the alternative is the stock market which is a little too crazy, that’s what you’re saying.

Ryan Isaac: Yeah. I mean I hear in this guy’s question kind of implied is, I’ve done this for a decade. I’ve put in $300,000. But it’s just really expensive and not turning out to be what I thought it would be. And that is in part because in this last decade, we’ve had incredible returns in markets, but in that podcast episode 106, was it? Where we talked about annuities, some of those returns you’re capped. You are limited. You don’t get to participate fully in those things. That’s how they provide guarantees.

Reese Harper: Yeah. I just had a conversation yesterday with somebody who’s got a life insurance policy that’s similar to this annuity where it caps the return at 10% per year. And initially that sounded like a great idea, but last year when the market was 20 plus percent or 30 plus percent depending on which global market you’re looking at, all your returns were capped at 10 and that really affects your long term return. Because without last year in your 10 year average, you’re looking at a more of a 4% or 5% return instead of an 8% or a 9% average annual return. So it’s just that one year out of the ten year that made such a big difference. These annuity companies know that and the life insurance companies know that and so by capping your return, they know that statistically they will capture the upside at the highest level during those years when the market grows a ton.

Ryan Isaac: Quite a significant margin.

Reese Harper: Yeah. But when they say we cap it at 10% or 12%, they know that most of their customers are just going to say, “That sounds great to me.”

Ryan Isaac: Because the lowest I could ever get is a zero.

Reese Harper: Yeah. So all it does is compress the possible return down to a much lower band. By taking the risk out of it, you just give yourself a more conservative return. Not necessarily bad, but once you add all the fees on top of that, like if you were just going to put your money in a standard mutual fund and earn 3% or 4%, you could probably do that for 5 bases points now. I mean it’s [crosstalk 00:26:19] .05%. It’s basically free. Once you start putting it in a product with guarantees like this with special features-

Ryan Isaac: You pay for them.

Reese Harper: You pay for them. And I would say in my opinion, this is my opinion going out on limb-

Ryan Isaac: Alert! Alert!

Reese Harper: I don’t think these products were actually invented to help people. All right?

Ryan Isaac: Boom! Shut it down right now.

Reese Harper: These were not invented to help you, they were invented to be sold to you in a very very compelling way that’s somewhat confusing. If insurance companies really really wanted to help people as their primary motive, they would not make these so complicated. But they are a clustered mess-

Ryan Isaac: They could be easier.

Reese Harper: … of fees. They are a clustered mess of benefits. And I don’t want to say everyone, okay like 1% of insurance carriers out there really do offer a stripped down, simple, easy to understand annuity.

Ryan Isaac: No load, no commission.

Reese Harper: And they have good investment products backing them, but 90 plus percent are the most complicated thing you’re ever going to analyze. As a financial advisor with over 15 years of experience analyzing these things, it still takes me multiple hours of research to figure out every product that I get put on my desk. I mean, it’s not a five minute job. It’s like, okay there’s a 60 page brochure here, and I’ve got to figure out the fine print on every provision.

Ryan Isaac: And you’ll have to call a customer service agent, like different ones, multiple times to get a consensus story.

Reese Harper: Yeah, when you call the first person you’re like-

Ryan Isaac: There’s no fees here. No, we’re good.

Reese Harper: Okay. You’ve been working here for like a month so can you explain to me like why, okay, and unfortunately a lot of these customer service representatives aren’t being compensated super well. They’re just taking calls. They probably are consciously hired under those pretenses so that they confuse people when you call in. And that might be part of the strategy-

Ryan Isaac: The plot thickens. It’s even more evil than I thought.

Reese Harper: If we just complicate the phone calls enough, people will just give up.

Ryan Isaac: The first line of defense.

Reese Harper: They’re like, they don’t want to make fun of the person they are talking to because it’s so confusing. So they’re just like, “Fine. I don’t understand it, you clearly don’t. I’ll just go back to work because I don’t even know how to get the answers”

Ryan Isaac: I already have it.

