The 4 Ingredient Recipe to Optimal Wealth Building – Episode 185

What’s the ideal recipe to accumulate assets as you build for the future?

On this episode of the Dentist Money™ Show, Reese and Ryan take on a question that many dentists often ask themselves: “Am I putting my money in the right places?” 

When asset building, your money can only go into one of four places—liquid assets, retirement plans, practice growth, or real estate acquisition. Reese and Ryan offer some sage advice about how to prioritize one asset bucket over another as you grow your net worth.

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Podcast Transcript:

Reese Harper: Hey Dentist Money Show listeners, it’s Reese Harper here. Sir Ryan Issac and I tackled one of the most important questions of all time today, which is where should I be putting all of my money? Should it be going to real estate? Should I build up my practice bigger? Should I put more money into retirement accounts or do I need more liquid assets? Do I have enough cash in the bank? This is one of the biggest problems that dentists have and challenges they face is figuring out as the year passes and as your situation becomes more complex, what do you do with what you’re making. I hope you enjoy the episode today as we go through we’re going to be able to get to the end of your career and do a theoretical look back and say, “Would you be happy if you had this much in this bucket or this much in this bucket or this much in this bucket?” Be able to kind of determine what the tax consequences, the growth implications and the lifestyle consequences would be of the choices you’re making along the way.

Announcer: 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 trusty old cohost, Sir Ryan Issac.

Ryan Isaac: Yes. Welcome back from the great dusty, snowy plains of Mongolia.

Reese Harper: That’s a whistle from the movie Iron Will- [crosstalk 00:01:38]

Ryan Isaac: Was that the robot?

Reese Harper: … when Iron Will tipped over. He’s a sled puller dog. Dog man.

Ryan Isaac: I’m thinking of a robot, a giant robot.

Reese Harper: For some reason, I haven’t watched that show in 15 years maybe-

Ryan Isaac: But you just got the whistle?

Reese Harper: The whistle came back to me when I was in Mongolia watching wild dogs and people riding reindeer. I watched people riding some reindeer.

Ryan Isaac: Was this bareback reindeer riding or did they saddle them up?

Reese Harper: Oh yeah, no you can’t saddle a reindeer Ry.

Ryan Isaac: Oh my gosh.

Reese Harper: They’re not going to appreciate that.

Ryan Isaac: That’s crazy.

Reese Harper: Yeah. I mean, just imagine that you’re-

Ryan Isaac: Did they raise them in captivity to jump on a reindeer’s back or did they …

Reese Harper: That is still a research project I’m working on.

Ryan Isaac: Okay, you’ll know.

Reese Harper: All I know at this point is there are some people in the northern part of Mongolia that ride reindeer-

Ryan Isaac: That ride reindeer.

Reese Harper: … and they refuse to ride anything else.

Ryan Isaac: Well, coming to a podcast story near you, soon.

Reese Harper: We’re going to be integrating that tale. It will happen. All right. Well, today we’ve got a great topic that was kicked off by a really good question in our Facebook group, which is probably a good plug really fast to say go ask us, join our Facebook group and ask any question you ever want to ask. We go in there and personally answer them and sometimes it’s such a good question we’ve got to spend an hour talking about it.

Ryan Isaac: Are there limits to what you can ask?

Reese Harper: No.

Ryan Isaac: No? In terms of-

Reese Harper: Will we ban you?

Ryan Isaac: In terms of will you get a competent response?

Reese Harper: Okay. It depends.

Ryan Isaac: That’s fair.

Reese Harper: When it comes to successfully raising children and instilling moral values and work ethic among them, we’re going to have a hard time with that one. Ryan and I are really struggling with that.

Ryan Isaac: Oh is that-

Reese Harper: Trying to raise our children.

Ryan Isaac: That was a good question, that’s true.

Reese Harper: We try. We’re just not claiming to be experts in that particular area. We are, we have some experience, some familiarity with the issue.

Ryan Isaac: Yes. I have kids. I’m probably screwing them up.

Reese Harper: I would say as it relates to money we’re going to be better. Money and finance. Business.

Ryan Isaac: If there’s a decision a dentist has to make around money-

Reese Harper: Or his practice.

Ryan Isaac: … then we’ve probably seen it.

Reese Harper: Yeah.

Ryan Isaac: DentistAdvisors.com/group, that will land you right in the Facebook page.

Reese Harper: And/or food, mountain biking and skiing.

Ryan Isaac: Yeah, food, shaving I’m an expert.

Reese Harper: Travel plans?

Ryan Isaac: Travel plans.

Reese Harper: Vacation preferences.

Ryan Isaac: This question came from, it was kind of on the heels of another episode, it was episode 180. It was a Q&A episode we did where we talked about somebody building a lot of their net worth in real estate.

Reese Harper: I think it would be on the toes of the episode.

Ryan Isaac: It’s not on the heels? Is it on the toes?

Reese Harper: The mongolian toe boot if you will. It was kind of like, we led into it.

Ryan Isaac: Yeah, okay.

Reese Harper: I just wanted to clarify that because I’ve been thinking about-

Ryan Isaac: The phrase?

Reese Harper: The mongolian toe boot lately.

Ryan Isaac: Then the phrase on the heels of?

Reese Harper: Yeah, it just threw me off.

Ryan Isaac: It doesn’t make sense to you. All right. On the mongolian toe boot, toes of episode 180 where we talked about building some of your wealth in real estate this person asked, well I’ll just read the question. This is a really good question. He said, “In determining one’s total term, is there an ideal mix of assets in the bottom row that you look to accomplish by the end of your career? What are the effects of being too heavy in one versus another?” If you’re not familiar, just push pause after I say this and go to the website DentistAdvisors.com. Go click on elements. There’s this table on the bottom row of the elements is where we track our clients, not only their total net worth but we track how their net worth is made up. Is it sitting in liquid stuff, retirement plans, businesses, real estate?

