Nate Reineke (00:13)
Hello, physician moms and dads. I'm Nate Renneke, certified financial planner and primary advisor.
Kyle (00:18)
Kyle Hesley, certified financial planner and retirement investing specialist.
Nate Reineke (00:24)
Good to have you back, Kyle. We're talking investments today since that's your ⁓ main area of competence. That's what we say around here, but really it's your specialty. So ⁓ yeah, I'm going to get right into this. Kyle, you got two and I got two. At least that's how I view these questions. ⁓ First question is from a dermatologist in New Jersey. Is VOO enough exposure to the US market right now?
So Kyle, first of all, what the heck is VLO?
Kyle (00:56)
VOO is a exchange traded fund offered by Vanguard at Target's owning the S &P 500 essentially.
Nate Reineke (01:05)
S &P 500, okay. So it's interesting. I want to even take another step back. This is like a big, this is what certain people would describe as an index fund. And typically it's like VOO and then VTI. Those are kind of the funds people talk about. What I think is interesting is I follow people online.
that talk about investing that I wouldn't take their investment advice and I follow them as a way to understand how other people are getting their information. So a funny ⁓ thing is every time Chelsea and I get the same questions over and over again, it tends to be something that's going around online. And the way kind of these online creators work is ⁓ if one person answers a specific question, the next person gets their idea.
content idea by answering the same question their own unique way. And so I thought this was a good question because I hear VOO and VTI used as if they are interchangeable. And so I thought, well, we got it. This is a great question for that. ⁓ what's your so I'll read the question again. Is VOO enough exposure to the US market right now?
Kyle (02:24)
You know, it's a really good question. the part that is hanging me up a little bit is the right now part, because to me, right now, tomorrow, yesterday, it's all the same answer. So the timing of it really has, to me, no bearing on this answer at all. ⁓ In my opinion, VOO is not enough diversification. An example, and you threw out VTI already, which is the Vanguard Total.
Nate Reineke (02:37)
Yeah.
Mm-hmm.
Kyle (02:53)
US stock fund. Just looking at the number of holdings in each of these two funds, the VOO invests in 500 or so stocks in the United States. VTI invests in 3,500 stocks in the United States. that's right away. You can see the magnitude of diversification you get with a fund like VTI for the total US stock fund versus the S &P 500.
Nate Reineke (03:02)
Uh-huh.
Mm-hmm.
Yeah.
Kyle (03:22)
And
diversification is important because when you're so concentrated in a small number of companies, your performance is at the whim of those 500 companies. And of those other remaining 3000 companies out there, there's going to be some winners. And you don't know which winners those stocks are going to be. But wouldn't you want to capture those returns when they do have their day in the sun? And conversely, when
the funds in the SP 500 have their rainy days, you want to potentially capture the positive returns in these other companies are not having their rainy days at the same time as a way to average out your returns and smooth out your volatility a little bit. So diversification is important for those things.
Nate Reineke (04:07)
Yeah. What I heard you say there, you didn't directly say it, but part of the reason we recommend index funds like VTI, where you're buying 3,500 stocks rather than 500 or 550, whatever it is in VOO, is literally to minimize regret. And it's because we're not making any assumptions about which one's going to win this year or next year.
It is, we don't know which one of these companies is going to be a winner. So we're going to buy them all. And that sounds like we're riding the fence because we are. Because we are. Like you should buy them all because if you buy the S &P 500 and it's more volatile because there's less companies, you are not, I mean, it just doesn't feel good. And if you're saving enough money, it has less to do with
exactly where every dollar is and more to do with how much money goes in your plan or how much money you are investing. this year, ⁓ if you're an S &P 500 investor, you've missed out on a lot of small cap returns, which are smaller companies. And ⁓ you can make an argument that VOO is diversified.
