PFFAP-PYP-24-0610-Ben and Nate Questions 7 EP 74-v1
Voiceover: [00:00:00] 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 performance is no guarantee of future results. Read show notes for full disclosure.
Welcome to the physician family financial advisors podcast, [00:00:15] where physician moms and dads like you can turn today's worries about taxes and investing into all the money you need for retirement and college.
Nate: Welcome to the physician family financial advisors podcast. I [00:00:30] am Nate Reneke, certified. Certified Financial Planner and Primary Advisor here at Physician Family.
And I'm Ben Utley, Service Team Leader and Certified Financial Planner here at Physician Family. Okay, Ben, let's answer more questions from physician families across the nation. [00:00:45] Nationwide. There we go. Okay. First question here is, um, I've got some extra cash and I want to keep it safe. I'm thinking of putting it in treasuries.
What do you think? Okay.
Ben: Hmm.
Nate: Well,
Ben: there's nothing safer than treasuries, uh, [00:01:00] particularly if you're talking about T-bills, ultra short term treasuries. Uh, so I'm gonna unpack this for a second. So treasury means the United States government, uh, they borrow from lenders everywhere, investors everywhere. And they IOUs that [00:01:15] they have come in ranges of.
of time. So you can buy something that matures in about a week and you can buy something that matures in three decades, a 30 year Treasury note or a bond. And then you have bills, which are shorter. Essentially they're all the same thing, but they [00:01:30] have different maturities and lengths of time. So the. The, uh, least risky way to do that is to buy T bills, all right, because the, you don't have interest rate risk.
You don't have default risk because the United States government has always paid its bills. Um, so [00:01:45] that's one way to go. Um, I don't like treasuries because you have to trade them in a brokerage account. And, um, while that's a skill that I have, and I'm certainly licensed and registered to do it, it's kind of a pain.
And, uh, you know, once [00:02:00] that, That one week or, uh, four week T bill matures, you get to go back in there and buy another one. So, um, I was actually looking on Reddit, uh, not too long ago in the investor forum, and I saw somebody who'd gone in to buy T [00:02:15] bills and his intention was to buy about 50, 000 worth of T bills, but he fat fingered it.
And he added an extra zero and he bought a half million dollars worth of T bills. So, but he only had 50, 000 in the account. He thought the account was smart [00:02:30] enough to know that if he bought too much to stop. But, uh, come to find out it was a marginable account. And so he wound up borrowing to buy that other 450, 000 worth of T bills.
Ouch. But the funny thing about it is the, the [00:02:45] interest on the margin loan was higher than the interest rate on the T bills. And by the time he figured it out, he was, he was paying more in interest than he was getting and yield on the T bills, which is really common. And so he had a big debt to pay to the brokerage company when he [00:03:00] finally unwound this position.
So, you know, I would say that buying T bills directly, like I said, it's a pain. And it's not something that I would recommend. Uh, it's easier if you go through the treasury direct website, which, uh, you know, basically it looks like it [00:03:15] came out of the eighties and it works about like it came out of the eighties.
I know this cause I've owned I bonds through there. So again, nothing wrong with that. I think it's okay. It's a good way to get some, uh, high safe yields, but it's a pain. You know, what I would recommend instead is to, uh, [00:03:30] buy an ultra short term bond fund or perhaps a, uh, you know, an ETF. That invests in a comparable treasuries for.
You know, for about 30 per 10, 000, you can get [00:03:45] Nate, is that right? Three basis points, 0. 03 percent at 30 on 10, 000. I think that's right. Yeah. So for about 30 bucks, you know, you can a year, you can, you can get that. So it's, I mean, 0. 03 percent is about all it costs to [00:04:00] get a decent ETF. So that's, uh, that's how I would rock that unless I was.
You know, the other options you have are certificates of deposit, which are super easy to get. And, uh, there's also cash reserve products out there that are pretty straightforward and you can get high, easy yields, liquidity without having [00:04:15] a trade. So,
Nate: right. Yeah. I want to, uh, pull it back just a little bit.
Cause that was, you know, high detail there. Yeah. You know, I think the key here in this question is I want to keep it safe, which sort of, to me sounds like I need this money soon [00:04:30] and I don't want it to be confused with like, This being a long term investment, right? You talked about short term. So if you need the money soon, you're kind of looking at, you know, that rate versus just rates in a high yield savings counter [00:04:45] rates with CD.
