Speaker 2 (00:00.172)
In order for you to have one as a physician, you're going to have to include some of your staff members. The more they make, the more money you're going to have to put in the plan, which comes across as a cost to you. And the more the plan costs, the less the tax benefits are valuable to you.
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 money you need for retirement in college. Hello physician moms and dads. I am Nate Renneke, Certified Financial Planner and Primary Advisor here at Physician Family Financial Advisors.
And I'm Ben Utley also certified financial planner and the service team leader here at Physician Family Nate I got a little surprise for you this So last week when we recorded you said the word plan over and over again, and I said, know what? ought to have a drinking game. So Today we have a drinking game. I've got my my Physician Family mug here full of BNF kombucha it's ginger turmeric just in case you want to know and Every time you say the word plan planner or planning
I'll be drinking and since you said certified financial planner wants I'm just gonna get started right now.
Okay, what? Wait, what's BNF?
Speaker 2 (01:18.606)
BNF stands for Billion New Friends because kombucha is a fermented beverage that is supposed to be good for your gut but has a little caffeine, little zing and I love ginger so off we go.
Yes. Okay, awesome. So wait, if I say plan.
Yep. sorry. Bottoms up, baby.
testing you.
Speaker 1 (01:44.93)
Well, we got more questions today. There's some good ones in here. I'll start with the first one. So we got an OBGYN in Virginia. So they said they have $700,000 in their bank account and they want advice on how to invest it.
Hmm.
I'm going to start here with a high level. Based on the question, mean, it sounds like they're ready to invest it, but I got a call from a prospective client yesterday and they sort of had a similar question. I don't think it was $700,000, which is a huge chunk of money to be sitting around your bank account. But it was interesting because when they asked me this question, I could feel some nerves about like, what would you do with it? What would you do with their extra cash?
and got to the bottom of the nerves. think they sort of were under the impression that I would say, you know, as the investment guy, give me all your money, I'm going to invest it right away. You know, like, and, I don't, that's just not, I mean, it never works that way here. And it shouldn't.
First off, I have to get a chuckle out of give me your money. And what are you going to do with it?
Speaker 1 (03:03.404)
like it's not theirs.
like it's like it's not theirs like we're financial advisors not you know not the or custodians or babysitters yeah it's your
Right, exactly.
Yeah, and that's the way it should be treated and it's your life. So I think when they, know, a lot of times, you know, people have been with us for years. They know this and they get more and more comfortable with like, I have $50,000. Should I invest it or go through? That's really the question. And so I thought it would be good. We've, we've talked about this before, but you know, it's important. So, you know, when you're looking at a big chunk of cash,
What should I do with it?
Speaker 1 (03:43.148)
I think there's some nerves around, I invest all of it or what exactly should I do? And, know, as you and I say, cash makes you stupid. So we should probably limit it to what you actually need. So the question is, what do I need? Well, you need living expenses. You and I have labeled that as about two months, two months worth of living expenses.
Yeah, you're talking about just like liquidity in your bank account for checking. kind of thing.
Emergency fund, I won't go deep into it, but it is usually three to six months depending. But you know, look at your disability insurance, you know, if you owe big taxes, maybe you need to account for that. You know, are both of you working? Both spouses working can lower the amount of emergency fund you may need.
And I would say if you're like a partner or a stakeholder in a healthcare organization, you might get a capital call, especially if you own a medical office building or a surgery center, that kind of thing. I would veer toward the six months ends of things just in case.
Yep. Another big one is just short term goals. You know, do you have some home improvements you want to do and just feel like you you're supposed to invest it? Well, you know, it's that's why you have a plan. Go ahead, Ben.
Speaker 2 (04:58.988)
Yeah, no, I didn't have anything to say. bottoms up
Go ahead, I said plan.
Yeah, so have a plan and then and if you can spend that money, it's okay to spend it. You know, if you're on track, then you can do home improvements. You can go on a vacation. But after that, you're looking at your your goals. So retirement.
Bottoms up.
Speaker 1 (05:29.144)
college and sometimes that includes debt reduction. It's not always just invest it right in the market, but let's hear. I don't know your thoughts on this about how to actually invest it if you're going a different direction.
