PFFAP-PYP-24-0417-Ben and Nate Questions 4 EP 71-v1
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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 and college.
Nate: Hello, physician moms and dads. I am Nate Reneke, certified financial planner in primary. And I'm
Ben: Ben Utley, certified financial planner and service team leader here at Physician Family.
Nate: Today we have more questions from clients and listeners. So Ben, I'm going to start us off with a question from a dermatologist out in Pennsylvania. They said that they're going to move in a year and they asked, should I stop contributing to my tax bill account and 529s if we're going to move? Yeah. Yeah.
Ben: I'm [00:01:00] curious what's behind that. Like why you would, why you would stop,
Nate: right? Yeah. I think a lot of people are nervous these days about interest rates. So they're kind of, um, going all in on getting big down payments. And you know, my answer to this question assumes that you have an emergency fund and you're sort of set up to actually be, you know, be, being ready to invest in the first place in a taxable account.
Right. Um, You know, moving into a second house, you should have some equity in your old house, right? So part of it is this interest rate thing, large interest rates versus like houses that people have been in for several years. They've had really low interest rates. Um, the reality is I don't think you should stop saving.
Uh, you know, there, there's this big thought about saving on, uh, you know, a little bit here and there because if you're saving into a taxable account on 529s. There's so many good tax breaks and tax benefits [00:02:00] to doing those things and staying on track. I hate to see people show up to a new house and then be behind on all their goals.
I could see, um, I guess
Ben: one of the questions I would have for the, for the listener is, um, you know, what does your plan say first? Cause we always go back to the plan. Second is, um, is it, are you, is it necessary to stop saving for these other goals in order to actually be able to buy the house?
Nate: Mm hmm.
Ben: Um, you know, for example, maybe they want to make a large, uh, an all cash offer, right?
So that'd be one scenario, but if they're, you know, if they're slipping into this with a doctor loan or a 20 percent down and they've got the cash and the emergency fund is filled, I don't see any reason at all to stop investing in a taxable account or a five to nine account. And in fact, you know, uh, if the house is a planned expense, it should be part of the plan.
Nate: Mm hmm.
Ben: So, I mean, yeah, I don't see any reason to derail savings if, if you, if it's part of the plan and everything's in the plan, [00:03:00] right. And if it's not the plan, the question I ask, why isn't it in the plan? Yeah.
Nate: Right. Yeah. And, um, there's always sort of a, an escape route here. I mean, getting your hands on.
money in a taxable account while you don't want to, cause that derails your plans. It's possible. Yeah. And this is sort of the same for five 20 nights people keep their hands off of it. And I encourage them to keep their hands off of it. But if you stick 10, 000 in a 529, you pull it out the next day, there's no taxes or penalties unless it went up.
Yeah. So, you know, it's pretty generally
Ben: don't stop saving. Yeah. And I, and I would say don't tap your emergency fund to buy your house. We've seen disaster happen with that in the past. So.
Nate: Absolutely. Yeah. Okay. Next question. So how much can we contribute to our grandchildren's 529s account without going over the gift limit?
Kind of depends on how many grandchildren, huh? Right. I guess. Um, so the way the gift limits work, uh, I'm the [00:04:00] college planning specialist. So I talk about these gift limits a lot and everyone sees the gift limit in 2024, it's 18, 000 and each person. So if you have a spouse, two people can give 18, 000 to one child, 36 grand.
Right. And so they sort of think that's the most we can give, but 529s have a special rule where you can do a lump sum contribution and you can spread out that gift over five years. They call it five year forward averaging. Right. So the answer is actually with, with, uh, Two people giving a gift to one grandchild, uh, is 180, 000.
Wow. So this, this is the cool part. This is what I found. Cause I, this is a client of ours and I wrote their plan for their, their grandchildren. You don't even need 180, 000 to cover, uh, in state public school. Right? Yeah.
Ben: It's probably a month, like. [00:05:00] 000 or 30, 000. Less than that, right?
Nate: Exactly. I think it was like one 25, depends on the age of the, of the grandchild, but.
And the state. Yeah. And the state. But. You know, I was, I was pleasantly surprised. I mean, I know that's a lot, 120 grand, but yeah, that they could squeeze all the money in and just be done. So. Yeah. And you
Ben: know, if you want to do more than that, then, uh, there's some people think that if you do more than that, you can't, you can't contribute more.
Right. So that's, that's not the case. Some believe that if you contribute more than that, you're going to owe taxes. That's not the case. Right. If you can attribute more, more than that, it's going to consume some of your federal state tax credit, which most physicians will never need. And in fact, I was interviewed by Medscape last week, uh, to comment on their upcoming person, uh, physician wellbeing and finance.
