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How much cash should you keep on hand? Beyond an emergency fund, what are the advantages of maintaining adequate liquidity? And at what point have you accumulated too much cash? In this episode of Dentist Money™ Reese & Ryan dive into a calculation called “Liquid Term” from the periodic table of financial Elements® and recap findings from last month’s client performance analysis. They raise common questions around cash management, highlight the lesser-known advantages of having enough liquidity, and describe how a dentist should expect liquidity to grow over the course of a career.
Reese Harper: Hey everybody. It’s Reese Harper here. Thanks for listening to the Dentist Money™ Show. Today’s episode is on liquidity. More specifically, we’re going to talk about one of our Elements on our periodic table which we call LT.
We just finished doing a lot of work on liquidity this month and we learned a lot of interesting things along the way. Ryan and I are going to talk about why we measure LT, the conversations we’ve had with clients over the past month, the way we benchmark these things, and some of the advice we give to our clients to help them optimize their own liquidity. We feel like this is a really substantive episode for you to think about as you look at your own mix of assets.
I want to remind all of you to submit your financial questions to either myself or Ryan, and we’ll try to answer them on an upcoming show. Just email firstname.lastname@example.org or email@example.com.
As always, I want to make sure you know how to get a hold of us at Dentist Advisors if you’re ready to have a conversation about your own financial situation. To schedule a call just go to our website at 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. Then we’ll have a discovery call to assess your personal situation and show you how to make work optional at an earlier age. If it’s easier for you, you can always just give us a call at 833-DDS-PLAN.
Thanks again for listening. 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 is 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 trusty old co-host and long-time loyal opera-goer, sir Ryan Isaac.
Ryan Isaac: Good to be here. I should have sang my intro.
Reese Harper: I recommended that of your options that you had available to you that you try out an opera. Ryan, for those of you who do not know him, unlike many of our listeners, I’m sure, who are really hardcore loyal opera-goers –
Ryan Isaac: Box seats, season ticket holders.
Reese Harper: Ryan hadn’t yet experienced the –
Ryan Isaac: I hadn’t seen a true opera.
Reese Harper: The opera. So, he picked to go to a stellar production of the Herman Melville classic, Moby Dick.
Ryan Isaac: Moby Dick.
Reese Harper: For those of you who do not know this story… If you don’t know it, you won’t know it after the opera either. I can’t explain it to you. It’s a novel. It was an interesting experience for sir Ryan Isaac.
Ryan Isaac: It was an interesting thing, yes.
Reese Harper: You said the thing that stuck out the most to you was someone that was wearing a Dracula cape.
Ryan Isaac: There was an old lady in front of us, she was very old, which is cool. It’s like wow, you have a long life ahead of you, there’s a lot to enjoy in life. Opera crowd is an interesting crowd, this is what I was saying. Her collar was like this half circle around her head and her shoulders, but the collar was like to the top of her head. It was like a Dracula outfit.
Reese Harper: So you couldn’t really see how old she was or who she was, because she was kind of covered.
Ryan Isaac: She turned around in the beginning.
Reese Harper: Are you making fun of old people?
Ryan Isaac: Man, this isn’t starting off good. No. Opera crowd is an interesting crowd. I will deduct points from myself for being uncultured and just not appreciating it enough.
Reese Harper: I think it’s an important thing to bring up today, because the story of Moby Dick involves a whaling crew that are trying to protect themselves.
Ryan Isaac: I guess. I didn’t really catch much of it.
Reese Harper: They’re in the hardy sea, and today’s podcast actually has a lot to do with water.
Ryan Isaac: Yes, it does. The name of today’s podcast is liquidity, which is exactly the story of Moby Dick and the hardy crew of the sea.
Reese Harper: The segue here, though, today’s podcast has to do with staying liquid.
Ryan Isaac: Yes. Liquidity, but there’s a reason, besides the fact that I watched half of Moby Dick – I did leave.
Reese Harper: Well, January is the month during our Elements process where we actually benchmark this subject, this statistic. The statistic we’re benchmarking in January is how long can someone live from today on their liquid cash. How about you just let us know what we view as liquidity, Ryan?
Ryan Isaac: First, I would just back up a little bit. I would just say for those that maybe aren’t familiar with the Elements. It’s funny, I talk to a lot of people that listen to the show and they catch little glimpses, “I’ve heard total term or savings rate,” but the Elements is a platform we built that each month has a corresponding theme, we call it an Element and it’s a part of your personal finance.
