Speaker 2 (00:00.278)
Define Benefit Plan would be something that'd be obvious for this situation. you know, older docs can put a couple hundred thousand dollars into Define Benefit Plan, and it's like a big fat 401k kind of, and that gets asset protection as well. So
Welcome to the Physician Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing into all the money for retirement.
family eventually.
Speaker 2 (00:27.39)
money you need to spend in college.
Hello physician moms and dads. I am Nate Renneke, Certified Financial Planner and Primary Advisor here at Physician Family Financial Advisor.
Ben Utley, Certified Financial Planner and Service Team Leader here at Physician Family. Before we jump into listener questions, I want to thank David and Miguel for reaching out, listening to the podcast, telling us how much you like it, and also for your questions. If you enjoyed today's podcast, make sure to rate and review us on Apple or Spotify so other folks can find us and get incredible answers to free questions. So with that said, Nate, what is question numero uno?
Yes, so this one's a little different, but I just want to say people this time of year, they tend to kind of I call it wake up from their vacation slumber. Yes. And they're a little worried, different circumstances. But sometimes you get families that have just spent a ton on vacation. They feel short on money. And so that's kind of the big question I'm looking forward to answering today. But yeah, just know you're not alone.
So first question is from an ent in family medicine. It's a family medicine doc in florida Okay, uh says our son just received a 50 000 inheritance from his grandfather Is is putting the money in a 529 a good idea? So I have a short answer to this I think you could probably guess what it is, but I wanted to start by saying the difficulty of saving
Speaker 1 (02:09.396)
money for college or investing for college tends to be that as soon as you need to start saving is right about the time that you don't have extra money to save. Right? I mean, this is like nannies and all sorts of bills come up and it's hard to save for college at that time. Right. And the big impact on your plan isn't that you won't eventually have money to pay for college. It's that, the, the time where you can get the, I guess the best
chance at a good return in the market is in the beginning. Such a short time horizon. And that's the time you don't have a ton of money to do it. So putting money into 529 in the beginning, putting $50,000 in the beginning would be a terrific idea. It gets you a jumpstart and allows you to get a decent return, you know, pending what the market does, but allows you to get a decent return or chance at a decent return.
In the beginning which not many people have right? Yeah, so I ran the numbers for this family It reduced the their required savings rate by like 60 percent Which is pretty uncommon they also had a prepaid plan so their savings goal wasn't as big as a Regular family because they're out in florida. Yeah. Yeah, I think the 529 is a great place to put 50 000
Hmm.
Speaker 2 (03:36.162)
Yeah, and I think it kind of depends. Do you remember how old the child was?
They were three.
Okay, I was gonna say, you know, maybe they maybe they need a little little cash to spend so they can enjoy some of it. I was also gonna I'm sorry that these folks lost their lost their dad. That's that's sad. That's some good is coming of that. So Yeah, I can't quibble with that at all. I mean you could argue that it's mom and dad's responsibility to save for college but you know, it's conceivable that they set this $50,000 aside they still save and maybe they have
Yeah, it was.
Yeah.
Speaker 2 (04:10.508)
an extra $50,000 when they, or all the growth of this $50,000 when they get to the end of college. And of course, you you can roll that forward into a Roth IRA for that child as soon as they have earnings, provided they've been in the program for 15 years and haven't made contributions in the last five. So, you know, we're getting a lot of questions about that. And quite frankly, the rules are so restrictive, very few people qualify. And it's almost, it's almost a fail.
for this because you put too much money in your 529. But you know, making a lemon, lemon, make lemonade out of lemon. Making lemonade out of lemons. Right? You can tell I don't make a whole lot of lemonade around here. Yeah. Anyway, okay. Before I butcher myself here, next question. Yeah.
Well, yeah, and just to finish that up, I have seen actually twice recently where grandparents are leaving money and it is for college. Yeah. So they kind of feel like that's the only place they can go. They just want to make sure it's a good idea.
If you're leaving money for college and your grandma and grandpa, you're doing this intentionally, probably the best way to do it is just to put in a 529 to begin with. mean, you don't get a step up in basis and appreciated securities, but you know, if you have the wherewithal, do that and you might even get a state income tax deduction.
