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When will you have enough money to make work optional? Are you building the right mix of assets? Is your tax rate minimized? Do you have the proper amount of insurance? In this episode of Dentist Money™, Reese and Ryan introduce a periodic table of twelve key indicators called Elements® which gives dentists a straightforward way to answer the some of the most difficult questions about their financial health.
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 my trust old co-host sir Ryan Isaac.
Ryan Isaac: Good morning, thanks for having me in studio.
Reese Harper: It is nice to bring you in, in studio.
Ryan Isaac: It feels good to be here.
Reese Harper: I’m excited to have you.
Ryan Isaac: Yeah. We have a good subject today.
Reese Harper: And you have been itching to tell this story for a long time.
Ryan Isaac: Oh, yeah, dying. Yeah. I’ve been asking, what is this, episode 82? When can we just talk about ourselves, I’ve been wondering that. And today’s the day.
Reese Harper: Today’s the day that we talk about ourselves and your trip to the doctor.
Ryan Isaac: Yeah. We’ll start with a little story this morning because today we’re going to talk about … We’ve mentioned The Elements briefly, The Elements is how we do financial planning for dentists and we’ve talked about it in pieces.
Reese Harper: Bits and pieces.
Ryan Isaac: Bits and pieces. Reese’s Pieces.
Reese Harper: Mm-hmm (affirmative).
Ryan Isaac: You could say that.
Reese Harper: Yep. Yes, you could. Reese’s Pieces.
Ryan Isaac: Reese’s Pieces.
Reese Harper: Mm-hmm (affirmative). Not an old joke.
Ryan Isaac: You’ve never heard that.
Reese Harper: No one’s ever said that.
Ryan Isaac: In your whole life. I feel honored. This is great.
Reese Harper: All peanut butter cups.
Ryan Isaac: Well, we’ve talked about The Elements in pieces on the show but we’ve never dedicated a whole episode to talking about what are The Elements, what is financial planning, what are the things that should help you figure out and know and quantify and feel comfortable with and understand. We’ll start with a story, though. My story.
Reese Harper: Yeah, it’s kind of both of our stories.
Ryan Isaac: I was going to say, I think that you’ve experienced the same thing.
Reese Harper: Yeah. Do you want to tell it or do you want me to tell it?
Ryan Isaac: I want you to tell it.
Reese Harper: Okay.
Ryan Isaac: I feel like I want to hear your version of it.
Reese Harper: Let’s just say I go into the doctor’s office. This is my primary care physician, okay?
Ryan Isaac: Good guy.
Reese Harper: I tell him what my problem is. Now there are two options that he has, he can test my blood pressure, look at my BMI, maybe do some allergen testing, or run a variety of blood tests to verify what I’m saying. He could take some MRIs, he could take some x-rays, he could take a lot of diagnostic tests to just verify-
Ryan Isaac: Spend some time.
Reese Harper: Spend some time verifying what I’m talking about.
Ryan Isaac: Get under the hood a little bit.
Reese Harper: Yeah. Or, option b, he could just listen to what I say and then take me at face value.
Ryan Isaac: You bring him the data.
Reese Harper: Yeah and then prescribe a treatment plan without running any diagnostic testing. Just like if I say I have a real bad stomach problem and I need medication to help me process my digestive issues, then he’ll just give me the medicine.
Ryan Isaac: Feels like, doc, when I eat cookies all the time and tons of chocolate milk, which is my-
Reese Harper: That’s your issue.
Ryan Isaac: Which is my issue.
Reese Harper: That’s your issue.
Ryan Isaac: Love my chocolate milk.
Reese Harper: So let’s say every time I have a problem with Doctor B, the only input into my situation that they really have is what they observe from what I’m saying and what I’m talking about. And that’s where the diagnosis comes from. But what if the problem is something they can’t see or …
Ryan Isaac: Something you don’t know about.
Reese Harper: Something I don’t even know about.
Ryan Isaac: Or you’re getting wrong, you’re misunderstanding something.
Reese Harper: Yeah, because it’s not really my area of expertise, strangely enough.
Ryan Isaac: It’s possible.
Reese Harper: Human anatomy and o-chem and such was not a real high interest for me during my collegiate days. But they just take me at face value and give me the diagnosis.
Ryan Isaac: Now when you’re saying this, I’m thinking about some of my own experiences in dentist’s or doctor’s offices where one of them does seem faster, maybe cheaper, like I’ll just walk in and tell you what’s going on and hurry and give me a treatment. It seems like you get out of there a little bit quicker. Don’t spend as much time in the …
Reese Harper: Yeah, you go in, you’re just going to go into your general dentist’s office and you’re going to be like, “I need a root canal on this one.”
Ryan Isaac: I’m not going to tell them [crosstalk 00:04:34].
Reese Harper: “On this root. Just go for it.”
Ryan Isaac: “Just get it done. Can you just get it done and I just saved us some time, now you don’t have to take those x-rays, you don’t have to send anyone in.”
Reese Harper: So this is the general problem of financial planning, okay-
Ryan Isaac: And health, I would say it’s probably [crosstalk 00:04:49].
Reese Harper: And health. This is a problem when it comes to getting advice, if you’re getting advice from anyone, could happen in … I’ve seen it happen in home design, I’ve seen it happen in health and wellness, like almost any medical career, I’ve seen it happen in consulting all the time, business consulting, practice management consulting, where prescribed treatment comes really pretty quickly without a lot of diagnostics or research or testing or measuring or sampling.
Ryan Isaac: Business owner engages a consultant, says, “Here are the five problems that you need to fix, you just fix them.”
Reese Harper: Fix them and whoever quotes me the lowest cost sometimes-
Ryan Isaac: The fastest, just get to working.
Reese Harper: Get to work and just get it done. That happens all the time.
Ryan Isaac: But the problem is that those five problems might not even be the real problem with the business.
