How Successful Dentists Track Financial Progress – Episode 64

Do you know your net worth? Not just an estimate, but the actual amount? And do you know what it was last quarter? What about your personal spending? How much of your income is used to support your lifestyle every month? Unless you know the answers, your path to successful retirement will be left up to chance. In this episode of Dentist Money™, Reese and Ryan provide solutions for tracking the most important indicators of financial health. They also give instructions for participating in a short benchmark survey so you can compare your own performance to hundreds of other dentists. Click here to take the survey.

Show notes:
Survey link: dentistadvisors.com/benchmark

Podcast Transcription:

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 co host, Sir Ryan Isaac.

Ryan Isaac: And we’re back. We’re going to start off with a couple questions, and these are rhetorical questions. Ask yourself these questions as we list through these. Question number one would be for all the listeners, all of us: do you know what your net worth is? This is all the stuff you own (all of your assets) minus everything you owe (your liabilities). Whatever is left over is your net worth. It might be a red number with a negative in front of it. Second question: For those of you who know what your net worth is, do you know how much it was last quarter? So whatever it is today, what was it three months ago? Six months ago? Last year? One more: do you know how much your average monthly personal spending is. Have you factored in months where spending was abnormally high? Here’s the funny thing about spending: whenever we run our spending month—every year we send a list to our clients that shows every month worth of spending to the penny on what went out the door in personal spending. And there’s always a few months for all of us where spending is really high, like it’s spiked. And we ask about that: was that a tax payment? Was that an extra debt payment? What was this? And they will say: we bought a car; we landscaped; or I had to furnish a kitchen; or that was a bigger vacation than normal. The funny thing is—these one-time things that are anomalies happen every year. Do you know what your monthly spending is taking into account the things that only happen one time a year every year? And one more for the road: what percentage of your personal income goes towards savings? What percentage do you save? Recent studies show that our country is saving 5% on average, and that is among some of the older population that is getting worried and actually cares about it.

Reese Harper: You may not believe this, but I was up at the University last night with Andres Lopez, my statistician, and recent graduate with his master’s degree in stats.

Ryan Isaac: People don’t know that Reese hired a statistician to follow him around and just repeat stats back to him.

Reese Harper: But we literally were breaking down savings rate in more detail than I’ve ever broken down. I don’t think anyone has probably looked at the savings rates in dentists more than I have in the last twenty-four hours. This was amazing because I learned so much from it that blew my mind. This particular spreadsheet I was looking at only had a hundred and something samples, so it wasn’t the biggest sheet ever. But you would assume savings rates increased as incomes increased as a percentage. Because living expenses should increase as much as your income does as it grows. Taxes don’t grow as fast as your income grows. If you make $500,000 one year and then you make a million dollars one day—the mean across that sample from incomes ranging from $250,000 to one million. I broke it up into four bins; the mean savings rate of this sample of one hundred people was almost identical, which is crazy.

Ryan Isaac: So if you’re saying the guy making $300 grand saved the same percentage on average as the guy making a million bucks?

Reese Harper: Yeah, but I don’t want to say that’s true for the whole, because I can think of outliers. There was plenty, but the issue was that there was almost as many people at the high income bracket whose savings rate was well below the mean. People were making a lot poorer choices; the extremes were just more extreme. Your financial behavior gets a magnifying glass put on it the more you make. I just thought that was interesting data. Anecdotally when we meet with a lot of clients, you know certain situations individually and you understand their savings rates and why some people save more and why some people save less. But just to look at the aggregate and go, man there’s a lot of people that really screw it up at the high end of the income bracket. There’s a lot of room for error up there and you start getting flexible. You set up an auto draft early in your career, and you’re saving X amount of dollars per month to kind of keep that draft going then your income doubles and you don’t change your savings draft. And the money is gone still. Mickey Mouse just comes back into your life like five times. It’s like Groundhog Day. Carrying on, here’s some other questions to consider which are these “should” questions. Ryan talked a lot about some really important questions I don’t think people ask. Here are some basic “should” questions. What should your net worth be at this point in your career? Ryan asked what is your net worth, but what should it be? You’re forty-four years old, and you’ve got a thriving business. What are you worth, but what should you be worth? How fast should your net worth be growing to sustain the lifestyle you want during retirement, or to sustain the lifestyle you’re currently living during retirement? How much should you allow yourself to spend on personal lifestyle? And how much of your personal income should you be saving? There’s these “should” questions rather than: what are you doing? And people don’t even know the “what are yous” and so the “shoulds” never really get discovered. And some of you may have all the answers to all these questions. All you geniuses out there. We applaud you. But there’s other elements here that make tracking your performance important. I think that’s one of the biggest values of a good financial planner or advisor is to help with that. But before we get into the shameless plug, which I don’t like to make, some of you may have estimates about your situations. If you have estimates, you probably don’t have any idea what’s really going on. If you’re estimating things, you don’t really know. I don’t want to hurt anyone’s feelings, but that’s the way we generally see things. People make a lot of broad brushstroke statements about the way things are, and when we look at the actual numbers it’s very different than they think.

