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How Much Money Does a Dentist Need to Save? – Episode 116


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How does your savings rate compare to other dentists? More importantly, how much money should YOU be putting away each month? In this episode of Dentist Money™, Reese and Ryan cover Savings Rate fundamentals and recap a few insights gained from this month’s Elements® analysis for clients of Dentist Advisors. They talk about appropriate levels of saving, how Savings Rate might change throughout a dentist’s career, and why the advantages of a balanced savings plan go beyond building a financial reserve.

Podcast Transcript:

Reese Harper: Hey everybody, it’s Reese Harper, and thanks for listening, again, to the Dentist Money Show. In today’s episode, we’re gonna talk about one of the most important financial elements in our periodic table, called savings rate, or SR. This past month, we completed savings rate analysis for all of our clients, and we want to talk about why this element is so important, how it’s calculated, and some of the advice we gave to our clients. We’ll talk about what qualifies as savings, how much you should save as a percentage of your income, and the right way to accumulate money in different places. Ryan’s also going to tell us a cool story about an Olympic skier. It should be a lot of fun.

Reese Harper: Remember to submit your financial questions to our next listener Q&A episode. You can send an email to reese@dentistadvisors.com or ryan@dentistadvisors.com. I also want to make sure you know how to get ahold of us at Dentist Advisors, if you’re ready to have a conversation about your own financial situation. To schedule a call, go to dentistadvisors.com and click the link at the top to book a free consultation. You’ll find a time on our calendar that works for you, and then we’ll have a discovery call to assess your personal situation, and show you how to make work optional at an earlier age.

Reese Harper: If it’s easier for you, you can always give us a call at 833-DDS-PLAN. Thanks again for listening, and enjoy the show.

Speaker: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Reese Harper.

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with Rockin’ Ryan Isaac.

Ryan Isaac: Yes.

Reese Harper: I’m going with a new nickname.

Ryan Isaac: I got a new nickname.

Reese Harper: He’s no longer the sir. Rockin’ Ryan Isaac.

Ryan Isaac: I think my teenage self would really actually appreciate that.

Reese Harper: So this month at Dentist Advisors is our savings rate month. It’s the month where we collect all of the savings data for 2017, and we compare each client in the category of … that’s most applicable to their income level, and we say how much did this person save, and was it a healthy savings rate compared to their peer group?

Ryan Isaac: Yeah.

Reese Harper: It’s actually a really interesting time for us, because we get a chance to see the anomalies of what happened, we get new averages, we get to see the new medians and means, all these data things that we’re interested in.

Ryan Isaac: Yeah.

Reese Harper: That only matter to the financial planning community.

Ryan Isaac: The way you said that, too, it seems like there should be a banner somewhere in the office. Like, it’s savings rate month.

Reese Harper: Yeah, we really enjoy it.

Ryan Isaac: It’s like Toyota-thon.

Reese Harper: Well, I think around her in our office, every month is a new subject that we focus on, and savings is actually one of the bigger topics that-

Ryan Isaac: Yeah.

Reese Harper: Really drives people’s overall financial health, so. You came across an interesting story to kick off the show today.

Ryan Isaac: So the Olympics are here, Winter Olympics in South Korea, and I found this story, and it was really cool, because it’s this … it was an article written in 2011 in Wired Magazine about a local Utah skier named Steven Nyman. But it was a cool story, do you know his story? Do you know much about it?

Reese Harper: A little bit, but I’m not gonna tell it, because listeners have not heard it.

Ryan Isaac: If you haven’t, the spoiler alert to this is he was actually gonna be on the ski team this year, and he had an injury like a week ago. He’s in the hospital again. It was like 364 days from a massive crash he had a year ago, and he’s worked for a solid year to get back. He was on the Olympic team for South Korea right now, and then he got hurt.

Reese Harper: Super sad, man.

Ryan Isaac: Anyway, so the story was about how, at about age 30, so this was six or seven years ago. He’s 30 years old, he was about, almost a dozen years into his pro career, but he was always kind of a middle of the pack guy. And he … after he had this huge injury in 2011, and then that thing was kind of this turning point where he got sick of doing the things he’s always been doing. He was obviously good, you know, a World Cup skier. But the way he described it is he stopped doing things by a gut feel, and he wanted to start learning from science and data. He said, “If you ignore a lot of that stuff and just go with your gut, I don’t think you’re doing everything you can to win.”

Ryan Isaac: So what he did is he just spent a lot of time in wind tunnels, and GPS, and nutrition. They messed with the uniforms. But there were a few things that stood out to me that were, so the results were pretty incredible. After a couple years of doing this, he went from his world standings of being like in the nineties out of, I think there’s a couple hundred, from what I was looking at. Down into the thirties, and down into single digits, eventually, in the downhill category. So it made a big difference in his training boost. Some of the things he did, was one of them was the wind tunnel, and I thought this was interesting, because the wind tunnel is like the mundane, I mean you literally kind of sit in your crouch, you know, which I don’t crouch when I ski. I’m like, straight as-

Reese Harper: You’re not there yet.

Ryan Isaac: Stiff as a board, my arms are like out in front of me.

Reese Harper: Not yet.

Ryan Isaac: Can I get … do you crouch?

Reese Harper: You will be there.

Ryan Isaac: Do you crouch?

Reese Harper: Oh yeah.

Ryan Isaac: Really? Pick up some speed?

Reese Harper: Yeah.

Ryan Isaac: Well, geez.