I agree with everything that you said, but, you know, we're, we're planners. I'm not going to drink to my own ELA anywhere, but, you know, I always start with a goal. Like what do you want out of your life? What outcomes do you want? You know, what kind of education do you want your children to have? What legacy do you want to leave? you know, what kind of retirement do you want to have? When do you want to have it? What are you going to spend? I always began with a goal and that always gets into planning, which ultimately tells us how much you have to save.
so that the money that's left over you can spend, right? So, I would say that if, you know, if they're on track for retirement and they're on track for college and they're on track for all the other goals that are in their plan, then, you know, there's a lot of flexibility. I've seen clients who have set aside money for vacation funds and cars and home improvements and they're on track for retirement and they're on track for college. And many times we'll say, Hey, you know, you've got this mortgage debt.
Whether it's at 7 % or 2.5 % and you need to pay it off before you retire. You've got this extra money. One thing you could do with it would be to exterminate the debt. People have different feelings about that. Some people are like, you know, I've got 2.5 % interest. don't want to pay that off. Other people are like, you know, just, want to be done. I want to be finished with my mortgage. I want to own my house outright. And so that's when we get the ability to do some really big things. But that's not what you do unless
You have, you know, sewed up college and your retirement is really, really on track.
Speaker 1 (07:17.678)
Psychiatrist in Illinois. By the way Ben, we love psychiatrists. What do think that is?
Speaker 1 (07:29.966)
They just are lovely to work with. Yeah. Okay. My practice partners and I have agreed to establish a cash balance plan. What guidance do you have to offer for us navigating, establishing the plan, any pitfalls to avoid? Okay. Let me set the stage. You're a lot better at the technical side of this. So let me get the high level. Okay. So here's where they're at.
They've already agreed to take on the extra complexity of the cash balance plan because that's there. you might say how to do this. We're not saying you necessarily should because, you know, there's funding commitments, there's administrative costs. but nevertheless, these partners have agreed they want to save some taxes. Right. So talk about the team involved.
Mean they're gonna need a financial team to do this like what does that look like?
This is not a DIY kind of thing. So first thing you need is a person to draft the document that creates the plan. And that is usually an ERISA attorney. You would need another party called a third party administrator or a pension actuary. We refer to them as TPAs. A TPA is a person who works actuarial assumptions, which is to say,
They help you calculate how much you can contribute to the plan because it's not like a 401k or profit sharing plan where the amount you can put in is defined. The amount that you're promising to have available at retirement for each of your people is the promise. And in order to promise, you have to do some time value of money calculations that are based on people's ages. let me just say that it gets very complicated very quickly. And there just a handful of firms in the country that really specialize in this.
Speaker 2 (09:26.964)
And a lot of them actually outsource or are the outsource partners for a number of record keepers throughout the country. So it's the deep end of the deep end of the pool. All that is to say that you need these people. They're not terribly expensive, given the amount of money at stake here. but you can't have a plan without them. Third person you need is somebody to manage the money, whether that is a financial advisor or a managing partner in your firm.
Somebody has to make investment decisions inside that program and act as the fiduciary. So those are your three parties, except for the participants, right? So you have to have participants and typically you have to have about half of your eligible people participating. So. did I answer your question? Cause I've got more.
I want to hear.
So in terms of pitfalls, these are not for every doctor. So here's an example of a group that would not be a fit for this. It is two or three physicians that are relatively young that have a large staff, you know, maybe 10, 20 different people in their staff that get lower compensation, lower salary. That's kind of suboptimal. So especially if your staff is relatively older.
Okay, so an ideal circumstance for this is, I see this all the time with the radiologists. It's three radiologists, mid to late 50s, maybe one or two staff that are working with them or under them. And, you know, like I say, the staff is younger, the physicians and providers are older, and there's a big difference in their compensation. So the physicians are earning, you know, mid six figures and the staff is earning maybe
Speaker 2 (11:16.27)
very low six figures or high five figures. So the difference in the compensation, the difference in the age, and the ratio of physician owners to staff, those are the three critical figures. And it could really go either way. But that's the major determinant about whether or not the physician is going to really benefit in terms of taxes from this program.
