Speaker 1 (00:00.078)
roll a thumb not to own shares of your employer. At the end of the day, you know, they could lose their job and their investment all at the same time. That's just not good strategy. And, you know, unlike an investment in a diversified mutual fund, they could lose the whole thing.
Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing into all the retirement and college. Hello, physician moms and dads. I'm Nate Renneke, Certified Financial Planner, Primary Advisor here at Physician Family Financial Advisors.
money you
Speaker 1 (00:43.598)
And I'm Ben Utley, also a CFP and service team leader here at Physician Family.
Ben, I got a story for you and our audience. My six year old lost a tooth. OK, so this isn't his first lost tooth. I'm wondering when your children started asking questions about if the tooth fairy is real.
Let's hear it.
Speaker 1 (01:08.174)
Geez, how old's your son? Six. Six. Well, that would have been like 14 or 16 years ago. So it's hard for me to remember. And I think at that time I was so busy, my wife was a tooth fairy. So I don't have a great answer for that.
He's already asking.
Speaker 2 (01:24.75)
Well, I'm the tooth fairy at our house. Uh huh. And he asked me and I just I just smiled at him and he goes, is it you? And I'm like, oh, I was just like, yeah. Like, what else do you say? I'm like, I don't. How long do you keep this lie going? And then I did little did I know it would unravel. He's like, all right, what about Santa? Oh, here we go. So I just said, said, I'll tell you, Mateo, but.
No.
Speaker 2 (01:53.166)
You can't tell chemo. Yeah, and he's like, is it you I was like, yeah He's like so all those gifts Santa gifts are you I'm like, yeah, and he's like like I go but shh He's like, okay He's not a good secret keeper. So chemo might get the short end of the stick on this
I was talking to a parent one time about about the same conversation around holiday gifts, and she said something I'll never forget. She told her kid, stop believing, stop receiving.
Yeah, I think normally at that age you start to have some suspicion, but I cannot believe he just asked. My judge told him. Okay.
Yeah. Yeah.
But what if they always believe like what if they're in their 40s and they play right? I mean you could have other problems. Yeah
Speaker 2 (02:44.878)
That's true. Yeah, I think he heard from someone at school and I was like, yeah, there's stuff too.
man, it just runs everything.
I know. all right. Well, we got some good questions today. More questions. So first one, family medicine doctor in California. And they asked, what tax benefits do I get when I invest in a moderate duration California municipal bond mutual fund? Okay, so that was a lot of words for essentially California
some more questions.
Speaker 2 (03:23.244)
municipal bonds.
beauties. Yeah.
So, yes, since this person is a California resident, essentially these bonds are federally and state tax free or tax exempt.
Is that right? Yep, that's correct.
Yeah, so these are pretty cool. What do you have to say about municipal bonds? We actually talk about these and I feel like we slip them in a lot. Yeah. Like, get some uni bonds, they're cooler than that.
Speaker 1 (03:54.382)
Well, I'm going to break it down. So, moderate duration, what does that mean? Okay, so, you know about certificates of deposit, right? You know, hold them six months, a year, three years, five years, whatever happens to be. So, that's known as the term, okay? Well, in bond land, we have a word called duration, which is kind of like term, but it's not the same as term. Duration basically means the number years you got to wait to get all of your money back in terms of your...
your interest paid basically to be made even. And I could be more complicated than that, but it doesn't matter. Basically what it is is it's a measure of interest rate sensitivity. Okay. So we got short, medium slash moderate and long. If interest rates arise, typically bond prices go in the opposite direction. So if we get a sharp rise in interest rates, like we did a couple of years ago, bond prices fall and vice versa. So your short term
or your short duration bonds are least sensitive to interest rate movements, long term, long duration is most sensitive. So the first thing moderate buys us is it buys us kind of a moderate volatility ride, right? Okay. So usually with the yield curve being a positively slope, that's kind of the normal state. Moderate would give us higher yield than short term. But since the yield curve is relatively flat right now, moderate doesn't do a whole lot for us in terms of yield, right? So short term,
intermediate term, long term, they're all kind of similar right now, just because the weird stuff that we have post COVID and post Fed having their fingers in all the pies. Okay, so that's first thing. then we have municipal bonds. a municipal bond, like if your kid goes to a public school, that school is paid for with municipal bond proceeds, which is to say that the state or the county or the city
borrows for a project that they want to do because they don't have a sovereign fund, right? They can't go just raid their piggy bank to do something. So they borrow from the public and that borrowing is represented by a bond issued by a municipality. So city state that kind of thing. Well, because of the way our tax laws work in this country, debt that's issued by a state or a municipality is federally income tax free. Okay.
