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White Coat Investor Podcast
MtoM #248: Veterinarian Is Able to Cut Back and Finance 101: Cash Balance Plans
00:28:16
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This is the White Coat Investor Podcast Milestones to Millionaire Celebrating stories of success along the journey to financial freedom.
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This is Milestones to Millionaire podcast number 248. Veterinarians able to Cut Back. This podcast is sponsored by Bob Bayani at Protuity. He's an independent provider of disability insurance planning solutions to the medical community in every state and a longtime White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage or to get this critical insurance in place, contact bob@whitecoatinvestor.com Protuity P R O T U I T Y. You can also email infootuity.com or just pick up the phone call 973-77191 hey, are you curious about real estate but not sure if it's the right move for you? Join me on Thursday, November 20 at 6pm Mountain for a live session where I'll walk through what physicians need to know before investing in real estate. We're going to cover the reasons real estate can fast track your path to wealth. We're going to talk about the massive tax advantages most doctors don't take full advantage of. We'll talk about the different types of real estate investments and how to choose the right fit for you. We'll talk about how to avoid common mistakes that derail returns and some tools to evaluate real estate opportunities. Whether you're looking for passive income or diversification or a more hands on approach to investing, this session will help you decide your next steps. Plus, I'll stick around and answer any of your real estate questions. Afterward, you can register@WhiteCodeInvestor.com Rei3 People who join live will win our no Hype Real Estate Investing course, which is a $2,199 value. You can register for that again. Whitecoatinvestor.com Rei all right, we've got a great interview today. It's with a veterinarian. Stick around. Afterward, we're gonna talk for a minute about cash balance plans and some of the ins and outs of those that a lot of docs have a hard time wrapping their minds around. But let's get into this interview. It's a good one. Our guest today on the Milestones Millionaire podcast is Alex. Alex, welcome to the podcast.
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A
Thank you very much for having me. It's an honor to be here. Love the show.
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B
All right, introduce yourself to the audience. Tell us what part of the country you're in, what you do for A living, how far you are out of school, et cetera.
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So my name is Alex, as you said, I am a veterinarian. I am 17 years out of school. I'm a 2008 grad. I own and operate a veterinary clinic on the coast in Southern California. So high cost of living area. My wife is also a veterinarian and my business partner and we run the practice, our lives and two kids together.
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B
Awesome. And tell us what milestone we're celebrating today.
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A
So the milestone that I thought would be fun to come on is that I am spending an equal or more amount of time coaching my kids sports than I am in the clinic, running the clinic and seeing patients on a day to day basis. So that was a big goal of ours to be involved in our kids lives while they still like us as much as we could be. And so it's been really great to be a part of their, part of their world.
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B
Well, if you do it just right, they'll always like you. Except for about two years between 16 and 18. But pretty awesome.
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A
Fair.
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B
Pretty awesome. I can tell you're passionate about this. So tell us about how you guys have lived your financial life to be in this position at mid career.
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Sure. So I mean my wife and I are a little bit different from the standpoint that we have very, very similar goals as far as financial things and how we manage money. But different as far as she doesn't really want to be involved in it too much, she just likes that we make it. But we had very similar goals and where we wanted to be and then we just basically reverse engineered on how to get there. For me personally, my financial journey started at a very, very young age. My father was also a veterinarian and my mom ran his business. And so I remember my mom coming into my bedroom and watching me count a stack of hundred dollar bills that I had been hiding behind a framed Michael Jordan photo. And she took me to the bank the next day, opened a bank account and showed me how to bal checkbook and started investing early. And when I was appropriate age about 16, she showed me my college fund. She said, hey, this is what you have for college. This is all there is. You need to make it work. And we also had a clothing allowance. From the age of 12, you had a certain amount of money to spend on clothes. If you bought the brand new Air Jordans, you better be prepared to wear socks with holes in them or underwear with holes in them. But it really taught us to learn about money and how to use that money. And so I was very motivated from an early age. In fact, I just went and found a copy of the Millionaire Next Door off my shelf that she gave me at about 14. And I highlighted that book from a very young age. And it really spoke to me because it's very data driven. And so I think that my mom and my dad, kind of seeing how hard they worked and instilling that in me and giving me that book honestly, is what really kind of set me up. And so I've always been very motivated to live below my means and put as much away as I could as early as I could.