Right, right. So you've said something a couple times. I want to make it clear to the audience, I guess, why. Why is it important to consider how much your staff makes?
Yeah, because in order for you to have one as a physician, you're going to have to include some of your staff members. The more they make, the more money you're going to have to put in the plan, which comes across as a cost to you. And the more the plan costs, the less the tax benefits are valuable to you, right? There's a cost benefit. And at some point, the cost of compensating non highly compensated people
outweighs the benefit of the tax break. And this really is a tax break thing. Right.
Right. The last thing I would add, kind of the feeling I get, no one's ever actually said this, but the feeling I get is that they, physicians will decide, make the decision to do it. And then they sort of want to hand it off, your involvement in this really doesn't end at just the decision to do it. Right. have to push contribution levels that you have to make decisions about, vesting schedules for your staff. also whether or not it's a
Speaker 1 (12:50.964)
standalone plan. You know, you might also have a 401k.
Yeah, there's integrations to be considered. So, you you and I are talking about the very deep end of the pool because this is a partner who's setting up a plan, right? A more clear-cut case is where, you know, we're working with a client that is a participant in a defined benefit plan and they're not a decision-maker. They work for an outfit like, for example, I work with a cancer doc and they're part of US Oncology and they're
their sub sub unit has a defined benefit pension plan, aka cash balance plan. And in those circumstances, you don't have control over the investments as a participant, they're going to be invested as they're going to be invested. And typically, these are very, very conservative investments. They typically have a target rate of return that's just a little bit above inflation. And I can't go into that because it's really complicated. But suffice it to say that when these are run correctly,
run very conservatively. Now, you can consider that the conservative portion of your portfolio, but what we find is that with very young physicians, the math does not work out on defined benefit plans. Because yes, there is a tax break to be had, but that tax break is spread over maybe a lifetime of 30 years. At the same time, they're getting a low rate of return. So where we see this work out really well is for physicians that are nearing retirement,
15 years from retirement, 10, 5 years from retirement particularly. And there's even benefit to be had within 5 years until retirement. But with such a long time to recoup that tax benefit, young physicians lose out because the rate of return is low inside these plans.
Speaker 1 (14:40.302)
Right. Compound interest is a fun thing to think about, fun thing to say, but this is where it really comes into play. It is so powerful that no matter how much taxes you save, if you're 30 years old or 33, it's just going to obliterate the taxes.
Exactly. Before we go on, could you say the word PLAN? God, I was so part.
I'll be playing. You thirsty?
Alright. Okay, speaking of radiologists, we have a diagnostic radiologist from Florida. Woo, go Florida! Variable Universal Life Policy. So they have one through a well-known insurer who has a bad reputation in the physician world and who sold them VUL and now he knows better. Wondering what to do with it.
Bottoms up.
Speaker 1 (15:34.286)
So, you know, these policies, they're, they kind of are sold in a much like many things that are sold in a really unfair way. And, I don't know if it's necessary because now they know better, but I get why people buy this stuff when they're being sold. They're sitting across from a salesperson and that salesperson saying asset protection and tax deferral and tax free withdrawals. The things they don't say and.
you know this newly well-read position didn't hear high premiums tax deferred growth rather than it's the tax deferred growth is ordinary income and not capital gains so they don't tell you those things and
They didn't hear modified endowment contract for bar. They didn't any of that stuff. They didn't hear high operating expenses, mortality and expense charges. They didn't hear the word. insurance company. Sorry. Can we say that on a family network? They didn't hear all that stuff. Yeah. So these are bad news. you know, if you get stuck with one of these things, you got options and there's, there's a pathway to go down to determine like,
are not here in that
Speaker 2 (16:52.418)
what to
Let's do it. It's you know, we can we've done a whole 40 minute episode about this. So there's a there's a lot here, but let's talk about it. I got I got three steps and I'll let you talk about them. But so first is to make sure you have enough insurance before you just get rid of it.
because some people legit need life insurance.
