In this podcast we are excited to interview Don St Clair with St Clair Financial as he shares his insights on the power of the paycheck illustration in financial planning.
Don St Clair is a successful financial planner out of Norther California. He has been in the business since 1991. He started off in the 403(b) marketplace and later found his niche with small business owners.
Ed Dressel 0:07
Welcome back to another podcast of Growing RetireReady Clients. I'm excited to have with me today Don St. Clair with St. Clair Financial. Welcome, great to have you.
Don St. Clair 0:19
It's great to be here, Ed.
Ed Dressel 0:20
And so tell the audience a little bit about what you do and where you're situated.
Don St. Clair 0:25
Yes. So I'm one of those advisors that have been doing this since college of all things, I wasn't a career changer. And I'm located in northern California and been doing some version of--I'll call itpracticing financial planning--since 1991. Originally, that was in the 403(b) world. I got started with a 403(b) shop and about 10 years into that I sort of opened up my arms wide to everybody and said, I want to be all things financial all people and that was probably a big mistake. I didn't have much of an appreciation for the niche that I had just left until I found out how difficult it was to work across boundaries. Fortunately, clients really didn't--our prospects didn't buy that story. And I ended up with a niche anyways. It turns out that an awful lot of sort of small business owners--I'll even call it micro business owners--self employed professionals primarily made their way to us, probably because that was what I was from day one out of school. I was a self employed professional. And I just knew that world. But I really enjoyed my time in the 403(b) market. And it really, candidly informs everything that I do today.
Ed Dressel 1:27
So let's talk a little bit about that 403(b) world. You said it informs you. What did you learn in the first 10 years, it sounded like that you were in business, about financial planning?
Don St. Clair 1:37
Well, let's see. When I started, what in 1991, there really wasn't--in the 403(b) world--there really wasn't a concept of rollovers. And it wasn't like we were looking for people with half a million dollars to invest. We were looking to get people to go from saving 2, 3, $400 a month to figure out how to help them save 7, 8, $900 a month. The maximum you could put in a 403(b) account at that time was $9500. 401(k)'s were $7500. It wasn't until years later that they started marching up together. But that was the focus. It was a lot of resource planning. So it was a fair amount of looking at the client's liability, the side of their balance sheet. What could we clean up there? Was there anything we could pay off? Could we use some savings to pay some debt off and free up some funds? Can we use some savings to fund their 403(b) returns after tax dollars into pre tax dollars. So I started seeing the world through those eyes. And what I mean by that is seeing the world through sort of the view of a paycheck. And I just thought that's the way that all financial planners did it until I got out of the world of 403(b) and found out that no financial planners that I ran into, really paid much attention to the whole of the client's paycheck. Mostly, they picked up the story at the net paycheck. And it wasn't that I was a genius or anything, it was just where I was trained. And that seemed odd to me. And so it's not like my self employed professional clients have paychecks, but I think through their finances as if they do. And that's quite helpful when we get them to that transition to retirement where we're really building a paycheck from various sources.
Ed Dressel 3:16
So that's a very different approach to retirement planning: to think of their paycheck. What advantages does it have? Let's talk about two different worlds there. To the pre retirement client, why talk to them about their paycheck stub versus let's move them forward towards retirement?
Don St. Clair 3:32
Well, I mean, to be fair to say not only talk to them about their paycheck stubs, or that we don't just talk to them about their paycheck stubs. But their paycheck stubs, I think that too often we in financial planning at large, we take for granted that their paycheck is sort of fixed. Right, that it's not something that--how do I say it--we spend a lot of time planning around. And I think the biggest advantage is to see the cash flow from beginning to end. And, you know, there's this notion, it's a rule of thumb for sure, but you need to pay 70% of your pre-retirement income, 80% of your pre-retirement income. That's really, it deserves more attention than just some rule of thumb number. But when you really get into it, you find out that--here I am in California. Let's take two teachers making $75,000 a year that's $150,000. Now, you might think at first glance that those two teachers need to replace tomorrow's equivalent, right? Inflation adjusted for replaced $150,000? But they don't even come close to spending $150,000 as STRS takes 10% of their income. So at best we're replacing $135 and if they're saving another--call it like $20,000 between two 403(b) accounts, what are we down to? Now we only have to replace $115,000. And I just don't think that--in fact I can assure you--that there's not financial planning software out there. We're big fans and we use MoneyGuidePro and we have for years. But MoneyGuidePro, there's nothing baked in there that says the more you save, the less you have to save for. And that, quite frankly, is what happens when you start paying attention to paycheck planning. You find if you're able to get people to save more money, they don't have to require as large as a nest egg. So we're attacking the retirement income gap, sort of from two angles. One is the obvious one. The more you save, the bigger your nest egg, and the more you're going to have to draw on in retirement. The second one's not so obvious. The more you save, the less you actually have to save for.
