Nate (00:13)
Hello, physician moms and dads. I'm Nate Rennekie, certified financial planner and primary advisor.
Chelsea Jones (00:19)
And I'm Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family Financial Advisors.
Nate (00:27)
So Chelsea, every once in a while I get people who tell me they like listen that like the podcast and everything. And
Chelsea Jones (00:35)
Mm-hmm.
Nate (00:36)
it's always like a few years ago, nobody was listening to this thing. And now and I try not to look at the downloads and all that, because it's just like that's
Chelsea Jones (00:46)
Yeah.
Nate (00:46)
not why we're doing it. But
Chelsea Jones (00:49)
Right.
Nate (00:49)
you know, it's it's nice when people say nice things, but here's the thing, we still don't get
A ton of listener questions. I d I
Chelsea Jones (00:58)
Mm-hmm.
Nate (00:58)
don't know what it is, but I know they're out there because we talk to you know, we have hundreds of physicians that we talk to every day. And I want to encourage everybody to to ask questions. If you're just a listener and not a client, you can send questions to us. And I always ask at the end of the podcast. But last time I put out this this request, we got a few listener questions that week instead of just like one or none. So
If you are listening and you like the the answers that Chelsea and I give, you want some feedback, then send us your questions. Podcast at physicianfamily.com.
Chelsea Jones (01:33)
Yeah.
And you can always ask for a friend too. They don't have to be your questions.
Nate (01:37)
Yeah. There you go.
Okay. Speaking of, we have an asking for a friend question today. what is it, Chelsea?
Chelsea Jones (01:47)
Our asking for a friend question today is: How do I help my parents with managing their finances when I'm a novice myself?
Nate (01:56)
So I think I've gotten this question three times this year.
Chelsea Jones (02:00)
Mm-hmm.
Nate (02:01)
And reluctantly. One not so reluctantly. It was like, I'm not asking for a friend for a friend and I'm a novice
Chelsea Jones (02:07)
Mm.
Nate (02:08)
and I don't care. Please help. so it's been it's been kind of a oddly like rewarding thing to help people's parents because something something to note here, okay. I've I have
No research to back this, nothing. I just have realized this over talking to physicians about their parents' finances. And what I have come to realize is that the reason your parents feel like they're no good at personal finance is because until their generation, depending on I guess the age of person we're listener today, before
Chelsea Jones (02:49)
Mm-hmm.
Nate (02:50)
their generation, nobody really had to get good.
At personal finance. Like all you had to do, yeah,
Chelsea Jones (02:54)
Yeah. You had a pinch in, right?
Nate (02:57)
you had a pension. That's all it was. And so pensions have run dry. Many don't have them anymore. And for most of our listeners, your parents is the first generation that has had to ri to decide what to do with their money without a pension. And before that, and and to until this point, everybody just knew I spend less than I bring in and I'll be okay. Okay.
Chelsea Jones (03:23)
Mm-hmm.
Nate (03:24)
So this could, I mean, we could go on and on. They they there are a hundred things you could teach them and you could research for them, but the number one thing that seems to bring set you off like on the on the right foot is the really basic stuff. So what
Chelsea Jones (03:44)
Mm.
Nate (03:45)
happens, at least from my experience, when I see aging parents, their situation changes and
they are no longer in their comfortable, a comfortable place where they understand their their expenses very well. Maybe they've been living for years without really watching their expenses because they just naturally spent less than they made. So now they're on the cusp of retirement and they don't know what to do. Before you get into getting some help or getting them a financial advisor or whatever, what investments they should choose.
That is all sort of irrelevant or not helpful until they sit down, look at their expenses, and figure out how much they spend versus how much they have. And
Chelsea Jones (04:36)
Mm-hmm.
Nate (04:37)
something that should, this is something that should bring them some peace, I guess, maybe. Or or maybe they'll find out that they're in rough shape and they need some help. But the other thing
Chelsea Jones (04:49)
Yeah. It's definitely enlightening
either way.
Nate (04:52)
Either
way, yeah. The other thing though is it will force it forces you to sit at the table with them and them to show you their books, which
Chelsea Jones (05:01)
Mm-hmm.
