Nate Reineke (00:13)
Hello, physician moms and dads. I'm Nate Renneke, certified financial planner and primary advisor.
Chelsea Jones (00:20)
And I am Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family.
Nate Reineke (00:25)
Chelsea, unfortunately the summer is over. I don't know if you could tell over there in Florida, but it is.
Chelsea Jones (00:32)
Yeah, it feels the same to me.
Nate Reineke (00:33)
What was
something fun you did this summer with the family?
Chelsea Jones (00:37)
Okay, in the summer we went to, which I talked about this a few episodes ago, we went to Disney for my daughter's birthday. She has a late September birthday. So we went to Disney for a week, celebrate her birthday and it was so much fun. made it, it was so fun to watch her experience Disney and like see it through her eyes. Cause she was, yeah, she could.
Nate Reineke (00:47)
Mm-hmm.
Yeah.
It's like the only way to do it.
Chelsea Jones (01:06)
She experienced all the magic and it made it feel really magical for me. It was like I was tearing up like every other hour just Seeing how happy she was there
Nate Reineke (01:08)
Yeah.
Yeah.
I was sort of one of those people that was grumpy and against Disney before kids. was like, I don't get it. And then once you have kids, you can take them there. Like, ⁓ this is awesome.
Chelsea Jones (01:30)
This is awesome. Yeah.
Nate Reineke (01:32)
Yeah.
Any humbling experiences over the summer? Well, Anna, she in preschool?
Chelsea Jones (01:37)
She's in her classes called early preschool. She's only two, but she's still got a few years or a couple years even before preschool, but
Nate Reineke (01:40)
Early preschool, only two. Yeah.
Okay, any humbling experiences over the summer though?
Chelsea Jones (01:50)
first one that comes to mind, I feel like kids humble us all the time. It's like a daily thing. But the first one that comes to mind is when we drive home from school, we usually have a little jam session because she doesn't like being in the car so I have to distract her somehow. And one time over the summer I was singing to, it was probably Milana. She's been really into Milana. And I just hear her go,
Nate Reineke (01:55)
huh.
Yeah.
Mm-hmm.
Chelsea Jones (02:18)
Mama, mama, no. And I was like, like, what are you talking about? I thought we were singing along. She's like, no, mama. I like, don't want me to sing it? No. Just looking in the rear view mirror at her face. Okay. Thanks.
Nate Reineke (02:20)
Yeah.
Yeah.
That's funny. Yeah, luckily I'm not
a big singer, so my boys don't have to tell me no, but I've heard them tell my wife no. I had a humbling experience this weekend. And it was truly humbling. My boys really like to wrestle, and my oldest, who's seven, he's getting bigger, more athletic.
Chelsea Jones (02:49)
Yeah.
Nate Reineke (02:57)
And so we wrestle, but they get kind of crazy. So we can no longer actually wrestle or like fight because they cannot help themselves but to start throwing kicks and punches. Like it is impossible for them to do. So, okay, there is absolutely no kicks, no punches. It's just, it's like, you know, push me off the mat sort of thing, only pushing. And he caught me off guard.
Chelsea Jones (03:05)
Yeah.
Mm-hmm.
Nate Reineke (03:23)
and full blown like dropped the shoulder into me and got me off the mat like easily. And he's like, dad, dad, dad, did you do that on purpose? And I'm thinking, unfortunately, no, you actually pushed me off the mat. So was like, man, gotta hit the gym a little harder. Otherwise, you know, he's only seven. What's gonna happen when he's like 10?
Chelsea Jones (03:28)
Go.
you
Yeah.
or stay prepared in time.
Nate Reineke (03:47)
Yeah, that's
right. Okay, we have some good questions today. The first question we have is actually, don't know what kind of doc it is, but it was from another webinar we did with Physician on Fire. So the question that I got after the webinar was, should I make a retirement budget or just use 80 % of my current expenses when calculating how much I need to save?
Chelsea Jones (03:53)
and
Nate Reineke (04:14)
And I'm the budget guy. You love your budgets too, but I really like budgeting. And we don't do it much because doctors don't really like to budget. But it's important to take one good hard look at your spending when you're planning for retirement. But you can just tell by the nature of this question, doctors don't really want to do a budget. They just want to do 80 % or something like that.
Chelsea Jones (04:17)
in.
Nate Reineke (04:35)
I don't think it makes a ton of sense to do 80%. There are some studies out there that say you spend, you know, on average everyone spends 15 or 20 % less, but that's the average Joe. The average Joe, you know, they may not pay off their mortgage. They aren't paying high disability premiums. There's a lot of things that doctors act differently in their spending years than they do the average person. So there's this, you know, rule of thumb here, but
Chelsea Jones (04:35)
Thank
Mm-hmm.
