Nate (00:13)
Hello, physician moms and dads. I'm Nate Renekie, certified financial planner and primary advisor.
Kyle Hoelzle (00:19)
And I'm Kyle Hoelzle, certified financial planner and the retirement investing specialist.
Nate (00:25)
So, Kyle, we got we have four questions today, but one of them is interesting. It's the first one. And so we're going to ask the question, but then I wanted to talk about something that you know you've been doing a little bit more and more as people have learned that that we actually do this year. So the first question is from a surgeon's son in Washington. That is a surgeon's son. what is the rule of 72? And so full disclosure: surgeon's surgeon came to us, said.
I want you to discuss investments with my son. And and you've done this many times and every, you know, child has a different interest. Maybe they want to talk about something as simple as budgeting. But a lot of times, I think what it is is parents want to get their kids interested or at least understand investing. And that's that can be a tall task depending on age. So but this
This particular person, the surgeon's son in Washington, was a little bit older, so you actually got to talk about investing a little bit more in depth. I think they were seventeen or nineteen. and you told them about the rule of seventy two. So back to basics, Kyle. What is the rule of seventy two?
Kyle Hoelzle (01:45)
Yeah, this nineteen year old man, he you know, got his first job and he he wanted to save a little money for retirement, get started, want to learn about it. he even actually expressed to me, he's like, I I haven't gotten any education around this in school. And I said, Yeah, most people don't. And I'm it's cool that you're interested in this. He he told me that he was interested in engineering and liked math. So I immediately thought of the rule seventy two because I thought this is a numbers thing and it's a pretty cool rule.
We all know these golden rules where it's eerily kind of creepy how accurate it is
Nate (02:17)
Yeah. Yeah.
Kyle Hoelzle (02:18)
all the time. that's that's what this rule of seventy-two is. It's one those golden rules. And it has to do with cal calculating or kind of backing into the number of how long it'll take for you to double your money or what type of interest rate or return you need to get in a given stated period of time
Nate (02:40)
Mm.
Kyle Hoelzle (02:41)
to double your money.
And you just you take those numbers and you divide it into 72 and it gives you the other corresponding numbers. So let me give you an example because it'll make a lot more sense with an example. So so 72 is easily divisible by six. Okay. So six goes into seventy-two 12 times. Okay. So if you want to know how long if you want to know how long it's gonna take you to double your money.
At a six percent return, you divide six percent your or six into seventy-two, and that gives you 12. So that's the rule of 72 tells you at a six percent return, it'll take you approximately 12 years to double your money if you have a consistent average six percent return
Nate (03:29)
Yeah.
Kyle Hoelzle (03:29)
over that 12 year period. Conversely, the fun part is conversely, you can do it the other way around. So you go, okay, what interest, what return do I need to get per year?
to double my money in six years. So take 72 divided by six, and you get 12%. So you'd have to get a 12% return annually for six
Nate (03:47)
Right.
Kyle Hoelzle (03:47)
years to double your money. So the rule of seventy two is really fun. And and how I use it with why I use it with young people often is because first of all it's really interesting and it's really cool to learn about because you're like, whoa, that's that's fascinating. But the other thing that's cool about it is that it illustrates the time value of money, which
Nate (04:04)
Mm-hmm.
Kyle Hoelzle (04:05)
when you're talking about saving for retirement for someone so young,
They have the advantage of the time value of money. They have a lot of time for their money to grow and compound, only if they leave it in there, invested, and don't withdraw it. And that's
Nate (04:18)
That's right.
Kyle Hoelzle (04:18)
super important for young people who maybe don't have a lot of experience with delayed gratification and they're saving for a goal that's 45 years away. And it's kind of hard to wrap your head around that when you're just leaving high school. But the rule of 72, by using that quick rule,
you can show how much money can double and then double then double then double then double when you use an assumed, you know, like a s a pretty safe assumed rate, like a six percent return or or an eight percent return, something like that, then you can see and you can illustrate easily to these young people the advantage of their time value of money, that the the advantage
Nate (04:51)
Yeah.
Kyle Hoelzle (04:51)
of that on their side given their station in life,
Nate (04:54)
Yeah.
Kyle Hoelzle (04:54)
if they can keep it invest not touch it. And it just really that's the important part. I really want to get that across to these young people that
This this is delayed gratification, but look at the power of this for your for your future self.
Nate (05:06)
That's right. Yeah. I I have experience trying to explain this to young people because I tried to explain it to them when I was young. My senior project in high school, I still have it to this day. it was called how to become a a millionaire making minimum wage. And I explained like what how much you'd have to invest. And I can't remember the exact dollar figure I gave. I probably used a really big rate of return, but it was something like if you can if your parents give you
Eight bucks for lunch. Okay. It's eight, eight dollars used to go a long ways. Eight bucks for lunch. And you could cut it down to spending five. And every day you invested three bucks a day. And then I would jump from that, investing three dollars a day to this massive like calculator, investment calculator that's you know, went up to the moon. And literally everyone I showed it to, they're like, that's not that no. No, that's not real. Like it is real.
