Did you know that Jeff Bezos’s salary at Amazon has remained the same for the last 20 years? Yet, he’s the richest person in the world. How you may ask? Well, Jonathan Bird, the founder, and CEO of Farnam Financial is here to give us the answer–as well as dispel some common retirement misconceptions. In this episode, Jonathan shares why the conventional wisdom of buying dividend-focused stocks is misguided and why for many people, the retirement dream they’re working hard towards can feel frustrating. The good news is it doesn’t have to be that way.

In fact, there’s a better way to generate reliable income and it’s a system that billionaires like Jeff Bezos at Amazon and Larry Page at Google routinely use. In his book, Income on Demand, Jonathan empowers readers to transform their financial house into a financial castle, where they’re protected and built for longevity. Sit back and enjoy this very interesting episode on how to secure your retirement with Jonathan Bird.

Miles Rote: Hey everyone, my name is Miles Rote and I am excited to be here today with Jonathan Bird, author of Income on Demand: Master Your Retirement Portfolio, Ignore the Market, and Leave the IRS Weeping. That’s such a wonderful title. Jonathan, I’m excited you’re here, welcome to the Author Hour podcast.

Jonathan D. Bird: Thank you. Appreciate that. I hope the subtitle doesn’t get me in any trouble with the IRS.

Miles Rote: Let’s begin by giving our listeners just a little bit of background on who you are.

Jonathan D. Bird: Yeah, absolutely. I’m born and raised here in Phoenix, Arizona and right now, I work as an independent financial advisor here in Phoenix, serving Scottsdale and the greater Phoenix area.

Miles Rote: Why did you become a financial advisor to begin with?

Jonathan D. Bird: Yeah, I’ll tell you a quick story. I graduated from Creighton University in 2010, amidst the whole great recession and I was looking for, really any job I could get, and my dad made the suggestion of, “Hey, you love golf. Why don’t you become a golf caddy?” I ended up getting some work up in Oregon, at a resort called Bandon Dunes, which was phenomenal. It’s like the Pebble Beach of Oregon. But when I was there, I had the most fortuitous break. I got hired by this Wall Street hedge fund billionaire named Julian Robertson to move out to New Zealand and be his personal caddy.

That just totally changed my life because I’m walking fairways with this guy who has turned clients into millionaires and then 10 times millionaires and beyond. What he started doing with all that wealth that he was making for himself is he started giving back and making contributions to the wider world.

His influence, and from other guys like Warren Buffett and Elon Musk, who I was reading about at the time, really inspired me to want to make a contribution in whatever small way I could. So, I became an advisor so that I could try to have that same kind of impact for my own clients and hopefully over time, on the wider world.

A New Zealand Beginning

Miles Rote: Wow, how old were you when that happened?

Jonathan D. Bird: I was 23, this was 2011 when I moved out there. I lived on a resort called Kauri Cliffs up in the North Island of New Zealand and it was stunning. I ended up being there for an entire year just because I wanted to spend extra time traveling, learning about the culture, and exploring. It was the trip of a lifetime.

Miles Rote: That’s amazing. Who should read this book? Who is this book for?

Jonathan D. Bird: First of all, I was the last person in the world who thought I would end up being an author but here we are. The book is for the same folks who I’m serving as clients as part of my firm. Those are people who are in retirement or who are nearing it–call it within five years of it. That’s regardless of age. My goal in working with those clients is to turn their financial house into a financial castle.

You might ask, “What the hell do you mean by that?” What I mean is, a physical castle offers two main things. It offers protection and it offers longevity. Why would those benefits be important for clients? For retirees, they want to make sure their assets are going to last and be protected, and they want to make sure that those assets are going to last for their entire lifetime.

When I work with clients and the way this book is written, it’s meant to offer those two benefits–the real and psychological protection when it comes to the construction of the portfolio and from a psychological perspective, understanding how to have peace of mind when there’s a down market. When you think back to, just March of this year, we had a bear market. We were down 35% at one point and for a lot of folks, it makes them want to pull their hair out, understandably. There’s a big value in understanding how to think and how to act in those scenarios and really giving clients and hopefully readers some comfort in those times.

