Financial Mentor: Creating A Wealth Plan That Actually Works with Todd Tresidder

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Episode Summary:

Have you ever fantasized about never working again? We probably all do. But even if you never have to work a day in your life again, financial mentor Todd Tresidder said that won’t make you happy because when you can have everything and when you have lots of money, you end up not wanting anything. Todd says work is part of having a purposeful life. Even with large income streams, Todd is constantly developing wealth plans that actually work. Being a financial mentor and creating successful businesses is his passion and he helps entrepreneurs identify common errors and things to avoid in creating their wealth plan.

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Financial Mentor: Creating A Wealth Plan That Actually Works with Todd Tresidder

Our guest is Todd Tresidder, who graduated from the University of California with a BA in Economics and has a passion for creating successful businesses. He’s a serial entrepreneur since childhood like I am, and he went on to build his own wealth as a hedge fund investment manager before retiring at 35. He grew his net worth from less than zero at 23 to the point of financial independence just twelve years later. It’s no surprise I wanted to have him on the podcast and how he’s maintained his wealth is by remaining an active investor and using a risk management system for investing. He’s also the author of several books like How Much Money Do I Need to Retire? We all have that question pending in our head. Todd, welcome to the show.

TSP 172 | Financial Mentor

How Much Money Do I Need to Retire? (60 Minute Financial Solutions Book 5)

Thanks, John. Thanks for having me.

I’m always interested to find out what that story of origin was. Since you talk about being an entrepreneur since childhood, can you take us back to one of your first entrepreneurial ventures as a kid?

I had my first paper route as a kid. Then I realized that if I’ve got a cool motorcycle, even as a little kid I could ride around the neighborhoods and deliver more papers and make more money and have fun. That was that first thing in finding efficiency and doing it faster, better, and cheaper. I made pretty good money in paper. I bought my first car at sixteen and then had a sailboat refinishing business, had a pool supply business, on and on and on. They just weren’t on top of the other, all the way through college and into adulthood.

I was also someone who had a paper route and I don’t know about you. I grew up in the Midwest, so I did deliver the papers in all kinds of weather including the sub-zero snow. What I think that taught me, and I’d like to see you learned some lessons is I did knock on these doors door to door. “Do you want to subscribe to the paper?” I had to sell it. Then I had to be the one to deliver it and then I had to go at the end of the month to collect the money. It was a full stop experience of what it takes to be an entrepreneur. Did you have similar life lessons from being a paperboy?

Absolutely, how do you grow your route? I would get extra papers and I would just start tossing them on people’s doorsteps and then the ballsy little kid would show up and try to collect for it when they never asked for it. I was such a crazy little kid. I didn’t know that that was unethical. People were nice. They go, “I’d never asked for it, but here, I’ll pay for it this month, but you don’t need to continue.” Then some people would continue. They’d like the paper and they go, “That was nice of you to start me, I’ll keep going.” It was funny how you build a business. I think even more so, John, it teaches discipline. Getting up early in the morning before school every day and you have to go deliver those papers. You run the business and you have to run your life in the meantime. I think there’s a beingness in that that transfers over in your professional life that is just powerful.

Let’s double click on the discipline because obviously you made a decision at a young age that you were going to be financially independent by 35. How much discipline did that take and what specific disciplines did it take?

Not that much, actually. I hate to disappoint you on that. Because what happened was I had the insight that if I want to be financially independent, I had become a master investor and so I skipped all the traditional routes. Most people, if they’re interested in finance and investing, they would go and become a broker or a financial adviser. I skipped that whole thing. I went straight to the hedge fund business, which is the rocket science of investing. I started developing quantitative risk management system and statistical risk management systems straight out of college. I was programming my own stuff. I had to build my own databases. I’m 57, so this is back in the 1980’s. It was very early on in computers. IBM came out with his first PC, Apples were still being made in a garage with Wozniak and Jobs. It was very early on. There were no databases for that you could even get a stock date. I had to hand key punch all my data in order to develop the methods. We’re talking early pioneer here.

What I learned was I had the insight that I had to become a master investor. I developed that skill and then we grew the business rapidly because we actually had it right. We knew what we were doing. We grew that business rapidly. My income grew tremendously straight out of college. As a result, I had a large income, but I didn’t spend much because I started college lifestyle days. I lived on a tiny fraction of what I made, socked away the rest. I never had to discipline myself. I could spend pretty much what I wanted and achieve financial independence rather rapidly.

