Nate (00:13)
Hello, physician, moms and dads. I'm Nate Rennicke, certified financial planner and primary advisor.
Chelsea Jones (00:19)
And I'm Chelsea Jones, also a certified financial planner and primary advisor here at Physician Family Financial Advisors.
Nate (00:26)
Just I think this episode drops right before Halloween.
Come I I'm thinking of Halloween titles right now in my head.
Chelsea Jones (00:34)
So many possibilities.
Nate (00:37)
Yeah. does Anna have a costume yet?
Chelsea Jones (00:41)
We just went to Spirit Halloween yesterday and picked it out. She's gonna be a rainbow fairy. Yeah.
She tried on the costume last night. She was so excited. It is the cutest thing I've ever seen. Like I I couldn't handle how cute it was.
Nate (01:00)
Little
girl costume versus little boy costumes
Chelsea Jones (01:03)
Ha ha ha.
Nate (01:04)
are absurd. we we went early, somehow, like right when they by the way, Spirit Halloween, they got something figured out. Somehow they pop up out of nowhere and then they vanish for a year. And like they just
Chelsea Jones (01:15)
Mm-hmm.
Nate (01:16)
f I I read some story about their their business model. It's it's like it's crazy how quickly they pop up, quickly they tear down, and then they're gone. But
Chelsea Jones (01:27)
Yeah.
Nate (01:28)
My boys are f well, my oldest is eight. And this is like the first year. Well, no, last year he was a scary pumpkin, but it was tame. I don't know what happened, but he came home with the classic scream mask that you can squeeze the little tube and the blood comes down the face.
Chelsea Jones (01:46)
Yeah.
Nate (01:47)
And I'm like, what has happened to my children? I mean, they
Chelsea Jones (01:51)
Yeah.
Nate (01:51)
used to be like, you know, some Paw Patrol character, and now I'm like, really?
Eight
Chelsea Jones (01:58)
Yeah.
Nate (01:59)
I looked at my wife like, what are we doing? He's still my baby. She's like, nah.
Chelsea Jones (02:04)
Yeah, what is happening?
Nate (02:07)
So Kemo is
Chelsea Jones (02:08)
No, it was funny.
Nate (02:10)
is some some character with swords, I don't but not scary.
Chelsea Jones (02:15)
Yeah. Anna it was funny yesterday 'cause Anna's not really the type to get scared. It's not like we expose her a bunch to a bunch of scary stuff, but like
Nate (02:26)
Mm.
Chelsea Jones (02:27)
things that might scare other three year olds, like the villains in the Disney movies.
Nate (02:32)
Yeah.
Chelsea Jones (02:32)
She's so like chill about it. She'll just be like, That stepmother's not nice and
Nate (02:38)
Yeah.
Chelsea Jones (02:39)
then move on with her day.
But she we went to Spirit Halloween and they of course have all of the scary Halloween decorations
Nate (02:46)
Yeah.
Chelsea Jones (02:46)
that jump out at you. And she saw one, it it wasn't a jump scare decoration, it was like a teddy bear singing or something. But
Nate (02:54)
Mm.
Chelsea Jones (02:55)
she was like, I want to go see that. And one of the I don't know, other decorations, I forget what it was, just jumped out at her and it scared like she jumped
Nate (03:05)
Yeah.
Chelsea Jones (03:06)
and then I had to carry her throughout the whole store and we couldn't walk by the decorations anymore.
Nate (03:11)
My youngest was scarred for about two years after a trip to Spirit Halloween. Like the something jumped
Chelsea Jones (03:17)
Yeah.
Nate (03:18)
out at him and he there was he's there's no way I'm going back in there. For like two years. We had to go pick his costumes. Yeah. But and now it's like an event. It's almost
Chelsea Jones (03:24)
I've seen what I need to see. Yeah.
Nate (03:30)
like go it's like their version of you know, haunted house.
Chelsea Jones (03:33)
Haunted house.
Yeah.
Nate (03:36)
They're the and by the way, both of them terrified of Disney villains.
Chelsea Jones (03:42)
Ha ha ha.
Nate (03:44)
So scared. I'm like, what? It's just it she just has a different voice. It's not that scary, but they're terrified. I
Chelsea Jones (03:52)
Yeah.