And with, with this type of investment, you're, you would want to match it with whatever your goal is. So maybe you need a car in a year and you just take the highest rate for. For the one year. So, well, yeah, not, not really a long term thing. And the key here was that [00:05:00] this physician was asking, how do I keep this money safe and sound for six months, 12 months?
Yeah, right. Okay, great. Okay, question from a psychiatrist in Illinois says, I saw a short on [00:05:15] Instagram that mentions a private family foundation. They said they can set one of these up, distribute 5 percent of it every year, and skip taxes up to 37%. Is this for real?
Ben: Yeah, this is, this is one that came [00:05:30] to my desk.
It was a, a client who was on Instagram and they texted me a link to this thing and I looked at it. I got to say that the video was really slick. I just thought how on earth after, you know, being in this business for 30 years, how did I miss this incredible [00:05:45] opportunity? Yeah, right. And so that was the first thing I thought is oops, I forgot something for the client and then I was like, nah, This can't be that great.
Yeah, and so fortunately in the video They made a little they referenced a little bit of the code and so I went and looked up the code uh, [00:06:00] and In my opinion, this is a very deep end of the tax pool, which borders right up on the edge of cheating on taxes. And I found some companies that do this and when I read blah, blah, blah, [00:06:15] tax attorney.
I said, yeah, this is about as far as I want to go. And just the common reading on it says that this is a target for the IRS. So basically, if you ever really wanted to paint a target on your back and have the IRS come, come hunt you down, this would [00:06:30] probably be the best way to do it. So, um, You know, the, the gist of it is with the family foundation, you are essentially setting aside money that you're never going to have again.
It's, it's an irrevocable gift and you give this money into a [00:06:45] foundation as opposed to using a donor advice fund or just a direct gift. And over time, you and your family get to direct how this money goes. Well, this is, this is for folks who've got seven figures to give away and most physicians don't fall into [00:07:00] that camp.
Right. So that's the first thing. It's, it's really about the way this breaks down is it's really about donative intent. So I hear clients occasionally asking, like, is this a way to save taxes doing this? Is this a way to save taxes doing that? [00:07:15] And many of these are like donation. Kind of scams or donation arrangements or donation tax loopholes.
And in all those circum circumstances, if, if what is in your heart is not a donation, right? It's [00:07:30] not a true gift, what they call donative intent. If you don't have Donative intent and you're not ready to just literally part with the money, it's probably a scam, a scam for you, or it's probably gonna get you in tax trouble.
Right? Right. So, mm-Hmm, , that's, that's where I come down on these things.
Nate: Yeah. The, these, [00:07:45] um, little, uh. Pushing the envelope strategies there. They're hard because I know everybody really wants to save on taxes, but the reality is that anything that feels like it's edging on the [00:08:00] line is either, like you said, going to get you audited or, uh, they're just going to close the loophole.
And people change, chase their tails all the time about taxes. And honestly. It over the years, seeing the loopholes that have been [00:08:15] closed and people trying to do this. It's like it's never ending. You don't find one silver bullet that that works forever unless it's like clearly in the tax code that it's okay.
Yeah, it's kind of the way that
Ben: I break this down. My, my pithy little, [00:08:30] uh, fragment of statement here is that, uh, anytime you're voluntarily. paying a tax attorney, you're probably doing something wrong. Right. So, I mean, if you, if you wind up in the hot water with the IRS, because you, you know, you did your [00:08:45] best and somehow something got jacked up and you have to go to the tax attorney to pay them to bail you out, that's fine.
That's not a voluntary thing. Right. But if you walk into something and you're like, I need a tax attorney to do this thing, you're probably headed down the wrong street. So, uh, in the, in the way, [00:09:00] so I think a lot of physicians just want to get the tax breaks that they deserve, but there are some physicians that are, are knowingly breaking the law.
They're, they're cheating on their taxes. I had a prospective client last week who came to me and, uh, You know, it had to do [00:09:15] with how they're paying their nanny and had to do with some, uh, how they're dividing up their payroll. And I had a CPA on the line on this call because I thought, I don't know if this is right.
And clearly they were in violation of the law. And when it, when it came out, the CPA is like, you know, this [00:09:30] is not right. I said, yeah, this is not right. And they said, well, if we want to do this, anyway, what do we do? I said, find yourself another financial advisor. Yeah, you know, I said you My, my take on all this stuff is that physicians make too much money to cheat on their taxes.
Nate: Mm hmm.
