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Putting Home Equity to Work During Retirement With Blain Pearson PhD

With current life expectancies, a typical retiree could be in retirement for 20 to 30 years. They have fully monetized their capital and need your advice on how to draw down their assets, how to use their home equity during retirement, and how to navigate the many challenges of being on a fixed income. Yet, financial planning usually takes a person to the point of retirement and no further. A handshake and pat on the back as they ride off into their “golden years” is not enough.

On this episode of Elementality, Reese interviews Blain Pearson PhD., CFP®, from the Department of Personal Financial Planning at Kansas State University to discuss Blain’s research on retirement satisfaction and why using home equity might be needed during retirement.

 

 


Podcast Transcript

Dr. Blain Pearson:
I think for a lot of retirees, they spend 40 years working and building up this big pile of money and their financial advisor says, “Okay, go spend it.” It’s like saying, “This is my baby, right? I’ve worked on this for 40 years. It’s my 401k and it’s now lower rate or what have you?” But I think that we could do better with the behavioral aspects of caring for retirement both in the retirement stage, the actual transition into retirement and of course retirement.

Abby Morton:
Welcome to Elementality. I’m Abby Morton CFP and producer of our podcast here at Elements. I love being a financial planner but I know it’s a challenging profession as well. That’s why the number one goal of our show is to help you prosper as an advisor as you better connect with your clients. We know your time is very valuable. Plan on a good return when you spend it here with us.

Reese Harper:
Welcome to another episode of Elementality, everybody. I’m your host Reese Harper. Excited for an academic interview today with one of the newest and most popular faculty members at Kansas State, Blain Pierson. Blain, welcome to the show.

Dr. Blain Pearson:
Thanks, Reese. Thanks for having me on. I’ve enjoyed your podcast. When I got the invitation to come on and talk I was very excited, so I’m glad to be here.

Reese Harper:
You’re one of three listeners Blain, so I appreciate you tuning in every once in a while. [chuckle] I don’t know if you knew that.

Dr. Blain Pearson:
I thought you had at least four, Reese.

Reese Harper:
[chuckle] You’re like, “I know all three then.”

Dr. Blain Pearson:
Yeah. [chuckle]

Reese Harper:
So, tell me just a little bit about… You did your graduate work and your undergraduate work at Texas Tech if I’m not mistaken, is that right?

Dr. Blain Pearson:
0:01:56.5 S4: Yeah. Well, I actually did my PhD at Texas Tech, but did my undergrad and MBA at a smaller school in my home State of North Carolina at Campbell University.

Reese Harper:
Okay, yeah. I remember seeing that on your LinkedIn profile. Yeah, it was… I didn’t know where Campbell University was located. Is that in North Carolina?

Dr. Blain Pearson:
Greater Metropolitan Buies Creek, North Carolina. And the reason I say Greater Metropolitan is because, I think when I was there at the time the population was all 6,000 so [chuckle]

Reese Harper:
That’s awesome, man. Yeah. So talk to me about… I’m curious, why personal finance? Was it clear during your MBA that you were gonna go that route, or is this been an evolution?

Dr. Blain Pearson:
That’s a really interesting question. I ask myself that quite a lot. [chuckle] Coming out of undergrad we were still on the cartels of the ’08-’09 financial crisis. Graduating in 2012 wasn’t… The market was better, but it wasn’t great for financial services jobs. And I did my undergrad in a program similar to Personal Financial Planning program called Trust and Wealth Management. And I stuck around for an extra year to get an MBA and hope the market would pick up, and it did. Had a position at a RAA in Chapel Hill, North Carolina after graduation. I stayed about a half decade or so working as it’s financial advisor. I built up lots of visors in Chapel Hill. And I think I had a quarter life crisis or probably a third of a life crisis at that point, and just thought, “Man, this is gonna be it for the next 40 years.” And I think before I was willing to fully commit to that I wanted maybe one more adventure. And I never wanted to really do research. Really understand financial planning from a research perspective, and somehow snuck into the PhD program in Personal Financial Planning at Texas Tech University. Spent close to another half decade there. And I graduated in 2020. And again I just somehow am lucky enough to time great job markets because…

Reese Harper:
Yeah, classic.

Dr. Blain Pearson:
The covid pandemic, of course, was in it’s full breath at that point. And lucky enough to have Case State open up a professor practice position, applied for it and got it. And been here at Case State ever since and love it.

Reese Harper:
That’s cool. So, I mean, it’s… Talk to me about what… When you say research in financial planning, what are some areas of interest that you feel passionate about? What’s on your mind right now?

