Holy Stealth Wealth Part II: Developing an Investor Policy Statement


To recap, in Part I, we met Dr. SW, decided on a simple three fund portfolio for his investments, and toyed with the idea of a donor advised fund.

Today, we will expand upon that last idea, make a plan for his kids’ future, touch on insurance and asset protection, and last but not least, develop an investor policy statement.

Please keep in mind that I am not a financial advisor and the only letters behind my name are M.D. I am relying on the knowledge I’ve gained from a healthy dose of reading and personal experience, and on the collective wisdom of the Bogleheads, which is where this story originated. While I endorse the advice given here, the ideas were crowdsourced online.

 

The Donor Advised Fund

 

Regular readers know that I am a big fan of the donor advised fund (DAF). I give to ours regularly and plan to have mine funded to the tune of $250,000 or about 10% of our nest egg prior to retiring.

I mentioned the benefit of establishing one for Dr. SW as a way to make some capital gains disappear on his “winners” while allowing him to take some losses when he sells “losers” and liquidates his taxable account.

In the high income tax bracket where he and his family live, every deduction counts. He’ll get the deduction for the full value of the appreciated assets he donates to the DAF he establishes, and will also be deducting the value of his losses when parts with stocks in the red.

 

Black Hills railroad

railroad stock. it’s the latest thing.

 

The DAF can be thought of as a reservoir for monies to be donated at a later date. You get the immediate tax deduction, the money remains invested in an account you control, and it can be doled out to the charities of your choice at any time, present or future.

Dr. SW regularly gives to his church, is destined to have excessive wealth, and will without a doubt be happier donating a large chunk of his fortune than spending it on himself or leaving an obscene inheritance.

 

What Insurance Does the High Income Earner Need?

 

While his neighbors might not have a clue as to Dr. SW’s net worth, just being known as a doctor makes him a likelier target for a lawsuit of any kind. He would be wise to carry an umbrella policy to cover his current net worth of more than $3 Million.


For many other types of insurance, he can afford to self-insure. The umbrella policy will presumably require him to carry high limits on his home and auto policies. For the little stuff (cell phone, electronics, etc…) there’s simply no need to carry insurance.

Regarding term life insurance and disability insurance, I’ve made the argument that it’s superfluous for someone in a position of financial independence. I also know that Dr. SW isn’t convinced he’s there yet; I believe he’s holding out for a grander state of financial freedom, which he will soon achieve, of course.

Nevertheless, Dr. SW would like to carry these, at least in the short-term. According to this thread at WCI, a $15,000 a month own-occupation disability policy with a laddered $4 million term life policy costs one 40-year old physician $730 a month. While the price will vary by age, gender, health, specialty, and location, Dr. SW can likely have similar coverage for under $1,000 a month. Instant quotes are available on my site via LeverageRx if you’d like to compare rates yourself.

We won’t even discuss long-term care insurance except to state the obvious fact that Dr. SW doesn’t need it. He’ll be able to buy the whole nursing home, all its rooms, walkers, and bedside urinals, and hire the best caregivers money can buy.

Is a cash value life insurance policy a smart option for Dr. SW? Most of us in the personal finance realm avoid them like the plague, but for the extraordinarily high income earner, there may be a place for one as an asset protection strategy. I would tread lightly here, and seek qualified, unbiased advice before strolling down this avenue.

Dr. SW will want to protect his assets. The umbrella insurance, maxing out retirement plans, and perhaps titling assets together as a couple as “tenancy by entirety” would be a good start. Beyond that, a complete asset protection plan is uniquely state and individual specific, and I would recommend a consultation with a local legal expert on the subject.

 

Planning for the Children’s Future

 

Currently, Dr. SW is investing in a Roth IRA for his children. How do they have earned income to qualify? Like GCC, Jr., his children are child models.

As long as the work is well documented and justifiable, it may be reasonable to continue. The benefit is obvious. The salaries paid to them are a business expense for Dr. SW, and all earned income can be invested in the Roth IRA of the child as long as they each file a tax return showing earned income up to the amount of the Roth contribution.

 

two_in_the_sink

these two deserve to be paid

 

Dr. SW has invested in Roth accounts, but hasn’t started any 529 Plans. Why the Roth? According to Dr. SW, “I was told a Roth IRA could be used for any education expenses (even private school), buying their first home or medical emergency. I was then told by them holding the IRA in their name it will not affect any scholarships ”

While it’s true that Roth contributions can be withdrawn at any time for any purpose, money is fungible, and Roth money is the last money you want to touch. All of those potential expenses can be paid for with cash flow or the taxable account. Dr. SW is going to have far too much money to qualify for any need-based financial aid, so merit based scholarships are the only option, anyway, so I fail to see the significance of the Roth money in this regard.