Ryan Isaac: And we’ve only kind of scratched the surface too on different subjects. We could talk about questions about practice value. What’s the practice worth today? What was it worth a year ago? What should it be worth? What’s your tax rate today? What was it a year ago? What should your tax rate be? Liquidity, insurance costs, financing on loans—there’s a long list of things that factor into your retirement and how soon you can get there. What it’s going to be like and how convenient it’s going to be. So our goal today is we just want to show the power of how tracking performance can actually help you make improvements more quickly, and they will help you stay on a more predictable path towards that retirement that you’re trying to get to.

Reese Harper: And this all started Ryan when you were doing some reading or listening to some podcast on health research that you shared with me and I said I didn’t want to listen to it. No, I really liked it and thought it was interesting. So tell me a little bit about all this stuff.

Ryan Isaac: When we are meeting new dentists they will ask, “Ryan do you do this in your own life? You’re teaching me about this financial tracking, do you believe in this stuff in your own life?” And I do. I’m clearly biased to say that I believe in financial tracking to a dentist that is thinking about hiring us, right? But in my own personal life non financially, I’m meticulous about tracking things about my health, and I’m always really fascinated by learning about those things. And I’m a bald, old man. Old and young. Over the last couple of years, I’ve been a lot more interested in my exercise and what kind of progress I’m making physically and with my fitness—especially food. Food is such a big contributor to overall health, so I’ve been really curious about what I actually eat. It’s funny when you say, “if we have an estimate about something, we’re probably really off on what it actually is.” If you asked me right now what did I eat for breakfast yesterday and how many grams of fat and carbs and protein, but I didn’t used to know those things. When I first started tracking them, I thought I had a good estimate on what I was feeding myself and the effect it was having on how I slept or how I was able to do in the gym or my energy levels or how much I weighed. When I started tracking it, I was really off. I feel like I eat decent anyway, but I was really far off, and I was surprised by the results when I actually started tracking the things that I ate, and then seeing how they correlated to outcomes in my life. Recently I’ve been listening to podcasts and reading a lot of cool stuff and research. There were two studies that I shared with you, and then you told me you don’t want to hear about this.

Reese Harper: Yeah, I’m just trying to figure out how to roll out of bed in the morning. If I roll really fast, my heart rate picks up to 70 beats per minute. So that’s kind of the extent of it. You and me are in different places.

