Nate (00:00)
Hello physician moms and dads. I'm Nate Renickey, certified financial planner and primary advisor.
Chelsea Jones (00:07)
And I'm Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family Financial Advisors.
Nate (00:14)
also I feel like we we have some questions about kids. Should we
Chelsea Jones (00:19)
Yeah.
Nate (00:20)
should we tell the the world about our kids?
Chelsea Jones (00:24)
Let's do it.
Nate (00:26)
So for the first time ever at Physician Family we have two families that have babies on the way.
You got a baby on the way. My wife's got a baby on the way. It's like, how are we gonna keep doing this podcast? Wow, just kidding. Yeah. I'm sure the audience
Chelsea Jones (00:38)
Yeah. If we seem a little tired in the near future.
Nate (00:44)
gets it. We are a physician family after all.
Chelsea Jones (00:47)
Yes.
Nate (00:48)
That'll put us at
What is that? Eight kids between you, me and Kyle.
Chelsea Jones (00:51)
eight. Yep.
Nate (00:54)
I think we should try to make it go for ten. Go for double digits.
Chelsea Jones (00:58)
Who's going to have the extra two?
Nate (01:01)
Yeah. Mine was a l a little later, so I've been talking to I mean I feel like physicians a lot of times I I see it pretty often where there's a pretty big gap between maybe
Chelsea Jones (01:12)
Yeah.
Nate (01:13)
their first two and and their last one.
So I've been asking for the f I feel like I I'm asking them questions. I'm trying to get some value for myself during some calls. I'm like, how'd you do it? The word is that, you know, you you're better at it than you think. So I'm I'm looking forward to that. You're like, Yeah, you've kind of done it a few times. The older
Chelsea Jones (01:35)
Yeah.
Nate (01:35)
kids, they can usually help. So I'm like, Okay, we'll see about that.
Chelsea Jones (01:40)
Yeah, it just becomes the new normal.
Nate (01:42)
Yeah. My current youngest
is already volunteering to share a room. So I'm like, we'll see how
Chelsea Jones (01:47)
Aww.
Nate (01:48)
long that lasts.
Chelsea Jones (01:50)
Yeah, that's sweet of him though.
Nate (01:52)
Yeah. I don't know if it's just because
he'd have to not him, but one of them would have to sleep downstairs, like their room would have to be downstairs if they if they don't. So you have like
Chelsea Jones (02:05)
all had separate? Yeah.
Nate (02:06)
yeah. Our bedrooms are upstairs and then there's a couple rooms downstairs. And I'm I don't think they they wanna do that. They like being all we'll see. I mean in a couple of years you're gonna be like
stinky teenagers and they're gonna wanna be downstairs,
Chelsea Jones (02:22)
Mm-hmm.
Nate (02:23)
which is why we bought this house. But yeah. So
Chelsea Jones (02:28)
You know, there for a while before I had any children, I thought that I wanted to have them close together. And then especially after going through the newborn phase, I was like, should I just put the hard all in one chunk and have one kind of soon after and have like a, maybe a two year age gap.
Nate (02:47)
Yeah.
That is the heart I mean yeah.
Chelsea Jones (02:48)
Don't think I could have done it.
Nate (02:51)
I mean, I had my first two boys, two year age gap, and you realize like the the heart well, the heart there's there's the heart of just new parent. But then when you have a baby and a toddler, you're like, Whoa, this is this is different. And
Chelsea Jones (03:08)
a lot, yeah.
Nate (03:10)
but now it's it's feels like a totally different world. I'm like, I'm pretty sure
I I guess it maybe it took a couple a couple times before before you realize that you're a lot smarter than your kids. Like,
Chelsea Jones (03:21)
Mm-hmm.
Nate (03:22)
I can I can outsmart this thing, the situation. But you can outsmart
Chelsea Jones (03:25)
Yeah.
Nate (03:26)
sleep deprivation. So everyone can give us some grace about that.
Chelsea Jones (03:29)
No.
Nate (03:34)
Okay. Well, we got a couple questions about kids in our in our lineup today. But we'll start with asking for a friend. So what do we have today?
Chelsea Jones (03:45)
Mm-hmm.
Yeah. So we're asking for a friend question this week is, is my spending normal compared to other families? How much do most physician families usually spend?
Nate (03:56)
I I've been getting this question since day one on the job. Everybody is very interested in what their colleagues are spending. It's kind of interesting because
Chelsea Jones (04:03)
Mm-hmm.