Reese Harper: Yes.

Ryan Isaac: Mongolian sheep farms, which would be businesses.

Reese Harper: Yep.

Ryan Isaac: This person is asking, is there an ideal mix here?

Reese Harper: Well, there’s only four-

Ryan Isaac: There’s only four.

Reese Harper: Well, four general categories for those of you who do not know. Business equity or business interests, that’s ownership in a small business, that’s ownership in your practice. It’s ownership of any private stock in any private enterprise you have. Then real estate is another category. Then retirement plans, qualified retirement plans, to have some kind of tax advantage to them. Then liquid assets or investments or cash that you’ve already paid taxes on.

Ryan Isaac: Doesn’t have a penalty to grab it- [crosstalk 00:06:10]

Reese Harper: Those are the four categories.

Ryan Isaac: Yeah. This person’s asking, is there an ideal mix between these two? That there should be.

Reese Harper: Great question.

Ryan Isaac: The main overarching theme or the thing people want to figure out here, the big question that a lot of people ask, I think it’s on the website when you go there and you hover over that bottom row, am I putting my money in the right places? That’s really the right question, right?

Reese Harper: Yeah, I think on the website it says do I have the right mix of assets. I think a better way to frame it or more like people would think about it is, am I putting my money in the right places?

Ryan Isaac: Yeah.

Reese Harper: In our business, the way we look at this, we define financial planning jobs into really core kind of high level, we call them sometimes functional jobs and then we have related jobs that support that core functional job. In this particular case, the core functional job that we would discuss today, we’ll call it the main job.

Ryan Isaac: The main question.

Reese Harper: The main question-

Ryan Isaac: The burning Q.

Reese Harper: … the main job that has to get done is am I putting my money in the right places? That’s it. That’s what this person is feeling. In order to answer that, there’s a lot of other kind of related, there’s a few other related jobs that we’re going to talk about today so when you get done with this, you’ll know for your situation do you have the right mix?

Ryan Isaac: The first one is liquidity. By the way, if you’re familiar with this or you go to our website, we measure everything for our clients in something called terms. What we’re measuring is how long could a person live given their current spending out of that current asset. How long could you, if you’re spending what you’re normally spending, how long could you live on just your liquid stuff and just your retirement plans and just your practice if you sold it and liquidated just your real estate if you liquidated? Pay off debts, paid taxes. Each one is in terms, you know? Liquid term is how many years of liquid assets, given your current spending, could you survive on? Let’s start on the first one.

Ryan Isaac: Liquid term. What are the, what’s normal for someone when they get to retirement, what percent of their assets end up being in this bucket? I think that’s a question people would have and what are the pros and cons of overbuilding your liquidity?

Reese Harper: Well, for me, the first one that comes to mind is, let’s just say that to give people a starting point, the combination of all of these things is what we call a total term. That, we would say, at the point you’re ready to be financially independent, I’d say the point you’re able to retire, that could be a 25 or 30 total term or you have total assets, all your assets you have about 25 to 30 years worth of all of your assets lined up. At that point, retirement starts to become-

Ryan Isaac: 25 or 30 years of your annual spending.

Reese Harper: Of your annual spending, meaning your net worth is 25 or 30 times what you spend in a year. That’s kind of the point we’ve having a conversation now and we’re saying what’s the downside of being in balance in liquid assets?

Ryan Isaac: Yeah.

Reese Harper: In this specific case, let’s say we’ve got someone who has a 25 total term, all right and let’s say 5 of it is in their house, in real estate and they’ve got 20-

Ryan Isaac: In liquidity.

Reese Harper: … in liquidity. They’ve basically built up everything, they’ve just paid their taxes their whole career, they’ve never done any retirement accounts, they sold their business now and they’ve just got one house and a bunch of liquid assets. They have no retirement accounts. They don’t have any ownership in a practice anymore or any private business.

Ryan Isaac: Right.

Reese Harper: The upside of that is you’re in really good shape. You’re in really good shape meaning you’ve paid your taxes, you don’t have a lot, you don’t have any tax risk anymore. You don’t know-

Ryan Isaac: Income tax really. You have capital gains if you sell some stuff out of your account.

Reese Harper: Yeah and hopefully managed it well out of your career, which is another job that you need to do as you invest in these after tax accounts. You shouldn’t be deferring your capital gains your whole career. You’ve got to manage those either through charitable contributions or tax lost harvesting, changing positions out during down years. That’s what tax lost harvesting means. Anyway. You’ve got to make some, that’s a related job. I want to make sure no one forgets about that one.

Ryan Isaac: Yeah. Kind of important.

Reese Harper: Kind of important but liquid assets, as you build them up through your career, they’re really the most secure, if I was going to have one category to be over-

Ryan Isaac: I was just going to say this.

Reese Harper: … weight in, I’ll take that one.

Ryan Isaac: I’ll take that one, yeah.

Reese Harper: Yeah.

Ryan Isaac: If there’s one category in the whole list that’s like you’re way over weight, that’s the one that would probably feel the best to be over weight in.

Reese Harper: Oh yeah.

Ryan Isaac: Because it’s already been tax money, you can have 5 bucks or 50,000 bucks out of it.

Reese Harper: Yeah.

Ryan Isaac: Your discretion, do whatever you want, invest it however you want.

Reese Harper: In terms of, imagine, it feels very different than if it’s all in real estate or if it’s all in a business or if it’s all in a 401K. We won’t get into those yet, on the pros and cons of those. We’re going to stay with this liquid one but that’s the upside. Okay?

Ryan Isaac: Yeah.

Reese Harper: The downside of it, to me, the downside of it is all things being equal, okay. All things being equal meaning two people, let’s say you have two people that worked for 30 years making 250,000 a year.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: One person didn’t do any 401K or any retirement plan contributions and the other person did-

Ryan Isaac: Maxed it out every year.