Ryan Isaac: One of these studies comes from the big health company, Kaiser Permanente. They are hospital chains, research, laboratories—huge company. They did this study on seventeen hundred participants over a long period of time. And it was seventeen hundred people that were trying to lose weight. All they had the people do was just keep track of the stuff they ate—that’s it. They didn’t give them specialized diets or force them to do things right out of the bat; it was just to have some accountability to the numbers. So they had these people keep daily food journals. Two things I will point out that is really fascinating from this: the people who kept daily food records lost twice as much weight as those who kept no records. So clearly, right off the bat just the power of knowing what was happening helped these people make better choices. Like I said, they didn’t start with dieticians yelling at them telling them what to eat. They are just telling them to be accountable to what’s actually happening; don’t be oblivious. And the second thing they found was: the more food records and the more detailed the food records were kept by the participants in the study, the more weight they actually lost. Among the people who kept the records and lost weight, the people who kept more detailed records lost more weight faster than even the other people who were losing weight in the study. Really cool stuff on just the power of knowing what’s going on in your situation. Another one I was listening to was about a guy named Kelly Starrett—he’s an author, a teacher, runs really famous gyms. He’s a physical therapist and has written some really good books on human body movement. He was on a podcast telling a story: he works with some elite athletes, some of the top in their sport, on tracking recovering performance. So what they would do is track food, sleep, and heart rate and metabolism during sleep. They were getting really detailed. And what he found was kind of funny—a lot of these athletes were elite athletes in really great shape. They had good lives and all felt like what they were doing in life was fine because their performance was ok. Some of these athletes drank alcohol frequently and didn’t feel like it affected their performance. These weren’t alcoholics, but what they saw that their recovery time was taking days instead of hours because of alcohol consumption, their alcohol consumption went down by 80%. So this group of athletes got rid of 80% of their drinking because they saw the data when they were sleeping and could see clearly that they were not recovering the way they thought they were. Another thing I thought was interesting that’s common among athletes is caffeine consumption. (And elite non-athletes.) But they saw a decrease in caffeine consumption about 44% because they could see that their caffeine was actually affecting the recovery. Same with sleep—these people started sleeping forty-two minutes more on average. The fascinating thing was that these were people who were already performing in the top of human performance in their areas, and just seeing the data—just like the Kaiser study. They weren’t being yelled at by their coaches to do something different, and they weren’t being yelled at to stop drinking caffeine or alcohol or sleep more. They just saw data.

Reese Harper: I really like this. There’s obviously some cool takeaways. My main takeaway is: why do people not decrease their caffeine as much as they did their alcohol? Is it just that caffeine is harder to give up? Is it easier to give up the alcohol? It seems like it would be the opposite. These are the questions that I would ask. Who took this data? I love it. Let’s talk about the shameless takeaways that I love about this study that I feel like are essential. Let’s have you bring some closure to the elite athletes—my peers and I.

Ryan Isaac: Okay, so among some of your elite athlete peers, Reese. When you use data, it takes emotion out of the decision. That has big implications in health and fitness, but in finance it’s really important because instead of making decisions on the way you feel about something—I feel like this investment or business opportunity is going to be good. We can actually just put some numbers to it. You can measure it; you can quantify it; you can compare it to other numbers. And so now we’re not reacting based on how we feel; now we can make decisions on data. Let’s talk about that for a minute and what it means to take emotion out of the equation.

Reese Harper: It’s funny we’re having this podcast today because I had this experience yesterday where somebody came into the office. And we’re kind of in a bull stock market right now, right? People would say we’re in an “up” market. Things are doing really well. And this person is a really conservative investor that is really risk averse. They don’t want to have volatility; they want a portfolio that doesn’t move up and down a lot. And this person came in and they brought in all these reports and documents they had printed off, and they just wanted to have a discussion. The interesting part about this was that the investor was a little frustrated because the stock market is up X percent, but this person had forgotten that they had invested in a portfolio that was not as aggressive as the stock market. It was just more conservative. So this portfolio was only up half as much as the market, because only half of their money was in the market. The half of their money that was in the market over this time period was up about 16%. They were really happy that had happened, but they were also really frustrated because the money that was not in the market which was in bonds had gone down during that same period of time, because bonds move in opposite direction from stocks. And so their average return was just lower than what their friends were telling them, or what they had heard or saw on TV. Coming into the office they had some extra cash– $75,000 or something that had piled up in their personal checking account. He said he wanted to change his portfolio and make it more aggressive because he wanted it to grow more. He remembered a little bit about how it was, but he was just frustrated. And the conclusion was: I gotta get more aggressive. And everyone listening to this is like, “Oh classic, I would never do that.” Well, this person is very intelligent, and this wasn’t a weird meeting where they were crazy.

Ryan Isaac: This is actually how investors behave: we wait until the stock market is at their all-time highs and then we buy stuff.