Thank you.
Nate Reineke (05:04)
You know, a lot of doctors too, they end up buying houses that too, if you follow these rules of thumb, might be a little out of range. Meaning they buy a more expensive house, but they actually can afford it despite it kind of running into these rules of thumb where should, know, 20 or 25 % of your income should be your house. And that is because they have a lot more discretionary income.
Chelsea Jones (05:15)
and then.
Nate Reineke (05:32)
So if your thing is to buy a house and you're spending 30 % of your income on it, but you don't spend a lot of money other than that, this rule doesn't make any sense, the 80 % rule, because you're gonna pay off your house before you retire, at least if you're Chelsea or Nate's client, you are, right? And so I think it would be a really good idea to take a close look at all the things that you won't spend money on.
Chelsea Jones (05:32)
Yeah.
Mm-hmm.
Yeah.
Nate Reineke (05:58)
and be realistic, so pay off your house, no more disability insurance premiums, no more saving, no more kids in the house, things like that. And I see all the time that spending is a lot lower than this 80 % number.
Chelsea Jones (06:12)
Yeah, I was going to say using 80 % of current expenses, especially if this is a like your mid career, you've had an attending salary for a few years, I see 80 % being an overestimate of retirement expenses most of the time. And this is one of those rules of thumb where if you're really far from retirement, and maybe you're not maybe not meeting with an advisor yet, but you're trying to figure out some kind of number.
This is kind of like the equivalent of the 4 % rule, like estimating retirement numbers where it gives you like a good starting point maybe, but there's so much more that goes into figuring out the actual amount that at the end of the day, just doesn't, doesn't. ⁓
Nate Reineke (06:43)
Exactly.
Yes.
It doesn't really, it's
just you could do better and it's not that much work to do a lot better than that. I actually introduced the 4 % role in that webinar because sometimes that's just the best you could do if you don't have fancy finatural planning software.
Chelsea Jones (07:00)
Yeah.
Yeah, so you need a
graph, but most people have heard of it before. It's a good starting point.
Nate Reineke (07:16)
Yeah. And you know,
if you use 80 % and you use the 4 % rule, at least you would have a target that you're more contoured and it might work out okay. But this one doesn't require any software requires a spreadsheet and some some of your time. So no, not 80%. I would actually calculate it out.
Chelsea Jones (07:30)
Mm-hmm. Yeah.
especially if you're closer to retirement. This becomes more more important getting that number right whenever the closer you get to retirement.
Nate Reineke (07:42)
Yes. Right. Yes.
Because you you're 58. You're not going to make any major adjustments to retire. I don't see doctors do it. If they find out they can't spend what they've been spending for last 10 years, they just work longer. Right.
Chelsea Jones (07:56)
Mm-hmm.
Yes.
Nate Reineke (08:01)
Okay, next question is from a double doctor family in West Virginia. Both of us are at a university and have a plan, a retirement plan, with a mandatory 6 % contribution. Is that 6 % outside of the $23,500 limit in a 404-01K or other plans?
Chelsea Jones (08:25)
Yeah, this is a great question because going over that limit, if you were to go over that limit, that would be a big no-no, right? But this 23,500 limit, that's known as the elective deferral limit. And the key word there is elective. So this client is talking about a mandatory contribution to a retirement plan. they're making you, it's a condition of employment to do the 6 % contribution.
Nate Reineke (08:32)
huh.
Mm-hmm.
Mm-hmm.
Chelsea Jones (08:53)
My definition is not an elective deferral. So it wouldn't count towards the $23,500 elective deferral limit.
Nate Reineke (09:04)
Yeah, I love when this happens, right? You get to put more money in there. In fact, I'm surprised I don't see it more. Maybe there's a good reason. I haven't looked into it, but you know, a lot of employers will use 457s or some other plan that maybe isn't as good as your 401k, but they're just trying to help you save more for retirement. When if they did this mandatory contribution that would solve it. There's probably a good reason they don't, but we do see it a lot at these.
Chelsea Jones (09:06)
Yeah.
And then.
Nate Reineke (09:33)
big institutions, especially in academia.
Chelsea Jones (09:36)
Yeah, I see
the mandatory contribution a lot with state schools. Like this is part of a university system. That's where I see it the most.
Nate Reineke (09:43)
Yep.
Yeah.
