PFFAP-PYP-24-0321-Ben and Nate Questions 2 EP 69-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, where physician moms and dads like you can turn today's worries about tax money. Hello,
Nate: physician, moms and dads, I'm Nate Renike, certified financial planner, primary advisor here at Physician Family Financial Advisors,
Ben: and I am Ben Utley with the Less Sing Song Boys, certified financial planner and service team leader.
Today we're going to continue our series of answering listener and client questions. Uh, we ran out of time last time to hit our entire list. So we're just going to pick up where we left off. So Nate, what's our, what's our first question for today?
Nate: Yeah. So this is a question about student loans. They asked, is it finally time to pay off
Ben: my student loans?
Oh man, we've seen, [00:01:00] we've seen so many times when it looks like it was like the last time it's like watching a horror show. And at the end, the, you know, the villain just keeps coming back.
Nate: Exactly. Yep. So, uh, this is this question, uh, I guess the details of this, they kind of sprawl out. So I'm going to lay out, uh, my answer for this.
Um, there's a few things you need to consider when you're deciding to pay off debt. This is. Mortgage, student loans, whatever it may be. But yeah, student loans, the interest rate is officially turned back on. So people are paying interest on their student loans. But the hard part is, and the reason they're asking this question is the savings accounts rates like cash reserve accounts are paying really great interest rates and they're sort of still wanting to hold out if they can, or they're asking if they should.
Um, And so the reality is that since interest rates are turned back on, eventually you have to pay things off, assuming you're not going for forgiveness. You should [00:02:00] probably start paying back your student loans and getting them out of your life as quickly as you can while living semi comfortable life.
That's usually seven, seven years is where people land. Um, and the reason for that is let's say you had a student loans that were 5 percent interest. Usually they're six, but let's say they're five and your cash reserves is paying 5 percent interest. So you just want to make minimum payments because what's the point?
What you're missing out of that calculation is the taxes on your cash reserves. So if for a physician who pays a ton in taxes, you get a 5 percent savings rate on your cash reserves account. The after tax. Return on that is 3%, right? So yes, it's time to start paying back those student loans and getting them out of your life.
Ben: Right. No, no tax deduction for the hardworking physicians that are sheltering that student loan debt.
Nate: Yeah. Yeah. Okay. Next question is I make 700, 000 per [00:03:00] year as an anesthesiologist, but I want my spouse to work. Am I wrong?
Ben: This reminds me of that section on Reddit, which is, uh, A I T A. And I'll let you guess what A stands for.
Do you want me to take this one? Yeah. So I think wrong is a, is a moral interpretation. You know, it kind of depends on what you want, you know, I mean, and it probably depends more on what your spouse wants. You know, uh, are they, is it because you believe that you need more money, you know, maybe, maybe recheck those values is it because they want to have some meaning and purpose?
Is it because, uh, their daddy brain or their, their mommy brain overwhelms them and they need something to kind of feel like they're checked into the adult world? Is it, are they looking for a sense of connection? Are they looking for, you know, uh, a social outlet? It kind of depends on what kind of work it's going to be.
Right. I mean, uh, there's a [00:04:00] difference between sitting in front of computer blogging and, uh, you know, being a caregiver in some kind of setting, maybe, uh, an educational setting. So I think that the nature of the work matters. And I think that the, uh, not so much the compensation, but really the, the why behind it.
Right. So, and I look at this also and I think, well, How, how much does it pay, but by the same token, you know, you take vacations where not only are you not getting paid, but you're paying to be there. You're paying to be there, to have some joy and to build memories with your family. So I can see a situation where that spouse might work for a very low compensation.
And that's something that brings meaning and purpose to their lives. So I don't know that they're, they're wrong for wanting them to work. It just kind of depends on their motivation. Yeah.
Nate: Yeah. And I'm going to piggyback on that a little bit and I'm going to get really real here. Okay. You [00:05:00] ready? Okay. So I, I, I have seen many times where the working spouse feels like the non working spouse, uh, kind of sits around and spends a lot of money.
Uh huh. Like, they don't go to work. They just spend money. And the reality is that when you're at home with your children, things, you, you end up spending some money for those experiences. Right. And a lot of times what it takes is for both of you to sit down and discuss that reality. Mm hmm. And sometimes, at least from what I've seen, to get a good head on your shoulders about this, you need, uh, kind of, uh, someone, a third party to sit down and talk to you about it.