Yeah. Next. Okay. Next question's from a dermatologist in Pennsylvania. So they said, I have a bunch of cash in my business account that is getting virtually zero interest, but I like to keep it in there for taxes. Is that okay?
Speaker 1 (05:49.816)
So.
It's-
This requires a little bit more work.
Kind of depends on how much a bunch of cash is, Exactly. 50k, that's different than half a million.
Yeah, it was a couple hundred thousand. Yeah. And, know, in that case, I could see I see this all the time. People love to keep their their accounts full if they have a big tax bill down the road. with a couple hundred thousand dollars, you're missing out on thousands of dollars of interest by living in that business account. Yeah. And so, you know, if you're weighing your options, you can either leave it in there and feel really good about your tax bill or you can do a little bit of work with a CPA.
Speaker 1 (06:32.994)
project your taxes and you can move that money into a high interest savings account outside of the business, earn interest on it and even leave it there. You know, some of it there, you don't have to invest it right away. in this case, when we did a little bit of planning with them, they were going to make an extra six grand. Wow. So
It was worth it, but you just got to make sure you're working closely with the CPA, which does require a little bit more planning, a little bit more work, but for six grand, I think it's worth it.
Well, you the other thing is when you pay your taxes, unless you have some kind of screwed up C Corp, you're going to pay your taxes personally. So that money's got to come out anyway. All right. So I got, I got a sleeper for you. This is the reason I would take the money out of the corporation. All those assets that are sitting there in that corporation are directly in the line of fire of the plaintiff's bar, which is to say that if you get sued, those assets are sitting right there in the corporation.
And when you get sued, your corporation's also going to get sued, right? So if you get out of the corporation, you put one more layer between your resources and the plaintiff, right? So that's why I take it out of the corporation.
Yeah.
Speaker 2 (07:50.702)
And if you wanted to go another another step beyond that. Dermatologists, know they tend to be highly compensated. Sometimes they they operate, you know, in small groups. I don't usually see large dermatology clinics, but smaller groups define benefit plan would be something that be obvious for this situation. And you know older docs can put a couple $100,000 in a defined benefit plan and it's like a big fat 401K kind of.
And that gets asset protection as well. So, you know, if you're reducing resources inside the corp, that's something that you could do as well. Now, the devil's in the details, but just saying, if you are in solo practice, or it's you and two or three providers, and you have a small number of extenders or staff, if you don't have a defined benefit plan, you are really missing out. So that's something to consider.
Yeah, okay. double doctor family, both in family medicine in Maryland. Okay. they said we make what I thought was a lot of money. Why doesn't it feel like it? So this is that, summer, summer slumber I was talking about. I spent some money on vacation and came back and I'm like, what's going on? So Ben, you were recently quoted in a Medscape physician wealth and debt report.
Mm hmm. This 2024 report that comes out every year. And you talked about how expensive child care was and taxes were for physicians. Yeah. I thought maybe you could wrap that into this. you know, I have my own thoughts, but why doesn't it feel like you're rich when you make five hundred thousand dollars a year?
It's funny because it seems like people are waking up and looking at their budgets right now. I don't know why it's right now that's budgets, but we're doing planning in my household for the next year, right? I don't hear this question all the time, but I got to say this is not the first time I've heard it. And usually I hear it from physicians where they have children, young children, and I'll just say that the nanny bill, the child care bill, that tends to suck up a whole bunch of it.
Speaker 2 (10:01.4)
You know, it doesn't get sucked up by that. A lot of times it's student loans. I don't hear this question from older physicians unless they are kind of spin-throughs, you know, if they just spend a lot of money or if they have a really high cost of living, which is actually kind of rare. You know, I don't see that a lot, but I think it probably has to do with the stage of life that they're in. And this is normal. know, in fact, I think we actually talked about this
In the last podcast, I mentioned something about being on a treadmill and going flying off once your nanny bills stop. So I went through this early in my career. It's like, making all this money. Where's it all going? you know, kids grow up, you stop changing diapers, they, you know, they go off to K-12 and lo and behold, all of sudden you got all this money. And the trick is to capture that, right? Not let your lifestyle creep.