Reese Harper: … other person did. The person that’s all in liquid will probably have total, a much lower net worth overall because when you do retirement accounts and do get the deductions for those accounts, all things being equal, let’s say they spend the same amount of money, everyone is spending the same amount of money, just the person that can do the, that does the retirement accounts or the person, we won’t jump into that one. The person that only does the liquid accounts, they’re actually going to pay more taxes during their career-

Ryan Isaac: At their highest peak earning.

Reese Harper: … at the highest earning point they’ve ever been at and they will likely, they will have a lower net worth. This person will be, if they’re at a 25 total term, the person that did retirement accounts and liquid would probably be at like a 33 to 35 total term.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: If you’re going to commit to doing qualified retirement plans during your career, you have to save-

Ryan Isaac: The difference.

Reese Harper: … the difference. You have to save more money. You should have a higher savings rate than the person-

Ryan Isaac: There you go.

Reese Harper: … that did not do them.

Ryan Isaac: Because you paid less in taxes.

Reese Harper: Yeah.

Ryan Isaac: Okay.

Reese Harper: That, to me, that’s the pro is it’s awesome.

Ryan Isaac: Of liquidity, it’s easy.

Reese Harper: It’s easy. You’ve just got to pay your taxes and move on.

Ryan Isaac: Yeah.

Reese Harper: A lot of people choose to do that. You’ll see a lot of people argue for that approach.

Ryan Isaac: Yeah.

Reese Harper: Just don’t do any of this crazy retirement plan stuff. I can buy into that. If you want to pursue that strategy, I don’t think it’s entirely rational-

Ryan Isaac: Well, if you know, yeah.

Reese Harper: … but I can understand why people would do it.

Ryan Isaac: Sure. [crosstalk 00:13:50]

Reese Harper: Just for the ease of it is if you’re the type of person that throughout your entire career you maximize your liquid assets, meaning every year that you could have, you just saved and saved and saved the money, you didn’t hire a new associate, you didn’t open a new location, you didn’t expand by taking out another TI loan and getting the practice larger.

Ryan Isaac: Yeah.

Reese Harper: You kind of just, you prioritize stripping the business of its cash and saving it into-

Ryan Isaac: Pay taxes on it and save it. Yeah.

Reese Harper: If you did that, you probably didn’t have as large a practice as you could have had.

Ryan Isaac: Mm-hmm (affirmative). That’s fair.

Reese Harper: Which is a very, it’s a fine path to go down. The only reason I’m saying that and giving you kind of the view of during your career that probably happened because there is a possibility that a person with a 25 total term, 20 of it being liquid and 5 being in their house, they did prioritize their practice and they just sold it at the end and got that whole amount of liquidity.

Ryan Isaac: Put it in the liquidity anyway, which is another-

Reese Harper: It could have happened. We’re talking about two different scenarios here. At retirement versus accumulation.

Ryan Isaac: It’s kind of like the big bang. Right at the moment of the big bang, what happened one second before?

Reese Harper: Yes. If you’re the type of person that right before it was a 25, you were at a 30 total term and 20 of it, 25 of it’s in practice equity-

Ryan Isaac: Yeah. You sold it, paid the taxes and then put it in liquidity-

Reese Harper: Then maybe you did aggressively grow it.

Ryan Isaac: Yeah.

Reese Harper: But that’s the challenge of probably to your question that came through is along the career, that’s the trade off you’re making.

Ryan Isaac: Okay.

Reese Harper: You’re saying bird in hand, I’m going to put some money in my accounts and save it and invest it, build my liquidity because I know that’s for sure going to retire me.

Ryan Isaac: Yep.

Reese Harper: Alternatively, you could invest that in retirement [crosstalk 00:15:53] accounts and your practice equity-

Ryan Isaac: Or buildings-

Reese Harper: Or buy a building and real estate. You’re making, there’s some opportunity costs to that.

Ryan Isaac: Yeah.

Reese Harper: That’s, I think that’s your thoughts on liquid.

Ryan Isaac: That’s liquid. Okay. Let’s move to the next one in the bottom row. What’d be cool is if someone is actually on the website listening to this and they’re just following along like a chart, just on the elements chart.

Reese Harper: They’d enjoy it.

Ryan Isaac: Or if you came to one of our events and you got one of our awesome new elements T-shirts and you listened to this while looking in the mirror or just looking down and pointing to your T-shirt.

Reese Harper: Then you could know, just be like, “Look, I’m pointing at my T.”

Ryan Isaac: You could just, I’m bottom row right now.

Reese Harper: If you want a T, shout out special offer right now to anyone who wants a T. If you’re listening to this-

Ryan Isaac: Follow, come up with a little contest here.

Reese Harper: If you’re listening to this, join Dentist Advisors Facebook group-

Ryan Isaac: Oh yeah.

Reese Harper: … and request your T. If it happens for the first 10 people that request their T we’ll give out free Ts.

Ryan Isaac: That’s fair. I was going to say the marketing team is going to hear this and be like, “All right what did you just do? You just blew up my life.”

Reese Harper: Hey, we’re living to get to 10.

Ryan Isaac: We’re not a T-shirt company. What just happened?

Reese Harper: Limiting it to 10.

Ryan Isaac: All right. Number two would be qualified term. This is the element where we track how much of somebody’s net worth is sitting in qualified retirement plans, which is just a fancy way of saying pre-tax retirement plans, stuff you put money into that lowered your taxes that you’ll be taxed on later that you can’t touch until you’re 60.

Reese Harper: Yep. Pros and cons.

Ryan Isaac: We’re talking IRAs, 401Ks, simples, seps, profit sharing, pensions, cash balance, that kind of stuff.

Reese Harper: Yeah. What’s a pro?

Ryan Isaac: The pro immediately is what you were just saying, which is the person who maximizes the most efficient retirement plan for that year, every year of their career is going to end up with a lower tax bill through a whole career and more cash and liquidity to save along their career. They should have a higher savings rate.