Reese Harper: Exactly. What we want to … What we’re trying to address today is from a high level, professional advisors, whether they’re … Whatever industry they’re in, who gather information, a breadth of information, and have a lot of data and comparative analysis and experience around that data, if you’re designing a home and your architect asks you, “Do you want a rambler or a two story?” And you just tell him what you think you want and-
Ryan Isaac: I think that’s an interesting example, actually, because expand on that, you’ve been talking to some home designers a little bit, you been learning about that, and I think when we think about the homes we want to live in, we probably think that we all know exactly what we want and how that would work out.
Reese Harper: How it would work best for us.
Ryan Isaac: Yeah, he’s like, “I want a big great room and some kitchen space and I want a master here, so just get that done.”
Reese Harper: Yeah, I just think that that’s … A lot of times we have these ideas about what we think might be the least expensive or what might be the best for our family or what we want or the way we live. We might not be as observant about the way we live and we might not be as observant about our needs, the way our lives function, the way we store things, how much gear we have.
Ryan Isaac: That stuff. It’s those little things that you talk to an expert, you talk to an expert and they throw out a little idea, you’re like, “I would’ve never ever thought about that.”
Reese Harper: Yeah. Like when you’re in your kitchen, are you left handed or right handed?
Ryan Isaac: It’s like, “Oh, well-”
Reese Harper: Like that plays into design? Like based on that where I place the sink relative to the dishwasher is actually really, really important because that’s going to affect the way you work every day and so let’s talk about how much, what type of food you guys store and how much food do you guys end up collecting. Are you like a vegetables, fruits, kind of a family or do you have a lot of processed food, do you have a lot of packaged goods or a lot of produce? And these are the things that eventually a good designer is going to discover something about your own situation that no one else will discover and they’ll go ahead and implement a better outcome, a better-
Ryan Isaac: Way better. And they tell you things that you thought you knew.
Reese Harper: Yeah.
Ryan Isaac: But you were way off. Okay.
Reese Harper: I think that happens a lot in the medical world, it happens a lot in any place where you get professional advice. You get advice and the data that people collect, the questions they ask, they’re just really surface level. And so in order to get to the recommendations that are the best for you, they never have time because they don’t get enough information. And so I think this is why we kind of decided to create a series of number one, a bunch of questions and several statistics and ratios that we measure and the system that we call The Elements, like how it came to be was some of it was based on this. I’m just going to ask you, though, in your memory if you can and say-
Ryan Isaac: The archives, the mind palace.
Reese Harper: First define The Elements, if you just had to say in simple terms what are they, what exactly are The Elements?
Ryan Isaac: Yeah. It’s how we would define financial planning. People ask that question all the time, what are The Elements? It’s how we define financial planning, more specifically, it’s a series of indicators that tell you how healthy you are financially. And what kind of progress you’re making in specific key areas.
Reese Harper: So you could compare it to taking someone’s blood pressure-
Ryan Isaac: Yeah, x-rays.
Reese Harper: Measuring someone’s periodontal disease, measuring how many millimeters of recession they have on a molar, there’s these specific ratios that we know that they don’t indicate necessarily, I’m going to add something to what you said, not necessarily indication of financial planning but maybe someone’s financial health.
Ryan Isaac: Health, yeah.
Reese Harper: Like someone’s overall-
Ryan Isaac: Did I say health?
Reese Harper: You said planning.
Ryan Isaac: I said planning, I thought I said health. All right.
Reese Harper: It’s okay.
Ryan Isaac: Let’s edit that so I say health the first time. Yeah, so it’s overall financial health and more than how healthy are you now but how healthy were you a year ago and based on progress you’re making or not making, how healthy are you going to be in the future? Because that’s really what people want to figure out.
Reese Harper: Yeah and I think that’s what you want out of your doctor, it’s what you’re hoping to get out of your any kind of professional advisor is some kind of frame of reference for where you’re at now and where you have been and where you’re going so that they can give you the right kind of advice to take the next step. Let’s talk a little bit about now jogging your memory of how The Elements started, how they began. If you could think back of like before we even called them The Elements, what was happening that what do you remember about what we were going through that made me feel like we needed something or what was going on?
Ryan Isaac: I remember two specific phases. The first was, I mean this was probably nine years ago, I remember preparing manually by hand quarterly reports, every three months, and there was a list of probably, I don’t know, maybe 20 or 30 questions. These things were tedious to do. We were making them in like Excel and Pages on MacBooks. But what we were trying to do was you were saying, “Let’s take a balance sheet, what is this person worth today, and let’s compare it to what it was three months ago.” In all the categories. And we’re trying to compare categories like liquidity, are we more liquid or less than we were three months ago or what is the practice worth or based on what did it collect in the last three months.
We were comparing categories of a balance sheet. And then we were asking questions about those categories. Like what did they spend in the last three months and what would happen if they just decided to stop working today? Could they last very long on these different categories in the balance sheet? Do we have cash, what do we have to sell things, we got to sell the house? We were asking a lot of just comparison questions with net worth and progress in net worth. That’s the first thing I remember and it was kind of crazy to try to …
Reese Harper: What do you remember about why it happened? Do you remember anything about that, like why … Because we weren’t doing … We were doing financial planning kind of the traditional way, which when we first started someone would come in, we’d design a plan, we’d take all their information and put it into a bunch of software programs, and then kind of …
Ryan Isaac: Build some portfolios, save some money here in these places, pay down debt this way, save for our taxes this way.
Reese Harper: Yeah. I can remember in my head why I remember doing what we were doing, I’m just curious in your head, do you remember what the stimulus was?
