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White Coat Investor Podcast
WCI #436: Retirement and Decumulation
00:43:25
This episode is all about retirement. We answer a handful of your questions from email, the Speakpipe and the forum. We talk about decumulation and how to start withdrawing from your investments. We talk about when and if you should increase your bond...
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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. This is White Coat Investor podcast number 436, decumulation in retirement brought to you by Laurel Road for doctors. Laura Road is committed to helping residents and physicians take control of their finances. That's why we've designed a personal loan for doctors with special repayment terms. During training, get help consolidating high interest credit card debt or fund the unexpected with one low monthly payment. Check your rate in minutes. Plus White Coat Investors also get an additional rate discount when they apply through LaurelRoad.com WCI. For terms and conditions, please visit www.l LaurelRoad.com WCI that's www.l LaurelRoad.comWCI LaurelRoad is a brand KeyBank NA member FDIC. All right, welcome back to another great episode. We are super happy to be here with you. We are here to help you get a fair shake on Wall street, to help you stop doing dumb stuff with your money. To help you put money into its proper place in your life where it's a tool helping you to accomplish more and have a happier, more fulfilling, more purposeful life rather than being something you spend time worrying about or stressing over. We firmly believe that docs with their financial ducks in a row are better docs. They're better physicians, they're better partners, they're better parents. We're here to help you. Let us know how we're doing. You can always send us emails. Editor, White Coat Investor et al. Give us 5 star reviews if you can, wherever you download your podcast. Those help us to spread the word among others who may not be in our community but should be. Thanks for what you're doing out there. It's important work. Well, let's start today by answering some questions you guys have been calling in with. And then I'm going to talk a little bit about some other stuff that we've got going on these days and that we're doing okay. We're going to be talking today about retirement. We're going to be talking today a little bit about the accumulation. We're going to talk about all this fun stuff. You know, the joy at the end of this long investing journey. Okay, so first question here is from Kevin Jim, I found your podcast and feel it's one of the best for investors. Thanks for what you do. I'm not a physician, but work as an administrator for a physician's group practice, my question has to do with the other side of the accumulation phase. I'm approaching retirement and I'm now starting to think about the challenge of withdrawing from my investments. There are many different methods for taking income from our retirement investments, like taking 4% or there are some that talk about putting investments into three buckets, one for short term needs, one for intermediate needs, and one for long term needs. Anyway, it's a little confusing and I'd love to hear your thoughts and suggestions about what one should consider and viable options for withdrawing funds. And can one do it without a financial advisor? Thanks, Kevin. In Utah. Well, thanks for being in Utah. There's lots of us here in Utah. Let's take that last question first. Can you do it without a financial advisor? Yes. Okay. There's basically three types of people out there when it comes to investors and working with financial advisors. There's DIYers, do it yourselfers. Right. People like me and many other members of the white coat investor community. No way are we paying somebody else to help us with this stuff. It's way too easy. Right? So we're going to do it ourselves. This is fun. This is a hobby. We read financial books. We talk about this with people in real life and online. Of course. We like to participate on forums. And not only are we asking our own questions and getting them answered, we're answering other people's questions. If that's you, you can save yourself something like $7,500 to $15,000 a year because that's what a full service, top notch financial advisor is going to cost you. So if you like this stuff, this is the best paid hobby there is. I'm guessing that's probably 20% of high earners like Docs. Okay, it's fine that it's not 100%, but it's not 100%. And we got to recognize that. I know it's hard for those of you who belong in this 20% to imagine that everybody's not just like you. But. But it's true. There are people out there that should not be managing their own money. They don't love this stuff like you do. They do not pay attention to it and they're going to do a crummy job of it. They are far better off paying thousands of dollars a year to somebody else having it done right than they are mismanaging it themselves. So let's keep that in mind. But in the other 80%, there's two categories. One is the group of people that the financial services industry is set up to serve. We call these people delegators. They want a money person. They're like, I don't like this stuff. I outsource my housekeeping, I outsource my lawn care. Of course I'm gonna