Leif Dahleen: Finding Financial Independence

Our guest on the podcast today is Leif Dahleen, who heads up the popular Physician on FIRE blog. Leif retired from his career as an anesthesiologist at age 43. Since that time, he has been blogging about his own financial independence, retire early journey, sharing early retirement and investing guidance with other professionals who might also wish to retire early. He attended the University of Minnesota for his undergraduate and medical school education, completed an internship at Gundersen Lutheran in La Crosse, Wisconsin, and finished his residency at the University of Florida.

Background

Bio

Physician on FIRE

Early Retirement Lifestyle and Financial Considerations

“Ramit Sethi: ‘What Is Your Rich Life?’” The Long View Podcast, Morningstar.com, Nov. 10, 2020.

“Karsten Jeske: Cracking the Code on Retirement Spending Rates,” The Long View Podcast, Morningstar.com, Oct. 14, 2020.

“Tanja Hester: The Pandemic Will Stoke Interest in Early Retirement,” The Long View podcast, Morningstar.com, June 3, 2020.

“Chris Mamula: What Young Retirees Need to Know,” The Long View podcast, Morningstar.com, Jan. 15, 2020.

Afford Anything

The White Coat Investor

“Choose FI Over Fire,” by Leif Dahleen, physicianonfire.com.

“The Most Important Factor in Retirement Withdrawal Plans,” by Leif Dahleen, physicianonfire.com.

“How Early Retirement Prepared Us for the Pandemic,” by Leif Dahleen, thephysicianphilosopher.com.

“How to Get Wealthy Investing in a Bear Market,” by Leif Dahleen, physicianonfire.com.

“Asset Location and Making Your Money Last in Early Retirement,” by Leif Dahleen, physicianonfire.com.

“Prices Are Rising. Should We Be Worried About Inflation?” by Leif Dahleen, physicianonfire.com

“Social Security & Early Retirement 2021: Know Your Bend Points!” by Leif Dahleen, physicianonfire.com.

“5 Reasons Why You Shouldn’t Ignore Social Security in Your Retirement Calculations,” whitecoatinvestor.com, March 30, 2021.

Real Estate and Passive Income Sources

“12 Passive Income Ideas for 2020 and Beyond,” by Leif Dahleen, physicianonfire.com.

“My 5 Current and 3 Future Passive Income Streams,” by Leif Dahleen, physicianonfire.com.

Taxes

“Taxes on a Million Dollars of Earned Income,” by Leif Dahleen, physicianonfire.com.

“Top 10 Ways to Lower Your Taxes,” by Leif Dahleen, physicianonfire.com.

TurboTax

Charitable Giving

“Pros and Cons of Donor-Advised Funds,” by Amy Arnott, Morningstar.com, May 17, 2021.

“Giving Faceoff: Charitable Remainder Trust (CRT) Versus Donor Advised Fund (DAF),” by Leif Dahleen, physicianonfire.com.

“A Gift on Giving Tuesday: $100 to 100 of Your Favorite Charities,” by Leif Dahleen, physicianonfire.com.

“DAF Giving Tutorial From Fidelity and Vanguard Charitable,” by Leif Dahleen, physicianonfire.com.

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Leif Dahleen, who heads up the popular Physician on FIRE blog. Leif retired from his career as an anesthesiologist at age 43. Since that time, he has been blogging about his own financial independence, retire early journey, sharing early retirement and investing guidance with other professionals who might also wish to retire early. He attended the University of Minnesota for his undergraduate and medical school education, completed an internship at Gundersen Lutheran in La Crosse, Wisconsin, and finished his residency at the University of Florida.

Leif, welcome to The Long View.

Leif Dahleen: Thank you, Christine. I'm very happy to be joining you today.

Benz: We're happy to have you here. Now you trained as an anesthesiologist, which is a grueling and expensive course of study. What were the pivotal events that prompted you to consider early retirement after practicing anesthesiology for a relatively short period of time?

Dahleen: Yeah, you're right. The training, if you include undergrad, you've got four years of undergrad, four years of medical school, four years of residency--it's 12 years all together, and I practiced for about 13. So, they're almost equal in that regard. But honestly, the main drivers for me was realizing that we were financially independent. I didn't know what that term meant until I read about it in an article online talking about this guy named Mr. Money Mustache, who was blogging about his early retirement. And I looked at the numbers--it said you needed about 25 times what you usually spend. And at this point, about almost 10 years into my career, we had paid off all student loan debts, we had paid off our mortgage. We lived in a relatively low cost of living area in northern Minnesota at that time, and we were spending about $70,000 a year. That doesn't include some things like charitable giving, or health insurance, which was provided by our employer at the time. But I looked at that $70,000 and multiplied by 25 and looked at our retirement accounts and my taxable brokerage account. And between the two, we were there. And that was a shocker. And I talked with my wife after I really ran the numbers and read more about this and felt confident in the whole idea. And I said, well, I don't think I need to work another 15 or 20 years like we thought I would be doing. And then we started talking about our future.