Nate (03:52)
took him to the movies the other day. it's one of those you
Chelsea Jones (03:58)
Mm-hmm.
Nate (03:58)
know the the K pop Demon Hunters movie? Did you ever watch that?
Chelsea Jones (04:02)
I haven't
I haven't seen it, but I've like heard the music and saw the posters and stuff.
Nate (04:07)
Yeah. So classic
dad moment did not check the movie before we went. They took the boys and one of one of my old friends into the movies. And it was just a kids movie, I thought. Just
Chelsea Jones (04:21)
Yeah.
Nate (04:21)
a kids movie. I don't know. Just Mateo said kids movie. I was like, Yeah, let's go see it. I love movies. I love going to the movies,
Chelsea Jones (04:29)
Mm-hmm.
Nate (04:29)
grew up going to the movies every weekend as there was a cheap movie theater by my house. terrifying.
There was like
Chelsea Jones (04:37)
Really?
Nate (04:38)
a a some crazy demon lady that would like cut her body in half. I mean, it was like some anime thing. I'm like, I think we have to go. This is this is like scary. They held on though. Goodness. I dropped I dropped
Chelsea Jones (04:55)
I think we have to go.
Nate (04:58)
my son's friend off and I said, sorry. S
Chelsea Jones (05:02)
Ha ha.
Nate (05:03)
I don't know what happened.
And then the next morning was soccer with his friend. I said, Any nightmares last night? 'Cause we had a rough one going to sleep. He's like, He was fine.
But
Chelsea Jones (05:15)
Yeah.
Nate (05:18)
Brittany, my wife, was out of town and I told her and she's like, You didn't check?
I saw the trailer, it seemed fine, but no,
Chelsea Jones (05:26)
Yeah.
Nate (05:26)
didn't check.
Chelsea Jones (05:28)
I thought it was a kid's movie too. I wonder what it's actually rated. Probably like PG thirteen or something. No?
Nate (05:32)
No! Not PG13.
No, no, no. No, it was just scary.
Chelsea Jones (05:37)
If it it maybe just pe
Nate (05:39)
It was a scary kids movie. It's crazy. Alright, we have some some questions from physicians here. We have four this week, and you're gonna want to stick around for the last one because we have some interesting news about the cost of college, and everyone's so interested about the cost of college.
And I have been
Chelsea Jones (06:00)
Mm-hmm.
Nate (06:02)
talking about college figures for s many years now. And we always do a deep dive into the cost of college around this time of year. And then we update your plans if you're a client, and we update you if you're a listener. So I'm sure everyone's gonna want to stick around.
Chelsea Jones (06:20)
Mm. All right. Our first question, however, comes from a pain management doctor up in New York. They said I'm currently participating in the pension plan at my job and I planned on retiring once I've vested. My employer is adding a defined contribution plan with an employer match, and they're making me choose between the two. Which is better?
Nate (06:45)
Mm-hmm.
Chelsea Jones (06:46)
So this is a great question, you know. Define contribution plan versus pension plan. There's a lot of things to consider. The key thing in this question, though, that I that's very important when when answering this particular question for this person is I planned on retiring once I vested.
Nate (07:06)
Mm-hmm.
Chelsea Jones (07:07)
Which means he's probably going to be retiring soon in a couple years.
Nate (07:11)
Right.
Chelsea Jones (07:12)
And so that means
that there's not a whole lot of time for that defined contribution plan to grow. Even if you do get an employer contribution. in the pension plan, he doesn't have to the the doctor doesn't have to contribute to. It's all the risk is on the employer. It's funded by the employer and you get a monthly benefit after you retire. So pension plan was a slam dunk for this particular person, but
it's not always a slam dunk. It depends on, you know, what stage of your career you're in. Do you think that you'll be at this employer for a while? what is how do you feel about passing assets on to your beneficiaries? Because a pension plan, you know, you accrue years of service and your benefit is based on how long you've worked in that job. And if you are early in your career.
And it's pretty likely that you're not gonna be in this job for, you know, forever, more than five years,
Nate (08:20)
Mm-hmm.