outsource this. Why would I wanna do it myself? This is boring. I'm not that good at it. I'm gonna do better just having someone else do it. That's a delegator. Okay. They should expect to spend something like 7,500 to $15,000 a year for financial planning and investment management. And you're going to get somebody very good for that. Maybe you need to hunt around a little bit. We've got a recommended list I highly recommend you use. But you're going to find somebody good willing to do it for that, that's going to give you good advice at that fair price. And they're going to help you to be successful financially. Then there's a big group of people in between. We call these people validators. And there's a whole range of them. Some of them just need a little bit of help and reassurance that they're doing fine. Maybe a little bit of access to software. They're, they can get by with just a few hundred dollars a year of paying financial advisory fees. And then there's people who, they want a financial planner that's going to tell them exactly what to do and then they'll go implement that themselves. And there's all kinds of stuff in between. It's just a lot harder to get an advisor that works with validators. It's hard for advisors to work with validators because you're constantly looking for more of them. It's much more transactional. You're not building long term relationships with somebody that you saw last year and the year before and the year before and the year before. Right. You're having to come up with new people all the time. And so it's harder. They sometimes have to charge pretty high hourly rates or pretty high flat rates in order to serve you. Still, if you need that help designing your financial plan or getting a second opinion on what you've done or just checking in every few years, be prepared to pay it for it. Right. It may cost you a few thousand dollars, but it's going to be a little bit cheaper than the delegators are paying. But what you don't want to do is, is just to be a cheapskate delegator. If you're really a delegator and you're trying to cheap out by, you know, picking up a service that's really designed for validators, you're not going to end up with the outcome you want either. So the big question, if you can do this yourself, yes, it can be done yourself. Whether you can do it yourself or not, I don't know. I don't know you, Kevin, very well. Whether you're a good match for being a do it yourselfer, or whether you're a validator or really you ought to hire somebody because you're a delegator. But you got to figure that out. And I've got a blog post out there that has a quiz on it. I just kind of put it together one day. It can maybe help you decide if you're a validator, a delegator, or a DIYer. Okay, so that's question one is, can you do it yourself? And yes, it can be done yourself. It doesn't have to be that complicated. Okay? Now, as we get into these questions of retirement decumulation, yeah, it's a little more complicated than the accumulating process, but it's not necessarily harder. What's hard is disciplining yourself, becoming financially literate, carving out a whole bunch of your income to put toward the future. As far as hardness, it's not necessarily harder in retirement. In some ways, I am both an accumulator and a decumulator. Right now. I am an accumulator with regards to retirement savings. So I'm still putting money into retirement savings even though we're past financial independence. I am a decumulator, however, of college savings. I got two kids in college right now, so we're withdrawing money from those accounts and paying expenses. And I think it's a pretty good trial run for your retirement. Get you used to spending money you saved for an important goal, let it compound for a number of years, and then you're taking it out and spending it, and that's perfectly fine. But anyway, the things you gotta be thinking about, one is how much money can you spend safely without running out of retirement? And there's lots of different things you can do around this question. You know, the general rule that comes from these safe withdrawal studies is about 4% or so of your portfolio, adjusted upward with inflation each year, is about what you can spend and expect your money to last at least 30 years with a pretty high degree of certainty, assuming you're investing in kind of a typical portfolio, so 4% or so. So that tells you about how much money you need for retirement. You need about 25 times what you spend. And then you're financially independent. You can live on just your money the rest of your life. And that's about how much you can take out. So the right answer is about that much. Where it comes from doesn't matter nearly as much as the fact that you're not taking 15% of your portfolio out every year and spending it. If you're doing that, you're going to run out of money no matter where you're taking it from. Now, there's lots of nuance beyond there and lots of people that like to make it more complicated than maybe it has to be. So let's go through a few principles here of the decumulation phase you ought to be thinking about. Okay? The first one is what I mentioned. You got to start in the right neighborhood. Okay? Yes, you can spend more than 1% of your portfolio a year. Yes, you can spend more than just the income, right? You can spend