Real Estate Investing For Retirement – Purposeful Planning III

BawldGuy Note: By necessity, this post is longish. I promise you though, it’ll be worth it. This step in the Purposeful Planning process is often overlooked and its value discounted. That isn’t advised, as you’re about to learn. Thanks for readin’ through.

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…

This entry was posted in 401(k)'s & IRA's, Purposeful Planning, Retirement Income on by .

About BawldGuy

I'm second generation real estate, first licensed in fall of 1969. Having been mentored by several iconic brokers, I'm also CCIM trained, having completed all 200 hours back in 1980. Have successfully executed well over 200 tax deferred exchanges, many of which have been multi-state in nature. Strong points are analysis and the creation and real world application of Purposeful Plans employing several strategies synergistically. The idea is to arrive at retirement with the most after tax income possible, backed by the largest net worth.

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10 thoughts on “Real Estate Investing For Retirement – Purposeful Planning III

  1. Joe

    What I don’t understand is, why wouldn’t you just sell one of the properties when it is paid off and put the proceeds into your existing EIUL rather than create a whole new one? Is there some advantage I just don’t see here?

    1. BawldGuy Post author

      My thought exactly, Joe. But Dave Shafer says it makes more sense, mechanically and structurally to do a separate policy with the sales proceeds. I’ll nudge Dave for his own words on this.

      Oh, and welcome, Joe — don’t be a stranger.

      1. Joe

        Thank you, Jeff. I’m really interested in what Dave Shafer has to say on the subject.This is one concept about this whole EIUL thing that doesn’t quite make sense to me.

        Anyways, great, thought-provoking post!

  2. David Shafer

    Joe, the short answer to your question is not short!
    1. EIULs are life insurance policies therefore have the majority of their expenses taken out in the first 10 years. At that point they start to really perform at an accelerated pace. So the sooner you start, the better you are.
    2. The original structure is dependent upon what we know the premiums will be. In other words in order to structure it correctly we need to know [or be pretty sure] what the premiums are going to be in the future.
    3. Putting in large amount of cash several years in the future forces us to structure them with a high life insurance amount from day 1. This increases the expenses in the policy dramatically which must be carried for those first 5 years. End result is a less efficient policy that is dependent on what might happen in the future.

    These issues are taken care of by having two policies, initiated when we are sure of the premiums, structured to be efficient from day 1.

    Hope this helps.

    1. Joe

      If I understand you correctly, in order to maximize your cash value to insurance expense ratio, you need to be able to anticipate your annual/monthly payment or lump sum contribution in advance. Thus, if you started an EIUL with a monthly payment and structured your EIUL as such and, then you suddenly wanted to put a huge lump sum in, you couldn’t do so without violating MEC rules. Do I understand you correctly?

      I have a question regarding your third point: I know some advisors structure an EIUL product with increasing premiums to keep up with inflation. This must also increase the insurance amount appropriately to maintain the max cash value to insurance ratio. Based on your explanation in your third point, you need to structure your policy based on the MAX insurance amount anticipated. How far in advance do you look if you’re doing monthly payments with increasing yearly premiums? 10 years? 20 years? I hope my question makes sense to you.

  3. Honolulu Aunty

    Aloha Bawd Guy,
    That 40 year old couple would do very well to take your sage advice. What about an older couple, 60 years old, about the same availability of cash or assets?



    1. BawldGuy Post author

      Hey Aunty — That’s definitely worth a phone call. Call me and we’ll laugh n’ scratch awhile, then figure out what’s possible. Lookin’ forward to it.

      1. Honolulu Aunty

        Laughing is always good, scratching can be great. If the coming week isn’t too crazy, Aunty will be giving you a call.

        Better yet, why not come out to Hawaii in early May? My favorite asset protection attorney (actually works with Clint Coons) is coming to Honolulu and giving a 3 day seminar on asset protection and tax relief for real estate investors – cost is just $97 plus air fare, hotel, and car! Such a deal, especially if you live in Hawaii, lol.


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