Dr. Blain Pearson:
It’s actually said that a lot of my research has been mainly focused on retirement, in retirement consumption, how we can use… Financial advisors can use and be better facilitators of creating a better retirement experience, I think. We get our money go pro, we run the Monte Carlo and we can say, “Okay yeah, you can retire.” But I really wanted to know, What does that mean? I mean, retirement is not a yes or no question it’s a 30-year process. It’s not like a flip of the light switch. We can absolutely say we’re gonna retire. I mean, we can just be financial advisors, of course, but I think there are just opportunities. And some of our recent publications have addressed like, for example, the use of home equity. Another example, or if another publication on residential location, another one on financial risk. And how those all are associated with retirement satisfaction. And you gotta think about retirees are very unique group because they’ve exhausted all their… They’ve fully monetized all their the human capital and have a set amount of resources, so there is no… I mean, other than biennuity or household security there is no other income coming in.

Dr. Blain Pearson:
And I think for a lot of retirees, right? You spend 40 years working and building up this big pile of money and your financial advisor says, “Okay go spend it.” It’s like saying like, this is my baby I’ve worked on this for 40 years. It’s my 401k and it’s now a rollover IRA or what have you. And I think that we could do better with the behavioral aspects of preparing for retirement, both in the pre-retirement stage, the actual transition into retirement and even post retirement. ‘Cause that’s kinda where I’ve been focused and been doing most of my work at.

Reese Harper:
What does real estate have to do with psychological wellbeing and retirement. That’s maybe my curiosity.

Dr. Blain Pearson:
Yeah, that’s a really good question. So this is actually an article I published with another professor at Texas Tech, actually in journal personal finance looking at the relationship between home equity and retirement satisfaction. And so I used a data site called the health retirement study and what that data set has is information on retirees and it has information on their net worth and how that net worth is broken down.

Dr. Blain Pearson:
So home equity, financial assets those types of things. What I actually did is what’s known as a random effects longitudinal. So random effects regression and we followed these retiree… We looked at 22 years worth of data and looked at, okay, how does the relationship between home equity relative to net worth affect my dependent variable of retirement satisfaction?

Dr. Blain Pearson:
And as one might expect as that ratio increases from zero to one, meaning very little if any of your net worth is in a home equity at zero. One, meaning your house rich and you have pretty much your entire net worth all in home equity that as that ratio approaches zero to one meaning you have more home equity it actually… I get with… Again, using longitudinal data, the paper shows that as that ratio gets close to one that you actually have this utility from that. And you don’t… You aren’t happy, right? It makes sense, right? If you had to recap from retirement because you don’t have liquidity to be able to… I can’t chop off my bedroom and go buy things, right? I have to have some liquid assets. And so in that paper, particularly I argued if financial advisors could really do a better job with de-stigmatizing the use of home equity. I think that, you know, classically financial advisors and just people in general think that having a paid off home is the key for successful retirement that having that full paid off mortgage you own the home. There’s no home payments.

Dr. Blain Pearson:
And I think that that’s fine and it’s nice to have that, but if all of your network is concentrated in that, then you’re not gonna be able to enjoy your retirement. And the easy… There are tons of home equity access schools, cash out refis, reverse mortgages, etcetera. And I think that our industry, and again I argued this in the paper, could do better at promoting the use of home equity to support retirement. And if you think about the beneficiaries of those retirees they don’t… They’re not gonna live in their parent’s house, right? They’d much rather them see that home equity being used so that their parents can have a enjoyable retirement and enjoy the fruits of the many years of work.

[music]

Reese Harper:
Elements break down the balance sheet into four items. And it, they don’t all apply to everyone, but one of them is after tax assets or liquidity. One is qualified assets. One is business equity, and one is real estate. And I’m really… And I didn’t, I don’t have a lot of research on this. I just have a lot of anecdotal experience on this. So it was fascinating to hear you kind of like site. You’ve been working on a paper on this topic, around the mix of real estate to total net worth and how that impacts people psychologically and their wellbeing during retirement.

Reese Harper:
I’ve seen this with, you know, thousands of customers at Denis Advisors, and then here working at elements trying to get other advisors to use this system that most consumers early stage, when they buy that there’s two things they know how to do. Pay off loans and buy a house. [laughter] And you don’t need to tell them that they’ll do those two things without any guidance, they’ll pay off debt and they’ll buy a home and pay that off too ’cause it’s a debt and they feel really good. Psychologically I think it actually feels better. I don’t know this, but I’d love for you to research this, during the accumulation phase my guess is it feels better to pay off the house than it does to invest in the stock market. Like 10 grand in home equity versus 10 grand in the stock market. My guess is that people would say, “I felt better paying off $10,000 in my house.” That’s my guess. That’s my experience at least in my internal surveys of customers and tracking it anecdotally myself. But when you get to retirement and you say you got 10 grand in the banker, you got 10 grand in your house, which one do you like better? They’re always gonna say, I need that, I like that liquidity. You just said it, right. I want that access to capital.

