“When can I retire?” It may be the #1 question financial planners get asked. Some advisors try to provide a simple answer, “Just save this much monthly”. But the reality is lifestyle preferences and economic uncertainty mean the answer is not easy to project. There’s a complexity to the question that deserves an in-depth examination.
On this Elementality, Reese explains to the clients of his RIA what it takes to reach financial independence. Clients want to retire to a stress-free lifestyle, one they can really enjoy. Reese explains what clients can do to ensure they’re on the path to the retirement they’ve imagined. Discover what your clients need to be doing today to retire comfortably tomorrow.
Podcast Transcript
Reese Harper:
My point is, knowing the projection 25 years in advance of what is gonna happen in 25 years and the choice you’re gonna make, it’s an absolute waste of time. It’s just a waste of time. What matters right now is, well, you make this much money, what percentage can you save? Let’s work on improving that. You have this much debt, these interest rates are at this level, how can we reduce those? You have this much personal spending, how can we cut that by 10%? You have this much practice profitability, how can we increase it by this percent? These are the things that are going to improve the probability that your future self is happy.
Abby Morton:
Hey Elementality listeners, it’s Abby. To help you better understand elements, we’ve chosen another episode from the podcast at Reese’s RAA The Dentist Money Show. On this episode, Reese and his co-host Ryan Isaac, discuss the total term element and what it takes to become financially independent. When can I retire is a common question Financial planners are asked and Elements handles that question in a very unique way. Here are some tips to discussing financial independence with your clients and how you can help ensure they’re on a comfortable path to retirement. Enjoy.
Ryan Isaac:
Okay. So Reese, let’s start with the end first and let’s give a brief overview of what we consider “done” or retired or financially independent. What is “done”? What is “retired” in our definition?
Reese Harper:
It’s when you have a big enough personal net worth to where the growth of that wealth or the growth of that net worth gives you the income that you need for the rest of your life. Basically you have a big enough pot of money that the interest on that money or the growth on that money is paying for your monthly living expenses. You’re now financially independent. So there’s a level that you can get to that’s measurable for any person that lets you arrive at… Three different levels of financial security. You can arrive at one where you literally… Your wealth is gonna grow faster than what you can spend. You have so much wealth and your spending is so low that you’re going to pass on many millions of dollars more than you have when you start…
[overlapping conversation]
Reese Harper:
Quitting work or when you reduce your hours. Then you have the one where it’s you are gonna keep the same amount of money that you had at the beginning. So you retire, you live on the interest, and when you pass away, you have a similar portfolio to where you had when you started. Or the most common is the scenario where you… Where work is optional, but you’re going to… You’re gonna deplete your portfolio to some degree, if not all the way, to zero, you’re gonna deplete it a lot of the way. You don’t exactly know how long it’s gonna last. We have some good guesses about it. And, we kind of… Our total term score tells us what kind of a person we’re likely dealing with. Are we dealing with person A, person B, or person C? Person A might have a score, like, a 100 total term score or something, where it’s just this person’s outta-control wealthy.
Ryan Isaac:
Great. Out-of-control wealthy, crazy term.
Reese Harper:
Yeah. They’re worth, in that particular case, a 100 score would be like you’re worth $10 million. You got $10 million in the bank and you spend like eight grand…
Ryan Isaac:
A hundred…
Reese Harper:
A month.
Ryan Isaac:
Eight grand a month. Yeah.
Reese Harper:
That person’s really, really never…
Ryan Isaac:
I feel like that describes quite a few people actually. There’s quite a few people in that sweet spot. That’s pretty good.
Reese Harper:
Yeah, it would seem but you could also be the person that’s worth 10 million. And if you spend a hundred thousand dollars a month, which we see it does happen, then instead of being at a 100 score, you’re at a 10 score. Meaning the people… Same two… Same people, two with $10 million each one person is gonna be out of money within like eight years and another person is gonna be…
Ryan Isaac:
Having hospitals named after them.
Reese Harper:
Yeah. Colleges founded after them.
Ryan Isaac:
Yeah, exactly.