Reese Harper: How are you supposed to, when you’re bombing it-

Ryan Isaac: I don’t-

Reese Harper: It allows you to not have so much wind resistance.

Ryan Isaac: Okay, so the wind tunnel helps you practice this.

Reese Harper: I don’t use the wind tunnel, not being a World Cup skier. Yeah. I would just classify myself as slightly more seasoned than you.

Ryan Isaac: Slightly.

Reese Harper: But not, I wouldn’t be a wind tunnel-

Ryan Isaac: Your five year old is-

Reese Harper: I don’t go into the wind tunnel to get ready-

Ryan Isaac: Your five year old is slightly more seasoned than I am.

Reese Harper: To take the kids out.

Ryan Isaac: So he spent a lot of time in the wind tunnel. I thought this was interesting, kind of compared to finance, because the wind tunnel is kind of like the mundane routine of skiing, it’s just that one position, it’s not the exciting turns, or the jumps, or anything like that, you know? It’s like the mundane. But I guess he got really well known for his tuck, it was like his, this strategy for tucking in the wind tunnel. But what was kind of interesting though, is in this, he said he developed this skill of standing still. Which I thought was really interesting, lately, this time that we’re recording the podcast, there’s a lot of market volatility that we haven’t seen in a long time. I mean, the market’s dropping by large amounts in single days, and I thought it was interesting when he was honing this skill of not doing anything.

Ryan Isaac: Like, he’d sit in this wind tunnel, and some people, the goal was I’m gonna … they’d go in and they’d try to reduce drag, or try to get their speed as high as they can. But his was, I’m gonna be as still as possible. So anyway, he got really good at that. Another thing they did is they used GPS. So apparently in their training runs, they can use GPS to track, to the meter, of where these guys turn down these hills, and it was interesting, because what worked for one guy, like a line that they would pick, like how they’d turn and where they’d cut different turns, would work for one guy, and then if another guy followed the exact same line, it wouldn’t work for him. And based on your height, or your weight, or just the way you rotate your body, so it was like extremely individual. Like the lines you picked to go down this hill, you know?

Ryan Isaac: And then another thing that he said I thought was really interesting, is he went through all this testing. Well to keep things really simple, he had a session with a psychologist. And the psychologist said, “I want you go to listen to music, watch TV, and read a book all at the same time, and tell me what happened in all three.” And he said that clicked with him, like he was trying to do way too many things when going down the hill, that’s why he went back to science, and data, and benchmarking for years, to try to get good at the really, the basic stuff.

Ryan Isaac: And then in this article, he says, “There was always risk, though.” Obviously, because he was gonna ski in the Olympics, and now he’s out. And he said, “On every single run, you always see a scenario that could take you out.” So from the story, I mean, he improved incredibly. He’s still going, he’s almost, he’s in his late 30s, and he’s still going. He was gonna go to the Olympics.

Ryan Isaac: So from the story, I kinda took a few things away that can relate to savings rate month this month, which is getting really good at the mundane stuff, you know? Kind of like getting really good at just cruising along with the wind tunnel. And then when they talked about the GPS tracking, it made me realize how individual finance is, too. Like someone’s savings rate, and where you put money, where it goes, is very individual. That’s why you can’t ask your buddy, like where do you … what retirement plan do you have at your office, where do you put money, great, I’ll just follow that. The line you pick will be highly individualized to you, your situation. And then keeping things simple, obviously, and there’s always some risk from deviating to the plan.

Ryan Isaac: So we’ll talk about some of this today. I was gonna ask you if we can start off with the question, why is a savings rate important? You talked about this is, we track it once a year, it has it’s own month, the other 11 subjects do, so why is it so important to track a savings rate? Why do we do that?

Reese Harper: Well for me, tracking the savings rate means that … it tells me a lot about someone’s situation, because it tells me if they’re living life, kinda to the maximum point on their income, so they always spread thin. Or do they have flexibility to make decisions. You know, like this morning, I was just analyzing a client, and I had to make the decision that this person, can this person afford to save more money, because if they can save more money and qualify for a higher tax deduction on their retirement plan, it’s gonna bump them into a different tax bracket, and save like $75,000 in federal and state income tax.

Ryan Isaac: Oh geez.

Reese Harper: If they can make this larger retirement plan contribution.

Ryan Isaac: Hmm.

Reese Harper: But I’m a little bit worried about them being able to afford to do that, because their lifestyle’s also increasing, and they’re moving into a new house.

Ryan Isaac: Stretching that savings is gonna be like, yeah, I don’t know if I want to do that.

Reese Harper: Yeah. And so for me, there’s a consequence to having a low savings rate, and it’s not just that you’re saving less money.

Ryan Isaac: Accumulating less for retirement.

Reese Harper: Yeah, the consequences are also you pay more taxes when you don’t save as much money. And you-

Ryan Isaac: In the right places.

Reese Harper: In the right place. And you also have … you have more stress in your life, because you’re never, money’s not just piling up in your business checking account. And the psychology of that is super different. I think if you have liquidity, and every year when you make money, you know that a good portion of that is just gonna be left over, and every month, as your collections and deposits come in, your business checking account just continues to grow, it’s such a different life [crosstalk 00:10:37]. I think the psychology of living that way is so different.

Reese Harper: So for me, measuring someone’s saving rate indicates that … it’s probably one of the biggest indicators that overall, their financial situation is stable, and we have a lot of options.

