Nate (00:13)
Hello, physician moms and dads. I'm Nate Rennekee, 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 (00:26)
Chelsea, have you ever wondered how stocks and what stocks and pizza have in common?
Chelsea Jones (00:30)
No, but I feel like you're gonna tell me.
Nate (00:32)
Yeah, we're about to find out. I'm sure
Chelsea Jones (00:34)
Yeah.
Nate (00:35)
our listeners are on the edge of their seats. All right, we're gonna do
Chelsea Jones (00:39)
That's right. So that
Nate (00:40)
asking for a friend and I'm gonna bring it home here with the pizza analogy.
Chelsea Jones (00:45)
Right. So asking for a friend question this week. Pretty straightforward, but we're gonna get into the pizza. what is a stock?
Nate (00:54)
What is a stock? Okay. So by the way, I don't know if I've told our listeners this before, but I'm obsessed with pizza. Always have been, always will be. it's the best food on earth. Can't I cannot be argued against it. But a stock is a tiny slice of a company. So when you buy one slice of pizza, it's like you own just a little bit of that pizza.
But there's a whole pie, right? So you own just a little bit of the bigger thing. And if you buy a single share of a stock, like you buy a single share of Apple or Nike, you literally own a fractional percentage of that company. So tiny, tiny, tiny slice. So when that company makes money, you make money because as companies make more and more money, the value of your share or your fractional share, it goes up.
It goes up. And when that company loses money, or even if that company makes less than you expected, or people who bought into the company expect it, the value of your share might go down. Okay. And then you can sell your share. And if it if it goes up, you made money. If it's down after you sold it, you lost money.
But even further than that, because it still seems like monopoly money to a lot of people, and I'm sure for asking for a friend, it's coming from someone who doesn't quite understand this stuff. I thought maybe they would be interested in knowing like why do people sell stocks? Why do people why do companies create stocks for you to buy? so imagine you are starting a pizza shop, okay, and you you could
Kind of bootstrap and like scratch and claw your way to opening up one single pizza shop in in your town. Right. So you you owe rent, you gotta buy the supplies, you gotta do all that stuff, and you you work your way up to a successful pizza joint. But it's so successful that you decide I should do this in all 50 states. I wanna o open up 49 more pizza shops. Well, you you're gonna need a lot more money than
starting that single pizza shop that was so successful. So you can either take a loan, which would be a really big loan, and it would put pressure on your business because you have to pay back that loan, right? So it's hard to do. Or you can sell a piece of your company. And that's all they're doing to raise capital so that they can expand bus their business or to just cash in on some of their business and hopefully continue to grow it.
They issue stock, which is just like saying a big chunk of this company is up for sale, and then the market decides on what they're gonna pay. And when they do that initial sale, they get the money, and then the shares of the company kind of trade on the open market. even further than that, buying into a single business or any business has risks. So this is why stocks are risky, because if that pizza shop goes under.
Or the operator in the pizza shop just was like, man, they were really good at running a tiny pizza shop, but they're not very good at running a national brand. Well, that business could go under. So let's say they got,
Chelsea Jones (04:15)
Mm-hmm.
Nate (04:16)
you know, a million dollars that they needed to start their pizza shops, and they just they just burnt it. Like they weren't good at operating a business that large, it could go bankrupt and your stock would be worthless. this is why.
Picking one single stock or a few single stocks is riskier than buying a whole bunch of stocks. So if you buy a tiny little bit of a company and you do that thousands of times, the likelihood that the entire economy is going to go completely bankrupt is pretty low. But it goes up and down. Sometimes stocks that you or businesses that you invested in do better than you thought. Sometimes ones that you thought were going to do great do a little bit worse, but at the end of the day, it kind of
smooths out your ride to diversify your money into all these different businesses. So point that out because while stocks feel like this imaginary thing out there, it's really just buying into businesses, a whole bunch of them. And when you feel like you're not diversified because you have one like position in your portfolio that says like VTI or it's the index fund that buys into thousands of businesses.