Ptak: The pandemic threw a bit of a monkey wrench into your early retirement. You thought that you'd travel extensively with your family but had to scale back those plans. What did you do instead?

Dahleen: Yeah, it really did. I left my job in August of 2019. And I believe it was October that we headed to Mexico for two months, came back for the holidays, went to Spain for two months. That took us into March of 2020. And we all know what happened then.

Our plans were to cruise to Shanghai, China, in the fall and hop around Southeast Asia, maybe Australia, New Zealand, come back six months later this spring. None of that happened, of course. So, instead, we stayed home like everyone else. And we realized that in the small home we had, which we had a small house in town and a small cabin on a lake an hour, hour and a half away. It was a great setup, when we were planning to travel for half the year or more, not such a great setup when we're forced to spend all our time at home.

And so, that actually led to a more intense home search, which I'm sure we'll talk more about this later. That's been interesting in the last couple of years, especially the last year. But we did end up buying a larger house this spring. I just sold the house in town, and we're showing our house on the lake this weekend and last weekend.

So, getting a new house was part of it. A lot of people I think working from home realize that they might want and/or need a little more space, and that was us too. I did also get into some daily habits just to have a regimen and so I have some daily exercises. I just do some bodyweight stuff that I can do anywhere in the world. I can continue that once we're traveling more again, which should happen soon, with push-ups and sit-ups and squats, that kind of thing. And I've been practicing Spanish every day with an app Duolingo, it's called, that's helpful, and we're hoping that we'll be traveling to Mexico again this fall. We do have tickets. I was able to vaccinate my 12-year-old son. He'll get a second dose soon. And hopefully 10-year-olds, which I have one of those, will be eligible by the time we're planning on leaving late September. So, really looking forward to getting back to travel.

Benz: Even though you are retired from paid work, you and your wife have spent a lot of time volunteering your time in health care, especially over the past year. Has that been helpful in terms of helping you maintain your sense of identity and purpose, even though you're not practicing as a physician any longer?

Dahleen: I think so. I mentioned I was able to vaccinate my son. And I mean that, as in, like, I held the syringe and put it in the shoulder and gave him the vaccine. And I've done that many hundreds of times, or more than a thousand, I'm sure, at various clinics throughout Northern Michigan. Once the vaccine became available, I said, I want this. How can I get this? How can I help as many other people get this? So, I've done that somewhat through advocacy and just promoting the vaccine on social media, but also by being present at these clinics. And the first few weeks, I was only able to be a helper, documenting the shot and actually welcoming people as they came in the front door and making sure they had appointments and knowing where to go. And then there were some changes made to the national PREP Act, it's an emergency preparedness act that allowed my Minnesota State Medical license, which I have maintained, to apply to Michigan for the purpose of giving a vaccine. So, I've been a little more satisfied now that I've actually been the one giving the shot. But I think it does give me something.

When I first got back from Spain and quarantined for couple of weeks, and I felt kind of helpless and like I might have retired at the wrong time; they might need me. So, I contacted my old chief of anesthesia, and I said, “I still have privileges at the hospital, I still have my license. Just let me know, when you need me and I can be there in a day.” I thought it might be the hospital overrun kind of thing. Well, it turned out that with elective surgeries on hold, and people being afraid to even leave their home or seek help for their health care needs, they were not busy at all, and they didn't have enough to do. So, instead of going back to anesthesia, like I thought I might, I was able to participate in helping us recover from this pandemic a little more directly, which really did feel good and continues to do so.

Ptak: You said that the more a person's identity and ego are tied up in their profession, the harder it could be to transition into retirement. From that standpoint, it seems like doctors might have an especially hard time transitioning into retirement. How did you deal with those feelings?

Dahleen: Oh, yeah, that is so true. And personally, I never really led with the doctor card. I wasn't the guy showing up to social events wearing scrubs, or with a vanity plate, this is Dr. Leif, or whatever it might be. So, I didn't lead with that, it was always a part of my identity, the fact that I was a physician, anesthesiologist, but it was never defining who I am or who I was. And there are quite a few physicians that I've heard about or know of or knew personally that that kind of failed retirement, mainly for the reason that they had not really branched out--that most of their sense of purpose and social life and everything else came from their work at the hospital or in the clinic. And so, I do think it is important to think about what post-retirement life looks like and have a life that is separate from your work life. And I know for many physicians who work long hours, it can be difficult to have a whole lot going on outside of their medical career.