more than just the dividend yield of your portfolio because that's probably less than 4% if you have, you know, typical investments. But it can't be 8% or 10% or 15% either, right? Just got to be in the neighborhood, you know, 3, 4, 5%, kind of in that range. So that's number one. Number two, recognize that you're mortal. There's way too many people out there that think their money has to last forever. I got news for you. You're not going to last forever. The bigger problem is actually you're going to get to an age where it's really hard for you to turn money into fun. It's really hard to turn money into happiness. It's really hard to turn money into awesome life experiences. My dad has hit this, right? He was so looking forward to flying this summer as he recovered from one medical problem. And by mid summer, by the time the plane was done with its annual inspection, he's ready to get out flying it. He was dealing with another medical problem. And you are just far more likely to have health challenges or to die relatively young than you are to run out of money and not be able to spend it on fun stuff later, okay? So recognize your own mortality. This is the big lesson in the book Die with Zero. And if you're wealthy already, you ought to read Dai with Zero. The book's not perfect, but it's the best book I know of for those of us who have trouble spending. Okay? Another important principle to understand as you're trying to decide how you want to spend money and how much money you want to spend is that your portfolio still has to grow in retirement. You don't turn 65 and retire and leave it all in cash until you die. That's not the way it works. It's got to grow. It's got to grow to overcome inflation. Inflation still takes place during retirement. And the reason you can take out 4% ish plus inflation each year is because the portfolio is still growing. Right? Yeah, you spent 4% that first year, but 96% of it still grew and had returns on it. And part of what you're spending in the future is money your money made during retirement. Okay? So you still need to be invested with some of your money in risky assets that have a little bit higher returns in retirement. Okay, here's another thing to realize as you start doing deep dives into all this data and research on the decumulation phase. The data sucks. Okay? It's not that good. There's not that much of it really. Even stock market data, it really only goes back to like 1926. We've got some data into the 1800s, but it's not awesome. Right? As far as independent 30 year periods, there aren't very many of them. There's only what, about four of them? That's it. If you were doing a medical study, there's no way you would consider this a good data set. So recognize the limitations of any sort of back tested theory, any sort of back tested portfolio, et cetera. The future may not resemble the past. Deal with it. And few of those studies look at anything besides publicly traded stocks and bonds. Right? They're not looking at bitcoin, they're not looking at real estate, even. So recognize that. And you've got to be, and this is my next principle, you've got to be comfortable with uncertainty. Right? You know, this is something as an emergency doc I've gotten very comfortable with. I discharge a lot of patients. I don't know what their diagnosis is. I know they don't have anything bad that's going to kill them in the next day or two. And I know where they need to go for follow up and maybe what testing they need to be doing down the road as an outpatient. But I'm okay not knowing exactly what's going on. And you've got to be okay with some uncertainty when you're planning for retirement. As you're choosing between different ways to spend your money and where it should come from, you got to be comfortable with some of that uncertainty. Okay? Here's another thing to Consider don't believe precision when you see these people telling you you ought to have 43.75% of your money in U.S. stocks and that you can withdraw 3.84% of portfolio each year. Give me a break. The data is not that good. You cannot get that precise on it. So don't believe people who start using numbers like that. Believe the people that say things like 4% ish, or maybe you ought to spend a little less because you're retiring at 45. Maybe you ought to be spending 3.25 or 3.5% or something like that. Fine. But when they tell you it's 3.47%, you can be assured that they don't really understand how statistics works. Okay? The other principle is you're probably not doing a set it and forget it kind of thing. As far as your retirement goes, you're probably going to need to make some adjustments. Most of the best plans that academia can come up with adjust. They adjust to your life and your spending needs, they adjust to market returns, so on and so forth. They're variable methods of withdrawing from your portfolio. Okay? The other thing to keep in mind is this stuff's all academic for most people. Most people either have significantly more money than they need, whether they're wealthy or not. They probably have more money than they need, and they frankly only need to be spending 1 or 2% of their portfolio a year. And it's fine. My parents aren't that wealthy and they don't spend 1 or 2% of their portfolio every year. Most of the time their required minimum distributions are coming out of