Most people. I talked to a 50 year old physician the other day and they left a job that had a bunch of insurance and it was appropriate for them to have life insurance because they had a big mortgage and one person sort of retired and they need to make sure that's covered. So you need to get enough coverage before you kick the old one to the curb. And I see it all the time. People, once they find out I'm in this evil VUL, which, you know, isn't actually evil, but
Expensive. They want to get out right away, but just slow down a bit and get covered before you kick it out the door. Next one is the next step is to get rid of it without paying a bunch of taxes. Can you talk about that part?
Speaker 2 (17:48.609)
expensive
Speaker 2 (18:08.206)
Yeah, so when you put money in these things, you establish basis. It's a little bit like buying a stock where you have what you paid for it then you have what it's worth later. So every premium that you pay accrues toward the basis. So let's say this person put in, God help them, $50,000 in premiums. Okay. If the cash surrender value of this product is now $40,000, there's a non-deductible loss and there's no tax consequences.
If the value of this thing is now $50,000, there's no loss, it's break even, and no tax consequences. But if this thing is now worth $60,000, their cash to render value is $60,000, and their basis is $50,000, then they have a gain in the policy of $10,000. And so if this thing gets cashed out today, then that policy would have an ordinary income, an ordinary income of $10,000 payable.
which for physicians like we serve is going to cost them somewhere between 25 and 40 percent depending on you know whether we're including state and federal income taxes. that's the first thing to know is like understand your tax status. Okay. So next thing you do is figure out like what what do I do with it. Is that part of your step three and eight or should I just talk.
No, go ahead. Yeah. What should I It was like managing your gains, which is exactly where you're going.
So I guess what was your step?
Speaker 2 (19:34.04)
Yeah, okay managing your gains. So there's a couple ways to go like if you have a loss, you probably just cash it out, right? That's that's the smartest thing to do get the insurance monkey off your back If you have a gain and it's a small gain you're just gonna have to not your arm off to get out of this thing and We see people do that. We see people pay the taxes just to be shed of the insurance company but if you have kind of a big gain in this thing, let's say you put in fifty thousand and you have
It's worth $80,000 now you have a $30,000 gain. It might be okay to pay taxes on that, but you probably don't want to pay it while you're in your top marginal tax bracket. I mean, maybe you ease out of that in retirement. That's one way to go when your taxes are lower. The other way to go would be to what's known as a 1035 exchange. And that's where you trade in the value of your life insurance policy for an annuity policy.
It could be a fixed annuity. It could be a variable annuity. And there some very low cost providers. Vanguard used to offer these. Fidelity has low cost annuities. We know a provider that has a range of low cost annuities where you're not paying a fortune to get out of these things. And let me break it down in terms of fortune. So I've had clients ask about whether or not their S &P 500 fund is charging 0.05 % or 0.03%.
Right. So we're talking about 20 bucks on $10,000. Okay. With these things, your all in costs could be 3.00%. It could be a hundred times what you'd pay for an ordinary tax-efficient mutual fund. Right. So, I've had clients who've come to me and they said, I've had this thing for 20 years. I look back at my returns and even though it's been invested in stocks, I can, it looks like I've only earned like two or 3%.
And that's because they've been paying mortality and expense charges, high operating expense ratios, the whole nine yards. it's just been a boondoggle for them.
Speaker 1 (21:35.938)
Yeah. Yeah, it's unfortunate, but at the end of the day, too, just I feel the need to give encouragement anytime we talk about this. It is 50,000 bucks, you know, and that's not going to make or break your plan. It's not a big deal, but just do the best you can with the new knowledge you have.
Yeah. And I, you know, when people come to me about this and they say, gosh, I met this guy, you know, when I was in training and I bought my DI from them and then I bought this thing from them then I kept buying it over the years, you know, I'll say, okay, well, here's what we have to do. And they're like, but I really liked this guy. They're really nice. So the thing you have to know to all listeners, all physicians and all consumers everywhere is that all of the mean financial advisors, the rude financial advisors.
got fired long ago. So there are only nice financial advisors, right? So if your financial advisor is nice, they can still be unethical, they can still be greedy. And you will have to watch yourself.