For someone who doesn’t have your skill set about algorithms and math, do you have any suggestions on what they should do if they’re working for someone else or if they’re starting their own company and money’s tight, they don’t say like, “I’m putting all my money into my company. I’m not saving anything,” which is a story I hear a lot from entrepreneurs.

The thing about being an entrepreneur that’s dangerous is there’s a real tendency to put all your money back into your business. You do have to pay yourself and you have to carve money out of the business and get it over to your personal net worth. That way all your assets are not tied up in one location. If something happens to you, happens unfavorable to the business, you still have a nest egg to show for the years that you built that business. You have to start separating out the equity and start transferring stuff over the personal side and keep a separation between it.

It’s almost like paying yourself first.

I try to avoid the clichés. That would be one way of saying it. You can also just set up retirement plans, government-funded retirement plans. The nice thing with those retirement plans is they have a penalty if you break into him and people would say, “That doesn’t sound very nice, Todd.” It actually is because it keeps you from using it. It creates kind of a little bit of a firewall around when you pay a penalty plus you pay tax to get into it. You look and say, “If I pull a buck out, I only get to keep fifty cents of it so what the good is that I may as well leave it in there.”

In your book about how we should plan our retirement, you talk about The 4% Rule. That’s not a cliché. How did you come up with that and what is it?

The 4% Rule was actually created by William Bengen long ago, a couple decades back in research on US data. The 4% Rule basically says that on a 30-year retirement, so it’s a 30-year time span, you can spend 4% of your portfolio fairly safely. It’s pretty safe. The failure rate is extremely tiny on US data. It does fail on international data, however. When we say 4%, what you do is you spend 4% first year and then you adjust it for inflation every year thereafter. The amount adjusts for inflation. The reciprocal of The 4% Rule is the Rule of 25. The Rule of 25 gets a little more intuitive and a little simpler. When it says is you have to have 25 times your annual spending in assets.

Work is part of a purposeful life. Click To Tweet

This is all for conventional passive index asset allocation portfolio. Is it accurate? No, it’s not. It’s not perfect, but it’s close enough that you can use it as an indicator or direction to point for how much you need to save. Another even more intuitive way to understand it is the rule of 300. The Rule of 25 comes from the reciprocal of The 4% Rule. 25, 4% equals 100. The rule of 300 is the same thing, but it breaks it down to a monthly amount. That’s what makes it intuitive. It’s 25 times twelve months, 300. What it is 300 times your monthly spending amount.

For every $1,000 you spend per month that you need to support your lifestyle, it requires $300,000 in a conventional asset allocation portfolio. Then if you want to be more conservative you could make it $400,000. It would be the Rule of 400. That would be a very conservative approximation. 300’s probably workable, 400 for conservative. We can go into how it varies. It varies with market valuation and interest rates, so in as we record this, you’d probably want to be on the conservative side and you’d probably want to push towards the 400 number.

In your book, you talk about your simple three rules that allowed you to retire at 35. Can you share with us what those are?

What that’s doing is this talking about a very different approach. That’s the cashflow-based approach versus the asset-based approach. We’ve got to step back a second and understand the traditional approach to contrast it with what I’m talking about. The traditional approaches that you amassed this pile of assets. You’re supposed to scrimp and save, put away money into your 401(k) and into your savings and you build up this big nest egg and then when you retire you do nothing of substance and live off it.

Obviously for entrepreneurs that’s probably not very likely because entrepreneurs have what I’ll call the modern retirement, which is they’ll have cashflow streams, maybe some real estate. Maybe when they sell the business, they’ll sell it over time and get cashflow from that. There are a lot of different ways entrepreneurs get paid, but again, that’s the traditional model. You build a big pile of assets and then you amortize them down. It’s like a mortgage. Every payment the mortgage makes the balance grows smaller. Same thing in retirement. Every time you pull money out it gets smaller.

The three-rule system I created, basically it’s a cashflow model. Instead of worrying about accumulating these assets and then you have to figure out this amortization equation for the assets were like you have to come up with your life expectancy and you have to estimate the return on investment and you have to estimate inflation. All these things that are impossible for any normal human to estimate over 30-year period you’re supposed to do for normal retirement planning and in fact it’s impossible for the pros to do right, which makes it inaccurate. The cashflow based model is super simple and it’s super accurate. All it says is you have to create cashflow generating assets.