That is highly diversified in stocks within the stock world. So you have a bunch of businesses that all are in different industries that sell different things that you know have have different sets of like cash flow. Some are growing and some are sort of staying the same, but they spit out a lot of money. it's all sorts of different businesses that you're buying into when you buy into a big
giant index font.
So that's how we connect pizza and stocks.
Chelsea Jones (06:01)
Right, very good. Our first regular question comes from an internal medicine doctor in Oregon. They said if we make a hundred and twenty five thousand dollar contribution to our child's five two nine account, will we owe gift taxes? So this is gift taxes is something that usually just comes up with five two nine contributions or
if for retirees who are thinking about giving money away. But this is specifically asking about 529 contributions. And if you didn't already know, a contribution to a 529 is considered a completed gift to the beneficiary. So usually to your child. So they're asking if I make this big contribution, will I owe gift taxes? Because I hear about all these gift taxes, but I don't really know what that means. and basically
The short answer is probably not immediately. Most people actually never pay a gift tax. because there's there's two exemption amounts that apply. So there's the annual exemption amount.
that the IRS sets every year. So it's nineteen thousand per person this year. So a married couple can give thirty-eight thousand, nineteen times two, to any single person and not have to do any filing, no taxes owed. It's just you can give away thirty eight thousand dollars a year, however many times you want, as long as it's to different people.
Nate (07:22)
Mm-hmm.
Chelsea Jones (07:24)
But if you make a larger contribution like this, which means a larger gift, there are a couple ways you could go about it. So one, you can elect a five-year forward averaging on your tax return. So what that does is it takes this hundred and twenty-five thousand lump sum contribution, and on your return, it's gonna look like you made a fifth a five thousand dollar or
125 divided by five, that number contribution for the next five years. That's a twenty five thousand. Yeah. So on your return, you spread it out. And
Nate (07:53)
Mhm. Twenty five K. Yeah. So you spread it out. Okay.
Chelsea Jones (08:02)
twenty-five thousand is under the thirty-eight thousand, that annual exemption amount. and so there's no there's really no tax consequence. if you don't elect yeah, tax paperwork.
Nate (08:11)
There's some tax paperwork. The co consequence
is just paperwork, but you're not going to run into any issues. Okay.
Chelsea Jones (08:18)
owe money. Yeah.
the other way you could go about it is to not elect elect the five year forward averaging, in which case you still wouldn't owe, most likely wouldn't owe any gift tax, because making the co whatever the contribution amount is above the annual exemption amount, it would just reduce your federal lifetime exemption, which, you know, right now it's fairly high. It's like 15 million per person.
So a married couple, thirty million. and so yeah, you would just reduce your fifteen million dollar exemption to fourteen point nine nine something. You just reduce it by a little less than a hundred thousand. and so you
Nate (09:03)
It's important to say
too, when we when we talk about this, we're we're talking about federal gift tax because
Chelsea Jones (09:07)
Yep, the federal
Nate (09:09)
obviously states have their own
Chelsea Jones (09:12)
Mm-hmm.
Nate (09:13)
rules, but federally it's really hard for physicians. I have met a couple, but they are very unique to ever get beyond that thirty million dollar limit. Now I will say that it's best practice to do the the five year forward averaging.
Like I I
Chelsea Jones (09:30)
Mm.
Nate (09:30)
think it's a lot more valuable to get the money into the five twenty nine than it is to worry about your estate taxes in this case. But if you want to do the five year forward averaging, then that would protect you from someday if that limit changes, even though it's I'm putting my fingers open quotes for our podcast listeners, in the law that is thirty million dollars, you know, if you can avoid having to go against your limit, then you probably should. It's easy enough.
Chelsea Jones (09:58)
Yep, because either way, a gift tax tax form is going to be filed, whether you elect five year forward averaging or elect to just reduce your lifetime exemption amount, the same form needs to be filled out. So you
Nate (10:11)
Mm-hmm.
Chelsea Jones (10:11)
might as well fill out or choose the option that doesn't reduce your your exemption amount.