And, uh, They, in their survey, they asked the percentage of physicians, well, they asked physicians what their net worth was, and that's including student loans, house investments, all that good stuff, and, uh, it was only [00:06:00] like, I believe it was 15 percent or 11 percent of physicians had a net worth as a household of more than 5 million.
And for your estate to be taxable at the federal level, it would need to be something north of twice that easily. So, you know, consuming that unified credit is really not a big deal. The thing that kind of sucks about it is that if you contribute more than that, you really need to file a gift splitting tax return, and that's about 500 bucks to have filed by the average CPA.
I think that's 500 you don't have to spend if you, uh, if you kind of plan your gifts carefully.
Nate: That's right. Yeah. That's kind of, it's sometimes if the child's a little bit older, you can run into it, but at the end of the day, you're either paying 500 or nothing happens really. Right. It's just. It, they've really, I, I'm, I'm a little biased cause I'm, I'm the college guy around here, but I love 529s.
They're so cool. I mean, there's so much good stuff about them. Okay. This blends into the next question. How much does college cost? Get this question. [00:07:00] All the time. And I got it this week. It's free if you're in the other countries. So I actually went and looked up because we do this every year, looked up the prices of college.
And, uh, so I got a list for you here. And then I got a bit of a scary story, but, uh, just tells you to be prepared. So tuition fees, room and board. That's what I'm quoting here. Instate public. 28,000 a year. Okay. Okay. Pretty close to last year. This
Ben: is average,
Nate: right?
Ben: Average. So if your kids are gonna Alabama versus going to New York, there's gonna be a swing in there for the cost of living,
Nate: right?
Uh, $42,000 for out of state uhhuh and private is coming in an average of about 57,000. So once again, private is pretty much twice what public is. Yep. So here's the, uh. The story I want to tell we have a family that has been preparing for private school for years. [00:08:00] And I think a lot of times physician families will say, Hey, we're preparing for private.
And then they feel like they're done. They're college journey is over. They're totally prepared. Here's the thing. If you're, if you tell your child, they can choose any school. Right. And rookie mistakes. Yeah. And I think we're, we're all rookies until the first one goes to college. Yeah. So this is like, They're learning.
Yeah. Um, but they, they, you know, give your child the pick of the letter. And generally I see them choose somewhere as far as possible from their parents. So for us, that'd be the East Coast. Yeah. And East Coast, they, they, it wasn't Ivy league. They just picked a private school somewhere on the East coast.
It was 90, 000 a year. So this is an average. Yeah. And your job's not over, um, preparing for college. Just when you save money, you have to talk about this with your kids, uh, and your young adults as they're [00:09:00] going into college about your budget. And yeah, you know, a lot, this family, I think is going to be able to do it, but Yeah, these are averages.
Okay. So
Ben: this is, uh, I want to share this and then I want to move on. So this is coming from the voice of experience, having watched physicians send their kids to college for the last two decades. And I got a couple of kids in college too. So, um, something I see repeatedly is that in a family of two or three kids.
The first kid goes wherever they want to go, that will pay anything they want to pay. And it typically is a very expensive private school. The second one goes to those, the place that's in their backyard, you know, their local state school. The reason for this is. I believe college is an experience. Good and experienced.
Good is something that you'd have to actually live through to understand the value of and with experience goods, people tend to equate price with quality or utility. So the higher the price, the more valuable they perceive it to be. And financial planning is an experienced good as well. So this is, I [00:10:00] know this, um, but yeah.
So I, uh, I, I. You know, you want the very best for your kids, but you find out that the very best is not the most expensive thing. In fact, the very best might be the school that they are fit for. That's easy to drive to, or where their friends are going, or where there's going to be a support network or where there's more majors in case they can't pick the major that they, you know, they, they.
Decide not to be an engineer and they want to be a biologist or something like that. So, uh, yeah, I would say that the choice of where your first child goes to college is an important and often overlooked decision that, you know, in this case could cost 380, 000. That's a lot of money in my world.
Nate: So, yeah.
Okay. Next question's from a prospective client and they asked if I go with physician family and you manage my Retirement investment accounts. How will you invest? My money. Yeah, this is a great question. Um,
Ben: and it, in fact, it's a real life question I got last week. Uh, don't [00:11:00] record. I believe the person was coming from, uh, Pennsylvania.