Reese Harper: Yeah, and if I didn’t have data– I showed a lot of data and benchmarking on why their portfolio moved the way it did; how it would likely move if things got bad and declined; and explained their portfolio really well to them and instead of making their portfolio more aggressive, we just kept it the way it was. The initial decision we had made over the last three years to invest the way we did was the conclusion we came to in the meeting. We did it right in the beginning. We are doing it right now, but this person had reacted emotionally to something. And if I wouldn’t have brought in—well here are other options, you could have had 16% return, but here’s what will happen if we have a portfolio that gets you 16% this year; when it goes down, you could have the possibility of losing 29% or 34% and here’s the frequency of how those returns might show up, and all the sudden someone went from wanting to be more aggressive to saying they will be fine. He was glad to be doing it this way, didn’t want to make a change, and happy with the returns he’s got because they make sense. And this is the fifth or sixth time I’ve had this conversation with this person in the last three years. And they don’t remember that we are having this conversation because it’s just a quick check-in for thirty minutes wanting to ask some questions. But they won’t remember those interactions, and I guess it’s just really hard for people to take emotion out of financial decisions and sometimes they just react to how they feel. I could give a lot of examples—that’s just one around investing.

Ryan Isaac: I think that’s a great example. I’m going to make a little bit of a shameless plug for any good financial advisor out there that has the client’s best interest in mind—yes that would include us. I would say that if you have had a similar situation where you have taken a problem or concern and the advisor acted more like an order-taker instead of maybe providing some additional feedback, maybe even some pushback, but teaching you in a way that would help you stay committed to the goals that you have originally set despite the emotions you’re feeling now. If you don’t have an advisor that’s doing that, you should probably look for someone who will. I hear you tell that story, and I think that was really helpful to his long-term financial well being. But if you just felt his emotion and maybe his or her frustration and just said, “Yeah sure let’s change it. I totally agree let’s make it more aggressive.” And then next year if the market crashes 30% then you didn’t do them a favor. I would say not only does the good data keep a client in check and as unemotional as possible, but good data can do that for the advisor too. The advisor should have the information to be just as rational as well.

Reese Harper: Well I couldn’t have given him that feedback unless I had detailed peak-to-trough returns for very specific portfolios and indexes to say, “If we do that here are the consequences. Here’s the expected return we might get; it might be a higher expected return, but this is the worst one-year period we could see. This is the worst three-year period we could see. Here’s the biggest peak-to-trough you could see.” And the crazy thing is, someone comes in to want to tilt their portfolio to make more aggressive, they did make that deposit, but that deposit went more conservative than it would have gone otherwise. They said, “you know what, I like our current plan and I really feel like you are interpreting my level of risk the right way.” And this person is at a point in their life where they are a little bit older, but more importantly they just don’t have a stomach for volatility, and I know that better than they do. And they have just been in a three-year bull market that makes them feel like they are confident and want to get better returns. And another thing is they were misinterpreting their returns. The client was thinking they were only getting a 3.78% return, but it was actually more like 7%. It was much higher. Actually this happened twice yesterday. And it kind of gave me conviction again of the importance of a good advisor, because what will generally happen is most investors won’t have an appropriate portfolio to begin with. They will lack a lot of exposure to the right investments, and they won’t have a broadly diversified or globally diversified portfolio. And then they will make changes to their portfolio on a regular basis and never really capture returns that are even average or median or appropriate for their situation. I just think it’s really important that your advisor have data and that the client has data not just to make investment decisions, but decisions about taxes, debt, spending, savings, the value of your practice, real estate purchases, equity that you have in your home, and more. These are really very consequential decisions that just like you make emotional decisions around your investments, you’ll make emotional decisions around every financial asset in your life. That’s just the way finances affect people.

Ryan Isaac: I’m glad you said that too, because you were explaining the data you had available to help tell the story of why they might want to stay on with what they had, and you know more than just market data about this person. You just said, you know their personality and their preferences and their habits maybe even better than they do, but you do know what they save every year, and you do know what they are paying in taxes. You know how much equity is sitting in their house. You knew how they were insured; you knew how much profitability is coming out of their business; you know what they income is and how much real estate equity they have or how much is sitting in 401K. You know these things about this person—it’s more than just peak-to-trough market data that told the story or helped you be convicted about why they should keep doing what you planned several years ago.

Reese Harper: Yeah it’s really important to have the full context of someone’s picture. Any other takeaways on this that you thought were good?

Ryan Isaac: No, I think that’s the general lesson. Having the right data can help you take a lot of emotion out of it—for the advisor and the client too. I think that’s a good lesson. Another lesson out of this would be improving performance often involves another person. This goes hand-in-hand with what you were saying. It’s the accountability piece of it. It’s not just having the data; someone needs to hold you accountable to that data too.