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B
Okay, so tell us about how that as you transitioned into adulthood, went through school in your 20s, et cetera. How did those lessons you learned, you know, as a young person, result in how you've lived your financial life as an adult?
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Yeah, so they also help. They also kind of let me make my own mistakes. When I was 20 years old, I actually cashed out my college fund and bought my first house at 20. Not something I would recommend a 20 year old do or even to my own kids. But at the time I saw how much I was paying in rent for California cities and I basically bought a house that was big enough that I could rent out all the other rooms and I didn't have to pay rent. And so from age 20, I bought my first house. I then eventually flipped that house into my next house and started my real estate journey. And I've always been very passionate about real estate. I also realized that as a 20 year old, the biggest expense was going to be tuition. And so I worked really hard and got a full ride scholarship. And I went out to the Midwest for my undergrad, which I didn't want to leave California, but the Midwest offered me a full ride scholarship. So to me that was a, you know, say $40,000, you know, right there in the first year. And then I also realized that at the time, UC Davis would let you get into veterinary school if you had all the prerequisites done without an undergrad degree. So I actually got into Davis a whole year early after only three years of undergrad. So that saved me another 40 to 50k. So just kind of finding the loopholes and exploring every possibility as far as saving money from an early age that I could start my savings and investing journey as early as possible. And my parents were very good at letting me make mistakes. I mean, they told me this is probably not a good idea for you to buy a house at 20 years old in California. But I did. It worked. Out luckily. And honestly, you know, they were a safety net that I didn't realize at the time, but it was really worked out well.
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B
Yeah, it is nice to have a little bit behind you, for sure. You're clearly pretty far out there on the satisficer versus optimizer spectrum. You've done a lot of things to optimize your finances over the years, it sounds like. Okay, so you got through school, you became a veterinarian. At what point did you get married?
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Well, I met my wife in vet school. I don't know if you know, but there's about 20 women for every one man in Vet school. So we used to say the odds are good, but the goods are odd. But luckily, I found a great wife who has just been my absolute rock and business partner. And we got married shortly after school, our first job. Before kids, we both worked really hard, her especially doing large animals. She was on call a lot. It would be nothing for her to go try to help pull a calf at seven months pregnant in the middle of the night. And so we kind of started looking at each other once we had our first child. After eight years of working for somebody else and saying, you know, if we really want to make good money, we really got to own a practice. If we really want to set our own schedules, we really need to be the boss. And if we really don't want to be on call all the time, it was really on call. You know, you'd work 50 plus, 60 hours a week, and then you get to take a pager home for the middle of the night. And that just wasn't really conducive to a family environment for us, how we wanted to raise our kids. And so we started looking, and we were a unique. You know, most people who they buy the practice, they buy it from the old retiring veterinarian. We started looking everywhere on the west coast, from Washington, Oregon, California, and, you know, looking for a practice that would fit our needs. And we looked at a lot of them before we found the right one that we felt would be a good fit for us and a good place to raise our family. And it was very, very difficult to start, I'll be very honest. Our sixth day of being open, I was so stressed that we'd made the biggest mistake of our lives that I actually ruptured my appendix and cecum and got a little peritonitis and was so determined, I was literally trying to see a Yorkie with peritonitis. But finally, when I was crawling on the floor, the nurses Said, yeah, you're going to the hospital. So that was a challenge. You know, the first few years were very challenging. You know, we didn't make any money and we thought we'd made a big mistake. But we, we kept our head down and grinded and got to a point where we are now.