Ed Dressel 5:34
I think there's another aspect of working with a client's paycheck that I think I would like you to pull apart, as you've seen it, I think it's an easy place for somebody to engage retirement with, rather than the abstract world of retirement is very concrete. I understand my paycheck today, my financial planning, you're going to start with something that I get rather than something I don't get and try to move me forward. Have you seen that in working with a client's paycheck?
Don St. Clair 5:58
Yeah, 100%. Because I mean, I can tell you that, again, we are big users of MoneyGuyPro, but nobody lives in their MoneyGuyPro report. It's not like they live in their paycheck either. But they live an awful lot closer to their paycheck, than they do some Monte Carlo analysis out of MoneyGuidePro, but they understand their paycheck. They understand they have some gross pay, that something comes out of that. And at the end of the day, they get a net pay. Oftentimes, they can't even tell you what that number is, but they know they live on that. And so if you can show them, relative to what they're doing right now, what they're going to have--when they pull the plug, when they cut back, when they stop working--that has always been a much better model, I suppose is the way to call it for me. It's the way that I get my mind around it. And yes, I find that clients can get their arms around it as well. I'm glad you brought it up, because it's one of those things I often forget, right? It's just, it's like the water we swim in without even noticing it. And I'm not sure I want to be in the business, if I had to not have the paycheck as a home base, to be able to demonstrate to people, this is where you are. And this is where you're going to be. And can you see you're going to have every bit as much money as you had before after this transition.
Ed Dressel 7:14
So you also use the paycheck stub. And it's something we brought recently to our software, but you use the paycheck stub in retirement too, or a virtual paycheck stub. You're talking to them about take home pay, which is a little different than I see most advisors doing. How did you get into doing that?
Don St. Clair 7:31
I think again, this sort of stems from my years in the 403(b) world where now--this is a while back--but it was certainly a time when rmds started at 70 1/2. And of course, you know, an awful lot of educators want to get out. The sooner they'll tell me the sooner the better. But it's generally long before 70 1/2. And I noticed early on that if I could put people in a position to be in the position where they they could replace 100% of their net paycheck with their CalSTRS, their California State Teachers Retirement System benefits. And I could keep their hands off of their 403(b) savings, their IRA savings, the longer I could keep their hands off of it, the better off they were in retirement. So I always sort of oriented around how do I move people towards that place where when they transition from working to retirement, that their net paycheck looks virtually the same as what their net paycheck looked like before they retired. And again, it puts people in a great position, because their retirement system isn't going to keep pace with inflation, particularly CalSTRS, which has a cost of living adjustment of 2% simple interest. So eventually, inflation is gonna run away from them, they're gonna need to fill in that gap as--how do I say it to clients--but the longer we go, the more you're, the harder your assets are going to have to work. But let's take the pressure off early on. And so seeing the whole--their cash flow from a paycheck perspective is not only the the thing that resonates with clients, but it's the thing that helps me make sense out of their retirement.
Ed Dressel 9:12
Yet the CalSTRS COLA is capped at 2% simple but there's also an 85% loss, while 15% loss, it's going to maintain 85% of its buying power, which we included in our software. It's part of the calculation. So if you're running a pension calculation, that's pretty critical, especially as you are working with clients that you anticipate living longer. Part of our commitment to the pension plan. So working with a client and a paycheck, have you worked with teachers and/or in your world today working with small 401(k) plans. What's the reaction when you pull out a paycheck calculator and you run a paycheck illustration for them today? How are you seeing them respond?