All right. Next question. General surgeon in Nevada, married with two adult children, seven million dollars in assets. That's for retirement. Plans to work 10 more years and save a whopping 30 grand a month. Thinking of long-term care insurance or whether or not to self-insure. What should I do? Okay, I've been setting the stage. I'm going to keep going.
That's some real money.
Speaker 1 (23:08.854)
Long-term care insurance is meant to cover, cause people wonder like, do I need this? Right? They, they read about it somewhere. Some people do. but it's meant to cover expenses in your older years that essentially isn't covered by regular insurance. So this is like daily living activities and you're older and you need someone to bathe you. You know, stuff like that. I, I, I'm sure we're on the same page about this, but I did some math actually.
before before we started recording
Wait a minute, you did some math.
Well, actually no, I plugged it into a calculator. Yeah. Seven million bucks now invested, you know, relatively, I chose, think 6%, 6 % return. Yeah. Plus $30,000 a month. That's going to be edging on 17 million bucks. Whoa. Yeah.
I'm stunned you did something
Speaker 2 (24:10.638)
You know, I was just thinking about the principle. mean, 30,000 a month times 12 months, that's 360 times 10 years is 3.6 million on top of seven. I mean that no, no compounding, no return. That's still be darn near 11 million. And most of that's after tax. Right. So, um, you know, with $11 million, people would be, I think they would be surprised to find out how little long-term care costs, even in the most expensive States relative to
I mean, gosh, I would think maybe a half million dollars in cover.
Yeah, and I think a lot of people, when they think about costs, it's hard in your younger years to even imagine what life is going to be like in your older years. And I have had grandparents and grandparent in-laws go into these facilities and they're affording this and they don't have $10 million.
but the reason that I think the surprising thing to me was how little they spend outside of getting this help. If you get to the point where you need someone to dress you, you're not buying new Mercedes every five years. Right. You're not even driving, you know? So, this is for it. Really long-term care insurance is mainly for the middle-class. Like maybe they have some money.
You're probably not even buying used toys.
Speaker 1 (25:42.126)
But like they don't have enough money to pay $10,000 a month to a really nice facility. Which a lot of them don't even cost that much. But if you're lower class with the, you don't really have much saved at all.
Well, there are people who for which Medicaid coverage. Admittedly, there aren't a lot of Medicaid beds. You typically have three strata. You have those who can't afford it and shouldn't have long-term care insurance and they, there's Medicaid for them, even though it's not great. You have people who can afford it and probably should self-insure. That's your top third. And the middle third are folks who can afford premiums, but they probably couldn't afford the hit.
Exactly. They're covered by medical-
Speaker 2 (26:28.094)
And those are the folks where long-term care is indicated.
So, and this is pretty cut and dry, right? They should not get long-term care insurance.
Not with this, not with this. Most of the physicians we see probably, you they shouldn't have it. A couple reasons. you know, if you are the last one in any long-term care, then you'll have a home, likely it's paid off. And so, since you're not going be living in your home, you're living in the home, you have the assets that are available in that house to use term long-term care. Another thing is it's not like long-term care is a special expense. I mean, you're, you go from
you know, paying your property taxes, paying for food at home, paying for a lot of things that you have as your ordinary cost of living. And now that you go into a home, all those things are part and parcel of paying the home. Right. So that's, that's all included. So, and I think most physicians have this covered, but I can say that I personally have had experience with three different family members that went through this. One had Medicaid and was in the home for 10 years before she died.
Another one, another was couple, they're both insured. And they use literally every dollar of their long-term care insurance. And then another maybe six months worth of living expenses and passed. And I handled their books at that time. This is long, long ago. Family members handled their books. I helped them get the policies. I managed their accounts during that time and their tax situation. And you're correct. There's really not a lot to be paid for.
Speaker 2 (28:02.4)
outside of long-term care. And these are folks that were kind of in the middle class. So, yeah, I think that for most of our clients, again, it's long-term care. It's not really a match for them with one exception. So one of the physicians we serve is married to a woman where dementia runs in her family, early senescence. And most of the people in her family suffered from dementia. And despite the amount of money they had, we said, yeah, go ahead and get it.
right? And they were young and so it was relatively inexpensive. So it's just a nice nice backstop that will kind of preserve their state.