Reese Harper:
But as advisors, we don’t really track the ratio of real estate equity to net worth during their accumulation period. And I think we need to so that we can proactively preventatively be like, “Hey man, you have 5 million in lifetime earnings that you’re gonna have by the time you’re done working, that’s your lifetime possible income.” Your house is worth this. And if we pay that whole thing off we’re not… We’re gonna have to use that asset in retirement. Your lifetime earnings do not, you don’t have enough earnings to pay off the house and not need the home equity. You’re gonna need it. So rather than incurring all of the tax and maybe the inefficiency of paying it off real early, ’cause if you put 10 grand in home equity at age 30, that is so much less efficient than 10 grand in the stock market at 30. It’s like night and day, the 10 grand in home equity does not grow at all, doesn’t compound. The asset of the house grows, but the equity doesn’t. But man, we treat this like it… This conversation is so critical, but we treat it like it’s just kind of an aside.

Reese Harper:
And then we get to retirement and we’re like, Oh, it’s kind of the biggest thing for most people. I guess we’re gonna have to now make a decision. And instead of coaching them gradually to that reality so it’s a nice, soft psychological transition to where the person says, “Okay, I guess I gotta get rid of… I can’t be so attached to my home equity, that’s not really… ” They get super emotionally attached. They hold on to it forever, they hold it till they’re really old, and they pull money out of 401ks and IRAs and pay taxes in audit, and they’re still holding this non-taxable home equity. They need it eventually anyway. Anyway, I’m kind of dramatizing the tension on both the accumulation side and the retirement side, because I’ve never heard anyone be… It probably takes someone your age to be interested in this type of question. But this question is probably one of the top I think 10 if in terms of the macro, if maximizing someone’s net worth with the income they have is part of what we do as advisors. This functional real estate job of… Let’s talk about appropriately limiting home equity at an early age and appropriately using it later on.

Reese Harper:
It’s gotta be like one of our most important conversations that we could have, but we don’t have the tools and we’re not preventative-ly tracking that during their accumulation years. So it makes it kind of a little abrasive, a little disruptive to have that conversation in kind of an emergency moment where it’s like, Oh, I guess we’re out of financial assets, time to tap the house and… Anyway, I wanna just get your… That’s a lot to throw at you, but I’m like really loving that you did this work and finding a ton of value in what I could learn from it, so anything you wanna respond to on all of that That’s just my feeling anecdotally about the topic. I wanna know how that kind of aligns with what you’ve been reading and researching to do this paper.

Dr. Blain Pearson:
Yeah, that’s great. I’m glad that there’s that interest there. As a researcher I might have five people to read my articles, so maybe two more than in your…

Reese Harper:
Podcast?

Dr. Blain Pearson:
So I’m glad that we’re able to have outlets, but yeah, I think your theory talks a lot about miniscule accounting and I think it’s absolutely true. I think people will view an increase in their stock portfolios having more discretionary spending power as opposed to an increase in their home equity, let’s say they’re both increased by 10%. Would you rather sell stock, you can get that 10% gain or you would rather give a cash out refund and get the 10% gain there. And I think this question now is more prevalent than ever with the recent real estate values. And moreover I think that as a retiree though you might have this kind of… I don’t wanna call it superficial but this notion of the home equity provides an inherent insurance value right?

Dr. Blain Pearson:
Like if you pay off home equity or you pay off your mortgage, you’re getting a guaranteed 3% creative return. It’s nice, I’m paying this debt off it’s immediate it’s not… And it takes a lot longer for investments to increase, right? And even though likely over the long term they will have a better ROI, the inherent insurance value of seeing the debt go from a quarter million to 240000 those are a lot better because it’s immediate, immediately satisfying and salient. It’s very present, I can see it. But the stock market and your investments in general, it’s gonna… If you have a good well diversified portfolio, it’s gonna take a lot longer to see a 10% gain.

Reese Harper:
So first thing I heard from you was good to know that someone else is thinking about this and you’re not totally alone. Have you not had a lot of people be super excited about that topic?

Dr. Blain Pearson:
I think it’s starting to… I think that…

Reese Harper:
I mean it’s not… Advisors don’t get paid to have that conversation really…

Dr. Blain Pearson:
Exactly.

Reese Harper:
Intuitively. So it’s unlikely that it’ll be for the advice only crowd or the advice… The fee only crowd, it can be a little more relevant.