Ryan Isaac: Yeah, it’s a good predictor. I always want to, when we meet new people, and I’m explaining what the elements are, these 12 indicators of someone’s personal financial health, I always tell people that savings rate is probably the second most important thing we track, behind total term. Total term being what is your net worth, and how long could you last on your net worth. Savings rate, I would call that number two. It’s just such a good indicator of how fast you’re gonna build net worth, and you know … when you’ll be able to make work optional. The higher the savings rate, the sooner that’ll be.

Ryan Isaac: The other thing I think is really helpful about savings, too, is it answers a lot of other questions that people have with their finances. Like a huge one is, how do I know when it’s time to invest versus pay down debt? And a healthy savings rate will answer that question with data. It’s kinda like the skiing story, you know? He said he was tired of doing things by his gut feel, it wasn’t getting him where he wanted to go. And so having a measurable, kind of consistent savings rate that’s appropriate enough for your income level, that’s high enough, that’ll tell you when it’s time to pay down debt, according to data. It’s like, it’s really an accurate way to keep you really balanced.

Reese Harper: So like if someone is saving 8% of their income, and they say, “I want to start paying down my debt”, well, the way we look at it, the way we look at savings, we’re measuring … your savings rate is the total possible income you have left over. It’s after taxes and living expenses, and mandatory debt payments, we have this leftover money. And that’s what we consider your savings rate. And so, with your savings rate, you have some choices of where to put it. You can let it pile up in your business checking account, it can pile up in a personal checking account, or it can be dedicated to a long term retirement plan.

Ryan Isaac: Yeah.

Reese Harper: An after tax brokerage account, or you could pay down debt with it. If you pay extra money towards-

Ryan Isaac: Kids [crosstalk 00:12:53]. I’m sorry, I was gonna say kids savings, short term liquidity for a big project, those are all … yeah, places where we’d consider savings rates.

Reese Harper: Yeah, they’re tangible goals.

Ryan Isaac: Yeah.

Reese Harper: Right. And so, I think what’s important to me, is to look at someone’s possible savings rate, and then say, if that’s a low number, like if it’s 7 to 10%, we’re probably not at the point in our life where extra debt payments really make a lot of sense.

Ryan Isaac: Or extra lifestyle. The boat, the beach house, the cabin.

Reese Harper: Yeah.

Ryan Isaac: The bigger trips.

Reese Harper: Yeah, I mean, you need to have that savings rate in the 20s for us to start having a conversation about big lifestyle expenses, and increases to your standard of living-

Ryan Isaac: We’re gonna cut, yeah, we’re gonna jump to that in a little bit, about what ranges they should be in. But I think, I mean, would you say, when people ask, what’s a minimum savings rate, I think we all kinda grew up with the save 10% for yourself, thing.

Reese Harper: Yeah.

Ryan Isaac: A lot of books written about that. But I don’t think that’s enough, when we look at the data of what dentists get used to spending, and knowing that spending is gonna be similar in the working years as it will be in the retirement years.

Reese Harper: Well, it’s pretty simple math, because if you look at the average American in, maybe in 2016, 2015 data, average income for … the median income was in the $50,000 range. For most US households. And so the percentage of income that social security makes up, of that 53,000, is like 70%. So you could save 10% of your income-

Ryan Isaac: It used to be enough.

Reese Harper: Well, you could save 10% of your income if your income’s low, and you’re gonna be fine when you hit retirement, because you got social security kicking in … a slightly reduced income than what you’re used to.

Ryan Isaac: Yeah, but it’s like, income replacement’s pretty high as a percentage.

Reese Harper: Yeah, you look at a dentist, though, average GP income from ADA statistics in the last year was about 230-something thousand dollars.

Ryan Isaac: Hmm.

Reese Harper: For GPs. Specialists was in the $300,000 range. Top quartile of specialists was north of 500 or north of 600. It’s a … so you’ve got this, that’s just average incomes. That means that many people are earning way more than that, and many people are earning less.

Ryan Isaac: Yeah.

Reese Harper: But your social security is barely … and what happens, and everyone gets used to spending a certain percentage of their income. The more money you make, the more you spend. So our average client spending is somewhere in the 15,000 to $16,000 a month range. And so if that’s your spending, and social security is $3,000 of that $16,000, I mean, social security basically doesn’t make a dent in your lifestyle. So you can’t, to replace the standard of living-

Ryan Isaac: 10%’s not gonna cut it.

Reese Harper: It’s not gonna cut it. So it doesn’t mean it doesn’t cut it for most people, it just means it doesn’t cut it for people who are used to living on much more than the average person. Or who earn a lot more. And that’s the challenge that a lot of dentists face, and why their retirement date is closer to 70, when the average US citizen’s retirements date-

Ryan Isaac: Closer to 60.

Reese Harper: Is closer to 60. So back to the question then, what’s the appropriate level where you can increasing lifestyle or paying down debt, or maybe investing in more speculative things? We’d probably tell anyone, like let’s make sure we can consistently hit a 20% savings rate.

Ryan Isaac: And then we can see what to do after that.

Reese Harper: Would that be a fair-

Ryan Isaac: Yeah.

Reese Harper: Call?

Ryan Isaac: Yeah. I would say if you look at your savings rate, and you say, “What’s a normal range for me?” I think, we look at the mean or average savings rate somewhere in the low 20s to high teens, that’s typically where it floats for most income levels. But once you get into the higher income ranges, people, the average savings rate does push higher for dentists. I mean, we’ll see it in the mid to high 20s. If you’re at the … kind of top quartile, of your specialty, or even top quartile of GPs. If your savings rate is 40% or more, that’s really unusual. It either means your income is probably seven figures-

Reese Harper: Yeah, you could have a seven figure income.