This month happens to be liquidity. We’re just measuring, like you said, out of all of your net worth how much of it is liquid. For the whole month of January, for every client, we’re just talking about questions about liquidity, how liquidity fits in net worth. That’s what we’re measuring for clients, so we thought we’d take some time to talk about some of the discussions we’re having.
The first question is; what is liquidity? Liquidity can be described as you could call it cash.
Reese Harper: Some call it moolah, I think.
Ryan Isaac: Moolah. I hear scrilla.
Reese Harper: Scrilla I’ve heard in the past few months from some of these young graduates.
Ryan Isaac: Young graduates talk about scrilla all the time.
Reese Harper: All you Millennials and your new fancy words we don’t understand.
Ryan Isaac: I’m like, “What’s your income, doc?” And they’re like, “I’m just trying to get that paper.”
Reese Harper: Do you have a number? No, it’s more conceptual.
Ryan Isaac: Liquid. That’s the cash portion, the money portion of your net worth that is accessible without a penalty. That’s a good way to describe it.
Reese Harper: Yes. Checking accounts, savings accounts, mutual funds that aren’t in a 401K or anything.
Ryan Isaac: Brokerage accounts.
Reese Harper: Cash value inside of a life insurance, technically we’ll consider that a liquid asset.
Ryan Isaac: Yes. It’s liquid, you can have it without a penalty. It requires a loan, but there’s no penalty.
Reese Harper: There might be a surrender charge, because you paid your brother-in-law $50,000 to buy it from him. But, technically it’s liquid.
Ryan Isaac: We digress.
Reese Harper: Whatever is leftover after that commission, you can still –
Ryan Isaac: That’s actually a good point. I wonder what a bank would consider cash value of life insurance, if they consider that liquid or not?
Reese Harper: They usually do consider that for loan purposes, it’s listed in the accessible cash liquid, in that part of the personal financial statement if you look on most of the applications.
Ryan Isaac: For new grads, this is the big question. A lot of people are asking, “What should I do when I come out of school?” A lot of the answer is you have to build some liquidity, because a bank needs to see when you ask for a loan that you have some liquidity. Those are the types of accounts that would be considered liquid.
Reese Harper: I would not consider life insurance the first place to put it.
Ryan Isaac: Don’t go buy it.
Reese Harper: When we look at liquidity, a lot of people end up accumulating money in a lot of different types of accounts throughout their life. If you just think of them as, “Can I get to that in a couple of days without a penalty?” The way we look at it, too, is have you already paid taxes on that money?
Ryan Isaac: Yes, that’s a good way to look at it.
Reese Harper: We reserve another bucket in your net worth for the stuff that you have to pay taxes on and you’re penalized for removing. How does this relate to a dentist, Ryan?
Ryan Isaac: Liquidity, if you think about when the dentist first gets out of school and buys a practice, starts working, think about the things that are on his or her balance sheet at that point. The first five years of a career you’re going to have a house, you might have the building that you practice into, you’ll have the practice, and then some student loan debt. That’s usually what a balance sheet looks like.
If you look at all the assets, one way that we’ll categorize people is we’ll just say, “How are your assets split up? How are you accumulating your wealth?” In the early years of dentistry, your assets are basically just sitting in a private business and in real estate.
If you think about it like a pie chart, there are four categories. We track four categories of our Elements, four places where you can build wealth. One is liquid, which we’re talking about today. One is retirement assets, we call them qualified assets, that’s your 401Ks, IRAs, and pensions. You can put it into the practice or private businesses, or into real estate. Those would be the four categories.
If you think about them like a pie chart, and you look at any dentist in the first maybe five, maybe even 10 years of career, that pie chart is going to be overwhelmingly real estate and practice assets. You’ll have little slivers of maybe some qualified plans, maybe you started a 401K or an IRA, maybe you have a little cash, but it’s overwhelming.
Why liquidity matters for a dentist is it’s so underrepresented on the balance sheet from day one. Most dentists could spend a whole career just saving liquid assets and barely catch up with the –
Reese Harper: Real estate and business equity.
Ryan Isaac: Yes. Anyway, that’s why it’s such a big deal. It’s so overwhelmed by the other assets on a balance sheet right from day one that it just matters, you have to focus on it. It’s easy to go 10 years in a career and then look back and go, “I still don’t have any liquid assets.”