I also fail to see any 529 Plans, and that’s something that can be fixed this year.

A 529 Plan is a great way to save money for a child’s education. It’s funded with post-tax money, grows tax-free, and when withdrawn to pay for education related expenses, withdrawals are tax-free. It’s essentially a Roth IRA for education, but the limits on contributions are much higher.

A high income earner like Dr. SW can “Superfund” a 529 Plan for each child. The limit is 5 years’ worth of the $14,000 gift tax exclusion amount per parent, or $140,000 in a lump sum.

They could afford to start two of them this year, and perhaps a third next year when the next bundle of joy arrives. It could be started prior to his or her birth, but we might want to spread this $420,000 expense out just a tad. Alternatively, he could start with a lower amount, but my understading is that you’re only allowed to exceed $28,000 as a couple once every five years without altering your potential estate tax. I recommend going all in with the big bucks or “starting small” with $28,000 apiece.

 

Creating the Investor Policy Statement

 


When I created mine, I called it an Investor Policy Statement¬†(IPS). The White Coat Investor calls his an Investing Policy Statement. The BigLaw Investor and most of the rest of the world seems to prefer the term Investment Policy Statement. I still think mine makes the most sense, so I’m sticking with it.

An IPS is a document that defines your investing goals and philosophy, with specifics as to asset allocation, tax strategies, and a drawdown or capital preservation plan. The bullet points are principles that should guide your personal finance decisions. It is a living document, and can be revised when appropriate, but only after careful consideration, and certainly not too often.

Let’s get to it:

 


Objectives:
  • Build wealth to easily support a relatively early retirement
  • Invest in a simple, reproducible, low cost manner
  • Residual money available for charity and / or a legacy
Philosophy:
  • Invest in a three-fund Vanguard portfolio, or similar variant
  • Accept market returns; rebalance with new additions
  • With a very low and safe withdrawal rate, risk tolerance is high to maximize potential returns
Asset Allocation:
  • 60% US Stocks. VTSAX or similar
  • 20% International Stocks. VTIAX or similar
  • 20% Bonds and Fixed Income. VBTLX or similar
  • Asset allocation will be calculated across all accounts, rather than within each account.
Additional Considerations:
  • Front-load tax deferred investments in January to the extent possible
  • Backdoor Roth contributions for both spouses in January
  • After initial funding, revisit further 529 investments in 2022 / 2023
  • Invest in taxable account monthly
  • Set Cost basis in taxable account to “Specific ID” and monitor for losses for potential tax loss harvesting monthly when making a new investment
    • Partners for VTSAX: VFIAX, VLCAX
    • Partners for VTIAX: VFWAX, VTMGX
  • Most expenses can be covered with cash flow, but keep a few months’ expenses in a readily available account as an emergency fund
  • Avoid rampant lifestyle inflation. Continue to spend intentionally.
  • Continue to build Donor Advised Fund balance. Consider modeling PoF plan of maintaining a balance equal to 10% of invested assets. Give from DAF annually rather than writing a check to charitable organizations
Pre-Retirement Considerations:
  • Explore part-time possibilities. Hiring locums may be a viable option
  • Research family health insurance options
  • Review estate plan with attorney
  • Maintain licensure and skills to allow for medical mission work
  • Develop hobbies and interests prior to dropping out completely
  • Explore opportunities to sell practice

 

That’s it! In my own IPS, I’ve got a drawdown strategy defined, but for Dr. SW, it should be really straightforward. Draw from the defined benefit cash balance plan and live off a portion of the dividends from a ginormous taxable account. Have fun, and give generously.

 

Further Considerations

 

Now that we’ve established a basic IPS, I think we would be remiss not to address a few items that are only peripherally related to personal finance.

Dr. SW stated:

“I finished residency and literally work all the time. Not sure if I can work this hard for the next fifteen years so at some point probably cutting back.”

 

I’m not sure he can work that hard for the next five years with three little ones at home. We can comfortably say they don’t need the money, but I can also understand the allure of the high-paying job. Once you get into money-making mode, a day off is many dollars lost. Breaking free from that mindset might do wonders for his psyche and his family.

Adding employees, sub-contractors, and locum providers may be one way to maintain the practice and literally buy time without a huge hit to the bottom line as a business owner.

I’m not a business owner, and my net worth is a bit smaller than Dr. SW’s. It also took me four times longer to obtain it, but I’m at a point where I value my time as much or more than additional money beyond that which I needed to feel comfortably financially independent. Beginning this fall, I am being demoted by request to a part time position¬† where my initials will only appear on the schedule seven days per month.

