Nate (00:00)
Hello, physician moms and dads. I'm Nate Rennekee, certified financial planner and primary advisor.
Kyle Hoelzle (00:06)
Kyle Helsley, certified financial planner and retirement investing specialist.
Nate (00:12)
Okay, Kyle. So we have you on about once a month. So we try to save our investment heavy questions for you because you are the retirement investment specialist. So we got four questions today. I'm gonna I'm gonna answer the first one, but then I got some other good questions for you here. first question is from ophthalmologist in Virginia. I have a five twenty nines for both my college age children.
With enough to cover their college education. Okay, so they're already done. most of the accounts are still in stocks, and I've just been liquidating funds as needed. Returns have been good to date, but I feel like I'm gambling with a downturn. Should I convert the five twenty nine funds to cash?
This is kind of uncommon, I think. I don't usually get this question because most people are just choosing the years to college target date fund in their five twenty nine because five twenty nines a lot of times like they sort of for you know, when you open an account, they they kind of force you or suggest they funnel you to a certain strategy and a lot of times five twenty nines funnel you to that. So even if you aren't a client, you probab a lot of our listeners are probably in
Target date funds for college. But every so often, someone has chosen the path of be all stocks. And if you've done that in the last 10 years or 18 years, you've done pretty well with all stocks. and the question is should I stop taking risks with those stocks? And I think this is kind of where heavy stock or more aggressive investors kind of hit this fork in the road where they're like, it's done well for me. But
The money like I have all the money I need. What should I do? I sort of think they're answering their own question. I have all the money I need. Could you know, I d I don't need any more money for college. This is a college account, and yet now I'm starting to feel the heat of risk. And when you have 18 years or for retirement, you're investing and you have 20 or 30 years, you kinda I spoke to a very, very
wealthy physician a couple weeks ago and he was running into the situation. He had kept his head down. And the story he told me was that anytime something happened in the stock market, he just was like, I'm just gonna go to work. Like that was his mentality. I'm just gonna go to work. I don't need to worry about it. But now he's retired or retiring and he has to care all of a sudden, or he feels like he does.
And this is kind of a nice little warm-up for what it might feel like in retirement. You get closer and closer to retirement, you've been taking more and more risk in your younger years, and you start to wonder like, how much risk should I really be taking? So they are answering their question in a way in that they are describing their risk tolerance because they said they feel like they're gambling. I'm sure it didn't feel like gambling 18 years ago. Felt like a prudent decision 18 years ago.
they have all the money they need. So whether or not you should be in 100% cash, I I couldn't give you a definitive answer right now, but lowering your risk, taking less risk with stocks, buying some more bonds and cash seems like a very reasonable thing to do when you've already won the race. college-age children mean you know what school they're going to. You know how much it's gonna cost, give or take inflation. you simply need to
keep up.
with the rising cost of college over about a four year time period. And if you have enough for that, there's no s there there's no legitimate reason to take risk. The only reason you might want to have a little bit more money in there, other than paying for college, is if you wanted to give the money to grandkids or you wanted to roll this into a Roth IRA later on for your children. But it seems like most people, that
is
Kind of the icing on the cake, it's not a reason to take a lot of risk in 529s. So reducing risk at this point from being a hundred percent stocks when you need this money in the next four years. I can't really see any argument against that. So short answer is yes, taste take less risk. Exactly how much cash, bonds, and stocks, depends, but probably not all stocks.
Kyle Hoelzle (04:49)
You know, and I I I love the acid test of like, especially with a hundred percent stock because it's the math is so easy, but the acid test would be like, Man, if I lost f if my stocks lost forty percent of their value tomorrow, that means I lost forty percent of my college savings tomorrow.
Nate (05:04)
Yeah.
Kyle Hoelzle (05:05)
Am I gonna be okay with that?
Nate (05:07)
Mm-hmm.
Kyle Hoelzle (05:08)
And if the answer is no, then you
need to reduce that risk. If the answer is yes, then you stay right where you're at.