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B
Awesome. Now it sounds like, I mean, you were getting into real estate investing at 20. So I assumed this was going on in the background the whole time. Even when you were making employee kind of money when you went to go buy a practice, what'd the real estate empire look like?
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So at that point I had sold my. So the first place I bought was in Sacramento. I sold that, bought a place in Davis for my vet school. And then I kept that rental going, basically just through word of mouth, through the veterinary school, getting more and more vets in there. And then when we bought our first house in the, at our first job, I managed to buy a property that had two houses on it, so a multifamily house. We could rent out the bottom house, which basically cut our mortgage in half.
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B
So this is all house hacking to start with, you know, the first three. All right.
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And then it became, you know, when we were moving, they said, oh, well, you got to, you got to sell this house. You know, you're buying this practice. I said, I don't think I do. And I was able to keep it, which has been great because now that house at this point is fully paid off and there's two, two rentals on it that, that are just like a cash cow. So that's good to have. And then when we bought the practice, I was very, very forward thinking as far as we wrote in the contract, you have to sell us the practice real estate. If I come and want to buy within the first five years of owning the practice and, and the seller was very generous, I think, and accommodating in that and that he let me pay a lump sum for the practice and then have that in the contract so that at year three or four, I was able to buy the real estate that the practice is on. So we now have two rentals, the practice that the real estate's on, and our primary mortgage.
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Where the lump sum come from?
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The lump sum for the practice came from a little bit of savings as well as grandma. So we took a loan out of Grandma. We made her take interest, but she did take interest, which we've of course since paid off. So it was a good deal for her in her mind, but it was definitely a good deal for Us too.
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Yeah. Very cool. Okay. At some point, since you owned the practice, it's doing well enough that you're like, I can cut back. Which is the goal of a lot of docs, especially by mid career. You know, burnout rears his head. But probably more commonly, you just become interested in other stuff. In your case, coaching. So at what point did you realize, I can cut back and do a little bit more of what I want to do?
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Yeah. Well, we got to a point where, you know, the finances were in a good place, and it kind of came about that another veterinarian who we had mentored as a student wanted to come back and work at the practice. And so, you know, finding veterinarians is. Is extremely difficult, as I assume it is a lot of specialties. And so when that fell in our lap, we kind of made the decision, hey, let's take a little less money and. And spend more time with the kids. And so it was really just.
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B
You both cut back at the same time.
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A
Yeah. So. And. And we cut out other things too. Like when we first started, we were doing boarding. So we were there seven days a week. I mean, I was walking dogs, cleaning cages on Sunday mornings and all of those things. And. And when we were hustling. Yeah, you have to. You know that. I mean, you have to. So I was the gardener. You know, I painted. You did everything it work. You do it all. And then Covid happened, and Covid changed everything. You know, Covid shut down our boarding for the most part. And Covid was an absolute boom to veterinarians. I mean, everybody who was sitting at home quarantining was bringing their cat in. The first time it sneezed. If you didn't have a cat or dog, you adopted one. I mean, I don't have the stats in front of me, but it was somewhere ridiculous. Of over 50 million pets were added to American households during COVID So it was the best years we ever had as vets, and it really kind of changed our perspective. I remember the first weekend my wife and I were home together, we never had a weekend together. In a few years, we were like, this is kind of nice being home on a weekend with the kids. So, yeah, when our associate came on, we just changed our schedules to. My wife and I both work three days a week each, so we both go in on Fridays, but Monday through Thursday, one of us is always there to pick up the kids. And there's chapters in life and our kids, I don't want to say they suffer. They didn't Suffer. But it was harder on them to be in daycare for 10, 12 hours a day during those first few years. So it's very nice to be able to pick them up from school and coach Little League, coach flag football, coach soccer, and do all those things. So that's been very, very fun for me.