Reese Harper: We’ll talk about this in a little bit. What I kind of want to jump into now is why does this even matter and why does this matter to have a discussion about liquidity, focus on that. What does it matter if I just have all of my money in real estate and business interests? I’ll save some money for retirement, but when I sell all this stuff it’s going to create a windfall of cash for me, so I’m fine anyway. Why does this all matter?
Ryan Isaac: Stress. Right? No matter what else is happening in life, when you have cash that you know you can get at, and it’s enough to cover maybe a few months of living or a few months of business expenses, or you could pay off a debt if you wanted to, that’s just a different feeling than when you don’t have it. You will tend to view your other problems in life, or just other aspects of your financial life, you’ll view your debt differently if you have cash available. You’ll view the struggles of business differently if you have cash.
Would you agree? As a business owner, would you say that stress levels fluctuate with fluctuations in cash and liquidity?
Reese Harper: Yes. I was just thinking back to the old days of your buddy Ishmael on your opera that you went to, Herman Melville and his friends. If you think about back in the day when you had farmers and whalers –
Ryan Isaac: They were mad, too, because they just wanted to get some oil and he just wanted to chase Moby around.
Reese Harper: See, that’s my point. Currency didn’t really exist back in the day, but there’s always this underlying stress about not being able to make it to tomorrow that has to do with food, shelter, basic lights.
Ryan Isaac: Whale oil.
Reese Harper: Whale oil.
Ryan Isaac: Blubber.
Reese Harper: Which they don’t have a way to turn on their lamps without the whale fat, so they have to harvest it.
Ryan Isaac: A common problem.
Reese Harper: Here’s the thing. I really do think after currency became a thing we went from piling up grain in these grain bins and storing corn and whale fat to where we have to store cash, but they represent a similar feeling in our lives, which is, “Am I good for a while?”
Ryan Isaac: A surplus.
Reese Harper: Am I good for a while? Can I last for a little bit? What if something bad happens, like all the whales turn into seagulls, and we can’t find whales anymore? Will we have whale oil for a while? I don’t know why that would happen. That would never happen in the history of mankind. But if a whale turned into seagulls.
Justin is going to cut that out. I want to see if I can make him laugh at least once.
Speaker 3: No. Let’s keep it. I haven’t seen you laugh that hard, actually. I think the audience would appreciate that.
Ryan Isaac: That’s just absurd.
Reese Harper: Cut to Justin.
The point is if I can’t get by for a month or a week, or six months or a year, I get stressed out. What did they do when they started running low on their whale fat? They head back out to the ocean.
Ryan Isaac: Grab the harpoons.
Reese Harper: They go for three months, they store it up a little bit more. I worry about that for us in the same way. It’s the not the fact that you have a loan on your whaling boat that really bothered these guys. Right? It’s the fact that they don’t have any whale fat piled up.
Ryan Isaac: There’s no oil.
Reese Harper: I think it’s the same thing with us. You could carry a lot of debt, you can have a lot of stress, you can run a business and feel all the pressure from that, but it’s totally tolerable if you have a good financial plan with adequate liquidity. Everything is tolerable with adequate liquidity. You can be convinced that you’re okay if you have liquidity.
Ryan Isaac: I was just going to say I can think of very specific client situations where the obsession with the debt and the stress levels with the debt, just of having a practice and a building, are overwhelming.
Reese Harper: It almost drives them to make poor decisions.
Ryan Isaac: Yes. Then to just convince someone to just give it a couple of years of saving money and building some liquidity. In a lot of cases, some of those people grew their businesses, got bigger buildings, got more debt, but they had more liquidity and they viewed it totally differently.
Reese Harper: When you’re a dentist and your AR is out and you have a problem with your dental software and you can’t collect, and you’re struggling to get caught up on all of your collections, that will create a lot of pressure in your life. Having a little bit of liquidity can kind of put those pressures at bay. If you have an office manager or a hygiene department have some turnover, or if a competitor moves in and you see a decline in your collections, if your marketing get screwed up and you didn’t realize that you hadn’t really been executing properly for the last six months and your new patient flow is down, all of these things can be really stressful.