Nate (05:13)
Yeah. Especially I mean, and and it's it's so obvious in this case. I mean, you so you you're asking yourself the question, would I be okay if I couldn't pay for junior and senior year? It's right there. And when you have a long time, that doesn't feel real and it's not real quite yet, because the stock market has time to recover if there was a dip in the market, a hu a big dip, like a forty percent.
downturn in the market. but two years, three years, four years, that's oftentimes, at least if history repeats itself, not enough time for the market to recover.
Kyle Hoelzle (05:52)
And and w
Nate (05:53)
Hopefully.
Kyle Hoelzle (05:54)
assuming you're spending the dollars on on qualified education expenses, then that's tax-free growth. So if the market corrects itself, not only are you have less money for college, but you've you've lost all those foregone
Nate (06:07)
Yeah.
Kyle Hoelzle (06:08)
profits, all those qualified profits that were going to be tax free, they just disappeared. So
Nate (06:13)
That's right.
Kyle Hoelzle (06:14)
by by reducing your risk, your one way to think about it is you're locking in those gains. You're
Nate (06:20)
Mm-hmm.
Kyle Hoelzle (06:21)
you're taking these gains and you're
taking that risk off the board and you're capturing those gains and you're locking them in for college. So yeah. So you got
Nate (06:26)
That's right. I like that too. I like that that reframe.
Kyle Hoelzle (06:30)
the got the acid test with the stock drop to see where your risk tolerance is at. And then you can think about it in terms of years of college that could be lost. You could think about it in terms of, hey, I got all these beautiful gains now. Let's take them off. I mean, there's a bunch of different ways you can frame it, but you know, it it
the it's good to think about it these ways 'cause you need to you need to figure out like where you're at, like where your feelings are with with your risk. And so some
Nate (06:58)
Mm-hmm.
Kyle Hoelzle (06:59)
of those questions I threw out there are just ways for our listeners to to ask themselves these questions.
Nate (07:05)
Yep, exactly. Okay, next question is from an internist in Oregon. I inherited my dad's IRA last year and I'm told it has to be emptied in ten years. How should that money be invested in the meantime?
Kyle Hoelzle (07:20)
Yeah, this is we get this question often. you know with our clients, it's very common for an IRA to be inherited and there to not really be a clear purpose for those funds. And because physicians, you know, they're saving for retirement, they got their
Nate (07:38)
Mm-hmm.
Kyle Hoelzle (07:38)
plan, they're saving, they're they got their cash flow, they got their their lifestyle set up. So this is usually most of the time truly extra money. And so what most of our clients opt to do is
Well, I'm just gonna I wanna I'll just add this to my retirement savings. I'll just add this to my overall pool. So now that's the common goal that our clients express with these inherited IRAs. So in that case, our recommendation is to invest it for your retirement. you know, whatever your current investment policy is for retirement, whatever your target stocks and bonds are, you invest that inherited IRA the same way.
Because your plan is at the end of 10 years, take it out because you have to, and then reinvest that money for your retirement, which would be in like a taxable brokerage account earmarked for your retirement. But but it's it's best practice to do it that way because you know, that's that's the goal for the money is for this this target way down the road. So invest it today for that target down the road. And then, you know, you're gonna sell out of it when you when you have to take it to cash and withdraw it.
But you can turn around and reinvest that money right away, right back into the same target that you had before. And that that would be a best practice. You know, just get the money which is in the market, take it out of the market, get it right back in the market. So so in that scenario, you know, we just recommend investing it how you would for retirement.
Nate (09:01)
Yeah. Yeah. If you zoom out, the it seems like the reason we get this question is that most people without that reframe that you just gave, they're they're not thinking about it as retirement money. They don't even know they they don't have a purpose for the money. Mo I I would say ninety-nine percent of doctors that I talk to, they don't really want to consider their inheritance. They don't want to think about it for retirement, they don't want to count on it, they don't want to think about it for buying a house. They
They make plenty of money to save on their own. They just want to enjoy their time with their parents for as long as they live and not really think about that stuff. and so when the time comes and they do get an inheritance, it's it's extra. And so kind of the root of this question is a misunderstanding about goals or what you would do with the with extra money if you got it. And so in the first time someone asks, it's usually like,
Well, I have to spend it's almost like they're asking saying I have to spend this money in the next 10 years. But they don't. It's just as if you got a big, you know, a bonus and you didn't have a reason to spend it. Well, what would you do with it? You'd probably invest it. And so you can invest it at even though you're going to have to liquidate it at some point, the risk tolerance doesn't change as long as you're planning to reinvest. Now, we do have some families that have that choose to spend some of it.
and that's a little bit of a different question. but it's usually a very small amount. It's like, I I'll take the first distribution, spend that, and the rest is gonna get invested. and at the end of the day, it the vast majority of the time it just gets reinvested. So you don't have to worry about liquidating because you're just gonna put it right back in, is essentially what you're saying. I think that's right for most people.