Reese Harper: Anyway I’ll get off my frustrating rant here, but I just think it’s important here for people to have some insight into how frustrating it is for even financial advisors to analyze some of these products. I don’t feel like people are sold these … They were never invented to help you. They just weren’t. I mean, it might have started out that way with a good intention day one, but this industry has evolved into something that’s highly lucrative and really hard to unwind. And there’s a lot of sales people getting paid really well to keep doing this, so I would just stay away from annuities as a general rule unless you have a really really, you’ve had one for a really long time then in a lot of cases, there’s a lot of analysis that needs to be done because you can adjust it.

Reese Harper: You can lower the fees, you can make adjustments. So, let’s talk about what this question that came in. What should this person do given all this?

Ryan Isaac: Yeah, it’s funny you said how hard it is to do research from one product to the next. Today I have to do a call to unwind someone’s annuity and I just did one a week ago and they’ll be totally different. I can’t use anything other than a set of questions. So I kind of wrote these questions down. What are some of the things that … I’m going to call an insurance company with my client on the line today and here is a set of questions we’re going to start to ask to try to figure out what this thing is. So, some basic things are, and this is what this person would want to do. You’d want to get your company on the phone and you want to know first of all what type of annuity is it.

Ryan Isaac: Is it what they call qualified annuity? Which should be like an IRA inside of an annuity vice versa. Or a non-qualified? Meaning if the money came out of it, does it have to go back into an IRA if they roll to an IRA or can I have the money? Can it be liquid? That will give you some idea about tax consequences, about liquidity, whether or not you can even get at the money.

Reese Harper: And it’ll tell you how incompetent the original financial advisor was that sold this to you.

Ryan Isaac: I was going to let you cover that part.

Reese Harper: Because if [crosstalk 00:30:42] it was inside of an IRA-

Ryan Isaac: Double the furrow? You did double the furrow?

Reese Harper: That was just a really really dumb thing to do-

Ryan Isaac: You’re saying an IRA defers taxes, an annuity defers taxes, but they don’t double defer taxes.

Reese Harper: They just added a bunch of expenses to something that didn’t need to be that complicated.

Ryan Isaac: Okay. I want to know what my basis is. Meaning how much money have I put in to this thing? How much have I sent in, right?

Reese Harper: Yup.

Ryan Isaac: I want to know what the benefit base is. So there is a difference between the money I put in and the balance that they’re going to pay my monthly payments from. That they’re going to base it on. And part of the way an annuity works, let’s say I put 100 grand into an annuity. That’s my basis. That’s what I put in. But they might pay me based on a balance of 110 or 120 or 130. And every so often based on the kind of writers or provisions I have in it, it’s called a step up, they’ll step it up. They’ll go from 110 to 120 even though I didn’t put that in. That’s some of the incentive to keep you in it, right?

Ryan Isaac: It’s like I only put in a 100, but they’re going to base my benefit on a 130 now.

Reese Harper: And in fairness, even though it might not have been the best thing you could have done with the money, if you have a really really high benefit base, relative to what you’ve put in, you probably don’t want to surrender that product. And one of the biggest problems that I have with annuities is that most brokers end up rotating through these annuities instead of keeping you in the same one. So, you’ll go seven to eight years in one-

Ryan Isaac: And wipe out your benefit base.

Reese Harper: … and they move you to a new one that has new features, but it wipes out your benefit base that you had and it cancels all the benefits you may have had for keeping your old one.

Reese Harper: It’s really important that even though you, it’s like even though I may have bought a vehicle that isn’t the best vehicle in the world, if I’ve driven it up to this point in my life, I might want to sell it and get the cash out of it instead of doing it as a trade in and getting like a huge discount and not really getting my value out of it. It’s a similar experience. You can try, you just want to take advantage of something you’ve owned forever and not just waste it.

Ryan Isaac: It’s funny. A few weeks ago, we have a client who had two annuities. They were pretty old annuities too and one of them was that case where the benefit base was way higher than what he had put in there. And so it was kind of like, you know, you’re going to get paid a withdrawal rate that’s going to be higher than if you took the cash and put it in an account.

Reese Harper: And Ryan’s sort of touched on this, but the benefit base as you said is the thing that your income is calculated from when you go into withdrawal mode. Like when you go into I want my money out mode, usually-

Ryan Isaac: Not money. I want payments.

