Nate Reineke (00:00)
Hello, physician moms and dads. I'm Nate Ranicki, Certified Financial Planner and Primary Advisor here at Physician Family Financial Advisors. Thank you all for being here today for another episode with some great questions. I am running solo today. My other partners are out saving you money on taxes and writing you plans that help you feel secure, along with rebalancing your portfolio and all the other things we do behind the scenes. So it's just me today.
to answer your questions. I'm gonna get started with one from a urologist in Maryland. He said, our practice is being purchased by private equity. Do you think we should take our payout in P shares or cash?
This is a tough question, β mainly because there is some fear of missing out. That really is what it comes down to. β And there's also some politics at play here. So whether or not you take the PE shares or not, you know, when you're asking your colleagues what they did or your new boss is wondering what you did, how much buy-in you have into the new practice, that all comes into play.
β But the reality is that PE equity is a liquid. It's also oftentimes leveraged and it's obviously concentrated. So β some of these deals do very well, but many are mediocre and some can even disappoint. So I would be cautious when considering whether or not to take this all out in β stock or shares.
β The real reason not to take the shares is that just like we talk about all the time on this show, we really value diversification. And this is about the furthest thing you can get away from diversification. β Now, that being said, you were already concentrated in your practice and in this business.
Right? This was already a thing. You put a lot of your time, energy, blood, sweat and tears and money into your private practice. So the real question is, do you want to do this again? Or do you want to kind of cash in your chips? And I believe it is probably time at this point for a lot of people to cash in their chips. And β
That is just from my perspective, the diversification is worth a lot. But the cool thing is this is usually not an all or nothing deal. If equity is offered, you could easily say, I'll take some equity and a whole bunch of cash. You take enough equity sort of to benefit β if things go up or if things go really well.
And then you take a whole bunch of cash to where you're not left with regret if things don't go as well. β I would ask you to ask yourself, if this were offered as a standalone investment, unrelated to your job, would you still decide to put this much money into it? Because many times the payouts are in the seven figure range. And the person who asked me this question,
It was the second payout and both of them were about $500,000 each. So if you had $500,000 in cash, would you invest in this private equity firm?
And β it may seem like you wouldn't because you haven't to this point, but remember that oftentimes this comes at a discounted rate. So you're getting these shares for discount. There is a lot that goes into this. At the end of the day, I think a prudent investor would β probably take most of the money in cash depending on their stage β in life, but taking a little bit of equity.
to continue to run your practice would not be a terrible choice either.
Next question is from a psychiatrist in New Jersey. We are financially independent but still working since we are in our mid 40s. We are considering shifting some money out of stocks and into bonds to get to a 60-40 portfolio. Is that a good idea for us?
β The fact that we're even asking this question makes me think this might be a pretty good idea. β If you are financially independent in your mid 40s, it's pretty unique. That doesn't happen all that often and it usually comes β because you're not big spenders. So high earning physician, you know, let's say you make seven, eight, hundred thousand, maybe a million dollars a year.
but you spend like an average physician, maybe you spend $10,000 month. That's a whole lot of saving. if you just did, β if you just invested in a reasonable portfolio, you're going to have millions of dollars at this point for this person. They had between four and five million at 45 years old and no intentions to spend a whole bunch more money. In fact, they like working. So the question is, should
we buy more bonds. I'll say, I'm going to answer this question from the perspective of 60-40, but that is unique to each person. If you're 90-10 at 45 years old, if you're 90 % stocks and 10 % bonds, you don't have to shift all the way to 60-40, but maybe you shift 80-20 or 75-25. You just make a shift toward bonds and potentially make a bigger shift toward bonds as you move forward.
As far as for this family, they asked about 60-40. I do tend to like a 60-40 portfolio. I was talking to Kyle about this question and he calls this the all-weather portfolio. 60 % stocks is enough stocks to outpace inflation and capture a decent amount of the returns in a well-performing stock market. But it also gives you a significant amount of capital preservation.
from a volatile stock market period. it's just performed really well in, at least if you look at the history of the stock market with the 60-40 portfolio. When you're financially independent, you truly are, β your portfolio's job starts to shift from kind of being maximizing growth to really wanting to give you a high degree of reliability.
with your goals. And so you have to ask yourself this question, do I now value β stability and a β reduction of volatility and sequence of returns risk? Do I start to value that more than I need growth? Because the only reason a sane person, I know we don't all do this, but the only reason the same person takes any risk is if they need something for it. You wouldn't take risk if you didn't need it.
not all of us β do that, right? We get greedy or we make investment decisions off of fear, but in a perfect world, we would only take risk we had to take. So the question is, if you don't have to take it, why are you? Well, that is unique to each person's plan. If you are saying I'm financially independent, but barely, you'd probably have room to take some more risk at 45 years old while you're still working, right?
If this family says, I'm financially independent, if I only spend $8,000 a month, but I sure like to spend 12, you have a reason to continue to invest slightly more aggressively or continue to save more money. There is β many different combinations of decisions that come when you're making this decision about the 60-40 portfolio. For this family though, they had plenty of money.
They did not intend on spending a whole lot more. They loved work and they really just wanted the stability. So they did move to 60-40. And I think that that will prove to be a portfolio that will give them peace and more stability for years to come than, you know, let's say an 80-20 or a 90-10 portfolio.
Okay, an ophthalmologist in Georgia. We have all the money we need to pay for college. Should I take our money out of the stock market?