Yeah, that's funny. We don't prepare for these questions together. Yeah, right. So when we see the questions and we're kind of thinking about them, I said the same thing about physicians in their 50s. You never hear it. Yeah. And it's just a stage of life. But I also want to say one more thing. Someone making 400 or $500,000 a year, they think they should feel rich and they don't. And I hear that a lot.
for from physicians in their thirties. The difference that I see between physicians in their thirties who are making multiple six figures in maybe the upper middle class is really only one thing. They live almost an almost identical life, but the physician is prepared for college and retirement. And the average upper middle class person making 250 is
That's correct.
Speaker 1 (11:54.838)
That is really the only difference. And so when you look outside and you see your neighbors and they're living the same life as you and you're like, what's going on? What are we doing wrong? You're actually not doing anything wrong. You're doing everything right. Right. And it's there's, you know, not to throw shade at them, but it's possible that your neighbors are doing everything wrong.
So this makes me think about the... So MIT puts out what they call the living wage survey. And you can actually go to MIT's living wage calculator, put in your zip code and figure out what a living wage is. And I played with this extensively. What I find is that the living wage... Before I do that, I'll define living wage is the amount of money that you have to make...
given the size of your family, number of workers in your household, and number of children. It's the amount of money you need to make to get by. So getting by means that you have a place to live, maybe you own a house, you know, you cost a housing in there, food, all those good things, but you're not eating out, you're not taking vacations, you're not saving for retirement, and you're not saving for college. That figure, Nate, is about $110,000 a year for a family of two with two workers and
two children. So I guess it's a household of four, two workers with two children. So this family making 250, they're making about twice the living wage, but they're also saving for college. They're saving for retirement. They're paying for a nanny and they're probably covering student loans. So if at the end of the day, there's not a whole lot of money left, it's not surprising to me at all. It's just that, you know, when we think of $250,000 or $500,000, it's just not as much money as it was last year. In fact, it's
It buys $50,000 less worth of stuff than it did just three years ago because we've had over 10 % inflation at that time.
Speaker 1 (13:46.422)
Yeah, I'm not surprised either. used to be, used to be, you know, my early days here. I'm like, well, let's take a look at that budget. And now I'm like, let's take a look at these three things, nanny, student loans and mortgage. Yeah. And it usually covers. It the whole story. Yeah. So, but there is light at the end of the tunnel. mean, those student loans will go away. If you're playing your student loans with me, it'll be five to seven years. Those nanny bills would go away about the same time. And all of sudden.
It's
Speaker 1 (14:14.638)
You will be flushed with cash probably in the neighborhood of five or $6,000 a month. Yeah. So just keep chugging along and you'll get there. Next question is from a psychiatrist in Illinois. I have some extra cash and want to pay down my debt. Should I pay down my private student loans or my mortgage? So things to consider when deciding which, what debt to pay off, at least a few things would be interest rates.
Taxes and the thing that a lot of people miss is cash flow So interest rate is highly, you know dependent on your situation. You got a mortgage a few years ago It's gonna be hard to justify paying that off before your student loans, but let's just assume for today They're they're roughly the same rate So maybe you refinance your student loans and got a mortgage a few years ago, which is actually the situation this psychiatrist was in So paying down student loans first clobbers
The taxes and cash flow issue. So you don't get a tax break as a physician for having student loans. Some people think they do, but you make too much to do that. Yeah. So no tax break there. And the big cash flow thing here is, and I guess I should take a step back. Both of these need to be eliminated by the time you retire. So this is just imagine this just as kind of a big pile of debt in your way to retirement. So which one goes first? Well,
Absolutely.
Speaker 1 (15:43.776)
If you can knock out six figures of student loans, which I see this people have $200,000 of student loans and they got an extra hundred grand. What do do with it? Well, if you can get rid of that 2000, $200,000 of student loans faster, a couple of years faster, you will have several thousand dollars a month extra. You know, instead of seven years from now, maybe in two years from now. Right. And if you can invest or spend that money.