Chelsea Jones (08:21)
then the growth that you can get out of that defined contribution plan in the match is likely to outgrow the very modest pension benefit that you would get with the low number of years of service. so that's one thing to consider.
And then a pension also doesn't pass to your beneficiaries. You receive the benefit for your lifetime. it there are certain elections that you can make to where your spouse will get a benefit after you pass. but once you and your spouse pass it the pension just ends. Whereas
Nate (08:56)
Yeah.
Chelsea Jones (08:56)
the defined contribution plan, like a four hundred one K or four three B, that balance can pass to beneficiaries.
Nate (09:05)
This is important
because anytime that there's a calculation or a projection in this, in the in this decision that a lot of people have a tough time understanding. So you mentioned a couple of things. One was the defined contribution plan, which means your employer is defining how much they will contribute, a dollar figure or a percentage,
Chelsea Jones (09:30)
Mm-hmm.
Nate (09:31)
and then you can contribute to it.
So this is think 401k like plan. you can contribute to it and the money grows with contributions and with the stock market. Okay,
Chelsea Jones (09:45)
Mm-hmm.
Nate (09:45)
so that means that you are taking the risk. And just like you said, the pension plan, you are not taking the risk. But what and then you you mentioned you your children can inherit the money inside of the defined contribution plan or your 401k because
It's just at the end of the day, when you retire, it moves over to an IRA and it's just your money. The r
Chelsea Jones (10:08)
Mm-hmm.
Nate (10:08)
but your but the pension plan dies with you and your spouse. Now, the thing that a lot of people miss is that they see pension plans and they seem like they're going to pay you out more money. So let's imagine you got a pension and it's paying you five thousand dollars a month.
Chelsea Jones (10:28)
Mm.
Nate (10:28)
And
you do some calculations about your contributions and your growth into a defined contribution plan. And then you talk to Nate or Chelsea, and we say, you could, you know, take three, four, five percent a year off of this account. And it's not five thousand dollars a month.
Chelsea Jones (10:46)
Right.
Nate (10:46)
You would think I should just take the pension plan then, but really it comes down to your goals for the plan. If you want your
Chelsea Jones (10:54)
Mm.
Nate (10:54)
children to inherit money.
That means you can't draw on the money like pensions do, which is essentially drawing the money to zero.
Chelsea Jones (11:04)
Yeah.
Nate (11:05)
But if you decided I'm going to draw this money to zero, the defined contribution plan may be richer. Right. So one is drawing to zero, which is a pension. One is not drawing to zero because you want your children to inherit it. So one is not necessarily always better than the other.
It depends on what you want out of the money. And the reason
Chelsea Jones (11:30)
Mm-hmm.
Nate (11:30)
you wouldn't draw the money to zero has everything to do with strategy and not try and trying not to run out of money in retirement. It's not guaranteed and you're
Chelsea Jones (11:39)
Mm.
Nate (11:39)
still in the market. So it's a risk question and it's a what do you want to happen to your resources when you die? question versus which one's, you know, going to have more money in it.
Chelsea Jones (11:54)
Yeah.
Nate (11:55)
And then once you decide what you want out of the money and you include in your plan, you look at your other resources, you can make a more kind of informed decision.
Chelsea Jones (12:04)
Mm-hmm. Yeah. And one thing to remember too, which I just thought of as you were describing all of that, it really depends on when you need the money to. Cause for
Nate (12:15)
Mm-hmm.
Chelsea Jones (12:15)
most pensions, there's going to be a full retirement age that's defined. And that benefit estimate that's gets spit out based on the formula is assuming that it starts at sixty five. And if you
Nate (12:28)
Mm-hmm.
Chelsea Jones (12:29)
plan on retiring before that, it's going to be reduced.
And sometimes it can be a substantial reduction depending on how early you want to retire. So the D C plan might give you a little more flexibility with that as well. Just something to to consider and
Nate (12:45)
Yeah. It's
Chelsea Jones (12:47)
keep in mind.
Nate (12:48)
unique to everyone. imagine the the flip side too. Imagine you you joined an employer that you only plan on working at for two years until you retire. Well, the defined contribution plan would be much better because you're not going to get much of a pension, if any pension, and you're just putting in the money right before you get to take it out. So everyone's
Chelsea Jones (13:09)
Mm-hmm.