One thing to note about the five year forward averaging before we move on to the next question is it does use up your annual exclusion amount for the next five years. So if the annual limit goes up next year from thirty eight combined to forty, you can contribute two thousand, no problem, and not have to file any more paperwork. But if you contribute more than that, you'll have to go back to the gift tax return and
In that case, since you already used up your annual exclusion amount and your five year forward averaging option, you would be reducing your lifetime exemption if you if you gifted more. So just keep that in mind.
Nate (10:53)
Yeah. Yeah. We have written yeah,
we've written hundreds of these plans. And I can I can say just, you know, for the people that are listening that we've written plans for, there are it's plenty of times where we have blown past the limit, knowingly blown past the limit, and it's like it's okay. You know, they're probably not at a big risk of paying any estate taxes. But just remember
Chelsea Jones (11:15)
Mm.
Nate (11:15)
that you know, there there's something to be said for the tax-free growth in a five twenty nine.
Chelsea Jones (11:22)
Mm.
Nate (11:22)
And that
being more valuable than preserving every dollar of your estate tax. So getting this money in there, getting college paid for is a lot more meaningful than protecting a few bucks from estate taxes 50 years from now. But if you can
Chelsea Jones (11:37)
Mm-hmm.
Nate (11:38)
avoid it, there's no reason not to. So there's
Chelsea Jones (11:40)
Exactly.
Nate (11:41)
there's times where breaking that rule is okay, or it's not really breaking a rule, but going past that limit is is probably advisable.
Chelsea Jones (11:50)
Mm.
Okay, so our next question comes from a double doctor family in Texas. They said we're currently renting but want to buy a home in the near future. We also have about a hundred and fifty thousand of federal student loans and are not pursuing PSLF. Should we use extra cash to save for a down payment or should we pay off our loans quicker?
Nate (12:11)
Mm.
Man,
The answer is so clear in my mind, but
Chelsea Jones (12:17)
Mm-hmm.
Nate (12:17)
it doesn't mean that you shouldn't you don't have to sit down and like do some math and be tactical about this. But h here's the big picture. The big picture is you're gonna have to buy a house, gonna have to pay off your
Chelsea Jones (12:28)
Yeah.
Nate (12:28)
student loans, you should do both, and you'll feel better if you do both a little faster than maybe exactly what the math says. So,
Chelsea Jones (12:38)
Mm.
Nate (12:40)
you know, f waiting to buy a house to like waiting to clear your loans to buy a house, I don't generally see that get people much further than just buying a house. But we've been in an
Chelsea Jones (12:51)
Yeah.
Nate (12:52)
environment with with houses, at least for the in in the last ten years, most years houses have gone up in value. There we've seen a little bit of that kind of correcting itself in the last couple of years. But
I think the number one thing here is just to look at cash flow. You can
Chelsea Jones (13:10)
Yeah.
Nate (13:10)
buy this house with student loans if your cash flow allows it. And that means you are saving appropriately for retirement, you're saving appropriately for college, you're paying your student loans off in a at a good clip, five,
Chelsea Jones (13:22)
Mm-hmm.
Nate (13:24)
seven years is reasonable for most young physicians. double doctor family with $150,000 in student loans.
Ye the the lowest they could be making unless someone's part-time is five hundred thousand dollars a year. This is a very reasonable amount of student loans. I hate to say that. I know six figures in loans
Chelsea Jones (13:40)
Mm-hmm.
Nate (13:42)
is so painful to hear, but I just see people succeed with this amount of student loans all the time. but getting down into the details of this.
Interest rates on loans range from four to six. Your mortgage will be s above six at this at this very moment. a lot of your mortgage interest can probably be written off on your taxes. So
Chelsea Jones (14:00)
Mm.
Nate (14:01)
the average here, four to six on student loans, above six on a on a mortgage, but you get to deduct the interest most likely if you're itemizing. The the average here, let's call it a wash. It's the same interest rate. Okay.
Chelsea Jones (14:13)
Yeah. Yeah,
'cause I think they would make too much to deduct student loan interest, right?
Nate (14:18)
Student loan interest, they make too much. And there's some rules about how much you can. Anyways, let's call it a wash. All right.