You know, lots of people try to make that argument. In fact, I know people that argue they only need 20 stocks to be diversified. You know, most of the time, you know, if they're the top stocks in the S &P 500, they're doing pretty good. But there are going to be some tough years. And in those years when those top stocks are down, ⁓ it's going to be painful. So why not put five, 10 percent of your U.S.
stocks leave somewhere else, which can be accomplished all by buying 3,500 stocks in VTI. So I'm with you. think, oh, one more thing. This is a little us nerding out a little bit, but I heard this week, I think at least, you know, the magnificent seven, which is the top seven stocks in S &P 500. This is like Facebook and Google. Many of those are trading at like 30 times or 50 times earnings.
I mean, they're really expensive right now. So to put all your eggs in, it's not all in one basket, but to put them all in the S &P 500 basket, I just think ⁓ you're in for volatility and whether or not it proves to be better or worse than VTI over 30 years yet to be seen. But ⁓ I'm buying small cap with my S &P 500.
Kyle (06:59)
say that building a good retirement portfolio is not about making sure you die rich, it's about making sure you don't die poor. And the best way to avoid losing a whole bunch of money right when you need it is to diversify away that risk as much as you can. And I just think, I think when I when I think through that lens, if I had the choice of owning 500 stocks versus 3500 stocks, I'm going to go up to 3500 stocks.
Nate Reineke (07:06)
That's right.
Yes, me as well. Okay, next question is from a double doctor family in Oregon. Should we invest in a condo for our daughter who is going to undergrad and medical school at the same college starting next year? This, ⁓ you know, I hate to do this to everybody, but it obviously depends, right? It depends on you, depends on your scenario. But I have kind of two angles for this. One.
That's a lot of college. It's a lot of years spent on rent. So ⁓ that many years spent on rent and that money is just gone, it can be tempting, especially if you know your child is actually going to go to that school for undergrad and med school. That's not always the case. They don't always go to the same school. There might be a transfer and then you're kind of in a bit of trouble if you start buying real estate. But at the same time,
You know your child best and maybe that works out for you where they do stay at the same school. So let's just say ⁓ right off the top, I don't believe this to be really a traditional investment, a good traditional investment. Condos don't tend to work out all that well because they have HOA fees and they just don't appreciate like other real estate. ⁓ So, you know, in today's market,
⁓ I just saw this the other day too. It was a chart of all the cities and states where renting is cheaper than buying right now. And it's most of them. Oregon's kind of right in the middle. It's kind of to do whatever you like. ⁓
For this family in particular, they are really confident their child's gonna go to school at one place for several years. And they have plenty of money for college and retirement. They are overfunded. So all they're thinking about is how do I not throw money away on rent? And so for them, and by the way, they are also pretty familiar with buying real estate.
They don't buy real estate as necessarily an investment, but over many, years, they sort of have fallen into a couple of real estate properties. ⁓ So they are very comfortable not getting a great return and instead just not losing money, which is in a way sort of a return. So I would say it depends, but in general, there is this ⁓ another theme I see out there on the ⁓ intranet.
is that people will say, you know, buy a rental property now so your child can go to, ⁓ you know, have the house for college and save money. That's all pretty much a bunch of nonsense. There's no specific strategy to doing that for your child. Buying real estate isn't always a terrible idea. And if you want to replace the carpets and the floorboards every year, you can buy a house in a college town. mean, it'll rent. It'll get beat up, but it'll rent.
⁓ So you could do that, but there's nothing specifically ⁓ beneficial about buying a house for your child to go to college. I 529s saving for college and getting the Dax free growth is still ⁓ the number one choice in my opinion. So it always depends, but in this person's case, double doctor family with plenty of cash to do it, not the worst idea in the world.
All right, next question is from a radiologist in Texas. I received a $300,000 inheritance. When is the right time to invest it? And what should I invest in?
one's for you.