Okay, yeah, that's good. You summed it up nicely, but you know, essentially what I'm just trying to say is that your expenses shift, but this is plenty of money in this case to pay your own bill. All right, last question here. We have a primary care physician in Texas. My dad passed away recently at age 74. I'm inheriting half of his traditional IRA. How do I minimize taxes when I take it out?
We'll let you run with this one, Ben. There's some solidified rules in tax code. I believe you're up to speed on those.
Well, living in Texas is a nice first step. Right? Yeah. Yeah, right. You live in Oregon, it's going to be 10%. Yes. I'm sorry if you live in California, New York, it's going to be a ton. Yeah. So there's not really a whole lot of way to sidestep the taxes on this. mean, the government wants to make sure they get their money back from tax referral. And so you're going to pay taxes on it. There's no two ways about it. You can't.
Speaker 2 (29:43.662)
take the money out, roll it into something else and get a tax break. It's just, it's got to come out. And the rules, there's devils in the details about the rules. I don't really want to go into the depth of it, but suffice it to say that that money all has to come out in a matter of 10 years. And in terms of the timing, you know, if you're going to be employed as a physician and you're going to be earning what you're earning, let's say you're earning $300,000 a year, and you're pretty much going to be earning that for the next decade.
then the thing to do is to spread these payments out equally so that you don't get pushed up in high tax brackets. But let's say that you're five years from retirement and then you're going to have five more years in retirement. You might take out as little as possible now and then take out more when you're in retirement when you're going to be in a lower tax bracket. The thing that you don't want to do is wait until the 10th year and take it all out in one shot because in most cases that's going to
push you up in the tax brackets and so you'll pay more than if you had paid a little bit over time. Yeah, so bunching these expenses is not a good idea because like I say it jacks up your brackets.
Exactly. Okay.
Yeah, this is a complex calculation that, thank goodness we have Chelsea on staff. She's our retirement planning specialist. And she has some software that she can kind of twist around this topic that makes it obvious kind of how to go and can run multiple scenarios. But again, this is the deep end of the pool. And I don't think this is the kind of planning that an individual should be doing on their own. It's tax complicated.
Speaker 2 (31:23.444)
know, miscalculation here could easily cost you 10,000 extra bucks in taxes. I mean, easily. So it's it's the thing where you need to get help.
Okay, yeah, and I assume, just judging by the fact that this question was even asked, that's a large IRA. If it was a small one, they probably wouldn't be too worried about it. So be careful, could be more than 10 grand.
Yeah, I know we're getting more and more of these inherited IRA questions because our our clients are aging and you know, just the general ring of America. There's more inherited IRAs. So, okay. Are you ready for me to take a Okay, we are physician family financial advisors. We are here and ready to serve. Thing that makes us cool is we charge a level monthly fee that does not depend on the amount of money that you invest. So whether you invest a hundred thousand, a million, five million, ten million dollars,
doesn't make any difference. It's the same monthly fee. So, you know, we don't have a dog in the fight when it comes time to roll stuff over or whether or you should pay off your house or how you should invest your $700,000. So that's one of the great things about us. The other great things about us is Kyle, Nate, Chelsea and Jack. So if you'd like to join us, visit PhysicianFamily.com and click the Get Started button. You get a chance to chat with me and we'll talk about what's really important to you about money.
If you're not ready to take that step, maybe send us a question. You can submit your question to podcast at physicianfamily.com or call our answer line at 503-308-8733. Until next time, remember you're not just making a living, you're making a plan. Bottoms up.
Speaker 2 (33:02.914)
to make a life.
Thank you for listening to the Physician Family Financial Advisors podcast. Are you getting all the tax breaks you really deserve? To find out, get your copy of the Overtax Doctors Retirement Investing Checklist available at PhysicianFamily.com forward slash go. This show is for educational purposes only and is not personalized advice. Consult your tax advisor before taking action. All investments involve risk of loss, past performances, no guarantee of future results. Read show notes for full disclosure.