Miles Rote: I love the framing of taking the house into a castle and I noticed how you didn’t say mansion, because it’s not necessarily about a bigger house but as you said, longevity and security.

Jonathan D. Bird: Right.

Miles Rote: You mentioned why you became a financial advisor and also, who you wrote this book for but why actually did you write the book?

Jonathan D. Bird: Yeah, that’s a good question. The answer is really because I’m a very different kind of advisor and I have a different set of benefits and skills that I’m bringing to clients and to my readers. I’m super upfront in the book about the three main benefits I want people to get out of this book.

The first one is they’re going to get an income strategy that can save them a bunch of money on taxes. The second is they’re going to get an easy to understand investing philosophy that can help them improve their performance. And third, they’re going to learn the four keys for having peace of mind in any kind of market. I wrote the book because I wanted to share those benefits with anyone who wants them.

Miles Rote: Digging a little bit more into the book, you opened up with the fascinating story about Jeff Bezos and how he has essentially earned the same amount of money for his yearly salary every year for the last 20 years and yet, he’s the richest person in the world. Tell us a little bit about that and why that’s the case?

Jonathan D. Bird: Yeah, obviously, Bezos has created one hell of a company but he’s taken an entirely different approach to how he gets income from that business. He’s like every other red-blooded American, he’s got his interests, including building rockets, and owning property all over the country and whatnot.

Rather than take the traditional approach of having the company pay dividends out, he’s decided to retain all the profit the company makes and grow the business as fast as possible when he wants income and boy, is it substantial year after year. He wants over a billion dollars. What he does is he sells shares, month after month. Intuitively, you would think, “Man, if you’re selling shares, you’re going to be losing your principle and reducing your upside.” But what he’s found is that as long as you do it the correct way–and the correct way is, that the percentage of shares that you’re selling is just a lower percentage than the stock price is rising–it’s that simple. That you can get growth of principle and you can get all the income you want, when you want it by selling those shares.

I’m glad you pointed it out, but the specific numbers are, he went from owning about 117 million shares of Amazon to, I think it’s around 57 million. His number of shares has been cut in half but the value of his shares has gone from two billion to way over a hundred billion.

It’s an extreme example but even if you’re not working with billions, you can still use that principle.

Dividend Income Myth

Miles Rote: This is kind of along the same lines as the dividend income myth that you discuss in your books. Let’s jump into that, what does that look like and what does that actually mean?

Jonathan D. Bird: What I found, because when I was working as an advisor with Charles Swab for a number of years, I found that a lot of folks view the dividends that a stock is paying as separate from the stock price. You have the stock price and then you’re thinking, “Okay, whatever the dividend is, that’s going to be different.”

Well it’s not, the stock price and the dividend are actually very closely linked. The reason is because a stock price simply represents two things. One is, how much money the company could pay out today in dividends and then as a second part, what the market thinks it will have the ability to pay in the future.

It’s not what it’s actually going to pay–it’s what does it have the ability to pay? Whenever a dividend actually goes out, it reduces that first component that I talked about–what it has in cash to be able to pay right now. As that cash goes out, whether it’s a dollar or it’s a billion dollars, it’s going to reduce the stock price by the very same amount.

The reason why there is this whole myth that that doesn’t occur, is because for most stocks that pay, say, 2% dividend yield, they’re going to pay it on a quarterly basis. So that means the stock price will only go down by maybe one half of 1% so it’s almost unnoticeable, especially when you factor in all the other institutes of the market. The principle has been around for as long as stocks have been around, and dividends have been paid.

Miles Rote: When you were working at Charles Shwab, didn’t you have an idea for a better way of investing because of this dividend income myth and you actually pitched that to Charles Shwab?

Jonathan D. Bird: Yeah, I still can’t believe it all worked out the way it did but I started noticing that at the Schwab Corporation that all the executives quite regularly were pointing out “Hey, we’ve got some really exciting growth opportunities for expanding our branch network and asset management businesses.” And that made sense to me but at the same time, the company itself continued to increase the dividend payouts. We were actually shelling money out of the company, money that we could reinvest in these exciting opportunities.