Nate (04:04)
it's just being a doctor in general, it's such a big it it's you you find a lot of commonalities between you and your colleagues. Everybody
Chelsea Jones (04:16)
Mm-hmm.
Nate (04:17)
kind of knows what each other makes, and so they can kind of bounce ideas off each other about how much they should spend. but
I will just start off by saying this isn't exactly productive most of the time to know what your
Chelsea Jones (04:33)
Right.
Nate (04:34)
friends spend, your colleagues spend, because everybody has different goals, everybody has different situations, everyone has a different amount of kids. and so what you spend to
Chelsea Jones (04:45)
They live in different states.
Nate (04:47)
live in different states, yeah, taxes and so w exactly what they spend today versus what you spend today has mean
You could find some productive nuggets in there, but it's really what what matters here and what the what's driving at this question is is guilt
Chelsea Jones (05:06)
Mm-hmm.
Nate (05:07)
and wanting to make sure that like you're not doing something dumb.
Chelsea Jones (05:15)
Pretty much, yeah.
Nate (05:16)
Yeah. So, I th I'm sure we've answered this question before, but this is how you sh I think how a family could approach this curiosity, which
Chelsea Jones (05:29)
Mm-hmm.
Nate (05:30)
is with a plan, obviously. you determine how much you spend now and you drop out what you would not spend in retirement. So point of when we point out that
you have a different amount of kids. I mean, kids are a huge driver of how much you spend. Right? I mean, if you have one child versus having three and you go on a vacation, vacation's probably, I mean, you're you're edging on needing two hotel rooms,
Chelsea Jones (06:02)
Mm-hmm.
Nate (06:03)
you know, and almost twice as many seats on an airplane. So spending is is off. does that mean that you should
Not fly on an airplane and go to Hawaii like the the family with with one child? Probably not. I mean, you could still do those things, but your priorities do shift and how much you spend and where and the you know what type of car you buy changes. It's it's all over the map. But what's
Chelsea Jones (06:33)
Mm-hmm.
Nate (06:34)
interesting is pretty much no matter how many kids you have or your situation, the retirement number, like how much you actually spend in retirement, is
Very similar across the board. And so I will give you one number, our listeners one number, which is the average physician family and the plans that we've written, and it's been hundreds of them, it's about eleven thousand dollars a month.
Chelsea Jones (07:01)
Mm-hmm.
Nate (07:02)
It was ten forever. I feel like, man, this is crazy how it's always ten, even though inflation goes up. But f inflation finally took took a hold, you know.
a death grip on that number and and flipped it up to el eleven thousand a month. And there's families that go all the way up to spending twenty thousand dollars a month. But as soon as you start assuming that you might be able to get away with like eight or seven, I start to get nervous as a planner that we're not accounting for something.
So imagine you spend eleven, but in the years leading up to retirement, you spend more than the average family. It doesn't change a whole lot in the amount that you need to save, which is really usually what people are driving at. It's like, I need to spend an amount that allows me to save appropriately for college and retirement. So naturally, the more kids you have or the situation you're in is is drive it and how much you can spend.
Is driven by how much you need to save.
And I will say that people who ask this question typically are not super savers. Super savers don't have this worry. They
Chelsea Jones (08:09)
Mm-hmm.
Nate (08:09)
they just don't spend. They just spend a lot less than what they make. But
Chelsea Jones (08:14)
Yeah.
Nate (08:14)
if you can run your numbers, look at your budget, take out the things that you wouldn't be paying for in retirement, and you're around eleven thousand dollars a month, you're probably doing very close to the best you can with with spending without just going scorched earth and and really doing a
honest to God, budget like the mere mortals out there that that must do that
Chelsea Jones (08:33)
Yeah.
Nate (08:35)
in order to pay for their groceries. but if you're s I I'll I'll s I'll throw out another number. If you're spending, and I mean spending, not spending and and not including taxes, if you're spending fifteen thousand dollars a month and you feel like that's insane. I mean it's a really high number to the average person, but I see it all the time.
Chelsea Jones (09:00)
Yeah.
Nate (09:02)
And that's vacations and cars and everything. So if you're spending fifteen thousand dollars a month, I for most physician families it is possible to save for college and save for retirement. But rather than just going off of gut feeling and how people spend, other people spend, you just need a plan. You need a plan to know how much to save, a plan to know how much to spend, and that will will be what brings you comfort rather than just playing this comparison game.
