Steve Medland - The Millionaire Next Door (G1517)

Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care. Welcome to the Exit Coach Radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for their best tips, strategies, and precautions so you can be well planned. And don't miss our one minute exit coach tip of the day on Exit coach. Radio.com. And now here's your host, the exit coach Bill Black. Welcome back, everyone. Thanks so much for listening today. Very excited about our next guest. Have you ever read the book Millionaire Next Door? It is a fantastic read. It's very important for small and mid-size businesses to understand. And even if you market to small and mid-size businesses, very important. Well, Medland is going to talk about that. He's joining us from Tabor Capital Management in Orange, California, and we're going to talk about some of the principles and the issues that the millionaire next door faces. Now Steve is a certified financial planner and again he's co-founder of Tabor Capital Management, an independent fee-only financial planning firm based here in Orange County. So Steve, thanks for joining us. Welcome to the show. Thanks Bill. It's great to be here, Steve. The Millionaire Next Door is one of my favorite books for for our listeners who may not be familiar with it. I'm going to ask you to describe it, but first tell us a little bit about Tabor Capital Management and your background and how you got into this line of work. Sure, I came into financial planning through sort of a roundabout way. I grew up here in Orange County and my parents always taught me good savings habits, but money was tight when it came time to apply for college, so I started looking for scholarships and ended up applying with my congressman for a nomination to the US Merchant Marine Academy in Kings Point, New York, and I received a full scholarship there. I studied engineering there. Oh, thank you. Um, after I got my degree, I served as a naval submarine officer, but I always had an interest in finance, so I decided to go back to school to pursue that interest and got an MBA from the Wharton School at the University of Pennsylvania. When I was there, I wrote my financial advisor and made a proposal to spend the summer working with him. That's when I realized that my interest in personal financial planning was going to become a career. He ended up bringing me on board after graduation, and we worked together at a larger firm for about a year. Then we co-founded Tabor Capital Management in 2004. That's great. So, so you identified as early as your your college years that you had an interest in that, and then you decided, you know, let, let me spend a year trying to figure out if I really loved this and found out that you did, and it's been a passion for you ever since. Exactly. At some point a light bulb sort of went on that. Good financial planning was what allowed me to shift my career from, you know, being an engineer and naval officer to pursuing my interest in finance, and I just thought it was a, uh, uh, a great career to pursue. Oh, that's fantastic. So. The somewhere along the line you must have read the book Millionaire Next Door. Tell us what your impression of it was and kind of what the what our listeners that haven't read it might find interesting about it. It talks about several different principles that the millionaires next door all sort of have in common. First, they would rather be rich than look rich, and the principles that they follow are is first spending less than you earn. They don't lead status lifestyles. They avoid risks in general, but they will take prudent financial risks. And one of the other things they have in common is they don't fund lavish lifestyles for their children. They tend to drive practical cars and live in safe but unassuming neighborhoods, and you probably wouldn't think they were rich if you ran into them at, say, a shopping mall somewhere. Yeah, it was an interesting revelation in that a group wanted to work with millionaires and they thought that they would find them at the top of the hill and instead they found them very much in normal neighborhood situations, just hardworking people that that chose to save and invest and live within their means. And then I think one of the things, the key points of it was that then they sent their children to the best schools to become doctors and lawyers and such, and the children. Opted for the lifestyle a lot of times, right? Exactly, yes, yeah, it's interesting and, and many of our clients fit this description, you know, they, as you said, they do their own grocery shopping, they do their Saturday chores just like the rest of us and in our case our firm normally works with clients who have average investments $500,000 to $2 million and they, they come to us for a comprehensive financial planning. And things like preparing for the transition to retirement and also as, as you said, the saving for goals like sending their kids to the best schools, so things like 529 plans. So they're looking for common sense, probably not too glitzy types of things. And what are some of the most pressing issues that they face when they're looking at planning today? The book was written almost 20 years ago. Next year will be its 20th anniversary. And a million dollars was a lot of money at the time. Today, most people still think a million dollars is a lot of money, but that would only result in about $40,000 per year income for someone facing a 25 year retirement. It's hard to believe, but a postage stamp in 1990 was at 25 cents. They're at 49 cents today, and we expect prices to double again. Over the next 25 years, um, so that's a big concern for our clients, especially since pensions have largely gone away. Those who are retiring today, they need to rely on their own investments and good financial planning more than ever. I mean, you look at, uh, by example, a lot of the people that received pensions 20 and 30 years ago, and it's, you know, it's, it seemed like a lot of money at the time, but it hasn't kept pace with inflation. And we haven't seen that much inflation over the last few years, so a lot of people have stopped thinking about, I mean, we're really victims of of myopic kind of planning, right? I'm not looking into the future. What are some inflation factors that you guys would build into a plan these days for someone who's planning on retiring in 10 or 20 years from now? Absolutely it's, it's a great point. We normally factor in an inflation rate of 3.5%, which at a 3.5% inflation rate, that's what it's been for the last 2020 years or so, or actually in 20 years, 3.5% would cause the cost of living to double. So that's what we've factored in. You mentioned inflation adjusted pensions. Many people don't understand that the only inflation adjusted pensions out there typically are military pensions, US government pensions, but if somebody has a pension from an employer or a corporation, those are almost never adjusted for inflation. What that means is if somebody retires today and they have a $60,000 a year pension. 