And then I showed like what it would look like if you stopped investing when your parents stopped giving giving you money. I I did all that. But this is more instead of just showing a calculator to somebody and someone like you and me who would get excited about a calculator, you explain that to them and like maybe you explain it to this person who legitimately has at least forty years. Right. And you just say, Hey, I like dividing seventy two by seven point two, because then it's just ten.
So 72, 7.2% return every 10 years. So if you put $1,000 in there today and it doubled once in 10, doubled again by year 20, doubled again by year f 30, and then doubled again by year 40, that $1,000 is $16,000. And that's like to somebody who think about how hard it was for this person, you know, a a young, young person to save up a thousand bucks.
That's crazy. That's crazy to them. And and and then I'm like, now you're about to go work this job. You're gonna be an engineer. You might be able to save a thousand dollars a month. And and then they're I mean the the idea of saving a thousand dollars a month in your twenties, like they're gonna be doing fantastic. So get them excited about the future, get them excited about investing. I also love this because there is kind of this
theme going around online, which young people are are following. And we and I follow pretty closely the the themes online because a lot of our you know, prospective clients and new clients, they, while they're they might be in their early 30s because they're getting out of training in their early 30s, they still view the world as a young person because they're just getting started. And there's a lot of doom and gloom about like buying a house and
Like the world's out to get you, the world's against you. And I just reject it. I reject that idea. Yes, you it's gonna be difficult to retire and pay for things if you don't invest. But if you invest and every thousand dollars you put in when you're twenty years old turns into sixteen thousand dollars, I think you're gonna be fine. So it's it's a nice like it's a positive note compared to the things that they might be hearing. And they almost feel like they're getting insider information. It's funny.
It's like, no, this has just been the case forever. It's great.
Kyle Hoelzle (08:28)
Yeah. Well, I
mean, we all know that it's kind of human nature to fear the unknown. And when we don't get
Nate (08:34)
Yeah.
Kyle Hoelzle (08:34)
any education around the financial world, then
Nate (08:37)
Mm-hmm.
Kyle Hoelzle (08:38)
it's this unknown thing and and money is real. Money you need money to survive, you need money to support a family, you need you know, you money's a necessary evil, some people might say. You know, it's it's i and and are you get if you have fear over here about what to do with it 'cause you don't understand and you don't know what to do with it, then
you don't do anything with it. You just you you just park the money in the bank the safest possible
Nate (09:00)
Yeah.
Kyle Hoelzle (09:01)
thing because you don't know what to do. So when I speak with young people and I educate them about it, I get super passionate about it because I I I my hope is that they have some courage that, hey, I can go out and learn this. I give people some sources. Hey, these these websites, you know, you know, Fidelity.com, Vanguard.com, you know, Schwab.com, these these these big names out there, there's a lot of information on there about all these different things and and you can read about it and
It's not not scary and you know, y you just it's just something you gotta learn, you know, just like anything else, you know. And so I
Nate (09:31)
Yeah. Exactly.
Kyle Hoelzle (09:33)
I like to hopefully inspire these these young kids to to dive into the subject matter and and and do away with the fear so that that they can start early with c some confidence, some level of confidence.
Nate (09:44)
Exactly. Yeah, that's great. Okay. So Kyle, to our current clients, Kyle does this a few times a year usually. Someone asks about this and he'll get on the phone with a young person, even if they are, you know, ten years old. It'd be it wouldn't be the rule of seventy-two, but it'd be something else. and at least teaching them the value of money. I mean, sometimes when you're 10, you were just telling me before we started you were working on a house project and your girls asked you like,
Why don't you just pay someone to do this? Right. And it's like they don't understand yet they will. And by asking questions like that, that the value of money, how hard it is to pay for certain things, and you gotta save for stuff like that. And I'd rather spend my weekend doing this project than paying someone else five thousand dollars that could turn into fifty. So sometimes
Kyle Hoelzle (10:32)
Yeah.
Nate (10:33)
that's the way it goes. But for physicians in general, they they earn a ton, and I'm I I'm considering
I've thought about this for years, writing a book called Don't Mow Your Own Lawn, which is for people who can earn more than they might spend by getting help. And that's a totally different story. But when you're six, seven, eight years old, you don't need to learn that lesson quite yet. So it's different for everyone.
Okay, we got three more questions. First one is from a dermatologist in Arizona. They said, we inherited three hundred thousand dollars that has been sitting in savings ever since. Every time I go to invest it, the market is at another record high. When do I invest it or when do I pull the trigger?
What do you think, Kyle?
Kyle Hoelzle (11:23)
Gotta watch out for indecision.
Nate (11:25)
Yes.