Dr. Blain Pearson:
And two like… Not to cut you off but I think as advisors, you just… We’re getting this motive just… Okay, we’ve got a process, this is how we plan for retirement, let’s update the Money Guide pro the E-money plans. Let’s split out some reports to make sure you’re still… We don’t have those behavioral conversations as much as we need to.

[music]

Reese Harper:
: I’m biased a little bit about this ’cause I’m building a piece of software that is advocating for this point of view, so full transparency. My audience probably knows that, or enough by now, but like the… I try to make this be as academic as possible in that… With that conflict that I carry. So the way I look at most of the… We call it, I don’t wanna criticize software, ’cause like software… Dude Money got Pro, like eMoney, RightCapital like these have been gifts to the industry, and I’m so grateful for people who have put blood, sweat and tears into building these tools, their heart, but they do orient the customer around one particular main conversation which is, I need to explain this distribution plan to you, or this kind of cash flow distribution plan. And for people in their accumulation years…

Reese Harper:
That’s one reason that they care about their money but it’s not the only reason, there’s a lot of reasons why not accumulating as much in home equity matters, let’s say, to the current customer, it could be a little bit more balance in your spending today. So that we have… You’re gonna be fine, you can spend a little more today, and here’s why we’re gonna… It could also have to do just with weights, you have more than… You have a large home equity position relative to people your age that I normally work with, we just don’t have a lot of data right now on best practices for the accumulation period. And that’s… The real estate question to me is one of the most hard to pin down.

Reese Harper:
I can pin down savings rates in our software pretty good and say this is low, this is medium, this is high, this is Atypically high, real estate equity relative to net worth at a given income or age level. It’s hard to establish a heuristic for that and say it should be this. But I think that’s kind of where I’m interested in exploring more, is not maybe today in this conversation, just with future research is like where, if I see somebody who’s got a net worth of $300,000, and they’ve got $250,000 in real estate equity, my alarm bells start kind of going off, ’cause I’m like, I got… That’s a 90% Plus weight towards real estate equity at 30, and $300,000, in net worth, that doesn’t smell totally balanced to me. That smells like someone who thinks they’re gonna pay this thing off, and then never touch it again.

Reese Harper:
And then they’re gonna build retirement financial assets after that. But the middle of the road is kind of tricky for me, should it be a quarter of their net worth, should it be half their net worth? Well, a lot of it depends on their actual income level, ’cause the higher the income, the less you’re required… The less requirement you have towards residential, real estate mortgage, but it is an area where I think we need to spend more time talking, just because it’s not an easy thing to recover from, it’s a time value of money issue. And essentially paying extra on your mortgage to accumulate more home equity earlier, has a massive financial cost, but so does carrying too high of a mortgage for your income level, so does the price of your home. So does the area you choose to live in. So does the median cost of the home in the city you choose to put your kids in for school. And was there anything else about real estate that besides the weight of real estate to net worth? What other things kind of come up in this real estate conversation?

Dr. Blain Pearson:
Yeah, that’s a good question. I think a lot of folks… When you look at the data, retirees want residential continuity. They want to stay in their home, they wanna age in their home, they want to stay in the same communities, generally speaking.

Reese Harper:
Okay, that makes sense. Yeah, dude, it make sense.

Dr. Blain Pearson:
And so I think that… Which is fine. However, that residential continuity, I don’t know if you have a mortgage on your home, I have a mortgage on my home.

Reese Harper:
Yeah, I do.

Dr. Blain Pearson:
And just because I have a mortgage on it doesn’t necessarily mean I don’t think it’s my home. I’m still gonna take care of it. I’m still gonna make sure the lawn looks good. I’m still gonna make sure everything is… And so I think… And there’s a lot of very… I’m not sure if I can use his name, but popular opinion leaders out there that say, first thing you gotta do is pay off the mortgage, gotta pay off the mortgage. And that’s not…

Reese Harper:
Like Dave Ramsey?

Dr. Blain Pearson:
Oh, you said it, I didn’t.

Reese Harper:
All right. I could say whoever I want. Debt is dumb… He says debt is dumb, cash is king, I don’t know, those are kind of in conflict, that statement. But if debt is dumb and cash is king, well, I can’t have both.

[laughter]

Reese Harper:
Anyway…

Dr. Blain Pearson:
Well then…

Reese Harper:
Okay, so you’re saying that’s the tone, pay it off quick?