Benz: You have young children, as you referenced, how are you inculcating a work ethic in them, even though you're no longer pursuing paid work? How have you talked through that issue with them?

Dahleen: Well, they're 10 and 12, they'll be 11 and 13 this fall, they're not so little now. And they were old enough to remember and to know that there were times that I had to work through dinner, sometimes through the night. They might not even see me because I went to work long before they woke up and didn't come home until maybe after midnight. That was not unusual when I was on call, which was pretty often throughout most of my career every third night, every fifth night, usually because I worked at smaller community hospitals. So, they will remember those times and now we do work differently. They were in public school until I retired, and then we started to travel, we started homeschooling. So, we have a lot of work for them to do in terms of academics, and then just things around the house. Like today we had a hot tub delivered at our new house that I mentioned. And I asked the boys to help me move it around to the back of the house, so they were moving the PVC pipes that we use underneath the hot tub as I pushed it around, kind of like the Egyptians pushing stones and moving logs--the same concept for building the pyramids all over, just moving hot tub. They also mowed some of the lawn today.

So, they're doing work, they're seeing me do work--lots of house projects. We moved into a house that had one owner for the last 60 years, and so some things aren't exactly up to date, up to code, or in keeping with current styles. So, lots of work for us to do and we're involving them where we can.

Ptak: What can people who aren't planning to retire early learn from the FIRE movement?

Dahleen: Well, I think there are definitely some lessons here, even if you don't want to retire early. And I would even caution, what you want now and how you perceive your job now may change drastically--it can happen abruptly, it can happen over time, but your attitude toward your career is probably not going to be the same five or 10 years from now. So, I think it's wise to plan for contingencies--have a plan B and the means to enact that plan. And that usually means having some, financial runway is a term I've heard (F.U. Money), etc. which really just means you have enough money where you can get by without, let's say, a year or two of working, or maybe five or 10 years. And so, you may not build up to that 25 to 30 times your expenses as quickly as you can, as some FIRE devotees will do. But, maybe try to get up to 1x, 2x. And when you're there 5x and 10x. And once you have that money set aside for your future, then you have more options. And if you lose your job or leave your job voluntarily, and you're not hosed, you've got the ability to get by for a while, maybe a number of years without a job or with a lower-paying job, or whatever it is that you think will make you happy.

Benz: Doctors often have high paychecks, but they often have very high levels of student debt. You've said that having a lot of debt wasn't a big part of your story. But for people who do have a lot of debt coming out of med school, is early retirement even realistic for them do you think?

Dahleen: Well, I think it is. And yeah, debt wasn't a big part of my story. I stayed in-state at public schools, had a bunch of scholarships for undergrad, and I did have some family help too, and some skin in the game as well. But, yeah, 20 years ago, when I finished medical school, I guess, 19 years ago, my debts were like $60,000, which I know pales in comparison to the $200,000 or so that is average, and $300,000 to $500,000 that is not uncommon or even higher. But does that make it impossible to retire early? I'm going to say, no, because once I got my debts paid off, I was setting aside $200,000 plus per year for retirement. And so, a few $100,000 in debt would have cost me probably a few years when you factor in the interest on that debt. Of course, interest rates are quite low now, which is wonderful. I think it makes it more difficult, and it makes it seem like a goal that is so far off, you can't even imagine. But when you also think about the fact that if you have a physician's income--and again, it helps to live in a lower cost of living or medium cost of living area as opposed to one of the most expensive cities on the coast--but you probably can set aside six figures a year and retire that debt in a number of years that isn't so daunting.

Ptak: Another headwind for new doctors is that during their training, they might not have the time or money to do a lot of things that their peers are doing. How can doctors beat back the natural urge to spend a lot once they start earning good salaries?

Dahleen: Yeah, that's a tough one. We built our "dream home on the lake" and we spent a lot more money than we should have. I think we have the most expensive house in the town that we live once it was done. So, we did that splurge. But I think you have to be somewhat selective in what you splurge on. I believe you've had Ramit Sethi on your show, on The Long View, and he likes to talk about, take what you love and spend freely on that and cut mercilessly on everything else. My friend Paula Pant, she has got a podcast and website called Afford Anything and she says you can afford anything, but you can't afford everything. So, if you are going to have your grand home, and luxury automobiles, and take exotic vacations all at the same time, well, people are going to look at you and say, wow, that person is rich. But you're not going to be building much wealth, not on a typical physician's income. You’ll probably be spending pretty much all of it, if not more than you have, and going into debt, which isn't going to make you happy at all.