Kyle Hoelzle (11:27)
you just get stuck. once you start thinking about timing, the timing is never feels right. Even if the market started to go down a little bit today, you'd be starting to wonder, is it at the bottom yet? It probably still has more room to go down. I should wait a little longer. Is it at the bottom yet? I'm not sure. I should probably wait. it's rebounding. You've already you know you're I better wait again. It's going back up again. I mean, it goes
Nate (11:49)
Yeah.
Kyle Hoelzle (11:49)
on and on and on. You don't know what the f what tomorrow's gonna hold.
You don't know what the future's gonna hold. So my answer is get started today, regardless of what the market looks like. you know, this is where good disciplined investing is it needs to take the wheel. You know, this is where you have your investment policy statements. So you're managing your risk with your stock bonds and your diversification. You know, you got your targets. That's you're already managing your risk that way. you
and so the only the only thing that basically once you've you've taken a lot of all that kind of portfolio of guesswork out with all your diversification, because you're buying a little bit of everything at that point, you don't know what part of the world's gonna sh you know, fire up and hit hit you know, hit good returns next, which part of the economy in the world's gonna not do well. So you've already taken all that guesswork out because you've bought everything. So now it comes down to like again, just timing, right? So
There's some pretty good studies out there that show that putting money in all in one lump sum is the best way to go. Like that has the highest probability of the best outcome, is just taking it all and putting it all in the market all at once. but if you have fear around that or you're you're you're you're unsure about whether the market's at the peak or at the at the trough and you're not sure if it's the timings right. One way to manage that risk is to just pick a monthly investing goal.
over a certain amount of time and just dollar cost average your investments in the market over time. So you could take that 300,000 for example and you could set a 10 month goal and you could put $30,000 a month in for 10 months or or any other, you know, you could
Nate (13:31)
Mm-hmm.
Kyle Hoelzle (13:32)
slice it any way you want. And that way if the market starts to dive, you're dollar cost averaging on the dip. And if the market does keep climbing, you're getting in. Your earlier contributions are going to have that growth because you got it in, but you're going to dollar cost average as you maybe potentially
hit the peak, I don't know. and so that is a way to manage risk of of putting all the money in at once and and risking
Nate (13:56)
Yeah.
Kyle Hoelzle (13:56)
the market dropping immediately the next day. So if you're if concerned about that, that's that's the best way to manage the risk. But you gotta get started, one way or the other, either all at once, over time, but but indecision is is the enemy.
Nate (14:09)
Yeah, I agree. Yeah. And I I pulled a couple tidbits from this like I I wanted to kind of give a another answer here. It kind of took a different angle. so you're managing your risk with that. but there's still then I mean, you and I still have this question with our own money. Everyone has this question. We're human. And it is nerve-wracking. That's why you put those guardrails in place, and that's why you develop a system that takes the emotions and
you trying to decide out of it. But something that has always helped me, and you you you touched on it, which is investing all at once has beaten spreading it out roughly two-thirds of the time historically. So you're trying to look at this math, you're saying it's it's at an all-time high. Okay. But look at the other side of the math, which is that putting in all at once usually wins. Okay. So that's that's one thing. the other part is
markets the market spends a lot of time at all time highs. Like if you never invested when the market was at an all time high, you would you would not get very good returns. So it's always everyone's always saying markets at an all time high. It doesn't really mean much.
Because in order for it to keep, I mean, it it has to be at an all-time high at some point, you expected it to be at all-time high. That's why you invested.
Kyle Hoelzle (15:38)
Mm-hmm. Mm-hmm. Yeah.
Nate (15:41)
So it doesn't mean that the market can't go down. It just means that if you're spending if you're setting money aside anytime the money market's at an all-time high, you're screwing yourself. it it I remember just a just a few years ago, market being at an all-time high and
Then AI came out.
It's like you th there's this thing in in this beautiful country you live in called innovation. And it sneaks up on you. You don't know when the next thing is gonna be innovated. You don't know when the next company is gonna do great or something new's gonna happen. not to say that those companies are over or undervalued. It's just you don't know. there was one more let me s look at my like little notes here.
th I I mean mainly i if a if record highs i record highs aren't a signal to sell is really what I'm trying to say. And it's also not a signal not to put your money in. So, like you said, you know, build your guardrails. You're buying American stocks, you're buying international stocks, you're buying bonds, all this money isn't going directly into the what you might think are overvalued stocks. but they continue to go up.
So and we're gonna get to another question that's very similar to this too, and and I'll bring up another point on that in a second. Okay, next question is from a rheumatologist in Kansas. My whole four three B is in one total market fund. I keep reading that the index is really just ten AI companies now. Am I less diversified than I think?
