So, what are these extensive benefits and why should one consider a self-directed ROTH 401K?

1)  The obvious is that by having a checkbook-controlled ROTH 401K, you will have the freedom and flexibility to invest in any asset class permitted under IRS regulations.  As long as you do not invest into a Disqualified Asset (Item #1), the IRS does not preclude you from investing in assets other than stocks, bonds and mutual funds.

2)  In your newly-established, self-directed ROTH 401K, you can make much larger contributions to the 401K that you can with any IRA.  Compared to your standard IRA plans (Traditional or ROTH IRAs), you can make elective employee deferral contributions of up to $17,000 (under the age of 50) or $22,500 (over the age of 50) on your first 100% of self-employment income.  Yes, in general terms, if you were under the age of 50 and wanted to contribute all $17,000 of your self-employment earnings into your 401K, you could do this.

Further, through profit-share arrangements, profit-share contributions (based on your percentage of profit/income) can take the total amount contributed to the self-directed ROTH 401K up to $50,000 (under the age of 50) or $55,500 (over the age of 50).  Oh, did we forget to say that your standard IRAs will allow you to contribute up to $5,000 (under the age of 50) or $6,000 (over the age of 50)!

3)  ROTH 401K contributions are NOT subject to the Modified Gross Income limitations imposed by the IRS.  Where you may not be able to fully contribute to an IRA based upon the MGI limitations, a 401K has no such limitations.  The contribution limits are placed based on earned income….so, where the MGI prohibits some from making full IRA contributions, that is not the case with a self-directed ROTH 401K.

4)  The ability to make BOTH Traditional (pre-tax) and ROTH contributions into one plan.  Now, the contributions have to be segregated into separate accounts (ROTH and Traditional) within the 401K, but his is a relatively easy process.  Plus, you would always want the funds segregated….even if not required…to protect the value and account of your ROTH funds.  The point, however, is that you can have both Traditional and ROTH funds in the 401K and use both funds for investment purposes.  You cannot do this with your father’s IRA.

Are there additional benefits associated with the ROTH 401K vs. an IRA….absolutely.  However, these four benefits sufficiently define why one might want to consider establishing a self-directed ROTH 401K account.  Remember, it’s not IF it is better, but rather do you qualify.

In blog post titled:  “Can an IRA be Co-Jointly Owned (Remember the “I”)? (May 3, 2012), we spoke of Jim and Susie’s question about whether they could co-jointly own each other’s IRA accounts.  We spoke of both of their IRAs having values of $60,000 (Jim) and $40,000, respectively.  Jim and Susie inquired about establishing self-directed IRAs so they would have checkbook control of their retirement assets.  They learned about how both of their IRAs could fund (or purchase the assets of) one LLC that could hold their IRA assets.  Ownership of each IRA into the LLC would be directly proportional to the amount of funding into the LLC from each IRA.

Okay, that was THAT conversation….Jim and Susie were all set…or were they?! (the mystery deepens!!)

Jim mentioned in the conversation that he was self-employed while his wife was a W-2 employee.  With Jim’s  business, he had no employees other than himself.  And, to answer your next question…Susie was not employed by or with Jim’s business.

The debate

What occurred next was a spirited conversation on the merits of Jim establishing for his business a self-directed 401K plan.  It wasn’t a matter of qualifying for the plan….Jim did qualify.  But, why should he consider the 401K vs. the IRA?  Further, Jim’s primary interest was the ability to use both he and his wife’s funds from one IRA LLC account, where each IRA had proportional ownership interests.  Wasn’t talking about a 401K messing this whole thing up?  Needless to say, he was perplexed.

Jim’s eyes grew large (metaphorically speaking…I couldn’t tell as I was on a call with him), when he was informed that by having a 401K, he could see the following benefits:

1)  Both Jim and Susie being able to “rollover” their Traditional IRAs into one 401K plan of which they would both serve as co-trustees.

2)  To further benefit Jim and Susie, while they would have all $100,000 ($60,000 for Jim/$40,000 for Susie) in the 401K plan and available for investing purposes, both Jim and Susie’s respective funds would be segregated into 401K sub-accounts in each of their respective names.