Ben: Mm [00:09:45]
Nate: hmm. Yep. Agreed. Yep. Okay. Next question from a urologist in Oklahoma. I received a notice of vesting forfeiture for an old 401k. Did I make a mistake? So um, I didn't answer this [00:10:00] question. Another team member did. Kyle did. But I saw it. When Kyle got back to them, uh, it, it's always scary when people send you a message like this, you're like, Oh no, did something happen?
And then usually it ends up being nothing really happened. [00:10:15] Uh, but so, uh, unless you can line up the timing just right, leaving an employer, there's, there's no way really around this. There's just a vesting schedule. So that means, you know, employers want to keep good employees. And so they have a vesting [00:10:30] schedule.
So maybe you have to stay there for three years. In order to be fully vested in what your employer. Is contributing to your employer sponsored retirement plan. Right. And so that employer contribution, if you leave before you're fully vested, [00:10:45] uh, you can, uh, they can take that money back essentially. Uh, didn't do anything wrong unless, um, You know, you can, you understand this and you're really close and you'd left a couple days before, which, um, Kyle actually, I [00:11:00] called him about this and Kyle told me a story of a physician who missed 100 percent vesting by one day.
Ouch. Yeah. So sometimes, I mean, maybe that's a mistake. You could. Kind of wait one more day to leave your job. But if you're a year out and you have a better [00:11:15] opportunity, there's no mistake to be made. You move on, you let them take their, their part of their match back. And that's that.
Ben: Right. Yeah. And I've seen vesting schedules that run from three years to five years.
And what's common is a five year step vesting where, you [00:11:30] know, if you leave after one year, you get to keep 20 percent of your employer contribution after two, it's 40, 60, 80, a hundred percent that's cliff vesting. And after that fifth year, you know, no matter. Uh, when you leave, no matter when they made the contribution, you get to take it all with you.
But this is, um, [00:11:45] this is something that is kind of on the changing jobs checklist, right? It's, it's something that you need to think about. In fact, changing jobs isn't as there's massive opportunities in there for tax breaks and also disasters. And, um, Unfortunately, I think many physicians don't think of [00:12:00] changing jobs as something they should talk to their financial advisor about.
They, you know, they think of us as like investment jockeys and, uh, there's a lot of value to be had in the council that goes around
Nate: changing jobs. I was thinking the same thing beyond this. There's, [00:12:15] there's a lot. So obviously when you change jobs, you get new benefits. You probably have to update your retirement plan and things like that.
But like you said, in motion. There's, there's tons of things that come up. I actually enjoy these calls because there tends to be like little, uh, low hanging fruit. [00:12:30] You can grab right before you leave
Ben: pearls, things to things to get that are like once in a lifetime change things. Yeah. I can think of seven different things you could be doing as you're changing jobs that can put money in your pocket or keep money from being taken out of your
Nate: [00:12:45] pocket.
Yeah. I had a call with a, uh, Double doctor family in West Virginia, and they had a pretty extensive schedule of forgivable loans, student loan, uh, sign on bonuses, forgivable loans, and we were just, [00:13:00] you know, they, they did leave some behind and that was okay, but some of them were like, well, maybe stay an extra three months because that's 20, 000 and you weren't sure you wanted to move now anyways, you know, so lots of, uh, Lots of things to grab there.
There's not a place for [00:13:15] ready fire aim. Exactly. Yeah. Okay. Cardiologist in Rhode Island asked, do I really need a financial plan or can you just help me with investments? So, um, Ben, you've written plans for many years, but now I write [00:13:30] plans, Chelsea write plans and, and Chelsea and I were talking about this.
Um, the answer is yes, you do need a plan. Sometimes I get tempted to say no. Uh, okay, fine. We'll just do your investments. But the reality is, um, because a [00:13:45] lot of families just, Um, but those same physicians that don't want to do the work are asking us, how much do I invest? Where do I invest? Should I buy real estate?
Can I [00:14:00] work less? And without a plan, you cannot know the answers to those questions. And what's worse, you and I don't know the answer to those questions. Correct. Chelsea doesn't know. Kyle, we don't know. Correct. Correct. So, [00:14:15] um, you know, you'll be left guessing throughout your entire investment career. Uh, if you don't know what your, what, what I call your why, you know, everyone that's a buzzword now, everyone know, you know, your [00:14:30] wife, but, um, If you know your why, you won't be falling victim to chasing returns or making emotional decisions.
You'll just be looking at your plan and will either make sense or it won't. But if you don't have a plan, you have [00:14:45] no true north.