I'm gonna start here. Okay. And then I'm gonna I'm gonna let you go. So
Kyle Hoelzle (17:20)
Mm. Yeah, yeah, go f
Nate (17:23)
yes, they're the top 10 companies, I think they make up you you looked this up before as 35. I I was looking at something like 40%. You're looking at like tech and and healthcare. but yeah, the top 10 companies are somewhere between 35 and 40 percent of the total market, and that is higher than normal. But those companies also make the vast majority of the money. Right. So it's like
You you're sort of asking, again, I I'm I'm gonna I'm reframing this. This is true. And this can give you make you feel some type of way about your investing. But what is also true is that those companies over historically, the top 10, the big companies make a lot of the money. So you're essentially asking, should I take some of my money out of the winners and put it it down at the bottom? That just because they're at the bottom doesn't make them winners.
Some of those will win, some of those will lose, just like some of the top 10 companies will win, and some of them will lose. There, there is no substitute for investing. Like you must take risk, and this is part of the risk. If you need a return, you have to take risk, and this is just part of it. but the question specifically is: Am I less diversified than I think? It's like, what does that mean? What did you think? so what's your take on that?
Kyle Hoelzle (18:47)
Well, I mean, I think it comes to down to selecting the fund. I mean, you you this is part of the due diligence you should do when you before you you invest in something. That's why when you invest in your 403B or 401k, they ask you, have you seen the prospectus or here's the prospectus? 'Cause they want to make sure you understand what you're investing in. So if if you're concerned about the diversification of your fund, then I would say you need to look at your fund. You need to see what
Nate (19:09)
Mm-hmm.
Kyle Hoelzle (19:09)
it actually holds. You know. there are security review websites you can go to that
that are independent that will have the information on there. And you can see the
Nate (19:19)
Yeah.
Kyle Hoelzle (19:19)
quantity of the holdings, like the total number of stock holdings. You can see stuff like that. You can see what the top ten holdings are. You can actually drill in on the fund company websites. You can actually go in and you can find that mutual fund. You can drill in, you can actually find the individual all the individual stocks and everything of as of the last posted a report for that fund. And you can actually see the breakdown on it. So if I'd say get curious if if you want to know, go the answers are there. Go get them.
Nate (19:45)
That's right.
Kyle Hoelzle (19:46)
has has the tech AI boom you know thrown diversification off? again, it's gonna be fund specific. I I looked into a couple of the you know some of the larger mutual fund names to see how they're gonna handle how they're handling this type of situation. what sparked it for me was the SpaceX IPO. I got curious about how that's gonna fit into these index funds. So I s and and some of these mutual fund companies already had articles out about.
their approach to new IPOs of this size and how they're gonna, you know, minimize the amount of stock that they put in at first and and keep monitor it. And it seemed like everyone's gonna be real gradual with it. But that's kind of a side note. But,
Nate (20:27)
Mm-hmm.
Kyle Hoelzle (20:28)
you know, my answer would be most likely no. I mean, you're not less diversified. You know what I mean?
Nate (20:35)
In fact, you're probably more diversified than you thought. Right.
Kyle Hoelzle (20:39)
Maybe, yeah. You might find
out that y it holds even more stocks than you thought you
Nate (20:43)
Yeah.
Kyle Hoelzle (20:43)
owned. but you know, you have to remember too, a lot of these the top ten tech companies you see on here that are heavily involved in AI, they have a lot of other facets to their business as well. It's
Nate (20:53)
Yes.
Kyle Hoelzle (20:54)
not like they're just an AI company. You know what I mean?
Nate (20:56)
Mm-hmm.
Kyle Hoelzle (20:56)
It's that's not their only revenue stream. They have a lot of them have physical products that they produce and ship. They have a lot of you know, they're they're kind of in it all. You know, that's why
Nate (21:06)
Mm.
Kyle Hoelzle (21:06)
they're so successful and so big. So
I think and like you said, you know, like you don't know what the next new technology boom is gonna be, what the next new thing is that's gonna really, you know, hit the marketplace that consumers are gonna really jump on and it's gonna you're gonna see a lot of growth on. You don't know what that's gonna be. And so if you dump say you dump all your tech stocks today, you might you're gonna miss out on the next the next, you know, big discovery or the next big trend.
Nate (21:33)
Yeah.
Kyle Hoelzle (21:35)
And I think we all know technology's not going away. Technology's here to stay.
Nate (21:39)
No.
Kyle Hoelzle (21:40)
We all use technology. It's just it's gonna change how what the technology is gonna change, but it's never gonna go away. So do you
Nate (21:46)
Yeah.
Kyle Hoelzle (21:46)
really wanna get away from I from technology companies? Like is that really something to be feared? I don't think so. I think I think it's I think it's a it's part of your diversification. It's just a it's just a part of your portfolio. It's you know, I wouldn't discard it any more than I would
an industrial stock, a healthcare stock, a communications stock, or any of those stocks. I mean, they're all they all fit into the puzzle. So yeah, I to go full circle again, you know, ch look in your fund. Find out what it holds. Is it diversified enough for you? You know.