It'll go a lot further than knocking a hundred thousand dollars off your mortgage, which probably won't shorten the life of your mortgage. It won't get you to that cash flow positive position as fast.
think what you're trying to say is, mean, if you have a half million dollar mortgage and you plow an extra hundred thousand into it, you're definitely going to pay off that mortgage faster, but it's not going to change your payments. Right. So it's not going to change your cash flow at all unless you recast the mortgage, which is a little bit advanced. you know, when I look at the situation, if the rates are the same, you know, I'm going to pay off that student loan first because the mortgage is tax deductible, right? To a certain extent, it's tax deductible. So.
You know, if your mortgage is running five, your student loans are running five, and you're a physician in the 37 % tax bracket, it's really not costing you five. It's really costing you like three and a half. So three and a half versus five, you know, I'd let the three and a half run and, you know, I'd pay off the five. And not only that, you know, you can refinance the mortgage easily. I guess you could refinance the private student loans too. But yeah, I think student loans would be the way to go.
the effort that their federal that's a different story you said private in the question
Speaker 1 (17:27.564)
Yeah, if they're federal, I'll just note that real quick. We haven't talked about this in long time, but you know, the federal student loans, PSLF, is in, it is all over the place. It's actually, your full disclosure, hard to talk about on the podcast because the rules are changing so quickly. Yeah. but yeah, if you are going for public service loan forgiveness, obviously you want to pay your goal is to pay the least amount toward those loans. So you wouldn't definitely wouldn't plow this money into that. Yeah.
Yeah.
Speaker 1 (17:57.65)
okay. So last question here, anesthesiologist in Texas and a big podcast listener.
Thanks
He said, a family member of mine saw some big returns in their 529 and mine were modest. Why are my target date funds underperforming?
You may jump on that.
go ahead i i got my i gave an answer so
Speaker 2 (18:25.134)
Okay, well you sent me the questions last night, so I'm gonna take a stab at this here. This is happening live folks, I did not study for this homework. Hard to compare target date funds if it is indeed a target date or a years to college fund, because if my kid is one and your kid is 17, they're gonna be invested entirely differently. They're gonna be in mutual funds, it's gonna be the same strategy, but the asset allocation is gonna be different, particularly over last three years.
You know, 17 year old kids, most of their money's in bonds. was 2022, 2023, had a horrible year in bonds, train wreck, right? And over that time period, stocks didn't do super great in that year, but in the following years, they came roaring back. So the 17 year old portfolio will have suffered in that timeframe. The one year old portfolio will have done stunningly well because it's like 90, 90 plus percent stocks. So you have to compare apples to apples and
I guess the other way to look at this is if you really want to compare, you would compare your same age target date fund to the same age target fund in their 529 plan. And I would expect that that performance to be really close, but all target date funds are not built the same. The glide path that's used in them is different. They can differ by as many as 20 percentage points in their equity composition. And then there's a huge difference between an actively managed 529
and an index managed 529. So if the target date fund is using index funds as an underlying component versus actively managed funds, we saw this. I was actually dealing with Kyle on this issue. We had a client that was underperforming the index by about 200 basis points, so about 2 % over a five-year period. And we said, God, we got to get that out of there, right? Because that means the index
you know, the index never sleeps, right? It never wakes up with a hangover. It never has a bad idea. Whereas actively managed funds, there's succumb to those things. So it kind of depends on the glide path, how it's managed, where you're at in the glide path, and to a certain extent, the expenses of the funds.
Speaker 1 (20:40.974)
Yeah. Yeah. And so there's a we could stop there. Right. I mean, that is a that is a perfectly good whole answer to 529. Thank you. Yeah. But there's something else here. And I get this sometimes from clients. And so I thought maybe we could address a little bit. Sure. Which is, you know, target date funds are different than a target date strategy.
Yeah.
Right. And so when I when I was asking answering this question to to this is a client of of ours I didn't even know if his Family member was in a target date fund. Yeah, but he sort of compared it as as let's say I don't know that a different investment altogether or a different strategy and so the if you're let's say you're underperforming and let's let's imagine you're just
in retirement, it doesn't even have to be in college, but you're quote unquote underperforming. A target date strategy isn't the reason you're underperforming. Your asset allocation may be the reason you think you're underperforming. But really, all that you're saying when you're asking this question kind of unknowingly is you're taking less risk. That's really what you're saying. And that is something that I believe is widely misunderstood.
Yeah.