3)  While they could also have an LLC established for their 401K, they had “checkbook control” of their 401K plan without the LLC….and, immediate access to their funds for investment purposes.  Also, since they ended up electing NOT to have an LLC, they would save the LLC set-up expense (where they would need the LLC for the IRA, in comparison), which in their case totaled $750.00.

4)  Finally, since they were not establishing IRAs (two total; one IRA for Jim and one IRA for Susie), they would save almost $250.00 per year in IRA custodian fees.  Jim was even amazed how PGI could possibly establish the 401K with no annual fees. Remember, the 401K does not require a custodian when there are appointed Trustees that the plan documents permit.

5)  As both Jim and Susie were co-trustees of the plan (by virtue of being married), Susie was permitted to rollover her funds into the 401K plan even though Susie was not an employee of Jim’s.

6)  Finally, in the case of death of either Trustee, the other Trustee can carry on the plan even after death.

Guess what?………Jim and Susie established the 401K!

Why? Remember, the “I” in IRA stands for Individual, and not anyone else. While you can certainly make other individuals the beneficiary of your IRA, it is still YOUR IRA.

So, with regard to a self-directed IRA, a typical question will be, “Is there any way my IRA and my wife’s IRA can be brought together for greater purchasing power for an investment in real estate (for example)?”

Yes, of course.

Both individual self-directed IRA accounts could purchase in proportional shares the assets of a jointly-owned and managed LLC. Ownership would be in direct proportion to the value of each person’s IRA. As an example, if Jim’s IRA was $60,000 and Susie’s (his wife) was 40,000, Jim’s IRA would have a 60% proportional share ownership of the joinly-owned and managed LLC, and Susie’s IRA would have a 40% proportional share of the LLC.

In the second half of this series, we will review how, if Jim or Susie were self-employed, they may want to rollover their IRAs into a self-administered 401K of which they are both co-trustees.

Why don’t people talk about real estate as a viable means for retirement?

It’s been part of my basic understanding of what I do. What with all the empirical evidence showing real estate is far safer, more reliable, and generates more wealth than the many alternatives, the vast majority choose everything other than real estate. Why is that?

I’ve had over 40 years to come up with a credible answer. People have figured out how to save money. Pay off their homes. Invest in stocks. Yet, they don’t go for the real estate. I don’t know how the ‘Invest for retirement’ pie is divided, but the percentage has to be single digit for real estate.

It doesn’t make objective sense. Americans flock to so-called qualified retirement plans at work that have been huge failures. The typical 50-something American (mostly male) has less than six figures in their account. Think they’re longing to retire? Or, are they hittin’ the panic button, their heads on a swivel as they frantically cast around for a viable solution to workin’ ’til they drop?

Based on my professional experience, most simply don’t think they can make it happen. They prefer the ‘experts’ provided by their employers, who guide them in choosing in what to invest for retirement, inside their 401k. By the time the results of that approach become painfully evident, it’s like runnin’ outa gas on the freeway in fly-over country. You thought you shoulda filled up at the last town, but decided it was easier to keep goin’.

How’s ‘easy’ been workin’ out for ya lately?

Real estate is simple on paper, just like every other route to a solid retirement. But, like most things in life, simple is the last thing it is once execution is the word of the day. The long and short of it is this:

Getting to a magnificently abundant retirement through real estate investing is anything but simple. Sometimes it’s a gigantic pain in the butt, and I’m being kind. However, if retiring well was easy it’d be like Grandma said — “If it was easy, everyone’d be doin’ it.

You’ve been goin’ down the Yellow Brick Road for how long now? There’ve been roadblocks, some scary, on the way to Retirement Oz. Yet it never dawned on ya what was waiting for you behind that final curtain.

Thing is, you ain’t Dorothy, and you’re not dreamin’. Retirement Oz doesn’t exist — and there’s no ruby shoes that’ll take you back home.

Ruby shoes AND callin’ me at 619 889-7100 will get things started on the road to a real retirement. Rather write me? Click on the Contact BawldGuy button up top. Have a good one.

Regardless of what type of plan he is establishing and the reasons for his initial call, he stated that a very well-known IRA administrator was “heavily emphasizing” to their clients the “new” opportunity to have “checkbook control” of their IRA retirement assets.  What was interesting was that they heavily emphasized that this was “new” and that the company was on “top of the competitive curve” in establishing such plans for their clients.