20 years from now if inflation doesn't double the cost of living, it would effectively cut the value of their pension in half where they'd be effectively receiving $30,000 in today's dollars. And Social Security has always had a little cost of living bump, but is it keeping pace with perceived inflation, do you think? I don't think it is. They, they do something called hedonic adjustments and substitution adjustments, and they'll say that, you know, an iPad is twice as powerful as it was 5 years ago, so the adjustment is. It's the cost is effectively half as much as it was, but for most people who are buying things like fuel for their car or groceries, they're affected more by inflation than the Social Security adjustments would would indicate. OK, so that they tend to overthink the fact that cars are getting more mileage now, that type of thing. Um, and so they'll, they'll build that in and and reduce the cost of living, um, anything they can do to reduce the cost of living to help Social Security. Um, now that's when people, when people are thinking ahead and saying, you know, I, I always heard that a million dollars was a good target for retirement, uh, what, what instead are some good targets that people should shoot for as far as, you know, what, when does my 401k have enough money in it to support me? It's a great question, and it really is very specific to the individual, but as an example, somebody could retire with a million dollars if they have no debt and they keep their cost of living and in, in a reasonable if they have a small pension and Social Security, you can actually live very well that way, but it really depends on what your lifestyle is and what your financial goals are. So one thing that we always recommend is first of all, defining what your financial values are and what your goals are from that you can build the financial plan as far as the actual mechanics of generating income in retirement. A good starting place is what's known as the 4% rule. So I mentioned previously that a million dollars would result in about $40,000 a year of income. That's just 4% of that million dollars. So if somebody retires with $2 million they would have $80,000 a year just from that lump sum. That's a reasonable rule of thumb. So if somebody knew what their retirement income needed to be. Separate from any pensions or Social Security, they could just use the 4% rule and quickly determine sort of what their goal might be. OK, well that that sounds like fairly simple math to back into that, but from the standpoint of the percentage of income they might need to replace what's a good usual amount for that? Is it 70% of income, 80% of their final income? Yes, I, I hear the rule of 80 to 85% of their final income as a replacement income once they retire. In practice, what we've seen with clients, because we work with clients, they generally find us when they're thinking about retirement, you know, looking to sell their business or make the transition. In their late 50s or 60s, but we work with clients in their 70s, 80s, 90s. What we've seen is the first maybe decade of retirement, your spending doesn't go down because there's more travel and there are more things that you want to do that you couldn't do when you were working, so I have heard that rule of thumb, but I'm not sure for most of our clients that that's going to be enough. However, once clients get into their late 70s and 80s, the travel tends to slow down and they don't need as much money to fund their lifestyle. One thing that many of our clients worry about are the expenses that come with long term care in their late 80s or maybe in their 90s, and that's definitely something that you want to plan for. There are, there are ways to plan. For it, but something that people often forget is when you're in that stage, if you are receiving long term care, many of your other expenses may go away. If you're living in a facility where you're getting more medical care, your, you know, mortgage and property tax and things like that are going to go away at that stage typically. That makes a lot of sense. So from what I heard, there's, there's a couple potential stages for retirement to plan for. There's the kind of making up for lost time that a lot of people say, you know, good, great, I'm retired, let's travel, uh, let's let's get on more planes. Let's, let's spend some money traveling and make no mistake, traveling is expensive and then there's this kind of the settling. In after that where you're saying, OK, let's just stay home more, stay around, visit family, and not not the expensive cruises or trips or things like that and then you move to I guess the rocking chair mode where you're not really moving around too much. It may be a rocking chair if you're lucky, it may be a long term care facility if you're unlucky or things happen. And at that point you need to prepare for not so much living expenses, but costs of care or and really plan for that right these days, especially people are living longer. So applying, applying that rule of thumb as a general that you mentioned that if someone's making 100,000. And they need to replace that with 80,000 and they're getting 4%. It seems like something like 2 million might be a good general target, but of course there's sophisticated planning programs now to really come down to specific goals, right? That's right, and we use a very comprehensive financial planning software program. We meet with our clients from from day one we find out what all of their assets are, what their income is, expenses, liabilities. We look at tax issues, state planning issues, and we developed this financial plan for them to help them reach their own financial goals, but it's not something that sits on the shelf. We meet with our clients at least annually and we'll go through their financial plan. We'll show them how some of their assumptions have changed over the year since we last met, how some of the things in the markets have changed. Interest rates go up and down. Stock market valuations go up and down. The key bill is really to make sure