So, um, Yeah. So they asked if you manage there. So first off, uh, when people come here, we require everyone to have a plan. So you've got to buy a plan first. And, uh, the plan dictates what your asset allocation should be. Asset allocation is that mix of stocks and bonds, whether it's 50, 50, glide path, whatever it happens to be.
You want to start by looking at your high level asset allocation. Cause that's going to tell you what percentage of stocks and bonds to have in each account. Okay. So that's where the plan ties in. Second thing is you want to look at the taxability of the account. So, um, you know, if it's a Roth IRA that puts you in a different tax environment than a traditional IRA, then you would in, let's say a joint, a trust, an individual, or another taxable account.
So you have those three different tax environments for your investments. Okay. And. Uh, the reason I say this is you wouldn't want to put tax exempt bonds into a traditional IRA [00:12:00] or worse yet into a Roth. And I've actually seen people do this. They, they pay a lower yield because they're tax exempt. You would not want to put a high yield bonds into a taxable account unless they're a tax exempt, right?
You wouldn't want to put world bonds into a taxable account because then you, you pay. Uh, ordinary income taxes where those taxes would be deferred inside an IRA. So matching the, the tax environment to the tax nature of the investment matters. Okay. So the third thing to consider is where the investments are going to be.
So we see, uh, we see physicians invest at, uh, Fidelity cause they have the largest share of the 401k market. We see them invest at Vanguard because they're the cheapest. Uh, we see people invest at Schwab because they've been around forever. And, uh, we also see. People invest in betterment because they do a great job and they make the, uh, the portfolio management process easy and cost effective.
So, you know, where the money is, is going to matter because, you know, if you're a [00:13:00] Schwab, you have an incentive to get the Schwab funds. If you're at Fidelity, you have an incentive to get the Fidelity funds and you have a disincentive to buy Vanguard open and mutual funds. So some of the costs that you're going to pay vary based on where you're at.
So. Um, if it is, uh, Fidelity or Schwab or Vanguard or your John Hancock 401k, we give investment guidance about those accounts, which means you log into your account, you, uh, you know, you open the account, you set up a screen share with us. We look over your shoulder through the, through the screen sharing window and we say, Hey, click this button here.
To invest in that fund and you know, I'm not well about that fund there. So let's reinvest, but it's quick by click guidance. And I think we're one of the few firms that actually does that because most firms really want to get that assets under management, that, that 1%, but we charge a level monthly subscription fee.
So to us, it doesn't make a difference where it is. Uh, If it's an account like a joint taxable trust IRA, Roth IRA, backdoor Roth, we tend to put those things at [00:14:00] betterment, uh, because we like the services that they offer. They make investing easy to stay and make the right investments. And then the side of those accounts, it depends on, uh, whether it's going to be a traditional slash Roth, or it's going to be a taxable account.
So for taxable accounts, we will typically own municipal bonds and tax exempt municipal bond funds, and then we'll own, uh, US equities, international equities, and emerging market equities. And so we own those through exchange traded funds. Um, I'm not wild about doing business at Vanguard because the customer service seems like it has, uh, well, I can just say I've experienced long hold times.
Um, But, uh, I do like the Vanguard funds. And so we own Vanguard and dimensional slash DFA funds in our client accounts that are, uh, that are through betterment. Um, then with, you know, traditional IRAs and Ross and those kinds of things, we tend to own those same three sleeves of equities [00:15:00] also, uh, with world bonds.
So you want some bond exposure and, uh, as long as you're going to own us bonds, there's no reason not to own international emerging market bonds as well. And we can cover all those squares with somewhere between, uh, four and five exchange traded funds, depending on the accounts.
Nate: Yeah.
Ben: So that's, that's the whole question.
Yeah. Yes. The whole answer from beginning to end. The only thing that's interesting is that, uh, Betterment charges their, their clients a percentage of assets under management, but through an arrangement that we have with them, there's no assets under management, uh, for our clients in any accounts that we manage.
Uh, that's all covered by the membership fee. So you don't have to think about how much is in there and your fees don't go up every time you put more money in.
Nate: Right. Yeah. I wanted to get to that too. There. Yeah. I would, I would understand the wanting to use a different brokerage for lower fees and no AUM fees.
Yeah. But really we can, I mean, we can help people with their money no matter where. Sure. Yeah. But the reality is that that doesn't exist if you [00:16:00] have a membership with us. Yeah. True. Okay. Um, similar question, but this is from a client of ours. It's he's a hospitalist here in Oregon. He asked if my primary advisor physician family.