Well, it is good to see that this company is doing what is possibly right by its clients, but what they failed to mention is that there has not been any prohibition on individuals controlling their IRAs and 401Ks since both plans were created by Congress.  In fact, this company has been in existence for some time extolling self-directed IRAs where they served as the custodian and did not allow their clients to have checkbook control of their IRA assets.

Considering this company kept 90% of the interest (yes, you read that right and it is not a typo) on their clients’ IRA funds that were NOT actively involved in an investment (in addition to many asset-based and transactional fees), you may wonder the reasons why this company did “right” by its new clients?    Before you give them too many kudos for their change in company policy related to their IRA plans, you probably want to consider that the reason probably lies more in the fact that the company was losing clients to other companies that establish checkbook-control for their clients’ IRA accounts.

Regardless of the reasons, it is good to see that they have taken a different course of action.  One question that one should possibly ask is why it took years and years to offer this account set-up for their clients.  The PollyAnnish way of looking at things is that possibly this corporate change of course should have taken place years earlier? 

Bottom line:  When you are establishing a self-directed plan, do your homework and choose to work with a company that has your best interests at heart.  It certainly doesn’t mean that you shouldn’t work with a company like the one referenced in this post, but do what is always suggested….a true “apples to apples” comparison of each company’s offerings so that you can make an informed and educated opinion on what is in YOUR best interests.

Then 2008 came and not only did it seem that many of these professionals became aware of such plans, it almost seemed that “self-directed” anything became the new buzz words.  Heck, it even seemed as if everyone wanted to set up such plans (evidenced by the fact that I have had more than a handful of people ask PGI if we could train them to enter the field).

So, I never thought I would be doing a post on this topic…hey, it’s been so long, I almost feel like I am going retro .  But, I was speaking to a new client this week and he actually told me that he reviewed a self-directed 401K with his broker first and was told that such a plan was “absolutely illegal.”  Feeling discouraged, he felt as if his broker may have selfish interests, so he reviewed it with his CPA.  Guess what?  Well, his CPA never said it was illegal, but said he had “never heard of it before.”

Before placing me on a three-way conference call with his CPA, the client (well, now he is a client) asked, “I’ve gone to  both my broker and my CPA and they both, basically, told me I couldn’t do this….why?”  Well, some of these individuals truly are ignorant of the IRS code and have never dealt with it.   As they say, sometimes it is just easier to take the path of least resistance.  However, especially as it relates to brokers, it MAY not be in their self-interest to encourage their clients to take money away from their management.  I mean, how do they make their commissions?!

So, the client, I think, undersood this concept, but still asked, “Well, once my broker DOES learn that this is legal, surely, he would give me the green light to move forward, right?”  Well, in theory, yes; however, mutual fund companies, insurance companies and security brokers don’t earn commisions when you buy non-traditional assets (e.g., real estate). It is kind of like the hamster wheel….the brokers keep telling us to get on the investment wheel and keep running strong.

This didn’t deter the next question….“Well, what about my local bank?  They should have an interest in setting up self-directed plans, right?  Or at least know about them?”  Well, I don’t think it is really any secret that banks make their money by using their clients’ deposits and loaning that money out to your neighbor…or maybe even you!  What a great deal, huh…well, maybe for the bank!  Think of it this way….if they are borrowing money from you and paying you 1%, that should mean that if they are really fair that they would loan the money out on that car loan for 1%, right?!  Or, anyone out there paying 1% interest on their credit cards?!  I didn’t think so.

We all have to “bring home the bacon”, but suffice to say that banks, brokers and insurance companies just don’t feel that, compared to their financial products, they can “earn” enough by offering self-directed plans.  As a result, they are not interested in providing this service.  And, for those of you who have worked with banks, trusts, etc. that are involved in non-traditional asset management, you KNOW their fees are very steep.

Will banks, brokers, etc. eventually get into the service of offering self-directed IRA and 401K plan?  The answer to that may very well depend on whether we have another 2008.  But, I will also make this proclomation…for anyone who has an interest in investing in both traditional and non-traditional assets, isn’t it nice to know that they can do BOTH from ONE account?!

1)  Some people, including myself, still believe that you can’t learn everything that you want to learn by just watching YouTube (sorry, YouTube).  Heck, even if you could, I think YouTube has the ‘ole “we are not responsible for content” disclaimer well established.