This is happening more and more lately, which is really encouraging. I see physicians that are actually prepared for college. So I'm sitting here and I'm imagining my children are five and seven. So I certainly don't have a full college fund yet. β But I'm sitting here imagining what if my oldest was 16 years old and I was a couple years ahead on the game and I had a couple hundred or even several hundred.
$1,000 and a 529 ready to pay for college You know, I've been saving for years and years and years It's ten years from now for me And I have all the money I need should I continue to leave my money at risk? This kind of goes back to the 6040 portfolio or should I? Take some risk off the table so, you know the question is
take my money, take my gains, of β lock them in or eke out a few more dollars of return. And assuming that you, the person asking this question, has planned correctly for high inflation, which the cost of college has, and you absolutely know you're ready to pay for college, I believe that it is better to lose some of the upside of being in stocks.
to gain some more certainty about being prepared to pay for this goal. Now, there's always some uncertainty about college. School choice, β inflation is high, so you can't be completely certain about if you're ready, but you can be really close, and this is the time for this person to take risk off the table. Now, β
There's also something at play here that is interesting. I get this question every so often and you realize when you really take a close look at these target date funds and 529s, you've already probably taken a ton of risk off the table. Most of your money is in bonds at 16 years old. So you'd be careful not to assume that you're in all stocks and you're taking a ton of risk.
Most of the time at 16 years old, you might be 20 % stocks. So that's a different question. Should you be all bonds? Should you be β all money market funds? β But realistically for most people, they are right on track for college or slightly behind and having β some of your portfolio and stocks as you're leading into college would be okay as well. This is talking about someone who is fully prepared and wants no risk, no volatility.
And for that person, think you can β make the choice to take all risk off the table.
Last question is from Hansurgeon in Florida. The surrender period of my variable annuity we purchased a while back is now ending. β We were told that we're only paying 1 % in fees on this account. Should we leave the money in the annuity?
man, so this is β interesting. You don't hear about annuities as often as used to, I would say. β The end of a surrender period removes only one barrier to leaving money in annuity. β But it doesn't necessarily mean that the annuity is a good long-term hold.
The things that factor into annuities are high fees. There's some tax consequences that are very unique depending on which product you bought. So I won't get into those and whether or not you get rid of it or not. β But there's high fees. And there are many times β a hidden expense here that isn't actually an expense. So I'm going to jump into each one of these. And I to be very
I want to be very careful here. β The way I talk about annuities, sometimes it can sound like annuities are wrong for everyone. And that is certainly not the case. Annuities are wrong, I believe, for most physicians that we speak with, because the physicians that we speak with are not retired. They have plenty of savings, so they don't need this guaranteed return. And they don't need an allowance. Many times annuities
can be for people who don't want to take any risk and they need an allowance. So just know that from the very beginning that I'm going to probably speak poorly about annuities, but that doesn't mean that they are a bad choice for everyone. So the first thing, only 1 % in fees. That is rarely the case. It's rarely the full cost. I think when I was asked this question,
There were some β &E fees that were 1 % but there's some kind of hidden β fees here. There's sub-account expense ratio fees, sometimes there are administration fees, administrative fees. β And costs with all of your investments are one of the very few controllable variables that you have. So that's why we care so much about costs. It's not that some investments aren't worth the cost. Many of them are, especially low cost ETFs.
But the reason we're so focused on them is just the one point of control that you have. You have investment selection and you have fees. Those are your choices here. So β if you can control cost, you should. So that's one big reason not to continue with a variable annuity is that the ongoing fees are still rather high.
And that doesn't account for the fees you paid upfront or the fees you paid to get it into the annuity because those are oftentimes very high. And the reason they are very high is because annuities come with a guarantee. A variety of guarantees many times, sometimes annuities have just a guaranteed rate. You get. 3 % return, 4 % return, whatever the guaranteed rate is.
Other times they come with a ceiling and a floor. So β they're guaranteeing that you won't lose money. And by the way, annuities are sold by insurance companies. So an insurance company says, β I'm going to β take this risk away from you and we're going to accept the risk. But in return, they want something. So you take no risk. The floor is zero percent. You're not going to lose money.
But what do they want in return? They want high fees and they want your upside. So there is a cap on your returns. So let's imagine you're in an annuity and you have a 0 % floor and a 5 % cap and you're tracking the S &P 500. So that means
you the rate of return you get goes up and down with the S &P 500, but there's a floor at zero and a ceiling at 5%. That means if in a $1 million annuity, which by the way, that's how much this annuity was for, if the S &P 500 returns 15 % and you only get five, then that year, that annuity not only costs you 1 % in M &E fees plus sub account fees,
administration fees, but it also costs you $100,000 in missed opportunity. Now that isn't a perfect example because you didn't take risk. So you don't get the $100,000 because you didn't take risk. So there is a trade-off here. But for many physicians that I know, that is not how this is sold to them. They look at it
It is sold by a slick salesperson looking for a high commission and they're just uninformed about exactly the costs and β the pros and cons of buying an annuity. And I just have yet to meet someone that once they hear all the pros and cons, they're all for putting a whole bunch of money in an annuity.
And that is probably some self-selection because, you know, the way I speak about them, so people come to me for advice about them, because they kind of want to hear that they should get rid of it. But again, I will just say, β annuities are for some. I don't believe they're great for the vast majority of physicians, but that does not mean that if you have an annuity, it's the end of the world. Some are better than others, and there are ways to untangle them if you...
think that you you purchase one that you're not happy with so you can always give us a call and we will work through it with you. So the question of should we leave the money in the annuity not because the surrender period period is finished that's not a good enough reason you need to evaluate whether or not the fees and the guarantees are worth the actual cost.
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