Dr. Blain Pearson:
Yeah. So that’s a general motif that you hear with popular financial opinion leaders. And if you’re an audience that doesn’t have a well trained financial advisor to kind of, I think you get into this whole notion of okay, then I do have to pay off that, that’s bad. I’m very debt adverse. And I think that’s reinforced and exacerbated by some of the opinion pieces that are on the public radio, and…

Reese Harper:
And it just feels good, right? It does feel good to just… Putting money in the stock market feels like not a very tangible thing for most younger people if they’ve never experienced that, I feel like it’s tangible ’cause I’ve bought shares of stock so many times now. I trust the price on those more than I trust my house. So but that is a very long journey for most people. And it feels good to just write the check against the house, it feels like for sure, at least a good thing. It was a good thing for sure. I wouldn’t say stock market investing always feels like a good thing, for sure. It’s always…

Dr. Blain Pearson:
Especially this year.

Reese Harper:
It’s always timing. Maybe I’m high. Maybe I’m buying too high, and so it doesn’t just emotionally feel as good, I don’t think, but let’s keep going with your line of thinking, you were going somewhere.

Dr. Blain Pearson:
No, I’m 100% with you on that, I don’t… I buy companies that I don’t ever think I’m gonna sell, I’m committed for the long haul, and so I’m right there with you on that. But anyway, so going back to kind of that idea of residential continuity. I think that there might be this like type of… This kind of sense that like, just because I’m gonna get a cash out refi or a reverse mortgage or any of the other available tools to access home equity, just because I’m getting that I think there’s a sense of, oh, well, I put all this money in, I’ve saved and I… It’s not gonna be my home anymore. The bank’s gonna own it, but in actuality, if individuals want residential continuity, they can still stay in their home in all those aforementioned ways. Actually I did a… I have a another piece coming out looking at basically cash out refi to buy an immediate annuity. And after about age 68, 69, in most circumstances, you can actually take out home equity. Let’s say, your new payments, you take out, I don’t know what the exact ratios are.

Dr. Blain Pearson:
I don’t have my paper in front of me, but, the idea is you take out home equity, buy the immediate annuity around the age 68, 69. You actually will have… After that will actually have more income from the immediate annuity purchase than your new mortgage payment that you would have. So you create positive net cash flow, and you still own the house and get the upward or potential upward price appreciation. And when you, when you are… You know, when you do pass, your errors can decide not unlike some reverse mortgage cases, your errors can decide, do they want a home? Do they want us to go ahead and sell it and taper off any remaining home equity? And so it get, you know, it gives your errors options. So I think like, you know, financial advisors don’t think in those terms. And I think that, you know, if we… If I have a 70 year old client that I’m seeing that is living on social security only, and doesn’t have… Is not having a good retirement experience and not enjoying their life then… But he has a paid off home. Like, you know, let’s… Why are you not using that?

Abby Morton:
Hey, it’s Abby, are you on the hump for ways to grow your book, speed up your planning process and better serve your rising star clients and prospects? Then it’s time to find out how Elements is helping advisors like you all across the country, modernize their approach to financial planning. To chat with us, go to get elements.com/demo, and we’ll show you how elements can help future proof your business.

Reese Harper:
You know, if I look at someone’s total net worth and I break it down by what percentage is in real estate, obviously, I include like rental property and vacation homes and everything, but most people are just gonna have like a residence sometimes a second home, but the average person doesn’t have a second home. They just have one house. And so if that ratio like, man, if that thing’s like… If it’s a fourth of their net worth it’s, if it’s like more than that, like at retirement, it’s a really important conversation for me to have, because I’m looking at their… Probably as much in their real estate, they might have qualified plans. And my, my sequencing of distributions has a massive like sequencing first out of the qualified plans while I’ve got a non-taxable home equity chunk sitting here.

Reese Harper:
And that’s like… That’s a really big mistake, like financially, probably way more than whether you’re in active, or passive mutual funds during the accumulation years, you know? So I, I… No shout out to any of you, out there who wanna take a strong stance on active or passive, I salute you, but this situation of like, I’ve already paid taxes on this asset. It’s sitting there and I’m just gonna not… I’m just gonna kind of ignore it until the client tells me they wanna do something with it. Like we kinda have an obligation to sort of… If you’re a holistic advisor, you gotta incorporate real estate as a part of your conversation. It’s gotta happen early. It’s gotta happen the whole time. And I think you’ve gotta have a plan for the sequencing of how you’re gonna access that. So let’s go to the options to sequence or options to withdraw. So we’ve got cash out, let’s start with a reverse mortgage. I mean, I can do a reverse mortgage, but what’s the downside of that?

Reese Harper:
It depends on the type of reverse mortgage there that you, that you go with, but there are certain, you know, age requirements and restrictions, and I’m not the reverse mortgage expert by any means.

Dr. Blain Pearson:
Yeah. I would not expecting you to be, but like, what would you say anecdotally people? Why don’t they do a reverse mortgage?

Reese Harper:
I, I think that there’s still a lot of negative stigma about reverse mortgages. I think that when you say…

Dr. Blain Pearson:
Deservedly or not really.

