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'm Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family Financial Advisors. So we're back with more questions this week. We're gonna get straight into it. The first one is from a pediatrician in California. They said, my Morgan Stanley advisor doesn't want me to buy and hold our index funds. How do you think that is?
Nate Reineke (00:41)
So this is a question from a prospect that I got just a few days ago. I think there's a few reasons. The main one is fees. The main reason for this is fees. β Buying and holding index funds doesn't pay well for the average financial advisor, I would say the traditional financial advisor, but they were charging them based on each transaction that they did. And what they found...
Right, they charge a fee every time you invest. And what I found was that they weren't investing regularly. They had quite a bit of money in there, a couple million dollars in their brokerage account, but they weren't investing in it consistently. So the advisor just didn't feel like they were getting paid. But they had great index funds. β Nothing wrong with them. That was my impression.
And so β the advisor said, hey, you know, you haven't, hadn't been able to talk them out of their index funds, which is, I'm very impressed and oddly proud of the client for sticking to their guns and not letting them kind of churn their account. But, β so they said, let's switch you over to an assets under management fee. And that's when all the red flags kind of went off for them and they realized they needed to find someone else. But basically the way that it works with the traditional advisor is.
They are, every time you meet with them, there are good ones out there, but the traditional advisor maybe at the bank, right, Morgan Stanley, this is every time you meet with them, it is a sales call. Every time you meet with them, they're trying to find other assets that they can pull in. β And if they are good enough, maybe they're not the worst, but they're good enough, you get the value β of a good planner.
Chelsea Jones (02:19)
Mm-hmm.
Nate Reineke (02:34)
and a sales call. Not or, but usually and. So they are looking for assets to pull in so they can make money. But at the same time, you're getting some value around planning, around tax planning, retirement planning, college fund planning and all that. But in this case, β that wasn't it at all. They simply wanted to turn their account over and over and over, meaning buy different stuff, buy and sell, cause a bunch of taxes, make some fees along the way.
And when the client put their foot down, they wanted to force them into an AUM model so that the money could sit there and they could charge 1 % on it. But this is, β I chose this question specifically because it's important that if you feel like something is right and you've done enough research and you know, even listening to this podcast that buying and holding index funds is probably, β is the right move for the majority of physicians. β
Chelsea Jones (03:32)
Thank
β
Nate Reineke (03:32)
and your advisor just is not having it.
And they're arguing with you every time you go in. It's time to look for it, no one.
Chelsea Jones (03:38)
Yep. Cause the same goes. Money is like soap. The more you touch it, the less you have. So you're paying, like you said, paying taxes the whole time. It's also diminishes returns. It's just, it's a win for no one except for the advisor that is being compensated because of the trades.
Nate Reineke (03:44)
Yeah, that's right.
That's correct.
Yeah, and it's a win for them in a very less β straightforward way as well. We call this entertainment value. And if you're not allowing the advisor to entertain you by buying and selling stuff, β what are they doing? You know, and we deal with this too. I mean, it's not like we're immune to people saying like, you know, the index funds are straightforward. β But
Chelsea Jones (04:16)
Peace.
Nate Reineke (04:25)
As long as you have an advisor who's getting, you you're paying them a fair fee, they're putting in index funds and they're making moves only when it makes complete sense for you. Like you're out of balance or you need to invest more money because you have more money or something has changed in your situation. There shouldn't be a whole lot of activity in these accounts if you're a buy and hold strategy. So β you don't need the entertainment value. You don't need the high fees. That is not going to get you any closer to your goals.
Chelsea Jones (04:54)
Okay, very good.
the next question is from an emergency medicine doc in Arizona. They said, I've been attending for about 18 months now and everyone's telling me to buy a house, but what's wrong with renting for another year or two?
Nate Reineke (05:08)
Yeah, we got the full spectrum here. Buying a retirement home, buying a first home. And housing is just β kind of getting hot right now, yeah. So, look, the people telling you to buy a house are the people that asked the question that we just answered, this retired urologist in Oregon, right? Because their house tripled in value. They're like, holy smokes, what are you doing renting?