Nate (05:02)
that generation also is not usually all that comfortable with. So if your parents are struggling, they're asking for some help, the first thing to do is just to become aware of what's going on. And so,
You know, you c even if you are a novice, you know how to write down what expenses they have and write down where their money is and how much they have. Okay. Getting help with Social Security and what asset allocation to have and what product to buy if they need it, which all may be very different than the products you buy, you buying index funds and being really aggressive is probably
Really different than something that they may need to do. I have done this with families together, and sometimes the right answer is some product that you will never need. You know, a a physician that saves really well. They may never need an annuity. But
Chelsea Jones (06:00)
Mm.
Nate (06:00)
somebody with $500,000 that spends $5,000 a month and is really worried about their money running out, it might be a better product for them, which is
Kind of blasphemous to say on this podcast, but they're in a different scenario than you sometimes. The other option, though what
Chelsea Jones (06:17)
Yes.
Nate (06:20)
I've seen more often than not, is they actually are doing fine. They
Chelsea Jones (06:25)
Mm-hmm.
Nate (06:26)
just don't have a great way to understand that they're doing fine. So maybe they've saved well and they just don't know how to turn their one and a half million dollar nest egg into an income.
And if that's the case and you can do, you know, some very easy math, you know, let's say you have one and a half million dollars. I'm pulling out a calculator if you can hear it, and you times that by four percent, which is the four percent rule. This is just really rough figures that you can do without showing them. That's five thousand
Chelsea Jones (06:58)
Yep.
Nate (06:58)
dollars a month.
Chelsea Jones (07:00)
Mm. Pre tax. Important to remember that, but
Nate (07:02)
pre-tax. And
then it's just, what do I do with Social Security? How do I get my
Chelsea Jones (07:07)
Mm-hmm.
Nate (07:08)
my my federal sponsored benefits, you know, with Medicare, and how much what's the difference? So if they can take out $5,000 pre tax and they have Social Security and they spend $5,000 a month, you know that at this point it's just find a professional to get the money invested correctly or optimally
Chelsea Jones (07:29)
Mm mm.
Nate (07:30)
for you.
And you have plenty and it's okay. You're just living on a fixed income now. so that that part you don't need to do. In fact, if you're a novice at this, you probably shouldn't do telling which product to buy. Yeah, what funds
Chelsea Jones (07:45)
Like what funds to buy, yeah.
Nate (07:47)
to buy if if they need some product you're not aware of. But just having them sit down and doing a new budget that they probably haven't done in twenty years is tends to like
start the conversation and bring clarity to their situation.
Chelsea Jones (08:03)
Yeah. And I as the person on the team who works with the retirees, I can't
Nate (08:10)
Mm-hmm.
Chelsea Jones (08:10)
stress enough how important it is to know your spending before you retire. Because unless you want to go back to work, you gotta you know, there's gonna be limitations based on how much you have saved. So it's just really, really important piece of information to have.
Nate (08:27)
Course, yeah. So you don't have to do it all here. most people I would consider, whether or not they know it or not, a novice at this stuff.
Chelsea Jones (08:37)
Mm-hmm.
Nate (08:38)
But every listener here is capable of writing down a budget for their parents, even if they don't want to do it themselves.
Chelsea Jones (08:45)
Yep. Mm-hmm.
Nate (08:48)
it's it's just gaining clarity.
Chelsea Jones (08:51)
Yep. Okay. Well, our first regular listen listener question comes from a urologist in California. They said, I want to help my children either buy a house or get started with a new family. Can I'm considering gifting them somewhere around a hundred thousand. How should I invest the money?
Nate (09:11)
This is a
Chelsea Jones (09:11)
What do you think?
Nate (09:12)
yeah, it's a very this is something I'm hearing more and more and more. So
Chelsea Jones (09:17)
Mm.
Nate (09:19)
I I'll get it's a tiny d I mean you could barely see it if I put it out in in the if I actually made it. It would be the smallest soap box you could ever see. It's just really small.
Chelsea Jones (09:28)
Yeah.
Nate (09:29)
'Cause I have the same worries for my children too. But I just I
Chelsea Jones (09:32)
Mm-hmm.
Nate (09:32)
I I may have said this before, but I know it's tough out there to buy a house. I know it's tough out there to launch.
But you graduating your child with no college debt, no student loans, and
Chelsea Jones (09:45)
It's a game changer.
Nate (09:46)
raising them in a way that shows them that they gotta earn and they have to work hard and it's gonna be hard and life is hard. Like life is pain, right? They they're gonna have to go
Chelsea Jones (09:57)
Mm-hmm.
Nate (09:59)
through that a little bit. And that is gonna be more impactful than this gift. But nonetheless.