Nate (22:20)
Yeah. Yeah. It's
a tough question to answer because we don't know which fund they're saying. A lot of people will say total market fund and we take them at that at face value, but you know, i i it's it's kind of like when people say I'm in an index fund and you find out like well, you're like, well, which one? They're I'm in the S P five hundred. You know, okay. Well, why not the why why the S P five hundred and not, you know, VTI?
Why? why don't you own two thousand twenty five hundred companies instead of five hundred? And so it kind of depends. Look at your fund, make a decision. we like true total total market funds and
Investing in that, investing in international stocks, and you probably don't own all stocks, you probably have some bonds. once you actually look under the hood on all those things, if you are truly fully diversified, you'll find that okay, so maybe a huge portion of your money is in AI, but it's not 40% of your money if you if you're buying all those funds. And so it might be 40% of
40% of your money. And I I don't know if I I mean I couldn't make a case for not investing in these things, just like i because they they could they are doing great numbers right now. And sure, they might like ri w what's if Chelsea was on here, she'd say revert to the mean. And maybe they will lose some value, but what's your time horizon? How long do you have? Because AI, tech
Technology, it's hard to imagine it going away. And while one of those top ten might go down, one of them might go even higher because one of them theoretically might quote unquote win. And so you have it all, and that's okay. but again, you you take risks when you invest. That's why you get paid. That's why everybody, every one of our clients that's invested in these companies has seen fantastic returns for about a decade. Like
Unbelievable returns. Go back to the rule of 72. We're using numbers like 7.2%. Try 17.2%. Like, okay, don't forget that. As the market potentially you know, goes down and gets into a trough, don't forget that for a decade you got incredible returns on your US stocks.
Kyle Hoelzle (24:48)
And if you thought that year one was the peak and year two was the peak and year three and year fifteen and you hadn't invested
Nate (24:55)
Yeah.
Kyle Hoelzle (24:56)
your money and you just missed out on that fifteen years worth of growth. And
Nate (24:59)
That's right. Yeah.
Kyle Hoelzle (25:00)
even and then and then you get that fifteen years worth of growth and say it does drop, but you've got all this growth. So you know, maybe it doesn't even drop all the way down to where you first started. So you you end up
Nate (25:07)
Mm-hmm.
Kyle Hoelzle (25:08)
still netting a return even when it drops. But if you were waiting that whole time, you didn't even net that return. You know what I mean?
Nate (25:13)
Yeah, exactly.
Kyle Hoelzle (25:15)
So
Nate (25:16)
Okay. Last question of the day is from a neurologist in Virginia. My father left me four hundred thousand dollars in one company stock that he purchased many years ago. I don't want to pay a bunch of taxes, so I just left it alone. Is that a mistake?
Kyle Hoelzle (25:33)
Yeah. This is a really good question actually. I I have a couple of different approaches to it. There's kind of some assumptions that you make. So I kinda wanna address the assumptions first.
Nate (25:42)
Okay.
Kyle Hoelzle (25:43)
And then and then I think drill down to what I think is at the core of this question or what I think like listeners need to know.
Nate (25:49)
Mm-hmm.
Kyle Hoelzle (25:49)
But he says the question is left me four hundred thousand. So I think the assumption is this is an inheritance. Okay, and that's
Nate (25:54)
Mm-hmm.
Kyle Hoelzle (25:55)
important because there's certain rules around that. But let's let's we're gonna assume this is an inherited stock. Okay, and then f
Four hundred thousand dollars in one company stock. So one of the risks that we have to be aware of as advisors is concentration stock risk. And this is really common with like CEOs or people who participate in their company stock plans. They end up
Nate (26:11)
Mm.
Kyle Hoelzle (26:12)
having a lot of their own company stock. And the concentration risk is basically you look at your entire retirement portfolio, your four one K assets, your IRAs, all of it pulled together. And you take the the value of that individual stock that you own a lot of and you divide it over it and you see what percentage of your portfolio is in this individual stock. And if
That percentage is really high, then you're you're too concentrated. And there's a lot of risk involved in that because that one company goes under or has an issue and you and and and loses almost all its value or more, and your portfolio is really heavily concentrated in that, it's just you can lose a lot of your retirement savings really fast because it's
Nate (26:46)
Mm-hmm.
Kyle Hoelzle (26:47)
all hanging on one company. So the other assumption I'm gonna make here in this scenario is that.
$400,000 is a lot of money for this person's portfolio. They say this is all the money in their taxable accounts. So that tells me this is all their taxable assets. They probably have a 401k in IRA. And depending on how old they are and how long they've been saving for, this $400,000 could be a a good chunk of their portfolio. So I'm gonna assume
Nate (27:08)
Yes.
Kyle Hoelzle (27:09)
there's concentration risk going on here, is what I'm gonna assume. I don't know this person's total portfolio. you know, if they had $12 million with $400,000 in company stock, I'm there's a concentration risk is small, I I'm less concerned about it.