So, I think dial-in on what makes you happy. For us it was having a nice home and taking some pretty nice vacations, maybe not five star, but we traveled far and wide and continue to do so. But again, we've never driven luxury automobiles, and we don't really get into fine dining, it's not our thing. So, we know what we value and what we don't, and that's worked well for us.

Benz: I want to dig into the financial aspect of early retirement. Can you give us the broad outlines of your analysis that helped you get comfortable with retiring at a relatively young age? You mentioned the 25-times metric earlier, but what were the other key items on your dashboard?

Dahleen: The money aspect is the biggest one and that one we just kind of stumbled into. My wife and I were relatively frugal compared with our physician peers. And I knew I was saving a good amount of money; I didn't know what for and it turns out it was for early retirement.

Other things that were strong considerations, especially regarding timing of leaving my career, etc., was our kids--they're at an age where they really enjoy travel and discovering new places. They can obviously feed themselves and dress themselves and do all of those things. It would have been more of a challenge if they were, let's say, two and four years old, rather than 8 and 10, I think is what they were when I retired. And so, the timing of that, and then having them in that late grade school, junior high/middle school age. I think that's an OK time to miss out on school. And our plans were to have a few years--maybe four years--to travel before settling down and being somewhere that they could go to high school for a more-traditional high school experience. So, the timing was based mainly on our boys, and it also gave me another four to five years to work this whole idea out in my mind of a post-anesthesiology life. And it worked out quite well. I'm happy with the time that I spent continuing to work. I did start my website and just typing things out, writing them out, looking into more detail, reading other blogs that were also in the same realm that really helped. I know you had Karsten Jeske, which I pronounced like Karsten Jeske, like a good Chicagoan. I'm not from Chicago, but I know that's where you are, Christine. But, no, it's not Jeske it's (Yeska), and I learned that by listening to him on your podcast, but he had, you know, tons of insight, and tons of good research into safe withdrawal rates and what can work and what can follow-up your plans, etc.

Ptak: You may have mentioned this, but I think you targeted having 36 times your income needs at retirement. I think Christine might have alluded to this a moment ago, which is a specific amount. So, how did you say you arrived at 36 times?

Dahleen: Well, somewhat backwards in a way because I knew if I stuck to a five-year plan to work that much longer after realizing we weren’t, I would probably have that, and then some, which we did. But also, I did an analysis, and she may have on the blogpost of mine called Financial Independence versus Financial Freedom. And I said that I think a financial freedom is having just a little more, well, freedom, whereas financial independence means you can kind of keep doing what you're doing, and there is a low likelihood that you'll run out of money if your spending doesn't change. But financial freedom to me sounds like you can spend freely. So, I took our annual expenses at the time, and this was when we were post-mortgage, post-student loan debt, etc., we were spending about $70,000 a year, like I mentioned, and I figured about $40,000 of that was core expenses that really couldn't be cut. And maybe $30,000 of that was fluff. And I figured if we doubled the fluff budget, and that was our second home, our travel, things that are not necessary to live--piano lessons, guitar lessons for the kids, etc.--if we doubled that budget, we could live quite well. And the way the math worked out, going from a fluff budget of $30,000 to $60,000, meant an annual budget of $100,000 a year. And that was 36 times the $70,000 that we had been spending at the time. So, that's where I came up with 36x as a financial freedom number for us, as opposed to 25x being the FI number, if that make sense.

Benz: It does. I wanted to ask about withdrawal rates, which is sort of a relative of what you're just talking about. And there has been a lot of research recently from retirement researchers about safe withdrawal rates potentially needing to come lower because of low yields, especially and also high-equity valuations. So, how does that influence your thinking about your comfort with your plan? How should early retirees grapple with that phenomenon that low yields, especially, are pushing down on safe withdrawal rates?

Dahleen: That's a great question, Christine. And I've read I'm sure some of the same things that you have from people like Wade Pfau and Karsten from Early Retirement Now and Michael Kitces. And it is a tough time with valuations high as they are and yields quite low from bonds. And so, I think it's wise to be conservative. I think 3% is still quite safe. And, it really depends in what your risk tolerance is, how safe does your plan need to be? Do you want that 99% likelihood of success or are you good with 80% or even 50%? Do you have a ton of fluff in the budget? Could you live on maybe two thirds of what you're spending right now pretty easily without any major hardships in your life? Would you be really upset if you saw your portfolio drop by 20% or 30% or are you comfortable with more risk. And so, I think just about anyone can feel pretty comfortable at about 3%. Now, that's assuming you're not paying 1.5% in investment management fees or something like that. But as far as overall spending, somewhere in the 3% to 4% range on the low end, if you're conservative. If you think you'll still do some paid work in retirement, or again, if you have plenty of room to cut back, then I think starting with that 4% or even a bit higher isn't unreasonable as long as you do have a contingency plan.