Reese Harper:
And it’s the same amount of wealth. And so we look at that and then the second tier might be someone who’s keeping the wealth they have, they’re gonna be in the 30s and 40s kind of a score, maybe that kind of a range. And then people that are depleting their wealth, they’re gonna be in the 20s or high teens or mid-teens. So there’s nothing wrong with being in that place. There’s many times where I’m just like, “I am not either one of the top two people. I’m gonna be customer C, I’m gonna be the guy that just loved life so much and had such a good time and enjoyed every last moment that when I die my kids are each getting five grand and I’m kicking 10 grand to the Red Cross and…
Ryan Isaac:
That’s it.
Reese Harper:
That’s it.” And the CFP board gets $2000, and an honorable message on my…
Ryan Isaac:
It’s basically…
Reese Harper:
Program for my funeral.
Ryan Isaac:
Your tombstone. It’s basically how my wife drives her car. It’s just enough gas where she knows she’ll probably arrive at the destination without running out and having to call AAA or me. Where…
Reese Harper:
But no reason to fill it up.
Ryan Isaac:
I like to fill it up when it hits like a quarter. I’m going but I’m filling it back up.
Reese Harper:
Yeah. So that’s what… That’s how we look at it. And that’s the definition.
Ryan Isaac:
Alright. So knowing that that’s the end point which, by the way, when this question gets asked from a client or a listener, and they’re like, “When am I done?” By the time you spend 10 minutes explaining the concept of total term, I feel like it kind of erases the previous question, which is give me a printout of my projection and it starts putting the right questions in people’s heads. ’cause then they go, “Oh, alright, so I never knew that. That’s a great target to know. That seems achievable. I can compute that in my head.” Now they start wondering, “Where am I today? Then what’s my total term right now? And how do I grow it?” That’s the next step. So let’s take it from that perspective now of someone who’s realizing what the end point is, how it’s defined, and then back that into today. So what kind of things do we have control over? How do we grow this? And how does that relate to the future? The stuff we do today…
Ryan Isaac:
Do you think in your case though, when you explain that to people, do you find yourself still needing to… Does that give most people closure? Like you say, “Hey, you’re gonna want to get this score to at least be 25.” But each person needs a little bit different score, it’s not that precise. You can’t say it has to be a 25 or it has to be a 20 or a 30 or a 35. But it’s relatively easy to explain and people I think can concretely wrap their head around that more than they can a projection. Because when someone shows you a projection and tells you you’re gonna be okay, then you have to tell them all the variables you used in your projection to come up with their outcome. So most people are used to hearing, “Save three grand a month and you’re gonna retire just fine,” or, “If you just put the money into this 401 [k] and do this, you’re gonna be fine.” And that’s what they remember is, “If I just do this 401 [k] then I’ll be fine.” Well, at the time they ran that projection, it might actually have made some sense, but now your spending has gone up. Now you’ve added a couple of debts.
Reese Harper:
You’re making more, you… Yeah.
Ryan Isaac:
And all these things have changed. And instead of you remembering, “I need to have 30 times my annual spending piled up,” you just remember they said, “You just gotta do this 401 [k] or get this thing set up and then…
Reese Harper:
And you’re good.
Ryan Isaac:
You’re good.” And you’re like, “Oh, I still have 10 grand left over every month on top of the 401 [k]. This is excellent. It’s time for the boat.”
Reese Harper:
Yeah. “So I could spend more.”
Ryan Isaac:
Which could be true also. That’s the other side of it. That’s why more… So to your question, do people get… I think people understand just having some closure around what the end point looks like. ’cause it is pretty… It’s hard to grasp until you put a calculation to it. So 30 times what you spend in a year is gonna give you plenty to live on forever and die with money left over.
Ryan Isaac:
And I think that gets people the conclusion. The question becomes what actions happen today? What do you have control over? What are things… What are people doing today with their debts and their investments and their business and their real estate and their savings? And how do you pull that into the future a little bit? What am I doing today and how does it affect my ability to get to a 30 or 25 or 40 total term as fast as I possibly can? So I’ll just start with today in our advisor discussion, I was just explaining to our team and for our listeners, part of our service that people hire us to do is, on the quarters, we do a net worth kind of report card. We just show all the stuff on your balance sheet.