If you have $800,000 in savings and you're $400,000 one stock, 50% of your portfolio is in this one stock, that's a concentration risk you need to be concerned about. So that's that's the assumptions I'm making. So now that we're there, we're we're saying we're constant heavily concentrated and I inherited the stock. Okay. So and they've left it alone, and and is that a mistake? That's the that's the core of the question. the short answer, yes. If you've done nothing,
And you've inherited the stock and it's and you're super cost traded and you want to sell it and get rid of it and you've done nothing and you're letting time slip by without doing anything, that is a mistake.
Nate (27:55)
Mm-hmm. Yeah, yeah, exactly. Did
Kyle Hoelzle (27:57)
And so why why is that a mistake, right? Sorry, go ahead.
Nate (28:01)
did you have more to say on that? Because I think you're about to get to the doing nothing part about inheriting pr most likely a I think this is from a brokerage account.
Kyle Hoelzle (28:13)
Yeah, I was getting to the like, well, well, why should why should I do something and what should I do, right? In this
Nate (28:18)
Mm-hmm.
Kyle Hoelzle (28:18)
situation, I might inherit money someday in a taxable account. My dad's talked about it. What, you know, so what do I do, Kyle? Well, right away, you know, when you go to claim your as early as you can, I mean, there's a grieving process, but as early as you can, and and when you start to tackle the estate stuff, one of the first things that I would do is address the taxable account. And
What you do is you ask for what's called a s you contact the brokerage and you give them the the deceased notification and you you clear their paperwork hurdle for that. And then you wanna make sure, you just want to make sure they should do this automatically, but not always the case. So you want to make sure you ask for a step up and basis.
Nate (28:54)
Mm-hmm.
Kyle Hoelzle (28:55)
And what that as of the date of death. And so what that means is it doesn't matter what price you're the person you inherited the money from, the original account owner, it doesn't matter what price they paid for those stocks. what happens is on the date of death.
the the the price that the stocks were bought for, they adjust that price to the value of the stock as of the date of death. So all that gains that you would pay taxes on if you were to sell it as of the purchase price of the original owner, that goes away because now the purchase price is set to the price of the stocks, the day to death, such that if you were to sell it exactly on the day of death, if you did a simple basis the the day of death, you would actually realize no capital gains because you sold
Nate (29:34)
Yeah.
Kyle Hoelzle (29:34)
it. I mean it's not possible to do it. It's usually always like some lead time and a little bit
Nate (29:38)
Mm-hmm.
Kyle Hoelzle (29:38)
time, but just to hammer the point home, if you if you were able to get the step of basis on the day to death, you wouldn't pay any taxes when you sold those stocks. So so by doing that that's the b that's the that's the big mistake. Yeah.
Nate (29:48)
That's the big mistake, right? It's like the
the having a concentrated position, we you know, we don't b we don't necessarily believe in that if it's a huge portion of your port portfolio. It's a risk. But the underlying mistake here is to assume that there's a big tax bill. Mm mm. I mean, we don't know for sure, but the judging by this question, it looks like you inherited money in a brokerage account and you are assuming that, you know, your dad
Bought it for $20,000, $50,000, and now it's $400, and you're gonna have to pay taxes on all of it. But you get a step up and basis in a brokerage account. So if you sold it day of, you wouldn't owe any taxes. So that's the that's the big one, is just this assumption. So you can sell this if there is, if you got a step up and basis, you can sell this and reinvest how you like, with no tax consequences. I wanted to touch on one more thing, too,
Kyle Hoelzle (30:44)
Exactly. Yeah.
Nate (30:46)
which is let's say.
They inherited it and it grew because they just left it alone. And maybe it's been a couple of years. They did get this step up a basis. Let's assume they've they cleared that hurdle and they just didn't know it. Okay. So now you know you have a stuff on basis, but there's still gain because the stock market's been doing well.
Kyle Hoelzle (31:06)
Mm-hmm.
Nate (31:08)
so the question I would ask you is l let's imagine there is a there's capital gains and it's gained
you know, $40,000. It's gone up, you know, 10% or something. It's $440 now. So you have to pay capital gains on $40,000. Let's let's say it's it's it's $10,000 tax bill. Okay. That is painful. No one likes to pay taxes, right? but if you had four hundred and thirty thousand or four hundred and forty thousand dollars on in your checking account right now.
Today, and you knew you needed to invest it. The question you should ask yourself is would you go buy four hundred and forty thousand dollars of stock in this company, in this single company, today? And
Kyle Hoelzle (32:01)
Mm-hmm.
