Are you wondering about your own case study 10 years from retirement? Even if you’re 20 years away, is your plan workin’ out the way you projected? Here’s an alternative for you to check out.
Transcript: Hi this is Jeff Brown the “BawldGuy”. Today, we’re going to talk about somebody who is may be ten years from retirement and they’re wondering what to do. They’ve looked at their 401k. It’s got about $300,000 and maybe a little bit more into it from a previous employer, and they realized that that’s just not going to get the job done. They long ago realized that the path down which they were going, as my English teacher would say, was leading to a dead end, what to do. Well, let’s first look at what his status quo would yield. If he’s got ten years to go and it took him twenty, twenty-five years to get $300,000, let’s be really grandiose and say that in the next ten years he would turn that $300,000 into $400,000. Now, the 4% that Wall Street tells you you’ll get in retirement keeping your risk down which is wise and prudent, that 4% is a whole $16,000 a year in retirement. Now I don’t know about you, but when you start thinking of retirement with $16,000 a year and that is going to be taxed, it’s not thrilling and doesn’t make you look kindly on all those years of sacrifice and discipline doesn’t. So here’s what I’m suggesting. It’s a rollover from a previous employer. So as the law allows them to get that 401k, which is exactly what I’m going to tell him to do. I’m going to further assume that the taxes, state and federal, and penalty is going to cut that $400,000 away. He doesn’t have it yet, three hundred thousand today in half to 150 grand. Now, we have choice. What are we going to do with that $150,000? There are a couple of ways to go. One is he can take all that $150,000 and have moved it into a tax-free type of Roth setup on a solo. He would then go out and buy discounted notes. They’d end up beginning at about $230,000 face value. They’d give him somewhere around $2,000 a month and then come to the 401k that would be Roth. He would be able to take it all in about five or six years if he wanted to when he got fifty-nine and a half. He’s about fifty-five now. He could do all that and that’s something he should consider. The problem is that when he did that, he would then begin taking that income in retirement which wouldn’t be bad. It’s a couple thousand dollars and if we assume we’d make a couple thousand in social security. Another six, seven years later, that would be okay but that doesn’t sound good enough to me. Does it for you? No, no. I didn’t think so. So let’s look at the big picture. He’s got ten years to go. Let’s put half of it in a Texas duplex. It’s going to cash flow him around $280 a month which is low, but we’re going to use the Murphy rule of 50% overall expenses in vacancy factor. So he’s going to take that 280 bucks and he’s going to set it aside for a loan payoff in addition to his normal payment which the ranch is paying for, anyway. He’s going to then take that extra seventy-five grand and he’s not going to buy a second duplex. No. He’s going to buy a note and that note is going to be hundred and something, the low hundreds. It’s going to yield about a thousand dollars a month. He’s going to pay taxes on it. He’s going to end up with may be seven hundred or so. He’s going to take that seven hundred added to the $280 from cash flow, which is completely sheltered, by the way. Then he’s going to take 250 bucks a month which he easily can and very comfortably so from his family budget. He’s going to add all that together. He’s going to put it every month to the payment on his loan on a duplex. I’ve done the numbers. That’s going to pay that duplex off in about nine years and two or three months. That means he’ll have a free and clear duplex that’s going to be given him may be 18, $20,000 a year. It doesn’t really sound that much to me, but meanwhile back at the ranch his notes have been paying off. They’ve paid off a couple times in ten years. I say a couple of times because they’ve been paying off on an average of two to five years. I took the longest of five and did it twice. That means that in ten years, he will have been collecting a thousand dollars a month and then down the road a little bit more than that, which I didn’t count, by the way, and how long it took the pay off his duplex. I was very conservative with that. In the end, it’s ten years down the road. He’s got a free and clear duplex which has been stoking up $18,000 for the first year before he retired, so he’s got that in the bank. He had $50,000 in cash when we started ten years ago, but I told him to keep that as a cash reserve. Very old school that way. Murphy is alive. He knows where all of us live. Let’s don’t be unwise. So now, it’s ten years. He wants to retire. He has a free and clear duplex. It’s 18 or 20 grand a year to him. Maybe 40, 50% of it is tax sheltered. He now has 2 or 3000 a year, maybe 4000. We’ll call it 3000 a year from his notes. Now, his notes are time to pay off in the tenth year. He buys more. He probably does now have about 50,000 a year before taxes in note payments. Let’s say he nets out about 36. We don’t know what it’s going to be net, but that’s probably right. That’s 3000 a month after tax. He’s doing around 18 or 20. We’ll call it 18 from the duplex. That gives us 18 and 36 or 54,000 a year. He’s going to get social security. Thank you Lord, and that means that the bottom line is he’s may be built himself around 5, 6, $7000 a month, much of it after tax money for retirement. Now, is that a whole bunch you’ve seen me talk about people that are getting hundreds of thousands a year? Look at it. He started with a plan that was failing him. He only had ten years to go. So unless he wanted to keep working until he was seventy-five, we took what the market gave us. We were realistic. Could he end up with a hundred thousand? Sure but don’t count on that. That’s a flash in the pan. It can happen, but it’s just probably not in the cards. Bottom line is do what you can do. That’s the lesson to take from this today. Do what you can do. Improve what’s going to be the status quo. In this case, he probably tripled to quintupled what would have ended up with. Try it yourself. Be realistic. That’s the lesson. This is Jeff Brown. Thanks for joining me. I’ll catch you next time out.