Ryan Isaac:
’cause we track all that stuff in detail and we just sum it all up in assets and debts. And we show a net worth report card every quarter. And we’re just showing how is this changing every three months of your life? And it gives advisors… It’s actually one of my favorite things that we report on because it shows me if there’s progress being made, how much is it? And where’s it coming from? Did your net worth grow up because we just said your house is worth a quarter million dollars more than last quarter? Or did you save a hundred grand? Or did you pay off 50 grand of debt? Or did your accounts grow? So I guess we can start there because I was just telling the advisors today when a client’s asking that, and I can show someone, “Here’s your net worth and here’s the last four quarters of growth. To score one point of your total term, mathematically, you gotta grow your net worth over a year by as much as you spend, that’ll get you one point of total term. So if you spend 200 grand… ”
Reese Harper:
At one point you mean if I’m worth zero and I grow my net worth to be a hundred thousand, but I spend a hundred thousand, I’ve just got to a one total term score at the end of the year. My net worth went from zero to a 100,000…
Ryan Isaac:
Approximately. Yeah.
Reese Harper:
Now it’s a one… I’ve lived for a year. I’ve gotten ahead a year.
Ryan Isaac:
Yeah. You got a one total term. And if you used to be a 10 and you spend 200 grand a year and your net worth went up 200 grand, now you’re at an 11 total term and the goal is 30. So I give people the context of how that relates to their spending. And I can see as an advisor, “Okay, here’s what happened. This person spent 200 and they grew 200. Great. We added one point of total term in the last 12 months.” Now how did that happen? Well, they save five grand a month in their brokerage account and three into the 401 [k], and they paid down 40 grand of debt and the practice became worth more. And so on and so forth. So to me, that shows me it’s a lot of information that I can say, “Here are the things this person has control over today.”
Ryan Isaac:
And if historically we’ve been going at a one total term or growing by one point every year, then if nothing changed your accounts grew at the same rate your practice did, your debts went down at the same rate, you saved the same rate, and you kept spending the same, then 30 minus however many years you’ve already got saved up. If you’re at a five total term now and you’re going at an average rate of one point per year, then we got 25 years left approximately if nothing changed. But that’s the funny, silly caveat because nothing ever stays the same. You will have more or less debt, more or less income, more or less spending, savings, those things change, which is why it’s super important to track this stuff so periodically and frequently. But anyway, that’s what I was explaining on how I found it being helpful to clients and listeners when they’re asking, “How do I know what I’m doing today and what kind of progress am I making?”
Ryan Isaac:
Because you can… If you’ve got enough data, again, this goes back to are you organized? Is someone holding you accountable? Are you measuring where you’re making progress? Because if you do that and you’ve got enough history, then you can start to say, “All right, if I keep on this track, I could reasonably expect to be done in this many years based on if nothing too big changes.” So anyway, that’s where the direction of the conversation went. I’d be interested to know where it went with the advisors you talked to today or what you think about it.
Reese Harper:
Yeah, I would say they… I showed them a few different samples of clients I’m working on myself right now and I’ve got some clients who are already at a… Are getting close to a 30 or over a 30 TT score and they’re having to make a decision on whether they’re gonna retire. But then some people are going, “Well, I have this vacation property though that I have paid off and it’s part of my net worth and I’ve just decided I wanna keep it forever.”
Ryan Isaac:
Yeah. “I don’t wanna include it”. Right.
Reese Harper:
And I’m like, “Well, that’s okay.” Then we just probably added we gotta… We probably have to add four more years of work if we were gonna keep that property. And they go, “Well, okay maybe not then, I might not want to have that property,” that rental, that vacation property, “Maybe I’ll just sell it. What would that do?” I’m like, “Well, if you just sold it, then you’re done. Financial independence is achievable. Alternatively, you probably need to work four more years to pay for that if you never wanna sell it, or you gotta get a line of credit against it and borrow against it.” And it was amazing though, when you give… See no matter what see the… It comes down to being at that moment when you’re 50, when you’re 55 or when you’re 60 or when you’re 65 whenever you’re at this point where you’ve achieved this amount of wealth that’s in this reasonable range of where work is optional.