Benz: One criticism that we sometimes hear about the FIRE movement is that it's a bull market phenomenon. Do you think some young retirees might be in for a rude awakening in a sustained bear market?

Dahleen: Well, a sustained bear market would be something of a challenge. Although, I had one of those early in my medical career and therefore early in my investing career, and it did wonders for my portfolio in the long term. I was investing starting in 2006 when I finished residency. I bought at rather high valuations then, I bought on the way down in 2008. I bought in March of 2009, at the nadir, I continued to buy on the way up. And when all was said and done, that really was like a nice slingshot boomerang just really helped launch my wealth up and net worth up and helped me reach financial independence. Now, if you never had that buying opportunity save for the blip we had in March of 2020, then you haven't had the benefit that I did from a bear market.

Now, having that at the tail end of your working career was a much worse sequence of returns as far as during your working years and that would make it more difficult to reach financial independence. But like we talked about with valuations being a bit high, this is a better time to be a little more conservative with your withdrawal rate. But I think the fact that we haven't seen a true extended bear market, at least in the last 13 years, it has allowed people to see their balances increase, but it has not allowed them to buy at low valuations.

So, it's not necessarily all wonderful for people trying to reach FIRE right now, if they're early in their career, they would benefit from a bear market, like I did.

Ptak: Can you talk about how you've attempted to make sure that your plan can survive less-hospitable market climates? What asset allocation do you have roughly? And do you expect that to change through your retirement years?

Dahleen: So the main thing I did was save “too much,” which is a good problem to have. I'm roughly 90-10, stocks to bonds, although I've got about 20% allocated to real estate now. So, it's probably more like 70% stock, 10% bonds and cash, and 20% real estate investment. So, I am more aggressive. And I feel that I can afford to be because we honestly have more than 50 times our annual spending now. And the way I like to look at it is take that 25x or 30x, or 33x, whatever you feel would be a truly safe withdrawal rate, and have that invested in a sensible way. It could be 60-40 stocks to bonds, 80-20 maybe if you're younger--I think is still considered sensible for an early retiree, and that's your 25x or 30x. Anything above and beyond that, you can choose to invest as you wish. And some people who are more conservative, will say I've won the game, why keep playing, like Bill Bernstein says. But others might say, well, this is money I don't really need; I can take more risk with it. And that might allow me to do different things later in life. It could allow me to leave a legacy for my heirs, my children and their children, etc. It could allow me to do something exciting with philanthropy, etc. And so, I take that latter opinion, that I've got what I need in that 25 or 30x invested in a reasonable way. And I'm willing to take more risk with the extra and with the overage. And so, I remain heavily invested in stocks with that portion of the portfolio and have made some real estate investments and some other investments in startup companies and that sort of thing.

Benz: I want to follow up on those real estate investments in a second. But first, what sort of inflation expectations did you use when you crafted your plan? And how worried are you about the issue that inflation could be kicking up right now?

Dahleen: The cost of lumber right now is insane, as we look to possibly build, that's another story. But the property we have is across the street from the lake we want to be on and we have property on the lake. So, we're looking at building and we're looking at the price of lumber, and what goes into so many other aspects of a house, like the cabinets and the subfloor and everything else. So, I hear you on inflation--steel and some groceries and other things are going up. And I expect some of that will be reflected in the CPI, but there are some things that maybe the CPI doesn't measure that we are going to be paying more for. What inflation expectations did I use? Well, when I read all the safe withdrawal rate data, they account for inflation. I use real returns when I'm doing any kind of analysis with data, with Excel. Historically, I know 3% is kind of the long-term average. We've seen 1.5% to 2% for the last decade or so. And I was alive in the late-'70s and '80s back when there were double-digit inflation numbers. Now, I wasn't paying a whole lot of attention to the Fed's inflation data when I was six years old. But I've read the history and I know that that is a possibility.

And so, I hope we don't see double-digit inflation again, but by virtue of oversaving, and having a well-diversified investment portfolio, I'm not worried that our plan could go under unless we see something like that has happened in Zimbabwe or Venezuela. But I don't expect that for the United States.

Ptak: You're a fairly young person. When you think about Social Security, how much are you expecting to receive from the program? And also, what sort of adjustments are you factoring in between now and the time you retire?

Dahleen: $48,622 per year. No, I'm kidding. I have done the math, but it's a guessing game. At this point, I am 45 years old, my wife is 38. And I'm 25 years away from age 70, which is the most likely age that I would collect. If--and that's a huge if--there aren't major changes to program between now and then. And so, if I look at my work history right now, and my AIME and all those numbers, I would get close to $50,000, a year between my wife and I, assuming she takes hers at full retirement age and gets half of what my benefit would be a full retirement age.