that you're reevaluating and monitoring the plan to make sure that you can continue to reach your financial goals. And your firm helps to customize those plans and goals and then has a wide variety of instruments to choose from as an independent firm, is that right? That's right. That's right. As an independent firm we have access to, you know, over 6000 mutual funds. We have access to all the stocks and bonds and other investment products. The key in being an independent firm is we're not compensated by mutual fund companies as a fee only firm we're compensated solely by our clients, so we don't have that conflict of interest to. Um, select one investment over another. We select what's the best interest of our clients. How far in advance should someone be planning for their retirement years? Well, it's never too early in my opinion. When you look at the power of compound interest, it's somebody who starts saving in their 20s is in a significantly better position than somebody who starts saving in their 30s and so on. However, most people, they don't have money in their 20s and 30s. They don't have that disposable income where they can save a whole lot. But it's, it's important to get serious about it when you're at least in your 50s because if you're a good saver and you've built up this nest egg, that's a very different skill than actually managing the money. There's the accumulation phase, which is, you know, building your business, preparing it for sale someday, or building up your 401k. You're accumulating money. You might be really good at accumulating it, but you may not know how to make, say, a nest egg of 1 or $2 million last for 30 years. So it's really important when you're, you know, in your 50s and retirement is, say, you know, 10 or 15 years out to really start to work with a financial planner who has your best interests in mind who can help you define what your goals are, what your values are around money, and help you develop that plan. Yeah, Steve, you said something very important there, and that is that you have to think over the long haul. The mistakes you make in the early years could come back and haunt you in the later years. And these days with all the advances in medical technology, diagnosis, early catching up of what, you know, have been diseases that might have killed us in the past, wiping out those things creates a scenario where it's very likely you could live a good long time, so you need to minimize your mistakes on the front end so they don't come back and haunt you down the road. Uh, fascinating information. How do our listeners get in touch with you best? The best way to reach me is through my website, which is www.tabr.net as in Tango Alpha Bravo Romeo.net. Those who are interested can call me or email me through the website for a free consultation regarding their financial planning or investment management questions. Fantastic. And is there uh if someone were to contact you and they're a business owner do you specialize in working with any particular types or sizes of businesses? We generally work with small business owners and we do have some who are more medium sized businesses but for the most part it's small business owners. So you understand that and that's important for our listeners because many of them are business owners and they may say I don't really have too much wealth to work with but I'm gonna plan to sell my business and that's what that's where my wealth's gonna come from so it's important to align and prepare for that well in advance as well. Correct? Absolutely, absolutely true. Great, Steve. Any other tips or ideas or precautions for our listeners? I've mentioned that I've had an interest in this since I was, I was a young man. My dad taught me at a young age that in order to become financially independent, you need two things. The first is a plan, and the second is the discipline to follow it. As far as developing the plan, I sort of touched on that. It's important to define your financial values and goals, and you can develop a plan from that which specifically says where you're going to save, how you're going to invest, things like that. But once you have the plan in place, you need the discipline to follow it. And a great way to do that is to automate your savings for retirement and your other goals. So one example is um you could open up a 401k with your employer. And or if you're a small business owner, you can start your plan whether that's a 401k for yourself and your employees or some type of profit sharing plan, but make sure that you set up those automatic monthly contributions. And the same is true with, say, your goal was to fund your kids or your grandkid's college. I would recommend opening up a 529 plan and set up that automatic monthly transfer from your bank account that way you don't even have to think about it. That's a great tip, great tip, and you, uh, listeners, the smaller your business, the more important that retirement plan's gonna be for you someday because you may not be able to sell it. You may not be able to transfer it over over ownership. You may have to close it at some point and that retirement plan is going to be what really saves you down the road, so very important to get in touch with people early. Uh, Steve, thanks so much for joining us today. It's been a real pleasure to have you on and I hope we can uh talk again in the future about some more specific ways for the Millionaires Next doors out there, uh, among our listeners to learn how to really plan properly and save for the future. It's been a real pleasure. Thank you, Bill. I really enjoyed it. All right, we're gonna take a short break. We'll be right back after this, so please stay with us. Just thinking about what will happen to your business if you're gone keep you awake at night? Will you get the price you need from your business to carry you through retirement? The BEI Network of Exit Planning Professions is the world's leading advisor network with the power to help business owners transition out of business on their own timeline and terms. Ask your most trusted advisor to create a BEI plan for you, or visit us at exitplanning.com. That's exitplanning.com. You're listening to Exit Coachradio.com, the information station for age 50 plus business owners, where we're interviewing top advisors for their best tips, ideas, and precautions so you can be well planned. We upload new one minute tips every day. Exitcoachradio.com. Come listen for a minute. Thank you for listening to Exit Coach Radio. Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care.