Ryan Isaac: Yeah, okay, I don’t know if this is what you’re thinking but there’s been one question since right from the beginning that’s always stood out to me that has been fascinating and it’s the same question and it’s with the same level of anxiety and it comes from a brand new dentist making at the lower end of income and the question comes from a specialist, multi-location specialist making the seven figures upper end of personal income, and it’s, “Am I doing okay? Are the things that I’m doing, the sacrifices I’m making, all the decisions I’m making in the business, is it actually pushing me in the right direction?” And I remember thinking how interesting that was to see very wealthy people ask that same question as like new docs buried in debt for the first time with like a negative net worth. And to me I think that’s what I remember it starting is people wanting to just have some kind of closure, and not just emotional closure but can we quantify this closure and show it to you contextually with numbers. That’s what I remember.
Reese Harper: Yeah. I think that’s actually good insight, good for me to hear that. I remember thinking back to I remember going around to different, because if you remember when we started, when I left the previous firm I was at and started this, I was kind of frustrated with what was going on in the industry. That was a big motivator for me, I was like, “I hate how everyone’s being sold products and calling it a financial plan.”
Ryan Isaac: And calling it planning, yeah.
Reese Harper: Like this isn’t planning, this is just salesmanship. And I remember being really surprised at I had to go and I did some research with maybe 30 to 40 different financial advisors, just calling people, asking them how they were doing business, learning about them, trying to just figure out how they were building their practices before I went and started this. And I remember thinking, “Okay, why is everyone saying they do the same thing? Everyone’s saying they do financial planning but it’s so different what that means to everyone. Shouldn’t there be some kind of standard measure of what’s healthy?” Like in dentistry you can say, “Well, this person has … They don’t have visible gum disease and they don’t have any decay and there’s no pain and their bite looks good and their overall total oral health appears to be objectively in good shape. Saliva testing is normal. Whatever.” There’s all these things you can do to quantify and it’s because the industry’s been around for-
Ryan Isaac: If you say I went in for my six month checkup with my dentist, you kind of know what that means. You know what your doing when you do that.
Reese Harper: Yeah, you know if you’re good or not. Yeah and you know what that entails. But I was surprised at when someone says-
Ryan Isaac: I’m doing planning.
Reese Harper: Yeah, like, “I’m doing financial planning,” like what does that mean to you? And different financial advisors would have so many different ways that they would say, “Yeah, I’m a financial planner, it says it on my card and we do this.” Or, “We do this.” And usually, like everyone will agree on let’s say everyone will agree that you should save money. Okay, like … And that’s usually the extent of what I was finding is people would be like-
Ryan Isaac: Spend less, save more, yeah.
Reese Harper: “We’re saving money.” Okay. Well, everyone says they’re saving money, so what’s savings, how do you define savings? Are you saying savings is just money you put into a 401k or what if I paid down my mortgage with extra money that I had, does that count? Or what if it just piled up [crosstalk 00:16:18] account, does that count?
Ryan Isaac: [crosstalk 00:16:21]. Or I knew I was going to buy a building in two years and I needed a down payment, so-
Reese Harper: So I saved it up in this money market fund and then put it towards that building, is that savings? And you know, every one of the financial, most of the financial advisors would all quantify this very differently. There was never a standardized way of measuring it and so when you have client a and client b that you’re talking to and they both say, “Yeah, we’re saving money for retirement, we’re maxing out our retirement plan and we’re … ” You don’t really know … You just kind of have to take it at face value and be like, “Oh, great, well I guess there’s nothing to do then.” Like if you’re telling me things are great, then it’s just great. And I just remember getting really frustrated like with these same questions, it’s like with debt, with insurance, with estate planning, with savings, with [crosstalk 00:17:06]-
Ryan Isaac: Taxes, yeah.
Reese Harper: Taxes, with business profits, with the size of your practice, with how much you should put into each place. I remember we had my buddy [Cree 00:17:14] Jones, who was at the University of Chicago-
Ryan Isaac: Yeah, shout out to Cree.
Reese Harper: He’s done.
Ryan Isaac: He’s done?
Reese Harper: He’s done now with his PhD in-
Ryan Isaac: I haven’t asked about Cree.
Reese Harper: Economics.
Ryan Isaac: Smartest guy … He was Good Cree Hunting, he was so smart.
Reese Harper: Yeah, what do you remember from that experience?
Ryan Isaac: I remember you buying like a 20 by 20 whiteboard at Home Depot and filling it in one of our offices and Cree, it was Good Will Hunting, Cree had math equations … Oh, my gosh, yeah, he had math equations on an entire office wall and you were building … You were trying to build the mother of all scores, you were trying to quantify someone’s tax rate, how they were insured, their savings rate, their spending rate, their debt rate, and a bunch of other things, and put it into the most complex equation. I don’t know if you ever finished it.
Reese Harper: We wanted one thing to score.
Ryan Isaac: [crosstalk 00:18:04].
Reese Harper: Or we wanted like one number, like could we get it all down to one number?
Ryan Isaac: And [crosstalk 00:18:07]. And it was literally like a 20 by 20 board filled with equations and he’d come in at night after his college courses and come write on this board.
Reese Harper: Yeah. Well, I think what we found was-
Ryan Isaac: It was so cool. We have a picture of that, right?
Reese Harper: I do, I’m trying to find one, I just don’t know if we even ever had one.
Ryan Isaac: We got to get that picture, that was the coolest thing. Cree was awesome. Shout out to Cree, hey Cree.
Reese Harper: But we might have to reproduce the picture.
Ryan Isaac: Cree doesn’t listen to this.
Reese Harper: I don’t know. Ultimately I think that we found was there wasn’t probably one number that-
Ryan Isaac: Yeah, it was tough.
Reese Harper: Because some of the things were unrelated, it got frustrating.
Ryan Isaac: You couldn’t relate the them the same set of numbers.
Reese Harper: I remember going on that for six months to 12 months and never really quite having the perfect answer.
Ryan Isaac: I was like, “Yeah, Reese, we need to pay for a secretary.” Like, “No, I’m paying Cree.”
Reese Harper: Yes.
Ryan Isaac: “To build the equation.”