Reese Harper:
What’s that?

Dr. Blain Pearson:
Deservedly or, or like it just is a public perception?

Reese Harper:
Yeah. And I don’t have any hard and fast data on this, but just kind of anecdotally what I’ve seen and working with folks is just, you know, they… I think that reverse mortgages have been stigmatized as being this like, well, they don’t have any more money left, so they have to do a reverse mortgage.

Dr. Blain Pearson:
It’s kinda a last, resort?

Reese Harper:
Exactly. And I think that’s the public perception when in actuality, there might actually, in some situations be an overlooked option that could help promote a better and more fulfilling life. Right?

Dr. Blain Pearson:
Full life.

Reese Harper:
Yeah.

Dr. Blain Pearson:
And I don’t think, you know, we won’t go into all the options today, but I think most consumers assume they will fully lose control of the asset. And that’s kind of a big… That’s a, it does… It’s my understanding that isn’t the case in every scenario, but in the majority of situations, it is. And so you were talking about a different option. Like I think you’re talking about, like, you could do a cash out and purchase fixed annuity. Right? But you could also do a cash out and just buy a bond ladder, or you can do a cash out and put it in an open end bond mutual fund, cash out and put it in the stock market. I mean, you can do a lot of things with it. You got home equity line too you can use. I… But like, we don’t really have a financial advisor driven tool set for that yet. Like the mortgage industry and the wealth management community are still kind of in a…

Dr. Blain Pearson:
I would say that that part of the industry is still perceived to be a very sales commission kind of stigma world. It doesn’t feel like a professional kind of world to the advice only crowd. It’s like, but I’m just wanting to ask you, is that a perception? Is that a reality, like, have you seen a really, you know, as K state and Texas tech, are they looking at like, Hey, there’s a lot of good options and these fee only advisors sometimes get on their high horse and they don’t consider some good options out there. I mean, do you guys have any opinion on that? It just seems like the… I’m curious what academia thinks about the business models that play here, ’cause there’s some conflicts of interest too, you know?

Reese Harper:
Yeah. I would absolutely say that, you know and the conflict there’s a principal agent problem, right? Especially with the AUM model of asset management, I mean, if I have between Ross IRAs non qualified accounts managing a million dollars charging 1%, well, if I’m a good advisor, we want to encourage my client spend on portfolio and the problem is 1% on million is $10,000 in revenue, they spend down to $500,000. My $10,000 is now $5000 so as a financial advisor am I incentivized to try to just house as many assets as I possibly can in my firm?

Dr. Blain Pearson:
Yeah.

Reese Harper:
And, I mean, right. And so, you know, there’s a whole bunch of other subscription based models and other different compensation models. But I think that’s gonna be a pivotal part of this next generation of advisors, especially is how do we manage the assets in a way that creates a symbiotic relationship between the client and the advisor where, they’re not necessarily incentivized to keep assets in house. And I think that two, if you look at the day that Mike I think he was a Texas tech down at the American college has some really good research looking at how retirees view their income versus the spend ability, if you will, of their income versus their wealth. And the research suggests that regular reoccurring income has retirees feel more entitled. They have a guaranteed regular income to spend those assets to spend that income as opposed to having just a bunch of wealth and saying, okay, go spend it. And so the way we look at income versus wealth and how the behavioral “spendability” of those respectives income and wealth, I think will also be a huge topic going forward.

Dr. Blain Pearson:
Yeah. I mean I kind of used to be really caught up into fee model because I see the obvious conflicts in an AUM model there’s conflicts, in advice only model there’s conflicts in, I mean, people say that, no there’s not and I’d say there’s decreasing… There are better and worse conflicts in a lot of models. I think it is fair to say some are better than others. That’s fair, but I do think it’s possible while we’re all living in this world where there are imperfect compensation models okay. It’s possible to back up and be objective, even if it affects your income. And I think it’s possible to say here, I don’t care how you’re paid. Like, there’s something about this conversation with home equity and liquidity and reverse mortgage. If you take away compensation and don’t think about it for a minute, we can actually start arriving. Maybe it takes only people like Blaine to do the research, ’cause you’re not getting paid to get to sell a client.

Dr. Blain Pearson:
But I feel like we still have to advance this conversation in a responsible academic way, regardless of the implications to the fee model. We have to just say, what’s the right thing here? And I think the north star has to be measuring the clients per like satisfaction, their comfort level, their retirement happiness, which I’m curious how do you measure that? How do you measure that now? You know, and how did you get 20 years of data to kind of look at that over a period of time? What is happiness for a retiree? What’s the standard there that we can depend on for over any meaningful period?