Nate (13:10)
a little bit different, but this is kind of the framework you and I use to help people
decide.
Chelsea Jones (13:15)
Okay, our next question comes from a double doctor family in Massachusetts. They said, I haven't been contributing to my nongovernmental four fifty seven B at work due to it having a substantial risk of forfeiture, but our tax burden is quite high and my hospital's fitch rating is excellent. and I'm concerned about missing out on several thousand dollars of tax savings each year. Should I start contributing to the plan?
So this is some version of this question I get almost every time I meet with someone that has a 457B
Nate (13:50)
Mm-hmm.
Chelsea Jones (13:52)
plan available to them, right? Because
Nate (13:53)
Mm-hmm.
Chelsea Jones (13:54)
it's so hard when you are a high earner and you have a high marginal tax bracket to pass up what seems like a good tax savings opportunity.
Nate (14:04)
Mm-hmm.
Chelsea Jones (14:05)
But the key here is that this is a non governmental plan subject to that risk of forfeiture.
and so we have to weigh that risk in with the potential tax savings to really get the full picture and make a decision. 'cause
Nate (14:22)
Mm-hmm.
Chelsea Jones (14:24)
one thing to remember too, it's not just a straight permanent tax savings. If you
Nate (14:28)
Yeah.
Chelsea Jones (14:29)
defer today at thirty seven percent, you're not saving thirty seven percent. You're saving whatever the difference is gonna be between now and when you would take it out in retirement.
So if your tax rate is twenty four percent in retirement, you defer at thirty seven, you're saving thirteen percent.
Nate (14:49)
Right. Which is still like we're n we don't have the opinion that that's not worth it. Right. It's j
Chelsea Jones (14:58)
Right. That's still a tax savings.
Nate (15:00)
it's still a tax savings. We still obviously recommend you do that in your four or one K. It's a great tax savings. It's kind of some of the only ones you got. So we understand the pain, but it's
Chelsea Jones (15:10)
Mm-hmm.
Nate (15:10)
mixed in with what most likely is going to happen with this account based on.
Talking to hundreds of physicians and seeing them do this. And the ultimate risk, which this this family pointed out, substantial risk of forfeiture, which means
Chelsea Jones (15:28)
Mm-hmm.
Nate (15:29)
if your hospital goes belly up, you lose the money. But there essentially
Chelsea Jones (15:36)
Mm-hmm.
Nate (15:36)
the the f this is kind of how the question has evolved over time. It used to, because this is becoming more and more common knowledge, at least with people that we talk
Chelsea Jones (15:45)
Mm-hmm.
Nate (15:45)
to.
That there is a substantial risk of forfeiture. And they're sort of saying, hey, if the substantial risk of forfeiture is the only issue here, I'm not really concerned with that. If I'm not concerned with that, shouldn't I just contribute?
Chelsea Jones (16:02)
And I would argue so substantial risk of forfeiture is a risk that is there. But the thing that I see happen that that messes up a 457B strategy for every physician that I've seen participate in it,
Nate (16:17)
Mm-hmm.
Chelsea Jones (16:18)
or almost every physician that I've seen participate in it, is either changing employers, like you switch jobs, or if there's a merger, you know, I hear
Nate (16:26)
Mm-hmm.
Chelsea Jones (16:29)
I feel like I hear about a new merger from a client every day, them saying,
Nate (16:32)
Yeah.
Chelsea Jones (16:33)
My hospital, we just merged with, you know, this bigger entity and our benefits are changing and you
Nate (16:39)
Mm-hmm.
Chelsea Jones (16:40)
know, culture's changing and all of that. and while that's not a bankruptcy, so it's not necessarily a risk of forfeiture where you might lose the money, in that case, usually what happens is the benefit structure changes, the new play the new employer
probably is not gonna offer the four fifty seven plan and if they do it's a different one. and usually what they'll do is they'll just distribute the full balance out to you. And when
Nate (17:10)
Mm-hmm.
Chelsea Jones (17:10)
it gets distributed to you it's fully taxable is is ordinary income. So you put it in at your highest rate, it's coming out at your highest marginal rate now, which potentially could be higher than when you started.