Or any other team member, for that matter, were to leave the firm for some reason. So get hit by a bus, leave something like that. What should his plan be for their retirement assets at Betterment? What do you mean? What should, should they, like, should they change the way they invest? Because I died?
Probably not. Well, you know, this, this is kind of coming on the heels of the other question. He, he is a lifelong investor at vanguard, Okay. Uh, and you know, he likes Vanguard. At least he likes their investment options. And so the question is like, am I going to be left high and dry for some reason, something happens, right?
So, um, you know, for, for him, we are somewhat of a backup plan. He knows Vanguard really well, but [00:17:00] his, uh, non financial spouse doesn't know Vanguard all that well. Right. And so, um, that was the only reason I even, uh, Really asked him to move it to betterment and I thought that was a much better plan. I guess the other reason would be just to take it off this plate.
He's, he's paying for it. So, um, yeah, so
Ben: you're basically, you know, the calculus he's got to do is, um, how is my wife going to fare if I pass and my stuff is at. Vanguard group, you know, where they're the custodian, leaving funds aside, right? Cause you can get Vanguard funds anyway, not just from Vanguard. Uh, how's my wife going to fare at Vanguard versus how she's going to, how will she fare in the hands of physician, family, financial advisors, uh, even though they're a small group, you know, there's only five of us, uh, what happens if they go away, right?
So, um, Yeah. So first off, I'm glad to hear the guy loves his wife so much that he's thinking about her all the time. I know that we're the backup plan for a lot of people. Um, we're [00:18:00] also the backup plan for each other. So, uh, if something happens to me, we have a backup plan for internal succession such that other, other members of the firm would, would continue.
Right. So, uh, that's available. And, and, you know, what's more likely than one of us passing is when I was taking a vacation or becoming ill, uh, we went through this when Chelsea went on maternity leave, we still managed to grow the firm and continue to serve clients through, uh, to the first quarter, excuse me, the last quarter of last year while she was out on maternity leave and, uh, yeah.
Actually, you know, transitions, the business through the Schwab shut down at that time. So, you know, we, we went through that just fine. So being without a, a team member for, you know, three months or longer is part of our succession plan. And as part of our SWOT analysis we run. So, uh, I'm not so, so much worried about that.
Uh, though I think it's a concern that the concern I would have, and this is, so I was born in a Vanguard household and I love Vanguard funds. Uh, but the reason I personally don't invest with Vanguard is because it's, it's a [00:19:00] maze. The phone tree is a maze and I wouldn't want my wife to have to navigate that maze.
So, uh, her funds are invested with Betterment and I have confidence that she would be taken care of by the team in the event that I passed.
Nate: Right. Yeah. This is the power of having a team. Yeah. I mean, you, everybody understand that this client in particular and all our other clients, we all have an understanding of their house.
Um, it's not just their primary advisor. So we have some, you know, what we call institutional knowledge about every household here and about investment strategy. And we wrap our arms around We would wrap our arms around this non financial spouse if anything happened. There's one more, uh, sort of question I get from everybody and when they're, when they're deciding whether or not to move to betterment, it is, can I keep the funds I already have?
It's a good, I mean, it's a scary question to think, am I going to have to liquidate and pay a bunch of taxes?
Ben: No, but so with us, um, if you, we have a lot of ways to handle things. So [00:20:00] one, you could constantly leave the money where it's at, you know, they don't have to move it. Uh, however, there's some place where they're being charged 1%.
Sometimes we can just remove that advisor from the account and leave the money where it's at, if it's necessary for tax reasons or for some other technical purpose, where it's in the client's best interest to leave the money alone, we'll do that, right? Uh, we can shut off that 1 percent and still have the account run.
So that's, that's one way to go is just leave it where it's at. Another way is to move it to a place other than Betterment. So we have, uh, other homes for money. But, um, yeah, in the past, the distant past, in order to move to Betterment, you had to sell all your stuff and start off with cash. And that's simply not the case anymore.
Uh, you know, we moved, oh gosh, four or five hundred accounts last year from Schwab and they, when they.
And, you know, we had all kinds of securities in there and, and, uh, the 99. 9 percent of it went without any problems at all, and they accommodated the other pieces of it. So, uh, their capability these days is far greater than what it was in the past. Otherwise I, I wouldn't go [00:21:00] there,
Nate: right?
Ben: Yeah. You don't have to sell your stuff.
And I mean, um, there are, there are advisors who. You know, they're charging 1%. And the threat that they're making is if you leave me, you'll have to sell your stuff. Or if you leave me, we'll sell all your stuff and you'll owe taxes. Uh, I just don't think that would fly in the face of sec scrutiny. And I think that's the mislaid fiduciary duty.