They put massive stress on your personal life, your relationships, making good decisions as a business owner gets put in jeopardy. You’re not thinking about it from the long-term perspective, it becomes very short-term. The cost of debt is a pain. I hate seeing mortgage interest paid and I hate seeing debt on real estate, debt on practice, and all of that.
Liquidity is a way that all business owners can think a little bit more rationally and approach all of your decisions with a little bit more savvy, instead of just approaching it from a scarcity or instead of freaking out because things are tight.
Ryan Isaac: I think that’s one of the best points about the stress levels of cash and liquidity. When you have to make a decision and you’re low on cash, you can just get forced panicking into decisions that you normally wouldn’t make. You don’t have the luxury of flexibility, time, and patience anymore.
That’s definitely a talking point. We do have clients who are in that position where they have a lot of debt and that’s a big stress. Solving it with liquidity can make a big difference.
Reese Harper: Now, you don’t have to keep all of your liquidity in the savings and checking accounts. Right?
Ryan Isaac: That’s the second point is talking about liquidity and looking at it at least once a year helps us make sure that we’re efficient with cash. We’ve talked about this on different episodes. Episode 17: How Much Money Should You Keep In Your Bank Account, we talked about this question. That’s very common when people feel maybe paralyzed by indecision or lack of a plan and cash just piles up in the business.
Reese Harper: Yes. I don’t think people realize that there are an infinite number of ways to grow your liquidity that don’t mean putting it in the stock market. The stock market is a great way to invest your liquidity, especially if you’re going to not need it for 10+ years, but you can grow your money at much higher rates than you can in the bank. I think that’s kind of the feeling people have is that it’s either the bank or the stock market.
Ryan Isaac: 401K.
Reese Harper: Really, there is an infinite number of ways to invest your money at rates of return that range anywhere from 1% to 5% that are not stocks. I just think that most dentists don’t realize that there is a better way to grow their net worth than letting a lot of cash pile up. They do, but I think they just get stuck feeling. It’s just scary to let go of the cash in your practice.
Ryan Isaac: Yes. We’ve talked about that before. When it’s $50,000, and $60,000, and $70,000, and then $100,000, that kind of feels like that’s operating capital. When it’s $150,000, and $200,000, and then $300,000, and then $500,000, that’s a big chunk of money to just commit to something.
Reese Harper: If you’re younger and you’ve never experienced this much liquidity yet, don’t worry about it. We can tell you from experience just this week I’ve seen dentists with seven figures in practice and personal checking accounts that has not been invested.
Ryan Isaac: I know no one is feeling bad for that person.
Reese Harper: For years, though.
Ryan Isaac: No pity for that guy.
Reese Harper: There’s nothing wrong, they’re in a great spot, but there is a huge opportunity cost to that. There are many people listening to this going, “That’s me. I just haven’t been able to commit or find comfort in a financial advisor or an investment advisor, or finding investments I feel comfortable with. At least I know that the bank doesn’t steal my money.” That’s actually not entirely true.
Ryan Isaac: Another episode. We’ll cover it next week. You bring up a good point. When people want to talk to us, if anyone ever has questions you can just call us at 833-DDS-PLAN or you can go to our website, which is dentistadvisors.com and there’s a little calendar link at the top. When someone schedules a first appointment with us, we send out a little survey link.
Quite frequently we get those back and one of the biggest assets that people have is the cash sitting in business. I think that’s kind of indicative on people maybe making decision on a financial planner for the first time or have not had one for a while or something. That’s really common. We see these surveys come back where people are just holding a lot of cash and they don’t know what to do.
Reese Harper: I think some other things that really come up why liquidity, why it’s important, one that sticks out to me is there’s a lot of emergencies that come up in your life that you need to protect yourself against, but there are also opportunities that you need to take advantage of.
Ryan Isaac: Yes. Specifically the ones you didn’t see coming, which is life. All the stuff that you don’t see coming that you’re not planning on, emergencies and opportunities.
Reese Harper: As business owner, it’s that perfect hire that you may not have felt like you could afford, but you had enough liquidity laying around where you thought, “You know what? I don’t really need to be as worried about that. I’m going to splurge.”
Ryan Isaac: “And this is the person that I want in my business.”
Reese Harper: Yes. “This is the right associate. This is the right hygienist. This is the right office manager. This is right key hire for my practice. Because I have that liquidity, I’m not that worried about taking a little bit more risk on payroll to grow my practice to that next level.” I think that’s a crucial one.