Nate (17:24)
Yeah, this is the big
thing. And that this is the the reason that this question is still welcome, even though
Chelsea Jones (17:30)
Mm-hmm.
Nate (17:31)
generally we advise against this. Because to me, the substantial risk of forfeiture is enough to give up the tax break. But if you if it if it's not enough for you, then there's some more digging that needs to happen. If you say,
Chelsea Jones (17:49)
Mm-hmm.
Nate (17:50)
I'm I'm happy with it, it's fine.
Which it's th it's not fine with me. we recommend a against nongovernmental four fifty seven plans for that reason. Cause we have seen, you know, where we see it. We see hospitals
Chelsea Jones (18:03)
Mm-hmm.
Nate (18:04)
go bankrupt. we were very close to a hospital in Oregon. That would mean we had many, many clients from the same company or organization that we worked with. And we they they all the employees thought
Things were going just fine. And then and the hospital is operating in the red. Okay.
Chelsea Jones (18:25)
Mm-hmm.
Nate (18:26)
So we have seen the dirty laundry from these organizations. So it's just not worth it to us. you want to lose
Chelsea Jones (18:33)
Right.
Nate (18:34)
a big chunk of your money at retirement. Sometimes these accounts, if you're doing it from an early age, I mean, we see these accounts, hundreds and hundreds of thousands of dollars can accumulate in these accounts. And so if everything goes perfect and you don't change jobs.
And you stay there forever, and you're deferring at a high rate to pay taxes ultimately at a lower rate, there's still this chance that you lose all the money.
Chelsea Jones (18:59)
Mm-hmm.
Nate (19:00)
but the part that you need to go further on, if you're okay with that risk, is you need to ask yourself the question: is if my tax rate is lower for a physician, like 32%, let's say, and
If I change jobs and this money is distributed out to me, most likely it will bump you into the 37% bracket. So you will pay more taxes on this money than you would
Chelsea Jones (19:32)
Uh-huh.
Nate (19:33)
if you were to just never use it in the first place. But on the flip side of that, if you are a double doctor family like this one and you're already in the 37% tax rate, sorry, 37% tax bracket.
That isn't really a risk to you. And
Chelsea Jones (19:52)
Mm-hmm.
Nate (19:53)
we have made a few, there's been a few times where we've looked at these and said, if you're okay with this, with this risk, substantial risk of forfeiture, you're already in the 37% tax bracket. There is no real risk that you're gonna have to pay more in taxes on this money when ultimately you probably change jobs, then you can
Chelsea Jones (20:13)
Mm-hmm.
Nate (20:13)
eliminate that. But that's a big if. Most
Chelsea Jones (20:16)
Yeah.
Nate (20:17)
families.
That most of the families we work with are not in the 37% tax bracket for a long period of time. I would say it's probably 60% are not in the 37% rate. For the 40% or not to mention the 40% that are in the 37% tax bracket oftentimes are not at a big organization that offers a 457.
Chelsea Jones (20:40)
Right.
Nate (20:41)
They're in private practice. So there's a little sliver here. Most likely it's from East Coast.
Double doctor families. So
Chelsea Jones (20:50)
Mm.
Nate (20:51)
it might make sense for this person if they're okay with the risk. and then even so you will probably get this out all in one lump sum and it will be of no benefit to you. Right. So that's kind of was there anything else? Was I I I think I think I cut you off, but the the that that's kind of the
The calculus you go through if you're okay with the risk. Was there was there another scenario we missed?
Chelsea Jones (21:21)
we've kind of gone through the scenarios that we see most often. The other scenario is that, you know, they if there is a switch, if there is a movement of jobs, you could just leave the money in there and y it doesn't get
Nate (21:37)
Right.
Chelsea Jones (21:38)
distributed to you, in which case there wouldn't be a huge tax bill, but it would still be subject to that same risk of forfeiture.
Nate (21:45)
That that's the big one, another big one. So most people look at this and they think, you know, let's say you had 10 years left to work.
Chelsea Jones (21:53)
Mm-hmm.