If you have the resources, I'm off my little tiny soapbox now.
Chelsea Jones (10:10)
Mm-hmm.
Nate (10:11)
if you have the resources and you're like, you know, a nice little hundred K starter to buy a house, we'll give them a really nice leg up. And maybe, maybe you could even maybe it's even selfish. Like, well, if they're not saving so much money to buy a house, maybe they could go on a vacation with me. So, okay, we'll we'll
Chelsea Jones (10:28)
Mm-hmm.
Nate (10:29)
make it selfish so so that it's actually your goal and not theirs. like if you want to do that.
I think that's cool. And you the investing the money reminds me a lot of a college fund. And here's why.
Chelsea Jones (10:44)
Mm-hmm.
Nate (10:45)
Investing for retirement is this it's a strange thing because you're investing for a goal, let's say at 62 years old, my favorite physician retirement age. 62
Chelsea Jones (10:58)
Mm-hmm.
Nate (10:58)
years old. But then you gotta spend the money for like 30 years.
So if you're spending the money for thirty years, you don't just take it all out of the stock market. It's gotta last you thirty years. It's gotta grow. Right? College is totally different. You save for eighteen, you spend in four.
Chelsea Jones (11:17)
Yep, every cent.
Nate (11:18)
Every cent of it, probably a little bit more. If you're if you're
Chelsea Jones (11:21)
Yeah.
Nate (11:21)
like the rest of you know, the world that makes a nice budget and then and then when your child wants to go to more expensive schools, school you don't say no. So it's similar in that you have you have a time horizon, but the spending sequence is so qu so fast that y you're really just investing the way you should structure your investment is to where
You're being aggressive for a shorter time period and then quickly taking it out of the market. That's how you that's how it works for college. The only difference between this and college is that the the time horizon's a little longer. So it's like if it's a undergrad degree, it would be 18 plus four, right? So it's four extra years.
Chelsea Jones (12:09)
Mm-hmm.
Nate (12:10)
And the spending sequence is a little shorter. It's all in one year. Right. So if you wanted to invest
This, it would be the you could invest with the same strategy for college, just with a different time horizon. And most people, this isn't a prescription, it's just an observation. Most people invest aggressively up front for college and then slowly unwind kind of the stocks in their portfolio and their really heavy bonds and cash, even just a few years out from college. So if your child is just born.
You know, it wouldn't be a bad idea to I mean, it would be reasonable to be a hundred, ninety, eighty, seventy percent stocks, a more aggressive portfolio. But then as you get closer and closer and you really wanna have that that money, you probably can't take risk with it anymore. And so you wanna be
Chelsea Jones (13:04)
Yeah. I always tell clients
you don't want a market drop when you're writing a check.
Nate (13:08)
Yeah. Right. you're hoping the market doesn't move as you're trying to cash your check. So you
Chelsea Jones (13:12)
Yeah.
Nate (13:13)
want to avoid that. And depending on how tied you are to the goal, like the actual dollar amount, right? 'Cause let's say you're like, I'm comfortable
Chelsea Jones (13:23)
Mm-hmm.
Nate (13:23)
with writing a ninety thousand dollar check instead of a hundred, no matter what the market does. Well, you know, that's fine. Or maybe you write an extra ten out of your checking account. But if you really like if you want to stay true to this goal and that's the money and you want it to be a hundred K, then
s a few years out from writing that check, the money needs to be taken out of the stock market so that you don't see a dip before you write it.
I'm so curious to see how this will evolve. Cause this you I think this stems from the housing market. It's really expensive to buy a house.
Chelsea Jones (13:53)
Exactly.
Nate (13:54)
It's just really expensive to live, usually in the metropolitan cities that a lot of doctors live in. So, but don't don't lose the the like don't take your eye off the ball with college with this is my main kind of side note.
Chelsea Jones (14:10)
Okay, our next question is from a neurologist in Oklahoma. they said we currently work at a university. This is actually a double doc family. So husband and wife both work at a university where they receive a generous retirement match and they have access to a non-governmental 457B. but they said that they have the option to switch to the physician group side, where
They're still kind of affiliated with the university, but it's not you're not technically employed by the university. So it's a private practice or it's a it's its own practice. where they would receive 457 F contributions. So those are from the employer. A similar match percent when it's broken down percentage wise. they also get a non governmental 457B and the option for the mega backdoor Roth. And they want to know if they should switch from the university to the physician group side.