Okay, next question is from a urologist in Vermont. Our taxable account has drifted way out of balance because the stock funds grew. Rebalancing means selling and paying taxes. Is it worth it?
This is so common ki especially in the last ten years. This has just been the common
Kyle Hoelzle (11:13)
Yeah. Yeah.
Nate (11:15)
theme of all brokerage accounts. So what do
Kyle Hoelzle (11:17)
Mm-hmm.
Nate (11:18)
you think? Should you stay in balance?
Kyle Hoelzle (11:20)
Yes. I mean that's the short answer. it's kind of kind of fringes on some of the other stuff we already talked about. I mean it it you you disciplined investor sets sets your targets and that's that's ultimately tied to your risk tolerance or the or the time frame of your goal or both and you should adhere to those targets. Otherwise what are you doing? You know?
Nate (11:44)
Yeah.
Kyle Hoelzle (11:45)
So now
There is, you know, people have different varying tax sensitivities.
Nate (11:54)
Mm-hmm.
Kyle Hoelzle (11:56)
And, you know, a couple of years of good stock market performance, you think, well, maybe the market's going to come back down again. It'll kind of rebalance itself, have new money coming in. I'll rebalance with new money. But then the stock market keeps going up and it keeps going up and you're drifting further and further. And this this problem is growing. It's growing. And you could have managed it on an ongoing basis by not being so tax restricted by.
Placing rebalancing in year one of growth and year two of growth and year three and year four and rebalancing over time. And it doesn't have to be all or nothing, but at least making strides towards staying near your target within your tax threshold. I mean, we all have a
Nate (12:33)
Mm-hmm.
Kyle Hoelzle (12:34)
tax threshold, amount of tax pain that we're comfortable realizing and feeling. It's it's kind of like almost setting another risk tolerance or something. It's like you set yourself a tax budget with your taxable
Nate (12:44)
Yeah.
Kyle Hoelzle (12:44)
account. Do, do be aware that.
Mo money means more problems, meaning the larger
Nate (12:49)
Yeah.
Kyle Hoelzle (12:50)
your taxable account gets, the larger the rebalancing trades will have to be, the more taxes
Nate (12:54)
Mm-hmm.
Kyle Hoelzle (12:55)
you're gonna realize. So that's just the nature of these taxable accounts. But yeah, I mean you you basically have to you basically have three decisions. It's like I can rebalance over time, I can allow myself to drift and and assume that risk of having too much stock, or I can wait to some indeterminate time in the future and do what I call a cliff rebalance where you're like, wow, I
I was targeting 80% stocks. I'm at 95% stocks over the last 10 years. I've drifted 15% by my stocks. So I'm gonna sell 15% of my stocks all in one year
Nate (13:26)
Mm-hmm.
Kyle Hoelzle (13:26)
and rebalance all the way back to my target and do it all in one year in one big chunk versus over time. And what happens is a lot of clients kind of get that quicksand where they're like, as the tax problem grows, they don't wanna do that cliff rebalance because the bill is getting larger, and so they do nothing and they just get stuck.
Nate (13:44)
Yeah.
Kyle Hoelzle (13:44)
And and then they continue to drift further and further. And here's here's why, like, so those are the scenarios, but here's why you should absolutely rebalance is that methodology of well, the market's gonna correct itself, stocks are gonna come down, and that'll lower my stock percentage. Yeah, but but then you you just lost all those earnings, like you had those
Nate (14:05)
Mm-hmm.
Kyle Hoelzle (14:06)
earnings there, and you chose to just wait for them for you to lose those earnings
Nate (14:10)
Mm-hmm.
Kyle Hoelzle (14:11)
versus.