Chelsea Jones (09:30)
Very good. Our first question comes from a surgeon in Pennsylvania. They said, currently have a high deductible health plan with an HSA and contribute the family amount since my son is also on my insurance. He will drop off mid-year and I'll then have single coverage. Does this affect my HSA contributions? So in short,
Nate (09:56)
Mm-hmm.
Chelsea Jones (09:56)
Any and
What I've learned with HSA contributions is if anything's up in the air, it's usually going to be prorated. Like if I
Nate (10:06)
Mm-hmm.
Chelsea Jones (10:07)
only have high deductible coverage for part of the year, can I still contribute to an HSA? Yeah, it's prorated. In this question, if I am eligible for the family amount for part of the year, but the single amount for the rest of the year, it's prorated.
So for every month you have family coverage. So you plus at least one other family member. You can contribute one 12th of the family limit and then one 12th of the single limit for each month. It was just you that was covered. And so you do get, you do get a little bit of, of both. You're not limited
Nate (10:44)
Mm-hmm.
Chelsea Jones (10:45)
to just the single limit for the year. And another interesting note for this family in particular,
So this is talking about the mom and the son being on insurance, but the dad is over 65 and being is covered by Medicare. So I just want to throw out there a PSA that even if you have high deductible coverage and you're on Medicare, being on Medicare disqualifies you from making HSA contributions, even though
Nate (11:15)
Mm-hmm.
Chelsea Jones (11:16)
you may have, you know, secondary high deductible coverage.
So if you're approaching 65 and you currently have an HSA, you might need to adjust your contributions so that way you don't over-contribute. Because once you hit 65 and you're covered for Medicare, you're no longer eligible. So if you are high deductible for the first six months, you turn 65 in July, then you'll only be able to contribute to the HSA for half the year.
Nate (11:46)
Yeah.
This brings up another kind of example in my head. I I am I oftentimes give the advice when we're talking babies, right? When you're if
Chelsea Jones (11:57)
Mm-hmm.
Nate (11:57)
if s if you're s if you're pregnant and you're gonna have a baby mid year, like mid plan year. So, you know,
Chelsea Jones (12:05)
Yeah.
Nate (12:05)
I will a lot of the times see families try to decide between a PPO plan and an an HSA eligible plan, a high deductible health plan.
And I have successfully gotten many people to sign up for the PPO, get get the the insurance that covers more of the delivery costs. And then
Chelsea Jones (12:25)
Mm-hmm.
Nate (12:26)
after they have a qualifying event, which is having a child, they can switch over to the high deductible health plan and just to get some money in an HSA. And that doesn't always work out. Sometimes that makes people flat out uncomfortable because they're like, well, what if there's
Chelsea Jones (12:40)
Mm-hmm.
Nate (12:41)
What if something happens afterward or the follow up doctor visits and I get that? But other times I I mean, we me and my house, we we have done this successfully once. It didn't work out with my second child and like the timing of insurance. But when you do this, it it goes by the same rules is that if you're switching over halfway through the year, you can't contribute the maximum. So that's a lot. Is that not true?
Chelsea Jones (13:04)
Actually, the pro rata rule
doesn't, that's not true for, that is the one exception. So if you are covered on December 31st with high deductible coverage,
Nate (13:13)
All right,
Chelsea Jones (13:14)
you can contribute the full amount. But the catch is you have to have high deductible coverage through the entirety of the following year.
Nate (13:22)
The
following year. Right. Okay. And I I'm gonna be super honest. I was actually a little nervous because when you said that rule, I thought, man, I I'm pretty sure I personally this was like years ago, but I've contributed the maximum. I was like, man, maybe I did something wrong. wow,
Chelsea Jones (13:36)
Yeah, that is the one exception. Yeah.
Nate (13:39)
okay. Good. That's great.
Chelsea Jones (13:41)
Thank
Nate (13:43)
Well I'm glad I didn't take anybody down the wrong path, you know, like ten years ago when I thought of this little wrinkle.
Chelsea Jones (13:51)
Yeah.
Nate (13:51)
Awesome.
Okay. So it it would be worth it then if you can switch back over to an HSA eligible plan at the end, like like even right before the plan year was over, and you had have the money. You know, a lot of times you're stretched thin at that stage of your life, unless you're like me who's having babies late a little later. but you're stretched
Chelsea Jones (14:12)
Thank
Nate (14:12)
thin when you're first having kids and maybe you just can't scrape together, you know, the nine thousand eighty
Eighty five hundred dollars. I think it's eighty five fifty now or is it eighty seven fifty?
Chelsea Jones (14:23)
I think it's $87.50. Yeah, for family.