Nate (15:06)
This is a i interesting question because a lot of times, while retirement contributions are part of the choice to like change jobs, it it's
Chelsea Jones (15:17)
Mm-hmm.
Nate (15:18)
not really the main driver, location, like overall comp, what your kids are gonna do as the main driver. But this is like we're gonna keep the same jobs, benefits are different.
Chelsea Jones (15:26)
Yeah, this is
Nate (15:27)
What should we do?
Chelsea Jones (15:28)
yeah, this is a very specific scenario 'cause I started asking them all those questions. I was like, Well,
Nate (15:33)
Mm-hmm.
Chelsea Jones (15:33)
if you switch, do you get paid more? And they're like, Nope, exactly the same. I'm like, Well, do you get to work less? Do you like is
Nate (15:39)
Mm-hmm.
Chelsea Jones (15:39)
the culture gonna be different? All of that. They're like, No, it's all the same. So this was truly just a benefits question for them. which I thought was interesting. Yeah, I don't get it that much.
Nate (15:46)
Okay. So what do you what do you think? Yeah, that is and
I'm I it's very uncommon.
Chelsea Jones (15:52)
Yeah. because there is no material change in their actual work life or their homework life as a result of this change or potential change. I and I should say when they asked this question, the thing that seemed most alluring to them to switch is the option for that mega backdoor Roth,
Nate (16:14)
Mm-hmm.
Chelsea Jones (16:15)
which again is post tax contributions to your 401 care four three B that you can convert to Roth.
And so whenever we started talking about it and I and I found out that this truly is just a benefits question, I was like, in the long term, you don't want to give up your non govern your governmental 457B, which
Nate (16:38)
Mm-hmm.
Chelsea Jones (16:38)
is not subject to risk of forfeiture. There's no additional risk associated with having money in that account. You can transfer it, you know, all the good things that you
you people usually like about their 403B and 401k. You don't want to give that up for the possibility to do a mega backdoor Roth because the mega backdoor Roth is for physicians and high earners secondary to maxing out your pretax contributions.
Nate (17:08)
Mm-hmm.
Chelsea Jones (17:10)
so making the switch to the physician group side would be basically cutting their
pre-tax contributions that they make in half because they're going from four or three B plus governmental four fifty seven to a four hundred one K plus a nongovernmental four fifty seven, which
Nate (17:29)
Mm-hmm.
Chelsea Jones (17:30)
we don't like the nongovernmental ones. So we would just
Nate (17:32)
That's right.
Chelsea Jones (17:32)
recommend putting money into the four one K in that scenario. so you're essentially cutting your pre tax contribution maximum in half times two spouses, by the way.
Nate (17:45)
Yeah.
Chelsea Jones (17:45)
so it's a pretty large number.
but you're also adding additional taxable income with that four fifty-seven F because that account vests for them, it would vest every two years. So any
Nate (17:59)
Mm.
Chelsea Jones (18:00)
money that that employer puts in when it vests, it's paid to them as taxable income. So they're already high earners and that money
Nate (18:08)
So yeah.
Chelsea Jones (18:10)
is just gonna be taxed at their highest marginal rate.
Nate (18:12)
That's it. Okay. Man, that is I think it would I mean it would you you probably ran the math and that's the conclusion you came to. But it is interesting. A lot of people are very
Chelsea Jones (18:25)
Mm-hmm.
Nate (18:25)
interested in make it backdoor Roths. which I feel like a lot of the times when we talk about Roth conversions or we talk about contributing to Roth, it almost seems like we don't like it. We love Roths. They're great, but we just love
the tax arbitrage of contributing pre-tax now and then taking it out later. Everybody wants to eat their vegetables first and put money in a Roth, no matter the math. But
Chelsea Jones (18:56)
Mm-hmm.
Nate (18:57)
it just doesn't work out that way. And back to the the asking for a friend question. If your parents did know anything about money, they probably sang the praises of Roths their whole your whole life. Just like my grandfather
Chelsea Jones (19:08)
Mm-hmm.
Nate (19:09)
did this. And I remember
Talking to him about the people we serve, physicians and their situation, Roth versus traditional. And he could not even fathom that. He just shook his head, no, Roth always better. Roth good. And you're like, you know,
Chelsea Jones (19:25)
Rot good.
Nate (19:26)
you're like, Yes, it is good. But imagine grandpa, who probably paid no more than twenty percent in taxes a year his whole life. Imagine someone paid forty or fifty percent in taxes, and he just shook his head, no, Roth Roth better.