Selling them, paying some taxes, locking in those gains, rebalancing back to your targets and waiting for the next big movement to happen and rebalancing according to those changes. Because you could rebalance back to target and the next change is stocks are going down, which means now you're too heavy in bonds. So now you want to sell bonds to buy stocks. And you wanna buy stocks as stocks are going down. And then if if your ratios are still dr d changing 'cause stocks are declining in value, you sell bonds, you buy more stocks, and you're picking up more stock shares as they're as they're losing value. So when
So when they rebalance, rebound in value, you potentially picked up more shares along the way. But
Nate (14:47)
Mm.
Kyle Hoelzle (14:47)
if you let if you go back to the scenario of letting your risk drift too long and letting the market rebalance, then you're just losing stock value to try to get back to your bond stock-bond target ratio. And none of that magic of selling bonds to buy stocks when stocks are down, none of that happens. You don't
Nate (15:02)
Mm-hmm.
Kyle Hoelzle (15:02)
get the opportunity to do any of that. You're just so don't let taxes get you in that quicksand where you
You have indecision and you do nothing with your taxable account. I think that's the
Nate (15:14)
Yeah.
Kyle Hoelzle (15:14)
biggest mistake. I think the smart thing to do is to set yourself a tax budget. I'm comfortable realizing 20,000 long-term capital gains. I'm comfortable realizing 15, 10, whatever it is. And that's what you use to rebalance each year. And when you're off target, trade up to your max capital gains budget, wait for the next year, see where you're at, trade up to your capital gains budget and manage your taxable account that way on an ongoing basis.
Nate (15:40)
Yeah. Yeah, I agree. it seems like tax tends to be like the scapegoat to any decision. because on the other side side of the coin, like st stocks have been up for a long time and we haven't really seen anybody do any heavy rebalancing over to to from bonds to stocks, like buying more stocks from their bonds in the last several years. But
We we do have some I've seen some portfolios in the last couple of years where maybe someone's buying some other funds that or single stocks that have gone down. And they don't want to sell those either because for whatever reason they don't want to admit defeat. They want to wait to get back to even. And so i no matter which way this goes, I always essentially see people hesitant to sell their stocks. They don't want to sell them when they're down, they don't want to sell them when they're up.
Kyle Hoelzle (16:38)
Mm-hmm.
Nate (16:39)
And that is a psychology issue over kind of a portfolio management question. So it's taxes are a bit of a scapegoat, timing can be a scapegoat, all that. But the reality is you take your emotions out of this and you set a reasonable budget, you stay within your you stay within your strategy. Strategy, and most of the people asking these questions are already heavy in stocks. So, you
Kyle Hoelzle (17:07)
Mm-hmm.
Nate (17:08)
know.
your 80% stocks, 90% stocks, and you don't want to sell out of your two or three percent to buy more bonds, it's just not healthy portfolio management from our perspective. and if you really are so allergic to bonds, if you're that allergic to bonds, you need to seriously consider just changing your strategy. You know, we don't recommend 100% stocks for almost anybody, but if you don't if I mean if
It it's never going to be a perfect time to do any of this as far as taxes and it n it's all kind of painful and w depending on which angle you want to look at it. So set a good strategy, be comfortable with it, and stick with it. That's what you're saying. And sometimes that means
Kyle Hoelzle (17:54)
Yeah. Yeah, and
and and I think don't be so tax sensitive. I mean, think of it this way, like you place a trade, it takes you ten seconds, right?
Nate (18:03)
Mm-hmm.
Kyle Hoelzle (18:05)
And we had given the stock market returns we had, you wake up the ten years later and that money has practically doubled. And you didn't do it you didn't do anything. You didn't put on a stethoscope to to make that money, you didn't put on a pair of pants and go out and get a job, that
Nate (18:20)
Yeah.
Kyle Hoelzle (18:21)
right?
Nate (18:22)
Mm-hmm.
Kyle Hoelzle (18:23)
That's money you earned from a 10 second trade, you know. So I think that's amazing. And I think, yeah, you got to pay a little taxes when you sell it. But think about all the benefit you just you just achieved, you know. So don't
Nate (18:36)
And locked in.
Kyle Hoelzle (18:37)
get don't get so hung up on the one negative of this whole situation.