Ryan Isaac: Or you need to spend some money and have some fun.

Reese Harper: Yeah, or you just need to have some fun, and you’re-

Ryan Isaac: Geez.

Reese Harper: Maybe being a little too frugal. Like we’ve had people in the median income range with a 40% savings rate.

Ryan Isaac: Yeah.

Reese Harper: You know?

Ryan Isaac: You’re like, you can upgrade the car.

Reese Harper: Yeah. It’s okay.

Ryan Isaac: You can do it.

Reese Harper: That hatchback has seen its last legs.

Ryan Isaac: It saw some good days, though.

Reese Harper: You know? That Nissan Forza-

Ryan Isaac: Forza?

Reese Harper: Yeah, I just rode in one of those the other day. It was a nice rig.

Ryan Isaac: Shout out to the Forza.

Reese Harper: So anyway, my thought is-

Ryan Isaac: May the Forza be with you.

Reese Harper: I like the idea that people have a chance to have a target that they’re shooting for, and realize that there’s an excessive point, and there’s a point where you’re just too conservative.

Ryan Isaac: It’s not enough.

Reese Harper: Yeah, and you gotta weight it a little bit.

Ryan Isaac: I think if you’re below 15%, you’re just really not cleaning up your-

Reese Harper: Yeah.

Ryan Isaac: Anything below 15% and there’s work you can do.

Reese Harper: Yeah, when I talk to people, I think, even coming out of school with first jobs, I think hitting a 10%, most first new grads can do.

Ryan Isaac: Yeah.

Reese Harper: That seems doable from everyone I’ve talked to. 15, even in, like if you have a good associate job, or even early practice, I think you can hit it.

Ryan Isaac: Yeah.

Reese Harper: Unless, if you can’t, that’s usually telling of something. And I was actually gonna ask you a question along these lines, but it’s usually telling of something … one of the other elements in that middle row that’s out of whack. Either, usually something with debt or personal spending. It’s not usually like your taxes are so high that you can’t save, it’s usually debt or spending.

Reese Harper: But here’s a question I’m gonna ask you, and tell me what you think, too. I was talking to a client who has a big practice and is doing really well, and had … it was like a 35% savings rate. And then he decided to build a building, and he went from … it was like, less than two grand a month in a lease, to like a $10,000 building payment. Now, we don’t, in our reporting, we don’t go take his loan payment and count that as his savings rate, right? I’m not taking in his new loan payment because some of that’s just interest expense, and that’s an expense he chose to bear. Right? But at some level, we were talking about this, because his savings rate dropped because of this, you know?

Ryan Isaac: Yeah.

Reese Harper: But at some level, he’s putting money into an asset that will be usable for net worth in the future. He can sell it or rent it out in the future, right? It’ll be usable for his retirement. But it affected his net worth. I was curious if you have any thoughts on that, like how to view-

Ryan Isaac: It affected his savings rate?

Reese Harper: Sorry, it affected his savings rate, yep. Versus maybe a similar situation, but a different asset. So same situation, someone goes from a low mortgage, builds a really big home, and now has a high mortgage, that also affects their savings rate.

Ryan Isaac: Yeah.

Reese Harper: But that’s not as usable as an asset, as a primary residence, as the building you’re practicing in, you know.

Ryan Isaac: Yeah.

Reese Harper: So do you have any thoughts about that? Because we were just talking about it the other day as like, yeah, your savings rate dropped, but a big factor was you chose to go from a cheap lease to a really nice building that you own.

Ryan Isaac: Yeah.

Reese Harper: That is an asset, thought.

Ryan Isaac: Well, I think for me, there’s a big difference between a physical structure and land, in real estate, and I don’t like to get overly caught up in the amount of wealth building that I’m doing by owning that physical structure, over the 20 to 25 years.

Reese Harper: Yeah.

Ryan Isaac: Because it will continue to depreciate, that physical structure will, but the land itself

Reese Harper: Yeah, the location.

Ryan Isaac: Is very different. So thinking you’d have to say, did you do a ground up construction, and you actually own the dirt? Or did you buy a condo?

Reese Harper: Right.

Ryan Isaac: And-

Reese Harper: Those would be two different scenarios.

Ryan Isaac: They’re very different scenarios, and I still think that there’s … there’s just a cost of operations, and some people choose to bear that cost of operations through a big down payment, and likely more expensive TI job, because psychologically-

Reese Harper: TI, like build out, interior, when you gotta build out the building.

Ryan Isaac: Yeah, I mean, ultimately, everyone’s going to feel like they’re, when you own your own space, and you’re reinvesting in that, a lot of times you’ll do things that you wouldn’t do, if you had a limited capital improvements allowance from a leasehold situation, where the landlord’s given you $30 a foot-

Reese Harper: Yeah.

Ryan Isaac: And you’re trying to-

Reese Harper: Just like use it, and-

Ryan Isaac: And you know in 10 years you’re leaving.

Reese Harper: Yeah.

Ryan Isaac: It just, emotionally, I think it’s dangerous to build your own building, and refinish it, and it’s a dangerous financial situation, not because you shouldn’t do it, but just because emotionally, I think people can get overly invested in the physical structure.

Reese Harper: It’s very personal, it’s very emotional.