I just couldn’t reconcile those two ideas in my head, so I just started asking managers and senior executives, “Why are we doing this?” I couldn’t get a good answer and it was perplexing to me. I kept going over time and this is over a year, I kept going higher up the food chain. I got to a senior executive and then I got to one of the guys who is on the executive council.

I won’t say his name but after a presentation that he gave, I walked up to him afterwards and I said, “Why are we doing this?” He said well, between you and me, it’s because Chuck wants income and I went, holy cow, now I get it. He’s been doing this since the 80s and he just wants income. So, I ended up writing Chuck Schwab a letter saying, “If I put myself in your shoes and I’m thinking about how do I maximize the benefits that the company could get shareholders, employees, everyone in terms of growing the company, but also allowing owners to get income, we should stop increasing the dividend and when shareholders want income, they can trim from shares.”

I send this letter and I get a message back that says, Chuck’s intrigued with your idea and he wants to have a meeting. That kind of blew me away. I flew over to San Francisco, I met with him and Chuck’s a really nice guy. I remember walking to his office, and he shook my hand and he said, “Why don’t you come sit down, you can win me over on your proposal.” I’m like, “Holy cow, this guy’s a billionaire,” but what really surprised me about my meeting with Chuck is that he agreed that financially, we would be better off if we use this strategy of selling shares for income.

But said that he didn’t want to change because of non-financial reasons. To him, it was important that Shwab maintained a broad investor base, which in his eyes would include income seekers. He wanted that because he wanted to be sure that the company couldn’t be taken over by someone and potentially lead to a changing culture, which at Schwab it’s super important because they do have a very good culture.

In the end, I came away from that meeting going, “Man, this principle has been validated every which way from Sunday and billionaires, whether it’s Chuck Swab, Jeff Bezos, Warren Buffett, they all believe it but why aren’t retirees that are more mom and pop investors actually using this?” So, that’s kind of what led me to go off on my own and in some sense, led to writing this book.

Miles Rote: Why aren’t they? I mean, is it a lack of information? They just don’t understand these things because it sounds like most retirees aren’t going to be in the same position as Charles Schwab and they would be able to take advantage of these things? Why has it been that they haven’t?

Jonathan D. Bird: I think it’s a two-part answer. One is it’s more intuitive to go the dividend route and just to try to maximize your dividends, it’s easily understandable. It can work, my book is not an argument against dividends. It can work, it’s just my thesis is there is a better way to go about it. But the second part is that because it’s more understandable financial advisers are more inclined to sell it.

It reminds of that story about the guy that goes into the fish store because he is looking for bait. He is looking at the cabinets and he sees this really glittery lure that looks all funky and he says to the owner, “You know do the fish really go for this lure?” The guy looks up and he says, “Mister, I don’t sell the fish.”

The whole idea is it doesn’t matter if it works the best–some of these advisors are just trying to sell what they can sell.

Miles Rote: What’s attractive.

Jonathan D. Bird: Yeah, exactly.

Miles Rote: So instead of selling or using the thing, the lure or the strategy that would actually be the best, they’re thinking, “Well, if I put this kind of wrapping on it and this bow and explain it in this way, it is easier. And because of the culture already in how people even think about dividends, they’re going to buy this up.” As opposed to a completely other strategy that would be better but maybe would seem less appealing on the surface?

Jonathan D. Bird: I would agree with that and maybe that’s cynical of me, but I’ve just seen it happen. So yeah that is where that viewpoint is coming from.

Passive versus Active Investing

Miles Rote: Yeah, I know I understand that too. Also in your book, you talk about different kinds of investing and I appreciate when authors like you are able to take these complex things, especially in the financial world, and break them down into things that I am able to understand because I am definitely not an expert in this field. You talk about active and passive investing. What’s the difference between those and why are they important?