So I don't know how I found myself in that situation, but that's a situation I'm in often where I'm talking to both of them at the same time. We get all our feelings out on the table and it turns out, um, money is the scapegoat, right? Well, we could be making, you know, Uh, [00:06:00] she or he is, is highly trained.
They could be making 150, 000 a year when the reality is after taxes and after nanny bills, it's squashed down to almost nothing. And so it really isn't about the money. It's about wanting to feel really great about choosing. To have mom or dad stay home. And if you make that choice, the money is, is well worth it.
Um, but you have to sit down and have a conversation that is not surrounded around money and your goals for raising children in order to feel good about one of you, as
Ben: one husband, wife, couple, uh, said, when they were in my office, back when I had an office, one said, why work really hard to make that money?
And then I said, well, I work really hard to spend it. And I thought, wow, you know, that's. I mean, somebody's got to spend the money, right? I mean, there's necessary things and there's, there's other things, but still, I mean, it is, it is work to spend that money. It's work to get out there and shop. [00:07:00] It's, uh, you know, it's work to look for a deal or search for value or to make those decisions about what's right for the family.
Somebody has got to do that. So, you know, to say that the only honorable work is the work of getting money. It's just not true. You know, everyone has a way to contribute in the family.
Nate: Okay. Next question is my child is 15. Should I put money in my 529s or should I leave it in cash since college is so close?
Oh, uh, can I,
Ben: can I take this one? Yes. Yeah. So I've done this. I have two kids in college and I Stopped investing. Oh, probably about five years ago when I hit my goal. Okay. Uh, and when I say stopped investing, I, I had all the money saved that I needed cause I've been saving since they were born, right?
Doing the responsible thing. Um, but I stopped taking risk. So I moved the money to the sidelines because I was like, Hey, I've, [00:08:00] I've crossed the finish line. It's okay to stop running. And I still, I still think that's the right thing to do. But by the same token, um, you know, I do have some regrets over that because I have missed out on some returns and, uh, taking the other side of that, you know, an investor only has two emotions, greed and fear.
Uh, that's the greed talking, but the fear side of me was super happy back when COVID happened and everything went in the tank. I was like, nice. Everything's sitting in the money market fund. So all I can say is if you do decide to move your money to the sidelines or, or stop investing, then you need to be prepared to, to face that and potentially have some regrets because these markets are going to keep moving.
You know, if you're, what did you say? Five years out. So, uh, three years plus four years, maybe you're, you know, maybe you have a couple kids you could be not invested for seven plus years. That's a long time to [00:09:00] be getting a cash return, especially when cash and inflation rates are about the same neck and neck.
So, uh, and then, you know, worse is if your children don't go. Then you've really missed out on a lot. So, uh, if I had it to do over again, honestly, I would just work the glide path on those years to college investments. And I leave it alone right up through, you know, having written the last check.
Nate: Yep. Yep.
Yeah. That the glide paths is important. Um, it gets a little bit into the investment weeds, but the reality is those glide paths are tailor made. To stop taking so much risk at about that time.
Ben: They are in the, you know, they're designed to make it so you don't have to think. And, um, you know, like all well designed things, I had a way of messing it up myself by, by overthinking it.
And, uh, yeah, I w I would just say for, for our listeners, you know, the right thing to do and most circumstances, the kind of circumstances that we see is to get invested in a, You know, a [00:10:00] target date or a years to college option and let it roll.
Nate: Yep. Get all the, the goodness out of it. That's
Ben: right.
Nate: Okay.
This is, uh, it's a question, so I'm going to ask it, but it is, uh, it's kind of out there. Uh, did my 2 million home purchase derail my retirement plan? Yeah, you're, you're good on that. You're our housing specialist. Yeah. So clearly this is, um, Um, but the answer sort of lies in your planning, your retirement college plan and your budget.
Okay. So, it could be yes and it could be no. If you buy that 2 million house and you can still save all the money you need for retirement. And save all the money you need for college and still live a comfortable life without going paycheck to paycheck as a physician, then no. And I think a lot of physicians see that 2 million price tag.