their tax deferred account and going into their taxable account. It's fine. And that's the way it's going to be for a lot of white coat investors to do a really good job in the accumulation phase is this is all just academic. You know, all these studies people do on withdrawals, techniques, so on and so forth are for people that barely have enough. If you work for a few more years after you barely have enough, this is all academic because you're not going to need anywhere near the maximum amount that you can take out of your portfolio. Your biggest problem is figuring out who you're going to leave all that money to when you go, or how to spend money in a way that's going to make you happier or who you're going to give it to during retirement. That's just going to be the case for lots and lots of white coat investors. So those sorts of people don't have to worry a lot about which exact method they're going to use for withdrawing money in retirement. Okay, so some of the options you can take, if you're in that category where you kind of barely have enough or whatever, well, you can just keep an eye on it, right? Take out 4% that first year, adjust it up a little bit, depending on how the markets did. Recognize that if markets really crash, you got to be pretty flexible in adjusting that down. But that's one option. Another option is put a floor underneath your mandatory spending, right? Delay your Social Security to 70 so you can get as much of that floor index to inflation as possible and maybe buy a few single premium immediate annuities to pay for your mandatory expenses, your fixed expenses, and then use your portfolio to pay for the variable expenses. You had a good year. Great. Go on a cruise to the Mediterranean. Didn't have such a great year. Okay, well, you eat out of home a little bit more, but you can use your portfolio to make those adjustments. Another thing some people do is they use a bucket strategy, right? You alluded to this in your question. You have some money in cash, that's maybe for the next two or three years worth of spending, and you have some money in bonds or whatever for years four through eight or something. And then you have money above that in stocks. And as long as it wasn't a terrible year, after a year, you replenish the bond bucket, you replenish the cash bucket, and you move on to the next year. Whereas if you had two or three bad years, well, maybe you go two or three years before you replenish that bond and cash bucket. Now, you ought to write your plan down and you ought to follow your plan that you write down if this is what you've chosen to do. But that is a reasonable approach to take. Another reasonable approach to take is what you call the RMD method, where you look at what your required minimum distribution would be for your given age, and you can find these tables, even if you're below age 73 or 75, and you take that amount out each year. So if you're 65, that amount might be 3.5%. If you're 90, that amount might be 8%. And most studies show you can actually take out a larger percentage than the RMD percentage. But that's a pretty safe way to spend. Make sure you don't run out of money. It adjusts upward as you go by virtue of the increasing percentage as you go. Doesn't mean you can't get a very low percentage. You'll never run totally out of money though. And then some people use a more rules based kind of variable withdrawal percentage. And there's lots and lots of these. There's at least a dozen of them out there and I'm not going to tell you one of them is better than the others. Some people will tell you that one of them is better than the others. And you can discuss this ad nauseam on the forums if you're a do it yourselfer, and if you're not a do it yourselfer, well, get your financial advisor to figure it out. You shouldn't have to if you're going to pay them thousands of dollars a year for that. Okay, I think I answered your questions at least about as best I can without a little bit more specificity to them. By the way, we have an upcoming event. I think this podcast drops on September 11th. On the 22nd we've got a few events. The financially empowered Alyssa Chang is going to be talking about wealth and deconstructing social narratives for financial empowerment. And that's going to be Monday, September 22, 6pm Mountain Time. You can sign up at whitecoatinvestor.com Few yes, that's a women only event, in case you're curious, but check that out. Okay, let's get into our next retirement related question. This one's also coming off the Speak Bite. Hi Jim, thanks for being so transparent about your asset allocation. I'm wondering if you're planning to change it over time. For example, if you're going to increase your bond allocation to greater than 20% in retirement and if so, what you are planning to decrease. One thought I've had as I've contemplated whether or not I want to put a small value tilt in my portfolio is, you know, I'm 35, so I have a long time horizon, but in retirement I think I would rather have less volatile investments when I'm not working anymore. And so if I put money in small value now, then, you know, in 20 or 30 years I think I would prefer to just be allocated to things like total US Stock, total international stock for the stock portion of my portfolio. So just wondering if you're going to keep your same small