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B
All right, let's talk about California. Yeah, I talk about California all the time on this podcast, as you know, not because there's anything particularly unique about California. We're just using it as an example of a high cost of living area. You decided that was going to work for you. You could make that work. Tell us about that decision. I mean, you knew after the time you spent in the Midwest that there were cheaper places to live where you could have, you know, lower tax bill, lower cost of living, lower housing prices, et cetera. But you went ahead, despite being, you know, financially literate, knowing what you were in for, you chose to stay in California anyway. Tell us about that decision, those conversations, what your reasoning was.
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Yeah, I think obviously part of it is we're both from California, so this is home for us. And certainly I see the California hate much of it deserved. It is not the easiest place to run a business. A lot of challenges in owning a business in California. Obviously the high tax burden for us. When we started looking, we wanted to be close to family so that our kids could grow up with their cousins who they're really close with, and be close to our parents as well. But the biggest thing when I was looking at practices was the community itself. And so when I found a coastal California community that was mainly made up of retirees in my area, in my specific community, the median age is 66 years old. And these are all affluent people who had very good careers. Most, not most of them, but a good percentage of them never had kids. So that dog or cat is their kid. And so they want good care, they want lab work, they want ultrasounds, you know, they want a ct, they want good oral surgery. So finding the right community was key for us. We're also in a community where there's not big box corporate veterinary practices, which is a pressure on a lot of small business owners. So I think finding the right spot was key. But also, we never really wanted to leave California. And honestly, that was one of the reasons I wanted to come on the podcast. Like, hey, not only can this be done in California, but I'm a measly veterinarian. I remember I went to career day and the guy that went in front of me was an ER Doc, and he said what his salary was, and I kind of balked a little bit. And then obviously I hear on your pod, so, you know, vets don't start out making that kind of money. And I wanted to come on to say, hey, not only can you do this in California, but you can do it as a veterinarian. Because I think too many veterinarians don't take the ownership route or don't explore it. And really for us, it's the only real way to make that kind of money, to make the kind of money to get to financial independence, in my opinion.
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Tell us about the difference between what you were making as an employee, your first couple of real hard years as an owner, and then, you know, what you were making working full time as an owner once you got established.
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My very first job right out of school was 70,000 a year salary, which I thought was the most money I'd ever seen in my life. That would have been in 2008. And I had a lot of on call that went with that. Our worst year as far as being owners was the first year we did not take a paycheck. The first six months, I think total between the two of us, we grossed 90k that first year. Our very best year as owners would have been 2020 and 2020, 2021, the COVID years, where we took combined gross salaries of about 440. And then our business is set up as an S corp. And so 2021 we took a dividend of another 325k. So combined with the dividend, you know, those were our two best years, about, you know, six and a half to seven and a half those two years. An average year like for us is we always kind of have the set salaries about 440, and then we'll take about 100 to $150,000 dividend. You know, vet salaries have come up a lot since COVID They were certainly lagging behind. But if you've been to the vet, you can all attest that prices have kind of gone through the roof as veterinary medicine has gone really, really corporate, which is not good for our industry. So salaries have come up, but, you know, we still don't make anything as far as what an MD makes or even some dentists make. And so your income to debt ratio is the worst by any white coat profession. And so to me, you know, your best bet to change that ratio of income to debt is really to be an owner, become a specialist, or just work your absolute tail off or a combination Thereof and for us, I was not. My wife had the grades to be a specialist. I did not. You know, C equals dvm. I was good in school, but not great. And I was much more business oriented. I was always wanting to be a business, business owner. My dad's practice was literally next door to my house growing up. So I walked through that business every day off the school bus and spent every afternoon in there. And I always wanted to own the business. And so that's been really, really fortunate for me that we found a good one to take over and run with it.
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B
Very cool. What's next for you guys as far as financial goals?