You know, so
Chelsea Jones (19:42)
Like
Q that that scene from the notebook where she's like, It's not that simple. She's screaming at him
Nate (19:48)
Yeah yeah. That's right. Yeah,
so so and I maybe you could tell me if I'm wrong. Maybe I'm missing something here.
Chelsea Jones (19:58)
Mm-hmm.
Nate (19:59)
There's no telling whether or not the university will eventually offer backdo backdoor Roth. Or I'm sorry, mega backdoor Roth. So yeah,
Chelsea Jones (20:04)
Yeah. The mega backdoor wrath. Yeah.
Nate (20:07)
take your tax break now. I and more income from the four fifty seven F, assuming that's part like
If you're looking at this as total benefit versus total benefit, and if they're the same, but one includes a 457 F, you're saying more income, more taxes, but it's really just I can get money into this Roth. probably not a great decision if you have this great benefit of the the governmental 457.
Chelsea Jones (20:41)
Yes.
Nate (20:42)
So save your taxes.
Chelsea Jones (20:44)
Save your taxes. Okay,
so the next question comes from a double doc family in Virginia. They said we have about twelve months of living expenses set aside for our emergency fund. Is this too much?
Nate (20:59)
Yeah. of course it always depends, Chelsea. But let
Chelsea Jones (21:03)
Mm-hmm.
Nate (21:04)
me tell you what it depends on. Okay. Doctors normally use their emergency fund for three things. This is what they normally use it on. Because unlike the average person, usually when your car breaks down, you just fix it. Like I have yet, yet to meet a doctor.
Who had to pull from their emergency fund for a $3,000 fix on their car. Right? In fact, normally at that point, they're just looking at buying another car. Right?
Chelsea Jones (21:34)
Yeah. Yeah.
Nate (21:40)
So you don't really use it for that. even the things that the average person might use their emergency fund on, like a roof, is never more
Chelsea Jones (21:47)
Mm-hmm.
Nate (21:48)
expensive than these three things I'm about to say. So these things, these three things cover the the
Typical what you would think of as an emergency. Okay.
Chelsea Jones (22:00)
Mm-hmm.
Nate (22:01)
It covers a hospital bill. Your, your, you know, the out-of-pocket maximum on your health insurance. It cover it, it is more than those things. So the three things that I see physicians actually need their emergency fund for, like the whole thing, would be
Chelsea Jones (22:17)
Mm-hmm.
Nate (22:18)
disability, like they go on disability, taxes, or
Some form of job loss or job change.
Okay. So let's look at each one of those. Disability insurance. Usually it is you have to wait 90 days to start getting paid. And then or to start getting your benefit. Then you have to wait another 30 days after you've been you're eligible. So you have an elimination period that's 90 days. You wait another 30 days and you start getting a check. It's like a job where on the first day on the job, you don't get paid. So that's
Chelsea Jones (22:54)
Mm-hmm.
Nate (22:55)
four months.
Okay. Now, if you have short term disability, it covers you in between. And the only issue would be if you didn't have enough coverage to like cover your bills. And if you're
Chelsea Jones (23:10)
Mm-hmm.
Nate (23:11)
doing your personal finances right, you're as a physician, you're gonna get disability insurance that covers your bills and your saving. So you
Chelsea Jones (23:20)
Mm-hmm.
Nate (23:21)
once you get that, you may make less, but you'll you should have enough.
To cover your bills
Chelsea Jones (23:27)
Yeah.
Nate (23:28)
and to save. Then there's taxes. if you are a W 2 physician, you most people don't have a big giant tax bill in excess of four months of expenses. You know, that might be fifty thousand dollars. They don't have an excess of fifty thousand dollar tax bill if you're a W 2 employee. Unless maybe it's the first year and there's like that whoopsie year where you filled out your
Your tax form's wrong. But beyond that,
Chelsea Jones (23:57)
Mm-hmm. Yeah.
Nate (23:59)
if you own your own practice or you're 1099, that tax bill can I mean it can be ridiculous. So really
Chelsea Jones (24:07)
Yeah.
Nate (24:08)
the right way to do this is to get a decent tax preparer or accountant, make sure you're making your quarterly payments so you don't have this emergency. Okay.
Chelsea Jones (24:18)
Mm-hmm. Yeah.