Nate (32:01)
for most people, even people who pick single stocks, that is far too much risk for them. They they're like, No, I would I might buy 10 stocks, you know, if I like single stocks, but one put
Put almost half a million dollars into one stock. If you ask yourself that question, it's a it's the same goes for all areas of finance. This is a very helpful tool when you're dealing with emotions about tax bills or you're dealing with emotions about anything in personal finance. it g it I ask this question when people decide if they want to pay off their mortgage. So maybe they have $100,000 left on their mortgage, they have $100,000 in cash. And they're asking, should I pay off my house?
Okay, or should I invest it? You could do all the math you want. Okay. You could you could try to determine what the rate of return you're gonna get. Meanwhile, all the questions in here are about risk and people nervous about the market because it's at an all time high. So it's like, what are we talking about? But if you instead, if you imagine your house was paid off and you called us instead and said, Should I borrow a hundred thousand dollars against my house?
go put it in the stock market because it's the same thing. Having
Kyle Hoelzle (33:16)
Mm-hmm.
Nate (33:16)
$100,000 in cash and trying to decide if you should pay off your house is the same question of should I go take out a mortgage? Except unless of course you have an unbelievably low mortgage rate and you're doing that math. But that's the question here. If I have almost half a million dollars in cash, should I buy a single stock, I have yet to meet a physician that would do that. It's it's too risky for them.
and most of our listeners probably are in the same boat because if they're still listening to this point, they know that we're not big on single stock, so that's not something that we generally recommend. So
Kyle Hoelzle (33:50)
That's a
that's a great acid test. And
Nate (33:52)
Yes.
Kyle Hoelzle (33:53)
you can only get that from like years of planning experience because
Nate (33:56)
Yeah.
Kyle Hoelzle (33:57)
you and I worked together for a while now and I haven't heard that one yet, and that's a good one. Yeah. I'm stealing that.
Nate (34:01)
Yeah. No, it's great.
It's and you can do this with anything, not just stocks. Any
Kyle Hoelzle (34:06)
Mm-hmm.
Nate (34:07)
decision you're making. Try to flip it on its head and imagine
Kyle Hoelzle (34:10)
Yeah.
Nate (34:10)
something different. I mean, so the answer to this question is you most likely don't owe a tax bill. You might have to go back and get a step up and basis with your brokerage. And if you had four hundred thousand dollars in cash, would you go buy into this single stock today? Probably not. Probably. and that also doesn't mean that.
You know, your your pops made a bad choice. The stock was in a
Kyle Hoelzle (34:34)
Mm-hmm.
Nate (34:35)
entirely different situation 30 years ago when he bought it. Right. So just
Kyle Hoelzle (34:39)
Right. And it
Nate (34:42)
because it's done well doesn't mean you should stay concentrated. And one more thing. There could be a really smart reason your dad did this, which is he had an unbelievably low basis. And if he sold it, he would pay an unbelievable amount of taxes.
Therefore he purposely let you inherit those stocks and spent all the other
Kyle Hoelzle (35:03)
Yes.
Nate (35:03)
money so that you could get a step open basis. It's like
Kyle Hoelzle (35:07)
Right, right. Yeah.
Nate (35:09)
it's working, you just have to let it work.
Kyle Hoelzle (35:12)
Yeah. Yeah. You know, I like to think too the step of a basis, this is the scenario I like to think of. Like you inherit a bunch of money like when you're thirty or forty, and maybe your your target allocation's like ninety percent stocks or eighty percent stocks, something like that. But you inherited money from like a a seventy or eighty year old, so you're getting like thirty percent stocks, seventy percent bonds, right? Which is not a fit for you at all, right? So
Nate (35:30)
Yeah. Yeah, right.
Kyle Hoelzle (35:33)
the step of a basis, the way I like to think of it, it's like really nice. It's like a really it's it's it's a beautiful thing because you can go, Well
I wanna save this money for retirement. I wanna spend it. And it's such a great like inherited gift I got from this family member. But I want to put it to work it like it towards my goals and and at my target
Nate (35:49)
Mm-hmm.
Kyle Hoelzle (35:50)
allocations. And so you get this beautiful step up and basis so that when this when you do inherit those assets, you can re you can fit it into your retirement savings at your targets. And I just think
Nate (35:59)
Mm-hmm.
Kyle Hoelzle (36:00)
that's that's how you should think about that, you know, with at least with the taxable accounts. Because there's concerns with the qualified accounts. So this is of course specific to taxable accounts,
Nate (36:08)
Yeah.
Kyle Hoelzle (36:08)
but
Yeah, immediately that's what you should thinking is like, wow, I got this big beautiful inheritance, but I wanna I wanna rebalance this and I have to step up a basis to do that. whether you have cost trade stock or not, like I said, it might just be a situation where the portfolio is just a completely different allocation. It
Nate (36:22)
That's right.
Kyle Hoelzle (36:23)
could be really expensive holdings that maybe, you know, they got through through a a a financial provider that they are going dealing with, and then you have your
Nate (36:31)
Mm-hmm.