The cashflow produced by him exceeds the amount you spend each month and when you do that, you’re infinitely wealthy. It requires no fancy assumptions, you don’t have to worry about your lifespan. You don’t have to worry about outliving your assets and if you do it right, you don’t even have to worry about inflation. Let’s say you have rental real estate income or you have dividend growth stocks. Historically, income from those assets exceeds or approximates the growth of inflation and so you don’t even have to estimate for inflation, you had to estimate for lifespan, investment return, all that goes out the window. You have a very secure, safe retirement working with the cashflow-based model.

The other thing where it’s helpful is for people who retire early. You opened up and you pointed out that I retired twelve years after getting out of college. I’m almost 57. That was a long time ago and that’s why I created these models is because the traditional model doesn’t work for an earlier retirement. Because you can’t safely amortized assets over periods exceeding 30 years. There are too many variables in the equation. It’s not stable. Whereas the cashflow-based models are stable over very long timeframes. That’s where I developed a lot of these very alternative, very different ideas. They’re more stable, they’re safer. It’s because I had to have them.

A lot of people are always talking about the importance of diversifying their portfolio and obviously you’re talking about if you want to be successful, what I heard you saying was get into assets that generate cashflow, whatever that might be, whether it’s rental income or other investments. How important is diversification when you’re looking at stocks and bonds, or should all that be in real estate or should it only be in things like know and trust? What are your thoughts on that?

First of all, diversification’s valid. The joke on Wall Street, it’s the only free lunch on Wall Street where it lowers risk and increases return theoretically. Diversification done the traditional way is fine, which is diversifying by asset classes. You diversify stocks, bonds, cash, commodities, REITs, that type of thing. I’m losing myself traditional paper assets when I talk about that because that’s where it’s commonly applied. However, diversification done the smart way is where you take it a cut deeper.

You go outside paper assets because the issue with paper assets now as they all correlate. Everybody knows that intuitively when the market tanks recently went through a quick 10% decline, when it does that all the assets declined at the same time. Diversification is this funny thing where it works the 95% of the time you don’t need it and it fails the 5% of the time you actually need it, but it’s worth doing. Again, it’s not hurting you to do it as long as you don’t diversify into lower expectancy assets, in other words, assets that have a lower expected return.

That lowers the expectancy or portfolio which then hurts your average returns over time or your compound returns over time. Diversification done the smart way however, as you go outside traditional asset. You get into real estate, you get into your business, since you’ve got entrepreneurs, that’s another asset class to retirement. It doesn’t correlate at all because the neat thing about real estate, most of the time, the only time this will be an exception is in a credit crunch nationwide, like we had in 2008, 2009.

In general, real estate is very stable and not correlated accepting credit crunches. What you get is you get non-correlated returns with your business and that’s because they’re a micro-economy. The growth of your real estate is generally driven by the local economy, job growth and income growth. The growth of your business is determined by your business model. In fact, you can create a business it’s inversely correlated to the markets.

A great example is an attorney. If he specializes in bankruptcy law, his business is going to grow every time the market’s turned down and every time the economy gets in trouble. What you want to do is you want to contrast what you build in alternative assets with what you have in your traditional portfolio. You get non-diversified returns. The other thing too, you can look at diversification, go cut deeper and diversify by the strategy source of return.

In other words, even within paper assets, you can have the conventional buy and hold strategy, which is a passive approach, but there are active strategies as well in those active strategies to have different sources of return and they don’t correlate. Let me make this more tangible for most people in real estate. You can have active and passive strategies so you could have a buy and hold real estate portfolio, but you could also have a fix and flip portfolio. The fix and flip portfolio probably will outperform in a downturn because you’re going to get better deals.

TSP 172 | Financial Mentor

Financial Mentor: Diversification is this funny thing where it works the 95% of the time you don’t need it and it fails the 5% of the time you actually need it, but it’s worth doing.

You’ve got to diversify by source of return as well as by asset class. That’s how smart investors do it. Then you want to make sure that the sources of return don’t stack up. The other thing about diversifying by source of return is it doesn’t start to correlate. The correlations remained stable even in adverse economic environments. That’s not true by diversifying by asset class. When you diversified by asset class the returns start to stack up and correlate. Diversification only adds value as long as you have non-correlation. That’s why source of return is actually a better way to diversify.