So, I've looked at it as money that would be a nice bonus and icing on the cake. But it's so far off, I have to plan for an early retirement that will last from now until at least age 62, if not age 70. And so, it doesn't really factor in a whole lot into my retirement planning. Like I didn't say, “Well, I only need to save 22x because I have this money coming to me.” Now, I do believe that it will be there. I would not be surprised if it were somehow means-tested, or simply a smaller amount for everyone. Or maybe we are taxed more heavily along the way to help support the program, something will have to change, otherwise, I think we take a 30% drop in benefits across the board in about 10 or 12 years if nothing changes. So, the money should be there in some form, there is a lot of political risk if it's not. But I am not counting on that to be something that I need in order to continue to maintain our lifestyle.

Benz: Many early retirees look to passive income sources, especially real estate to augment their portfolio withdrawals. You mentioned that that's part of your plan as well. But the property market is arguably a little bit overheated right now, especially in certain markets. How would you suggest that early retirees proceed with respect to real estate investing in this environment where there is the risk of things being a little bit frothy?

Dahleen: It sure is frothy. And having been a buyer for the last couple of years, and finally landing a place to now selling a place that had multiple offers over our asking price. And now selling another, I'm very familiar with that. But that's residential real estate. And I would say most real estate investments, at least the most passive kind are more on the commercial side, which includes multifamily housing, and also office and retail, which obviously suffered recently, and there might be some bargains to be had in that space.

So, I like to diversify somewhat broadly. I know some real estate investors are very much into single-family homes. And that right now is probably more challenging. You often need to come with cash to be willing to pay more than the asking price, which is probably 20% or 30% higher than it would have been a year or two ago. But if you're looking more at commercial real estate investments, those might not have had the same kind of inflation and you can invest in funds that are going to be diverse geographically. And even in the type of investments you can invest in REITs, obviously--the real estate investment trusts--which are very much passive and you can buy a REIT fund, which was my introduction to real estate investing was Vanguard's REIT Index Fund. So, lots of options, and not all of them very well correlated with the residential real estate market.

Ptak: One option is crowdfunded real estate. You've written that you've made investments in crowdfunded real estate. Can you describe how this works? What are the pros and cons of investing in real estate this way versus investing in REITs or REIT fund or REIT index fund, as you just mentioned? It seems like the risk/reward profile is substantially higher or is that not the case?

Dahleen: Well, I've kind of looked at it as being in between, say, a REIT and a full syndication where you are going in a loan with a sponsor as a limited partner and investing, usually the minimum is $50,000 to $250,000. Those are big numbers. And if you don't know what questions to ask, and you don't know what the terms mean, you may be getting in over your head.

So, crowdfunded platforms are also investing in syndications, but they make it easier for typically, it's the accredited investor, so you have to meet certain, either net worth requirement of $1 million, exclusive of your primary home or have income of $200,000 to $300,000 a year, depending on whether you're single or a couple. And so, what they do is they will do some due diligence on a deal and say, we like this deal, we're going to present this to the people who have registered on our crowdfunding platform, and rather than have the minimum of $50,000, or $250,000, we'll make it $10,000 per investor--collect a fee and it might be 0.5%, 1%, 2%. They do make some money in there. But they give you the benefit of some initial due diligence, a lot of data: usually a webinar with Q&A with the sponsor of the deal. And so, you can get your feet wet and learn more without investing six figures at a time in one deal. And it also makes it a bit easier to diversify. So, you do have $100,000 to invest, you can invest in five to 10 different crowdfunding deals. And if one of them doesn't do well, because they don't all do well, then you're not shirtless; you've still got the other four to nine investments that you made. But again, you can also diversify with REITs. There are real estate funds that are basically going in on multiple syndications, and I've invested in a couple of those. And you can look at different types of real estate investments. And oftentimes you'll find these on the common, popular crowdfunded platforms, but there will be equity deals, there will be debt deals, there will be preferred equity--all of those investments you can find and learn about, too, because they often have pretty good education setup on their blogs, and through their educational resources.

Benz: Your blog, like many others, has advertising, most of it from financial firms. On the Physician on FIRE website, you note that you accept advertising from firms that you wouldn't hesitate to recommend to your friends. Have you rejected any potential advertisers that haven't met that standard? And, if so, can you describe in what way they fell short?