Chelsea Jones (05:16)
hot topic nowadays. Yeah.
and
Yeah.
Nate Reineke (05:37)
Okay, but it's easy to forget how difficult it is to buy a house when you're first starting. You don't have a bunch of cash to put as a down payment. You might even have a good income. You just don't have a lot of cash. You're not gonna get a great interest rate because you're putting zero down or 5 % down. The other piece of this is the housing environment right now is not the same as it was even just five years ago, especially not 10 years ago and certainly not.
Chelsea Jones (05:53)
you
Nate Reineke (06:04)
you know, 20 years ago or around the 2008, 2010 period when houses were a lot cheaper. So houses are expensive. Interest rates aren't low. I wouldn't consider them ultra high, but they're not super low. And so β new doctors are looking at the housing market and they're saying, I'm just going to rent rents three grand a month and the mortgage would be five. And it used to be where you do this math and you say rents three grand a month. My mortgage is going to be three grand a month.
Chelsea Jones (06:10)
Mm-hmm.
Yeah.
Nate Reineke (06:33)
The only thing in between me and a house is a down payment. And then there's these doctor programs where you don't need a down payment. So for several years, I was sitting here saying, yeah, you should probably buy, but there are great reasons to rent. β the answer to this question is β there isn't a whole lot that's terribly wrong with renting. I would say you should buy a house
Chelsea Jones (06:37)
Mm.
Nate Reineke (07:01)
that you can comfortably live in for several years. So what does that mean? Comfortable means it's a comfortable payment. Comfortable means it's a comfortable space. Comfortable takes into account your family dynamics. So do you have a child that's going to go off to kindergarten and you're going to have to move next year again? Probably don't buy a house yet. β So you look a little bit into the future, but not too far because you're going to move. So a lot of physicians
when they're just getting started, they want to buy their forever home as their first home. It is not going to happen. Even if you bought an expensive home and thinking that it was your forever home, I have never met someone that didn't move three to six years later from the first home they bought. You always move because you realize what you want at a house. You realize that you want to live in a different neighborhood.
But the what you get from renting is flexibility. You can pick up and move any time you want. What you get from renting is you avoid many of the emergencies that people have in their day to day expenses. So literally on Thanksgiving morning this β this year, I had a a β shower in my downstairs just essentially explode, Chelsea. It was
Chelsea Jones (08:27)
my god.
Nate Reineke (08:27)
bang,
bang, bang, bang, bang, someone was in the shower and I woke up, you know, was five in the morning and I was like, what is that? Went downstairs, the shower is just spraying everywhere. Okay. And β I know I talk about, you know, β hiring professionals and all that, but I can't help myself, but to try to fix something before you pay a plumber $2,000 to come to your house. And I spent, and of course on Thanksgiving, Home Depot is not open. So I
Shut off the water as fast as I could. Downstairs was out of commission. Didn't have hot water on Thanksgiving morning. And the next day I was up bright and early. Everyone's buying their Black Friday deals at Home Depot and I'm in there buying plumbing supplies. Because no plumber is going to come to your house on Thanksgiving and Black Friday unless you pay him an arm and a leg. And I spent Black Friday fixing my shower. And then for the next week we didn't have hot water. Because I'm not a plumber.
and I screwed something up. So then for the following week after that, I had plumbers in and out of my house and I'm paying them all as we go along. That's what you get as a reward of home ownership. And if you don't have an emergency fund and you're not in love with this house that you're buying to make it worth all this work, β you don't need to be buying a house. Right? If you don't have an emergency fund to pay those people,
Chelsea Jones (09:25)
Yeah.
Nate Reineke (09:55)
and there isn't a really good reason for you to be buying, meaning like the payment is really high versus what renting would cost, we are in an environment right now where that's okay. But here's the good news. All these people that are telling you to buy, they had a great experience with housing because they saw their house go up in value. And I still think houses will go up in value over the long haul. But even they don't have
Chelsea Jones (10:16)
in.