Ryan Isaac: And you don’t always get the money out on the backend.

Reese Harper: Yeah.

Ryan Isaac: Usually the reason that things appreciate is because there’s scarce land, and scarce property, and if you buy it in a really great location, that land will continue to appreciate.

Reese Harper: Yeah.

Ryan Isaac: But the structure will depreciate over time.

Reese Harper: Well, it’s like you ever walk into an old, gross building? That building was killer like 30 years ago.

Ryan Isaac: Yeah. Yeah.

Reese Harper: So the sweet new project you just got going, like the nicest finishes, it’s not gonna be that, you know-

Ryan Isaac: Totally.

Reese Harper: Times change.

Ryan Isaac: And I’m not saying that you shouldn’t do it.

Reese Harper: Yeah.

Ryan Isaac: I’m just saying, don’t say, well … like if someone had a 0% savings rate-

Reese Harper: But they’re like, I have huge building payment.

Ryan Isaac: But I have massive, I’m building massive equity in all these properties, I’d still say that’s really imbalanced, and you’re not as liquid, and you’re not as flexible. But you’re making a good point, like … that individual skiing line that you talked about really is personal. And this client probably made the best decision that they could’ve made, given the resources they have.

Reese Harper: It’s true, and the town he lives in, and yeah, the availability of more space.

Ryan Isaac: Yeah.

Reese Harper: And the size of his practice, and his competition.

Ryan Isaac: Yeah.

Reese Harper: I think it was.

Ryan Isaac: And so will his savings rate be slightly lower as a consequence of that decision? Of course.

Reese Harper: Yeah.

Ryan Isaac: Should it be drastically less? Well, it will be if they’ve invested a significant amount into the building.

Reese Harper: Yeah.

Ryan Isaac: And there’s a question of whether they will ever be able to recuperate all of that investment-

Reese Harper: Yeah, get it all back out.

Ryan Isaac: Because will another person moving into that town-

Reese Harper: Value it the same.

Ryan Isaac: Value it the same, and will they want the finishes you picked, and will they even like the location you ended up getting a good deal on.

Reese Harper: Yeah.

Ryan Isaac: And I can’t tell you how many dental buildings that I have seen in … poor locations, that are extremely nice buildings.

Reese Harper: Yeah.

Ryan Isaac: I’m like, why is this sitting here? This is like a two and a half million dollar building-

Reese Harper: Who put this here?

Ryan Isaac: I’m like, someone got to a point where they just said, you know what, at least I can own it instead of leasing it.

Reese Harper: Yeah.

Ryan Isaac: At least I’ll own this thing. And my lease is 10 grand a month, and my payment’s not gonna be that much. Or my lease is seven grand a month, and my payment’s not gonna be that much, so let’s just build it.

Reese Harper: Yeah.

Ryan Isaac: And what happens is, with a lease, you get a significant tax deduction every time you make that payment, and you don’t have any obligation when you’re done.

Reese Harper: Yeah.

Ryan Isaac: With a purchase, you invest a lot of money, you do have the time [vive 00:24:25] money of your 20%, 30%-

Reese Harper: Yeah, your down.

Ryan Isaac: Your down, or at least your 10%, or in some cases, you got zero down. That’s okay.

Reese Harper: But you leverage the practice.

Ryan Isaac: You leverage the practice, and you get zero down.

Reese Harper: Yeah.

Ryan Isaac: But you do have this, you have this baggage you’re gonna have to deal with, and I have a lot of clients that 30 years after owning their building, are kind of stuck with their building, and they’re trying to figure out, what do I do with this? Do I lease this out?

Reese Harper: Yeah.

Ryan Isaac: Do I … and at some point, and sometimes at that point, it’s not as nice on the inside. Because the last 10 years of your career, let’s not totally remodel the building.

Reese Harper: Yeah.

Ryan Isaac: So then you get done, and you try to lease it, and someone’s not as excited about leasing the older space. [crosstalk 00:25:08]. I’m not saying don’t own your real estate.

Reese Harper: Yeah.

Ryan Isaac: I’m just saying, don’t make that be a rationale for why you don’t have a high savings rate.

Reese Harper: Okay.

Ryan Isaac: Which addresses the question.

Reese Harper: Yeah.

Ryan Isaac: So will it be lower in this client specific case? Yes, that’s their own individual line.

Reese Harper: That’s their GPS line that they’re track.

Ryan Isaac: Yeah.

Reese Harper: So the other thought I was thinking about, too, is is there a difference between reducing a savings rate for a piece of investment real estate versus reducing your savings rate for a personal, primary residence?

Ryan Isaac: No question.

Reese Harper: That’s a different story, too.

Ryan Isaac: Primary residence-

Reese Harper: Like if this guy had increased his monthly spend fivefold for his primary residence, that would’ve been like, man, you made a big mistake.

Ryan Isaac: Yeah.

Reese Harper: Because your savings rate dropped. Different story, at some level.

Ryan Isaac: Yeah.

Reese Harper: Than an investment property.

Ryan Isaac: Yeah, I mean it’s … I think it’s tough, because I think it’s tough to say which one’s right or wrong, because some people don’t have aspirations to maximize their net worth. They’re not trying to just-

Reese Harper: Fair.

Ryan Isaac: Blow their net worth out and get to be the wealthiest person they can be.

Reese Harper: And then die with all the money still left.