I think there’s also real estate investment opportunities for you to relocate your practice or purchase space at the end of a lease term that are pretty critical.
Ryan Isaac: Or buying out a lease because the perfect building opens up with other referral sources and it will be career changing to move there, but you have to have some – what do they call it, moolah?
Reese Harper: Scrilla.
Ryan Isaac: Scrilla. Paper.
Reese Harper: Maybe buying a new practice that just comes on the market. Maybe you’re a new associate and it’s the only way for you to really be able to do it. Maybe the seller wanted to do seller financing, maybe that was a variable for them, but they wanted a down payment that was $100,000+ and they were willing to do it that way but they wanted to earn the interest on the sale. You may not be able to qualify or fit the profile that seller is looking for if you don’t have liquidity. There’s a lot of things.
Ryan Isaac: I was going to say on the same situation but on the personal side, this happens with primary residence frequently where people aren’t planning on moving. They kind of always have in their head, “I don’t know. If that one house down the street, we love that yard, maybe if that ever opened up.” Sometimes you just don’t know those things and then the perfect opportunity comes along and you kind of wish you had the means to take advantage of it.
We want to make sure that we’re checking in once a year to say, “Do you need to buy anything?” If you’re saving $10,000 a month and it’s all going towards stuff that is for the long-term or putting it into accounts that could decline in value during certain markets, we want to make sure that you don’t need any of that money in the short-term, whether it’s for business or personal or anything else.
Reese Harper: On the same vein, I think that it’s really easy to be imprecise in the amount of liquidity that you keep around for those things that you’re talking about. You know you have a remodel coming up, so you kind of keep a certain amount of money around, but you don’t really know exactly when that remodel is going to happen and you’re not really sure.
Ryan Isaac: Some of these things are two or three years out.
Reese Harper: My point is I think a good financial advisor can help clarify a timeline that is realistic and appropriate for your situation, both for practice expansion, second locations, associate hiring, relocation of your practice, purchasing a new home, a remodel, expanding your practice by buying another location. If you don’t set a timeline and you don’t quantify the down payment needs for those various financed items, you’ll carry too much cash for too long.
What I’ve seen in the last three or five years, for example, is a lot of clients have way more cash than they need for those specific goals. Even if it would have been, “I have $100,000 too much,” or, “I have $200,000 too much,” or even $50,000 too much, you would have earned like 45% return over the last three years just by taking that excess liquidity that you have and deploying it into a long-term investment portfolio.
What I usually see is people have a little in the opposite case. You’re saying in cases where bankers are saying people don’t have enough liquidity. That’s also a problem. But there are many cases where people have too much liquidity. It’s because they have these undefined unquantified goals.
If you say, “I’m going to do a remodel,” is this a $150 a foot remodel, is it $175 a foot, have you talked to a contractor yet, do you know what the range of nice to cheap looks like? The cheap is probably not you, but maybe the most expensive is not you, so let’s plan on $210 a foot in your community based on what three contractors have told us, and it only took us an hour of phone calls. We know that we can say the down payment is going to be $147,000 at most, and you have $243,000. You have $100,000 more than you need for that specific goal. Do we really want to wait three years, or how long are we going to wait sitting around with more than we need?
My point is that throughout our lives the lack of quantifying our goals and clarifying our timeframes causes our net worth to not grow as fast as it could. It’s just as simple as that.
Ryan Isaac: I think that’s great. I think it can definitely work against you in both situations, for sure. Another big one where liquidity starts to make a big difference that we want to make sure we’re catching earlier in career if possible is planning for later on in your life when you’re a little bit older. Some bigger qualified retirement plans, things like pensions, cash balance plans or profit sharing plans, they’re better for you in terms of cost and efficiency when you’re older than most of your staff. That’s kind of part of the formulas that actuaries use to determine how much you have to give to staff if you use a pension plan or profit sharing. They look better when you’re older.
Reese Harper: Older meaning it works in your late-30s, but it looks better in your 50s.
Ryan Isaac: It does. The bigger the disparity between and owner and the average age of employees, basically, the better.
Reese Harper: Yes. Don’t hesitate to try to get clarity on this.
Ryan Isaac: That’s part of it. We look at that once a year, too, for everybody.
Reese Harper: We’ll look at it in your mid-30s. We want to know what the ratios look like.
Ryan Isaac: We always try to encourage clients to accumulate their assets in a balanced way, which is why we’re taking about this.