Nate Reineke (10:24)
a huge portion of their net worth tied into their home. So waiting a year or two, you are not like the average person in this country where 70, 50 % of their net worth is tied up in their house by the time they retire. A smaller portion of your net worth will be tied up into your house. That means that you don't have to squeeze out every little angle of housing just to be on track for retirement.
be financially successful. So wait a couple years, 18 months, find the right time for your family and you will be just fine.
Chelsea Jones (10:54)
Yeah.
Yeah, not to mention this doctor said that he's been attending for 18 months. I've never met a doctor who kept the same job their entire career either.
Nate Reineke (11:12)
That's right. Yep.
Chelsea Jones (11:13)
So
you may have an idea if you want to stay at that job after 18 months, six months from now, you could also decide that you want to leave because not because of the housing market or school districts, because you just need a better job.
Nate Reineke (11:19)
Yep, it's totally true.
Mm That's that's interesting that you said that. β We've we've obviously and I've obviously done this many many times because β on that same call we were discussing whether or not they should change jobs.
Yeah.
Okay, what's the next question?
Chelsea Jones (11:43)
Next question's from a retired oncologist in Oregon. They said that my expenses are pretty sporadic. β Whenever I had a regular monthly withdrawal set up previously, I found that the cash just started to build up in my checking account. What do you think about me taking withdrawals out in chunks instead of monthly? Which, I thought this was interesting because it also gives a... β
Nate Reineke (12:03)
Hmm.
Mm-hmm.
Chelsea Jones (12:12)
of a juxtaposition in my planner brain and in my working with actual clients that are retired brain. Because in the plan, we're like, β $10,000 a month. You're going to have $10,000 a month to spend. When in reality, your home's paid off. You own your cars. You have to pay property taxes every year. Most of your expenses are not monthly. And if they are, it's like Netflix.
Nate Reineke (12:39)
That's right.
Chelsea Jones (12:41)
It's okay. You can, you have eight bucks to pay Netflix, right?
Nate Reineke (12:42)
Yeah. Right. When we're doing this, this,
spending plan, it's like, well, you know, you'll need, let's say a thousand dollars a month just to upkeep on your house. But if you own a home, you know that it's like, you don't spend anything one year and the next year you're replacing a roof, but that's mixed into your monthly withdrawal. doesn't, you know, but they don't spend it monthly. I think that's a
Chelsea Jones (13:11)
Yeah,
Nate Reineke (13:11)
Really good point.
Chelsea Jones (13:13)
it is. Yeah. And I, β we talked about it and I was all in favor for taking it out in chunks because I think it was a great idea. Cause would you rather have cash building up in a checking account that's earning no little to no interest, or would you rather have it working for you in your brokerage account and you can just take it out when you need it? Is the taxes, there's no, there's no tax benefits taking it out monthly as opposed to chunks.
Nate Reineke (13:32)
Mm-hmm.
Chelsea Jones (13:40)
you're probably going to take out the same amount each year, whether you take it out monthly or in chunks. And then if you take it out in chunks, you might even use less because you found that, you know, you're not in a year where you need to spend $20,000 on a roof. β
Nate Reineke (13:54)
Mm-hmm.
Chelsea Jones (13:56)
So yeah, I think it makes total sense to take money out in chunks when you need it. It's not like the money is not there for you. It's still in your brokerage account. You can still take it out. It's just not in your checking account. It's working for you. You take it out when you need it. It'll continue to grow in your investment account.
And everything will be totally fine.
Nate Reineke (14:18)
Yeah,
mean, essentially it's and it's, you know, less than, I don't know, there's less planning you have to do, I guess, because you're like, what do I do with this extra money? β The only thing I can think of, and I don't even know if this would be true, but I was trying to think like, yeah, what doesn't make sense about this is just if you get in the habit of pulling out a really big chunk way too early, you know, like you kind of do want to,
Chelsea Jones (14:30)
Mm-hmm.
Yeah.