Nate (21:53)
And you're like, they're gonna be fine for 10 years. Even if the fit rating goes down. Now, if the fit rating starts to go down, maybe they don't just go belly up, but they're most likely going to merge somewhere. Someone's gonna come in and save the day. But let's say everything goes well. Remember, you're not taking this risk for 10 years.
You're taking this risk as you draw the money, too. So if you're
Chelsea Jones (22:17)
Mm.
Nate (22:18)
gonna be tax efficient and not have them send you a big check all at the end, right? So that you retire and then they pay you out all the money, you're gonna be drawing this money out slowly to be tax efficient. And that could be a risk for even longer. So the distribution rules are important to look at. You have to look at the distribution rules in your plan.
If you decide to take this risk on. So, that those are the the main points. That's the part that you know, and especially know, this family in particular, I think they have maybe 20 years left of working. And then if they distribute out for another 20 years, you are taking that substantial risk of forfeiture for 40 years, not twenty. Who
Chelsea Jones (23:03)
Right.
Nate (23:04)
knows what this organization will look like in twenty years?
Chelsea Jones (23:07)
Right. So a lot of things could to consider. Like many things it comes down to risk that you're willing to bear.
Nate (23:13)
Mm-hmm.
Chelsea Jones (23:14)
but
All right. So our next question comes from a family medicine doctor in Kentucky. They said, I'm about to have to pay to put three children in daycare and the cost is substantial. I'm considering hiring a nanny instead for a similar cost. What should I consider when making this decision?
Nate (23:36)
Yeah. there's a couple things to consider and some of them I mean all of them are financial in a way, but the
Chelsea Jones (23:47)
Mm-hmm.
Nate (23:48)
I think the more helpful thing is to just frame up like this decision from coming from somebody who has hired a bunch of nannies. so just the financial part of this, you probably want to go through payroll service.
and the reason to do that is they become an employee and you can protect yourself a little bit. I mean, you're a physician and you don't want to get sued for something like this. So you probably should do it above the table. the the other point is that daycare has its benefits, which is if there are multiple people at the daycare, like running the daycare, if someone gets sick, this is very not financial.
This is just life.
Chelsea Jones (24:32)
Yeah.
Nate (24:33)
If someone at the daycare gets sick, there's usually someone to cover for them. So I have experienced, I mean, feels like all the time. Something's going wrong with childcare. Someone, me or my spouse, has to take off work and stay with them.
Chelsea Jones (24:50)
Mm-hmm.
Nate (24:51)
And that is a burden in and of itself. If you are having a nanny, they're a human being. They're gonna get sick. You don't want your kids to get sick. So you end up
Taking on that responsibility. Your nanny's gonna want time off around the
Chelsea Jones (25:05)
Mm-hmm.
Nate (25:06)
holidays, right? So they're gonna want to go home. You know, sometimes nannies are college students and they're only around for a year or two. So you're gonna have to find a new one. So there are good or there are negatives to having a nanny. The big positives are your kids are home,
Chelsea Jones (25:23)
Mm-hmm.
Nate (25:24)
you can see them faster, you're in traffic less often, right? And if
you're like me and you have a you work from home, you get to hear your kids' footsteps all day long, which sort of feels like you're around I have always opted for the nanny. Financially speaking, usually nannies are more expensive if they're a good nanny. Because a good nanny
Chelsea Jones (25:49)
Mm-hmm.
Nate (25:49)
knows it's harder to take care of three kids than it is to take care of one, so they charge you more. And you will be tempted to go for the cheaper option. And I promise you it's gonna be a headache.
'Cause it's once you go for that cheaper option, they're not as, you know, tied to you or your family. They have to pay their own bills. They'll grow up and realize they need more money. And then you're searching for a new nanny every year. Every single year. We used to hire one, like, man, they're great and they're less expensive. And then before you know it, you're looking for another one. And
The hard part about that is your children have to meet a new person and get comfortable with the new person in their house every single year. So my advice is don't skimp on paying your nanny. They are human beings, they get sick, they need money. you shouldn't pay them the minimum. Pay them a fair amount that they can survive on. And you know, don't just go with the cheapest option.
Even though I know it's really hard, even for physicians to pay child care bills. So
Chelsea Jones (26:59)
Mm-hmm.