Nate (14:24)
8750. So, you know, roughly
just under $9,000 a year if you in an HSA. If you can't scrape that money together right before right after you've had a child, then you know it's it can be stressful. But
Chelsea Jones (14:39)
Mm-hmm.
Nate (14:39)
we love HSAs. It's a great tax deduction. the money grows tax free. And so you will find Chelsea, Kyle, and I pushing hard for it because it's like
You know, physicians just don't get enough tax breaks, and this is one of them. So if it's possible
Chelsea Jones (14:58)
Mm-hmm.
Nate (14:58)
and you have the cash, it's a great move to switch back and forth between the two. and also if you accidentally get caught with an HSA while you're having a child, it's really not as bad as you might think. We have had my youngest, we had on an HSA eligible plan as well. And so, you know, you pay the maximum, but
When it's all said and done, a lot of times it's just a couple thousand dollars difference. You know,
Chelsea Jones (15:25)
Mm-hmm.
Nate (15:26)
you you just pay your deductible and it's over. But it's also a lot of stress in that, you know, delivery room and to try to think about insurance is usually the last people thing thing people want to talk about. So I get it. If you miss it in a year.
Chelsea Jones (15:40)
Okay. The next question comes from a urologist in Minnesota. They said our oldest starts college next fall and the 529 has more in it than I expected. How do we actually spend it and do we tell him what's in there?
Nate (15:54)
Yeah, there's kind of like two parts to this question is how do we actually spend it? you know, I I've seen families feel better about just paying the school directly, which is something you can do. You can send them essentially, imagine sending them like a bill paycheck right out of your five twenty nine. And that keeps things
Chelsea Jones (16:13)
Mm-hmm.
Nate (16:13)
really clean. You know, you have obvious records with the school and with your five twenty nine about where the money's going. But there's things that you might spend money on.
that you can't do that, like, you know, food and housing.
Chelsea Jones (16:28)
Mm-hmm.
Nate (16:29)
And so in those cases, you keep your receipts, you reimburse yourself out of the account, and that works pretty well. But you do need to keep your receipts if you get audited or someone asks for these receipts, they'll ding you really hard if you don't have receipts. It's like if you don't have receipts, it didn't happen. Okay,
Chelsea Jones (16:47)
Yeah.
Nate (16:48)
so it's important. And it's similar with an HSA, but HSAs
tend to keep you, at least the servicers tend to keep you pretty honest with that because you upload the receipt to get your expenses approved. not that you should be doing that. You should be leaving your money in your HSA. But if you've ever done that in the past, you'll see how that works. Or a dependent care FSA, they are
Chelsea Jones (17:10)
Yeah.
Nate (17:11)
hardcore with receipts. It's like not only do you have to have receipts,
Chelsea Jones (17:13)
Mm-hmm.
Nate (17:14)
but you have to get something signed usually by the person who you're paying. It's it's a lot. But
with 529, it's pretty easy. You can just like send the money out of the account. And if you're not keeping your receipts on your end and you get audited, then it gets you in hot water. So you just you reimburse yourself or you pay d the school directly. That's that's how you get the money out. The second part of this question, which is do we tell him what's in there? Is it is a common thing. I hear it often.
But I don't hear it in the form of a question. I just hear parents saying, this is what we're gonna do, because they don't view it as a really financial question. They view it as a parenting question, which it is, so they may not ask us all the time. But I think there's a huge opportunity here to talk to your child about money and in a
Chelsea Jones (18:08)
Yeah.
Nate (18:08)
way that is directly related to them. Because if they don't know how much is in there, they don't have
They're not participating in the budgeting conversation when it comes to college. So it is a
Chelsea Jones (18:22)
Mm-hmm.
Nate (18:23)
little late for this family because their child is off to college. They've already selected a school. But
Chelsea Jones (18:29)
Mm-hmm.
Nate (18:30)
to you may not tell them what's in there, but you should tell them and discuss with them how much they can spend and give them a budget.
Chelsea Jones (18:38)
Yeah.
Nate (18:39)
Like mom and dad saved for 18 years for you to go to college. We saved
religiously for 18 years or however many years you've done it. And that is what and that saving has afforded you this kind of spending budget on your housing or on your f or whatever it is. And
Chelsea Jones (18:59)
Mm-hmm.