Speaker 1 (22:07.882)
If you want a chance at higher returns, you need to take more risk. And if you can try to compare this apples to apples, imagine you're in the same index funds, but you're just in more bonds than your family member because in the college, their child was 18. So they could have the exact same underlying, you know, positions, all the same index funds. were all Vanguard funds inside of 529 great funds. They were just in mostly bonds.
I want to go. I want to step back a second here, so I'm underperforming whatever, right? So we get this. We see this occasionally like I'm underperforming, so I'm questioning the whole measure of performance. So it is notoriously difficult to measure the performance of your portfolio. It can be done. It requires some fancy software, or maybe you're with a custodian like better, but he actually calculates this for you. But just to just to scratch the surface of performance measurement.
There are two ways to measure performance. One is the dollar weighted return. The other is the time weighted return. If you don't know the difference between dollar weighted return and time weighted return, you don't even have the beginning of a basis to judge performance. Like you can't accurately determine performance. And if somebody calculates the dollar weighted return and the time weighted return for you as an investor in your own investment account, you will find that those numbers are two different numbers.
One has to do with when you put the money in, the other one has to do more with what you put the money into. So if I'm looking at my IRA's performance, my dollar weighted return and time weighted return can be two different numbers. They could vary by as much as a couple percentage points, right? So which of those do I use to compare to my neighbors or my friends in the hot tub that talking about their performance? And then the performance also is like if you're off by
a month in measuring the period. So was it a five year performance, three year performance? Was it a 12 month window in there? If you slide that 12 month window forward by one month or backward by one month, and that captures a particularly good or bad period of performance, then your performance comparison is going to be off versus the other person's performance comparison. So the comparing game is fraught. And I've seen clients and even prospective clients say,
Speaker 2 (24:30.508)
My performance is bad. We pull up the statement, we look at the statement and come to find out they've actually taken money out of the portfolio and so it looks like they have a loss. It's merely a withdrawal, right? I've seen clients who said this performance is great and in fact it was so-so but they had put money in the portfolio, forgotten about it and they just judged it by the beginning and ending values in the statement. So there is a right and wrong way to judge performance but I have to say that it must be done very carefully.
I have taught an advisor to do this and it took me two years to teach them beginning to end everything that I knew about performance and it took me a lot longer than that to learn it when I was young in my career.
Yeah, yeah, it's a it's a bit of a dangerous game
It's a weird game. Yeah, it's a weird game. Yeah. I mean, if you want to judge your performance, you have to go actually dig down a look at the performance of each of the mutual funds or stocks that you own. And you can do that using Morningstar or Value Line or whatever it happens to be or the annual report from the mutual fund company that produces your funds.
Agreed. Yeah, it's, it's one of those things that, you know, you're sort of taught as an investor, if you read up about it, kind of to not look too closely, but it's almost impossible not to for a lot of people. They feel they feel the need the itch. But, you know, time tested strategy should allow you to not look too much into it. And just be very careful. You know, it's fine. Look at look at your own performance, maybe with some help.
Speaker 1 (26:00.024)
But comparing to other people, it's very difficult to get apples to apples.
Yes, that's like me comparing my statin to somebody else's psych drug. It's like, it's weird. Yeah.
Alright, I think that's it for today.
Awesome. Okay, so we are open for business. We are looking for clients. If you'd to become a client, ask yourself a couple questions. One, do I have children? Two, am I really sure that I can't do this myself? Because if you really can do it yourself and you call me, I'm going to tell you to do it yourself. Three, are you ready to get some actual help? And four, do you want a real financial plan? So, oh, and you also have to be...
physician MD or DO or we're not serving dentists. It's a long story. Don't ask me, but we're looking for physician moms and dads, single or married, with kids, practicing medicine, who want help from professional advisor. If you meet all four of those criteria, all you have to do is hit our website, go to the get started link and you can schedule time to chat with me and we'll see how it goes. You can also lob a question. So you can write us at podcast at physicianfamily.com.
Speaker 2 (27:08.214)
or can call in a question at 503-308-8733. Until next time, remember, you're not just making a living, you're making a life.
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.
really deserve
Speaker 2 (27:36.974)
and is not personalized. Taking out all investments.
