22 Apr April 22, 2020 – Financial Mentor Todd Tresidder and Always Day One Alex Kantrowitz
Todd Tresidder, Founder of FinancialMentor.com, is a former investment hedge fund manager turned writer and financial educator who offers coaching and eBooks on how to build wealth and invest smarter. Todd pulled off what many of us can only dream about: He retired at 35, and he did it through investing. At the age of 23 his net worth was $0 and 12 years later he was a millionaire. He choose an ordinary but comfortable lifestyle because he prefers to build net worth instead of overhead so that he can enjoy freedom instead of flash. Todd’s goal is to help people lead happier, more productive lives by freeing themselves from the financial tyranny caused by poor decisions and planning. His financial writings have been featured in the Wall Street Journal, Smart Money Magazine, Investor’s Business Daily, Yahoo Finance, Bankrate.com, and more. Todd is also the author of several books including his 5-Book Series Financial Freedom for Smart People Book where he dives deep into the subject to provide his readers with a definitive, one-stop solution.
Alex Kantrowitz – Senior Tech Reporter at BuzzFeed and Author of Always Day One: How the Tech Titans Plan to Stay on Top Forever
Alex Kantrowitz is Senior Technology Reporter at BuzzFeed who reports on social and communications. His work has been referenced by dozens of major publications, from the New Yorker to the Wall Street Journal to Sports Illustrated. He started his career buying digital ads for New York City’s Economic Development Corporation and selling ad-tech software. He has interviewed some of the world’s top CEOs, including Larry Ellison, Mark Zuckerberg, Richard Branson, and Jack Dorsey. Alex is also the author of Always Day One: How the Tech Titans Plan to Stay on Top Forever a must-read for anyone trying to understand how successful companies operate in the age of the tech giants, and explore the secrets behind those giants’ dominance.
Highlights from Todd’s Interview
Well, the reason I wrote the book is there’s a lot of myths out there about how much money it takes to retire, and there’s a lot of different ways of approaching it. People just think it’s about amassing this big pile of capital. You work like a dog and scrimp and save for 40 years, and then you have this big pile of money, and then you don’t do anything of substance for the next 30 years while you wither away and die. That’s just not how most people really describe success or happiness. So the book really goes through a lot of different approaches to how to do this that are more reflective of how modern retirements are created.
One of the strategies that are in there is how you can focus on the really big expenses, which is generally housing. Housing and healthcare are usually the two large ones and taxes. That’s one of the strategies how you focus on the big numbers in order to make ends meet if you will if you’re coming up short on how much money you need to retire. So that’s a really good strategy, which is you find a different location, a different home that you might actually be happier in.
Another strategy is maintaining the cash flow. One of the things that I teach is that this idea that you need this big pile of money and then you just live off it and you amortize it, is not really accurate. What you really need is cash flow. The definition of financial freedom is cash flow exceeding your expenses. So you’re just talking about one strategy, which is, you significantly lower your expenses and then you get yourself within the structure of your social security payment. So I teach another model in there which is the cash flow model. It’s more than just a twist, it actually changes your investment strategies, it changes your analysis, it gets rid of a lot of the arcane assumptions, it’s way more stable. So that’s just another approach to it, is to approach retirement planning from a cash flow model, not an asset growth model.
Another strategy is to get all your properties paid off. I actually call property an inflation adjusting bond you can never outlive, and nobody can ever default on it either. So the nice thing about when you have paid off properties is it gives you pricing power. So you can always reprice your rent in order to make sure you maintain it as full occupancy because you don’t have the mortgage to meet, which is the single largest cost of carrying a piece of property. It gives you pricing power to always stay full, regardless of market conditions. You don’t ever have to worry about losing the asset because you can always rent it. On top of that, if you go into an inflationary period, the rent goes up with inflation so your income rises with inflation. As long as you maintain the property and it’s in a reasonable location and a reasonable quality structure, it’s an inflation adjusting bond you can never outlive and nobody will ever default on it, and you don’t carry any interest rate risks. So it’s a very smart strategy. It’s not a get-rich-quick strategy, it’s a safe maintenance strategy. It’s how you cash flow your existing equity, it’s not a strategy for growing your equity. Typically, if you’re going to use real estate to grow the equity in the first place and build the wealth in the first place, then you will employ financial leverage on it through mortgage because you can control more real estate and there are strategies on that.
One of the things I talk about is what I call ‘taking a knee’ and that’s pulled from football, where you do the safe catch, you take a knee. So if you’re winning the game and there are 30 seconds left, and they kick-off and you’re up by three, the stupidest thing in the world is to try to run that thing back for a touchdown. You want to take a knee because you’ve already won the game. So all you have to do is not fumble the ball, you have to not screw up. It’s the same thing in wealth building and return planning. You reach a certain point where it makes sense to prioritize the defensive side and take a knee. What I was talking about is converting equity into lifetime cash flow that you can never outlive, and that would be part of the strategy.