Reese Harper: What do you mean by balanced?
Ryan Isaac: Let’s say you have $10,000 a month that you save. You don’t want all of it to go into a pretax retirement plan that is going to be taxed later. That’s illiquid, that’s a penalty, you can’t get at it, if you have no other means of liquidity. We want to create some kind of balance.
Having said that, if we know that later on in career there might be an opportunity to really sock away a lot of money to take the bulk or maybe all of your monthly savings and put it into those kinds of plans to save on taxes, we’re going to want to make sure that we have some kind of liquidity buffer before we get to that point.
I’d love to have a 50-year-old client and say, “We’re going to take every penny you have every month and put it into this pension plan, because you’re going to save a huge amount on taxes, but it’s okay because you’re also extremely liquid. You’ve spent the first 15 years of your career building liquid assets, and we’re quantifying what the practice and the building are, so I know what kind of liquidity event we’ll have when you transition out of working. We’re okay to put all of your money into this qualified plan and lock it up.”
Reese Harper: Just to back up a little bit on this, it sounds like what you’re saying is when I get to a point where I start withdrawing money for retirement I don’t want to be pigeonholed into having all of the money come out of the 401K or pension type of accounts. Right?
Ryan Isaac: Yes. For sure. And along the way, too. If all of it is sitting there along the way, those things will happen where you have to go rob the thing and pay a penalty and taxes.
Reese Harper: All these issues we talked about previously, you can’t pull that money out of a 401K without pretty significant consequence. If you build up the liquidity prior to really tackling the tax deductible contributions, you’re just in a really great position at the peak of your career to really minimize your taxes.
Ryan Isaac: Yes. Think about the impact of that. If you can get a bigger retirement plan for the last decade of your career, if it can save tens of thousands of dollars a year in taxes, which usually they do, then that could be a multiple six figure decision by the time the money is invested and grown.
Reese Harper: Yes. I’m just going through this right now with a 44-year-old client. It has been a perfect example of how I would ideally like to see this happen, which is early on in their career –
Ryan Isaac: When those kind of plans didn’t make as much sense, right? When you couldn’t max it out.
Reese Harper: Let’s say I’ve known this person for 10+ years now and worked with them since their mid-30s. I’ve seen the graduation from dental school, almost no liquidity, and I’ve seen them go from their mid-30s clear into their mid-40s.
Ryan Isaac: Like a child, you watch them grow up.
Reese Harper: I’m like his child, but yes. You’re in your mid-30s and the tendency, I remember, early on was, “I want to pay off our house. We have to pay off our house. If we can just pay off our house, then everything is going to be fine.” Well, I remember them telling me, “This is the be all, end all house. We’re never going to leave.” Then at 41, in 2007 market crisis…
Ryan Isaac: There was a deal of a lifetime?
Reese Harper: Yes. They bought another house and moved out anyway. The fact that we didn’t end up paying down the house in the first place, we built up liquidity and we were investing money, and we started to get a nice reserve. Then when they bought that next house they also financed 70% of it and maybe put 30% down, but sold some of the equity out of their previous house.
They kept liquidity. They kept saving money and building up liquidity. Their taxes were really low because they had 179 expenses, they had their own equipment, they had their TIs, they did a cost segregation study on their building to bring their taxes down. They really didn’t have high taxes during their late-30s.
Ryan Isaac: Comparatively.
Reese Harper: Compared to what it would be later. Now, we’re 10 years in, they have a million plus. This is an average GP that just earned at the average income level, as most GPs do across the country, but he spent the first 10 to 12 years building a massive amount of liquidity and growing that.
Ryan Isaac: There was a lot of back and forth in that, though. That wasn’t easy for him.
Reese Harper: That was not easy. That was an emotional traumatic journey for me to have conversations with this person every year about, “My accounts just went down,” or, “My accounts went up, let’s put more in.” No. We can’t chase returns, we’re doing this consistently. Should we shift to more aggressive? It’s going awesome right now. Let’s back off, I want to be more conservative. I’m scared about it.
It’s really hard.
Ryan Isaac: Along that way, multiple business opportunities came up and all different kinds of places you could have put money.
Reese Harper: Yes. Now we’re at a point, in our mid-40s, where we have over seven figures plus in liquid assets that are growing really nicely. This year has been a good year to see that. This is the best year they’ve ever had because it’s the year when they have the most amount of money saved in their life and it finally felt significant.