Reese Harper: Yes.

Ryan Isaac: All other things being equal and done right.

Reese Harper: What Ryan’s saying, let’s say someone is making 250,000 a year and if they do it all into liquid, we’re saying maybe they’ll only be able to save, you know 40,000 a year but if they do, if they maximize the most efficient retirement plan for their situation that year, maybe they’ll save 60,000 a year. You go from saving maybe 4 grand a month or you’re saving 5 grand a month or 3500 to 5500 maybe or it can even be higher depending on the type of plan that you construct.

Ryan Isaac: You should have more actual savings dollars that get put away, more to compound and a higher net worth-

Reese Harper: Because of that should result.

Ryan Isaac: … because of that.

Reese Harper: Now I’m just sitting here thinking, if you’re looking at this chart and you just move your finger up to the middle row, the middle row is what you have to know in order to make sure that that tax savings actually goes somewhere useful and doesn’t just get spent. The middle row is where does my money go?

Ryan Isaac: Yes.

Reese Harper: Saved or spent or taxes or debt.

Ryan Isaac: Well, the middle, let’s say where does my income go.

Reese Harper: Where does my income go. Where does my income go. Yeah, that’s the huge caveat with this one, you were just saying a few minutes ago, too. If someone, it’s not going to benefit you unless it’s being monitored and tracked and you know that that extra 10 grand of savings that year actually went somewhere to build your net worth.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: That’s the pro then. What about cons? Now, it’s actually more common for the typical, average American worker to have most of their retirement assets sitting in a company 401K.

Ryan Isaac: There’s a couple of cons. Con artists.

Reese Harper: Remember Con Air with-

Ryan Isaac: Nicolas Cage.

Reese Harper: Nick Cage.

Ryan Isaac: And a bearded guy, it’s Russell-

Reese Harper: I don’t remember him, I remember Steve Buscemi, he was the crazy guy that had all the dolls.

Ryan Isaac: Con Air had-

Reese Harper: It was so good.

Ryan Isaac: Who is the guy who is the coach in, or the hockey movie?

Reese Harper: I don’t know.

Ryan Isaac: He’s the coach of the US Olympic Team.

Reese Harper: I don’t know, I don’t know. I can’t remember who you’re talking about. I just remember Nick Cage. He had a skullet basically. John Malkovich?

Ryan Isaac: No.

Reese Harper: You had Buscemi, Malkovich, Vin Rhames, John Cusack, this was, Chappelle was in there.

Ryan Isaac: It’s a great show.

Reese Harper: Anyway, the cons, multiple cons. Of Con Air.

Ryan Isaac: The con of 401K, IRA, well for the con of, one of the cons of-

Reese Harper: Over balancing. That’s what we’re talking about. Being overly concentrated.

Ryan Isaac: One of the cons is when you get to retirement, you’re not only pulling out money out of this account and spending it, you’re also paying taxes on the money that you pull out and then spending it. It feels kind of like it just feels maddening to some people.

Reese Harper: Yeah, they’ve already- [crosstalk 00:20:35]

Ryan Isaac: I paid taxes my whole career-

Reese Harper: My whole life. Can I be done with this?

Ryan Isaac: … now I’ve got to pay them again?

Reese Harper: Yeah.

Ryan Isaac: Sometimes they’re just mad at that.

Reese Harper: Now, a counter argument could be I’m a high income earning dentist throughout my career and the money I pull out in retirement to spend is far less than what I pay tax on along the way. Maybe my actual rate that I’m paying is lower in the future. Maybe that-

Ryan Isaac: It will be for most people.

Reese Harper: Maybe that ends up okay but the other con is during that entire 30 year career, that money is not liquid. No matter how many times someone says, “No, this is 20 year money, I’m never going to touch it” a few times in a career there’s just, you touch the money. You get it. You need it.

Ryan Isaac: Another con that I see quite often is not only, you have to manage your retirement plan very efficiently in order for it to actually be better for you because when you do a corporate retirement plan, you are going to be matching money for team and matching money for employees. Dentistry is not an industry, for the most part, to where employees value that benefit-

Reese Harper: Participate that much. Yeah.

Ryan Isaac: They really don’t value it that much. If you do pay a significant percentage of your income, I’ve seen mismanaged retirement plans quite often result in massive amount of money going to staff-

Reese Harper: Oh yeah, that don’t even care.

Ryan Isaac: … that don’t value it. I have clients doing meaningful employee contributions but they’re getting a ton of money away from themselves. [crosstalk 00:22:13]

Reese Harper: This is a big question. It’s a con of the qualified retirement plan, part of your net worth, this QT area. If you accumulate a significant portion of your wealth in that type of plan, there’s a good chance that you probably gave a lot of money away to a team that you may not have needed to give away and there’s a good chance you might have incurred a fair amount of admin fees in order to manage it throughout your career, too, because you’re paying 1500 bucks or 2 grand a year-

Ryan Isaac: Most expensive than a brokerage account.

Reese Harper: It’s more expensive than a brokerage account, which is your liquid assets. Ryan and I aren’t like, 100% convinced that you have to do the qualified retirement plan to retire. In some cases, people that don’t do them might be better off than the people who mismanage the plan, the retirement plan and gave too much to staff and didn’t maximize their annual contributions in any way. They didn’t even keep up with their maximums. They never upgraded their plan to say-

Ryan Isaac: Or their tax savings never went anywhere anyway, just sat in a personal checking account and got spent.

Reese Harper: Yeah, if all you do is fund a 401K and then don’t save any more money than a person that- [crosstalk 00:23:31]

Ryan Isaac: Didn’t.

Reese Harper: Let’s say both people saved 20,000 a year. Well, if two people saved 20,000 a year and one is going into liquid accounts and one is going into a 401K, I’d way rather take the guy or gal that’s saving to liquid accounts. You can have an effective net worth that’s way higher but the person saving into 401K should be saving 35,000 compared to the person that’s saving 20 into liquid.