Reese Harper: Totally. I think what we learned, and this is why it’s relevant to dentists and is that over time we realized that in order to quantify someone’s financial health and measure someone and say, “This person’s in good shape or not,” it couldn’t be just one number because there was things that you couldn’t really measure. And like someone’s, let’s say, whether they’re adequately insured for life insurance or adequately insured for liability and malpractice, that how do you mix that variable with whether they’re saving enough money for retirement and say which one gets certain amounts of weighting.
Ryan Isaac: Or if their tax rate’s appropriate. We could lower by a more efficient retirement plan or something unrepeatable.
Reese Harper: Yeah, so we went from this mother of all scores to-
Ryan Isaac: We just wanted to give the guy a seven out of 10.
Reese Harper: Can we just give him a seven out of 10. We went from that to, okay, there’s a few other scores here.
Ryan Isaac: Yeah, we had to split it up.
Reese Harper: And I remember we went through that process for several years of figuring out what are the real key indicators that we’re going to use that measure someone’s overall financial health? We had several versions of visuals and charts and graphs that would measure these things and it wasn’t for a few years that until it finally came together where we had this idea of a periodic table and I think there’s a lot of different visuals that we could’ve gone with. I think a lot of it had to do with wanting to see a lot of information in a small area. For me. I didn’t want to have to go through-
Ryan Isaac: What did you always used to call it, the baseball card?
Reese Harper: Yeah, the baseball card.
Ryan Isaac: I don’t know if you were … I never asked if you were still big in trading when you were-
Reese Harper: [crosstalk 00:20:40].
Ryan Isaac: You always would say, “Can’t a financial advisor just open his phone or his laptop or iPad and just see a baseball card? There’s the client’s picture, some basic data, and then some numbers. Like a baseball card stats. Can we just see a dentist’s stats below his picture and know how he’s doing in these different areas?”
Reese Harper: Yeah and I think that you’re going to be excited because we’re going to have that within the next year [crosstalk 00:21:03].
Ryan Isaac: We’re still building the actual tech behind that.
Reese Harper: [crosstalk 00:21:04]. But I think the numbers finally started to come into a shape that this idea of a periodic table made sense because you could create different rows of relationships, you could have different columns of relationships, you could group things in … Like this section is kind of [crosstalk 00:21:24]-
Ryan Isaac: Subatomic.
Reese Harper: Yes.
Ryan Isaac: Yeah, financial health and …
Reese Harper: And it just started making sense. I think initially we had 30 to 40 of these numbers and …
Ryan Isaac: Well they were in a checklist, the version before this was years ago but we’d sit down to client meetings and there would be a four or five page checklist with about 100 questions that we’d go through quarterly with someone, or more frequently.
Reese Harper: Yeah, it was. It was a big long, long checklist.
Ryan Isaac: And it was hitting everything but it was still too messy.
Reese Harper: Yeah. And it was too much for people to digest. And eventually we got to the point to where I think we could summarize it, we summarized it down instead of saying let’s show them 100 things we decided let’s just … let’s focus on the high level showing them the most important things that really need to be measured, the most important things, and then beneath the surface there’s those 100 questions still exist but we’re going to show them at a surface level what are these most important factors. And i guess that’s what The Elements was, it’s basically turned out to be 12 ratios that measure the most critical parts of someone’s financial health.
Ryan Isaac: Yep.
Reese Harper: And they kind of answer four main questions. The first one, you said, is too high level, but that’s what everyone asks which is am I okay?
Ryan Isaac: Am I okay, yep.
Reese Harper: Like am I doing okay, am I headed in the right direction? I think what we found is if you list all the questions that people have, they can be summarized usually into these four parent questions and one of them was how much wealth or how much money do I need before work is optional? That’s kind of the …
Ryan Isaac: When can I be done?
Reese Harper: When can I be done, when can … Even if I don’t want to quit, when is work optional for me? The second one the table answers is do I have the right mix of assets?
Ryan Isaac: Or what’s it going to look like when it is optional? Where am I going to pull money from and where’s it going to come from?
Reese Harper: Yeah, well, am I putting money in the right places? Should I have more real estate? Should I have more practice equity?
Ryan Isaac: Yeah, am I in balance in any of these areas? Yeah.
Reese Harper: Yeah. And those, the four areas that we measured that we found were the primary four areas, were practice value and practice equity and any other business equity people have, real estate and real estate holdings, those are two, and then retirement plans, like your 401k, your defined benefit plan, your pension-
Ryan Isaac: Stuff that has to be taxed later, has a penalty if you take it out too early.
Reese Harper: Mm-hmm (affirmative). And then the fourth one was all your liquid stuff.
Ryan Isaac: Yeah, liquidity.
Reese Harper: And so those, your cash, your after tax investments, some of you have money inside of annuities and retirement plans and life insurance policies that have already been taxed, those are all in your liquid category. And so ultimately, actually annuities are not in your liquid category, I misspoke, annuities are going to be in your qualified category, even though they’re not really technically a qualified plan, you still get stuck with them and you can’t touch them till you’re 59. So that’s another podcast for another day about how we feel about that. But those four general categories are the essence of what most people ask about in their financial planning. They don’t verbalize them this way, it starts with, “Am I doing okay? What do you think? What’s wrong with my situation?”
Ryan Isaac: They get more granular, it does get in the weeds. Yeah.
Reese Harper: Yeah. Let’s talk about some of the more … Let’s talk about some of the more granular questions that they answer and then how those are grouped into these primary four.
Ryan Isaac: I think that’s a great idea. Let’s take a quick break before we do that. We’ll go to a quick commercial break.
Reese Harper: I love breaks.
Ryan Isaac: Yeah, you do. You need a break. And when we come back, we’ll talk about these. What do The Elements answer specifically, some of these more detailed questions, when we come back.