Nate (19:00)
to me, that is better than we're just gonna stay quiet and you're just taken care of, don't worry about it. And the reason I think it's better is because I talk to physicians all the time who when they see how what's required to save for college,
They literally say out loud to me, I don't know how my parents did it. I d so you're doing them, and this is in my humble opinion, you're doing them a disservice by not showing them how you did it. And not rubbing in their face, but like an 18-year-old is not going to naturally understand the sacrifice that you made in order to save for
Chelsea Jones (19:37)
Mm-hmm.
Nate (19:37)
college. And therefore, they may not take it all that seriously. And then when
They have children, they, much like most of the families I talk to, will not understand what it takes to pay for their child's college. Therefore, they may not take it as seriously. So I think
Chelsea Jones (19:55)
Yeah.
Nate (19:55)
this is a very big opportunity to maybe not to discuss the balance, but to discuss the process and what you say for and why it's important to follow at least some budget, which, you know, it's they'll they're gonna have to learn to budget.
at some point and you might as well have a say in it. Since you've saved so much for them and there's more in the account than you expected, you've done well in saving and they should learn from that. You know, this is where personal
Chelsea Jones (20:23)
Yeah.
Nate (20:23)
finance is learned. And this was not common for most of the physicians I talk to where they talk to their parents about money because your your parents, at least if you look at like the average age of the physicians we work
Chelsea Jones (20:37)
Mm-hmm.
Nate (20:38)
with, their parents
were maybe the first generation that didn't retire with pensions and all that. So
Chelsea Jones (20:45)
Yeah.
Nate (20:46)
they were not spoken to about money with their parents, which is, you know, a physician now, their grandparents didn't talk about money because they're
Chelsea Jones (20:55)
Mm-hmm.
Nate (20:56)
I don't know, it was a cultural thing. They had pensions. They didn't really need to discuss saving and what's required. So it is up to us, people my age, your age, Chelsea, ever all of our
All of our clients, it's up
Chelsea Jones (21:07)
Mm-hmm.
Nate (21:08)
to us to start educating our children about finances. And that doesn't mean getting into the weeds about investments all the time until they're the right age or showing interest. But showing them a budget is such a worthwhile exercise. And this one has real consequences for them. Like if you overspend, these are the bad things that will happen. And if you get used to overspending in college, it's not gonna go well for you when you get out.
And get your first job, and maybe you're not a physician right away and you're making an average salary, you won't know how to handle money. So
Chelsea Jones (21:44)
Yeah. And
I've seen this on the student side, because whenever I was in college, I worked in the finance department and I coached my peers, other students.
Nate (21:52)
Mm-hmm.
Chelsea Jones (21:55)
And I can tell you financial literacy and the lack of it is a real problem because I met with students, they came in. Most of them that I met with, none of them had five two nines. They were taking loans, but they couldn't tell me who their loan servicer was. They couldn't tell me how much they had borrowed.
They couldn't tell me if they were paying interest or if interest was occurring yet or not. They just saw money hit their checking account and like they spent it. They didn't realize, you know, I'm sure they knew cause it's a loan, but they didn't realize in the moment, like I have to pay all this back. Like maybe
Nate (22:30)
Mm-hmm.
Chelsea Jones (22:31)
if I have a residual of $5,000, I shouldn't spend that on crazy stuff. You know?
Nate (22:38)
Yeah. Right. Yeah. I had a friend
in college that did the same thing and he literally was buying flat screen TVs with loans. I I think the rules have tightened up on that a bit. But you know, the if you don't if no one's teaching at a budget, you're certainly not gonna learn on your own at eighteen unless you're Nate Reneke or Chelsea Jones. Like
Chelsea Jones (22:57)
Yeah. And you're going
to be approached by, you know, lenders wanting you to borrow money or to get a credit
Nate (23:04)
That's right.
Chelsea Jones (23:04)
card when you have no idea how a credit card works. I met with someone one time where they thought that they didn't have to start paying on their credit card till they hit the limit.
Nate (23:15)
gosh. Yep.
Chelsea Jones (23:18)
So
we need to teach our children how to
Nate (23:21)
Yes.
Chelsea Jones (23:23)
not financially ruin themselves just out of
Nate (23:27)
Before it.
Chelsea Jones (23:29)
ignorance and not knowing how things work.
Nate (23:32)
Exactly.
Yeah. I feel strongly about this. my my dad is a financial advisor, so I did get taught a a lot. In fact, one time he, you know, when I was in college, it was very difficult to make payments online to the school. So he walked
Chelsea Jones (23:48)
Yeah.
Nate (23:49)
me up to the financial aid office, showed showed himself writing a check. He paid for like a third of my college. And
Chelsea Jones (23:56)
Mm-hmm.