Nate (24:20)
But even that, usually if you're off, like if you have a good tax
Person and you're off on your tax bill, it's not going to be in excess of four months of your expenses. The next one it can be, it would be job loss or job change for some reason, or you had to get out of town and you need to get re-credentialed. Sometimes
Chelsea Jones (24:46)
Mm-hmm.
Nate (24:47)
that can take a year. Most often it takes a couple months, but you have to look at your own specialty, your own situation.
And make a real decision about how long it's going to take to get up and running again. So to answer this question, if you're in category number three, where it takes 12 months to get re-credentialed, it's not too much of an emergency fund. For most
Chelsea Jones (25:10)
Mm.
Nate (25:10)
people, though, an emergency fund has to it is directly aimed at disability, which is about four months.
Chelsea Jones (25:18)
Mm.
Nate (25:19)
And you know, most of the time when we're talking about emergency funds.
People hear four months, and let's say they spend fifteen thousand dollars a month, and I say your emergency fund should be sixty thousand, they're mostly comfortable with that. But if for some reason that just makes you totally uncomfortable because Nate, the rule of thumb is six months, okay, fine, six months.
Chelsea Jones (25:44)
Mm-hmm.
Nate (25:44)
But you don't need it, and it's just sitting there, quite literally losing value because inflation is gonna eat it alive. Okay.
So I would say that one year is very uncommon. And that the only reason I have seen legitimate reason I've seen to do it is if you it takes a long time for you to get credentialed. and that you could most physicians four months is good. Six mo six months makes them feel comfortable. Therefore, if you have a twelve months emergency fund, you have probably near six figures of money.
That is just not serving you. It is not getting you any closer to the outcomes that you're looking to achieve. You
Chelsea Jones (26:33)
Mm.
Nate (26:34)
could front load college, you could put more in retirement, you could do what I mean, you could do a lot of things with six figures of after tax money. So usually it is too much. maybe it's a little different for you, but.
What I nor well, if you have extra money, if you do this exercise, and you remember like the typical emergencies aren't gonna be six months of expenses or four months of expenses, then you can decide like any short term cash needs that you have.
Chelsea Jones (27:06)
Mm-hmm.
Nate (27:07)
so you know, maybe we need a new car soon, maybe we need a vacation fund. Because what something I see a lot, and I think this is a mistake, is people
make a really beefy emergency fund. And then they think, but if when I need that new car, it's gonna be for that. But then you just lose the thread with what your cash
Chelsea Jones (27:26)
Mm-hmm.
Nate (27:26)
is supposed to be doing for you. You don't know what it's for. Maybe you shouldn't invest this money. Maybe you should put it in a car fund, but you should separate
Chelsea Jones (27:33)
Mm-hmm.
Nate (27:34)
them out so you have clarity about what this money's for. And then when you know how much truly how much extra money you have, then you can make more progress on some goals or more maybe have more aggressive goals. You might find out that
with this money you've been putting in an emergency fund for no reason, you could retire a little earlier or spend more. So
Chelsea Jones (27:52)
Mm-hmm.
Nate (27:53)
that's the exercise I don't I don't think for most people, especially a double doctor family, that they're gonna be in a situation where they can't pay their bills for twelve months.
Chelsea Jones (28:02)
Yeah, that makes sense.
So our last question here is from an orthopedic surgeon in Kentucky. They said, We're in our mid-30s. We make $800,000 per year and max out all of the accounts we hear you normally recommend. So that's going to be workplace retirement account, backdoor Roth, and HSA are usually hits
Nate (28:20)
Mm-hmm.
Chelsea Jones (28:20)
the baseline. We also have approximately five to eight thousand a month, which we have been putting into a taxable account. My group is opening up a cash balance plan.
And the current tax savings are really tempting with regards to the extra amount I have to invest, which in this case would be that five to eight thousand a month. Would it be best to continue putting it all into a taxable account, put some into taxable and some into the cash balance plan, or put all of it into the cash balance plan?
Nate (28:49)
Mm.
Chelsea Jones (28:50)
So this this is a great question. It's a question
Nate (28:53)
Mm.
Chelsea Jones (28:53)
that I've gotten many times before. And it's basically, you know, it boils down to should I put money in a taxable account or should I put it in a cash balance plan? And it's always when I when I get this question, the real underlying question is like is the tax worth the tax break that I get now worth the low investment return?
Nate (29:17)
Mm-hmm. Because in a cash balance plan, it's pre tax, but the way that
Chelsea Jones (29:21)
Mm-hmm.