2)  If you are establishing a self-directed plan and utilizing a company like PGI (or any other company) to establish your self-directed IRA or 401K, NO company in the market place assumes responsibility for your self-directed decisions and investments.  And, yes, even for those custodians who “hold” your funds and assets…they clearly state in tiny, tiny print on their application, that they are not responsible for any investment you make, or your compliance with IRS regulations.

IRS Publications

So, that being established, what are some IRS publications you may want to review prior to and in conjunction with establishing your self-directed plan?  The following list represents some publications you might want to crack open (online) and peruse.  This is not to say that this is an in toto list, rather, just an initial list to get well educated.

IRS Publication 560 (Small Business Retirement Plans) — Especially if you are a sole proprietor or owner of a small business, you should review this publication as it will educate you on both the types of retirement plans available to small businesses and the regulations governing such plans.  Remember, the IRS doesn’t differentiate whether a plan is self-administered or not.  They just merely tell you what the rules are for a particular plan.

IRS Publication 590 (Individual Retirement Accounts) — Otherwise, known as IRAs.  Learn everything you may want to possibly know (or care to) about IRA accounts.

IRS Publication 575  (Pension and Annuity Income) — Okay, I will admit it, pretty dry stuff .  But then again, are pensions and annuities by their very nature, exciting?!

IRS Publication 529 (Miscellaneous Deductions) — I am kind of ignorant on this category as no one taught me the difference between what is miscellaneous vs. necessary.  That was my attempt at bad humor…read to your delight.

IRS Publication 550 (Investment Income and Expenses) — Again, being an investor, you may want to read up on what is and isn’t investment income and associated expenses with investments and investment income.  Believe it or not, there are many people who call me who automatically believe that “rental” income on a rental property is, and of itself, self-employment earnings.  If you are one of these folks, another good reason to read Pub. 550.

IRS Publication 598 (Tax on Unrelated Business Income of Exempt Organizations) – Investing into a business and think you can earn profits and not pay municipal, state or federal taxes on that profit?  You may wish to re-consider that notion and you may want to read this publication.  In short, income earned off an active business will “trigger” UBIT.  I always use this example when visiting with folks…..do you really think your State government and Uncle Sam would let you operate (there is a difference between operating a business and investing retirement funds) will let you run a business (think of that tire shop) and not pay taxes JUST because you claim that the business is just an investment from your retirement plan?  If you do, there are some folks out there who might want to visit with you about some ocean-front property in Arizona.

IRS Publication 3125 (Information on IRS-Approved Investments) — This piece is not earth-shattering news, but it does re-affirm that the IRS does not approve investments, etc.  Even in the world of companies establishing self-directed plans, there has been the occasional company that proclaims “Approved by the IRS”.  I always tell folks…when does the IRS approve anything or anyone?  Yes, you are correct, they don’t.  So, this piece is just a bit of sage advice from the IRS.

There you have it, folks.  Most interesting blog you have ever read?  Probably not.  If you are self-directing, might these publications be some of the most important information (along with Department of Labor (DOL) Advisory Opinions) you will ever read?  Absolutely.

Now, on to figuring out how I can improve upon the best pot roast recipe anyone will ever have…now, we are talking really serious business!

We’re finishing up Step #3 in the process of creating a Purposeful Plan. In yesterday’s post we created an investor, giving them a financial ‘status quo’ based upon my ongoing experience. Turns out they have decisions to make about the potential sources of their investment capital.

The decision is crucially important.

In this virtual case study, it’s sometimes possible that this decision can and will dictate the quality of retirement possible. It’s akin to laying a building’s foundation. The larger, deeper, stronger, and more reenforced it is, the larger the building can be built. It’s how real estate investors begin that will often ensure success, failure, or merely mediocrity. Many times the difference in starting with more or less available capital can literally make or break the end game goal.

Factors they are considering.

If they chose to follow my Plan, they’d be starting with a about $310,000 or thereabout. If they can’t make themselves pull the trigger on cashing out their 401k and IRA, but sell Teresa’s stocks, they’d have about $175,000 — leaving them, in both scenarios about $40,000 for cash reserves. We’ll deal with the expected performance of the capital held hostage in the 401k and IRA a bit later.