Reese Harper: I want my payments out mode. I’m ready to start taking distributions. Then it’s calculated from that benefit base, not the actual-

Ryan Isaac: What you put in.

Reese Harper: … surrenderable value that you’d get if you took the money out.

Ryan Isaac: Okay. Another question we’ll be asking is, if we kept this contract, what’s it going to pay us in the future. And what we’re trying to figure out is what percentage of this benefit base, are we going to get? Are we going to get 4, 5, 6, or 7? And we can compare that to what we can do by ourselves. Like you were saying earlier. If I just took my cash, if it’s not dramatically different than the benefit base they’re using, then if I just took my cash then I can give myself a 4% withdrawal rate, is that similar to what I’m going to have in the annuity, but with way higher fees, no access to my liquidity, and very restrictive investment options?

Ryan Isaac: You want to just compare what is it going to pay you. You want to know things like how does it grow, how it invested? That’s a little bit harder to understand. Usually there’s not many investment options. Usually they’ll list like 6 of them and it’s all like US. It’s either the Dow Jones or the the S&P. And then there is three different versions if them because you can either have full participation or partial participation with a cap.

Reese Harper: Like what’s crazy is that they are not like investments that you could actually compare to something you could buy.

Ryan Isaac: Specific to that annuity product. They’re [crosstalk 00:34:49].

Reese Harper: They’re proprietary investments that are inside of that annuity product and those carry their own cost. And that’s another way that Ryan was saying what are the investment costs as a question. A lot of times, that’s where the annuity carrier is making a lot of their money. Is actually they’ve got a very very expensive investment product that you’re investing in.

Ryan Isaac: And it’s there. They built it. It’s their product. And investment cost we’re talking in the range of, it’s always over percent. It’s usually 1 and a half to 2, sometimes over 2% for those funds that you have access to at the account. Versus what you were saying earlier, you can go buy a mutual fund for a .05% if you wanted to.

Reese Harper: And in fairness, I only know of one to two carriers out their, TIAA [Cref 00:35:39] has an annuity where the funds are delivered close to or at cost and they are not really making any money on the funds. That’s becoming a little bit more of a trend. I’m sure there’s one or two other carriers that I haven’t seen that are trying to do that right now, but and most of the time you’ll see that the names of the funds they’re not something you could go and find on Google or research. It’s going to be like the enhanced growth US focus fund. And you’re like, all right.

Ryan Isaac: It doesn’t exist anywhere except for in your annuity.

Reese Harper: I’ve no idea what these guys are trying to do with this leave of investments. And consequently I don’t know how to pick which one I should have. And-

Ryan Isaac: No, they’ll provide you like a 100 page prospectus in a PDF.

Reese Harper: On historical results which may not, because a lot of these funds aren’t following a really specific repeatable strategy, it’s difficult to use those historical results to say what’s it going to be like in the future. Or I have seen prospectuses that literally are like, it says like safe growth. And I’m like-

Ryan Isaac: Good.

Reese Harper: Okay. Thank you.

Ryan Isaac: It’s awesome.

Reese Harper: Quite helpful.

Ryan Isaac: Anyway. So the other question we’ll be asking are what are the main expenses in this product? The main one is called an M&E Mortality and Expense Cost. That’s usually is a 1 and a half, so I get these statistics, it ranges between 1 and a half and 3% prior. That’s on top of the typically 1% to 2% investment cost. And that is also still separate from what an advisor might be getting paid on top of that as well.

Reese Harper: Yeah. I mean it will be broken down typically into, M&E, what Ryan is saying is it’s a generic term for a lot of different costs that get wrapped up in a product. You’ll see like 4 or 5 different costs that are ranging from administrate fees to contract fees to distribution fees to marketing expense to 12B1s to mortality and expense charges which are most often related to that, by definition should be more related to the actual insurance cost. This annuity typically will pay you a debt benefit that’s either equal to what you’ve put in or equal to your benefit base, or equal to your benefit base [crosstalk 00:38:21] minus what you’ve taken out.

Reese Harper: So there’s some features that you’re paying for, but I’d be surprised if like in most analysis that I’ve done, at least especially with a dental focus that we have, the products that they end up purchasing typically is between, I’ve never seen anything under 3% that I can recall all in.