Ryan Isaac: They’re just saying, look, I really want to have a good life, I don’t mind working late into my 60s, even my early 70s, I just want to have a balanced work life.

Reese Harper: I want to enjoy some of it.

Ryan Isaac: I want to have a really nice house. And that’s just what I want, Ryan.

Reese Harper: Yeah.

Ryan Isaac: And that’s my choice.

Reese Harper: Getting personal.

Ryan Isaac: And don’t tell me that I have to have a 25% savings rate, because I’m fine at 16, I’m fine at 18, I want a really nice house.

Reese Harper: And if my money runs out at 90, I don’t care. My kids don’t get anything, but that’s okay.

Ryan Isaac: I’m gonna save money, but I’m not gonna do it as fast as everyone in your client. All your clients are gonna save more than me.

Reese Harper: Yeah.

Ryan Isaac: Don’t give me a hard time. Lay off, man. So I think it really does boil down to, look, you can make your own decision, but the role of the financial advisor, it’s not to make you the wealthiest person ever.

Reese Harper: Yeah.

Ryan Isaac: But it’s to protect [crosstalk 00:27:07] you from making decisions that are probably going, you’re going to regret.

Reese Harper: Or at least be aware of what’s gonna happen, because of those decisions.

Ryan Isaac: Someone values a primary residence and wants to reduce their savings rate to do that, they will still regret spending too much on the house, and doing too much of a decline in their savings rate, and not accumulating enough money. They’ll still regret it.

Reese Harper: Yeah.

Ryan Isaac: So it’s your job to say, look, I get that this is your value, but I think I gotta push you a little bit in this direction. And I think that’s where measuring someone’s savings rate really comes into account. If you’re saying it dropped to 7%, I’d say that, yeah, that probably is in the you’re making a mistake range. But if someone’s going to still have-

Reese Harper: 20 to 15.

Ryan Isaac: Yeah. Or-

Reese Harper: 25 to 20.

Ryan Isaac: 25 to 14, and that’s just their call, and it extends their working life eight years, that’s their decision.

Reese Harper: Manage expectations.

Ryan Isaac: Yeah, that’s why the example you gave was so good, because you’re really kind of highlighting the shouldn’t just be a gut feel kind of thing.

Reese Harper: Yeah.

Ryan Isaac: You gotta be able to quantify it. So the last thing that I would ask is, and this is what other people ask, okay, so great, I saved 20% of my money, where do I put it?

Reese Harper: Yeah.

Ryan Isaac: And just like the skiing story, the line you pick, you know, the places you decide to put your money will be highly individual. They’ll be very dependent on your own personal situation, you can’t just do what someone else is-

Reese Harper: Yeah, you have a lot of experience in this area, probably more than I do, trying to design these individual lines, these individual savings rate plans for a lot of new people. At least the last 12 months, man, you’ve had like dozens and dozens, if not a hundred opportunities to do this.

Ryan Isaac: Yeah.

Reese Harper: Tell me a little bit about what you see, you know-

Ryan Isaac: I just, when you talk about picking lines it just makes me laugh, because I don’t pick lines when I ski.

Reese Harper: Yeah, you’re just picking which shape of the capital A, you’re wanting to make.

Ryan Isaac: Honestly, the biggest thing I’m usually worried about is who’s coming behind me. That freaks me out, man, when I’m like, I gotta make a big wide turn to slow down, and these guys are just bombing. And I’m right in their line. But yeah, it’s a very individual thing, and so … I mean, some examples would be, let’s say you have two doctors, and they could be really similar in collections, and even savings rate, income, all that kind of stuff. One of them might be piling a ton of money into a qualified plan, and it works for him. But it doesn’t-

Reese Harper: So you’re talking about like 401k-

Ryan Isaac: 401k, or a pension, or profit sharing, or something, yeah. Good question. But it doesn’t mean that the second one should follow that, even if they have a lot of other identical things, you know?

Reese Harper: Yeah.

Ryan Isaac: Because … and we will see this sometimes, so we’ll see this with a savings rate, where I’ll meet people that’ll have, let’s say a 401k at the office, and all of their money goes into it. That’s like all their savings, and there’s no liquidity. We just talked about liquidity a couple episodes ago. But where you put it is just really individual depending on your situation. A lot of people have projects coming up. They know they’re gonna move, they know they want a second location, they know they’re gonna remodel their house, or have to move their family somewhere. And you have to … financial planning is putting money to the highest priority things first. The most important things first. And sometimes that is really liquid, conservative cash, or conservative investments to get ready for a big purchase.

Ryan Isaac: So the line you pick with where your savings go, it’ll just matter. But see, I think a mistake that can be made really easily, and I hear this a lot too, is the intuitive thing is to jump to the product. Like where should my money go? And then you just start talking about what type of account, or what type of insurance policy, or something like that. You know, what type of investment. When the real answers will come from doing planning first. Those are like the financial version of exams and x-rays first.

Reese Harper: Yeah.

Ryan Isaac: Knowing … the whole row of income elements that we talked about, where does your money go in terms of taxes, and debt, and how much do you spend, what is your net worth. You know. Those are just things you want to know before you pick that end line of that product of where the money gets put. So.

Reese Harper: Yeah. I think, it’s probably, and this might be insightful for some people to hear, because I think that when typical … when the average person talks about savings, you’re thinking about money that I’m putting away for retirement. When we talk about savings, we’re actually at a different, we’re at a step before that. We’re at a step where we’re saying, how much money is left over-

Ryan Isaac: What’s even there? Yeah.