Reese Harper: Hi, this is Reese Harper, I’m the host of The Dentist Money Show and CEO of dentistadvisors.com. I want to take just a minute and explain why dentistadvisors.com is different than your average team of financial advisors. We help you plan, invest, and retire better using a unique set of tools you won’t find anywhere else. First, we use our proprietary methodology called Elements to assess your financial health. The Elements framework enables us to give you data driven objective advice based on a comprehensive picture of your personal and practice finances. We maintain that picture in a custom dashboard that tracks all your assets, debts, and accounts, so you know what you’re worth any time and anywhere. And because we work with dentists and specialists, we can leverage our industry expertise to weight your progress against your peers. We are the premier wealth management firm for dentists and specialists and we’re ready to put you on a more predictable path to financial independence. Start now by booking your free consultation [today at dentistadvisors.com. Thanks again for listening. Now let’s get back to the show. …
Reese Harper: And we’re back.
Ryan Isaac: All right.
Reese Harper: We’re back.
Ryan Isaac: We are.
Reese Harper: From break.
Ryan Isaac: We’re back.
Reese Harper: Let’s jump into what are the questions that The Elements answer …
Ryan Isaac: A little more specifically.
Reese Harper: More specifically.
Ryan Isaac: Well, let’s take a common one from our industry that everyone has, life insurance. Everyone has life insurance, or should. Most people should. And it seems like this would be a really easy question to ask but if you asked anyone who owns life insurance, you ask them, “How much do you own?” And if you ask them, “Why did you pick that amount? If you have two million bucks of life insurance, why $2 million?” Most people … Here’s what normally happens with life insurance, it either you own about as much as you’re comfortable spending on per month, whoever far the person could push you to spend every month, or you just kind of picked an arbitrary number that seemed pretty big. Most of the time if you said you’ve got $3 million of life insurance, that would seem crazy for the average person. Like, “I don’t need to die with $3 million. Who am I trying to leave money to?” But for a dentist, that might … Hundreds of thousands of student loans and you could have a million bucks in practice and business debt besides your mortgage and other debts, that might not even cover it. One of the questions would be how much life insurance should I actually have so that if I died, my family just can continue life as normal at least from a financial perspective?
Reese Harper: Yeah, and that’s not a one time number, right?
Ryan Isaac: When does that change? It changes every time your spending changes, your debt changes, your assets change, your net worth changes.
Reese Harper: It changes every day because as you get deposits in your checking account leaving or coming, I mean technically there should be an exact amount that you’re using as a standard that you’re measuring for. And that’s a big difference between what a good financial plan does and what a average financial plan does is that it’ll measure, it’ll quantify the specific issue that you’re trying to decide on rather than leaving it up to like a subjective decision that you make every time you think about it.
Ryan Isaac: Yeah and the crazy thing about something as simple as life insurance, too, is not only is it usually a number that’s kind of guessed at but it’s done once and then left in place for a really long time. And it could be very incorrect five years later or one year later.
Reese Harper: Yeah, it could be super incorrect. If you add more debt or if you paid down a lot of debt or if you earned a lot of money and have a lot more liquidity than you used to have.
Ryan Isaac: Or you spend more than you used to.
Reese Harper: Yep. That’s just like one example, but that would fall under that fourth question, are you taking the right amount of risk? We talked about the four questions, how much wealth do you need to make work optional, do you have the right mix of assets, is your income going to the right place-
Ryan Isaac: Yeah, where’s my money going? Yep.
Reese Harper: And are you taking the right amount of risk? Those are kind of the four main questions but underneath those there’s hundreds of questions that are grouped into those four primary questions and the life insurance question’s one of them. But you have questions about … The same rigor would go into how to calculate disability, how to calculate malpractice, how to calculate liability insurance, how to calculate every type of insurance policy. Like insurance shouldn’t be a subjective decision you’re making year by year. The amount of personal liability insurance you need is based on your net worth, not based on-
Ryan Isaac: Yeah, those two are interesting, too, because you take a life insurance, for example, the wealthier you get the more you pay down your debt, the more liquid you are, the less life insurance you need, technically. But the higher your net worth goes up the more liability insurance you need. They’re kind of inverse as your net wroth and liquidity grow.
Reese Harper: Totally.
Ryan Isaac: But they don’t usually get viewed that way or not renewed in that context, it’s kind of like just auto-renew the liability stuff and I bought life insurance 10 years ago and probably fine.
Reese Harper: let’s take another example of a question, one would be let’s say is your tax bill higher or lower than it should be for someone who makes what you make?
Ryan Isaac: The answer’s always yes.
Reese Harper: Like people will … Yeah.
Ryan Isaac: [crosstalk 00:30:43] you pay too much in taxes? Yes.
Reese Harper: Yes, that’s always the answer. And how are you supposed to know if you should just be okay with the amount of taxes you’re paying or if you really aren’t doing enough, like how are you supposed to know? And what we found is there really isn’t a way to know unless … Like each of these Elements that we’re measuring, one of them is it’s your tax rate. That’s one of them. It’s what is the exact amount of taxes you pay as a percentage of your income. But in order to know what your tax rate is, we first have to agree on what your income is. And if you ask a dentist what he makes, say, “What do you make?” You’re going to get a response from everyone that’s kind of a little bit like a little bit of a guess, right? Because everyone’s a little unsure of what they make exactly.
Ryan Isaac: You know, everyone undershoots that number, by the way.
Reese Harper: What they make?
Ryan Isaac: Yeah.
Reese Harper: I find that they always underestimate it.
Ryan Isaac: They always underestimate because there’s so much that comes out by the time you pay that tax bill and your debts and everything, it is a lot less.
Reese Harper: Yeah, it feels like-
Ryan Isaac: [crosstalk 00:31:55].
Reese Harper: It feels way less.
Ryan Isaac: And the number on the personal return is very different than the number that actually you actually made. The money you touched to pay taxes with and pay your debts with and everything.