Dahleen: Yes, I definitely rejected some earlier on and I haven't had these types of ads in at least couple of years, maybe several years. I had what are called served ads, which just means that it can be Google running your ads. And if you visited certain websites, you'll get certain type of ads. And I used a different ad service like that for a while. And I was getting ambulance-chaser lawyers advertising on my site. I'm like, no, this is awful. Get them out of here. I don't want whatever money they're paying, it's not worth it. It's not good for my reputation, it's not good for society as far as I'm concerned. So, I cleaned that up. So now, if there is an ad on my site, I am aware of it. And I'm OK with it. And generally, it's the service that I think I would use, or I think would be reasonable for my readers to use.

As far as rejecting others. I do work with The White Coat Investor in a number of ways that we've kind of partnered, and one of those ways is that we share the same advertising manager. His sister, Cindy, helps us both line up those advertisers. So, we both do some of the vetting. And I would say the people that get declined most often are financial advisors that have asked to be on our recommended page. And I only allow basically the lowest-cost fiduciary fee-only advisors that we can find essentially, and that means if you're charging 1% AUM fees across the board, that just doesn't cut it. I do prefer hourly rate, I prefer a flat fee, especially for the higher-income folks that may have multiple millions of dollars of investments to manage. And then AUM fee just doesn't work out very well for them, unless it's on a schedule, which you will see occasionally where once you reach $1 million net worth, maybe they're charging 0.5% or less, when you're into multiple millions, it might be 0.25% or 0.15%. And then I think, well, if you can still get great service for $10,000 or fewer dollars a year, I think that's reasonable. But I don't think 1.25% on $4 million is, at $50,000 a year, a very good deal for the investor.

Ptak: Let's shift to taxes. You're really well versed about the ins and outs of taxes, and specifically, how to keep taxes down during retirement. Can you discuss some of the main techniques for doing so?

Dahleen: It all comes down to your taxable income. And there are so many different scenarios that you may have a lot of flexibility; you may not have as much depending on what sort of tax diversification you have in your investments. If everything you own is in an IRA or 401(k), then you don't have as much flexibility. But if you've been investing in a Roth IRAs, via the backdoor, you have a taxable brokerage account, you've got some real estate investments that might benefit from depreciation that's built into your distributions. That all is going to flavor what your specific situation would be. But some of the more common ones that are really helpful include being in the 0% capital gains tax bracket. So, if your taxable income, which can be quite a bit lower than your actual spending, is about $80,000, or less then you don't pay any capital gains taxes, at least at the federal level. So, that can be really nice for retirees who have some Roth money, some taxable money--they're getting qualified dividends and paying no taxes on them.

If your taxable income would be a bit higher than that bracket and you want to bring it down, you can donate money. I have been donating to a donor-advised fund and building that up while in my higher-earning years. And then I'll be giving money out later on when I have lower income when I'm fully retired. And I know I talk a lot about early retirement, and I do feel most days that I am early retired, and I'm definitely retired from medicine. But I do still make money online with having that online presence and website. So, I am not fully retired from that aspect. So, I still am doing this tax planning and a lot of the low-tax retirement that I've read about, written about and thought about I have not yet lived. But it does help to understand the tax code. I don't do my own taxes, but I know the ramifications of certain things that I do, whether it's selling an investment, selling a home that wasn't our primary home for two years, which we just did, that sort of thing. And there are definitely some tax-planning tools you can play around with--TurboTax, TaxCaster, which is a simple web app. I've got a great spreadsheet that I was given by a CPA that did a great job of actually getting basically the entire 1040 built out in a series of spreadsheets. And so I can play with different numbers and figure out pretty closely, dial-in what I think our taxes will be, and then determine how much I should donate to maybe get just below a certain marginal tax bracket or make sure I get all of the certain benefit, like the child tax credit, for example. So, know where those certain cliffs are, know where the brackets fall for you and your filing situation. And then plan accordingly.

Benz: What do you say to the criticism that there is something a little bit untoward about young retirees who have fared pretty well in our system, overall, trying to pay the least that they possibly can in taxes?

Dahleen: Well, I don't know if it's necessarily a fair accusation. I look at what I have paid in taxes, and it's something in the range of $2 million over the last 20 years. So, if you say that I haven't paid my fair share, well, I've kind of prepaid it more than a lifetime's worth. It's a lot of money. And most early retirees probably made pretty good income. I think six-figure income is pretty common, maybe not everyone in the FIRE community, but most have made good money and paid good taxes. And so, we don't want to continue paying six figures per year, because we're not even spending that much. I've tried to look at it as having prepaid the future benefit that we might get from them. And so, now, I know not everyone is an anesthesiologist, and it's maybe not common to pay six figures in income taxes annually, but that's what I did. So, if someone wants to accuse me of trying to cheat the system, I can just point to my prior returns and say, “No, I already prepaid probably more in a year than you might have in five or 10.” So, that's how I look at it.