Ben: You know, what I've seen is, uh, without a plan, physicians tend to look at their colleagues. Like that guy bought that investment. She's doing this thing. Uh, they've got so much money at my age [00:15:00] and you know, they're, they're trying to see where they're at by looking at where other people are.
And that's just, you know, it's like trying to drive to a destination by just following the traffic. I mean, maybe they get there, maybe they don't, you know? So the plan [00:15:15] is the plan is your internal You know, like you said, your, your internal compass, right? It's the compass for you and your family as opposed to what everybody else is doing.
And like you said, you know, if you need to make a major life decision about to work [00:15:30] less or work more or, you know, when can I retire and, and even, you know, the easy things. The plan is one of those things that helps also. Um, so Nate, you know, I've been through a few market cycles in my time. I've been at this for 30 years.
I've been [00:15:45] through three or four major drubbings and I have to say that having a plan in place has been the thing that's held a lot of clients in place, which is to say there was times when it looked at the wheels are absolutely coming off the cart and looking at the plan, you know, realizing that [00:16:00] that dip.
Really didn't change much of the plan, right? You'd think that a 50 percent correction in the value of your portfolio would absolutely derail your plan. Well, it kind of depends. It depends on if, you know, that happens a couple of years before retirement or if it happens, you know, three years into your [00:16:15] career, it makes a huge difference.
Three years into your career, that's a buying opportunity. Three years from the time that you retire might be a disaster. And so, you know, the plan also dictates how you invest. Right. So if you're a few years out of retirement, you're not going to experience a [00:16:30] 50 percent correction because you're not going to have all your money in stocks.
Right. And the plan is the rationale behind that. It's like you say, it's the why that keeps people out of the ditch. Yeah. Yeah. So, I mean, go, go ahead and invest without a plan, but don't try to be my client and do that. It's a disaster.
Nate: Yeah. [00:16:45] It's tough. Yeah. Very tough to do. Uh, I actually don't know anyone who does it successfully, even, uh, financial advisors that I know there's no plan.
No direction. Okay. One more question here. Um, I [00:17:00] have a chunk of cash to invest for retirement. Should I do a lump sum investment or spread it out monthly? So, um, there was a Vanguard study and this was a question that someone asked Chelsea and she showed [00:17:15] me this Vanguard studies for, for the podcast today.
And it's literally called lump sum versus cost averaging. So dollar cost averaging monthly investing, spread it out, maybe. Six months a year. And in that study, the lump sum [00:17:30] outperforms dollar cost averaging 68 percent of the time. So the answer is lump sum is better usually for returns. Um, but dollar cost averaging can be better emotionally for some people.
[00:17:45] So holding room for that. I mean, some, some actually right in this study, it says, uh, But for some risk averse investors, dollar cost averaging approach may be more suitable because it reduces the risk of drawdown or even [00:18:00] abandoning their investment plan altogether because of the fear of large losses.
Yeah. So once again, we kind of come back to the plan a little
Ben: bit. Yeah, Nate. Um, you know, when, when we look at lump sum versus investing on a monthly basis, a couple of factors are in there. [00:18:15] So, you know, the Vanguard study is looking at people that were investing in stocks. Right. So if you're investing in bonds, then that issue becomes less important because they're less volatile than stocks.
So, you know, the time to invest in it, it's, it's better to invest a lump sum if you're [00:18:30] investing in bonds and into the corollary of that is that the more conservative your portfolio is invested, the The more you should lean toward investing a lump sum, but really there's a kind of a psychological thing goes on with this, which is regret.
So if I have [00:18:45] an investor who is relatively new, you know, they've been investing for five years, maybe they haven't seen a market correction. I'm more likely to ask that person to invest, uh, split it up over six or 12 chunks and invested over the course of a year because there is a [00:19:00] regret factor. I mean, if you've got this lump sum, maybe it's a once in a lifetime lump sum, maybe it's a half million dollar settlement or, uh, an inheritance or something like that.
You drop that half million dollars in and you promptly see the market go down by 10%. You're going to have some, some [00:19:15] concerns about that. You're going to feel like you've made a mistake and that mistake is going to get burned in it. That's it. And you're going to think about it every time you make a mistake for the rest of your investing career, which might be 30 or 40 years.
So, um, you know, it's like raising with raising kids, you know, when you put them in the swimming [00:19:30] pool, you don't just chuck them in the swimming pool because they're going to feel like they're drowning. They're never going to want to go back to the water again. Right, but investing is the same thing. You know, better to kind of put your face down, blow some bubbles, you know, go slowly in the beginning.