Reese Harper:
It could be anywhere above a 20 even for people that were not wanting to pass any money on. They were just wanting to live comfortably and be fine. Most of us straight up we’re just not gonna accumulate the ideal amount of money. We’re just gonna accumulate a good enough chunk and we’re gonna be good enough. That’s how most people are gonna shake out. And there’s nothing wrong with that. That’s just… That’s your best effort. So when you get to that point in time…
[overlapping conversation]
Ryan Isaac:
[0:14:47.5] ____ you mean you retire, you’ve got enough and then you deplete it slowly until your last breath and then it’s mostly gone.
Reese Harper:
My point is knowing the projection 25 years in advance of what is gonna happen in 25 years and the choice you’re gonna make, it’s an absolute waste of time. It’s just a waste of time. What matters right now is well you make this much money, what percentage can you save? Let’s work on improving that. You have this much debt, these interest rates are at this level, how can we reduce those? You have this much personal spending, how can we cut that by 10%? You have this much practice profitability, how can we increase it by this percent? These are the things that are going to improve the probability that your future self is happy with your results. And any projection you make right now is just a waste of time. It doesn’t teach you anything because when you get out there, you’re gonna have the same choices. You gotta make the same choice. It’s like, “Well, the projection said this, I’m here, what do I do?” And I find that no matter how much projecting or how much future-forecasting I do, we end up at retirement and people are asking the same question, which is like, “Should I sell this? Should I… Can I do that? Can I buy this still?” It doesn’t change. They’re in retirement. And they’re asking the same things. Well…
Ryan Isaac:
The only thing that’s different is you’re not working now. Your income comes from your net worth.
Reese Harper:
Yeah. The only difference is you’re not working, you’re asking the same questions. So it’s like, “Well, can we buy that? Can we do this?”
Ryan Isaac:
“Should we pay this off? Should we… ”
Reese Harper:
” [0:16:26.3] ____ buy our house and we want that lot,” or, “We have an old boat… ”
Ryan Isaac:
Your housing’s not solved at 65.
Reese Harper:
Yeah, “I got this old boat and I just want a new one can we afford it or should we sell it?” And it’s you’re gonna be making all these changes you didn’t even think about. So what should you focus on? The things you can control. And that’s not the projection, it’s the individual elements that we’re tracking through our process that drive net worth higher. How much liquidity should you maintain? What is your savings rate? What is your burn rate? What is your debt to income ratio? How low is your effective tax rate? And then let the future just be the future. It’ll be fine. You’re gonna be okay. We’re gonna figure it out. We’re gonna take care of things and we’re gonna make it good no matter what. If you literally get close to your retirement and you have 25 grand in the bank and that’s all you were able to accumulate. We’re gonna look at this situation, we’re gonna say, “Social security pays this much and you’re not gonna be able… ”
Ryan Isaac:
That’s much home equity and…
Reese Harper:
“We’ve gotta do this and this is what your reality’s gonna be.” Okay. You’re gonna deal with that. But to give us the best chance of you not having just the $25,000 in the bank when we get there, we’ve got to focus on these other variables that are critical to moving the needle in a positive direction and not give you too much closure about an exact projection and date of when things are gonna be perfect in the future. ’cause there’s just way too many opportunities for COVID/Interest rates being a few zero. Investment returns are in the United States from the year 2000 to the year 2020 are not at 11% annual returns. They’re not at 13% like they might’ve been from ’99 to… Or from 1990 till 2000.
Ryan Isaac:
Shout out to the ’90s. Yep.
Reese Harper:
You just are gonna have a lot of things that are not… We don’t know. So let’s focus on what you can control and let’s not obsess about it, but let’s get a little bit of an idea. We don’t wanna be totally blind, which I think Ryan and I have talked about how we’d like to view that.
Ryan Isaac:
Yeah. There’s two things you mentioned or two things that come to mind as you’ve talked about… First thing is something you said early on, which is, your discussion with the other advisors. And that was about not just giving someone some target number that they’re supposed to save, but what are they supposed to save in context relative to their current situation. So when you say it’s gonna be… Like when you say, “Ah, it’s gonna be fine we’re just gonna focus on these other things,” I think the tendency to a listener might be, “How can you say that, man? I’m really worried, you know, the future.” But what you’re saying is if you look at this whole picture of these 12 elements which encompasses your taxes and your debt and your spending and your savings and your insurance and the way you invest money and all these things, if those things are okay relative to today’s situation, it means that they’ll… If you continue that, they’ll be okay in the future relative to your future situation.