value tilt for the rest of your life or if you're going to potentially decrease that when you increase bonds. Thanks so much. Okay, well there's a couple of questions here. Some of them are personal and specific to me and I don't mind talking about those questions. I don't know how helpful it is to most of you though my financial situation is not the same as most of your financial situations are. Thanks to the success of the white coat investor. We're fairly wealthy people. We have an estate tax problem that means most of and we don't spend any more than most typical doctors. So what does that mean? That means most of our assets are not going to be spent by us. Right? They're going to be left to charity, they're going to go to heirs, et cetera, et cetera. So in a lot of ways, we're not investing for ourselves, we're investing for our heirs, for charity, etc. And so that has an effect on how you invest, how you change your investments in retirement, how you, what your asset allocation is, etc. Right. Has an effect. But in general, most people decrease the aggressiveness of their investments as they get close to retirement, and particularly in those first few years after retirement. The reason for that is to reduce your sequence of returns risk. What is sequence of returns risk? That is the risk that while you're withdrawing from your portfolio, your portfolio is also falling rapidly in value. That's when sequence of returns risk shows up. It's the risk that despite having adequate average returns during your withdrawal period, you run out of money because the crappy returns came first, that sequence of returns risk. So you reduce the risk of that in lots of different ways. But the main one people do is they just invest less aggressively, at least for the last few years before retirement and the first few years in retirement. So that usually means an increased allocation to safer assets like bonds or CDs or cash or whatever you need a plan for. Sequence of returns risk. What are you going to do if it shows up? What are you going to do to kind of prepare for the possibility of it showing up, et cetera. And then if it doesn't show up, well, fine, you can actually get more aggressive later. In fact, a lot of people argue for an increasing percentage of your assets and stocks throughout retirement. But the traditional teaching is that you increase your bond allocation throughout retirement and you get less aggressive as you go. And I don't know that anybody's right about that. I understand and agree somewhat with the arguments for both things. You definitely still need growth in retirement. So you don't want to go all bonds or all cash. But how much goes into that safer, those safer investments is really up to you, particularly if you're a do it yourself investor. It's got to be something you are comfortable with. The general rule is as much in risky assets as you can handle without Selling low in a nasty bear market. But how much that is is a little bit different for everybody. So most people will increase their bond allocation retirement. If you want to drop your small value tilt when you get to be a certain age, that's not unreasonable. Maybe if you've got, you know, 25% in U.S. stocks and 15% in U.S. small value stocks and you want to increase your bond allocation by 15%, well, maybe over the course of five years, you decrease 3% a year what you own in small value stocks and you increase 3% a year what you own in bonds. Totally reasonable plan. And then you'd get rid of your small value tilt as well as increase your bond allocation in retirement. Do I foresee myself doing that? Probably not. When you choose to tilt your portfolio to something like small value stocks because you think they're going to have better returns in the long run, that's a long term decision. I've been doing this now for 20 years. So far it's been the wrong decision. I have less money than I would have had if I had not tilted my portfolio towards small value stocks. In fact, I would have been better off tilting it toward large growth stocks, which the data we have, which is not awesome, suggests is not the best thing to do. So keep that in mind as you move through retirement. Your asset allocation remains just as personal as it was before retirement. And you've got to decide on something reasonable and you got to stick with it. And that's the bottom line. So I'm not going to tell you exactly how your asset allocation ought to change. I can tell you my plans aren't to make significant asset allocation changes anytime soon and maybe ever. One change we have considered is just making our bond allocation a fixed amount of money and everything above and beyond that, however much that might be. It goes into riskier investments, but that's more a function of our wealth level compared to our spending needs than it is necessarily a change in asset allocation for some other reason. Asset allocation is always personal. It's gotta be in accordance with your need and ability and desire to take risk. Okay, got an email said when you state if your plan does not account for inflation, it will fail, are you talking mainly about your monthly cash flow or your retirement goal? I have a spreadsheet where I track spending and use that to calculate my annual spend and project my retirement number inclusive. In the calculation for