Nate Reineke (14:47)
automate this, maybe you just take out less, you know, rather than $10,000 coming out a month, you take out seven. And then, you know, at the end of the year, if you need the 30 grand that's sitting there, you take it out then. But you don't want to be taking out like $100,000 out for the whole year. Take it out in a big giant chunk. But that's sort of semantics. mean, like basically, the idea, the spirit of this is, yeah, leave money in there in the account.
β until you need it.
Chelsea Jones (15:19)
Yeah, yeah, because this client in particular, it's, you year end, she's got priorities that she wants to give to, it's Christmas, she wants to buy gifts for her family. She knows how much she needs. And so she was like, can I just wait and take it? Yeah, you can. It's no problem at all. Okay.
Nate Reineke (15:29)
Yeah.
Yeah. Yeah, no problem.
Chelsea Jones (15:44)
So the next question is from a pediatric anesthesiologist in Texas. They said, my work now offers a mega backdoor Roth option. How do I know if it's a good idea to do it? We're getting more and more about these mega backdoor Roths and Roth accounts in general with workplace plans.
Nate Reineke (15:58)
Yeah.
Yeah, I want to just kind of give what we're hearing and then kind of get the response that I'm hearing from people and then I'll have you explain a bit of what it is. We've explained it before so we can be brief about it. And then I'll give kind of my perspective and I want to hear what you think about it. But basically what happens is you get you get your employee benefits and you see new mega backdoor Roth is offered. This is after tax.
β contributions that can do an in-plan conversion over to a Roth. That's the high level. It doesn't make a whole lot of sense to people sometimes because it's Until, you know, a year or so ago, we hadn't seen a whole lot of it either, right? So, β but what I hear from people is they come to me and they, out of nowhere, they're like, they want to do anything possible to fill this account up.
They just want to fill it all the way up. And β then I hear it go into like, should I be doing all Roth? Like even my employee employee contributions, the normal contributions I've been doing in my pre tax, the pre tax side of this. So I just want to remind everyone and let's be careful here. The most valuable money that you can put away in your workplace accounts will be pre tax money. This is for physicians, right?
Chelsea Jones (17:25)
Yes.
Nate Reineke (17:26)
You pay so much in taxes now you want to defer those that tax bill until later when your tax bill is lower. So the difference between what you've been taught maybe when you're younger or what the average person is when you're if you're talking money with your friends that aren't doctors that don't make several hundred thousand dollars a year. The difference is is that Roth is better for them because they won't be able to arbitrage their taxes.
They're going to pay roughly the same amount of taxes in retirement as they do today. Roughly. So but for you, you're paying much more now in taxes than you will in retirement. So pre-tax is better for you. So that but that doesn't mean you don't do any Roth. Roth is still awesome. It's still great. But you it's just secondary to pre-tax. So should you do this? I mean, of course you should do this.
It's a great idea to put money into Roth. This is another option. You don't do it before you do your HSA and you do your β pre-tax contributions into your 403 BR-41K. β But now that I've kind of, I think that's how most people are reacting to this. I wanted to get that answer out there. Can you just really quickly tell us what a mega backdoor Roth is?
Chelsea Jones (18:43)
So the mega backdoor Roth, the strategy is the same as a backdoor Roth IRA. know a lot of our clients, a lot of the listeners are familiar with the backdoor Roth IRA, where you essentially pass the money through the traditional IRA and put it into the Roth to bypass the income limits. You make too much to contribute directly to a Roth. So it's got to pass through the traditional IRA first. It's essentially the same.
Nate Reineke (18:50)
Mm-hmm.
Chelsea Jones (19:09)
with the mega backdoor Roth, except it's with bigger dollar amounts and it uses your 401k or 403b. So you make these after tax contributions, which in the IRA example would be your non-deductible contributions. You pass it through the tax deferred account or the traditional account and do the in-plan Roth conversion, which moves it to the Roth side of the plan.
Nate Reineke (19:14)
Mm-hmm.
Mm-hmm.