Ryan Isaac: Yeah, it should be way more.

Reese Harper: It should be way more. You just have to make sure and get all those things right. That’s a con.

Ryan Isaac: Con Air.

Reese Harper: Cons are, it’s a pain. It takes time. You have to match staff. This thing has to be outsourced and you can’t just outsource it to a 401K provider because you all know how that will work when you just hire a TPA to do your 401K and they’re like, “Yeah, we’ll help you think through this.”

Ryan Isaac: Spoiler alert. They don’t do the planning for you. They’re great people and wonderful companies but that’s not their job.

Reese Harper: They are filing your tax return. Kind of like a lot of you are probably frustrated with your CPA some days because you’re like-

Ryan Isaac: He should be doing all my planning.

Reese Harper: … they should be doing all the planning. It’s like-

Ryan Isaac: No.

Reese Harper: … they’re doing your filing of all your returns. That’s a real hard thing to do, too.

Ryan Isaac: Yeah.

Reese Harper: You’re not, in some cases you’re paying for planning, in some cases you’re not. If you’re paying 1500 bucks a year to file your tax returns, chances are you’re not going to get any tax planning for that. You’re just going to get filing my return.

Ryan Isaac: Yeah. It’s a job you pay for.

Reese Harper: When it comes to this qualified plan stuff, someone needs to be paid for planning and thinking through it.

Ryan Isaac: For thinking, yeah. Paid to think.

Reese Harper: Because you probably won’t, the industry evolves too fast for you to figure it out and this is probably one of the number one reasons why financial advisors will still have jobs for the next 30 years because it’s just getting more complicated by the day.

Ryan Isaac: Oh yeah.

Reese Harper: Actuarial science is getting more complicated by the day and the government keeps regulating the retirement plan industry more and more by the day. But the person who does this well, okay, the person who really does a good job in this area will have a higher net worth than the person that just says, “You know what? Passing on it. I’m just going to do liquid assets and real estate.”

Ryan Isaac: Just call it good.

Reese Harper: Just gonna call it good.

Ryan Isaac: Okay, all right. Those are pros and cons-

Reese Harper: Those are the first two.

Ryan Isaac: Those are the first two. The third one-

Reese Harper: What’s the third item?

Ryan Isaac: Number three is practice and private businesses. This is how much of your net worth is sitting in your practice or other privately held businesses that you- [crosstalk 00:26:00]

Reese Harper: What’s the up side of this?

Ryan Isaac: The up side of being overly concentrated in this, I would say there’s caveats here, if you did it well. If you were a good entrepreneur and a good business person and you made good decisions-

Reese Harper: How do we objectively define this? It’s pretty easy in my mind. You go, okay, you made 250,000 in a year and you’ve got 30 years to work, okay? 250,000 a year times 30 years is 7 and a half million dollars I think.

Ryan Isaac: Okay. Let’s say that’s true.

Reese Harper: You made 7 and a half million. Of total earnings. 1 person at the end of their career let’s say has a net worth of, I’m totally spit balling here because this is really, this is where-

Ryan Isaac: This is where you’re going to get comments like, “Did you know how bad your math was? That’s not even possible.”

Reese Harper: No, my math won’t be bad-

Ryan Isaac: Okay.

Reese Harper: … but this is going to be like, it varies so much by the person-

Ryan Isaac: Yeah okay.

Reese Harper: … that there isn’t a great standard here. Some of you are getting, some of you with 7 and a half million of earnings-

Ryan Isaac: Lifetime earnings.

Reese Harper: … are going to have a 2 million dollar net worth or 1 and a half million dollar net worth and some people are going to have-

Ryan Isaac: It depends family size and the city you chose to live in and spending habits.

Reese Harper: Number of times you’re embezzled or divorced, just so many variables but let’s say the 7.5 million dollars of lifetime earnings that someone has. 250,000 a year, 30 years. The person that goes all liquid assets might only have let’s say a 2 million dollar net worth.

Ryan Isaac: Okay.

Reese Harper: The person that went retirement plans and liquid assets, let’s say has a 4 million dollar net worth or 3 and a half. It’s like, boom. Big difference. They succeeded. Both of these people have succeeded in terms of what’s possible for their choice, for the things that they did. Then someone that does, let’s say someone that went all practice-

Ryan Isaac: Meaning they lived on the minimum that they could take from their practice and put all of the net profits back into growing-

Reese Harper: Yeah, growing into, growing the practice. In that scenario, you better have a net worth that’s bigger than 4, okay?

Ryan Isaac: Yeah. It should probably, I mean, is it fair to say it should probably be bigger than your lifetime earnings?

Reese Harper: It should be as good or-

Ryan Isaac: As your lifetime earnings?

Reese Harper: … as your lifetime earnings or better.

Ryan Isaac: Because the risk is so much higher in a private business, the return has to be bigger.

Reese Harper: Yeah.

Ryan Isaac: If you did it well, you got a bigger return than other types of investing.

Reese Harper: Yes.

Ryan Isaac: That’d be fair.

Reese Harper: Now, most people will do some hybrid of all of these things but we’re just talking in extremes. [crosstalk 00:28:37]

Ryan Isaac: Yeah, that was the question.

Reese Harper: If you’re all in practice, someone who is successful would have a net worth that far exceeded the other possibilities, the people that could have just gone liquid or just with retirement accounts or a combination of the two. It shouldn’t be way less than liquid person and that’s the challenge that we typically see is that the successes and the outcomes on someone who pursues the entrepreneurial path varies a lot more.

Ryan Isaac: That’s the risk of it.

Reese Harper: That’s the risk of it. You’re either going to have someone who has failed-

Ryan Isaac: Bombed.

Reese Harper: … or someone who has done really well but there’s not really a great average, the average is, if you’re going to be someone who says, “You know, I want to have a location maybe two and I want to hire an associate or two or a handful” you’re probably still going to want to build liquidity-

Ryan Isaac: And they probably still will.

