XRAYVSN

Johanna’s Take:

This week’s submission is by a physician who transformed a side hustle into his main gig, becoming a mid-career millionaire with a penchant for helping others.

Dr. “Gates” is a high saver and, dollar-wise at least, a high spender.

At what point should he worry about the feasibility of his family’s lifestyle?  

It was very exciting to take on this case because, although I rarely discuss it, I happen to be a Registered Life Planner with the Kinder Institute.

The information submitted by Dr. Gates and subsequent discussions gave me the perfect opportunity to use my life planning skills in in my assessment, making this a particularly enjoyable analysis.

Dr. Gates is past the point of worrying about whether he can afford a Tesla or first-class airfare on multiple annual vacations.

He is more concerned with his and Mrs. Gates’ expenditures – are they sustainable and should he be worried?

In additional dialogue, I learned: 

• Laddered term life ($1.5M remaining) expires within the next 5 years. 
• Rudimentary estate plan in place 
• Not sure of succession plan 
• The additional real estate holdings have a very low basis; their sale would expose the Gates’ to high income and capital gains taxes. 

The positives: 

• Very high earnings from an established business with a quantifiable value 
• No debt 
• Solid balance sheet 
• Moderate standard of living  

The negatives: 

• Lifestyle disconnect between Dr. & Mrs. G  
• Lack of a succession plan 
• Residents of HCOL area 
• Potential large tax bill from any sale of real estate 

Assumptions (I will use conservative estimates wherever there is an uncertainty.) 

• 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections) 
• By my calculations, you will have ~$22M in retirement and brokerage accounts at retirement. This does not include the value of the business or real estate. 
• Average inflation 
• Retirement in 9 yrs 
• No divorce 
• Savings of $987k/yr until retirement 
• Average lifespans 
• No significant financial assistance for other family members 
• Reasonably good health 

Additional commentary:

The present lifestyle has a moderately high happiness factor until retirement, at which time Dr. G and Mrs. G’s ratings trend in opposite directions.

At his current savings rate and COL, I project a potential portfolio for the Gates of ~$22M at retirement and, after 2% withdrawals (which is even more than they are already spending), ~ $53M at first death.  

At first blush, a lifestyle costing >$350k/yr is extravagant, but context matters.

With earnings of $2.35M/yr, 15% for living expenses is, in my opinion, quite modest.

When one reaches FI and continues to earn, I believe it’s a good exercise to sit as a couple, with or without an advisor, and say, “We will never run out of money. Now what?” and accept that some significant decisions need to be made or the government will happily accept a large chunk of wealth from your estate at death and bitter fights may ensue among survivors. 

In the case of the Gates’, my concern is not that they are living an extravagant lifestyle, but that the spouses will not continue to take similar pleasure in their net worth at some point, possibly soon after retirement.

I don’t see this as a huge red flag but an issue to be aware of and explored by the Gates’.  

Dr. G has recognized the need to feed his soul beyond the lavish lifestyle.

This does not necessarily mean that Mrs. G should be deprived of her enjoyment, or that it is “wrong” for her to appreciate creature comforts.

However, communication about and understanding of these differences is essential for the marriage to thrive for 3 decades post-retirement.

Both spouses will benefit if they can be open about and celebrate their differences with a goal of forging a path that nourishes their unique needs. 

I don’t think my verdict will be a surprise to anyone.

But that’s not my biggest worry for the Gates’.

I am concerned that, with no current money worries, they have been gliding through their everyday lives without concrete financial goals for the future.

Therefore, I have the following recommendations: 

• Sophisticated estate planning:
  • At this level of income and wealth, excellent estate planning can save millions of dollars at death.
  • Given Dr. G’s desire to do more good for the world, he should be thinking about what is “enough” for his heirs and consider projects he will support after death.
  • (Note –consider using pre-tax assets for bequests to charities.) 
• The G’s may also want to do more good during their lives.
  • Funding a DAF [Donor Advisor Fund] in peak income years will not only benefit others, it will save them taxes. 
• To supercharge the DAF effect, consider donating some or all of the appreciated real estate.
  • The Gates will receive a tax deduction for the fair market value and avoid taxes on the sale. 
• If the Gates do not want to donate the real estate, I recommend holding until death and/or using 1031 exchanges to consolidate holdings and defer income/capital gains taxes. Then pass to beneficiaries, who will get a stepped-up basis at death. 
• Put a succession plan in place.
  • I have a huge concern that, should Dr. Gates die unexpectedly, he will leave Mrs. Gates with a business she does not know how to run or even want to be involved in. What a shame that would be!
  • I don’t know whether the children are involved, but a plan for giving shares of the company to them at death could be beneficial. 
• The Gates should consider irrevocable trusts now to begin gifting to their children. Trusts will also provide asset protection. 
• Finally, consider retiring to a state that is more tax and estate favorable. 

Xrayvsn’s Take:

I am not one for making snap judgements but I am going to come clean.

When I first saw what was being requested (continue indefinitely making property tax payments with yearly maintenance costs totaling $100k/yr) I said there is no way that this could be feasible.

And then I read on.

Color me impressed.

By the numbers provided, “Dr. Gates” has a net worth of $18M currently.

Subtract the value of the primary home ($2.55M) and that still leaves a very healthy $15.45M in assets that generate cash flow.

If this was subject to the annual safe withdrawal rate of 4%, that would fund a lifestyle of $618k/yr and that is without considering even further funding which the good doctor is still doing.

The biggest concern, as Johanna pointed out, is not that the lifestyle can be maintained, but more along the lines of estate issues.

The estate of this physician family is very likely to surpass the exemptions for estate tax (currently at $11.2M/spouse) and it would be wise to plan to minimize the significant tax hit that would occur over this limit.

As an aside, congratulations Dr Gates on successfully pivoting from medicine into a successful medical startup that has allowed you to achieve extraordinary wealth.

It is easy now to look at the results of this endeavor and proclaim how lucky you are but I am certain in the beginning it took a lot of risk on your part to parlay this startup into what it has become.  Well done!

The Decision:

Johanna Verdict: Thumbs up. 

Xrayvsn: Thumbs up

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