Reese Harper: I think it’s crucial. It’s important to have someone in your life who knows your tendencies and can help you think through decisions before you make them. Some people are very rational and very capable financial decision makers. And that’s not an overstatement. There’s a small percentage of people that really are pretty rational, but the vast majority of people make irrational financial decisions. They will pay off a debt that shouldn’t be paid off randomly, or they will borrow money for something they don’t need. They will buy an asset, invest in something that’s inappropriate, or they will spend money on something that is unnecessary for their situation. Their overhead will be a product of some piece of advice they got from somebody, and they will be doing things that are inappropriate within their P&L. There’s just a lot of irrational things people do with their money, especially a dentist where I was making the point earlier—the larger the income gets, the more room there is for problems. It generally affects the wealthiest people the most. When you have scarce resources and you’re limited and you don’t have a lot of resources—making $30,000 a year, you’re not really making any choices. It’s just rent and you don’t get food. You have to eat the things Ryan says don’t eat—purely refined sugars, white flour, and anything that’s really cheap. Just trying to survive. I think the third thing that is really important is, and we talk about this a lot, but that your progress improves if you know what your performance should be. If you know where you should be headed and you’re tracking it. Tracking it makes it improve, and if you know where it should be it improves even more. It’s crazy to see how measuring performance can affect the way people behave in a major way.

Ryan Isaac: I just think about my own experience tracking what I eat, and I paid for people to give me accountability. The first step was just like that Kaiser Permanente study. They just told me to spend two weeks and track everything that you do, and don’t worry about trying to change it. Just track what you’re doing and let’s talk about it. When I had that data it was surprising to me. I was eating more than I thought I was eating—more of certain things than I thought I was and less of other things than I thought I was. So that first part of accountability was: what should this be? And it was based on: what are you goals? How much do you want to weigh? What do you want to be able to do outside or in a gym? What are you long and short term goals with fitness? And so knowing: here’s what it is; here’s what it should be. It wasn’t easy at first. I remember thinking: getting things to where they should be from where they are is not always an easy path, but when you have accountability and you have the data and actually know where things are headed, it does make it a lot easier to make changes. And they’re incremental. For example, I had to cut my fat intake by about half. I had no idea how much fat I was actually consuming—I love eggs, cheese, chocolate. Those are some of my loves in life. I had no idea I was consuming about twice as much fat I should have been for the goals I wanted to achieve. But I couldn’t cut that in half week one or week two. It slowly had to cut back.

Reese Harper: Yeah, because you had a closet full of cheese.

Ryan Isaac: I gotta get rid of the inventory first. I’ve already paid for it.

Reese Harper: A basement full of chocolate. You had chocolate underneath your pillow. I can relate to that.

Ryan Isaac: I want to go back though from something you said about accountability. In our business, we send reports to every client every single month that show them the data. It shows them where they are, where they used to be, what it is compared to their peers, which tells them what it should be. But that accountability piece—everyone gets these reports, but a lot of the value actually happens when we have conversations about these reports.

Reese Harper: Yeah, it’s a combination of the accountability, the conversations, the data, where should it be. So let’s talk about what we can do, Ryan, to make a pragmatic change.

Ryan Isaac: Yeah, I think one of the most basic things that anybody can do, and it’s really annoying. Everyone likes to start it, nobody likes to continue doing it, but use something electronic—a dashboard or app—to track all of your finances so you have an accurate picture on what you’re spending and net worth actually are at all times. Start with spending. That’s probably the more actionable number to be faced with to really actually know for real what is this number? Not what I feel or estimate it is—know what you actually spend every month. And there’s a whole host of apps or websites that will do it for you. It does get a little annoying because you have to link your accounts with a username and a password, and they will go down. The connections will break. Sometimes you will log it and the connection will be down and you think you don’t want to do it. But do it.