Beginning with $135,000 in additional capital will make a huge impact on the ultimate net worth and cash flow they’ll enjoy in retirement, 20 years down the road. Think about it in a different context for a minute. What if you got a 77% raise at work? That’s the difference in seed capital we’re discussing here. That’s the reason Rod’s and Teresa’s ultimate decision on this point is so critically pivotal to the eventual quality of their retirement.

NOT my way

Due to Fanny Mae insanity, a decision to begin with the lesser figure of $175,000 means they can barely acquire $675,000 in income property. And by ‘barely’, I mean by the skin of their teeth. The only thing makin’ it even feasible is that there are relatively rare duplexes available, sporting separate Tax IDs for each side. This means they can be bought ‘n sold separately if desired. It also means Rod and Teresa can design their acquisitions such that three of ‘em can be completed using just 20% down.

When these properties are freed of their loans, they’ll throw off annual cash flow of roughly $50-53,000. The equity at that point would be $675,000.

BawldGuy Axiom: When planning for future net worth and cash flow, it is my policy, never to be violated, to assume that both property value and NOI (Net Operating Income) will never increase. Basing present strategy(s) and tactic(s) on assumptions of rising prices and/or rents (NOI) is folly at best, and the road to acute disappointment at worst.

There are other factors for which we can’t account today. Such as . . .

? How quickly will they be able to eliminate all income property debt?

? Will they be able to improve their position significantly by selling/exchanging for more property in years to come?

? Once free and clear of debt, what will the interest rates be then?

Here’s the Purposeful Plan I’d lay out for Rod ‘n Teresa — at least in part.

They’d immediately acquire 4.5 duplexes. The down payments would range from 20-25%, tilted slightly to the higher. If they never did anything else ’til these loans were all paid off, their cash flow and net worth would look like this. Keep in mind the policy of no increases in value or NOI.

Yearly cash flow would be approximately $90-95,000. Their free ‘n clear equity would be a tad more than $1.2 Million.

Being my usual OldSchool self, they’d be able to eliminate the debt on two complete duplexes in roughly 5 years, give or take. Since they’re high wage earners, i.e., they’re barred by the tax code from using depreciation against their ordinary (job) income, it’s a virtual lock their CPA would approve the depreciation strategy of Cost Segregation. This would result in impressive annual dollar amounts of unused depreciation, which would patiently wait to be put into the game.

Keepin’ this part brief, in the 5 years it takes for them to pay off a couple duplexes, they’d have accumulated something like $180-200,000 in unused depreciation. This would likely be used (Who knows? My crystal ball is as reliable as yours, right?) to massively turbo charge their EIUL.

Oh yeah, their EIUL

Given their household income of $190,000, and their already demonstrated financial discipline, I’d say a conservative EIUL monthly premium of $1,000 would be a justifiably prudent start. Remember, since they gutted their job related retirement plans, they were also advised to halt any further contributions. So this monthly premium would, in reality, add less than a few hundred bucks to their monthly outgo. They’d be redirecting contributions to Rod’s retirement plan at work to their new EIUL.

Think 20 years of these monthly premiums. Their only decision would be whether or not to apply annual inflation bumps of 2-3% to the premiums. Though I haven’t bothered David Shafer to do the exact analysis, my recent experience tells me the annual tax free income using just a flat, unchanging premium, would be approximately $50,000. We’ll call it $4,000 a month.

Somewhere during the sixth year of their Plan, we’d probably (We never know for sure.) sell the first two debt free duplexes, offsetting any capital gains taxes (and other taxes as well) with our saved up depreciation. Invoking the policy of no appreciation ever, that would yield tax free proceeds of $500,000 — give or take. Mr. Shafer would then structure a brand new EIUL, calling for 5 equal payments of $125,000 — payable in 4 years and a day. (Don’t ask, it’s a regulation.)

The two EIULs will combine to deliver somewhere around $120,000 a year in tax free income, no doubt into their 90s. It could be more, but I’ll leave that to Dave. Just a week or two ago we did this analysis for a couple pretty similar to this one, and the annual income ended up being much more than this.

So now, to be fair, we need to assume they never exchanged or did anything different than the first scenario. So the income from the 2 duplexes we sold must be subtracted from the total real estate cash flow, earlier mentioned. That figure would be about $48,000 a year or so.