Another way is to go after short-term Airbnb rental type properties, mostly in vacation markets. It’s a different risk profile and it’s more of a business at that point. At that point, you’re running a vacation rental property business. There are ways to systematize it. You can get the person that does the cleaning to where they’re on autopilot. You can get the booking done semi on autopilot. You can set up your promotional strategies. So if it’s in the right location, it can work. You’d certainly get more per day when it’s rented to vacation rental than you do for long-term rental, but it’s a different market. Right now, we’re in this period where COVID-19 is developing and so a lot of people aren’t traveling. So that’s an example where it’s a different risk profile. Compare that to local rental housing. Let’s say, you had a fourplex of apartments and you wanted your four units paid off. So let’s say you had a fourplex of rental units and they’re locally occupied. Well, those things are still rented, nobody’s leaving anywhere. They’re all buckled down and hunkering down, whereas the vacation rentals are all vacant. As a matter of fact, they’re getting refunded. I’m not going to say either or, I’m just going to say they are different risk profile and they are different business model. If that’s what you want to do, if you want to run a vacation rental business, then it can work for you.
There are other cash flow retirement strategies, but it actually depends on your employer. Sometimes annuities can be quite beneficial, but it’s unique to each employment situation. I worked with several doctors from a specific company, that they had an incredibly lucrative annuity program where you could convert your retirement plan to an annuity at retirement. I ran into it accidentally because I just happened to have two doctors from this company over a span of years and they were never connected. Usually, I wouldn’t analyze the annuity, but each time I analyzed it with these doctors, it came out incredibly lucrative. There’s just something that this company offered was a very lucrative annuity conversion. So don’t overlook that, particularly with record low-interest rates. One of the things you want to be careful of is, when you build a large pool of assets and you have to manage it, then you essentially have to become the pension actuary; you have to become the statistical expert. The problem with that is, and I teach this in the book too, you’re a lifespan of one and you’re a sample size of one. So there’s no statistically valid way to do it. Whereas pension funds, annuities and the IRS, they can all do this stuff with statistics, and it’s valid because they have large sample sizes. For you, you’re one and that means you have to manage things ultra-conservatively to make sure you don’t run out of money. Therefore, you can actually get higher yields sometimes by farming longevity risk out to companies with large sample sizes. It’s surprising, people don’t expect it but it can work and is something worth looking into.
Risk Management is something that people aren’t usually thinking about while creating their retirement plan. A lot of people don’t understand how retirement calculators and retirement estimates are really garbage in, garbage out. I teach what the pluses are and what the minuses are in the book. They’re worth doing, but don’t take them as the science that they appear to be. People will go in and they’ll use Monte Carlo calculators. I got a whole chapter in the book on why Monte Carlo calculators can’t be trusted and what the shortfalls are. Again, you’ve got to understand the limitations of the mathematical models and understand how they apply to your life to do this right. Because you’ve only get one chance to retire and you have to do it intelligently. If you make mistakes and you blow up your finances on it, that’s it. You don’t get a comeback on that one. So it’s worthwhile to learn the basics and learn how to do it properly.
Now, another retirement strategy is around lifestyle. Something people don’t understand is what I call The Rule of 300, which is, for every $1,000 you spend in retirement, it’s $300,000 in assets that are required to support that. That’s the inverse of The 4% rule. It can be $400,000 if you want to be more conservative, it’s kind of a range depending on interest rates and market valuation at the time. But basically, what that means is that for every $1,000 that you can earn or cut in expenses in retirement, you can change the amount you need to save to retire by $300,000 or $400,000. Now, most people find it a lot easier to live happily ever after on $1,000 less than it is to surface $300,000 or $400,000 in assets after tax. So there’s a whole section in the book on all the different lifestyle strategies you can apply to retire in less than actually be happier. What that does is that closes the savings gap dramatically. Another problem is not supporting your adult children, but I haven’t seen too much of that in my work where that’s been a problem. I know it exists; it just hasn’t shown up a lot in my work. But I’m fine with that one because that’s a valid one.
The things that really surprise people are things like, you can travel full-time for far less than you can live in most states in the United States. There’s full-time travel in foreign countries. You can live semi-permanently in various countries, and you can do it for a fraction of what it costs to live in the United States. You can also travel around in an RV and fish and camp and chase the one weather; you can go to South in the winter and go north in the summer when it gets too hot, and just always have the wilderness as your great outdoors. That’s way more affordable than owning a home, cheap by comparison. So these are lifestyle changes you can do where you can actually be happier depending on your personal preferences. If you’re an avid fly fisherman and your wife loves to knit and read books and you guys are a kill in a smaller space, then that can be a great lifestyle, if you love to camp and hike and fish. So it’s really kind of a personal thing and you have to go through the menu of choices and see what fits your values and your lifestyle preferences.
In lifestyle changing strategies, housing is a big one. You can have a tremendous amount in home equity. You can downsize to smaller home, you can move down to someplace like there’s a lot of retirement Meccas down in Mexico, where people repurpose their equity down there and they have groups of retirees that live together in Mexico. You can get the most bang for your buck by focusing on the big numbers, which is really housing and healthcare. Some people live in foreign countries where healthcare is part of it, they’ll move to Canada, Great Britain, Thailand. So they go places where healthcare is either included or way more affordable, as opposed to the insane system in the US.
Financialmentor.com is the hub of everything I do. The book is the second edition book. It was a very popular book, so I came out a second edition. It’s 40% more content, the storyline is way tightened up from feedback I’ve gotten from early reviewers. It’s got illustrations added now and everything else like that. It has done quite well and people are really liking it. That’s the book How Much Money Do I Need to Retire? You get it wherever books are sold, Amazon obviously is one of them. Financialmentor.com has got lots of free resources too. I give away free books on the site, free calculators, free mini courses; all kinds of good stuff.