Chelsea Jones (19:37)
or
through a Roth IRA if it makes sense to do that. So you're essentially just passing these after-tax contributions through a tax-deferred account because you're just not able to put them directly into the Roth. That would be a Roth deferral. So yeah, you're passing it through. Ultimately, it lands in the Roth where it can grow tax-free, which is great.
Nate Reineke (19:52)
That's right.
Yeah, so really high level, like the mechanics of how this happened can feel complicated. But at the end of the day, you're just getting money into a Roth, right? It's like getting money into a Roth IRA, but the limits are higher. So the question that the actual question that I think people should be asking, whether or not they actually do or don't ask this question is a whole nother thing, is when is it a good idea to do this? And that's what this, this
Chelsea Jones (20:14)
Exactly.
Nate Reineke (20:31)
β physician asked me, when is it a good idea? The money. So you have a plan, you have a retirement plan. It's like, fill up both of your 401k, fill up your 403b, fill up your HSA, you know, do all these things. And then at the end, when it's like you still need to save more money, you should be contributing to a brokerage account. OK, the only money that belongs in a mega backdoor Roth
would be money that otherwise would have been put in a brokerage account. Any pre-tax, know, HSA money, all of the pre-tax money, cash balance plans, that should happen first. And then if you still need to save more into a brokerage account, that brokerage money can now be shifted over into your mega backdoor Roth. Okay. Now, β what's odd about this to me is everyone looks at this and says like,
Chelsea Jones (21:06)
exactly right.
Nate Reineke (21:30)
Well, almost like an oppo, it's an opportunity that they feel like they need to stretch their cash flow really thin in order to take advantage of it. And I do understand that quite a bit just because you don't have all these opportunities. Like there's only so much you can put in and they don't want to miss the boat. But this is a good idea to take a step back, look at your plan, look at your goals. And if your goals are accurate, then you should
you should be asking yourself the question, how much must I save to have enough, to have enough to retire, have enough to send my children to college? Ask yourself those questions before you stretch yourself so thin. Like I had somebody that wanted to dip into their emergency fund to do this, right? Don't stretch yourself so thin here. It's just another Roth savings opportunity. And for a lot of people, not all, but...
Chelsea Jones (22:18)
Thank
Nate Reineke (22:27)
A lot of people, they don't need to even make the maximum contribution to their mega factor Roth in order to achieve their goals. If you have extra money, go for it. Right. It's a great opportunity. β But I think it's important to have perspective here and to know what you actually need to retire rather than just looking at kind of opportunistic savings plans.
Chelsea Jones (22:48)
gotta know why you're saving, not just throwing money in accounts because you think it's the right thing to do, because it might not always make sense. There might be something else where that money is better put to work.
Nate Reineke (22:51)
Yes.
better put. You know, if you β we talk about this a lot, but there's a lot of small things that come out throughout your life. The emergency funds, paying cash for things, paying down a high interest mortgage, paying down your student loans. All those things come into play. You need to get on track first and then look at those other things in your day to day life. If those things are taken care of and you have extra cash, throw it in here. mean, max it out. just take that into account.
You don't hear us, you know, our audience doesn't hear you and I talking about this because nobody can retire just off their 403B. Right. So of course we say always max that out. No, most people can't retire just off their 403B in a backdoor Roth. So of course we say max that out. But now we're getting into this territory where employer plans. I mean, there's a lot of money that can be saved in these plans. And if you're starting early enough, there's a chance that β you could over save. Just depends on
Chelsea Jones (23:38)
Right.
Nate Reineke (23:59)
You got a pension and a mega backdoor Roth. It's like you might be set. So just just be careful not to forget about today when you're saving for tomorrow.
Okay, I'm gonna close this out here. Thank you everyone for listening. If you liked this episode, please be sure to subscribe. We release a new episode every Wednesday so you don't miss it. β If you'd like to work with us, you can go to physicianfamily.com, schedule an interview, and if you aren't ready for that, you can send us a question at podcast at physicianfamily.com. We promise to answer every question even if it doesn't make it to the show. And until next time, remember, you're not just making a living, you're making a life.