Nate (29:21)
they're structured is usually you can expect generally you can expect a re a lower return on your on your that's that what they aim for. Mm-hmm.
Chelsea Jones (29:31)
Yeah, three to five percent is usually the credit rate that I see. Yeah.
Yep. And I've done I've done math on this to see like when does it make sense? Because in general, the older you are, the closer you are to retirement, the more the cash balance plan makes sense. Because there's a shorter time horizon for that money to grow at a higher rate in a taxable account, and outpace the tax break that you got.
And when I did the math previously and I calculated kind of the the break even point, like when does when does the cash balance plan start to make sense more in terms of how old you are? it
Nate (30:13)
Mm-hmm.
Chelsea Jones (30:13)
usually is somewhere around mid to late thirties. and when you're earning eight hundred thousand per year, you're in the highest marginal federal tax rate. And if your state has a tax, which Kentucky does, you're paying the highest rate for that. I think Kentucky has a flat rate, but
you're paying at the highest level on all levels at that at that income amount. and so if we're talking about
you know, which one is better tax wise. especially as you get into your forties, the cash balance plan is gonna make more sense. but there are other factors that you have to consider, right? When does this person want to retire? Do they want to retire
Nate (30:59)
Mm-hmm.
Chelsea Jones (31:00)
in their fifties? Or do they want to retire kind of closer to an average age of sixty-two, our our favorite age?
Nate (31:07)
Mm-hmm. Yeah.
Chelsea Jones (31:10)
if you want to retire earlier, taxable account makes sense.
Because if your money's tied up in qualified accounts only, you're it's gonna be hard to access that money if you're retiring
Nate (31:20)
That's right.
Chelsea Jones (31:21)
younger. so while there is a larger tax benefit, usually there's less flexibility when it comes to when you could use it. So
Nate (31:32)
Mm-hmm.
Chelsea Jones (31:33)
those are all things to consider, but
Nate (31:35)
Did did
you mention to I may have missed this, but did you mention sometimes you only have one chance to get into these cash balance plans?
Chelsea Jones (31:45)
Yeah, sometimes there's y you one chance if you do n if you don't enroll right now, you can't enroll later.
Nate (31:54)
Mm-hmm.
Chelsea Jones (31:55)
some plans will have multiple windows for you to enrol. and so yeah
Nate (31:58)
Yeah. So w w
if you if you only have one chance, usually
Chelsea Jones (32:05)
Mm-hmm.
Nate (32:05)
usually people are happier with kind of riding the fence and and joining, but contributing a minimum the minimum amount in your younger years. But at the end of the day, most it seems like the so the math that we described, like the rate of return, we don't know what rate
Chelsea Jones (32:26)
Mm-hmm.
Nate (32:27)
of return you're gonna get.
And so doing a little bit of both seems to minimize regret for people. But when you're asking Chelsea or I this question, we're just thinking strictly risk return. And
Chelsea Jones (32:42)
Mm-hmm.
Nate (32:44)
so that's not everything and how comfortable you are with each decision and the value of each account. So, like you said, the the brokerage account has a value beyond
tax benefits. Like it's it's not it's not just a tax question. But yeah, I think the older you are, the closer you are to retirement. Cash balance plans make the most sense. And that but you're going to have I can I can almost almost certainly say you'll you will be really happy to have this super flexible brokerage account to work with
Chelsea Jones (33:22)
Mm-hmm.
Nate (33:22)
if you're funding that too. So it doesn't have to be all or nothing.
probably shouldn't be in your thirties. but as you get closer and closer to retirement and flexibility becomes less valuable to you and a steady return becomes more valuable to you, the cash balance plan seems to make more sense.
Okay, is that it for today? All right.
Chelsea Jones (33:42)
Yep, that's all the questions for today.
Nate (33:45)
Thank you everybody for listening. if you like this episode, please be sure to subscribe. And like I said at the top of the show, you can send us questions at podcast at physicianfamily.com. we will answer your question whether or not it makes it on the episode or not. I did that this week. Last week we got two questions about the Trump accounts. I answered one by email and then the other one took on the podcast. So
Sometimes it's not even that the question wasn't good. It's just that it was a duplicate. But we will make sure to answer your questions and give you our time and energy to the best of our ability. if you are you know, a listener and y you want some some thoughts on our end. remember, until next time, you're not just making a living, you're making a life.