Reese Harper: Yeah and that’s based on all of the tax write offs and depreciation and amortization that happened that’s kind of complicated-
Ryan Isaac: Between a business and your personal [crosstalk 00:32:15]-
Reese Harper: Yeah, from the time you make the money at the practice and the time it shows up on your personal return, there’s often a big different between those two and people don’t really … Dentists don’t really feel like they made as much as what the numbers say.
Ryan Isaac: Oh yeah, no one ever felt that way. Yeah.
Reese Harper: In most cases. And so comparing your tax rate, though, you have to go back and you’ve got to find the real income number that you actually made because if your income on paper shows let’s say $500000 but you had $100- to $150000 of write offs that make your income look lower but technically they didn’t … It wasn’t actually money you spent, you bought the equipment, you financed it, and you got to take this write off that made your income go down a lot, pay less taxes, but technically you still had the cash.
Ryan Isaac: It wasn’t an expense.
Reese Harper: Yeah, because you financed it. And then you can’t compare that person with someone else who didn’t have that equipment expense that year and shows the same amount of money, $500000 is the income, you got two people earning the same amount of money on paper but one person actually made close to $6- or $650 and another person probably only made $500. And so if you were going to compare those two people, you’d want to compare them on their real income numbers, you’d be comparing someone that earns $650 to someone earning $500. That’s not a fair comparison and you need to be taking that into account.
Ryan Isaac: Both of those guys think they made $350.
Reese Harper: Yeah, and both of them think they made less.
Ryan Isaac: $4.
Reese Harper: Yeah, a lot less.
Ryan Isaac: Yeah, it feels that way.
Reese Harper: And so I think when you look at taxes and you’re trying to compare, you want to add up every, you want to add up taxes, what we do when we do tax rates, we add up everyone’s tax bill of their state tax, their federal tax, their …
Ryan Isaac: AMT.
Reese Harper: AMT, their property tax, all the types of taxes that they paid that affect their income, that come out of their pocket, we divide it by their income, then we measure it. And then we measure it as a percentage, we just say, “What percentage of your income did you pay?” And some people are much more effective at managing their income tax than other people. Some people have 10 times the amount of retirement plan contributions going in than other people. Some people spread out their depreciation and their amortization more efficiently than other people. Some people have financing that they use the right way and some people don’t use financing at all. And that affects your taxes in a major way. Some people do charitable contributions in a really tax efficient way where they eliminate their capital gains tax on some of their after tax investments, which does have a meaningful effect on their overall tax rate.
Ryan Isaac: Yeah, year in and year out.
Reese Harper: And all of these little things add up, from taking the right deductions, expensing things properly, and managing your loans, managing your retirement plan contributions, managing your charitable contributions, all these things combined really change someone’s-
Ryan Isaac: It’s meaningful, man, I mean-
Reese Harper: It’s meaningful.
Ryan Isaac: Think about, I talk about this all the time, but let’s say you’re at a 28% tax rate, you pay 28% of your total gross income to some form of taxes, what if that could just get to 27% or 26%? No one’s going to make their tax bill go away but by making one small change in your situation, you could free up 10 grand a year, $20000 a year, the amount of a really killer vacation or a kitchen remodel or just more savings or faster debt reduction. Like a small change make a huge difference over the years, it make a big difference in one year.
Reese Harper: Yeah. And that will result in thousands of dollars a month in retirement income, as well. You make one change today in your 30s that might have a $20000 swing in net worth per year, you could be looking at $5- to $600000 of additional net worth at retirement which translates to thousands of dollars every month in retirement income. And just for making that one adjustment. That’s why we’re so passionate about a detailed process around financial planning. Basically the each of these Elements measures something really concrete, like taxes, like risk that you’re taking in your investments, it measures things like your liquidity and your retirement plan contributions, your practice profitability, how much money you’re putting towards real estate and debt reduction. All of these things are that we’ve measured, we know that they’re the questions, there are these … The original 100 question list that we had, we know that they’re the core of what really drives someone’s net worth growth and these Elements just compare, they create a ratio and they compare you to people that are just like you and you’re someone in your situation so that we can give advice that’s really context specific. I don’t know if there’s any … I don’t think we need to go into the details about every Element.
Ryan Isaac: Explain every single question we have, yeah.
Reese Harper: But you can go to, in show notes, Ryan will mention it later, but there’ll be a slide deck that you can download that’ll kind of walk you through each of these core Elements, these 12 main indicators, and you’ll be able to see, look at those and understand what we’re talking about in more detail. But let’s just talk about why do you think this has helped, Ryan, how has this helped you in your practice working with all the dentists that you work with, how is doing financial planning this way, how does it help you?
Ryan Isaac: So many conversations, man. I was just on the phone this morning with somebody who’s, I don’t want to be too general about it, like you said it’s such a high level question, like, “How am I doing? Am I okay? Am I headed in the right place?” But having actual closure to that question is it just feels so good. I’ll give you two conversations. One was last week with a single location, one doc, private practice office, and mid-career, doing pretty well but really kind of wondering like, “When am I going to retire? Or when I can just not have to work?”
Reese Harper: When’s work optional for me?
Ryan Isaac: Yeah, “And is all this worth it? I’m in a lot of debt. I bought a building and I’ve invested a lot in equipment and I pay people well. Run a good business. Spent a lot on marketing. And is this paying off?” Versus a conversation I had just this morning with someone who’s part of a large group practice and will probably have a large exit one day and get a big piece of money for his equity stake and he’s having to defer income right now and he’s wondering, “Should I just be the solo doc guy? Should I just go be that because I think this is going to be worth a lot one day but I have no idea if it’s worth it. And I know I’m giving up income now to be part of this big group and I’m having to defer this.” And so two very different situations, two people that can and probably will end up just fine, but they don’t know. Despite all the years of school and the money and the debt and the hard work and the sacrifice, they don’t know if the choice they made is pushing them to the destination they want to be in. So just providing a little bit of context, just some numbers, not … Take some of the emotion out of it and just provide some numbers. You are halfway to retirement.