financial independence, which he says 25x and fire financial independence, retire early, which he says 50x, I use that fire number as my retirement goal. That I do, though I do not plan to retire once I hit it. Do you feel that number should be indexed to inflation? That is, should I take my current spend and project that with a reasonable average inflation rate to truly calculate my thresholds, or does that get factored in with the 25x50x? Thanks for your opinion. Okay, I think when we talk about these multiples, we're typically talking about a multiple of what you spend, right? This idea out there that you can spend about 4% of your portfolio a year and not run out of money suggests that you need about 25 times what you spend to be financially independent. Now that's 25 times of what you just spent this last year, not 25 times what you spent 20 years ago. Okay, so that's where the number comes from. Yeah, it's gotta be adjusted for inflation as you go. When we first wrote our financial plan in 2004, I think our financial independence number was 2.7 million. Well, 2.7 million in 2004 is the equivalent of something like $4,200,000 now. So, yeah, we need more money now than we needed in 2004 when we wrote up the plan. So it's important, anytime you're doing any sort of long term projections that you adjust your numbers for inflation, you can do that either with your returns, adjust them down and say, well, I'm going to make 5% a year real, not 8% nominal. Or you can do it with the amount you need and adjust that to go. Okay, I'm not going to need 2.7 million, I'm going to need 4.2 million. But you gotta adjust it. Don't ignore inflation in the long run. Inflation is a major factor in your finances. There's gonna be some inflation. How high it's gonna be, we don't know. Just as you go, okay? So knowing all that, 50x is nuts, right? 50x is spending 2% a year, okay? There is no scenario, no asset allocation where if you're only spending 2% adjusted for inflation every year, you're gonna run out of money, okay? You're gonna die dramatically wealthier than you were on the day you retired. So anybody out there telling you you need 50 times what you spend is just a ridiculously conservative nutcase, okay? It's not true. You don't need that much money to retire. And if you have that much money, it's fine. I'm not saying it's bad to get that wealthy. It's not bad if you only wanna spend 2% of your portfolio. But doing that because you think you're gonna run out of money is dumb. Okay? If 25x is what most people think, if you want to be really conservative and you're like, I don't know, I might retire early and I might have bad returns and the world might implode and Donald Trump's in the White House or whatever else is freaking you out at the moment, fine, adjusted up to 33x but not 50. 50 is getting into ridiculous territory, okay? And some people do get ridiculous, right? I wrote a blog post that was titled the Silliness of the Safe Withdrawal Rate Movement. And it talks about just how nutso some people get when they start talking about this. And if you read what those nutso people are writing and believe it, it might cause you to not only work for years longer than you really need to at a job you're not enjoying, but it might cause you to spend much less than you would prefer to spend that you could buy more happiness with, and you'll end up dying the richest doc in the graveyard instead of having an awesome financial life. So don't get nutso about this stuff, okay? All right. The second point I want to make is, yeah, it's gotta be 25x or whatever, what you're spending that first year in retirement. Not if you were going to retire today, unless this is the year you're actually retiring. So you got to adjust as you go. You got to adjust what you're going to be spending every month. You got to adjust how much you need in order to do that. But how you adjust for that, I don't care. You can adjust on either end. Just recognize that you're going to need to make adjustments for inflation. If you're happy today spending $100,000 and you think you want to maintain that in retirement, it's going to be more than $100,000. Have you been to fast food restaurant lately? You can no longer buy a burger and fries and a shake for five bucks. You just can't do it. It's probably 15 bucks, okay? And that's the case for lots of stuff that you buy is just become more expensive. Okay? Our quote of the day today comes from Robert G. Allen. He said, how many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case. And I like that quote because it reinforces the fact that you've got to take some risk with some of your money. For most of us, the majority of our investment portfolio, the majority of our asset allocation has to be in risky assets like stocks, real estate, et cetera. Okay. We need our money to do some of the heavy lifting. We cannot save it all ourselves. If you want to save for retirement using nothing but safe investments, safe, low returning investments, cash, CDs, bonds, whole life insurance, gold, whatever you want to put all your money into those sorts of investments, recognize you got to save about 50% of your gross income throughout a standard length career. 