Nate (27:01)
it's gonna be expensive, but there's light at the end of the tunnel. You know, we're expecting our third child, so the the tunnel just got longer for us, but we were this close to having no child care bills in like a year or two. And so
Chelsea Jones (27:15)
Yeah.
Nate (27:16)
it's several years of ex of high expenses, and then it's over. So don't fret about spending an
extra
five thousand dollars a year for a few years. 'Cause soon enough if they're
Chelsea Jones (27:27)
Mm-hmm.
Nate (27:27)
a daycare age, you know, soon enough they'll be in school and those nanny bills will go down to almost nothing.
Chelsea Jones (27:33)
Mm. Yeah.
Right. Our final question, the ring dinger, comes from
Nate (27:39)
Yes.
Chelsea Jones (27:40)
a double doctor family in Georgia. They said I want to put my kids through college with no loans. My husband thinks they should have some skin in the game. How should we settle this?
Nate (27:52)
Yeah. I feel like I don't wanna c create a bigger argument. But it's funny, we've gotten a couple of questions like over the last few weeks about us settling arguments.
Chelsea Jones (28:06)
Mm.
Nate (28:07)
I hate to do that, but th this whoever asked this question was smart because they probably know how our take on this. we generally believe that physicians should pay for their kids college.
and that's a parenting decision, you know, it's not right for everybody.
Chelsea Jones (28:26)
Mm-hmm.
Nate (28:28)
but here's my issue with it. It's not just you make enough so you should, which is there's a valid argument for that. It is I don't like the skin in the game thing. And most of the time when people talk like that, they they're not talking about a little skin. Right? It's mainly to save money.
Probably because you feel like it's very difficult to save for college, because if it if it was easy, it wouldn't really be a big argument. But the
Chelsea Jones (28:57)
Mm-hmm.
Nate (28:57)
the way the the way the cost of college is trending is like this is a lot of skin.
Chelsea Jones (29:06)
Yeah.
Nate (29:06)
A lot worse than it will be worse than the skin that you probably had to put in the game. And it was probably worse than the skin I had to put in the game. You know, it's just getting to be more and more and more to the point where you are setting your kids up for failure if they have to pay for all of their college.
Chelsea Jones (29:30)
Mm-hmm.
Nate (29:31)
So that is not something.
Generally, that that is not a good long-term way of thinking. Because, not because I just believe everyone should pay for their kids' college. It's that after hundreds of interactions with physicians, at some point they realize this is too much skin, and
Chelsea Jones (29:54)
Mm-hmm.
Nate (29:55)
they are not satisfied with it when it comes time to actually pay the bill. So I'm hoping that by
Encouraging people to pay for the whole thing, even if they're a little short, if they really do believe in skin in the game, they can find an appropriate amount to have
Chelsea Jones (30:13)
Mm-hmm.
Nate (30:14)
their children pay for. sometimes that means their pay children pay for their own graduate school, right? sometimes that means they pay for 20%, something
like that.
Chelsea Jones (30:26)
Mm-hmm.
Nate (30:27)
But that it it it really does not.
set you up for success when you decide I'm not gonna save for college. You get to the end, you have no you're not prepared, and then you end up paying for most of it anyways, which is what I generally see. And then
Chelsea Jones (30:46)
Yeah.
Nate (30:47)
all of a sudden you didn't get all the tax, tax breaks or the the the tax free growth of a five twenty nine. So this
Chelsea Jones (30:55)
Right.
Nate (30:55)
is just long term thinking. We've seen it happen over and over again. But there's a f there's another
Issue going on that kind of underneath this question, which is just the cost of college, is absurd. And we get this much much like a lot of the questions we got today, I get this almost it feels like every day. Cost of college is insane. Your projections are insane. And we
Chelsea Jones (31:19)
Mm.
Nate (31:19)
follow these projections really closely. So this is the part that everyone hopefully stayed around for to hear. The college board collects all this data.
I tell you about the the trending cost of college. And for I mean, close to 10 years now, we have been saying a number which has been held true for a long time. Six point eight percent per year. I remember
Chelsea Jones (31:47)
Mm-hmm.