Reese Harper: What was that solo doc, do you remember in your head what the closure was that he got from the conversation?
Ryan Isaac: Yeah, it was we quantified what we call a total term, so we talked about this before, it’s total term is a measure of how many years could you live on your net worth? And there’s a magic number there, the way the math works out. If you can hit about a 30, which means 30 times what you spend in a year, you have a net worth, if you can hit that point, you’re probably pretty close to being financially independent indefinitely. We roughly calculated that for him and explained the concept behind it and showed him that he’s mid-career and he’s a little bit past the halfway point of that 30TT.
Reese Harper: So he’s like at a 15 or 16?
Ryan Isaac: Yeah, mm-hmm (affirmative). And to have him understand how much progress he makes in one year, in one given years, compared to what the average dentist can make in one given year, and if he’s got 14 points left that he’s got to make up in that score and he’s moving at an average of 1.2 per year, he’s going to be done sooner than he thought and wealthier than he thought. But he had no clue. And that took 10 minutes.
Reese Harper: But it’s the fact that you had that database that you could reference and go, “Well, this is what I’ve seen happen in your situation and then here’s some … This is where you’re at and I can compare that and … ” Without the context, though, like imagine if you were not working with just dentists, imagine if you were working with 25 different occupations and this person called you and asked you these same questions and you didn’t have this Elements structure behind you, what would you do? If you didn’t know?
Ryan Isaac: I don’t know.
Reese Harper: Well, I mean, can you think back to what do you think the average financial planner does in that situation?
Ryan Isaac: Well, I know what our industry does. If it’s like a money manager that you’re asking this question to, they’ll answer it with a pretty complex set of helpful tools and software that’ll project what they feel like a stock market’s going to do, what returns and withdrawals are going to be, and they’ll say, “In 30 years you have between a 70- and 93% chance of having enough money to live indefinitely. And it should be between these ranges based on this series of possible stock market data.” It’s just a really big general projection. It’s not like specific to their situation.
Reese Harper: And it’s based on … Then you have talk about inflation and how inflation effects that and it just gets overwhelming real quick.
Ryan Isaac: It doesn’t answer any questions. To tell someone if you sold everything you have today and pay off all your debts, you could live for the next 12 and a half years, it’s not enough, at least that’s some closure to feel like, “Oh, that makes sense.”
Reese Harper: Yeah and then the obvious followup is, well, is that good, is that good for where I’m at?
Ryan Isaac: What’s the … Yeah.
Reese Harper: And someone who might not be working with … Let’s say you have someone who’s working with people that are not as successful as the dentist, on average, but this dentist is a pretty successful [crosstalk 00:42:58].
Ryan Isaac: Oh, I might feel like, oh, you have a million dollar net worth, man, you’re killing it. I don’t know, don’t worry about this.
Reese Harper: The feedback might be that you get might be-
Ryan Isaac: Geez. You’re just killing it. Well, we hear this. We’ve heard this from clients that have worked with either other advisors or maybe just not just financial advisors but other professionals that are giving them advice where the dentist is kind of the unique outlier in their group of clients and because of their naturally high income and cashflow and net worth and debt levels, some of the advice they get is like, “Whoa, buddy, you have so much debt. You’re in trouble. You have way, way too much debt.” Or, “Oh, my gosh, you’re killing it. You made $300000 last year.”
Reese Harper: Yeah, “You’re one of the most successful people I know, why are you complaining, you’re in great shape.”
Ryan Isaac: Yeah. Which might be true compared to everyone else they work with, but …
Reese Harper: So in that first example where someone who isn’t accustomed seeing this amount of debt gives someone the feedback of you’re in a lot of debt, then the reaction is they go and start hacking away at that debt like crazy and they pay down that debt because they’ve just been told that they have too much debt.
Ryan Isaac: Yes and all the emphasis gets placed on that, where in context if they had 50 or 100 other dentists that had the same amount or more debt they’d be like-
Reese Harper: It’s like, “Oh, you have 25% less debt that your peers, you’re already in okay shape.”
Ryan Isaac: “It’s going to be gone in 15 years.”
Reese Harper: “Don’t worry about it.”
Ryan Isaac: Yeah.
Reese Harper: Or, “You’re going to be out of debt in nine years and-”
Ryan Isaac: “Or let’s quantify, you’ve got five grand a month to save, let’s put this percentage towards the debt and the rest of it towards retirement and here’s how the balance will work out for you in your net worth.”
Reese Harper: On the flip side, the person that maybe they’re the outlier from an income perspective or-
Ryan Isaac: Yeah, which would be the case statistically. We’ve talked about that, too, in the United States, dentists are an outlier with income.
Reese Harper: Yeah, they have much higher incomes but they also carry a lot more debt and they carried a lot more opportunity costs to get there. They started later than the average person. And so even though they’re a very high income person, you can’t treat it like casually, like it’s just going to be okay.
Ryan Isaac: Like [crosstalk 00:45:03]. Yeah.
Reese Harper: Because there’s a consequence to deflecting planning. But how many times have you heard from a dentist, a professional advisor, could be a CPA or an attorney or a friend or a parent or someone who just is like, “Well, Doctor John here, he’s probably going to be one of the most successful people you’ve ever met. He’s doing so well.”
Ryan Isaac: Yeah, we’ve heard that.
Reese Harper: “He’s just … ” I mean, that’s … And the doctor carries that perception about his own situation, too, like, “I must be doing really well.”
Ryan Isaac: Yes, “I’ll just keep doing what I’m doing. Must be fine.”
Reese Harper: Yeah.
Ryan Isaac: Yeah.