Speaker 1 (06:16.286)
And if you're that municipality, you're not going to tax your own debt, right? Because that would basically just make it harder for you to get your loans met. we have what we call single state or double tax free bonds. This is particularly useful in states like New York and California, where you have high state income taxes. So you get the double tax exempt. That's one of the things that you get in your California communities.
Really, you you get more after-tax yield is what it boils down to. Okay, so that's the benefit. All right, but we don't actually use California munis. We don't use New York munis. We don't use New Jersey munis in our portfolios. And the reason we don't is because sometimes municipalities kind of come close to welching on their debt. Right? So some of our listeners are probably too young to remember this, but there was a California municipal bond crisis and things looked really dire.
for California bondholders. And so basically, you you could hold a multi-state municipal bond fund that's going to have munis from most of the states in it, or you can have a California muni bond fund, right? So I live in Oregon. One of the reasons I don't own Oregon munis is because the biggest municipality is Portland. They're on a fault line, which has a river and upstream of it, they have a defunct nuclear power plant, right?
It wouldn't take a whole lot of earthquake to inundate Portland with nuclear sludge and other problems. Right? So I'm not going to put all my money in Portland, Munis. So I'm not going to put all my money in Oregon, Munis. I'm just not comfortable with that level of geographic risk. If I lived in California, I wouldn't be comfortable with that level of geographic risk. Same story for New York. New York is a financially strong state, but you never know what's going to happen. And the term on Muni bonds can run all the way out to like 25, 30 years. That's a long time.
So, no, for my money, I don't, I don't want to take the risk and the incremental after tax yield is just very small. It's just marginal. It's, I think you're picking up maybe, I don't know, maybe a half a percentage point on safe money. So, or I should say low risk money. So it's not worth it for me. And, we still use them. We do use munis. We just don't use state specific munis.
Speaker 2 (08:35.126)
Right, right. Yeah. the benefits that you're talking about is essentially the after-tax yield, which is hard for people to wrap their head around, but if you pay a lot of taxes, then you're comparing the after-tax yield with the yield on other bonds. Yeah. that's why you use TNC. Okay, great. Okay, next question. Family and sports medicine doctor in Oregon.
correct.
Speaker 2 (09:02.21)
I'm shopping for term life insurance and I received a quote which included a convertible option. What is a convertible option?
This is life insurance that only pays if your car flips over and you have your top down
Yeah.
Just JK dad joke. Convertible. You get it?
Yep. Okay. So the convertible option essentially allows policy holder to convert their term life into permanent life insurance, right? Yeah, it's a whole life or universal.
Speaker 1 (09:36.43)
permanent permits the way i said terms for a term permanence right now basically forever
Yeah, so it costs more money to have this. Yeah. But gives you some flexibility. Yeah. Could you tell me, know, like just when would someone want this? Like, what's the benefit? I mean, you can convert it. OK, so it's convertible. You can get this permanent life insurance. Why would I want permanent life insurance?
I think if you're doing your financial planning correctly and you're choosing your insurance products correctly, then you don't need this convertible feature. So the reason we have term products is to match the term of the risk to the term of the policy. So for example, let's say you have an eight-year-old and that kid's going to go to college in 10 years and your risk is that you die before you can save enough money into the college fund.
Okay, so if you buy a 10 year term policy in an amount equal to what it takes to pay for four years for that child to go to college, one of two things is going to happen. You're going to die before you save all the money, in which case the insurance policy is going to pay off or you're not going to die. if you do your planning, right? And it's a predicate here, then you're going to have the money that you need for college. So I'm not seeing a real need for convertibility. Maybe it gives you some flexibility.
But I think before I would pay the kind of the added premium for a conversion feature, I'd be really careful about matching the term of the product to the term of the risk. So for example, maybe a 30 year product for a mortgage, but most physicians don't hold their mortgages for 30 years. So maybe a 15 year product for that. Right. You know, if you're if you have brand new parents, you could get 20 year term to for your college. If you're you know, if you're the breadwinner and you're and your spouse is a stay at home parent.