And [00:11:00] even if they have the income, they have the down payment to make it work. They feel, um, nervous about buying a house that they can actually afford. So the key there is you have to actually have a plan. So that you can measure your cashflow against the plan and your life. Right. Right. That's the key.
Now, if you get, if you want, if you just want that 2 million home, you newly minted a doctor who has no money, negative net worth with your student loans, uh, it, the answer very well could be yes. Yeah. A big, giant mortgage payment, big doctor house that, uh, just gets in the way of your future. Well
Ben: put. Yeah.
I was thinking about this the other day, literally sitting on the couch, thinking about home sizes, which is a geeky thing. I think financial advisors do on Saturday mornings, but, um, You know, if, if somebody is going to buy a larger home and then they're going to downsize later on, that home is going to appreciate, right?
So they're going to, they're going to have some gain in value there, which is going to be [00:12:00] offset by property taxes and that kind of thing. So it's not really a loss. It's not like you bought some shoes and wore them out and now they're gone. Um, so, but by the same token. We know that, uh, equities slash stocks have outperformed, uh, homes over a longer period of time.
So when I say outperformed, I mean, the homes typically truck along at inflation plus 1 percent and we've seen, uh, stocks. Truck along at inflation plus six or 7%. So really there's an opportunity cost there. It's, it's the money that you have versus the money that you could have had. But with that said, you know, it's, uh, not everything in life is, is finance.
You really can have a balance between, you know, uh, living the good life now and living the good life later. And, and, and as you said, you know, I, I totally agree. It's, it's in the planning, but you know, you really need to. Uh, you really need to get out the pencils and the paper and the calculators and sit down and actually, you know, put numbers on paper and see how that works out.
Nate: Yeah. Okay. Real quick too. Cause I think [00:13:00] financial advisors do like talking about homes. Um, we just had, uh, we had a client here in Oregon, um, come to us with this exact problem. They wanted to upgrade home. I think it was a 3 million home and they had a, I mean, the physician was 46 and he And it has 10 million bucks in retirement and makes about 800, 000 a year.
So we're good, right? Right. And, and the, the key was. He didn't have a plan without a plan. He could not buy that house and be confident. But once he had a plan and it was proven to him, Oh, you'll be fine. Now he's now he already bought the home and he's actually enjoying it rather than worrying about it.
Yeah. It gives
Ben: you permission to, to actually enjoy the money that you have now without the fear of running out later. Exactly. Yeah. And by the way, he is downsizing. Nice. Good one.
Nate: Next question is, uh, just bought a new house, got a new job. Can I wait to start saving for retirement while [00:14:00] everything is in flux?
No. This is a tough
Ben: question. No, no. Yeah. Um, so there's two things. One is the time value of money, but the other is the tax savings. Yes. Those tax saving opportunities are never going to come back. So, you know, your, your 401k match, It's never coming back. Your ability to do it back to a Roth is never coming back.
Uh, the huge tax savings you get from contributing to health savings account. It's never coming back. And so, um, you know, this is, this is not where you sit down and, and you, you eat all of one thing on your plate and eat all of the next thing on your plate, eat all the next thing. Personal finance is really a matter of chipping away and you need to be eating a little bit of everything on your plate to get the benefit of all these things at the same time because they work together.
Nate: Yeah. And not to mention, there's some careful planning you need to do when you change jobs. So, uh, there's a chance that you need to max out all those things before you leave, at least at work. So, [00:15:00] uh, it changing jobs, changing cities, states, it's difficult. And I can understand why they asked this question.
Cause they feel like, oh my gosh, I'm strapped for cash movings expensive. But the reality is you need to carefully plan that out and be able to continue to save for retirement while you're shooting. Should I keep my whole life insurance? Uh, I'm going to let you answer this Ben, but this comes from someone who has had the life insurance for a long time.
I think their parents bought it for them or something. Um, and they know that whole life insurance is labeled as bad online, but they've had it for so long, they're trying to figure out if they need to do the work to let it go.
Ben: If it's something your parents bought for you, the chances of this The chances are good that this is a really small policy in which case, um, you know, might feel good to keep it.
Um, it, it might bear higher fixed rates of return, you know, so, you know, I say there's no damage or harm in, in [00:16:00] keeping that. However, um, You know, if you were in training and you met a really nice man who, uh, sold you some disability insurance and you wound up with some whole life when really what you wanted was a savings vehicle.