Nate (18:41)
Yes.
Kyle Hoelzle (18:42)
There's so much positive going on. And and I think that that's you know, and the other thing that is you're talking, I this is another thing that I've I hear too is buy and hold.
Right. I'm gonna buy and hold. I'm just gonna right and buy and hold I think
I think people take that too much to the extreme. Like, I'm never gonna sell a lot in this position ever. I'm gonna buy and hold it forever. And I think I don't think that that's really what that means to buy and hold. You know what I
Nate (19:07)
Yeah.
Kyle Hoelzle (19:07)
mean? You still have to manage your risk. You still have to manage a stock to bond ratio. You can't just buy and hold everything forever, right?
Nate (19:15)
Mm-hmm.
Kyle Hoelzle (19:16)
But if you found the fund you like, you found your total stock fund that's low cost that you love, yeah, you might want to trade some lots out of it to rebalance here and there, but.
To me, buy and hold is like, I bought this fund, it did well in three months, and I'm gonna sell the whole thing and realize the short term gains and I'm gonna buy something else. And that's, you know, that's not buy and hold, right?
Nate (19:35)
Mm-hmm.
Kyle Hoelzle (19:35)
But the long term strategy over 30, 40 years of of buying and holding, it doesn't mean that you never place a sell to realize a gain. I think that that's
Nate (19:44)
That's right.
Kyle Hoelzle (19:45)
I think that's something that maybe people read about or something and they kind of get it in their mind that I'm gonna buy and hold, that sounds great.
Passive index,
Nate (19:52)
Yeah.
Kyle Hoelzle (19:53)
that's great. Buy and hold, that's great. And yeah, it is. I I I I think it is great. But you have to be reasonable about it. You know, this
Nate (19:59)
Right.
I mean, the the fund that you're buying manages its risk too. I mean it different philosophies, but on like what's being sold and what's being bought. But if you're in a target date fund, they're not gonna buy and hold the whole time. There's th they're certainly managing their risk. Why shouldn't you? Just because you're the one that has your you're managing your portfolio. So I mean
The smart guys at Vanguard and Fidelity are managing their risk. I think you should too.
Okay. Dermatologist in Illinois asks, I'm putting everything in the pre tax four three B that I have at work for the tax deduction. I also plan to cut back to three days in the next in about six years. Does that change which one I should be using?
so it do it it doesn't change which one you should be using over the next six years. You don't really have to prepare to change your contributions as far as from a tax perspective, you know, if they're prepare to change your contributions for something that might happen in six years. this is another one of those rules that people kind of like the buy and hold. It reminds me of that. It's kind of these rules of thumb that we all hear if we're at all interested in personal finance as we're growing up, and then our situation changes from the ones we were.
For the people that taught us these rules. So the the rule that a lot of physicians struggle with is they always hear Roth is better. More Roth, more better. That's how I say it. but that's not the case for you. I mean, you're a dermatologist. I imagine your spouse, they might earn some money. more than likely, you're either in the 32% or 35% tax bracket.
And you want to take that deduction now and pay a much lower tax rate in retirement. there's more to this. I think, I think I want to try to touch on it. It's kind of a more complex view of Roth versus pre-tax. So I'll I'll try to do it right now, but long story sh the the short of it is at in the in the 30s, when you get into those 30% tax ranges and above, you should be doing pre-tax.
The more in-depth version of this, if you're ever struggling with should I put money in pre-tax or should I put money in Roth, is that if it is not one or the other for a physician. So when you put money in a pre-tax account, you got a tax break. So just for easy math, let's say you put in $10,000. You would never do that. You would always put in the max, right?
But let's just say you put in $10,000 for easy, easy, easy numbers. You just saved $3,200 in taxes this year. Now you will have to pay taxes at some point. So you didn't, it's not a a lifetime saving of $3,200. But this year you got to break $3,200. now that $10,000 that went into that that pre-tax account.
Is going to get taxed someday versus $10,000 in a Roth that will get taxed that will not get taxed later. But you had to earn $13,000 in order to put in $10,000 in the Roth. Right? Either way, one way or the other, there's sort of this calculus on each side of the equation. There's $13,000 in play. Either $10,000 went in and you got $13,000, $3,200 back on your taxes.