So if, if that's what's keeping you from moving your money from another advisor to an advisor of your choice or moving your money from there to taking an over on your own, um, You know, don't, don't buy it. They're just, they're just BS in you. Right? Yeah.
Nate: Okay. Uh, next couple of questions about life insurance.
Uh, so the first question is, is term life insurance really the only life insurance I need? Ben, can I take this one? I have a hilarious comment on this one, but yeah, you're, you're, you're welcome to. Oh, my answer is
Ben: Yes,
and I would say [00:22:00] yes, unless you're a doctor on the side and your major means of support is a farm that's been in your family for a hundred years and all the rest of your family lives on the farm and it's like a, you know, like a 20 million farm.
Nate: Okay.
Ben: So I'm sure that one, that warm, one farm, farm doctors, financial advisor, you sold them a whole bunch of, you know, variable universal life is going to be sent as hate mail.
Send your hate mail to podcast at physician family. com. I will read your hate mail on the air. Nice. Yeah. I love it. Yeah.
Nate: Yeah. Term life insurance. Term life insurance. None of the VL stuff you don't need. Yeah. Okay. The next one is how much life insurance should I buy? Okay. And. Uh, you know, we actually have a, uh, what we call the life insurance guide, a guide for this.
Yes. Right. And, and if you email me at, uh, physician, I'm sorry, podcast physician.com com Yeah, I'll send it to you, but I'll, I'll give my answer here too. So how much life insurance you can [00:23:00] get it. It's a tough question to answer. Not because getting there is tough. Getting to the number isn't all that difficult.
It's just, it's not the same for everyone. Okay. So there's no right answer. There's a wrong answer, which is not having any life insurance, but the way you get to this number, uh, come comes from a few things. You got to look at Paying off your mortgage and your debts. So that should be covered in life insurance.
Uh, that would be student loan debt, car debt, any, any type of debt you have, including your mortgage. You want to be able to take care of childcare and possibly private K through 12 school. Yep. So imagine your life, you know, as a single parent. What are you going to need to pay for, for your children to go to school?
And what kind of help are you going to need? Right. And in this case, when you say imagine your life as a single
Ben: parent, that means that you, you're the surviving spouse. Right. And maybe you're a physician, you know, but maybe you're not a physician. Like how much money did, do they need? Right. That's the, that's the question that we're trying to [00:24:00] answer.
Nate: Right. And then, uh, obviously you need to cover college. So, uh, a lot of times getting to the answer of that requires a plan. Uh, these plans, a lot of times can help drive the life insurance conversation. Uh, and then lastly, uh, we call it a lifetime income because it's not exactly retirement income because, you know, there's There's money that you need to have from life insurance that you would need to spend before you retire.
But, uh, they, you have an easy way to kind of calculate this, Ben. Uh, I think you said multiply your monthly cost of living by 400. Yeah. So, you know, that could be that right there. If you spend 10 grand a month, that's 4 million. So if you are a fresh physician, like you, you don't have much assets built up, you could have several million dollars of life insurance.
Yeah.
Ben: For younger physicians, I'm used to saying, you know, three, four or 5 million [00:25:00] for a mature physician, which is most of, most of the people that we serve, they're people with, you know, some, a couple million dollars saved or half a million dollars saved. They're further along their need for life insurance is less because they have more money.
Nate: Mm hmm. Yep. And so, uh, we, we usually see physicians with sort of a laddered approach as you save your life and some of your life insurance expires and that's on purpose, right? And then, you know, as you go along, you might get close to retirement with one policy, one, one or 2 million policy, cause you have some, some cash and assets laying around.
Exactly. Someday you'll get
Ben: a letter that says you're 20, your term is up. Your premiums are going to go up unless you take action. I'm like, Hey, I graduated. Yeah. Right. I've actually experienced that. I've gotten that letter. So it's, it's a, it's a nice moment when you realize, Hey, Hey, you live that long B you accomplish the goals that that was going to cover and see, you don't have to pay those premiums anymore.
Right. That's right. Yeah. Okay. That was the last question for today. Fantastic. Okay. Uh, listen, folks, uh, if you have [00:26:00] questions, feel free, feel free to, uh, put them on our answer line. You can call us at 503 308 8733. That number once again, 503 308 8733. Send a hate mail, comments, questions, and other good things to podcast at physicianfamily.
com. Until next time, folks, remember you're not just making a living. You are making a life.
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