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Next for us is, you know, really trying to. And this was a mistake I made despite listening to all the Fire podcasts and everything. I really think you need to have a plan when you get to this point. And I thought I had a plan, but I did not have a plan to stay busy enough. You know, most of us who get to this point are hustlers. You know, we're used to being very busy. And so I spend a decent amount of time on my tractor. I got a little farm stand. I do the coaching, obviously, but I'm looking more to do some volunteering at Spay and Neuter. I've actually gone and gonna do some ER shifts just cause er, so exciting and just to kind of keep excited and into the business. But I think that was a thing that I would recommend people, if they're trying to get where we are with the balance is really have a plan on how you're going to fill your day because, yeah, you go from, you know, working so hard to what the heck am I going to do now?
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B
Yeah, well, the nice thing is you're moving slowly, right? You're still working part time and I think that's far more difficult, especially for a doc that's been nosed to the grindstone for 30 years and then at 65 or 70 just punches out completely overnight. It's way easier to have some sort of a gradual transition, part time work for a few years, et cetera. So I think you're doing awesome. Well, our time is up, but I want to thank you for being willing to come on the podcast, share your story and inspire others, whether they're vets, dentists, some other allied health professional, or physicians themselves. Now 75% of physicians are employees. The ownership dream still exists and, and can still be a significant way to not only control your life, but to make a little bit more money too. So thank you so much for being Willing to come on, inspire others.
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Thank you very much for having me. It was an absolute honor. Appreciate it.
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B
Hope you enjoyed that. We don't have a lot of veterinarians on the show and so it's great to not only showcase one, but showcase one that's hitting it out of the park in a high cost of living area right now. Clearly there was a lot of work involved. There's a lot of hustling going on. There's some interest in business there. There was some risks taken. Right. Remember the risk of buying a house with this college funds at 20? That's risky. Did it work out okay? It sounds like it. There was the risk of starting this practice, right, Taking grandma's money and going and starting to practice and realizing this is hard. But they kept at it, made smart decisions and worked hard and it paid off. And now look, by mid career, their life is under control. They get to do what they want with it. He's got these existential issues that retirees have, right? What am I going to do with my time? He's not even retired yet. You could always work one more day. You got all kinds of options when you're cutting back like that. And I know a lot of you out there mid career may be suffering a little bit from burnout or whatever, just finding other interests in your life. It's awesome to have your life in a financial place where those opportunities are available to you. So I want you to get there. We're trying to help you get there. The entire white coat investor community is trying to help you get there. All right, I promised at the top of the podcast, we're going to talk about cash balance plans, also known as defined benefit plans. Actually, a cash balance plan is a type A defined benefit plan, right? Defined benefit plans are generally thought of as pensions. Think of a cash balance plan, though, as an extra 401 masquerading as a pension. So it has to follow all these pension specific rules and the costs are a little higher than a typical 401, but it allows you to max out your 401, which is this year's $70,000 apiece between the employee and employer contributions. If the plan's set up right, you can put $70,000 in there. And if you have a cash balance plan, you can put a whole bunch more money in there. Maybe it's just a little bit depending on how the partnership or whatever set it up, or it might be a lot. I mean, some people are putting $100,000, $200,000, et cetera. Into a cash balance plan. The older you get when you start these things, the more you can put in there. In my partnership, you can put as much as $120,000 a year into a cash balance plan once you get to a certain age. And if you're willing to commit to that for three years. Right. The way it's set up like a pension, the funding has to be somewhat stable. For example, when I fell off the mountain last year, I still had to make my payments into the cash balance plan. So we made them from savings for a couple of months when I wasn't working, rather than having come out of my distribution for that month for the partnership. So there are some rules that you have to deal with when you have a cash balance plan. But the benefit is you get way more money into a retirement account. Right. Remember in retirement accounts, your money grows faster because it's not being taxed. As it grows, you get that tax protected growth. You also get asset protection. Right. This is an ERISA plan. I think I'm pronouncing that right. I was saying Ariza. That was one of the feedbacks we got on our annual survey. Thanks to all of you that filled