What we’re not accounting for in either scenario is what Rod and Teresa do with the impressive cash flows they’ll have from the time all debt is eliminated to the time they retire. My guess, and experience tell me they’d turn their sights on any balance left on their primary residence.

Income 20 years from now — 1st scenario

They’d have about $50,000 a year from their real estate portfolio and likely the same, though completely tax free, from the EIUL. That’s $100,000 a year, half of it tax free.

The 2nd scenario

They’d be gettin’ about the same $50,000 annually from their remaining income properties, as in the 1st scenario. But due to the well timed use of multiple strategies — what I’ve come to call Strategic Synergism — Their tax free income from a couple EIULs will be around $120,000 yearly. This brings their total retirement income to roughly $14,000 a month, or $170,000 a year. The really cool thing to notice is that just over 70% of this income is tax free — by definition. Not after tax. Not tax sheltered. Not tax deferred.

TAX FREE. Over 70%. Put another way, the executing the Plan I advised increased the amount of tax free income, as a percentage of the whole, by 40%. This is huge, especially when it comes to retirees.

Total income is a whopping 70% greater in the 2nd scenario. And yeah, I know, the money they left in the 401k and IRA grew. Not by all that much though. Remember, it only got to less than $200,000 in the first 20 years or so, and that was with employer matches and them pilin’ in their own money every month.

Step #3, if executed with serious intent, can sometimes make or break a magnificently abundant retirement.

In the end, ask yourself this question, as you compare the two scenarios.

How much is your employer retirement plan gonna get you by the time retirement rolls around?

Don’t let the answer deflate you. Let it motivate you to talk to me. Just use the form below to start the conversation…

Today let’s talk about the third step of any Purposeful Plan.

Step #3 — Identify your source(s) of investment capital.

Seems self-explanatory doesn’t it? Much of the time it is. There’s the cash in the bank. Maybe some stocks here and there. Or, takin’ advantage of today’s historic low interest rates, maybe the home equity is calling to you to put it somewhere else. You know, to more effective use. But, what most don’t even consider, is where many have bunches of available real estate investment capital — A 401k or IRA from a previous employer. An IRA sittin’ dormant for the last few years. Your instincts stopped you from continually adding to it, but you’ve been stymied from that point for awhile.

The case for gutting your 401k or IRA

Let’s build an investor, OK? Rod and Teresa are in their early 40s. They’ve been relatively successful in their careers. Rod makes around $120,000 in middle management. Teresa, who took seven years off ’til their kids all hit school age, is a self-employed commercial photographer, making roughly $70,000 a year. Rod has a 401k from a previous employer with around $190,000 in it. Teresa rolled her old 401k over to an IRA when she quit to stay home with her babies. The balance is just under $85,000.

They’ve built their savings, during their 21 year marriage, to around $175,000, give or take. A little bit here and there, add consistent discipline, and before ya know it, there’s a nest egg. Then there’s the stock Teresa has from her last employer, which is worth around $50,000 in today’s market. It hadn’t really risen much, then 2008 crushed its spirit. But hey, it’s still money, right?

This is where I tell ‘em to gut both of those plans like freshly caught trout. “Why on earth would we do that?!” is the usual response. I’ll repeat one of my policies not subject to exception:

No advice to a client to do anything with their real estate investment portfolio should ever be given unless it’s a no-brainer, easy decision. The projected results should provide significant improvement to the portfolio. Not marginal improvement. Not even moderate improvement.

BigTime improvement — or don’t do it.

If they followed that advice, they’d net somewhere between 50-60% of the current balances. I know, it’s brutal. The combination of being taxed and penalized doesn’t leave much. But the real determining factor must be the end game — retirement income. If retirement is set for their early 60s, say around 20 years from now, what will deliver better results? Will it be the total of about $275,000 in those plans? Or would it be $135-165,000 or so, after taxes and penalty?

Most investors, if they’re objective about it, realize the performance of their work related retirement plan hasn’t even begun to cut it. What I ask them, is whether they believe they can accomplish two things.