Reese Harper: I think the point we’re highlighting here is like financial planning really needs to be quantified and I think that’s where this whole, I guess the summary of the podcast is kind of like don’t assume anything about your finances until you’ve quantified them, measured it, compared it, and someone like us, someone who is not going to just sell you a bunch of financial products needs to be able to bring some perspective to the table to give you the right strategic direction.
Ryan Isaac: Do the x-rays, do the cleanings. Right?
Reese Harper: Exactly. Take that blood pressure, the BMI.
Ryan Isaac: [crosstalk 00:46:19] poke and prod. Yeah, the BMI index. I’m way over that.
Reese Harper: Measure it all. Anyway, let’s give people a few resources they can collect in order to do a little bit more research on this and gather some things up.
Ryan Isaac: Yeah. Well there’s one that we’ve talked about a lot in the past, one of the indicators, maybe the most important indicator, at least the one people really want to know which is the TT, it’s the total term.
Reese Harper: This one answers the question of like when is work going to be optional for me, that’s kind of the main one.
Ryan Isaac: Yeah. What if I retired now? Where would I be? So you can get this TT guidebook by going to dentistadvisors.com/tt, as in total term, so dentistadvisors.com/tt.
Reese Harper: Yeah, just fill out the form and download it. And that’ll walk you through how it’s calculated, how you can calculate it on your own. And then like we’ve said today, there’s a range there that you can probably start talking about retirement, like if you’re in your mid-60s to late-60s, you could probably start talking about retirement when your TT approaches a 20 or a 20 or higher.
Ryan Isaac: If you’re that old, yeah.
Reese Harper: If you’re that old. If you’re in your 50s and you’re trying-
Ryan Isaac: [crosstalk 00:47:30] if you’re that age.
Reese Harper: Yeah, you’re such a jerk sometimes.
Ryan Isaac: That sounded really mean of me, I’m sorry. I mean, if you’re that age because what we’re talking about, a 20 TT means you have 20 years worth of your living expenses in net worth that you can use and get out.
Reese Harper: And if your stuff didn’t grow, you could just [crosstalk 00:47:45].
Ryan Isaac: Yeah, so if you’re close to 70 and you got 20 years, that’s a fair amount of life.
Reese Harper: Yeah, very comfortable. But if you’re in your 50s and you’re trying to get to the point where work is optional then, you probably need to be looking more at a 30 to be a safe spot. If you were at a 40 or more, you’re probably … You’ve got plenty of net worth to support your standard of living and you’re going to be donating money to charity or inheriting it, your kids are going to be inheriting it, your grandkids are going to get some of it. That range 20 to 40, I wouldn’t say there’s a perfect number for anyone, there really isn’t like an exact number. A lot of it depends on your specific situation. But that’s the range that you look at and 30’s a pretty good number to gauge as a [crosstalk 00:48:31].
Ryan Isaac: Yeah, mathematically a 30 is the amount of money that if nothing else changed, that the money would probably last indefinitely. The rate of return that you need to clear in order to keep living on the interest from that net worth is pretty low and sustainable, historically.
Reese Harper: Yeah, the only challenge to it is if you are the type of person that really likes to have multiple or a very, very large primary residence, if you’ve got a large, large primary residence or you have two properties and you don’t want to liquidate those, you don’t want to get the money out, but you’ve paid off these two really nice properties-
Ryan Isaac: You don’t want to sell them or mortgage them again.
Reese Harper: Yeah, if you don’t want to sell them and you don’t want to get rid of them and you want to keep them forever, then a 30 might not be enough for you. But if you got a normal average house and you’ve got yourself in a situation where you’re to that 30, you’re probably going to be just fine and you’re probably never going to run out of money and last, and all your investments will last indefinitely. That’s kind of the general perspective. Download the TT guide, again.
Ryan Isaac: Dentistadvisors.com/tt. The nice thing about this, though, that I like, is not only is it probably one of the most common questions and maybe the most important indicators that we’re tracking for people, but it’ll show a philosophy behind how every other thing in your situation can be quantified, because everything else is quantified in similar ways. How do you break down the numbers and put some data to it. It’ll give a lot of philosophy behind of how things are done and calculated.
Reese Harper: Yeah. Also, I just finished a presentation called Four Keys that Help Dentists Retire Early and Make Work Optional, something like that, I don’t remember the exact name of the title.
Ryan Isaac: It sounds like a pretty good title. We’ll run it past Justin.
Reese Harper: It was like, it’s a slide deck that I did a presentation around these four main questions and all the Elements’ definitions and-
Ryan Isaac: All the rest of them.
Reese Harper: How they’re calculated and everything’s in there and I’ll just put that deck up in the show notes.
Ryan Isaac: Show notes, a link in the show notes.
Reese Harper: To that deck and that way people can look at each Element and also look at the TT guide, that’ll give everyone a lot of context around what we’re talking about.
Ryan Isaac: Okay, so if you ever want to get in touch with us you can go to our website dentistadvisors.com, you can see all the episodes on our website, you can call us. We have a new phone number which we’re really excited about, really proud.
Reese Harper: Yes, it took a long time to get it.
Ryan Isaac: We prank call it every once in a while and be like, “This is really cool.” You can call us at 833-DDSPLAN. How cool is that?
Reese Harper: 833-DDSPLAN.
Ryan Isaac: Oh, there’s a chime and a jingle in here somewhere.
Reese Harper: C for [inaudible 00:50:59] coming up.
Ryan Isaac: You can hear Reese write a jingle on the fly.
Reese Harper: NBC can sue me for that.
Ryan Isaac: That was NBC’s, yeah, you can’t use that.
Reese Harper: Okay.
Ryan Isaac: Oh, we’ll scratch that, but 833-DDSPLAN. You can get in touch with us, you can schedule a phone call with us on our website, just go to dentistadvisors.com, at the top there’s a schedule link on there. We’d love to hear from you anytime and thanks for joining us today.
Reese Harper: Carry on.Getting Organized, Tracking Progress