Speaker 1 (11:32.93)
then I could see a longer term policy for that. And maybe a conversion feature, but to me, I think if you're planning correctly, this is something you can skip.
Yeah, I think it gets slipped in a lot. But this question came from from someone who saw that convertible option on a quote. Their quote was really high. I think that they thought that the convertible option was the reason there. It was so expensive and it was part of the reason. But I think it was just a bad agent or something, you know, just an expensive.
Yeah, just dig in for more commissions. I wouldn't expect the conversion. we'd have to look at the numbers, of course, but I'd expect that that conversion feature might be worth like, I don't know, 10 % of the premiums or something like that. It's not half. You know?
Exactly. Okay, next question is from an orthopedist in Nebraska. All right, so I got this question actually yesterday, right? And it was interesting. So I have the opportunity to buy more shares of my practice every couple of years. And I'd like and I would need to take out a loan to do it. Should we slow down retirement contributions to pay off the loan faster? Okay, so I've actually gotten this scenario
Over the last eight years several times this happens actually all the time where yeah You you started a new practice you get the option to buy in a little bit and the funny thing is it wasn't until now Where someone was able to tell me this is gonna happen every couple of years and then I reflected back on all the ten other times it's happened and I realized yeah, this does happen every couple of years and Here's my big takeaway from this because so originally I thought well, maybe maybe that makes sense
Speaker 1 (13:16.13)
Mm-hmm.
Speaker 2 (13:23.726)
because these payments are going to be high and you want to get rid of this debt. Maybe it's a high interest. But what I've learned over the last eight years is exactly what this person said, which is this loan is like a revolving door. You're going to keep getting this loan. if every time you get this loan, you slow down retirement to pay it off. I'm not so sure that that's all that beneficial because every two years you pay down the loan, you take out another loan.
And then what I've seen is it takes, you know, six, 10 years before the distributions and all these shares start to pay in full for these loans. So you wait 10 years to restart your contributions toward retirement. Now on the flip side, these shares are worth something. And you're going to, you know, it's, it's a little nerve wracking to put it in your plan because, you know, lot of money's based on it.
Yeah.
Speaker 2 (14:23.438)
all wrapped up into your job and your practice. But they're all worth something. But the problem is, at least from what I've seen, maybe you could speak to this, the value of these shares that you can sell at retirement is not growing even close to the same rate as the stock market. I've growing 3 % per year because they're not trying to gouge doctors who are trying to buy in. So they do grow.
but really the money is in the distributions.
Exactly. I was going to say it's not exactly a fair comparison because the money you make on these is in the distributions, I the dividends, right? Exactly. really what it is.
So what the thought would be that you invest the dividends, but every doctor I talked to wants to take the dividends and pay down the loan. And so there's has to, my take on this and was there has to be some balance of the two. You don't want to have a bunch of debt that's never getting paid off and you keep borrowing. But the reality is this should make sense to where the dividends are big enough.
to make a dent in these loans and you should probably continue to invest at some reasonable rate because if you wait 10 years to invest all your dividends that are huge at that point you've lost all the power of compounding interest over that decade. So that's kind of where I landed on this. It's not an exact answer but a lot of times it has to do with how much are the distributions going to be, how big is the loan, how good of terms did you get on the loan.
Speaker 1 (15:43.564)
Yeah.
Speaker 1 (15:55.446)
I see this problem through a couple lenses. One is just the kind of rule of thumb not to own shares of your employer. Because regardless of how it's financed, whether this is revolving revolving door loans or they're paying for it out of pocket or somebody's landing from Mars with a pile of cash that they buy in with it, it doesn't make any difference how they get it. At the end of the day, they could lose their job and their investment all at the same time.
you
Speaker 1 (16:24.782)
That's just not good strategy. you know, unlike an investment in a diversified mutual fund, they could lose the whole thing. Right? When practices go down, they go down in flames. They don't just reduce in value by 20 or 30 or 40%. Typically, they go away. Right? We saw this in COVID. There are whole practices that just don't exist anymore because of that. And these things happen. So that's the first thing, you know, not owning shares in the company that employs you. The other thing is, I mean,
This is, if we look at kind of the spectrum of risk, this is on the very high end of the risk spectrum. So not diversified, right? So it's comparable to owning a single stock, but it's not a single stock of Apple or IBM. It's a single stock of a tiny, tiny company that's a service business, 100 % dependent on the people that work in the company.