1. Grow that $275,000 to at least $1 Million, while remaining inside the retirement plans.

2. Generate significant and reliable retirement income when needed.

Over the next 20 years their return would hafta be consistent annually to hit the million dollar mark. If they added $1,000 monthly, it’d surely boost annual yield. This assumes they started with the aforementioned combined balance of $275,000. That assumes no losing years — ever. If a repeat of 2008 comes their way, it better be a mild version. Makin’ up lost ground isn’t terrible cuz you need to generate larger yields. It’s cuz while you’re gettin’ back to where you were, you keep havin’ those pesky birthdays.

‘Course, if they actually do manage to amass that million bucks in the next couple decades (They won’t, but we’ll say they will.), what will the retirement income be? If those couple decades began 20 years ago, their income, using universally recommended vehicles like bonds, would be based on 2-3.5% yields. Put the ugly way, that means they’d be retiring on around $20-35,000 a year, before taxes. I’m impressed. Are you? Don’t answer, it’s rhetorical.

On the other hand, how might they end up, opting for half a loaf, but invested in real estate, with maybe an EIUL on the side?

We’ll use an after ‘gutting’, after tax & penalty net of around $135,000. Add Teresa’s $40,000 from her stocks (after tax). Take about $135,000 from cash savings. That gives ‘em roughly $310,000 or so. It also allows for $40,000 in their Sominex Account, which everyone knows, of course, is cash reserves.

Tomorrow we’ll put all this together, to compare reasonably predictable results. This is important, cuz ’til we decide the source of their investment capital, we can’t begin selecting appropriate strategies. This is a must in Purposeful Planning. That is, every step must be given very serious attention. Missed possibilities can rarely be recovered.

Step #1 in getting started is to use the form below so we can have a quick friendly chat about your situation…

However, while not ever giving advice, I continually find it amazing that when the “experts” speak of investment diversity, they always maintain such diversity within the arena of stocks, bonds and mutual funds.  In a recent article by Margarida Correia related to a recent study undertaken by SEI. A fund manager and investment management business outsourcing provider, the SEI found some common sense opinions currently held by investors.

The Study

Specifically, in the study, investment advisors say their clients’ account portfolios have largely rebounded from the debaucle of 2008.  In fact, 10% state that their clients’ portfolios exceed the level they held before the recession.  However, the biggest worry held by the clients is that they fear another “significant” market decline.  This opinion was held by 60% of the respondents.

As expected, the following information will not surprise anyone.  The findings showed that approximately one-third of the advisors use a 60/40% portfolio strategy to manage their clients’ assets.  The “60/40″ definition means that they allocate 60% to stocks and 40% to bonds and other lower-risk securities.

What I found surprising is that very few investors worried about making bad investment decisions (3%) or running out of money when keeping up with inflation (7%).  As expected, they did have concerns related to how much income would be needed for retirement years.

Not a surprising study, to say the least.  But, what I continue to find surprising, is the lack of reference to whether these financial advisors ever recommend that their clients invest in non-traditional assets.  While clearly not meant for everyone, it seems as if advisors are clearly steering down the “let’s just do what everyone else does and hopefully things will work out for the best” model.

This post is not to suggest, recommend or otherwise advise that anyone invest in non-traditional assets.  However, there is an old saying that sometimes more (investment options) is better.

BawldGuy Here: Let’s poke around this study a bit, OK?

First, it has advisors saying their clients’ stock/bond portfolios have either returned to their pre-2008 collapse values, or are now above that figure. Yet, 60% of their client-investors express concerns about another significant market downturn. But that’s predictable, right? What’s confounding is those same clients’ worrying about their retirements, given the proven dismal track record they’ve experienced first hand.

Really? They’re concerned? Enough to switch horses before they find themselves in the deep rapids, sans horse? But that’s not all.

If you know that your advisor was constructing the contents and mix of your retirement portfolio, and strategies to be applied based on the majority of his clients’ wishes, I has one itty bitty question.

Why on earth do they even need that advisor then?

Every year, without fail, I lose potential clients due to my policy of tellin’ them when their understanding about various strategies are either mistaken or misplaced, and will eventually harm them. It makes no sense for me to be a part of a losing strategy when I know in advance how ugly it could end.

Yet millions continue to follow the advice of those who’re blithely, one might say cynically following what the masses ‘believe’ is wise. That might be the most damning piece of evidence I’ve seen when it comes to understanding why most folks retire poorly. At the least it’s sad, and if truth be told, it’s been tragic for most.

Great stuff, John — Thanks.