Don St. Clair 9:52
Maybe this is unique to our process. Maybe it's not. I mentioned earlier that my previous employer, we spent a fair amount of time devaluating the liability side of the balance sheet. And I really got kind of hooked on that and learned an awful lot and designed an awful lot of strategies and tactics around debt consolidation, and then 2008 hit. And I found that I couldn't consolidate anything I ever wanted to, and had to come up with new strategies. And we developed these tools around that. But the point is, we spent a fair amount of time planning and restructuring some of the expenses that happen after the take home pay. Those expenses, by and large happen on a monthly basis. And so putting everything into a monthly basis, whether that is because you've got a W2 employee who's paid 26 times a year, or 52 times a year or twice a month, or because you've got a self employed person who takes a draw, sort of whenever they need the money, but does have quarterly taxes, quarterly tax payments that they make. But then they make their mortgage payment on a monthly basis. I mean, this is very difficult to sort of evaluate and keep track of, for anybody. I pay this bill on a monthly basis, I pay my taxes on a quarterly basis, I, I take a draw whenever I need a little bit more money. So finding a baseline. And we find that putting it into a monthly basis is the most logical and coherent and resonates the best with clients. And then stacking it up side by side has been helpful. Now, it's not like I am creating a paycheck. It's not like I'm having necessarily the self employed person pay themselves to paycheck, although S Corp, of course they would. But they'd also still have that debt drawability. But we're bringing their cash flows into a monthly basis, which would include the tax payments of 1/3 of those estimated tax payments. If you've got something better, I'm all ears. But that's the thing that I've found, that most resonates with people is to begin to see their financial planning on a month to month cash flow basis, from beginning to end. And then I can go in and do all the magic that we do as financial planners, and the magic that your product allows for paycheck, so that I can stack it side by side and, and demonstrate to the client that they're going to be okay. Because I don't know about you. But you know, as--whatever I was--25-30 year old when I was demonstrating to people that they could afford to not just save 2, 3, $400 a month in their 403(b) but save 8, 9 $1,000 or more in their in their 403(b) or 401(k) or 403(b)'s combined, I really needed to be able to demonstrate that to them, because that was a big leap for them. Right? That's a little hard. And how am I going to do this, if you just came to somebody and said, what you need to do, Mr. Client, in order to put yourself on track for retirement is go from saving a few $100 a month to saving a couple $1,000 a month, you just lost a client. I mean, there's not one of us that are going to convince somebody of that. We need to be able to demonstrate where they're going to get the money to do their retirement savings. One of my frustrations with--I'll call it a frustration, but it's also what I think is missing from financial planning. We jumped from all these great investment. We've got literally Nobel Prize award ways of allocating investment assets. And then we jumped from there to but if you need to save more, you need to tighten your belt, you need to you know, you need to save more, you need to spend less. And I don't think that--I just don't think you're going to get people to go from where they are to where they need to be by telling them that they need to tighten their belts any more than you're going to get America to diet their way to to health and fitness. You need to be able to demonstrate where they're going to get the money.
Ed Dressel 13:37
What does the conversation look like that you've had with a client recently where you said, you need to save more? How do you--what's the interaction?
Don St. Clair 13:45
Well, I candidly, I hate that idea. Right? If my career came down to telling people they needed to tighten their belt in order to save more for retirement, starve analysis, you don't have to starve in retirement. Ed, I just want to put a gun to my head and say no, no thanks, right? That's not financial planning to me. Financial Planning to me is demonstrating to somebody and then teaching them how to save more, have more and spend half of your life without spending less. And you can't do that without doing some work in the paycheck, you're just not going to get there. I'm not saying that the paychecks the only thing, but it's missing. I just hope we quit telling people that they need to save more and spend less and start teaching people how to save more, do more, have more without spending less.
Ed Dressel 14:33
So after you sit down with a client, work through their paycheck stub, then you move on to the investing side.