that out, by the way. But apparently you're supposed to say erisa. So it's covered by erisa. So asset protection, Right. You have to declare bankruptcy. You gotta keep the money that's in the cash balance plan just like your 401. Pretty awesome. And then what typically happens with these plans is you close them periodically and open a new one. Right. And you need to have an IRS accepted excuse to do that. But typically if you've had it open for five or most 10 years, you can close it. And what happens when you close it? You roll the money into your 401. So it's just another 401. That's what it is in the end. But you've gotten this pre tax deduction upfront during your peak earnings years. Maybe you get an arbitrage on the back end of that tax. You certainly get tax protected growth. You certainly get asset protection. Later down the road, you could do a Roth conversion on this money if you want to. It's just all the benefits of having more of your money in retirement accounts rather than in a taxable account. But there are the complexities of the fact that it has to masquerade as a pension. One of the interesting things about it is a lot of people start wanting to be aggressive in their investments in a cash balance plan. This is not the place to be aggressive, though. Okay, For a couple of reasons. One, if you get really crummy returns, right? Aggressive means you're taking risk and sometimes the risk shows up. If you're getting crummy returns, you got to make up for em. You gotta put additional money in there. That's not the end of the world if you have the money, right? Because you get a deduction for the money you put in too. So it's like you can contribute more that year to the cash balance plan, but you gotta come up with the money. And that's a problem in a lot of partnerships. Like in my partnership, that would be a problem. Most of my partners aren't even maxing out their 401k, much less contributing to the cash balance plan. But so that's one downside of taking too much risk. The other downside is if you just smash it out of the park, you have great return year after year after year after year after year. You have this problem if you have too much money in there because there's a crediting rate that gets assigned to it. It's typically something in the 0 to 6% range. And that's really where you want the returns on the thing to be is within that range, at least in the long run. Or else you can end up with some excise taxes and all kinds of other issues. But the bottom line is you want to take your risk in the 401k and put your bonds, your less risky kind of assets in the cash balance plan. So you don't want to be 100% stocks in the cash balance plan. In fact, some people say you don't even want to be 20 or 40% stocks in the cash balance plan. I think ours is 40% stocks in it. But the point is you're not taking tons of risk. The point of a cash balance plan is to get that big fat tax deduction, get more money into retirement accounts. It's a tax play more than it is an investment play. But you realize that this is only going to be in there for a short period of time. If you're closing this thing six years, well, some of that money was only in there for a year or two, right? And if you wanted to have some money in bonds anyway, no big deal to have some money in the cash balance plan. Just adjust your 401 to make up for it. No big deal. You manage all your retirement accounts as one big account and have, you know, spread your asset allocation over all the funds that are designated for one goal. In this case retirement, Whether that's a 401K or Roth IRA, your spouse's accounts, your cash balance plan, your taxable account, whatever. Manage it all as one big portfolio, one big asset allocation. Hope that's helpful. Helps you understand a cash balance plan. You can open these even as an independent contractor, but it's probably more common to see these opened among partnerships for relatively high income physicians. Right? If you're in a cardiologist partnership, it wouldn't be unusual to have a cash balance plan or something like that. You know, if you're an orthopedist or something like that and you want to be putting away two or three hundred thousand dollars for retirement a year, well, this might be a really great piece of that puzzle for you, especially if you're in your 50s or 60s. So look into it. We got some people that can help. If you go to whitecoatinvestor.com you go to our recommended page, go down to retirement plans. We got a whole list of people that can help you set up these sorts of things. This podcast was sponsored by Bob Bayani at Protuity. One listener sent us this review. Bob has been absolutely terrific to work with. He's always quickly and clearly communicated with me by both email and or telephone, with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications and underwriting process in a clear and professional manner. Contact bob@whitecoatinvestor.com Protuity or you can email inforotuity.com or just call 973-771-9100. But do it today. If you don't have disability insurance or you're not sure you have the right disability insurance, get it in place before you need it or before you develop some problem that keeps you from getting it. All right everybody, that's the end of our podcast. Keep your head up, shoulders back. We'll see you next time on the Milestones to Millionaire podcast.
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A
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.