Nate (31:48)
that number like I remember my original phone number at my mom's house. Like six point eight percent per year, six point eight percent per year. It's absurd. It's so hard to save for college when you only have eighteen years.
And the cost of college is going up by 6.8% per year. Where that number comes is stock-like
Chelsea Jones (32:03)
Yeah. Which is a stock like return, by the way.
Nate (32:07)
return, but in the wrong direction. And
Chelsea Jones (32:10)
Yeah.
Nate (32:11)
so the but where that number comes from is interesting, and I think everybody should know. I don't want to give you too much ammo to say I don't need to save much for college, like our listeners,
Chelsea Jones (32:22)
Mm-hmm.
Nate (32:22)
but it it I you should know where this number comes from. So
There is a history of the cost of college that was not so kind to us back in the 80s and 90s, which is a sharp increase in the cost of college back then.
Chelsea Jones (32:40)
Mm-hmm.
Nate (32:41)
that is blending into this average. And then in after that, it wasn't 6.8% per year. It was a little bit lower, which dragged us down to a an of kind of rolling rate of.
6.8%. So
Chelsea Jones (32:59)
Mm-hmm.
Nate (33:01)
the college board's coming out with new numbers every year, and we're watching it. And there was a couple years, and we did say this on the podcast, I think last year, where the cost of college did not trend upward as much as it had in the past. And then
Chelsea Jones (33:15)
Mm.
Nate (33:16)
another year came out and it was sort of a similar story. It still went up, but not at a crazy stock like return rate.
And this year marks, you know, as as far as the data that we track, a decade of the cost of college not going up as as much as it had in previous decades. And so
Chelsea Jones (33:37)
Mm-hmm.
Nate (33:39)
if this continues to hold true is kind of our thesis in the background, then we should actively lower the expected increase in the cost of college in our plans. And so that new number.
went from six point eight, this is over decades of of cost of college data, went from six point eight to five point eight. And
Chelsea Jones (34:04)
Mm-hmm.
Nate (34:05)
while that doesn't seem like a big number, it's one percent, over an 18 year time period, it's a lot. It's a lot different.
Chelsea Jones (34:11)
Yeah, that makes a huge difference.
Nate (34:13)
Yeah. So there's two things going on. Most people are ahead of college right now, if you're a client of ours that have been with us for a while. One is the stock market is booming.
and two is the cost of college is is not flat, but it's not going up as much. And so I do think that it's it was possible to save when the rate was 6.8%. It's even more possible now to save at 5.8%, but it doesn't change the fact that you're gonna have to send a ton of money for college. And how should we settle this? You need to talk about the reality of whether or not you're going to.
Allow your child to take out hundreds of thousands of dollars of loans for their undergrad degree. Because that's what things
Chelsea Jones (34:55)
Mm-hmm.
Nate (34:55)
are trending to, whether or not it's 6.8 or 5.8. But if you are a client of ours, I think you should come prepared in the next 12 months to your annual progress checks to adjust your college plan. Because if you have a child that, you know, it's 10 years out from college, that that's a pretty big runway.
For you to
Chelsea Jones (35:18)
Mm-hmm.
Nate (35:18)
reduce the the savings. And we'll talk about it more in depth during our during our checkups. But there's an an other factors in here, which is stock market being expensive. And you may or may not lower the cot the how much you save, but more than likely you'll be more ahead this year than you have in the past, unless the stock market disagrees with me and goes down.
Chelsea Jones (35:44)
Yeah.
Nate (35:45)
So this is all all that to say is that's our stance on this. Physicians should probably pay for undergrad for their children because you care a lot about your kids and it's gonna be hard to s I d I won't I don't believe that you will be willing to saddle them up with that much loans. And so you might as well
Chelsea Jones (36:03)
Mm-hmm.
Nate (36:03)
get a tax break along the way.
That it for today.
Chelsea Jones (36:06)
Right.
That's it for today.
Nate (36:09)
Okay, thank you everybody for listening. If you liked this episode, please be sure to subscribe so you don't miss when a new episode is released every Wednesday. if you'd like to work with us, you can visit physicianfamily.com, 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 that even if it doesn't make it on the on the next episode. Until next time, remember, you're not just making a living, you're making a life.