probably a small or perhaps inexperienced management team with a short track record, you know, and then there's the liquidity issue. mean, so let's say that this let's say that it has a great performance and that they're getting, I don't know, huge yield on it. How do you get out of this investment? And when you leave, you're part of the factory production. You're part of what's making that dividend happen. So, you know, it's one thing if there's, you know,
four or 500 people in the practice and they're going to continue on, you're going to own a chunk of that practice. It's another thing if it's you and three or four or five other people, some of which are older and they're going to look be looking to cash out. I mean, you certainly don't want to be in a situation where it's musical chairs and you you own 50 % of the company and somebody else who's 10 years older than you owns 50 % of the company. They want out, you have to cash them out. Then you wind up on honing 100%. It's just, it gets weird really fast.
So, you this goes back to a belief that we hold, which is, you know, you don't have to invest in rocket science to be able to be successful with a retirement college as a physician. I mean, particularly at orthopedist, you know, they're relatively highly compensated specialists. So, you can brute force this problem just by saving into regular old garden variety mutual funds. On the flip side of this, there is typically a political aspect of these closely held corporations.
Speaker 1 (18:48.64)
or closely held entities, which is, know, if you don't own any of it, you don't have a seat at the table and people view you as less than. So I always look at this and I say, well, what's the lease that you can own and still have a voice? What's the lease that you can own and still be politically at parity with the other stakeholders? And then I guess you have to look at the prospective returns, right? We have some idea about what we're expecting from
diversified portfolio of stocks and bonds or all stocks or wherever it is, you might have some idea of the past distributions from the shares that you're buying. But I'm not sure that that past record is really indicative of the future, because CMS could change one thing, and those reimbursements could, you know, go by half. Right? So to me, this is very, very, very risky. And I guess if your retirement is fully funded,
and your college is fully funded and that's as houses and your house is paid off and you got extra cash and you just want to invest it, I guess I'd be okay with that. I like to say that you should invest like your life depends on it. And this just seems a little too shaky for that kind of investment.
Yeah, yeah, honestly, for the clients listening, I mean, that was great. But also, I tend to get this call after it's kind of done.
Exactly right. Dad, did I do it right?
Speaker 2 (20:10.99)
Yeah, so I'm like, well, so do we pay off his debt or not? It's kind of like the
That's a whole different story. pay off the debt or not? Yeah. Do stop saving for retirement? Hell no. Yeah.
I think that after I heard you say that I'm sort of like well you don't have an option. It could work out, it could be great, know practice could go great but if it doesn't let's have a bunch of money in your retirement account so it kind of doesn't matter.
I've seen at least two cases in the last three years where this did not work out. yeah, yeah, where the investment went belly up because the company was poorly managed and it's just, you know, vapors.
Yeah. Well, I appreciated that question. was like I had a moment yesterday with a client that's like, man, I've seen this a lot. Yeah.
Speaker 1 (21:01.646)
You're going to keep seeing it. Yeah, right. I guess the only thing there is like, there's always this looming specter of PE private equity could come buy it out and the more shares you have, the more you'll have to sell. True. You know, so. But as I like to say, private equity ruins everything. They really do. They run everything. Yeah.
Yeah?
Speaker 2 (21:23.37)
Okay, we got a question from a listener. and so not a whole lot of background here and I just
This is not a question from a watcher. It's just a question from a listener.
yeah, we're on YouTube. Okay, so I need to invest the money in my 401k at work. What should I be focused on when selecting a mutual fund? This is a wide open question for you.
Yeah. Well, gosh, I don't know whatever's done best lately. Well, here's I would say you focus on several things, not all at the same time. First focus is your plan. Like, where does this fit in your plan? Right? Do you need to contribute to it or not? Do you need to have it or not? What falls out of your plan is your asset allocation, your target asset allocation should be should you be 60-40, 90-10? Where do you belong in that?
Yeah.