Nate (23:58)
it was like
Okay, this is a lot of money. And he looked at me and said, Look, y you need to do your very best not to graduate with loans because it's difficult for me to pay for this, let alone you,
Chelsea Jones (24:09)
Yeah.
Nate (24:09)
when you get out and you're making, you know, just a an average or below average
Chelsea Jones (24:14)
Yeah.
Nate (24:14)
salary right out of school. So, there's some other carrots, you know, that's kind of the stick. Like like don't go into debt, don't be dumb. but there's some other carrots as well, which is if you teach them
that you know, they don't need to spend all the money just because it's there. And I assume if there's a lot of money in this account, you've had the account for a long time, but they can you can roll some of the leftover money into a a Roth IRA, which you'd have to do it slowly. Your child has to eventually earn an income and it's still subject to limits on how much you can do.
Chelsea Jones (24:48)
Mm-hmm.
Nate (24:49)
But over a lifetime there's you can move thirty five thousand dollars from a five twenty nine to an IRA, a Roth IRA and
your child, you can show them, this is when you get into investing, if they get excited about this, you can show them what thirty five thousand dollars in retirement would look like, which would be absurd, like how much money they can have 30, 40 years from that day. and then
Chelsea Jones (25:13)
Mm-hmm.
Nate (25:15)
I I just by the nature of this question, I doubt that this it I it seems like maybe this is the last child going off to college. But
If there is more children, you can move money around. So you can give it, you can
Chelsea Jones (25:28)
Mm-hmm.
Nate (25:29)
move money from one child to the next. But if if you're a client of ours, ask and you're interested in this, you know, ask about the rules of moving the $35,000 over to a Roth because there are some strict rules about it. But if I'm if my inclination is correct here, seems like you'll have a little bit of extra money. There's ways to get it out into a Roth.
And this is a huge opportunity to talk to your child about budgeting, even if it's smaller stakes, cause you clearly have the money to pay for it.
Chelsea Jones (25:59)
Okay, the next question comes from a radiologist in Illinois. They said, I inherited an after-tax retirement annuity from my dad. What is it? Like what is
Nate (26:11)
Yeah.
Chelsea Jones (26:12)
an after-tax retirement annuity?
Nate (26:14)
Tell me, Chelsea. These are these are
foreign to most most people we talk to.
Chelsea Jones (26:20)
Yeah. So it's, it has the word annuity in it. So it is an annuity, which we have kind of defined previously as, something that gives you an allowance, right? But you, in order for you to start getting that allowance or that regular lifetime payment, you have to actually annuitize it. So this after-tax retirement annuity, it's funded.
This person's dad funded it with after-tax dollars. They put that lump sum into this annuity product and that contribution became their basis. So that's the portion of the balance that they've already paid taxes on. And these after-tax retirement annuities, they could be fixed or variable. So fixed is where the insurance company says, I'm going to credit your account 5 % per year until you decide to take money out.
Or if it's variable you invest the money in the account and it grows with the underlying investments This one happened to be variable so the money was invested and it grew so now there's the basis and then there's the growth on top of it and You can take money out one of two ways you can either annuit eyes it Which in that case it just turns into a check that you get for the rest of your life
Or you could take ad hoc withdrawals. You can take chunks out at a time.
Nate (27:52)
Mm.
Chelsea Jones (27:53)
If you annuitize it, each payment that you receive is going to be part return of basis and part return of earnings. So the only amount, the portion of that payment that's going to be taxable is just going to be the portion that makes up earnings.
Nate (28:08)
Okay.
Chelsea Jones (28:09)
And it is taxed as ordinary income.
if you take lump sum withdrawals, kind of just periodically, but not on a set schedule, it follows what's called a LIFO approach last in first out, which basically means the earnings are going to come out first. You're going to pay taxes on all of the earnings before you can start dipping into your basis tax free, which kind of sucks.
Nate (28:36)
Yeah.
Chelsea Jones (28:39)
But one interesting thing here, which you said to me before we even started talking, I didn't even think to mention when I was writing my notes on this. you'd said, I'm surprised that she inherited an annuity because usually if her dad would have annuitized it and was receiving payments, those would have stopped after he passed and they wouldn't have passed on to his daughter. But since he had not taken money out or he didn't annuitize it, there's still this bucket of, you know,
tax deferred dollars, none of it was paid out. So the insurance company doesn't just get to keep it. Right. And so that's how she ended up with it. And unlike a...