What are some of the mistakes you see people making when planning their retirement?

There are so many, you’ve given me a layup. Because I have a course in the whole course is about how you develop a wealth plan that actually work.

Let’s talk about the course so people can decide. People are desperate or at least hungry or thirsty for this. Don’t be shy in telling us what your course offers.

I’m not trying to pitch, but what prompt me was when you asked about all the errors. I’ve actually got a lesson right before they build their wealth plan, there’s a lesson teaching all of the common errors and things you want to avoid when you go to actually create your wealth plan. You build up to a point in that course where you develop all the knowledge, all the things you need. You actually know more than your financial adviser about how you design a wealth literally. I’ve got multimillionaires in the course and they are like, “If I had this knowledge twenty years earlier, I would have done even better.” It takes you from beginner level, starts with your resources, shows you how to harness your resources, convert them into conventional plan like we were talking about.

Then you convert them into what I call the advanced planning framework, which is the alternative assets, which includes your business in real estate. That’s governed by very different mathematics and limitations. All of these asset classes and all these strategies, they have different characteristics. Then you yourself, as you come to the equation you have specific characteristics as well. You have values, you have goals, you have resources, and they’re unique to you. Skills that you bring to the equation. What you do is you connect your unique situation to unique characteristics of the asset class to create a wealth plan that’s personalized to you.

On your Financial Mentor website, you have this great for phrase tagline, “Invest Smart, Build Wealth, Retire Early and Live Free.” I want to reverse engineer that for people because there are a lot of people that don’t know people that have retired early and don’t know what it’s like to live free. Would you describe to us, Todd, what does it feel like to be financially independent? Where you can in fact live free?

It’s been my life for so long. I don’t even know how to relate it to something that isn’t. How do you describe the color orange, except in contrast to the color red?

Do you see other people hating their job and how to go about it and living for the weekends and you’re living, you’re happy all the time? Anything like that would be interesting.

I don’t even distinguish. The only distinguishing difference between a midweek day and a weekend day is that my kids are in school midweek during school time. That’s the only thing I miss. I work on weekends. I play on weekdays. I mix it all up. It depends on where the opportunity is. I live opportunistically. If there’s something going on that I want to do, I go do it. I’m an avid snow skier. If it’s a powder day I’ll go ski. There’s a certain amount of freedom there. I vacation probably on average about three months a year I found is what I enjoy. If I do a lot more than that, then it becomes a way of life and I did do less than then I’m working too much. Here’s something that will surprise people is that work is part of a meaningful life.

The fantasy, it’s all or nothing.

People think that when you’re working hard and you need the money and you’re trying to build up, a lot of things happen like you start to covet goods when you have plenty of money. You don’t covet goods anymore. When you can have everything, you don’t want anything because you don’t value it. If you started acquiring endless stuff before you know it, you’re filled with clutter in your life and you have no freedom again. It gives you the opposite of the value you’re trying to honor in the first place.

I know you’re breathing it for the last 27 years, but for most people those are some valuable insights whether you retire early or not to keep that perspective in place is helpful.

For business owners, here’s one of the myths people do. They build up their business and the big dream is that big liquidity event day when they sell the business and they get a few million dollars and now they’re finally free. Wrong. What you want to do is you want to design the business so you have a life so enjoyable that you never want to retire from it. That’s the real goal. Not the liquidity event day but get the cashflow of the business and figuring out how to develop the business that you’re unnecessary so you have whatever freedom you desire right now. I’ve coached clients on this and it takes a few months. It’s not that hard. What you do is you start looking at anything that requires your time and you look at as a failure of your business systems. You start finding employees and developing business systems to replace every aspect of what you do that you can.

Then over time you may remove yourself from the business so you have the freedom you desire right now while you still have the cashflow of the business and that’s freedom. Because see what happens when you sell the business, you get a liquidity event, you have a bunch of money. First of all, you pay out a ton of it in taxes. That’s the first thing so you end up with a fraction of what you had before and then now you’re in an amortization equation, which I talked about earlier, and you’re living off those assets. While people think that’s free, you’ll be surprised once you start living off the assets what it does is it creates a scarcity mentality, because you know that every dollar you spend is a dollar. It’s like killing a soldier on the battlefield. Those are your soldiers on the battlefield of wealth and every time you spend, when you kill them, you slaughter them, and I’m being graphic to make it visual.