Reese Harper: And sometimes it’s just as high as 5. I mean it just depends on how expensive the investments are and then how many features they’ve elected to receive. So, it’s just really expensive.

Ryan Isaac: And that’s why you have to compare. You have to say, “if I took this money myself, even if I paid a penalty to get it out,” which is another question, if I took my money back, what kind of a penalty am I paying? Usually they’ll last for about ten years. Which is why the annuities get switched at about year eight or nine.

Reese Harper: I know we’ve spent a lot of time on this question, but I just think should summarize it with saying like be aware of all the penalties you pay. Be aware of any taxes and tax effects that are going to impact you on the growth.

Ryan Isaac: Because it’s possible that the money you could pull out of it could be more than what you put in and you’d have a taxable event.

Reese Harper: Not likely, but possible.

Ryan Isaac: Every time I’ve seen that happen, it’s literally like a couple thousand dollars.

Reese Harper: Yeah. I’ve never, like I’ve seen hundreds and hundreds of these, but I rarely see one where I’m like, “You have more than you put in. Excellent.”

Ryan Isaac: It grew?

Reese Harper: It’s grown. Congratulations.

Ryan Isaac: It’s crazy. So yeah. That’s a good list of questions to start with to do some analysis.

Reese Harper: And switching, you just have to like moving out of it in many cases unless there is a significant benefit base, and unless your fees are very reasonable, meaning all in. You’re less than 1 and a half percent which would be unlikely, but possible.

Ryan Isaac: And a high withdraw rate they’re going to give you.

Reese Harper: Yeah, and off of your benefit base you’re going to get promised a very high withdrawal rate.

Ryan Isaac: I would say like tempting would be like 6 or above.

Reese Harper: Yeah. And if your benefit base is much higher than what you’ve contributed.

Ryan Isaac: That what you’ve put in.

Reese Harper: Because to me like withdrawing, like I don’t know, withdrawing 6% of my principal, if life expectancy for male and females is somewhere in your early 80s to late 70s to late 80s, depending on your health history, you really don’t have like a super … I know everyone’s thinking I want to live until I’m 104, but-

Ryan Isaac: No you don’t.

Reese Harper: You don’t want to live that long, trust me. But the withdraw rates are often, if you’re taking 6% or 7% out of your benefit base, and they’re promising that that’s going to be for life, a lot of the time it’s just not that compelling given the average mortality of our lives. And so it just makes some more sense to have the liquidity, enjoy your life in your early 70s, your late 60s-

Ryan Isaac: Keep access to the money.

Reese Harper: Keep access to the money. Spend it down. And you’ll still have a lot of other, hopefully you’ll have other income sources that can be there to guarantee the longevity of your, in case you live a lot longer than you’d expect. But honestly like in my experience most people that are living into their mid 80s or late 80s, these are kind of the worries that people have. Like their standard of living is gone down so much at that point.

Ryan Isaac: Spending and-

Reese Harper: And their spending’s decreased so much that a lot of the times most people are doing quite well on social security, plus a little bit of, I mean their debts are gone. It’s just not a really expensive time. And so I worry that a lot of people end up annuitizing principal, going on a fixed income in the point in their life when they really want to enjoy their money most. Because retirement really is a spend it earlier in retirement and spend less later. That’s the typical spending pattern. As we spend more early and we spend less later, so why would I want to go to a fixed income early in my retirement and not have the flexibility to spend extra money on things I really enjoy.

Ryan Isaac: Okay. Yeah. That’s good coverage of what to do with your annuity. Again, we should say that if anyone ever has more questions, someone’s listening and they’re like, but I have more follow up questions, call us. 833-DDS Plan. Go to dentistsadvisors.com click the link at the top and you can schedule a call so we can go into more details and-

Reese Harper: Yeah, and submit questions about all of this stuff again. This is the Q&A section, we just want to make sure we get all of your … We want to get a variety of questions pretty consistently. I’d also love to hear from more women dentists. It seems like we get more male dentists sending in questions. The statistics are pretty compelling right now. More women are getting involved in dentistry than men coming out of school and we need to, I just want to continue to hear from their perspective on a lot of these questions as well. Because it seems like we get a disproportionately high percentage of male questions coming in.