20% isn't going to cut it. That 20% number I throw out on this podcast all the time is assuming your money's taking some risk both before retirement and after retirement. Okay, it can't all go in CDs, or you got to save a ton of money. All right, let's talk about an issue brought up on the White Coat Investor Forum. This post said this recently. I and my parents gifted our shares of a rental property to my youngest sibling as a means to support them in adulthood. The initial purchase price was $120,000 is more than doubled in valuation based on an official appraisal prior to transfer. I'm glad to hear they got an appraisal prior to transfer. That's pretty important, actually. My gift of equity would be half the share of the house. An accountant had prepared a gift tax form to submit to the IRS. I noticed that they put in my gift as 50% of the updated appraisal. Okay, well, that makes sense. However, my understanding is that there is no step up in basis, given that we are both living. That's correct. The step up in basis happens at death, not while you're living. Should the accountant have prepared the gift tax form is whatever my initial basis was, minus depreciation taken, which is a lower basis than the original purchase. Okay, so the question was, should the accountant have taken into account the depreciation when calculating the basis? Wow, that's a complicated question. I don't know the answer for sure. It seems fair to do that. But are most accountants doing that? I bet they're not. I bet they're not because it's harder. It takes more work to do that. So let's talk for a minute about gifting. Okay. Gifting is a nice thing to do. Thanks for being gifters. When you give stuff to charities, you get a tax deduction for it often, and it can help the charity. It's a wonderful thing to do. When you're gifting stuff to other people, you got to keep in mind the consequences of doing it. Sometimes gifting stuff to people causes them to live their life differently in a way that you maybe didn't foresee and don't like, right? Give too much money to your 20 year old and maybe they choose a different career than they would have otherwise. Maybe they take a different job than they would have otherwise. Maybe they end up marrying somebody different than they would have otherwise. There's consequences. And likewise, there's some pretty awesome consequences to donating appreciated assets to charities, right? You get the full charitable deduction for the value as long as you've owned it for at least a year. Whatever the value was when you donated it, that's your deduction amount. You don't have to pay the capital gains taxes and the charity doesn't have to pay the capital gains taxes. And if it's an asset that's been depreciated like a real estate property, you don't have to pay the depreciation recapture taxes and neither does a charity. That's great. That's not the case. When you give it to somebody that's not a charity. If you give it to your sibling or something, they inherit your basis, right? There's a step up in basis. Basis is what you paid for the property. There's a step up in basis at death. But when you give something away, they inherit your basis. Now that might be smart if wealthy grandpa gives money to not so wealthy 18 year old Joe Bob. And now Joe Bob can sell it and not pay any capital gains taxes that grandpa would have paid if he had sold it and then given the remaining cash to Joe Bob. Well that's a good move, right? Let Joe Bob in the low tax bracket pay the taxes. And sometimes that tax bracket is 0%, especially for long term capital gains. So that can be a good move to do that for the family. But recognize that Joe Bob has the same basis grandpa had in that and so he may need to pay taxes depending on his tax bracket when he goes to sell that asset. And that's just the way it works. So be careful giving things to people. Think about the tax consequences when you give it to them. Think about the life consequences when you give it to them. But a lot of times it just makes sense to die first and give it to em in your will because then they get the step up in basis of death, they save all that depreciation recapture tax, they save all that capital gains tax and it's great. Like one of the dumbest things you can do out there is put your kid on your title with you of your house, right? So you buy this house in whatever year, it's $200,000 and you live in it for decades, and now it's worth 1.5 million. And you're like, oh, this would be a lot easier. I want Joe to get the house. So I'm 90 years old, but I'm gonna put Joe's name on the title. Bad move. Right? Instead of Joe now getting the house with a basis of 1,500,000, now Joe gets the house with a basis of $200,000, and he owes capital gains taxes on like $1.3 million. That was not a very nice gift for Joe. I mean, it's still a nice gift. Joe still comes out ahead. Right, but it would have been nicer if Joe had just gotten it when you died and gotten that step up in basis of death. So understand these basic rules. When you're giving gifts, when you're receiving gifts, when you' planning with multiple generations how to pass assets along and make sure you do it correctly. Okay, let's talk for just a minute about a dilemma that my parents and I were dealing with recently. As you know, I helped them manage their portfolio. And they've now got three kinds of assets in that portfolio. The same three kinds that a lot of us will have in retirement. And they want to spend some