Ryan Isaac:
And you’re controlling as much as you possibly can today, which is all you can ask for. Just control what you can today. Which I think is super important, man. And then the second thing that comes to mind is if you are looking at a client, and their net worth has been trending at 0.5, they’re growing their total term by 0.5 every year. You know their spending, you know their net worth, you know all the things about ’em. They’re growing at 0.5 and they’re asking, “Hey, I think I need to go faster what can I do?” I think that’s a totally fair, call it a projection if you want, you could say, “Well look, if you just saved another 1500 bucks a month,” or, “We could refinance this loan over here and save a thousand bucks a month in cashflow, then you’d be at 0.75 Or 0.8 and that makes a meaningful difference over the next 10, 20 years for you.
Ryan Isaac:
That will put you multiple years sooner assuming we kept going.” So it’s kinda cool to just think about the present. If you have enough information and you’re organized enough and you have enough accountability that you can change things now that you know will affect your future. And then at the same time know when things do change, your spending, your income, your debts, whatever, that you’ll revisit it and you’ll do the same thing in a year and in five years and in 10 years. And you’ll do the same thing again when you’re 70. You’ll just always keep checking your situation, like, “Where are we at? What’s net worth? What’s spending? What’s coming in?” So… Anyway.
Reese Harper:
I would say we just… We don’t wanna disparage the feeling people are having to want to see the future, but we’re just trying to get you to focus more on the present ’cause we’re worried that as you focus too much on the future, you’re going to either work too hard or too little right now. And we want you to focus right now on the right thing right now, we want you to focus on savings and spending and taxes and debt and liquidity and retirement accounts and practice profitability and real estate. We want you to focus, right now, on the optimal way to enhance each of these key indicators. And as you focus on that, you’re gonna find that your future is gonna be way better than if you project the future and let your current self be influenced by that. It’d be like knowing what time you needed to complete the race. You’re gonna go run this Olympic race, if you were given the time that you knew you had to beat, you would only run just slightly…
Ryan Isaac:
To do that.
Reese Harper:
[laughter] Less than that time. And if we knew the exact number you needed to retire comfortably based on COVIDs and future and interest rates and projections on your spending and all these variables, if we knew that precisely, we could tell you the precise minimum amount you needed to achieve. But we don’t. This is a race with no exact predetermined time to complete. There’s an unknown time that we have to achieve. And all we know is that if we get up every morning and train, and if we have a good diet and we go through our routine and we push really hard and we train effectively, we’re gonna optimize our chance to having the best time. But we can’t… We aren’t given this race completion time, we’re just not. It’s not handed to us in financial planning. And, I think that we have to just continue to focus on our routines, focus on our preparation, focus on our training, focus on the things that matter right now and make sure our financial advisors are also focused on that. They’re not just painting a rosy picture about the future, but they’re helping us up our game for today.
Abby Morton:
Next time on Elementality.
Roger Pine:
A tax return for a financial advisor is just such an amazingly valuable document, it’s an incredible window into your client’s financial life that, by the way, by law they have to file every year. So we as advisors, we beg our clients, “Please update your will, please, it’s way out of date. Please update it.” And they’re like, “Yeah yeah I’ll get to it next year. I’ll get to it next year.”
Abby Morton:
We totally get that. Yes.
Roger Pine:
But the tax return, they have to do every year, by law. And so that’s a great document for us to start with. So what Holistic Plan does is you upload that document, it reads it in, it runs it through a big old checklist, and then it gives you this report that you can share with the client. Just have a great conversation about taxes, explaining what’s going on with taxes. It’s complicated, just explaining what’s going on is valuable.
Abby Morton:
To find out more about elements, go to getelements.com/demo. Elementality’s executive producers are Reese Harper and Carl Richards. Elementality is produced by Tad Henderson and directed by Abby Morton. Have a good one.