Reese Harper: … in that model and you probably still will.

Ryan Isaac: They will.

Reese Harper: Okay.

Ryan Isaac: The pros are you can have exceptionally high-

Reese Harper: Net worth.

Ryan Isaac: … net worth. Yeah.

Reese Harper: Like, you’ll have a significantly higher net worth. You’ll pay capital gains tax on the sale of that business asset. It’s the lowest tax rate available-

Ryan Isaac: You could be done sooner if you- [crosstalk 00:29:58]

Reese Harper: You could be done a lot sooner and maybe that fits your personality. A lot of these are like, what fits you?

Ryan Isaac: Yes.

Reese Harper: But, the downside of that is, until that moment in time, [crosstalk 00:30:16] until that moment in time of that sale, in that liquidity, when it goes to LT, right, you don’t know. You never know. It’s always a little stressful. The advantage of the LT QT saver along the way is they’re just taking a little off the table all the time.

Ryan Isaac: That’s true.

Reese Harper: Just getting a little off the table, building that net worth predictably. The alternative is someone that’s just kind of kicking the can down the road going-

Ryan Isaac: I’m going big.

Reese Harper: I’m going to make this thing happen. It can be some hybrid too. Okay, we’re not saying there can’t be some middle ground. But if you build a big practice term, you will have a lower savings rate because you’re-

Ryan Isaac: Like, technically on paper. Now, if we went back into the P&L and said, “What did you actually take that could have been profit and leave it back in your business to hire more associates?”

Reese Harper: I take that back because Ryan and I don’t consider- [crosstalk 00:31:11]

Ryan Isaac: That’s hard to measure.

Reese Harper: … contributions into the practice is really-

Ryan Isaac: It’s not going to get reported as like, you saved that percentage last year.

Reese Harper: No.

Ryan Isaac: It’s harder but you didn’t blow it. You invested it into something.

Reese Harper: Yeah.

Ryan Isaac: That’s harder to measure.

Reese Harper: Yeah, anyway [crosstalk 00:31:26] those are some of the pros and cons of that one.

Ryan Isaac: Okay. The last one is real estate term.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: What part, how much of your net worth is sitting in real estate? The pro of being overly weighted in real estate-

Reese Harper: What is it?

Ryan Isaac: What would that be?

Reese Harper: Go ahead.

Ryan Isaac: I would say-

Reese Harper: You can’t think of one.

Ryan Isaac: I’m having a hard time.

Reese Harper: I’ve got one [crosstalk 00:31:46] forcing it.

Ryan Isaac: Here’s one I was going to say but I don’t know how many people are going to relate to this but this is just the first thing that came to my mind is I think that person has an above average emotional value that feels better about having tons of real estate because real estate is a very emotional, very tangible asset. Statistically it’s not the same as growing a private business, it’s not the same as a public market but it’s a very different tangible and emotional thing. I think a person has a big net worth in real estate just has a different emotional tie to their assets and their net worth than someone who’s just got a big portfolio of stocks and bonds in a brokerage account.

Reese Harper: You’re saying it feels better?

Ryan Isaac: It feels different. I don’t know, the person’s got 4 million bucks in a brokerage account-

Reese Harper: I think they think-

Ryan Isaac: … and no real estate probably feels pretty good too.

Reese Harper: I just think it’s subjective. I think the person that owns all that real estate a lot of times feels better about it. I think they feel better about owning that type of property than if they had a bunch of stock.

Ryan Isaac: I think so. It’s a different emotional component.

Reese Harper: If you, like-

Ryan Isaac: Feel superior.

Reese Harper: … yeah, if you get-

Ryan Isaac: I’m a better investor.

Reese Harper: If you feel better about owning property, if you feel more confident owning property than you do having a mutual fund, if you feel like that, let me, that’s an emotional reason. Now there’s some practical, financial reasons too why it could be a pro and the pro is, if you’re really, really in a, if you’ve really, really been in a good market for real estate meaning all the rentals you’ve acquired, man you have had really great luck with your repairs, you’ve had really great luck with your acquisition prices-

Ryan Isaac: Your tenants.

Reese Harper: … your tenants have been amazing and you’ve been able to charge well above average rents to all those people, you can probably, arguably have a pretty dang good return from your real estate portfolio. In that way, it’s similar to a small business, your practice term kind of concentrating your wealth in real estate, it has the possibility of having a higher than average return if you, if all of your chips kind of fall-

Ryan Isaac: Like anything.

Reese Harper: … the right way. But if you take the average return of real estate and the average rent and the average costs-

Ryan Isaac: And the average person’s experience with-

Reese Harper: … and the average person’s experience with-

Ryan Isaac: … tenants and rents and repairs-

Reese Harper: … then it, it typically is not as successful as a public market would be, a stock market for example. It would be a higher return than a bond market or a safe, you know, it is a little more, the other advantage of it I’d say is it feels a little stodgier, especially if you have rents and rents coming in.

Ryan Isaac: It feels like it’s harder to take away from you because it feels like you have more control because it’s a physical thing.

Reese Harper: Yeah. You and I have talked about this before, I think there’s some advantages for some people in accumulating more in real estate both psychologically and based on their experience level and just their interest and what they want to do. For most people, I would say unless you’re going to make that be the replacement for, really focus on it. You’ve got to have some diversification in your real estate portfolio for it to really not be super risky for you during your retirement. I mean, I’ve seen nightmare stories happen where people had too much of their net worth tied up in one building or one piece of land that at one point was looking great but during the wrong market cycle or the wrong tenant or the wrong natural disaster or the wrong, you know, lack of insurance coverage, the wrong liability event, it just, there is more risk in it and so, as a general rule I’d say the cons are, it’s more concentrated, it is riskier, it doesn’t perform as well on average to even public real estate.

