Last week we talked about the first two steps in the Purposeful Planning process. If ya missed it, go ahead and catch up. We’ll wait.

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…