Ptak: You've made a point of donating a portion of the profits from your blog and other activities to charity. How do you decide which charities to contribute to?

Dahleen: Well, I talk about it with my family, and we've given to some local charities. I like to see the effects close to home and know that people down the street now have heat where they might not have been able to pay their bill before. I've also read some on effective altruism, and giving places where it will have the most impact in terms of saving lives and improving the lives of people much less privileged than we are here than I am here in the U.S. as a tall white male.

We also look at things that have made a certain connection with us. For example, my family and I went to Honduras as part of a medical mission a couple of times, and I provided anesthesia care, while my wife and kids were able to volunteer on the site where they have the surgery center, but they also raise children--kind of a children's home for disadvantaged youth. Several 100 kids actually living on this 2,100 acre ranch in the mountains of Honduras. It was a really wonderful experience for our family, eye-opening in many ways--very helpful to people who couldn't afford medical care, because they have no other way to get it in Honduras. And we give money to that organization, because we're familiar, we've been there, we know what the impact is, and it feels good.

Benz: You mentioned that you're using a donor-advised fund for the giving that you do. How do you balance the convenience factor of donor-advised funds with the extra cost that they entail? One of our colleagues has been doing some digging on them. And I guess we've all been a little surprised at the administrative costs that are potentially a drag on the charitable contributions over time.

Dahleen: OK, that's fair. But where would that money be if it wasn't in the donor-advised fund? It probably would be in a taxable brokerage account, that's typically what you are donating. And so, there is tax drag on the money that's sitting there. So, if I have, let's say, $100,000 in a taxable account, spitting out 2% or 2.5% in dividends, now that's going to be taxed at a capital gains rate, plus state income tax--might end up being 20% to 30% tax on that. It works out to I'd say about 0.5%, 0.6% tax drag on that money. And guess what the donor-advised fund charges: 0.6% for the big ones like Fidelity Charitable, Vanguard Charitable, Schwab Charitable, and those are basically the only fees they charge beyond the expense ratios, which are very, very low in most of the funds they offer.

And so, the cost to me is a non-issue; it's equivalent to what you would have in tax drag on that money if it weren't yet donated. So, that disappears. You mentioned the convenience factor. And that is huge. You can make one big donation to the donor-advised fund, you have one receipt to track that particular donation. And then you can make hundreds of grants. You can make them anonymously, and you don't have to keep track of any of it and you're not going to receive any phone calls. And you won't get any mail from these charities for the rest of your life like you would if you gave money directly.

Every Giving Tuesday, now I think it's the last three years, I've done this. I've told my readers, “Where do you want money to go? Name a charity, and I'll donate 100 bucks.” And I spend all day making grants that takes about a minute per--not even, maybe 30 seconds. But in the past at least, I've also saved screen captures so I could prove to people, “Hey, I gave money to your charity.” That's more cumbersome than actually donating the money. So, I'm not sure I'll keep doing that. But I have made hundreds and hundreds of grants to all kinds of different charities--don't have to keep track of a single receipt, don't have to worry about getting the further solicitations. It's pretty amazing. And, again, I think the 0.6% fee is fairly--depending on where you live and all that--fairly comparable to the tax drag that you would incur on that money if it were sitting in your brokerage account.

Ptak: Charitable giving is also a big consideration in your personal financial plan. Can you talk about how you've gone about deciding how much you can afford to give away and what charitable-giving strategies are part of your personal financial plan?

Dahleen: Like I said, we ended up oversaving, mainly just as a function of time. And, as you mentioned, a strong bull market at the end of my career. So, after you are financially independent, and you have the 25x or 36x for financial freedom, or whatever it is that you're aiming for, maybe it's passive income that is exceeding your monthly expenses. Anything above and beyond that is gravy. Once you give the money away, you can't take it back, and that includes putting money in a donor-advised fund; it's not yours anymore. So, you'd want to consider how will my needs, my wants, my desires change in the future. And maybe you don't want to just keep living right at 25x, especially where you have the frothy valuations that we've talked about. So, I don't give away everything above and beyond a certain number, but I know that we can afford to donate generously. And we have made several six-figure grants to our donor-advised fund and we're building that every year, more and more so that philanthropy can be a part of our future and part of what the kids see is that we are really doing what we can to try to make a difference in the world and not just hoarding money for ourselves.

Benz: Well, Leif, we've really enjoyed talking to you today. Thank you so much for taking time out of your schedule to be with us.

Dahleen: You bet. This was a lot of fun, and great conversation, and I appreciate the opportunity, Jeff and Christine. Thank you.

Ptak: Thank you.

Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)