Kyle Hoelzle (36:31)
financial provider and you don't want these funds, or maybe you can't move these funds because they're special and you can't transfer
Nate (36:36)
Mm-hmm.
Kyle Hoelzle (36:36)
them.
So this step up and basis gives you the option to sell the cash, move your assets, put them where you want them to go, invest them how you want to go. And so take advantage of that step up of basis and and
Nate (36:46)
Agreed.
Kyle Hoelzle (36:46)
slot this inherited money, this taxable money into your life and into your portfolio.
Nate (36:51)
Yeah. There it it can go in an entirely different direction too. I love that you're say that you pointed that out because sometimes your goal isn't to have four hundred thousand dollars in a brokerage account. Sometimes your goal is to buy a house. Sometimes your goal is to put it in a five twenty-nine for college. This is why having a plan in place before this happens is important because you should have a roadmap for like what what are my what
Outcomes that I'm looking to achieve are being neglected. And let's fund some of those. This is
Kyle Hoelzle (37:24)
Yes.
Nate (37:25)
a true gift. I mean, you're you're you're getting this money, you can do what you want with it. But most people have that emotional tie to keeping this money in the market because that is what dad did, which was great. And you will have money in
Kyle Hoelzle (37:40)
Right. Yeah.
Nate (37:42)
the market. And all of these things are.
Catapulting you forward so that you can put money in the market and do the same thing for your kids. I have
Kyle Hoelzle (37:49)
Right. Right.
Nate (37:50)
a friend, does not make doctor money, does not own a home, did not have a good college degree, inherited six figures from her grandfather, and said, I think I want to leave it in the market. And I thought,
This $100,000, while fantastic, is not the thing that's going to give you financial freedom. The thing that's going to give you financial freedom is getting a good foundation in your life. Maybe getting a degree, maybe getting a skill that can pay you more money, maybe buying a house. But for some reason, because grandpa did it and grandpa was good with his money, I'm going to leave it here. Well, grandpa was in a different situation than you.
He had a foundation. He set that up so that he could save this money. And it's a that's a extreme example. None of our doctor listeners are going to deal with that. But it to put it in your own situation, you have other goals too. A lot of this money, I mean, half a million bucks is can go a long ways. a lot of it will probably get reinvested, but some of it should probably apply to other goals as well.
Kyle Hoelzle (39:03)
Yeah, and you know that it's interesting too that I'm glad you brought that up because I notice in a lot of the plans that you guys write that that I see that there's never an assumption that they're gonna get a windfall from family, like like inheritance.
Nate (39:15)
Yeah.
Kyle Hoelzle (39:15)
Like a oftentimes retirement plans are written assuming that you they're not gonna get anything from their parents. So
Nate (39:20)
Mm-hmm.
Kyle Hoelzle (39:20)
a lot of times when we get these when the clients our clients contact us and say, Hey, I I just inherited half a million dollars. Do I need to try to save it for retirement? And we look at their plan, you're like, you're on track for your plan.
What other goals are out there that that that like you said are neglected or maybe because everyone's so focused on putting their own auction mask on for retirement, that's
Nate (39:40)
Mm-hmm.
Kyle Hoelzle (39:40)
college or paying off their home or buying cars in the next few years, re-roofing your house, renovations, these things that you're gonna be stressing your cash flow to try to pay for. If your plan's on track, it just becomes it just opens everything up. And then with the step up and basis, you can raise the cash with very little taxes owed.
And
Nate (40:01)
Yeah.
Kyle Hoelzle (40:02)
and you don't have to re yeah like you said, you don't have to keep them in the market. So I think that's just such a that's such a that's a really good point to make too. Everyone's situation's different.
Nate (40:08)
Everyone's is and a and and mo and the only reason I I have such a strong opinion about this is because I know that that everyone will still invest most of this money, which is a great idea. I think they should. But you know,
Kyle Hoelzle (40:19)
Yeah, nothing wrong with that. Nothing wrong with that.
Nate (40:21)
to to carve off fifty K to make it so that you your plan will stay intact, like no nothing big will come up because
Kyle Hoelzle (40:29)
Right.
Nate (40:30)
you need it for something else is great. And and it reduces
Kyle Hoelzle (40:32)
Yeah. Yeah.
Nate (40:35)
the obligation of you.
to continue to save aggressively if you can invest some of this. So lots of great things to do with it, but the tax bill, most likely in this scenario, is not one that needs to be kind of fretted about. You just need to do some paperwork.
Kyle Hoelzle (40:52)
Yeah. Yeah. Double check your cost basis and see where you're at.
Nate (40:54)
Yeah.
Okay. Thank you everybody for listening. If you've liked this episode, you can be sure to subscribe wherever you're listening. You can send us questions at podcast at physicianfamily.com. You can also schedule a conversation with us if you're interested in becoming a client. but until next time, I want you to remember you're not just making a living, you're making a life.