Ryan Isaac: In raw dollars the return is pretty impeccable.
Reese Harper: Their returns were similar in previous years, but they just didn’t have a lot of money. It just feels different when the money gets bigger. Now we’re shifting entirely, the entire automatic draft, which I think for this person is 25% of their gross income, which is somewhere between $11,000 and $12,000 a month. That entire deposit now is shifting pretax. We’re going 100% pretax.
Ryan Isaac: Cash balance plans.
Reese Harper: Yes. And they’re going to wipe out $70,000+ in taxes per year.
Ryan Isaac: Gees. Think about that.
Reese Harper: Every year for the next –
Ryan Isaac: 15 or 12…
Reese Harper: Yes. Work is going to be optional within the next 12 years. That’s a shift. It could be sooner, depending on what the economy does.
Ryan Isaac: That’s like a million dollar swing in net worth, though.
Reese Harper: Well, it’s probably a two million dollar swing.
Ryan Isaac: After growth.
Reese Harper: They have $600,000 in net worth, probably, from the growth of the last 10 years, which has mostly been happening in the last two, and that will continue to happen moving forward now that they have a large block of money.
Ryan Isaac: I’m just saying the new tax savings alone is probably a million dollars over the next 12 years.
Reese Harper: Yes. Now the new tax savings is going to add an additional million plus.
Ryan Isaac: But you would not be comfortable telling him, “Yes, put 100% of your monthly savings,” if he was not liquid.
Reese Harper: I couldn’t tell him to shift his savings to pretax if he didn’t have any liquidity in after tax money, because he wants to retire earlier. If work is going to be optional in your 50s, we can’t have all the money in the 401K, because you can’t even pull money out until you’re 59. Ideally, we’d like to wait until you’re 70.5 to pull that money out.
It’s this nice smooth curve of low taxes, accelerated depreciation. Pay off some high interest rate debt and just get to where what we call your balance sheet looks proper, it has the right debt to income ratio.
Ryan Isaac: It puts the balance in balance sheet.
Reese Harper: It does. It puts it right there.
Ryan Isaac: Put the balance back in balance sheet.
Reese Harper: A lot of companies have this shift where they have to fix their balance sheet to make the bad debt be not quite as bad and refinance things. If you have a low debt to income ratio and all of your interest on all of your debt is reasonable, it really is a time in your early career to accumulate liquidity. Your opportunity cost is not just the return, but it’s the entire calendar year of liquidity that you won’t be able to ever go back and get.
You can always pay the debt down in a future year, and the cost of doing that is some interest expense, but you don’t get to relive a whole calendar year and build up that liquidity. It has a compounding effect that is really not only financially essential, but emotionally I think it puts you ahead in terms of your financial maturity. You’re learning how to invest, you’re learning how to think through these difficult issues as an entrepreneur, “Should I hire someone? Should I expand? Should we buy this? Should we refinance?”
Ryan Isaac: Learning how to evaluate different investment opportunities along the way.
Reese Harper: Yes. If you don’t have liquidity, you don’t even have those opportunities. I just think it matures people financially better to be more balanced as they pay down debt throughout their career. When you get into your 50s and your early-60s, if you’ve done it properly it will all be gone anyway, but you’ll have a net worth that is probably millions of dollars more than you could have had otherwise.
Ryan Isaac: I love that example. Kind of related to that, then, one of the last things we’ll talk about is the effect that liquidity has on the way you invest money. It’s kind of along the lines of what you were saying.
If you have different buckets of money that you’re going to access at certain points in your life after you’re done working, maybe 55 to 65 is this bucket, maybe it’s some of the practice equity and then it’s some mutual funds from the brokerage account, and then at 70 then we’ll finally hit the cash balance or the defined benefit plan or whatever, won’t that change the way you invest money? If you know you’re liquid enough to last you until the government makes you take money from your pension, will that allow you to invest the pension differently than you would other accounts?
Reese Harper: Oh, yes. No question. How would you advise people on that?
Ryan Isaac: Totally. If you know that you don’t need the pension money until you’re 70, that means you have a longer time horizon on the account. The rule of thumb is the longer the time horizon the more risk you can afford to take.