Speaker 1 (22:17.47)
And is that a fixed asset allocation where you're to hold that all the way through to retirement? Or is it going to be like something where it floats down, which would be like a target date strategy. So, you know, then we get down into product. You look inside the account, you see what's available in terms of your investment options. You know, do you have a nice Vanguard target date fund in there or a nice Fidelity Freedom Index fund? Or do you have a bunch of, you know,
random mutual funds that somebody picked that are all loaded and inexpensive, right? In that case, I would say when you get down to the product level, you're really focused on expense, right? Because if I'm looking at a passively managed index fund and I'm getting that for 0.05 % or 10 basis points, 0.1 % versus paying 1.5 % or 1 % for an actively managed mutual fund, I'm going to take the index fund.
because one of the huge determinants about how these things turn out happens to be expenses. So I'm going to take that index fund in 99 out of 100 different circumstances. And then it's a matter of like, do you want to have a bespoke portfolio where you take this little subclass of small cap value and this value of large cap value and international and your emerging markets? Like, do you want to build that way or do you want to build it all in one? Because sometimes you can buy a hybrid fund that's got stocks and bonds built into it.
like a target date fund. If it's me, if you looked in my 401k right now, you'd see a target date fund. knowing as much as I know, it would be really hard for me to keep my hands off of it. I mean, just just saying like, I hear the news, I think about things, and tempted to go in there and play with stuff. But if I have the target date fund, I know it's I know it's like 95 99 % right. And I don't feel the need to mess with that last little piece of it. So
I worry about people who want to rebuild the wheel because when they do so, they tend to screw it up. It's hard to beat a target date strategy that's low cost built with index funds and left alone over time. yeah, focus would be one, are you going to screw it up? And B, what does it cost?
Speaker 2 (24:31.342)
I remember years ago I asked, have a, step grandfather is a mechanic, know, really good working with his hands. And I said, hey, Dennis, why haven't they made a new invention for the roof? Like you got all these shingles up there. You're putting like one at a time. It seems crazy like to me. And he just looked at me in the most blue collar like simple way and he goes, because it works. I'm like,
Yeah.
okay. Big brain over here trying to recreate the roof. Like, don't do that with your mutual funds. They work. They work. And they work especially for physicians who do not need to outperform what the market's giving them. So.
Yeah, it worked.
Speaker 1 (25:13.486)
Not to mention the fact that that's practically impossible without taking on a more risk, know, because I don't honestly I don't even think it's worth the effort. I just don't I've I tried I suffered mightily every time just absolutely not worth the effort. It's so much easier to just take the the easy quote unquote easy here. I mean, you're still going to bear all the risk, right? So that the work of this the hard part the tuition that you pay the down in this is
holding onto it through thick and thin. That's how you pay for your investment returns is gutting it out when things suck.
Good. Okay. Last question from an ICU doc in Washington, DC. Should we pay off our house before we retire or invest the extra payments and carry a mortgage into the first 10 years of retirement?
This is so slam dunk. I'm not even I'm not even gonna comment. It's all yours. Really? Okay.
Yeah, so I feel like it's slam dunk too, but I think it's the it's in the details and everybody's situation is slightly different Which is why we probably keep getting the question, but I mean I've been saying pay off your mortgage before I Had licenses. Yeah, like right like paying off your mortgage for retirement is a great idea. Yeah, But the real question that people are kind of asking is hey if I think I can do better than my mortgage rate
Speaker 2 (26:39.938)
Should I try like in the market, I can invest this extra money and it gets really complicated really fast with this because there's taxes involved after your returns and all that. But at the end of the day, it's very expensive to carry a mortgage into retirement. amount that the nest egg, the size of your nest egg has to be so much larger to make sure that you have basically a big enough balance to draw off of to pay your mortgage payments.
I just don't think that part's worth it. And so for me, it's just that coupled with the peace of mind that you have a paid off house is all I really need to say pay off the mortgage. So that's generally what we recommend sometimes even better downsize. Like if you can't do it, it's difficult to do just downsize.
I'm in violent agreement with you. have nothing else to say. Yeah. Okay, folks. So I hope you've enjoyed the show today. We love listeners, you can rate us, you can upvote us, you can tell your buddies. If you're interested in maybe becoming a client, can visit PhysicianFamily.com, click the big Get Started button, and you'll get to chat with me. And we can just talk about the stuff that's important to you and figure out whether or it's a match.
If you're not ready for that, maybe shoot us a question. So you can send that to podcast at physicianfamily.com. Until next time, remember you're not just making a living, you're making a life. Thank you.
Thank listening to the Physician Family Financial Advisors podcast. Are you getting all the tax breaks you deserve? To find out, get your copy of the Overtax Doctors Retirement Investing Checklist available at physicianfamily.com forward slash go. Thank you for listening. Show notes for disclosure.
Speaker 1 (28:14.935)
really deserve
Speaker 1 (28:27.992)
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