But if I had a seasoned investor, you know, somebody [00:19:45] who's 10 or 20 years in, they've gone through a few market cycles, they know themselves, and they had a half million dollar chunk. I wouldn't hesitate to have them lump it in. Yeah. So it really is a behavioral thing, I think.
Nate: It really is. I had uh, a family, double doctor family again on the East coast.[00:20:00]
And when they originally came to us a couple of years ago, and I'm not kidding, they had 1 million in cash and you can guess why they were terrified to invest the money. Yeah. And so, um, you know, originally I kind of [00:20:15] talked to them about it and I'm like, okay, well, you know what, you know, 68 percent of the time and da, da, da, da, let's throw it in there.
And, uh, and. Uh, about six months later, when I finally got them to agree to get back on the phone with me, the money was still sitting there. Yeah. [00:20:30] And so, uh, I made a mistake as an advisor there to not realize that somebody who has a million dollars on the sideline is not ready. To throw it all in at the same time, you know, math, math, doesn't math if you, if, if [00:20:45] feelings are involved.
So I would say choose the best course of action that lets you stick to the plan. Yeah. Like if you're not going to do it, that 68 percent of the time means nothing.
Ben: Yeah. And even in the planning process, I mean, you can, you can demonstrate what happens if that [00:21:00] million dollars sits on the sidelines for a decade.
Yes. And it's going to be a huge difference because if you, you know, if you get like a six or 7 percent return. [00:21:15] Um,
Nate: it, there's another number in there. It's a, it's a similar number. It's something like 70 percent of the time, dollar cost averaging beats cash. Yeah. You know, so it's a spectrum and you have to be honest with yourself about what you're [00:21:30] comfortable with, but yeah, I think a seasoned investor can put it in all at once.
And if you're not, maybe dip your toe in the water first. So I'm going to
Ben: circle back here. So this, you have to ask yourself the question of how that million dollars got there. Right? So [00:21:45] sometimes it's a, it's a, like a one chunk event where the money just comes and it's boom, it's cash. But there's a lot of times where, you know, high earning physicians are, they just not spending at the rate that they're getting money and money piles up in their checking account.
And [00:22:00] so you see your a hundred thousand dollars pile up and then you get comfortable with it. And then it's one 50, you get comfortable with that. And I, I've seen Clients who had a quarter of a million dollars in a checking account, and then they invested 150,000 of that, and they said, there's only a hundred thousand dollars left in my [00:22:15] checking account.
They felt terrible. They felt like they had a loss. Mm-Hmm. , because they're not looking at the bigger picture, they're not looking at the net worth statement, they're not looking at their investment accounts, they're only looking at the bank account. And, and to them it felt like $150,000 just gone. Mm-Hmm.
just absolutely gone. And, [00:22:30] you know, having paid off a house myself. So, uh, I have the same experience paying off the house and I knew the mortgage was gone, but I still miss the money that's in the checking account. So I guess what I'm saying here is that that money piles up in these accounts without a plan, right?
If you don't [00:22:45] know that you need to be saving X thousand dollars a month, then that money will be piling up wherever, wherever it's going to pile up. So once again, there's a plan. So a plan, plan, plan, plan, plan, plan, plan. That's right. So Nate, is it okay if I take us out? Yes. Okay. [00:23:00] So, listen, we answer a lot of questions here for folks and it's a lot of fun for us.
So, uh, we'd like to have your questions. You can send them to podcast at physician family. com or you can call into our answer line, which is 5 0 3. You can also [00:23:15] text 5 8733. I just want to remind you that Nate is a financial advisor. I'm a financial advisor. Chelsea's a financial advisor. Kyle is a financial advisor, and we all love to work.
We are actively seeking clients who [00:23:30] are open for business. We accept referrals. Uh, and if you've, if you've never spoken with us before, you're going to get to speak with me. I'm the front end of our sales queue. So it'll just be a regular old conversation. We'll talk on the phone and, uh, to set that up, you can go to physician, family.[00:23:45]
com and then click get started. And there you can schedule right there on the app. You can schedule a time to chat with me and we'll figure out what you need. If we're fit, great. If we're not, if we're not a fit, then I'll do the best I can to help you find someone who is, but either way, I would love to hear from you.
[00:24:00] So, um, until next time, remember, you're not just making a living, you're making a life.
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