Okay, let's see. So an emergency medicine doc in Tennessee. I'm only a 1099 employee. I guess I should say all their income is 1099 and contract with hospitals. Is it worth it to set up an LLC or S-corp if that would be better for us than a sole proprietorship? Some of the other doctors I work with have those and they pay their wives a salary.
Um, yes, it is worth it. That's the short answer. I touched on this quite a bit in the last episode. Um, the S corp is what makes, you know, being, I mentioned in the last episode being 10 99, there's nothing magic about that. Right. If you're 10 99 employee and your sole proprietorship or you don't do the right thing with that 10 99 income, you, probably won't save much in taxes. Um, but if you set up, you know, an LLC.
and you have a tax as an S-Corp, then you do have the opportunity to save quite a bit in taxes. And that is because when you pay yourself a salary, you have this, it's 15.3 % payroll tax. And so you pay your 15.3%, this is what you would pay half of this if you were an employee and then your employer would pay half of it. And since,
Since you are an employee of your S corp, you do have to pay yourself something you pay yourself What is known as a reasonable salary and you do pay that 15.3 % you can't get around it entirely Because the IRS has some rules that you must pay yourself a reasonable salary, but let's imagine you made five hundred thousand dollars a year and Your tax professional determined that two hundred thousand dollars a year was a reasonable salary, right? So the rest of it the three hundred thousand
you can pay yourself as distributions, but only if you set up the S-Corp. And those distributions skirt around the 15.3 % payroll tax. So quite a bit. mean, a couple hundred, few hundred thousand dollars, 15.3 % of that is a lot, right? So certainly worth it. You just have to be careful. I mean, you don't want to set up a really low salary and you do have some more complexity.
Chelsea Jones (11:39)
Okay.
Nate Reineke (11:56)
With an S-corp, you you have to set up payroll and do bookkeeping and tax filings, but you're going to do a lot of that work. You should be doing a lot of that work anyways if you're self-employed. As far as the paying your spouse. So the important thing to know is that when you pay your spouse, they have a salary. And so you are paying that self-employment or you're paying that payroll tax.
Chelsea Jones (12:08)
And then.
Which is also the 15.3 is sometimes called the self-employment tax.
Nate Reineke (12:24)
to your spouse.
Yes. So, you know, you have to, you should probably do some math to see if that's worth it. But the reason you would do it is so that they could take part in your retirement plan so they can defer most of the salary that you get. You could pay them $50,000 and they're deferring most of it, you know, into maybe a little less than half of it into 401k or something. Then that's a good move, right? You're deferring all the taxes on it.
and you pay that payroll tax on a chunk of it as well. The part that, you know, my red flags go up when people are just doing it to do it, they need to actually be doing real work, right? I see a lot of tax tips where you're paying your children, you put your children on payroll and all that, and they're not really doing anything. They need to actually be doing work. Your spouse needs to actually be doing work.
Chelsea Jones (13:04)
Thanks.
Nate Reineke (13:19)
It could be admin work, bookkeeping, scheduling, things like that. Track your hours, track your duties so that if you ever get audited, you have a real case because it's real. They're actually working. And then you have to run them through your payroll. so if that pencil's out and it's all worth it, then yeah, you can hire your spouse if they have a legitimate job.
Chelsea Jones (13:40)
Yep, and this is something that your tax preparer can help you with. can prepare projections, pencil out how much you would save in taxes if it's a net positive to the spouse. I've worked with CPAs that have done that for clients before. There's ways to run the numbers with your CPA to go in informed before you make that decision.
Nate Reineke (13:59)
Yes,
agreed. Yeah, and you know, we, it's not all that exciting, but we talk all the time about the complexity of all this. Sometimes if it's a little bit of savings, but it's more complex, you know, move on, do something else with your time, you know, but if it's not that hard and they are doing work for you, then you should take the benefit.
Chelsea Jones (14:08)
Mm-hmm.
Mm-hmm.
Yeah.
Nate Reineke (14:22)
Okay, next question's from an anesthesiologist in New York. Earmuffs, if you got kids in the car. I know some religions have kids in the car, but this was a fiery question. Yeah, direct quote. I have a whole life policy and it seems I have a loan on it. I'm pretty pissed at the broker who sold it to me. I had no clue that this would happen. What do I do now?
Chelsea Jones (14:30)
This is a direct quote.
Nate Reineke (14:43)
So a lot of physicians end up in this spot. They get stuck with these whole life policies and they never really understood them when they first bought them. And then they discover at some point that there's a loan against it. And how that usually happens is early in your career, some financial professional, I'm putting my fingers up in air quotes, YouTube people can see it, but people listening.