When you can have everything, you want nothing. Click To Tweet

What does is it creates scarcity and it’s the opposite of freedom, which is the value we’re trying to honor. Cashflow is freedom, assets are nice reserves. They’re great security but they aren’t freedom. It’s the cashflow from the assets that creates the freedom, and so your business is a valuable asset. You’re probably better off not selling it and paying the taxes and keeping the cashflow than you are to pay the taxes or sell it. Pay the taxes converted into income producing assets. They’ll produce far less cashflow than your business would in the first place.

Here’s a question that may not get asked a lot, or maybe you do, which is what are your thoughts on cryptocurrency and how that’s changing the world and is that a good investment?

Almost every interview asked me that, basically it’s a bubble. Back in 2008, 2009, I couldn’t talk to anybody without being asked about how you get rich in real estate and of course that was the absolute top and then the market or 2007, 2006 and then the market rolled over obviously after that. Same thing in 1998, 1999. Everybody wanted to talk to me about internet stocks and technology stocks and of course that was the final top. Here’s the thing, the blockchain is real. The blockchain’s a big deal. The blockchain is going to have impact. The great analogy actually is the Internet bubble in 1998 going up to 2000 top, the internet fulfilled its proclamation, it’s destiny. It has changed our lives. It’s a huge big deal. It was everything that they claimed it would be back in the 1900’s.

However, the stocks that people bought of many of them got slaughtered in the downturn and many vanished. is a great example. All these stocks vanished from the scene and it was nearly impossible to put together a portfolio that would benefit from this big internet revolution, except in hindsight. You could do it in hindsight, but in real time it would’ve been extremely difficult to know who the ultimate winners would be and to whether all the volatility of went with the assets. The same thing’s going to happen with cryptocurrency and you’re already seeing it. Bitcoin went up to $ 20,000 and then it went down to $6,000 to $7,000. That’s a 70% decline. It’s crazy and if you think about it, no sound currency goes through fluctuations like that. If people run around and they think it’s a sound current center placement for a currency, it’s not. It’s pure speculation. That’s all it is.

Any last thoughts on how the average person can achieve financial freedom?

Save more than you spend and invest the difference wisely.

Todd, your Twitter is @FinancialMentor, your website is You’ve got several great books on this topic. Why don’t you list them for us?

The big main seller, the book that most people would be interested in is How Much Money Do I Need to Retire? Then the following book is The 4% Rule and Safe Withdrawal Rates. If people are interested in coaching, the book Don’t Hire a Financial Coach! Until You Read This Book is designed to protect you from all the fraud out there around and financial coaching. Frauds’ probably a strong word, I’ll call it overblown sales hype. There are legitimate financial coaching businesses and there are people who primarily New York Times bestselling authors who hire these companies who have floors of guys sitting in cubicles with headsets on, offering these high-end coaching programs and they don’t know anything. They’re following scripts, and so you’ve got to be careful who you hire and what you’re getting and understand that there are differences in quality.

TSP 172 | Financial Mentor

Financial Mentor: Save more than you spend and invest the difference wisely.

All my books are consumer protection books. They’re all written in as a result of client need. My Variable Annuity book, I only wrote it because I had so many clients being ripped off by variable annuity salesmen that I felt the need to write a book that simplified and dumped them down to where the person had the tools and the knowledge they needed to counteract the salesman’s hype. It’s a brief book. It’s like 30, 40 pages. It goes through and it explains what a variable is, how it works in simple language so that when the salesman is hyping out, you can go, “Yes, but what about this? Yes, but it doesn’t fit my profile because I’m not that.”

It gives you the exact tools you need so you can counteract their hype and not get ripped off. Then the Investment Fraud book was also written because I have a remarkable number of coaching clients who are victims of investment fraud. You can look into the testimonials of how many people I’ve saved from fraud. You’d be surprised if you’re going to build wealth, you’re going to run into investment fraud so I wrote a book to protect you.

I have a book coming out, On Leverage, which the subtitle is How You Make More by Doing Less. It actually explains the distinction but it would be important for your business owners. That book is important. The feedback from the editors as they’re working on it is they’re surprised because they go into it expecting another junk-me to how-to business book thing and they’re going in it. Their response is, “I wish I’d learned this years ago.”

Thanks again, Todd. We appreciate your sharing your wisdom and it is wisdom when you actually lived it yourself and you certainly have done that. Thanks again.

Thank you, John.

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