Jonathan D. Bird: So, it probably is easier to start with passive. You’ve probably heard of indexes like the Dow Jones Industrial Average or the S&P 500, those are just lists of companies. The Dow Jones has 30 companies, the S&P 500 has 500 companies. It is that simple. What passive investing involves is just owning a fund that tracks those companies. It doesn’t do anything fancy, it doesn’t buy or sell depending on what’s high or low. It just owns the broad market.

The benefit of that is that you pay almost nothing in fees. I mean typically 1/50th or like 1/50th of 1% is really small. The returns that the companies earn is the same return that you earn, which kind of makes sense. So that is passive investing.

Active investing is the idea that the returns that the general market gets aren’t enough even though the general market historically is returned about 10% per year over the last 50 years where dividends are invested.

So, with active investing we’re saying, I want to get even more than what the broad market could get me. So, what I am going to do is I am going to buy and sell individual securities, maybe that’s stocks, and try to outperform. What’s notable about that is while there certainly have cases where it’s been done successfully and folks have made a ton of money doing it, the cold reality is for professional money managers that try to do that about nine out of ten fail over the long term–being defined as 15 years.

It’s just really, really difficult to do and when clients sign up for active investing you are going to pay higher fees. Typically, 1% or more. And then, because there is buying and selling, you are going to be paying more in taxes when you are selling it for gains. So, there are a lot of merits at the end of the day, and this is what I talk about in the book, of forgetting the sophistication and complexity of active investing or trying to hit home runs and to go with passive investing.

Miles Rote: Even though it may not feel like the most captivating way of going about it, you’re saying still it can be the more secure and better way. And when you said the nine out of ten essentially over the long-term fail, you’re talking about professional planners who know these things very well, right?

Jonathan D. Bird: Yeah, I am not talking about mom and pop who are investing on the weekends. I am talking about guys and girls whose full-time job is professional money management and they’ve got all of the resources and research at their fingertips to do this and they still come up short.

Miles Rote: Wow, that is mind-blowing to me. So, speaking of helpful tactics and strategies even in your book title, you’ve mentioned leaving the IRS weeping. I think secretly or not so secretly, we all kind of wish to do that a little bit. What are some strategies you suggest for people to save money on their taxes?

Jonathan D. Bird: Yeah, absolutely. There is absolutely an entire chapter dedicated specifically to this called ‘Disinheriting the IRS.’ Probably the easiest one to learn and then apply is called asset location and this is simply the idea that you want to place the assets that are going to generate the most taxes, you want to put those in retirement accounts where you can avoid taxes altogether or at least defer them.

Then for your investments that aren’t going to generate a lot of taxes, which may include an index fund, you can put those into a taxable account. If you’re in bonds that are taxable as ordinary income, which is usually the highest rate, you can tuck those away and shelter those inside of a retirement account. Then for more efficient investments, a UTF, or whatnot, you can put that into a brokerage account, and you end up just automatically lowering your tax bill year after year after year and you don’t have to do anything.

Vanguard actually quantified the benefit of this. They did a study on a huge group of their own investors and found that if you applied this principle, you can save every year about 0.75% of your portfolio value in taxes, which, it’s going to sound smaller, but on a million bucks that’s $7,500 per year. That really adds up.

Four Keys to Peace of Mind

Miles Rote: Yeah, no definitely and there are tips like that all throughout the book. Another one that you talk about is the idea that even when the world may feel a little bit upside down or even the market is upside down, you give advice on how to endure. What does that look like and how can people stay in the ring, so to speak, when markets seem like they’re falling?

Jonathan D. Bird: Yeah, so in the book I talk about four keys to having peace of mind. I won’t talk about all of them right now but one of my favorite ones is the Mr. Market parable. Now, I did not create this idea on my own. This came from a guy called Ben Graham who is known as the father of value investing. He was actually the mentor to Warren Buffett when Buffett was in business school. He wrote a book called The Intelligent Investor and he created this idea of the Mr. Market parable, which is this idea that every day when you pull up market prices, those quotes that you’re getting on Apple and Google and Amazon, those quotes for what you could buy it or sell it for, they’re coming from an individual man and his name is Mr. Market. And so, his job every day is to get up and give stock prices on everything.