Reese Harper: If you just bought a Vanguard Reed Index, the VNQ, buying that index typically will outperform owning physical property and so, you can get the exposure to real estate that public market exposure in real estate is a very different than buying a rental on the corner of your, the city that you practice in. In terms of how, the sequence of returns that are going to occur, a private piece of real estate that you own, you know that story you know the history, you know what your market cycle is going to be a little bit, you’ve got a better understanding of who the tenant is. It just feels more tangible.

Ryan Isaac: Yeah, it feels different.

Reese Harper: I’d say the con is it’s less diversified, it carries more liability and for most people there’s a pretty big opportunity cost by investing money in real estate. It’s a pretty significant one for a small business owner-

Ryan Isaac: Especially most dentists.

Reese Harper: Yeah that you need the money, we talked about the practice not getting enough-

Ryan Isaac: Yeah, your expertise could go probably a longer way in the practice growing something in dentistry than anywhere else.

Reese Harper: Yeah. Anyway. Those are some pros and some cons.

Ryan Isaac: I was just thinking of a couple things that are tough about those two are liquid ones. Anything liquid, your cash flow is always at the mercy of whatever the net income in from that asset. You can’t go get the principal, even if you have a massive DSO, I mean until you can actually liquidate it to a seller you can only get what the cash flow is. The same with a building or real estate. You only get what the rents are. If you needed more than the rents are, you’re kind of stuck in that position too. But they are all trade offs.

Reese Harper: Yep.

Ryan Isaac: It’s all trade offs.

Reese Harper: Let’s wrap up with how does the, a few people are going to be the extremes in one of those areas.

Ryan Isaac: Yeah.

Reese Harper: You know? I think some of the extremes are going to be in the two liquid ones. They’re going to be real estate and private business. You’re just going to have the entrepreneurial DSO builder or the just, I’m in love with real estate person, those are going to be probably the two more extreme version of those but for the average dentist who is going to be balancing all of those things, maybe what are some closing takeaways that are practical to kind of keep in mind?

Ryan Isaac: Well, if it were me, I would try to remember to focus on building my, building the assets in the right order. That would be something where I would strongly encourage people to think about what order they’re going to spend down and build.

Reese Harper: Okay.

Ryan Isaac: That’s critical.

Reese Harper: Yeah.

Ryan Isaac: Because the order that you’re going to spend down for most people is going to be they’re going the liquidate their practice-

Reese Harper: You mean the first things you’re going to start getting in retirement.

Ryan Isaac: Yeah, the first assets you’re going to spend down-

Reese Harper: The practice.

Ryan Isaac: … or sell is you’re going to sell the practice most likely. You’re going to get this lump sum of cash and that lump sum of cash you don’t have a very long time horizon now to invest that money.

Reese Harper: Because it’s in cash already, it’s already been taxed at that point.

Ryan Isaac: Yeah and you knew you wouldn’t have a long time horizon so hopefully you set up your whole financial plan to know that you’re going to have this liquidation event and you’ve known how much you’re going to get. Your financial planner is looking out into the future and going, “We’re going to get 710,000” or “We’re going to get 550” or “We’re going to get 1.6.” This is the liquidation-

Reese Harper: Build everything else around that expectation but dynamically because it changes over your career.

Ryan Isaac: Yeah. You’re going to be planning for that number that you’re going to get when they sell it and you’re going to not be able to, because you’re going to be at that number it’s going to allow your other investments to grow longer, your qualified plans to grow longer and your liquid assets to grow longer and your real estate to be deferred. You want to sell that or liquidate it or get equity out of it soon. You’re going to spend your practice proceeds first. You’re likely then going to turn to your liquid assets second and then you’re likely going to go for your qualified plans-

Reese Harper: Yep.

Ryan Isaac: … and then your real estate if you need it-

Reese Harper: Unless it’s a rental and there’s some, yeah.

Ryan Isaac: Yeah.

Reese Harper: But liquidating real estate you’re saying.

Ryan Isaac: Well, yeah I probably wouldn’t want to liquidate real estate before I’ve liquidated all my retirement accounts just because I’m going to pay tax, I don’t know. It depends. Real estate and retirement accounts, close but definitely practice goes first, then my liquid, then depending on my basis and what my income tax is-

Reese Harper: Are you going to sell the building? It’s funny how many people, by the time they get to that point, they thought they’d always hold the building for rent but by the time they’re ready to wash their hands of a practice they kind of feel the same way about the building as soon as the buyer is in a position to take it off their hands.

Ryan Isaac: Yeah, they kind of, well, you’re saying why don’t they hold it? Why don’t they, typically?

Reese Harper: Yeah. I’m also saying those plans change. It’s kind of surprising how often the plan is to hold it but by the time they get there it kind of just like- [crosstalk 00:40:47]

Ryan Isaac: I don’t know why it does, if it’s a case of they just need the liquidity again because they didn’t accumulate enough to put a lot of it in there.

Reese Harper: The rent isn’t enough, what they need.

Ryan Isaac: They don’t want to repair the thing and they don’t want an association with the tenant.

Reese Harper: Yeah, they just want to be done.

Ryan Isaac: Yeah. Anyway, if you’re going to withdraw in that order, then you want to accumulate in that, in a similar order. You’d want, you want to put your money into your practice-

Reese Harper: Right off the bat.

Ryan Isaac: … early in your career so that you get your income up as high as possible because earlier what we were saying was, let’s say you make 250 a year over 30 years, that’s 7 and a half million. What if it takes you- [crosstalk 00:41:26]

Reese Harper: Five years.

Ryan Isaac: … fives years to get to your maximum income level or whatever your-

Reese Harper: Yeah. What if you could have made 300 instead of 250?

Ryan Isaac: Whatever your maximum income was going the be-

Reese Harper: Get it there sooner.