Reese Harper: To work with. Like when we do an initial analysis, we say, what’s your income? And we have to, that’s always a challenge, to figure out what someone actually makes. So once you know what someone actually makes, then you can say how much tax they’re gonna have to pay, and then you can say how much mandatory debt payments they have. And then you can say what they probably will have left over after you measure what they spend. So you say, tax, debt, and spend, and then what’s left over.

Reese Harper: And we do that before they even tell us where the money’s going. A lot of people are saving money somewhere, or they’re putting money somewhere. We don’t care where it’s going right now.

Ryan Isaac: Yeah.

Reese Harper: It’s like we have to go back and fix where it’s going anyway.

Ryan Isaac: If you don’t know these answers, you end up doing what we’ll call random acts of money.

Reese Harper: Yeah.

Ryan Isaac: Yeah.

Reese Harper: It’s like, okay, well, you just … we know people are putting money in places-

Ryan Isaac: But why, is the question?

Reese Harper: But we wanna back up before that, and say, what’s the total number first. Because that’s really … the savings rate, the percentage of your total income that you can do something with, you have control over, is the starting point. Now, if that number already is too low, then we have to look up above in the other areas. The debt may be structured poorly. Or maybe your interest rates are too high.

Ryan Isaac: Could be profitability of a practice.

Reese Harper: It could be that your income is just too low.

Ryan Isaac: Yeah.

Reese Harper: And so the fundamental, kind of first step in financial planning is taking a look at that middle row, the income row of the periodic table, and saying, what … for someone who’s at your age, who’s earned this much money, and been practicing this long, does your savings rate look right? And we know the way to compare that, to kinda say, man, for a 41 year old, at your stage, I’m really surprised that your savings rate’s this low. And-

Ryan Isaac: Where’s the issue?

Reese Harper: Where’s the issue at? Let’s fix it. Or man, you have a killer savings rate, it’s just time to start allocating it to the right places. I mean, a lot of times it’s like, people just haven’t done any financial planning for a decade, and now it’s time. They’ll be like, I have five things, I don’t know, it kinda just randomly goes here.

Ryan Isaac: Yeah. Yeah.

Reese Harper: So you made the point, it’s always individual, and I really think it really is individual, and it can be that savings does need to go towards extra debt payments, to be able to eliminate a couple of loans, so that savings rate can actually be healthy.

Ryan Isaac: Yeah.

Reese Harper: Because you just didn’t … you just got a lot of debt, or the place you went to school was just way more expensive than the average person, or the practice you purchased, you actually paid a little more than maybe you would have liked to have paid.

Ryan Isaac: Yeah.

Reese Harper: The market where you’re at just was a hundred percent of collections, and you had to do it.

Ryan Isaac: You happen to live in an expensive city where housing just is what it is. It’s just expensive to live there.

Reese Harper: Yeah, you need a house.

Ryan Isaac: Your taxes are just high.

Reese Harper: You wanna have a house, and you don’t wanna keep renting, and so we need to dedicate that to a down payment first, or we’ve gotta … you want a second home, that’s a huge priority, and your kids are at a stage in their life where this is something your family’s dreamed of having this cabin to get away to, and you have enough liquidity to where that goal, you could … like a lot of times what I think is challenging about financial planning is, when you want to have the … when you want to do things, you feel like you can’t, because you feel like you shouldn’t be doing these-

Ryan Isaac: It’s really common, actually.

Reese Harper: You know, good things.

Ryan Isaac: Yeah.

Reese Harper: Until you’ve got all your money saved up, or you’re all ready for retirement, but ultimately it’s more about a balance of saying, okay, well … if I’m gonna do this, and I want to have this lifestyle experience, or I want to have this vacation budget, I want to have that cabin, or I do want to have this-

Ryan Isaac: Country club membership, or the boat.

Reese Harper: Yeah. And in [inaudible 00:35:23] case, I mean, he just … he’d buy the most expensive country club in town.

Ryan Isaac: He would. That’s how he rolls.

Reese Harper: And he’s a scratch golfer.

Ryan Isaac: Scratch, [inaudible 00:35:30].

Reese Harper: So everyone’s got these things that you want, and I think there’s times in your life when they’re more valuable than others.

Ryan Isaac: Yeah.

Reese Harper: Like, they’re more valuable in your 30s, and 40s, and 50s, than they are in your-

Ryan Isaac: Than they will be in your 70s.

Reese Harper: 70s.

Ryan Isaac: Yeah.

Reese Harper: And so, it’s okay to have those preferences.

Ryan Isaac: Totally agree.

Reese Harper: But you’ve gotta find the line that works for you. And then build a plan that makes you feel happy.

Ryan Isaac: Yeah, from the skiing story, I liked the … where his psychologist was like, go listen to music, read a book, and watch a movie, and tell me what happened in all three. And just the thought of keeping things simple, too. It doesn’t have to be really complex, where your money goes, to make good progress. It doesn’t have to go to a million places at the same time. Oftentimes, that will derail a plan, when there’s too much going on, so I like the thought of keeping it simple.

Ryan Isaac: And then I … you know, it’s good to keep in mind that these things change all the time, too. What you did one year doesn’t necessarily mean you’ll do it the next.

Reese Harper: Oh yeah.

Ryan Isaac: In terms of retirement plan, or liquidity, or debt reduction. You know, investing in a practice. Things change, things come up. So anyway-

Reese Harper: Personalities change.