[music]

Reese Harper:
My research like with the paper that we have been discussing on that home equity to net worth ratio that came from a data at the HRS, the health and retirement study that is out the university of Michigan. They have been following folks from 1992 to today. It’s still an active data collective source and it’s longitudinal. So every two years they ask those same questions to see why we have the benefit of longitudinal data. And so we can see how these different changes. And for example, the ratio of home equity net worth.

[laughter]

Reese Harper:
Affects the satisfaction of net retirement. And so it’s survey data. I mean, you gotta ask what it’s dependent on.

Reese Harper:
I’m just wondering the question itself. I know maybe I’m pinpointing you on something that has been a while since you read it, but like, how do you objectively know if someone’s happy and someone’s sad in retirement? What’s the question, you know.

Dr. Blain Pearson:
You ask him them. I wish I had a more sophisticated route. I wish I had, you know…

Reese Harper:
So it’s objective and was it on a scale?

Dr. Blain Pearson:
Yes.

Reese Harper:
So like a one to 10 kind of scale.

Reese Harper:
So for a couple of papers, yes. But, for a couple of projects I have, but the one that we were talking about was the one to three. How satisfied are you? Very satisfied, moderately satisfied, not at all satisfied.

Dr. Blain Pearson:
So the three, three options.

Reese Harper:
That’s our dependent variable. Let’s see what are the people that are very satisfied? Let’s compare them to the others. What about them is different?

Dr. Blain Pearson:
It that is so fascinating.

Reese Harper:
Than everyone else.

Dr. Blain Pearson:
It’s so fascinating. ‘Cause I think this generation of X, Y, Z will call ’em consumers. I think we’re seeing that preference going away, I could think this home equity, own my home as a dream. When you were talking earlier, I’ll still mow my lawn, I’ll still take care of it. Even if I’m leveraged to the hilt. Me and you both have mortgages, and I think it’s fair to say, we treat our homes like they’re we care… Whether they’re paid off or leveraged, we’re gonna treat them like they’re our baby, because the financial upside that we still have in the asset for one and the fact that it’s just like our place of domicile. But I was thinking, as you said that like, I might… If I signed a 20-year rental agreement, it starts to get kind of close for me still.

[laughter]

Dr. Blain Pearson:
Just because I’m so grateful for the consistency of knowing I can… I am being here for a long time. But there is still an element of, Nah, I still probably would not take care of that I probably still wouldn’t take care of it that nice. It breaks down for me around when I start saying renting versus owning, I think it is a substantial difference. But I’m seeing a lot of people not choose to buy houses anymore. They’re just tired of the financial drain, and the volatility, and the unknowns around that asset. It’s just nice to have the money in your pocket. If you’ve seen anything in that genre, in your research, where you were curious about home ownership rates, maybe or whether people prefer to own homes, what’s the next 15 to 20 years look like? Is it different than Dave Ramsey’s past?

Reese Harper:
Yeah, If you’d have asked me that at any point other than probably the last year, I would have had a really good answer. But with that out there with volatility of that the housing market, mainly on the upside, actually, pretty much in most parts of the country, with the only upside, I would say that that has kinda skewed the views of, I think, right. You mentioned, especially millennials right have delayed the first home purchase and delayed marriages and delayed and delayed delayed delayed.

Reese Harper:
Yeah.

Reese Harper:
And I think that, Well, now, millennials…

Dr. Blain Pearson:
They got burned didn’t they? They just got burned the last couple of years when the houses took off.

Dr. Blain Pearson:
Yeah.

[laughter]

Dr. Blain Pearson:
They’re like, “Oh, no, I knew I should have bought it.” Yeah, that’s probably gonna hurt them for a while, isn’t it? That’s gonna bleed over to the next 5-10 years. People are gonna remember missing out, I guess?

Reese Harper:
Well, one thing I will say the folks that are buying, so this housing market is different than ’08 and ’06, ’07 housing market where the I mean, this time around, people actually do have the assets to put the down payment. They are being really mindful. Exactly. So I think like a byproduct of seeing… Of millennials seeing and going through that great recession is okay, “I better not… I better wait till I’m fully ready to buy this house I better wait, I better wait, I better wait. And then now, everyone else also waited, and everyone else has a less liquidity and well, let’s start the auction. Right?

Dr. Blain Pearson:
Yeah. Yeah, I think you’re right. So what I’m hearing, this is what I’m… I gotta let you go ’cause I know you’ve got to get going, but I think that this… To put a bow on this, we need to start contemplating how to better advise accumulators on the allocation of equity towards real estate, when to cash out maybe along the way, when to redeploy some of that growth and diversify. I mean, we do that with all our equity portfolios, what my house gets to become like 50% of my net worth ’cause of price appreciation. And now I’m like, Is that healthy? Or do I need to rebalance that and provide a little more liquidity for myself, so I can actually live, and I took a lot of risk to buy this house? We they did tied up a lot of liquidity for me, it’s paid off, but I need something.