Chelsea Jones (14:48)
Mm-hmm.
Mm hmm.
Nate Reineke (15:09)
Financial professionals, someone in a nice suit, is kind of selling you this idea of building wealth and protecting your family with this whole life policy. But what they don't mention is that they're about to make one of the biggest commissions out there
Chelsea Jones (15:23)
Mm hmm.
Nate Reineke (15:23)
in the financial services industry. So they leave that part out. So you buy it, you're paying your premiums, fast forward a few years, and what happens is that the policy doesn't perform like you were told it would perform.
and the premiums are high, eventually a loan gets put against it. And it's not a loan like a regular bank loan. A lot of times you don't even really realize it's happening. It's an insurance company lending you money and using your own cash value in that policy as collateral. And there's interest being charged on it. And if you don't pay that interest in cash, it just adds to the balance. So if you're kind of asleep at the wheel,
Chelsea Jones (15:40)
Okay. Thank you.
Nate Reineke (16:07)
it can
get worse and worse. And over time, the loan grows, sort of eating away at your cash value, eating away at your death benefit. And then if that gets big enough, the policy can collapse. And the IRS would treat that unpaid loan as taxable income. OK, so these these policies on the surface, it's like they sound pretty good. But when you dig into them, they get messy and they get, I mean, just nasty.
Chelsea Jones (16:29)
Get real messy. Yeah.
Nate Reineke (16:34)
So the question is how do you kind of untangle this mess? And most of the time when this is being sold to you early on, the policies aren't absurdly large. That's what we usually see, but it just feels slimy and gross. And even if you are paying a thousand bucks a month, that's not nothing, that's a lot of money. ⁓ And that just so happens to be roughly the premium that this person is paying.
Chelsea Jones (16:46)
Yeah.
Nate Reineke (17:00)
So how do you untangle it? First thing you need to look into and who, by the way, who cares if this salesperson knows that you're plotting to get out of this thing. Don't let that uncomfortable conversation sway you away from moving in the right direction, right? You're pissed at them, be pissed, ask for the information you need, okay? So you're asking for cost basis. You need to know what you've paid into the policy versus what it's actually worth. And then that kind of can...
Chelsea Jones (17:06)
All right. Yeah.
Nate Reineke (17:29)
inform your next move. If your basis is really low,
meaning the policy has grown beyond what you've paid into it, you can consider exchanging the policy into a low cost annuity. Annuity is also a bad word most of the time. When we're giving advice, we're hearing people buying stuff, but it's just a lesser bad thing.
If you have a really low basis and you just cancel the policy, then you're going to pay taxes on the gain. And if you don't want to pay a bunch in taxes, let's say it's a really large policy, which I'm also looking at right now with a different client, it's a really large policy. It's just not worth it. But there are some great low cost annuities that you can put your money into for almost nothing. I mean, I was looking into a new product. It looks...
Chelsea Jones (18:06)
Yeah. Okay.
Yeah.
Nate Reineke (18:26)
almost too good to be true. And I vetted it and it looks like it is true. So you can get into these different policies that they make these different types of annuities that don't have large fees for this reason to get you out of a nasty policy. So that is an option. It's a bit more complicated, but it's not it's not too bad. Now, if your basis is really high and you can get out, cancel this policy, take your cash value and run, then
Chelsea Jones (18:30)
Yep. Yep.
Nate Reineke (18:54)
You should just do that, right? You're gonna cancel it. You've already paid mostly all the fees. you know, kind of, it costs you some money in taxes, costs you some money to cancel it, but the reality is you kind of at this point need to gnaw your arm off to get it out of this trap.
Chelsea Jones (18:56)
Yeah.
Yeah, and figuring out that amount I've learned, you have to specifically ask for the cash surrender value, because the cash value is different than the cash surrender value. The cash surrender value is net of any surrender charges.
which if this is a relatively new policy, there might still be surrogate charges that apply. You've held it for a long time. The value is probably the same, but.
Nate Reineke (19:31)
That's right. Yep. Yeah.
Agreed. Yeah. So it can be painful, but once you free yourself from that trap, you're kind of back in control. You take that cash, you do something a lot better with it. You know, it's just sticking into a brokerage account. And I've seen a few of these this year. One, this is a whole life policy. I saw a variable universal life policy. And I'm happy to say they're becoming less and less common. I think people are kind of getting smart to this whole deal, but not always the case. There's some really good.