Chelsea Jones (14:26)
Yeah.
Nate (14:27)
So putting 20% down on a on your first house, not totally necessary, very difficult to do quickly if you also want to pay down student loans. So
Chelsea Jones (14:37)
Mm.
Nate (14:37)
finding a balance between like how quickly can I pay these off, even if I buy a house.
And do I have the cash flow to support it is the answer. But the the big one here, because I did all of that by the way, all those caveats for this little statement, which is I hate to tell people not to pay down their student loans, but you need cash when you buy a house. You need some cash. I don't care if you're putting 20% down or you're putting five percent down, you're gonna buy a couch, you're gonna paint the walls, something's gonna break. So I mean, you need some cash.
Chelsea Jones (15:12)
Yeah. Which don't even get me started on how much paint costs. I had talked to you about it the other day.
Nate (15:13)
And I know this. Yeah. We just talked about that in the huddle this week.
so I know this because I bought a house. I think I was how old was I 23 with no money. Like, no money. Somehow I got into a house with no money. And
Every time something broke, I had no money and I was fixing
Chelsea Jones (15:46)
Mm-hmm.
Nate (15:47)
it myself. And I do not wish that upon any MD or DO. Okay.
Chelsea Jones (15:53)
Right.
Nate (15:54)
So I mean, I was like replacing, I mean, that tells you what kind of house I was in, but in my shower rather than having a a fan, there was just a window in the shower.
Which was, you know, of course, rotted immediately. And because of all steam. so I am out there not knowing what I'm doing, replacing windows, you know, cleaning out fireplaces. I mean like I'm doing all this stuff because I have no money. And that's just not the position you're in. You're not 23-year-old Nate just grinding
Chelsea Jones (16:27)
Right.
Nate (16:27)
away, right? You need some cash. I also s sat on IKEA furniture for years.
You know, if you don't want to live like that, you need some money. And I know you won't live like that, so you should have some money rather than putting it on debt. So
Chelsea Jones (16:44)
Mm-hmm.
Nate (16:44)
build up some cash. That's like, you know, probably 5% down. Build up an emergency fund. And once you have that, you have a choice to make about like, do we wait even longer or while we're paying off our student loans? but typically.
At that point, you could go buy a house as long as your cash flow supports it.
Chelsea Jones (17:05)
Hey. Our last question comes from an anesthesiologist in Oklahoma. They said, My parents just bought an annuity right before retirement. What what is an annuity? What even is it? Which is
Nate (17:17)
What is an annuity? Man, we don't
talk about annuities a lot, but I'll let you take this one.
Chelsea Jones (17:23)
Yeah. They get the people hear annuity and kind of get the ick a little bit if you're
Nate (17:29)
Mm-hmm.
Chelsea Jones (17:30)
I don't know, if you're introduced outside of like the insurance world, I guess, or e even in it sometimes. but annuities, they're not inherently bad. They have the they're a match for the right person. It's just usually not a match for doctors unless it's a very specific case.
But in general, what an annuity is, is you take a lump sum of money, you give it to an insurance company, and they guarantee you a set amount of income for the rest of your life.
Nate (18:00)
Yeah. Which is nice, right? Like if if you are eighty years old
Chelsea Jones (18:02)
So it is nice.
Nate (18:06)
and you are worried about running out of money and
Chelsea Jones (18:09)
Mm-hmm.
Nate (18:09)
you don't have like enough to withdraw, you know, there's the four percent rule, the five you know, maybe you're eighty, you can go to five percent or six percent. If you're withdrawing
Chelsea Jones (18:20)
Mm.
Nate (18:21)
six percent and that just doesn't feel like enough and you're worried about your running out of money, like you might want that guarantee.
Chelsea Jones (18:28)
Yeah, because it is a guarantee for the rest of your life. They're gonna pay you an income for the rest of your life. usually doesn't have a cost of living adjustment, but I'm sure you could add it on, it would just cost you more money. Because guaranteed anything costs money. It's not gonna be free.
Nate (18:45)
Yeah.