Kyle (11:12)
Yeah. Well, the simple answer is you don't need to do anything different with this money. You know, you, you have your other goals. They need money, you know, retirement college. This is a windfall, ⁓ where you've, you've came into some money that you didn't have already planned for or wasn't already allocated. And I would pick which I would just pick a goal that you have that needs some extra help.
and apply that money to that and invest it the same way you're already investing for that goal. know, college comes to mind first because it's the shortest time horizon. And, you know, maybe you super fund your college and get it all locked in and invest it according to how you're investing currently for college. Maybe you ⁓ want to pad your retirement and have more money to spend in retirement or you want to maybe see if you can retire a smidge earlier. ⁓
Nate Reineke (11:42)
Mm-hmm.
Kyle (12:10)
or have the option at least to potentially, you know, so invest it for retirement. But there's, I think some clients fall into that, that back of the envelope calculation where they just kind of start putting things in buckets and they go, well, this is different money from a different source that ⁓ I need to do something different with it because it's different. And that's, I just don't think that that's the case. I think that, that this money should be used. I mean, you already have your goals lined out. You already have
your strategies in place, this money should just be slotted into one of those.
Nate Reineke (12:43)
Yeah, there's emotional ties to the money. I think that's what happens. know, when people get money from specific places, from grandma, grandpa, mom, dad, ⁓ they just, they want to honor their parents or they want to honor their grandparents. And so it's interesting to see ⁓ their ideas that come out of it. It's like, you know, whatever it may be, whatever they think is them. Here's the thing. My
interpretation of this is, I want to be prudent with this money. Tell me what to do to be prudent with this money. And the odd thing is to assume that they aren't already being prudent with their money. Investing for college, investing for retirement, paying down a mortgage, building an emergency fund, that's all prudent things to do. So ⁓ there is no difference. And it's just getting over that emotional hurdle. Now, I will say, I liked your idea about college.
because it's not very often that you do get a windfall. So where this money goes exactly might change ever so slightly, ⁓ but it's probably it's one of the three or four buckets that that accomplishes your goals. So, you know, not very often do you have three hundred thousand. Maybe you could pay off your mortgage, clear it, and maybe that feels more prudent and it feels like it would honor your parents more. That'd be fine. That's a good choice. ⁓
If you have young children, I love college because in the beginning is when they're zero through five or six years old is really the time that you have the biggest opportunity for tax-free growth. So it's really, really nice to get a leg up on college and college is expensive. So it helps with cashflow too. But more often than not, ⁓ when you're getting inheritances like this, it's later on in life. And just like you said, I
just put it in retirement accounts. ⁓ Would you invest the money, the strategy of how you invest this money? Would you do that any different?
Kyle (14:46)
I mean, I already have your strategy in place. It's it's, you you got to get to eat your own cooking if you will. I mean, that's why we have investment policy statements that have guidelines on how to invest. That's why we have in our disciplines that we follow so that we, you know, try to take as much of the guesswork out of this as we can. Part of the question you asked was, you know, the timing of it had a timing component to it. And
Nate Reineke (15:03)
Mm-hmm.
Yes.
Kyle (15:16)
this goes back to that age-old discussion of do I lump some invested or do I dollar cost average it over time, meaning do I invest small chunks over a certain period of time? And that's always going to be a risk question. It's going to be what's your tolerance for risk? If you're worried that the market's going to have a downturn in the short term, then you'd want to dollar cost average it over time to reduce the risk of investing it all at once and having that market.
have a downturn right after you invest it. But of course, if you have enough time to absorb those losses, then maybe putting in an alum sum isn't really a big deal, you know, if you have enough time to let it rebound. There's this interesting study done by Vanguard where they look at past returns and they pick random periods of time in history.
With the known returns and go what happens if I invest a hundred thousand all at once on this date and what happens if I spread that hundred thousand out over ten months at ten thousand a month What returns would I have gotten in these prior periods and they do this sampling of a whole bunch of different periods? The result of the paper was a 70 % of the time lump sum investing had the better outcome versus dollar cost averaging So if that paper is an indicator of anything it shows that you know
Nate Reineke (16:30)
Right.