Or $10,000 went in the Roth and you had to pay $3,200 in taxes. Now here's the thing that everybody misses. If you have a plan, if you're a physician with extra money, you wouldn't just go spend the $3,200 you got as a tax break. You would go do something smart with it, like invest it. So you get the tax break, you take the $3,200 you got back, and you go put that in a brokerage account. Now you have an apples to apples comparison.
Of where you'll end up in 30 years. One is $10,000 in a pre-tax account plus $3,200 in a brokerage account, both growing at the same rate, they will both be taxed. The other, a smaller amount, $10,000, will be growing and you won't pay taxes on it. And if you ever go put this into a spreadsheet, which I have done many times because I was enamored by this choice many, many years ago when people had asked me this question.
It's it's roughly the same after tax result. The only difference is for you versus anybody else is you got a bigger deduction because your tax rate is so high. So you will make out better in a pre-tax account plus r investing the difference. Nobody looks at this way. They look at it 10,000 versus 10,000, and one's taxed less. You're just eating your vegetables first in one.
But for physicians, your vegetables, the plate of vegetables is bigger and taste worse because you have a bigger tax bill. So in the next six years, back to this question, you should probably be doing pre-tax. I would imagine you're in at least the 32% tax bracket. After that, when you're working three days a week, it's the same question with different numbers. Should you be doing pre-tax?
Roth or should you be doing pre-tax? I guess it depends on how much you make, but I know plenty of dermatologists that are in the 32% tax bracket working three days a week. So, I mean, odds are, especially if your spouse works, you should still be doing pre tax. But if it's like three half days and all of a sudden somehow you're in the 22% tax bracket, you could probably justify putting the money into a Roth.
And you might not have a whole bunch of extra money. So if you got that tax break, it might be wasted or something. Maybe there's some psychological benefit to getting the money in Roth. But it's just a a this is a math question that that many people do not understand, which is investing the tax break that you got. So hard to answer this question without real dollar figures, but most physicians, the vast majority of them.
are gonna make out better by investing in pre-taxed dollars plus take their tax break and do something smart with it.
Anything to add? How'd I do?
Kyle Hoelzle (26:36)
No, it just makes total sense to me, you know. yeah, I mean, you save the money on the taxes, you reinvest the money, you get to keep the way I explain it to clients in a kind of a real simple boil down way is you get to retain more of that money in your household today. And when you're saving for retirement, you have time value on your side. And so you're you're basically retaining more of that money and then and investing more of it to capture that time value of money with that tax savings. So
Nate (27:04)
Mm-hmm. Yeah.
And there's another way too, by the way, you can take that thirty two hundred bucks and go throw it in a 529 that grows tax free. It's a a lot of people struggle with how much they need to save for college. Well, let's get you some tax breaks to boost up your your take home pay, you know, so that you can afford to put money in all these other accounts that work. And you're doing a backdoor Roth, I hope. So we got money in all sorts of tax diversified ways.
And the thing that makes people uncomfortable is just they they wish they had a little bit more in Roth, but it's just generally generally speaking, not always not right for you.
Kyle Hoelzle (27:42)
And you to look forward to when you get to do your catch up contribution. The the government now requires
Nate (27:47)
There you go. Yep.
Kyle Hoelzle (27:48)
you to put that in a Roth. So you you get you get your moment in your Roth four one K land. It's it's coming. Yeah, something look forward to. Yeah.
Nate (27:53)
Yeah, that's right. I like it. Yeah,
and more and more lately we're doing mega backdoor Roths and at least in with you have a large employer, they're offering those. It's coming around. You'll have money in a Roth. you will have a lot of money in pre-tax, but hopefully if you've saved well, you'll have it spread out. Roth, pre-tax, and a brokerage account. And five twenty-nines.
Okay, thank you everybody for listening. If you liked this episode, please be sure to subscribe so you don't miss the next one when we release it every Wednesday. you can leave us a rating wherever you're listening. If you would like to work with us, you can visit physicianfamily.com to schedule an interview. But if you aren't ready for that, you can send us a question at podcast at physicianfamily.com. We'll answer your question even if it doesn't make it on the show. Until next time, remember you're not just making a living.
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