Reese Harper: Let’s give people some closure on maybe options to go online for free for that. And I would make a plug for people who don’t even want to use an app, if they are phobics and don’t like people to have their information. You can still track all this in a spreadsheet—just take a column in a spreadsheet and put a date on it, and on the top just put all the stuff that you own and all the stuff that you owe money, and track that once a month. Just write it all down: every bank account balance, every investment account balance, every asset that’s a thing, every house value, and then all your debts. And then every month, just write down what those balances are. At the end of the month just write them down in a column in a spreadsheet. I did that when I was broke and there wasn’t really apps, and I just did that for almost five or six years, and it was fine. Today there are so many financial tracking apps. Mint, BillGuard, You Need a Budget, Good Budget. There’s a ton. Find one you like. We’ve got one that’s a little more robust and a little more advanced and it does a lot more tracking related to specific asset types and debts and amortization schedules on debts. For a dentist that’s pretty important, that’s probably why we exist because it’s hard to track this as a dentist and for most people. But most of these apps are going to track spending really well, and they will be able to connect to your bank accounts well, but that’s not exactly what you need to do. It’s not just the spending that we need; you need to track all of your stuff—what you’re worth and what you owe. And you need to put those in a column in order to see what you’re worth, right? And we think that’s really important because the real point of financial planning is making sure that every month and every quarter of your life you’re increasing what you’re worth. And if you’re working for a whole calendar year, you have to have something to show for at the end. If I work for a full calendar year, and I’m worth exactly the same amount of money as I was at the beginning of the year, that means that I’m not making any progress. If I’m going one quarter at a time and I’m not making any progress, something is wrong. You need to be able to face that and address that and make changes as quickly as possible. For most of you, your net worth is going to be growing. Most of you it won’t be growing fast enough. It’s not moving at the rate it should for your age or for your income level, and so that’s where you need to address that and make sure you can take accountability for the amount of progress you’re having.

Ryan Isaac: Okay so step one: track it. Know what it is. Net worth and spending, those are the two things to start with. Step two: benchmark it somehow. Know what it should be against some kind of standard. Let’s talk places where dentists can go to learn what these numbers should be.

Reese Harper: It’s hard man. You should just call us and ask, and we will tell you for free. We’ll just let you know if you’re off—we can tell you. Some CPAs will have good information. There’s a lot of good CPA firms around the country that work specifically with dentists and they have a lot of this kind of information this anecdotally. Some of them track it in their own practice and have good benchmarking statistics that they can talk to you about. Some practice-management consultants can be a good resource, and some financial advisors who work with dentists will also be able to tell you where your numbers should be. The most difficult stuff to get has been hard for us to compile, that’s taken us a long time is: where should your net worth be at a given age?

Ryan Isaac: It’s the personal side that’s difficult.

Reese Harper: You can get profitability and overhead from a lot of people, and you can understand whether you’re heading in the right direction with your collections and your income, but this net worth picture is really important. In statistics there is something we call standard deviation: you have this average, and then you have how big of a different people are at the high and low around that average. If the average dentist earns between $250-$300,000 (maybe the average GP)—some weigh more, some are double or triple that and some are half that. That’s the mean. You’re not going to see that vary a lot. There’s not a lot of variation from that. Net worth is kind of crazy how that varies. If I’m forty years old, it’s amazing because you could be worth ten million; you could be worth ten thousand. The choices that people make after they make the money are so different.

Ryan Isaac: That’s why it varies so much. What loans did you take? How big is your house? What kind of cars do you drive? How do you vacation?

Reese Harper: Yeah, how do you consume money? What kind of investment returns are you getting? What kind of investments have you set up? What kind of losses have you had—who has stolen from you? That’s really important to know, and if you don’t know that it’s really hard to get to retirement on time because you have to have a net worth at a certain amount before you can quit working. Ultimately, we talk about that in terms of a Total Term or TT ratio, and we have some stuff in the show notes today that will be kind of exciting that I think will help people with this too. I think we have talked about tracking it over time; that’s really important. It’s another big principle.

Ryan Isaac: How often would you say? How often do you want to track your net worth, Reese? Every month?

Reese Harper: Every quarter. At least every quarter. I used to do it all the time because I was trying to learn what I thought made sense while inventing this for myself for the first time. I think every quarter is plenty, and it’s probably a more realistic gage of what’s actually happening. Monthly there’s too much volatility and noise: the bank account balance and practice checking; the amount of movement and investment in your accounts. Every quarter gives you a little bit more stable view of what your trend is going to be.

Ryan Isaac: Let’s just throw out maybe a general number here if people ask how much should my net worth grow every quarter, every year? We would tell someone on average: you will end up comfortable at an average retirement age being somewhere in your sixties—not early but not super late, if you’re adding about a year’s worth of spending in net worth every year. So if every year that goes by you can add whatever you’re spending to your net worth, then at a normal retirement age you should be in a pretty healthy spot if nothing crazy goes on. It’s a pretty general rule, but if you kind of want to know where you should be landing. Now if you want to retire any time sooner than that, it’s got to move faster, especially if you’re starting late.