Don St. Clair 14:39
In some ways, it's sort of reverse, right? That the way that I think through this is I know going in I'm going to want to maximize pre tax investments to their limits, or to the place where they're no longer paying taxes in a higher bracket. So keep them in a 10-12% bracket. If they've got room in their 403(b) I'm not going to keep having them save in the 403(b). I'm probably going to have them start saving money in a Roth at that point, right? But I kind of have this aim. And it's developed by having a field to begin with, I suppose, right? You meet somebody, you've got an idea whether they're on track or not, you don't need to run a big Monte Carlo analysis to find out whether they're on track. You might very well know within five minutes, these people need to save more money. Okay. So one of the great things in your software is that what do you call it? The Quick Max? So you're plugging in their paycheck, you take another paycheck, and you hit Quick Max, and it just calculates the maximum that they can put in for per pay, period, right? Well, that's going to result in a reduction in their take home pay. Now, I'm not going to present that initially. I'm not going to present Oh, hey, can you live with $400 a month less? Can you live with $600 a month less? I'm going to look somewhere else to see if I can make up that gap before I come to. So that's where I'm going to start looking at the after paycheck, cash flow, starting with the liability side of their balance sheet. You know, in some ways, it's still liability side of the balance sheet to paycheck is talking about the tax side, the tax liabilities, right? That's what's going on in the paycheck. And when we get to the after the paycheck, now we're in the, can we do something about restructuring their debt? An awful lot of times that sort of classic example around here is we'll have somebody walk in with 400, 450, 500, maybe $600,000. In a mortgage. They're paying maybe $2,500, that seems about right--$2,500, a principal and interest on that debt. Then you look beyond the mortgage, and they've got a car loan, maybe two car loans, maybe a little bit of credit card debt, they've got some student loans, or their kids college is costing them this or they've got some daycare expense. And when you tally up the debt behind that it's only $70-80,000. But they're still spending $2,500 a month on all that stuff. But I guarantee that a payment of $5,000, or what did I come up with $470? $500,000? Will pay off that mortgage debt an awful lot faster. And actually a payment of $3,500 will still pay off that mortgage debt an awful lot faster, and still free up $1,500 that can help us make the paycheck work that we need.
Ed Dressel 17:19
Finding the money.
Don St. Clair 17:20
Yes, that is what we're doing to find, to close that paycheck gap. So first step would be to create the paycheck gap. The second step would be, let's figure out how we close that paycheck gap so that you're still living on the same amount of money that you were living on before, but you're saving and investing more money.
Ed Dressel 17:40
We've had a long history of the paycheck calculator being one of our principal tools. We came out of the 403(b) side. If you were running back in the earlier years, we were very committed all the way back to the DOS days. We had a paycheck calculator, and we continue to and it's continues to be one of our primary calculators, both in the 403(b) world, and 401(k). It's interesting to hear you talking about it with general retail clients, which is a little bit different than I normally hear. It's kind of fun. And we've also made some additional features implemented towards the paycheck, integrated with retirement planning calculator. You'll start seeing those where we've got it in our desktop tool. You'll see it on our online tool shortly. So I appreciate your comments. Any other comments in wrapping up today?
Don St. Clair 18:24
I think your tool is a wonderful tool. You were mentioning, you go back to the DOS days. I remember doing this work on a yellow pad and a calculator. At least I had a calculator I suppose right? And was looking up the the withholding tables in the old IRS pamphlets to figure out what withholding would be. So you can imagine when I stumbled upon your tool, I was just like, oh, thank goodness, I mean, somebody did all this work for me and a heck of a lot better for my accuracy. I'm not transposing numbers and adding numbers together poorly. All that's done by RetireReady. So I very much appreciate having the tool available.
Ed Dressel 18:57
And I appreciate your kind words and I appreciate you taking the time today. Thank you for sharing a little bit about what you do a little bit different than most people with a paycheck calculator. But I believe and I've seen it not only your stories, but hundreds of other advisors have a lot of success engaging clients towards retirement success. Thank you, Don, I wish you the best. Appreciate you taking the time.
Don St. Clair 19:18
Thank you for having me.