Ryan Isaac: Maybe the women already know all the answers.

Reese Harper: They probably do. I know the men are just sitting around-

Ryan Isaac: They’re smarter.

Reese Harper: Yeah.

Ryan Isaac: It’s not sarcasm either, I believe that. Okay, so finally, question number three. This comes from a general dentist back in the East Coast. Mid 30s. Single location, one owner in the practice. Looking to grow in the future. Kind of some background. He says, “I have a brokerage account instead of doing a Roth IRA or backdoor Roth for both myself and my wife. Is this the right thing to do and what would be the reason for doing this?” He’s asking, why am I doing a brokerage account instead of a Roth IRA?

Reese Harper: Let’s try to answer this one-

Ryan Isaac: In terms of like, when is the appropriate time to do a Roth IRA conversion or it’s also known as a backdoor Roth IRA?

Reese Harper: So, I don’t think it’s better to pay taxes now all the time. It’s not always better to pay taxes today. If you have a large IRA balance and you’re already in the highest federal tax bracket, meaning your taxable income is in the 400 plus range, it’s not likely that you’ll have that high of income in your retirement. Because you’re only spending we’ll call it 150 to 180,000 a year. Most people. In retirement your income’s likely going to be 150 to 200,000 a year.

Ryan Isaac: Yeah, you’re saying today in your working years, you have to pay taxes on everything that comes in and in the future you just pay taxes on whatever you take to live on.

Reese Harper: Yeah.

Ryan Isaac: Which is likely to be less than today.

Reese Harper: I think it’s really bad advice to just tell people pay taxes now, taxes are always going to go up and it’s never going to get cheaper. And look at our government’s problems. It’s true, we have a massive federal deficit. And we just cut tax rates right now and the best estimates are we’ll still have more deficit when we get done.

Ryan Isaac: If you’re listening to this podcast like 10 years from the original air date you’ll know.

Reese Harper: The best estimate is we’ll still have more federal deficits. I mean, at some point, tax rates will increase, but if the last 50 years are any indication of what’s going to happen likely moving forward, it’s that there will always be some level of progressive income tax where people who make more pay more. And so if you’re going to be spending less in retirement, then you are, if you’re going to be pulling out money in the future like Ryan said, that’s going to make your income be lower than it is today because today you’re paying taxes on everything.

Reese Harper: So when do you do a backdoor Roth? It makes sense to do a backdoor Roth if you’ve maxed out all of your other tax deductible options. Meaning you’re putting as much money away as you can into tax deductible retirement whether that’s profit sharing or 401K deferrals or defined benefit plan contributions. That could be as much as 100 plus thousand a year though. If you are already doing all of that and you still have access to money that yore going to put in an after tax brokerage account anyway, then it does make sense to take at least $11,000 dollars of that, put it into a non-deductible IRA, and then convert that to a Roth IRA every year. That’s currently still legal and possible.

Reese Harper: We’re just saying instead of putting money in an after tax brokerage account, put it in this backdoor Roth. The other situation where I might do a backdoor Roth is when someone’s got an income that’s like just right at the threshold of not being able to qualify for a Roth, but it’s just barely above it. Because your taxable income is going to be quite low still there. It might make sense if you don’t have a lot of savings and you don’t really want to do a 401K yet in your early career and you already have a bunch of money in a Roth and you’re just going to save 10,000 a year. It might make sense for someone in a really, when you have just a tiny little bit of money, not a lot.

Reese Harper: You’re not saving 3, 4, or 5 grand a month. You’re saving a thousand a month. I could see it making sense there potentially, but that won’t be a lasting thing most likely.

Ryan Isaac: Yeah, it’ll go away at some point.

Reese Harper: It’ll only be a few years that you’ll do that.

Ryan Isaac: And you wouldn’t say to take your after tax money and put it into a, do a Roth IRA conversion at the expense of having some liquidity?

Reese Harper: No.