Nate (29:21)
Yeah. It's it's
a shame a bit, you know, 'cause if if he never annuitized it, there was really no need to put it in an annuity. I mean, I don't know the situation,
Chelsea Jones (29:30)
Exactly.
Nate (29:30)
but you know, i if you inherited this, and you're if you you know, a radiologist is probably saving well for retirement and has plenty
Chelsea Jones (29:41)
Mm-hmm.
Nate (29:42)
of money to retire, annuitizing this would be a mistake in most cases because
Yeah, you're gonna have to pay some taxes to get the money out. But if you if you took all the money out and paid the taxes, which you'd have to decide if that's worth it or what year to do that, obviously in your peak earning years, maybe that's not great. But if you take all the money out, pay the taxes, and then stuck it in a brokerage account so that your children can inherit it, they are gonna get a step up and basis in their in their in a brokerage from a brokerage account. And
Chelsea Jones (30:13)
Mm-hmm.
Nate (30:14)
if the the radiologist's father
would have done that as well, then you would have gotten a step up in bases.
Chelsea Jones (30:22)
Yeah.
Nate (30:23)
but, you know, I don't know his situation. Maybe he was planning on annuitizing it. Maybe maybe there it was that he he passed earlier than planned. but yeah.
Chelsea Jones (30:33)
Maybe, yeah, because
whenever I was looking into the kind of the specifics of an after-tax retirement annuity, the kind of justification that I found for like why someone would get it would simply be because it was tax deferred. Because you don't get an immediate tax break putting the money in, right?
Nate (30:53)
Mm-hmm.
Chelsea Jones (30:53)
But the, especially if it's a variable, if the interest and dividends that are earned within the annuity,
throughout your lifetime, those aren't taxed immediately like they would
Nate (31:05)
Mm-hmm.
Chelsea Jones (31:05)
be in a brokerage account. And so that's really the only benefit I could find, but I don't really view that as a, like a really good benefit, you know, cause
Nate (31:17)
Well, you
know, in our world it's not a good benefit because if you choose securities in your brokerage account that are strategically not you're not paying a bunch of taxes on, then you can avoid that anyways. You don't really need tax deferral on s on an on a security that isn't paying a lot of income. So these are oversold. Maybe this one was, maybe it wasn't. but
Chelsea Jones (31:38)
Mm-hmm.
Nate (31:39)
yeah, i i i with a with some detailed planning I imagine that this person will
eventually get the money out, putting it in a more tax efficient account for their children, or put it in a tax efficient account for themselves if they end up spending it. But yeah, annuities are it's it's really tough to find a an annuity structure that is beneficial for for the physicians that we're talking to.
Chelsea Jones (32:11)
Exactly. Okay, our last question comes from a double doctor family in Texas. They said, my parents are running out of money and my siblings can't help. How much can we give them without wrecking our own plan?
Nate (32:27)
Yeah. I'm getting this question more and more. and I I don't know if it's just by chance or or what, but you know, I just want to start by saying just because you're a doctor doesn't mean you can save the world. Like the whole world. You're saving a lot of lives. you can help family, but it reminds me of, you know, almost like a professional athlete where they have all the stories of how they're funding their they everyone.
And they're
Chelsea Jones (32:57)
Yeah.
Nate (32:58)
funding everyone's lifestyle. And there is a limit to your resources. And so,
Chelsea Jones (33:02)
Mm-hmm.
Nate (33:02)
but I appreciate how this question usually gets asked, which is they do want to help. And I think the question comes from like without wrecking our plan, a lot of times, they're not really thinking of themselves. They mostly just want to do this in a responsible way. And so,
Chelsea Jones (33:21)
Yeah.
Nate (33:24)
there's some harsh realities to deal with here.
But I will say that with a with a solid plan, you can offer some help and
Chelsea Jones (33:34)
Mm-hmm.
Nate (33:35)
but you should be running the show on how much you can help. And so let me just give some pointers here because how much we can give, I mean, this this person got a specific answer because they have a specific plan. but for our listeners, the the the things to think about when family members, especially parents, which I'm sure
you you want to help are running out of money, it one of two things is happening. Either they're irresponsible with their money, or they are doing their best and they are rather responsible, but they just didn't save enough. And
Chelsea Jones (34:14)
Mm-hmm.
Nate (34:15)
in either case, usually handing them a pile of money isn't productive because
Chelsea Jones (34:23)
Right.