Ryan Isaac: Get it there sooner so that your lifetime earnings are higher and that way you make use of the practice for the longest period of time and you get nice tax deductions from that. Then I would probably want to start building my liquid assets more significantly. Making sure I had a strong kind of portfolio of liquidity to either, because you never know what kind of a practice owner you want to be. Do you want to be a high growth owner, do you want to be a DSO? Do you want to just have two locations, one location? Having a little bit of liquidity also lets you have some flexibility. If it all goes into retirement accounts or always into real estate real early, you don’t really have as much flexibility.

Reese Harper: Well, the other thing I like about that piece of advice is most of the time a dentist doesn’t have an opportunity for a really big retirement plan, like a pension or cash balance or profit sharing until they’re older anyway, like 40s and 50s. I mean, if you can, in the earlier part of your career build the business and your liquid position so that when you hit a point where a pension might make sense, that your balanced enough where you could put every penny of your monthly savings into a big pension or something.

Ryan Isaac: You could shift it all.

Reese Harper: Yeah because you’re like, I’m not doing this at the expense of liquidity because I’ve already spent 15 years building liquidity so I can spend the last 15 years just pumping this thing into pre-tax retirement accounts and- [crosstalk 00:42:56]

Ryan Isaac: Wiping out a very significant portion of my tax bill.

Reese Harper: Yeah. You can see how the order of spending affects the order of accumulation. I said first build the practice, then build liquid, then I would look at qualified and if you’re really trying to build a real estate portfolio, arguably, you wouldn’t want that to come prior to the practice. You don’t want it to come prior to building some meaningful liquidity. Usually what I see if people are serious about real estate, it usually comes at the cost of building more retirement accounts, more qualified assets. I like it in the order of build the practice, then build liquid and qualified and then focus on real estate as kind of a capstone piece or a place to park money later on as you’ve accumulated and your practice is really humming and you’ve got nice liquid assets and you’ve brought your taxes down through good qualified plans. You don’t get to bring your taxes down as much by investing in real estate as you do in retirement accounts.

Ryan Isaac: Yeah, it’s not consistent.

Reese Harper: I’m not opposed, it might sound like we’re a little anti real estate on these last two. I’m not opposed to it, it’s just that for a lot of people real estate really is like a small business that you have to start. [crosstalk 00:44:22]

Ryan Isaac: It needs to be meaningful.

Reese Harper: In order for it to really be meaningful, you’ve got to pursue it with some level of passion. You can’t just be like, “I own one or two properties.” You’ve got to get your whole net worth tied up-

Ryan Isaac: But that flies in the face of spending 10 years in school and a million bucks in debt for student loans and a practice.

Reese Harper: Yeah. It’s just conflict [crosstalk 00:44:44] it’s a conflict of-

Ryan Isaac: Give and take.

Reese Harper: You’re not taking advantage of the opportunity you have in front of you as much.

Ryan Isaac: Yeah.

Reese Harper: I like that. I think in order to do all those things you’ve got to be careful not to accelerate your debt payoff too quickly. In order to make all these things happen you really got to pace yourself and not just focus on your debt reduction is such a high priority.

Ryan Isaac: Yeah, so the invitation, going back the the first question is how do I know if my money is going to the right assets. Then the only way to really know that the invitation is you’ve got to get organized first and you’ve got to get someone who is spending enough time organizing all these pieces in enough detail that it can be tracked and analyzed and then when decisions come up, like we’ve got years of data in all these pieces to make that decision.

Reese Harper: Like, okay if the practice is the first place to go, how do I know when it’s good enough? Well, it depends. We’ve got to look at your market, you have to look at your specialty, we have to understand and compare you to other people with your hand speed and your competency level and kind of go, “You know, I just don’t think you’re taking advantage of the opportunity you have.” We have to look at your offertories, we have to look at you are market, your fee schedules. You’ve got to have not, it wouldn’t be just a financial advisor that you need, you’ve got to make sure you have that kind of validation coming from-

Ryan Isaac: Yeah, different-

Reese Harper: … other people.

Ryan Isaac: Experts.

Reese Harper: Other coaches and consultants that can kind of verify to you that you really are operating at maximum capacity.

Ryan Isaac: Maximize.

Reese Harper: The practice is healthy or at least above average. It doesn’t have to be optimal but above average it should be. At that point, then we have a lot of other choices we can make.

Ryan Isaac: Okay. I was going to say the reason why I think a lot of this stuff does not get done is because analyzing this stuff or organizing the data to figure it out is not an event you do once because as soon as your collections change or your spending or your income or you took on another debt, as soon as anything changes at all in your situation you have to reorganize all that data and reanalyze it all. Every year that goes by this stuff changes. The building decision from last year won’t be the same building decision as it is next year, even if it’s the same building because there’s so many moving parts. It’s just really time consuming to do that.

Reese Harper: I like it. It’s good closure.

Ryan Isaac: Here’s what we do, then. Reese, here’s the deal I got for you.

Reese Harper: Okay.

Ryan Isaac: Well, you said 10 people get T-shirts.

Reese Harper: Okay. 10 Ts.

Ryan Isaac: Go to our Facebook group, I thought this was a great question. I had a fantastic time recording this episode because of such a good question.

Reese Harper: Yeah.

Ryan Isaac: Invitation number one is go to our, join the group and post a question and if you post a question that is like, even more private and needs more attention to detail, we’ll take this private message and we’ll talk to you directly. It’s kind of cool. DentistAdvisors.com/group. Go in our Facebook group. Or something that might be even more helpful for you and more direct and personal is just get on our calendar. Go to DentistAdvisors.com, click the big green button that says book free consultation and schedule a time on our calendar and let’s have a chat about your situation. Let’s talk about your bottom row of assets and where you’re putting money right now and let’s help you figure out if you need to make some changes.

Reese Harper: Got to come up with a plan.

Ryan Isaac: Come up with a plan. Thanks everyone for listening, until next time.

Reese Harper: Carry on.

Cash Management, Investing