Kyle (16:37)
put it all in all at once. If you can stomach the risk of doing that, you have enough time to absorb any losses and have rebounds on the money, then lump sum is actually, according to Vanguard's study, the way to go. But not all of us are that risk tolerant, ⁓ and in which case dollar cost averaging, I think is a more feel good way to do it and not have to worry so much about it.
Nate Reineke (17:00)
Right. And you know, if you do it within
six to 12 months. It's really not that big of a difference of the return. know, so if it helps you sleep at night, you can drip it in. ⁓ if just so everyone's listening, if you ask Kyle, he's going to put it all in at once. So you have to tell him. ⁓ But yeah, that's good. I think it's the same as if you got a three hundred thousand dollar bonus. Just doesn't feel that way. So it's nice to have
you know, third party like Kyle or Chelsea or I to just kind of walk you through that. But it's just it's going to go toward your goals. Not going to, you know, blow it on something ⁓ meaningless if you're putting it toward your goal. And I don't think anybody, any of your whoever you inherited this money from will ever will care or won't be happy with putting it toward college or retirement.
Kyle (18:00)
Yeah, and the other thing too that I think is, for me, is appealing to me anyways, individually, is you talk about paying off the mortgage, and I said ⁓ superfunding college, right? Well, there's a regular cashflow that's going into these goals, paying your monthly mortgage payment, saving into college every month. You get this windfall and you check one of the boxes on one of those goals, you get that cashflow back.
You know, you're no longer saving. You're no longer paying down your mortgage. You could turn around and open up a vacation savings and start sticking your monthly mortgage amount into a vacation savings and take a really nice vacation every year or two or twice a year even. there's sometimes I heard this from our clients, like I inherited this, this account from my mom or my dad. And they told me to have fun with this money. They want me to go out and enjoy life with this money. But then you're, you're, you feel a little stuck cause you're like, well, like you mentioned, we all wanted.
Nate Reineke (18:27)
That's right.
Mm-hmm.
Kyle (18:56)
be good stewards of our resources and make the prudent decision on how to use this money. Well, you can do both in my opinion, because just like I said, if you super fund college and you're not saving for college anymore, you turn around that monthly cash flow you're putting into college and you can save into a vacation savings and go out and have fun. And it's the same difference, but you get that satisfaction of checking that box, knowing that your kid's college is saved or your mortgage is paid off. And then meanwhile, you can take a worry, a stress-free vacation because you've saved cash to
Nate Reineke (19:02)
Mm-hmm.
Kyle (19:25)
to take this vacation. I think that you can achieve both if you make the right decisions with this money versus just going out and spending it all and then it's gone and the opportunity was lost.
Nate Reineke (19:36)
I totally agree.
Yeah, I think that's a great point because ⁓ it's easy to, you know, accidentally double whatever you're going to spend on a car or whatever you're going to spend on a vacation when you have a pile that's $300,000 tall. But it's not so easy to do that. And maybe you take buy a more reasonable car or take a more reasonable vacation if you invest it and then save. But either way, you're going to do both because
You know, if you're if you don't have to save for vacation, you have extra money to put into retirement. If you don't to save more for retirement or college, you have extra money to put in vacation. So I'm with you. I like that. At the very least, do a little bit of both. Just write down like, know, you probably have one hundred thousand dollars worth of short term goals and invest the rest.
All right, last question from a cardiologist in Florida. I'm planning on hitting my 401k limit for the year. And while my company says I can keep putting extra money in through after-tax contributions, they won't let me move that money into a Roth account. Is this a mega backdoor Roth and should I do it? Okay, I am seeing this more and more. ⁓
And I've tried to explain it a few times. I think I'm getting better at explaining this. So hopefully it comes out well in the podcast. But this is a classic, almost but not quite, mega backdoor Roth situation. So I am pretty sure, and we didn't really look into this years ago before mega backdoor Roths were popular and kind of a thing.
But I'm pretty sure this whole after tax contribution thing into your 401k has been a possibility for a long time. You can make after tax contributions. It's just that now people are looking for it. They're looking for this after tax contribution. ⁓ And they assume that if you make after tax contributions into your 401k, that that is what a backdoor or mega backdoor Roth is, but it isn't. So I'm going to take a step back and explain this.