money. This year they were doing some prepaid funeral expenses. They're doing some renovations on the house, and they want to spend some money. So three types of assets, right? My dad's got a small Roth ira, and they've got some tax deferred money, and they're of RMD age, so they're required to take some required minimum distributions out of those tax deferred accounts every year. And because they haven't spent all those RMDs, we've reinvested them in the taxable account. And now all the assets in the taxable account have significant capital gains. So now we get to the point where they want to spend some money and we got to decide where to take it from. Now, in this case, it wasn't a big deal because they told me, hey, just leave that money in cash from the RMD last year. We're going to use it on a renovation. So we left it in cash. It's been sitting there for the last eight months in cash. And. And they've got enough to actually pay for these next couple of expenses they have that's just been sitting in cash in there. So no big deal, no tax consequences to solve it. But if they wanted to spend more, we got to decide where to take it from. Now, the obvious place to start with is any money that you've already got to pay taxes on anyway. And in this case, they have not yet taken their 2025 RMD. So if they wanted to spend more than they already had in cash, that would be where we take it from. We'd take it from their rmd. As I record this, it's the end of August. By the time you listen to it, we're into September and we're only three months from the end of the year, the last day to which they can take their RMDs for the year. And so that's where we take it out from. That would give us a certain amount of money that they can then spend that they're already going to have to pay taxes on this year. So they might as well spend that money first. Now if that's not enough to spend, that leaves us the three options. We can take more out of those tax deferred accounts. We're going to pay taxes at ordinary income tax rates on that money or we can liquidate some of the taxable account. We're going to have to pay long term capital gains taxes on the amount of that money that's gains. Or we can raid that Roth account. Hard decisions, right? There's lots that goes into it. You know, maybe if you do the wrong thing, your irmaa right, this additional fee you pay for your Medicare taxes might go up a little bit. Or maybe you're just taking that money out in a relatively high bracket. So lots of choices there. Probably the best thing to keep their tax bill low, which is, you know, their main priority at this point. They're less worried about their heirs and what their heirs tax rates are going to be. Probably the best thing to do would be to either take a little bit of Roth money out if they want some more money or to sell the taxable assets. Okay, they're not going to be paying a very high long term capital gains tax rate on that money. I'm not even sure they're out of the 0% long term capital gains tax bracket yet. But that's probably where we would go first if we wanted to raise some more money from their portfolio. But these are complicated questions. These questions like this are why lots of people pay a financial planner to help them wrestle with them and come up with the right answer for them and their situation and who their heirs are, what tax bracket their heirs are likely to be in. But obviously you spend the stuff you got to pay taxes on first and then you can look at the other options for spending money and decide what your priorities are. And a lot of times if your heirs are in a lower tax bracket than you, your priorities might be to spend Roth money, to spend taxable account money rather than tax deferred money because your heirs will pay a lower tax rate on that. On the other hand, if you're leaving it to your kid that's a doctor and they're going to get it in their peak earnings years, maybe you want to leave them Roth accounts preferentially and have paid the taxes on your side before the money goes to them. It can get pretty complicated, but those are the things to be thinking about. Okay, this episode was sponsored by Laurel Road for Doctors. They're committed to helping resident and attending physicians take control of their finances. That's why they've designed a personal loan for doctors with special repayment terms. During training, get help consolidating high interest credit card debt or fund the unexpected with one low monthly payment. Check your rate in minutes plus by code. Investors also get an additional rate discount when they apply for through Laurelroad.com WCI for terms and conditions, please visit www.l Laurelroad.com WCI that's www.l Laurelroad.com WCI Laurelroad is a brand KeyBank and a member FDIC. 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If you got questions, leave them for us on the speak pipe whitecoatinvestor.com speakpipe until next time, keep your head up and shoulders back. You've got this. The whole white coating community is standing next to you waiting to help you to be financially successful because they want you to be a better document, a better partner, a better parent. And we know if we can help you get your financial ducks in a row, that's what will happen in your life. See you next time. 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.