The unfortunate thing about Mr. Market is that he’s a manic depressive. So, some days, he’s humped up into optimism. Think back to the tech bubble, anything that had a dot com was worth a billion dollars. And some days, sometimes for no good reason, he’s just downtrodden into pessimism. You could think back to 2008 or even to March of this year. The takeaway from that is when you view the market through that lens, you realize that it is on you to let Mr. Market serve you rather than pressure you into doing something.

So, you want to take advantage of what prices he’s giving. That can be buying when prices are too low. That can be selling when prices are too high. The crucial thing is that you’re not going to fall prey to, “Well prices have gone lower week after week after week and now I am going to sell because I don’t want them to go even lower.” That is Mr. Market taking advantage of you. I talk about in the book how to use that parable to your own advantage.

Miles Rote: It makes it so much more simplistic. I am able to grasp it whereas before if you think about the market it just feels like this overwhelming thing but putting, almost like a comedic lens, where it is just moody and that you can sit through some of the moods and it will pass makes it feel very different.

So, I feel like a lot of financial advisers, in general, could be pretty salesy, but it sounds like based on just how you got into this in the first place and why you got into this in the first place, you take a different approach when you work with clients. What does that look like when you are advising clients?

Jonathan D. Bird: Yeah, well I appreciate that. I would actually describe myself as anti-salesy. I really don’t have any interest in convincing people to work with me who don’t want to. It is just not my gig. So actually, what I have done is I have created this process for folks who want to learn more that’s designed to just do two things. One is, I am going to educate them about an easy way to save money on fees and taxes and that is just kind of my free gift to the world to anyone who wants it. And I’ll even help them apply it if they want it.

Second, it’s just designed to ask them what their goals and concerns are and then show them how I would help in those areas and that’s it. I don’t do sales pitches. It’s just a quick easy process and people have fun doing it and I do it for literally anybody.

Miles Rote: That’s a relief and I feel like more and more this is something that people are attracted to just the authenticity of people and no gimmicks. No salesy kind of BS, but just hey, “If you want to work together, here is what I offer, and here is what I can do for you.” I like that.

Jonathan D. Bird: Yeah, life is too short to do otherwise.

Miles Rote: Exactly. Well, listen, Jonathan, writing a book is no joke. So, congratulations, first of all. But if readers could take away just one or two things from your book, what would it be?

Jonathan D. Bird: Yes, so the first one would probably be the income strategy that is the centerpiece of this–that, dividends are not the end all be all to income generation. You can get income by selling shares and get a whole slew of benefits from doing that whether it’s lower taxes, more control of how you get your income, or how you take it. And then potentially accumulating more money and thereby leaving more to your beneficiaries.

Then the second would be those four keys to having peace of mind. I think it is so important that when we are having this much market volatility to be able to have some calm and comfort when it comes to the market. So, taking that Mr. Market parable and really putting it to work along with those other three keys. I think investors would be way better off.

Miles Rote: Beautiful. Well, Jonathan, thank you so much. This has been such a pleasure. For anyone who is thinking about retiring in the next five years or is retired and you want to learn more about this, I highly recommend this book, Income on Demand: Master Your Retirement Portfolio, Ignore the Market, and Leave the IRS Weeping. You can find it on Amazon and besides checking out the book, Jonathan, where can people find you?

Jonathan D. Bird: Yeah, you can find me on my website, www.farnamfinancial.com and you can also email me, jonathan@farnamfinancial.com.

Miles Rote: Can you spell Farnam Financial for us?

Jonathan D. Bird: Yeah, Farnam is F like Frank, a-r, N like November, A like Apple, M like Mary. Farnam Financial. A quick story, Berkshire Hathaway, the company that Warren Buffett owns and runs is on Farnam Street in Omaha and my company is named after that.

Miles Rote: Thats awesome, how cool.

Jonathan D. Bird: Thanks.