You want to be smart with money and they promised tax stuff and what you wound up with was terrible universal life and a feeling in the pit of your stomach that you kind of done the wrong thing. Uh, that requires a second look. And many people hang on to those policies way longer than they should have fearing, okay, well, I'm this far along.
I should keep going. The economists call that sunk cost fallacy. That is absolutely not the case. There are ways to work these things out and kind of get out of the grip of the money machine. So, yeah, different, different cases, but yeah, if it's, if it's small quantities, it's no big deal.
Nate: All right. Am I putting too much money into my 5 29?
What if my kids don't go to college? That's all you. So that's all you, Matt? Yeah. We're written about a [00:17:00] hundred of these plans. Mm-Hmm, . So, um, the reality is that in today's day and age, most kids are going to go to college. Um, but there is the chance, you know, that your child doesn't go. So I wanna talk about how you can mitigate that risk.
So, uh, right outta the gate. You should be saving a ton of money for college. I mean, like your child's three years old, uh, chances are, they'll probably go, you don't want to be caught with no money. Yeah. If you're, if you're saving, if you're saving and
Ben: it doesn't hurt, you're not saving enough.
Nate: Yeah. Uh, yeah.
College is expensive. Um, but if you, as the years go on and you're saving a ton of money for college, you start to get worried. Like, man, there's a lot of money in here. You come to your annual progress check with me and I go, man, you already have enough to send them to public school. Yeah. You're doing great.
And you start to just get that pit in your stomach. Like this money is, is a little much. And, uh, there's a chance that I won't get to retire [00:18:00] exactly when I want to, you know, I'd love to retire a couple of years earlier. You can, you can really look at this and you can say, I want to buy flexibility. And you buy flexibility by rather than putting that money in your 529, you can just put it in a regular old brokerage account and label it as for college.
The reason I say buy is because you do lose some of the value. The tax free growth and your five 29. The really, you know, they're really cheap to put money in five 29s, but that's okay because you're making a purchase of flexibility, right? If your child doesn't go to college or let's say they don't go to private school, they just go to public and you saved private school money.
You can take that taxable account and just turn it over to retirement when no fees, right? Okay. Now let's say you went the other route. You wanted to squeeze all the money you could out of a 529, meaning all the tax savings you could, and your child didn't go or spent half the [00:19:00] money. Um, if you're not worried about retirement, you just don't want to make a bad decision with money.
You can get money stuck in there. You could look at this like, um, money for grandchildren. Right. Okay. So it can always just be passed on to a family member and that'll keep it out of Uncle Sam's hands. And then, um, the, the one that I see more often is one of your children chooses a really expensive college and the other might choose a less expensive college and that money can be transferred in between the children.
Right. So there isn't a ton of risk if you're carefully planning for college and putting money in 529s. Really just comes down to if you're prepared and you understand the trade offs, there are options for you to still be prepared for college, but, uh, maybe not put so much money in a 529 that takes us taxes and penalties to get it out for using it for something else.
Okay. Uh, last question. All right. I am retiring in [00:20:00] five years. Should I invest my extra cash or pay off my mortgage? You want to take that one, Ben?
Ben: Yeah. Um, I see this pretty regularly. Uh, you know, progress checks, you know, we measure, uh, where our, our clients are versus where they need to be. And when I see that clients are ahead or if they're, if they're where they need to be, then the answer is pay off the mortgage.
This period stone cold pay off the mortgage, um, paying off the mortgage literally rewires your brain. You will see the world in a different way. You'll wake up with a different feeling in the morning. Uh, it literally just repaints the whole scenario that you see as you look at the world through your own eyes.
So, you know, if you're on track, yeah, pay off the mortgage. Um, If you've, if you've got a gap though, fill that gap first. It's that simple.
Nate: All right. Can I take us out?
Ben: Yeah. So that's our last question for today. Believe it or not. We still have unanswered questions. We'll be back next time with more, uh, if you have questions, send [00:21:00] those to podcast at physician family.
com. And in the meantime, remember you're not just making a living, you're making a lot.
Voiceover: Thank you for listening. Family Financial Advisors podcast. Are you getting all the tax breaks you really deserve to find out, get your copy of the overtaxed doctor's retirement investing checklist available at position family. com forward slash go.