Chelsea Jones (18:46)
so annuities do typically have higher fees, especially compared to, you know, something that's not guaranteed, like a brokerage account.
But it does give you that peace of mind that you won't run out of money. You know, you're limited to your your annuity paycheck in that case, but but you're not gonna run out. That paycheck's still gonna be there for the rest of your life. and because it's guaranteed, you're not feeling the ups and downs of the market. Cause the alternative
Nate (19:12)
That's right.
Chelsea Jones (19:13)
would be your money is invested and you're withdrawing a certain amount each year. so you're not
growing your money, but it's also not shrinking. so giving lump sum to an insurance company, they give you a set amount of money for the rest of your life. and one thing that most people don't realize about annuities that's different from a a brokerage account or some other investment account is once you pass, the annuity is gone. It's not something that your children or any beneficiaries can inherit.
so it's something to keep in mind too if you're, you know, considering this as an as an option for retirement income.
Nate (19:52)
Yeah.
Chelsea Jones (19:53)
but
Nate (19:54)
Let me let me I that is true and I think that's where people get the like shock. my gosh.
Chelsea Jones (20:01)
Yeah.
Nate (20:03)
But if you are an astute investor, which most people are not, right?
Chelsea Jones (20:10)
Mm-hmm.
Nate (20:11)
But you would s something would s feel off if they didn't keep the money. And here's why.
Let's say you bought an annuity, let's say you had five hundred thousand dollars and that wasn't enough to draw, you know, what if six percent of that a year, that's a aggressive withdrawal rate is thirty thousand dollars a year. And that wasn't enough to pay your bills. And then you go to insurance company and they say, Well, we'll pay you sixty thousand dollars a year.
Chelsea Jones (20:41)
Mm-hmm.
Nate (20:42)
You know, we'll pay you more than 10% every year out in payments for the rest of your life. And you think that's a great deal. Well, why would they do that? They're doing that, they're paying you more because they're taking a risk that you will outlive this contract. Like if they're doing the math, and they're like, you'll probably die at 91%, but you live to a hundred, they will have probably lost money.
Chelsea Jones (21:10)
Mm-hmm.
Nate (21:11)
Right?
And so, but their insurance companies, they have a lot of data. They know probably when you're gonna die. And they and statistically,
Chelsea Jones (21:18)
Yeah, statistically at least.
Nate (21:21)
and they're banking on you dying on like on the average, and so they will get to keep what's left. Not all of it. You didn't pay five hundred thousand dollars and they get to keep five hundred thousand dollars. You paid five
Chelsea Jones (21:35)
Right.
Nate (21:36)
hundred thousand dollars and they get to keep what is left.
Chelsea Jones (21:39)
Mm-hmm.
Nate (21:39)
So they
go through all this analysis and they decide what's a what's an amount that they can stomach to pay you for it. And you take no risk. They take all the risk. You're transferring risk. And that's why
Chelsea Jones (21:49)
Mm-hmm.
Nate (21:50)
that's why they keep the money at the end. So no inheritance. That's that's a d a con of an annuity.
Chelsea Jones (21:57)
Yeah. But if you were worried about running out of money, there might not have been an inheritance anyway.
Nate (22:02)
Exactly. Exactly. Let me let me say too that 'cause I I was the one who got this question. even if they they aren't gonna run out of money, but your parents don't have a quality financial advisor who can explain to them going through like withdrawal rates and they're not used to
Chelsea Jones (22:23)
Mm.
Nate (22:24)
having money a lot of s of money in stocks.
For this family, they their parents took a chunk of their money, not all of their money, but a chunk of their money and guaranteed
Chelsea Jones (22:33)
Order all that. Yeah.
Nate (22:34)
that still had money on the side. I personally don't think that I mean they probably had enough to just take a a reasonable withdrawal rate and not pay the high fees of an annuity. But
Chelsea Jones (22:47)
Mm-hmm.
Nate (22:48)
it's hard to say. You know, they they they
Chelsea Jones (22:50)
Yeah.
Nate (22:51)
might they may not take enough risk in the stock market to keep up.