Ryan Isaac: Because you can’t really access that money very easily without causing penalties and everything. So, in situations where our clients are doing backdoor Roth IRAs, there are situations where they’re maximizing their efficient plans for that year, the most efficient pre-tax retirement plan for that year and they’re building and have adequate liquidity accounts. Meaning brokerage accounts they can have access to. What was our liquidity podcast? We just did this. You can listen to it. Episode 112 where we talked about liquidity. That would give you a good idea on how to determine how much to keep around and how much you need.

Ryan Isaac: So we wouldn’t say do it at the expense of putting some money in liquidity. And keep in mind thing that are maybe more short term. I mean, do you need to buy a house? Are you going to move? Are you going to build a building? Are you trying to expand to multiple locations? I think this person who asked the questions said that that’s kind of their ultimate goal, so at some point you’re going to need enough liquidity for a bank to give you loans to keep expanding. You wouldn’t want to lock away money that you’re going to need for liquid purposes. You can check out 112, episode 112 to go into more detail about that.

Ryan Isaac: I just wanted to clarify, we wouldn’t say do it at the expense of building liquidity.

Reese Harper: No. We wouldn’t. And I’d also say there’s probably not any reason not to do it if you have adequate liquidity and you’re saving money in an after-tax account. It’s not as big of a windfall as people feel like it might be.

Ryan Isaac: Yeah.

Reese Harper: I mean you’re talking about-

Ryan Isaac: You can only put a small amount every year.

Reese Harper: Yeah, you can only put, right now $5,500 into each.

Ryan Isaac: But if you did that for a good solid couple of decades between you and a spouse, I mean that’s a, I mean [crosstalk 00:49:29].

Reese Harper: It’s hundreds of thousandths of dollars.

Ryan Isaac: That are, yeah.

Reese Harper: Yeah, it’s just not millions of dollars most likely. And so you start, by the time you’ve built liquidity, got your debt to a manageable level, and you’ve paid down, and you’ve made meaningful pre-tax contributions to bring down your tax rate in your most higher income years, you are going to want some after-tax money because if you want to make work optional before, to have the option to slow down and maybe slow back off of work in your late 50s, that Roth IRA money is not accessible until you’re 59 and a half anyway. You want to have a meaningful amount of-

Ryan Isaac: And half.

Reese Harper: After-tax money besides just locking it all up in pre-tax in the Roth. I like it. I just think it’s probably [crosstalk 00:50:21]. We get calls about this and texts about this quite often. And I think once we explain the trade offs, most people will realize, “Okay, I probably don’t have enough liquidity and I’m probably no maxing out my pre-tax accounts at the level I should.” And then clients who are definitely have them. It definitely comes into-

Ryan Isaac: It’s like algebra. There is an order of operations.

Reese Harper: Yes.

Ryan Isaac: Was that algebra?

Reese Harper: I think it was geometry.

Ryan Isaac: Men! Let’s not end with math.

Reese Harper: Let’s do a proof real quick.

Ryan Isaac: I hated proofs. I loved math, but I hated proofs.

Reese Harper: Proofs are not math.

Ryan Isaac: Okay.

Reese Harper: And I’d refuse to-

Ryan Isaac: Was it like a mathematical philosophy?

Reese Harper: Yeah, we were taught that they were, but it is not.

Ryan Isaac: I loved math man, but I hated proofs.

Reese Harper: I just remembered that part of my math life.

Ryan Isaac: All right, as Reese mentioned, please send us your questions. You can email those questions to us. You can email Reese. It’s reese@dentistadvisors.com or email me, ryan@dentistadvisors.com. Check out the Dentist Money Show on YouTube, you can see which socks we were wearing, right?

Reese Harper: Yeah.

Ryan Isaac: That’s a really important thing. Schedule a free consultation if you want to talk to us. If you have some more questions, you want to dive into more detail, you want to talk about your situation or see what it would be like to get help from a financial advisor that knows your situation and knows dentists, then go to dentistsadvisors.com. There is a link at the top of the page. You can click on that and that’s our calendar so you can pick a day that works for you and we’ll be happy to talk to you. Or call us, 833DDS Plan. And thanks everyone for listening.

Reese Harper: Carry on.

Investing, Retirement Plans