 


You’re still not using Personal Capital? Track all your accounts in one place like I do.


 

Finally, I simply want to say Bravo!

It takes intelligence, an impeccable work ethic, and a keen business acumen to arrive at the place you have positioned yourself. What I find equally impressive is the manner in which you humbly go about your life living a bit better than a resident simply because it suits you. Good for you, Dr. Stealth Wealth.

 

Now that you’ve read Part I and Part II, how did we do? What additional feedback or suggestions do you have for Dr. SW? And please don’t ask his specialty — he wishes to remain anonymous, and we don’t want to jeopardize that.

 

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9 comments

  • You have left quite the trail for someone to follow PoF. This is a great round up of things everyone should be doing to get their financial house in order. Nicely written.

    I call mine a life philosophy (not just investing) as these steps will lead to financial freedom sooner then any other philosophy and thus freeing up your life. So maybe it should be the Freedom Funding Filosophy (FFF from DDD?).

    This doc is doing just fine. He needs to realize his financial position is strong and not be overwhelmed or stressed that he will loose all of his money. If he wants to keep working, great, but he likely does not need to.

    • The great thing about coming up with a plan for Dr. SW is that it doesn’t have to be worked out in great detail. Like I said about his drawdown strategy, there’s not much to it. There should be plenty of excess.

      He just needs to avoid catastrophe. Disability, divorce, and lawsuits could throw big wrenches into his plans. Fortunately, there are some steps that can be taken to decrease the likelihood and mitigate the potential damages in these areas.

      Cheers!
      -PoF

  • I’m concerned about Dr. SW stating he “literally works all the time.” This is a problem that is much more important to address than where to put his millions. He needs to spend more time with his family before it’s too late. I’m sure he will do just fine if some extra time off only allows him to make $1.2 million a year. Right now he is making a lot of money, but his statement tells me he is not experiencing “smart” success.

  • hatton1

    No question that he will be fine financially. You gave him lots of good advice. Hopefully he will work as hard finding some balance.

  • Sam

    Hi PoF,
    Love your site. Long time reader but I infrequently post. Your leverage Rx doesn’t seem to work. Keep up the great work!

  • walrus

    I think at 20% bonds, he will need to place some in taxable, and therefore would need a tax exempt bond fund

  • Dr. SW

    Thank you all for your time and efforts. The information that was offered is truly valuable and I hope it proves useful for others. Invaluable for me.

    Based on all the recommendations, I’ve started the process of implementing the following:

    ** PLEASE ** If you feel obliged to comment and tell me what you would do different. Please do. Greatly appreciated.

    Allocation- I believe the correct allocation for me is 65% Vanguard Total Stock Market/ 15% Vanguard Total International/ 20% Vanguard Intermediate Tax exempt bonds. I will hold the Tax exempt bonds in the taxable account. Currently I have invested $1.8M in VTSAX. I am investing chunks over time. If the market corrects then I would dump whatever is left in equities. I don’t think an investor needs international but for the time being I think 15% will be appropriate. I have sold all my stocks except 6 of them (4 of the 6 have limits orders in and hope to sell this coming week). I will also be selling the other two after everything pans out. I have also placed a limit order to sell VDE. Trying to simplify everything. Not going to do the backdoor Roth IRA.

    529 plans. I am going to setup three separate plans for my children this year. I plan to contribute $100k in each account and invest in VTSAX. I am going to continue contributing to my children’s Roth until they reach $20k and then re-eval. My concern is their education- not their retirement.

    I plan to continue the defined benefit cash balance program. I hate the administrative fees but I need the write off and it helps me squirrel away as much as possible.

    Insurance. I don’t think I need disability insurance. I will be purchasing an umbrella policy. I had an informal meeting with an attorney and the only asset protection advice he suggested was the umbrella policy. Keep the term life insurance.

    Salary- I always knew I should be taking a monthly or at least a quarterly salary (instead of once a year because it to make it simple and clean- which also helped with making donations to the church). I will invest salary distributions according to my 65/15/20 allocation.

    Setup a DAF through vanguard and make all church donations through this fund. Sell VTSAX to fund the DAF every year.

    Commercial property- probably not going to pay off note for a few years considering low interest rate.

    Lifestyle- work hard and try to retire in 11-16 years. I have taken some time off of work after reading some suggestions and will work on doing a better job balancing. Will limit my day to 9 hours a day.

    I would still like to find some type of investment that creates an additional source of revenue. As many pointed out, I am my own returns. If I don’t work, no returns. Another source of income would be great.

    Thank you again for taking time to read the posts and share your knowledge.

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