That alone, depending on when you live, when you retire, the market cycles, and when you access the money, that could be a big difference in money if it’s invested slightly more aggressively. If you have your pension money that’s the last thing you’re going to touch, it can be invested differently and that could make a big difference.
Your spending will change throughout your career and your retirement, too. End of career, early retirement, probably into your 60s, spending is going to reflect pretty similar to what it was preretirement. We know that just statistically and having seen people. There will be a point later in your 70s and 80s when spending will slow down as you slow down.
Those will be lower tax years, 80 will be a lower tax year than 60 will be, regardless of what the rates are.
Reese Harper: Age 80, you’re saying?
Ryan Isaac: Yes, age 80. Just because you’re probably going to spend less money at 80 than you will at 60. It would be ideal if you could afford to –
Reese Harper: I’m not. I’m going to spend more.
Ryan Isaac: You’ll spend more at 80?
Reese Harper: Yes. Just for fun.
Ryan Isaac: That’s because you’re like, “I don’t want the kids to have anything.”
Reese Harper: Yes.
Ryan Isaac: Lazy bums. But, it would be ideal if you could keep the withdraws from the accounts that are still taxable, still need to be taxed one day, towards the later end of life when spending should be lower.
Reese Harper: You’re right. It usually is.
Ryan Isaac: Usually, except for you. That’s when you’ll just be like, “I need some tractors.”
Reese Harper: I’m going to be doing bungee jumping and plane diving at that point.
Ryan Isaac: You’re going to see if you can make yourself –
Reese Harper: Hold me to that.
Ryan Isaac: I will.
Speaker 3: Plane diving? That’s a thing?
Ryan Isaac: There’s sky diving.
Reese Harper: I’m not talking about sky diving.
Ryan Isaac: That has a pretty high survival rate. Plane diving has almost no survival rate.
Reese Harper: Have you ever taken a Cessna into the Columbian jungle at a 70 degree angle? No. That’s plane diving. That’s what I’m planning on doing when I’m 80.
Ryan Isaac: That sounds like drug trafficking, actually.
Reese Harper: Have you seen American Made with Tom Cruise?
Speaker 3: Yes, I’ve seen that movie.
Reese Harper: That’s what they do, plane diving.
Ryan Isaac: I haven’t seen that yet. Okay. I’m going to read the book first.
One last thing I want to mention, and we kind of covered this, is liquidity giving flexibility.
At some point you’re going to have to sell the practice and the building and maybe a vacation home or something. You’ll have to make decisions. Do you keep the building, do you lease it out, do you sell it? When do you let go of the practice, do you slowly let go of it or do you let someone buy you out? If you have liquidity, you won’t be forced into decisions that you wouldn’t otherwise make.
Reese Harper: In a market that you shouldn’t be selling in.
Ryan Isaac: Yes. If you’re sitting in a market that’s down and you don’t really want to sell your practice but you have to, that’s just not a position that you want to be in.
Reese Harper: Yes. I think that’s really good advice, Ryan. This was a great topic. We got a lot covered today.
Ryan Isaac: I think that was a lot. Anything else you want to say, anything you want to mention?
Reese Harper: I just think it’s important that we get people out to see the Moby Dick opera sometime soon.
Ryan Isaac: Shout out to Capital Theater. Great facility.
Reese Harper: Great people.
Ryan Isaac: The talent there was unbelievable. The blame is on me, I’m not cultured enough yet. The blame is on me.
Reese Harper: You’re working on it.
Ryan Isaac: I’m working on it. I’ll go to some more. All right. Thanks for joining us. Thanks for the input. Thanks for making Q laugh a little bit today, that was refreshing. If you’d like to call us, you can call us at 833-DDS-PLAN. That goes directly to Reese Harper’s cellphone. Just kidding. It does not.
Reese Harper: Text me there, you’ll get a nice error message.
Ryan Isaac: 833-DDS-PLAN, you’ll get a hold of someone here. We’d love to talk to you. If you’d like to schedule an appointment, have a free consultation to ask us some questions, if you want to ask us about your liquidity, you can go to dentistadvisors.com and at the top there’s a calendar link where you can schedule something at your convenience.
We also encourage people to send us some questions. Once a month we try to do an episode of answering listener questions. You can email Reese at firstname.lastname@example.org or email me, Ryan, at email@example.com. Send us your questions. We’d love to answer them on a future episode.
We’ll see you next time.
Reese Harper: Carry on.Cash Management