Chelsea Jones (19:58)
and
Nate Reineke (20:03)
salespeople out there. But you know, if you have your foot or your arm in this trap, you can call me, you can call Chelsea. And we don't earn any commissions. We don't sell any of these products. We don't sell any products. We just sell ourselves. That's it. It's a plan or a subscription. And you know that if we're recommending one of these low cost annuities, we don't get anything from it. So we're just going to recommend what's best for you. Stop the bleeding and kind of move on to something else.
Alright, I'm off my soapbox.
Okay, last question is from a psychiatrist in West Virginia. We just moved and have about $50,000 left over from the sale of our previous home. Where is the best place to put this cash?
Chelsea Jones (20:49)
Yep, and this came from one of my clients. To give a little bit of context, there's a few places where they could put this cash and they asked about them. They're like, should I put it in my 529? Because we haven't really been able to fund that yet this year. Car loan, should I pay that off? Should I defer more money into my workplace plan? There's, yeah.
Nate Reineke (20:57)
Mm.
Ooh, that's a idea.
Yeah, I
think there's like, you know, there's gotta be at least 10 different places you could put the money. ⁓ It's interesting that they have this money because, sometimes people, it's kind of the new norm to make an offer on a house that is not contingent on you selling your old house. And I hope that goes away. That's kind of a COVID thing.
Chelsea Jones (21:19)
And then.
Mm-hmm.
Nate Reineke (21:37)
It used to be very normal to say, need to sell my house to buy a new one. But for whatever reason, that's not the new norm anymore. And I imagine it will sway the other direction. something they could do that's different than kind of what to do naturally with just when you have extra money would be they could put, could attempt to put the 50,000 toward their new mortgage and do what's called a recast, which is you put the 50,000 toward the new mortgage.
your mortgage company recasts the loan and it resets your payments. So if the payments are high and your interest rate is high, which interest rates are getting a little bit more manageable, but depending on what bank you use and when you bought the house, they might be in the mid sixes. You know, it's not a foregone conclusion that you get in the mid sixes when you invest. Your auto loan rate might be 3%. I don't know, but ⁓ you could recast the loan if that's an
Chelsea Jones (22:23)
Thank
Nate Reineke (22:31)
an option, but what did you end up, like what were the things you considered? You said 529 investing, I'm kind of thinking like new house. A lot of people put work into their new house.
Chelsea Jones (22:33)
Okay.
Okay.
Yeah.
Yeah, they literally just bought their new house and move state. So some of the places that I considered was or my initial recommendation was pay off your car loan because it was at seven percent and then put the rest into your child's five to nine to catch up on the contributions for this year. But after meeting with them and finding out a little bit more, I changed my recommendation.
Nate Reineke (22:50)
Mm-hmm.
Chelsea Jones (23:12)
and recommended that they instead defer more into their workplace plan because they switched jobs part way through the year. And it turns out we found out after digging into one of her accounts that she hadn't maxed out her workplace plan at her old job. So I thought that she would only have a portion of the 23.5 to contribute before the end of the year. And she had the full 23.5 to contribute.
Nate Reineke (23:23)
Mm-hmm.
Mm.
Aha.
Chelsea Jones (23:43)
I recommended that she kind of keep that in cash and use it for their living expenses so that way they could defer more into their 403B and reduce their taxable income.
Nate Reineke (23:50)
Yeah.
That's interesting because normally, you know, I'm very high on putting money into 529s, right? Because tax free growth and all that. But when you are not putting money into a workplace plan or your IRAs or something like you only get one 20, 25. You can't go back and say, well, now I have extra money. I'm going to put money in the year that I missed it. This is it. You get one year with 529s. That's not the case.
Chelsea Jones (24:01)
And thanks.
Nate Reineke (24:21)
You can play catch up with 529s. So I like that. And then by the end of all this, I'm pretty, there's a pretty high likelihood that they have some money left over because they're saving all the taxes from that contribution. So, you know, it's not always best to take this, take your cash and just, you know, fire it all out there and do it really quickly. You can take it slow. And in a few months, if they have extra money, then they put in their 529. That's good.
Chelsea Jones (24:33)
Mm-hmm.
and
Nate Reineke (24:47)
Okay, and I think that's it for today. Thank you everyone for listening. If you liked this show, be sure to subscribe so you don't miss out when we release new episodes every Wednesday. you can leave this episode a rating wherever you're listening. I'd really appreciate that. And if you'd like to work with us, you can go to PhysicianFamily.com, schedule an interview. If you're not ready for that, we are still taking questions. We get questions all the time from clients, but.
I'd love to hear from the listeners as well. And even if it doesn't make it on the air, we will promise to answer your questions via email. So until next time, remember, you're not just making a living, you're making a life.