⁓ For physicians, high earning individuals, you want to be deferring the most money that you can, meaning not paying taxes on it now, therefore paying taxes on it when you withdraw it in retirement. And that is because with some strategic withdrawals, you can most likely keep your tax rate rather low compared to what your tax rate is now. So you're going to defer now when you're paying a whole bunch of taxes.
start paying taxes when your rate is a lot lower. Okay, so that's the strategy. sometimes you'll look at this and you'll think people confuse this as well. Should I put my ⁓ my 401k contributions directly into Roth? The answer is no, you should do it into a pre tax 401k. After you do that, there is more room that could technically you could technically contribute more to a 401k.
which these are after-tax contributions. They won't let you defer any more taxes, but you could still contribute. You pay the taxes on the money and then you contribute more to the 401k. We'll leave it at that for now. There's some limits involved, but for today we'll leave it at that. That is great if there is a mechanism inside of the 401k that allows you to convert it to a Roth.
move it to a Roth account. Okay, so you make these after-tax contributions and then they do an in-plan Roth conversion, meaning there is a mechanism set up in the plan to convert that money over to Roth, then you're in good shape because then the money is growing tax-free. But if there is no mechanism to do that, then your after-tax dollars are growing and they will be taxed at ordinary income rates.
So imagine, Kyle, you put in $10,000 after tax and it's growing and you worked there for 20 years. You just put that money in after tax. It gets taxed at regular ⁓ income tax rates when it could have went into a brokerage account and been taxed at long-term capital gains rates. So the answer is no, this isn't a mega backdoor Roth. And unless you have very unique situation, which I can think of a couple.
⁓ You shouldn't be trapping that money inside of a post-tax money inside of an account that's going to tax the gains at a high rate. So the situation where you might do this would be, let's say you're going to retire on January 1st, 2027 and you put all this money in post-tax and it can be converted over to a Roth IRA.
So when you retire, you move that money out, that after tax money into a Roth IRA. That would be a good idea because it's not going to sit in there for very long. You might consider doing that. ⁓ most plans won't allow you to move this money to a Roth IRA if you're still working. So they don't do what they call in-service distributions. So here's the key. You have to be able to contribute post-tax dollars and
There has to be a mechanism to convert the money. Otherwise, you have to be a special case. So when you see this post-tax dollars language in your 401k packet, just ask HR, can we do in-plan Roth conversions? They'll probably tell you to call Fidelity and Fidelity will answer.
How'd I do?
Kyle (25:23)
Good, it's good stuff. Yeah. And that mechanism, can be tricky to find. I get where this question is coming from because I've seen a ton of 401k plans and sometimes you see three buckets. You see the pre-tax deferral bucket, you see the after-tax bucket, and you see the Roth 401k bucket. But that doesn't mean you can do a mega backdoor Roth. There has to be something in the planning document saying that this is an allowable mechanism to be done.
Nate Reineke (25:24)
Yeah.
Yes.
I
Yes.
Kyle (25:53)
So just because you see the buckets, the accounting buckets, doesn't mean that you have the ability to do that mega backdoor Roth conversion. And unfortunately, clients fall prey to that assumption and they put a bunch of money in the after tax. And then we see this and we go, and then we do some research and we go, there's no mechanism to convert this to the Roth. So that's a great question. It's a great question to pump the brakes and do your research first before you start putting money in there that you can't get back out.
Nate Reineke (26:13)
That's right.
Yep, that's exactly right. You have ask before you contribute. Ask HR. All right, thank you everyone for listening. If you like the show, please be sure to like the show, subscribe. You can rate us wherever you're listening. And if you'd like to work with us, you can visit physicianfamily.com to schedule an interview. If you aren't ready for that, you can send us a question at podcast at physicianfamily.com. We'll answer it even if it doesn't make it on the show.
Until next time, remember, you're not just making a living, you're making a life.