Dr. Blain Pearson:
That choice is something I think we need to have an opinion on at some point. And there should be a ratio-driven analysis that we can use, at least to say, “Okay, at this level, it starts to smell like smoke.” But there’s an accumulation decision. And then there’s definitely a pre-retirement, kind of prepare… There’s education and kind of awareness to get people to start thinking about this topic, so that they’re not caught off guard when their financial advisors are like, “I think we should do a cash-out refi” And then they’re like, “What? I don’t wanna borrow against my house.” It’s like there’s this education component to create psychological well-being. And then there’s a real practical tax component in retirement. The sequencing of withdrawals from after-tax qualified and real estate assets. It’s like, we don’t even touch that. And it’s such a tool anyway.

Reese Harper:
Yeah. For me, it’s like that should actually go in the other one word, like why do you start with your you are qualified and then you’re using Roth assets last, and then after the Roth assets are exhausted, then we’ll look to home equity, like “No, let the…

Dr. Blain Pearson:
No.

Reese Harper:
Roth assets keep going.

Dr. Blain Pearson:
Yeah.

Reese Harper:
If anything, I can pull cash out of my house and avoid the tax, like you mentioned. And it might actually help me depending on if I’m itemizing or taking the standard.

Dr. Blain Pearson:
It might, yeah, I mean, you should be touching qualified assets last. I mean, you should be looking at the home equity first, then go into your brokerage assets, that you probably have very little capital gain or some capital gains, and then hopefully, you’ve managed the capital gains throughout your life, whether you’ve gotten any charitable donations, or whether you’re trying to just do smart tax-loss harvesting along the way, just so you’re hopefully extending the longevity of those qualified assets and creating a nice… Just extended glide path for… Because of the frequency of how you withdraw and the order in which you accumulate it. Both play into that picture. I just think it’s a big conversation.

Dr. Blain Pearson:
And I… And I’ll… And I know, this is obviously recorded I would say that you should use home equity at least for sure, before your Roth assets, right? Like that makes no sense to do that. Now, depending on whether or not you’re taking out your pre-tax assets, like your IRAs and 401K’s that’s gonna depend on your tax situation. Now as so you’re 64, having started Social Security have no income. Yeah, take a distribution from those 401K’s right? When you have no income, you have no income tax 0% of… Or, whatever percent of zero is still zero. So let’s use that as an opportunity and let’s not do this standard brokerage, IRAs, and Roth IRA, let’s actually rearrange that. Once Social Security kicks in once if I have any pensions or annuities kick in, then I can have income tax, and then I can make that the switch to other assets if needed to support the income. So I 100% agree that we’re looking at this the wrong way.

Reese Harper:
Yeah, yeah, that’s brilliant, and a great new kind of budding research that I’m excited to continue to explore with you. I know we went down a narrow channel today. And you’ve got a lot of opinions on a lot of other topics, Blaine, but that’s what we tried to do here is go narrow and deep on something and then we’ll come back and do another episode. So thanks for only sharing a small part of your breadth and expertise today. But this is a really important topic. So I’ll let you leave… Advise us with the last word.

Dr. Blain Pearson:
Hey, thanks for having me on. And I hope your three listeners enjoy our conversation.

Reese Harper:
They will they’ll text me it’s my mom and my granddad.

[laughter]

Reese Harper:
My cousin. And you apparently. It Was great.

Dr. Blain Pearson:
Thanks so much, Reese. All right buddy.

Reese Harper:
Thank you so much, man. We will look forward to talking to you soon.

Dr. Blain Pearson:
All right. Bye.

Abby Morton:
Next time on Elementality.

Reese Harper:
If undergrad, I’ve hired a lot of undergrads at Dentist-Advisors that have undergrads in financial planning and are CFPs coming at into the job.

Matt Glazer:
And still.

Reese Harper:
And still, we’re like, there’s a lot of… They just did a bunch of just-in-case learning, all of which is like, hard to apply right now. Especially in the context of delivering financial advice to another person. Because how do we deliver financial advice to another person? Through email, through texting, through phone calls, through in-person meetings? What’s the most effective way for someone to learn is through those activities through the doing of something.

Abby Morton:
You can learn more about the elements financial planning system at getelements.com/meet and schedule a time to speak with one of our friendly financial planning experts. Elementality’s executive creators are Reese Harper and Matt Glaeser Elementality is produced by Abby Morton and directed by Jordan Haynes. Have a good one.

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