Ryan Isaac: Yeah. Career goals.

Reese Harper: Your goals change.

Ryan Isaac: Opportunities.

Reese Harper: Who you are as a dentist starts to evolve.

Ryan Isaac: Yeah.

Reese Harper: You’ll surprise yourself, the way you look at money, year by year. It’ll change as you age. And it’s important to address those changes in perspective with a financial plan that’s designed for you.

Ryan Isaac: Well, with data, yeah. You use the data and science available instead of that gut feeling all the time, so … alright, well in conclusion, let’s wrap up. I wrote down four points here. I would say number one, I liked what Steven said, the skier, he said, there’s always a scenario that could take you out. And I think that’s good to keep in mind, because even the best plans that you have, and the best job you could do to try to predict where you’re headed, there’s always something that’ll happen, you know.

Ryan Isaac: Number two would be don’t be a victim of random acts of money. Throwing arbitrary amounts of money at random things, based on the pressure you’re feeling, or the stress, or the excitement, or whatever at that moment. I feel like that’s one of the biggest things that causes some kind of financial despair, destruction, you know?

Reese Harper: Well, I think people will be surprised, like the more you study about human psychology, and human behavior, the more you realize how many decisions are literally made purely out of emotion, and have nothing to do with logic. We all like to think of ourselves as very rational people-

Ryan Isaac: I’m the exception.

Reese Harper: Like we’re very logical. And we make decisions because we’ve thought them through. And this is the right choice. But a lot of research has been done on all of our decisions that are made, not just our financial ones, but especially related to money-

Ryan Isaac: We think they’re conscious.

Reese Harper: We think they’re very conscious, but a lot of them are just triggered by an emotional reaction we’re having to something that came up.

Ryan Isaac: There’s been some killer research, in kind of funny, trivial ways about that, where we make certain decisions, like in a grocery store, that we think are conscious, and they’re totally not.

Reese Harper: Yeah.

Ryan Isaac: Yeah. You didn’t buy that cereal because you thought you really wanted it, they made you buy that cereal.

Reese Harper: Yeah.

Ryan Isaac: You know?

Reese Harper: Yeah.

Ryan Isaac: So anyway, number three, we said try to … a good baseline savings rate is try to hit a 20% consistent savings rate. Sometimes your income or situation won’t allow for that, sometimes it’ll allow for a lot more than that, but that would be kind of a good baseline to start with, before you start thinking about putting money in other places.

Reese Harper: Yeah, and I would say, as your income … that would be for the median income, and the median income of people, probably in the mid 200,000 range. If you start getting a lot higher than that, you should see that savings rate increase. And if you’re not seeing your savings rate approach 30, as your income approaches the top quartile, talking about people that are-

Ryan Isaac: Into the fives.

Reese Harper: Yeah, that are double, probably, the median. And especially if you’re a specialist with two locations, and you’re approaching seven figures, you-

Ryan Isaac: For sure.

Reese Harper: Your income savings rate needs to be significantly higher than the average savings rate, because you won’t be able to replace your standard of living, and it’s gonna result in an extended working life. Which if you’re consciously aware of that, that’s okay, but you will have to have a higher savings rate than 20%. I would say, like Ryan said, it’s really a range, it’s not a number we want you to remember, that goes from 10 to probably 30 plus, depending on your income.

Ryan Isaac: Yeah.

Reese Harper: And if it’s at 40, we’re probably like, what’s going on, you’re either … you’ve got an extremely high income, or you need to take a break, and if it’s at 10% your whole career, you’re just gonna continue to struggle, and it’s gonna take social security to make you feel comfortable that you can even stop working.

Ryan Isaac: Yeah. Last one I was gonna say, treat it like bill pay. Try to automate it as much as possible. We try to get our clients-

Reese Harper: That’s great.

Ryan Isaac: To save things directly from, you know, with some … approval from CPA, but we’ll try to get them to save directly from business accounts. Don’t even let it come home or to personal checking. Don’t leave it up to … if you can, month to month, like I’ll just let you know how much to save, try to automate it, as much as possible.

Ryan Isaac: Again, some situations don’t allow for that all the time. We do have clients who have a smaller automated savings rate, and then we check in every month, you know? Maybe they have a really fast growing business or some variable things going on, and every month is a little bit different, but try to automate as much as possible, because it’ll make it a lot easier.

Reese Harper: That’s great.

Ryan Isaac: Kind of a no brainer. Alright, well let’s just wrap up today. We want to remind everyone we take questions every month to do a Q&A episode, once a month, so send us any kind of question that you’ve ever wanted to ask a financial advisor. Send it to us, you can email Reese, it’s R-E-E-S-E, reese@dentistadvisors.com, or ryan@dentistadvisors.com.

Ryan Isaac: Take a minute and give us a review on iTunes, we’d really appreciate that. It’ll make it easier for other dentists to find us, when they’re searching for podcasts. And then you can feel really good that you’ve helped dentists find the Dentist Money Show.

Reese Harper: And make smart financial decisions.

Ryan Isaac: And make smart financial decisions. Schedule a free consultation. If you want to talk to us, you can get on our calendar, just put something the calendar at your convenience, that works for you. You go to dentistadvisors.com, there’s a link at the top of the page, it’s our calendar. Pick a day and a time, we’d love to talk to you, and answer any questions you have, or go into any specific details about something you’re working on. Or just give us a call, 833-DDS-PLAN, and thanks for listening.

Reese Harper: Carry on.

Income

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