And they and that means that if their nest egg is going down because they're withdrawing from the money, that means their income would go down. You know, if they're not in enough stocks because they're nervous about the stock market, then you know, one year they might make thirty thousand dollars and the next year a financial advisor might tell them, Hey, like you can only afford to take twenty eight. Cost of living
Chelsea Jones (23:17)
Mm.
Nate (23:17)
went up, your income went down.
So it's this is right for some people. It's just that if you're preparing for thirty years as a physician, you're saving a ton of money, you're preparing to not have to pay for a high cost annuity.
There's a couple more cons. do you want to go over those?
Chelsea Jones (23:34)
Yeah. So some other cons with annuities. We've already talked about the high fees. I already mentioned the slower growth. You know, you're not feeling the ups and downs of the market, but there is no growth.
Nate (23:43)
Yeah. Yeah, well there is no growth really.
I mean th there's different type again, we don't sell this stuff. We don't generally recommend this stuff. There is about a hundred different kinds of annuities. We're talking like the basics. You buy an annuity,
Chelsea Jones (23:57)
Yeah. Yeah.
Nate (24:00)
an immediate fixed annuity. The second you give
Chelsea Jones (24:03)
Mm-hmm.
Nate (24:03)
them the money, they start paying you cash. That just it's just what you get.
Chelsea Jones (24:08)
Mm.
Yeah. So no growth or slower growth because of the fees
Nate (24:13)
Mm-hmm.
Chelsea Jones (24:13)
or because the amount of risk that you're taking because you're transferring it. and then the last one is that it's it's not liquid. Like you have your stream
Nate (24:20)
Yeah.
Chelsea Jones (24:21)
of income, but you can't just take, you know, a couple years of the income and say, I want my remaining four hundred thousand dollars back.
Nate (24:29)
Right.
Chelsea Jones (24:29)
It's locked in to the
Nate (24:31)
Yeah.
Chelsea Jones (24:32)
insurance contract or the annuity contract. so
It's liquid in the sense that you get your income every month consistently, but it's not liquid in a sense where you can just take a bigger chunk out at any time.
Nate (24:43)
Yeah. It's just it's the it's the typical fixed we're on a fixed income. So you know how many times do I do we write plans where physicians are like, in this year of retirement I wanna take a hundred thousand dollars out to pay for a wedding, or in this year in retirement I want to travel, like do this very big travel year that's gonna cost a hundred thousand dollars, but it's just once. Well
If your parents have an annuity and that's all they have, annuity plus social security, they can't do that. But this is an entirely different situation that they're in. If someone should buy an annuity, should. like
Chelsea Jones (25:21)
Mm-hmm.
Nate (25:22)
if it's an advisable thing to do, they never had that money anyways. They didn't have hundred thousand dollars of extra money. I mean, we're talking about five hundred grand. They can't just take twenty percent of their money and go spend it in a given year. So this is this is in a nutshell.
And you're thinking about annuities, and your parents you hear your parents' advisor sold them one or wants to sell them one. It is an allowance. It is just an allowance and it's expensive because they transferred the risk to somebody else. That's what it is. And sometimes it being expensive is okay. For any one of our clients, if you've prepared, which we get.
physicians in here that are right when they're be starting or they're in their 40s. I mean, they're preparing. If you've prepared well enough, you don't have to pay the transfer the pay for transferring the risk. And your children will get to inherit what's left. So, you know, a lot of the families we serve care a lot about their children at least inheriting something. And annuities won't get you that typically.
But
The it's a classic case of they are right for some people, they're just oversold.
Chelsea Jones (26:35)
Yeah. They're not right for at least most physicians, like you said, 'cause you have the means to prepare well in advance to not have to not have to transfer the risk.
Nate (26:47)
That's
right. Okay, that is it for today. Thank you everybody for listening. If you liked this episode, please be sure to subscribe. You can schedule a an interview with us if you'd like to work with us at physicianfamily.com, or you can send us questions. We'll answer here right on the show at podcast at physicianfamily.com. Until next time, remember, you're not just making a living, you're making a life.