Nate (34:24)
If they're irresponsible with money, they will not all of a sudden, just because you gave them money, be able to manage money properly. If they ran out of money, usually handing over a retired per person a lump sum, unless somehow, like the only scenario I can think of where handing them over a pile of money would work is if they're just a little short on their monthly income, like they have their social security.
Maybe they do have
Chelsea Jones (34:52)
Mm-hmm.
Nate (34:52)
an annuity, it's just not quite enough. And maybe they have a mortgage and it's small and you want to throw the money at the mortgage and clear it.
Chelsea Jones (35:01)
Yeah.
Nate (35:01)
and then that would reduce their expenses and all that. But most of the time, these are the people that should be getting an allowance.
So the way to go about this is to look at yourself look at your own situation, see what you need to save, college, retirement, you know, short term goals, like cars and housing stuff. and make sure all of that's covered. And then look at your budget. And if you decide, you know, I want to do what I think is the right thing, which is cut my budget to be able to help my parents.
then maybe you could do that. But if not, then you just look at your budget and you'd say, you know, we have an extra fifteen hundred dollars a month that we could give them. And the last thing I'll say is that most physicians live really well and they assume that everybody else must live that well in order just to just to get by. But that's not the case. most retired people, they they don't spend a crazy amount of money. Naturally as you get older, you kind of have all the things you you need.
you know, a house, you had furniture, you got maybe a car. and i the your desire for material things tends to go down as you get older. Which
Chelsea Jones (36:22)
Mm-hmm.
Nate (36:23)
is a I could probably spend a whole podcast episode talking about that. Wanting material things and all of those desires going away as you get older. Maybe we should listen to the older people about material things. But I I've seen
a thousand, fifteen hundred, maybe, maybe two thousand go a very long way with retired families. If you
Chelsea Jones (36:45)
Yeah.
Nate (36:45)
think about what fifteen hundred dollars would cover for two people, it'd cover groceries,
Chelsea Jones (36:48)
Mm-hmm.
Nate (36:49)
cover car insurance, it would cover a phone bill, it would cover gas, it would cover electric. I mean, for two people, that's like most of what they need. And if they also
Chelsea Jones (37:00)
Mm-hmm.
Nate (37:01)
have Social Security in between the two people, maybe that's another few thousand dollars.
that's plenty of money. It doesn't feel like a lot, but a thousand, fifteen hundred dollars gets people a long way if they are actually running out of money.
Chelsea Jones (37:18)
Yeah, for sure.
Nate (37:20)
So
that isn't a prescription about how much to give. It is you need to understand your finances before you start sending off, you know, the equivalent of childcare to your parents. Because that that is also a a lot that can go toward your long term goals and paying your own bills. So do what you
Chelsea Jones (37:42)
Mm-hmm.
Nate (37:42)
can. one more thing. If you hand them a pile of money.
And they are actually out of money, that pile of money will need to get spent down to zero before they qualify for some state sponsored like Medicaid. And so
Chelsea Jones (38:00)
Yeah. Like Medicaid and yeah, I was thinking that too, cause I was like,
one thing that can really drag people down is healthcare costs. And so if
Nate (38:08)
Yes.
Chelsea Jones (38:08)
you're giving them a bunch of money, then they might disqualify them for Medicaid, but
Nate (38:13)
Yeah.
Chelsea Jones (38:13)
you can pay medical bills directly to the provider
Nate (38:17)
Mm-hmm.
Chelsea Jones (38:18)
and you don't run into gift tax stuff. So.
Nate (38:21)
Right.
Yeah, it's it's tough because you you want them to have some money, but really a conversation
Chelsea Jones (38:26)
Mm-hmm.
Nate (38:27)
about, hey, if it y you're never gonna go hungry, mom and dad, and you're never gonna not have a place to live. But I can't give you a pile of money because then you won't get Medicaid. And so, if they need it and they need to go to some place that takes care of them full time at some at some point, that money literally will drain from their account until there's nothing left and then
they will qualify. So be very careful about giving away massive sums and have a conversation with mom and dad about what you can afford on a monthly basis. And hopefully you do it in a way that doesn't bring them shame or anything like that.
Okay, that is it for today. Thank you everybody for listening. If you liked this episode, please be sure to subscribe wherever your list to your podcast. if you'd like to work with us, you can go to physicianfamily.com and just schedule an interview with us. we'll get to know each other a little bit more and see if you want to if you're ready or if if you want to move on to the next stage of kind of our interview process.
Or you can send us questions at podcast at physicianfamily dot com and we'll be sure to answer those on the on the show or directly by email. until next time, remember, you're not just making a living, you're making a life.