Reese Harper: Yeah, especially if you are starting late. And what you’ll see is that it will be easier to grow your net worth later in your career than early in your career. Early in your career you’re going to have a ton of debt and high interest service on that debt. It will move at .5 a year. And then later on in your career you will have years where if your investments do well once every 3-5 years you might see your net worth increase at two, three, four times what you spend in a year. The bigger you get, the more that 5% return matters. If we’ve got a million dollars in your retirement portfolio, and it grows 7%, you just made $70,000. But when you have $50,000 or $70,000 at 7% you only made seven grand or $3,500. The faster you can get to a large net worth will determine how early you retire. You gotta start in your thirties so that your forties are really productive years for your investment accounts, and if you haven’t started that early you have got to start in your forties so that your fifties really are productive years for your investment accounts. If you haven’t started in your fifties, you are going to be calling us and be really frustrated; you’re going to have to make some major changes. There’s just not enough time; a ten-year period is really a short window, and you are going to need to make some significant changes in order to prepare for retirement effectively. I would say, anyone can prepare for retirement if you have twenty years. But if you’re starting when you’re fifty, you’re probably going to be preparing for an age seventy retirement. If you’re fifty-five, it’s seventy-five.

Ryan Isaac: Yeah, some adjustments are going to have to be made. You’ll work longer; you’ll be a lot more reliant on social security; the equity sitting in the dream home you never wanted to sell might have to be tapped or sold.

Reese Harper: And I’m just saying this from an investment perspective: you need investments to grow for you in order to retire, and you can’t retire off of purely cash in the bank that just sits there and doesn’t do anything. You have to have investments. The longer and the more you invest, during your late forties, fifties and sixties, you’re going to reap big rewards from that. And it’s not speculative; it’s not scary—it just takes time, and that’s why it’s important to get that net worth tracking going on early and know whether you are on track and making the right decisions.

Ryan Isaac: Okay so last point would be: know what number you’re trying to arrive at. And how do we do that? How do we calculate what someone actually needs to retire on?

Reese Harper: You want to look at that multiple like we were saying of personal spending. If you’re tracking spending, and you’re spending $100,000 a year right now, you are going to need a thirty multiple of that number in order to have a really comfortable retirement. If you’ve only got a twenty multiple of that spending, it’s not going to be enough for you to comfortably retire. You’re going to be spending down your assets relatively quickly. You’re going to want to be closer to that thirty multiple in order to have a comfortable retirement. At some point in your life, you have to address the fact that you’re going to have a lot of real estate equity in your primary residence, and you have got to decide what you want to do with that. If you’re uncomfortable owing money against your home, then you’re going to have to have a thirty multiple outside of your primary residence. If you’re comfortable using your home equity as part of your retirement income—meaning you can refinance the house and cash it out and have mortgage payments during retirement and live on that cash or borrow against the home as you need it. If you’re comfortable using the home as part of your retirement income—we don’t necessarily have a problem with that and some people are going to be forced to do that. I think ideally no one would want to have to do that, it just feels like it’s not the most comfortable situation. But for many people that will be a reality. So you have to kind of keep in mind we’re talking about a thirty multiple of spending as it relates to your net worth, but some people a large portion of their net worth is sitting inside their home, in which case they are going to be forced to use that equity to retire or keep working until they accumulate more.

Ryan Isaac: Yeah and I would say for everyone being tempted to think that spending will be dramatically less than it is today, anecdotally and studies that track people’s pre and post-retirement spending, it’s not that different. Yes, kids will be gone; mortgage payments should be done; loans should be paid off. But rising healthcare costs; more time on your hands to spending money; grandkids; kids; whatever it is. Spending typically doesn’t change that much once you retire.

Reese Harper: Totally. I think that’s great.

Ryan Isaac: Thanks for listening. While you’re on the website though as always, we would love to hear from you. We love the feedback and the questions. You can leave comments in the episode link. On iTunes we would really appreciate if you go rate the show, leave us a review or comment—we would really appreciate that. Thank you very much.

Reese Harper: Carry on.

Tracking Progress