Ever wonder about the ‘known fact’ that when you retire, you’ll automatically find yourself with vastly reduced income? Given any thought to what that implies? I have, and for quite some time. Granted, for the small fraction who’re big wage earners, it’s more likely to be true than not. You may agree with me though, that at least the 80/20 rule probably applies. But if you’re in the vast majority of wage earners, it simply doesn’t have to be true, nor should it be.
What the heck am I talkin’ about?
Let’s create a case study of sorts. We’ll construct a typical 35 year old couple. Their goal for retirement is to quit working at 65, sooner if possible. They both work, have a couple kids, and are savings/investment oriented. They gross a combined $95,000 a year — him as the manager of a Costco store meat department and her as a pre-school teacher.
They have enough in the bank to buy their first piece of income property, and cash reserves (Sominex Account) in the form of over $50,000 combined in their 401k’s.
Let’s grant them an Internal Rate of Return of 12% a year. In my 40 plus years that’s not an unreasonable expectation. It accounts for detailed Purposeful Planning. It includes use of tax deferral, wise use of intentionally applied unused depreciation, present and future purchase of EIULs, before and after tax cash flows, and of course both good and bad years.
This means starting out with an initial investment of approximately $53,000.
In 30 years they’ll have reached a net worth exclusive of any work related retirement plans and their personal residence of roughly $1.6 Million. In my humble opinion, they’ll end up with much more, but we’ll stick with that number. Now, let’s use just 7% as a yield on that figure upon retirement — a conservative figure. We come up with an annual retirement income of about $112,000.
That doesn’t include income generated by 30 years of periodic payments made into EIULs separately set up, and exclusive of their real estate investment activities. We’ll say they only allowed $6,000 yearly for that. Conservatively, and I’ll let Dave Shafer correct me here if I’m woefully outa line, that should create an additional income basket at retirement of give or take, $40-50,000 a year. We’ll use the bottom of that range for this exercise.
We’ll pretend Social Security will be in place 30 years from now. 
They’ll receive $18,000 a year from that source.
At age 65 they happily quit their jobs. Their highest combined income ever was $135,000. Why are they smiling?
Their income from real estate is about $112,000 — roughly 2/3 ? of which is sheltered. EIUL income — $40,000 — all of which is tax free, not sheltered, tax free — period. Add $18,000 in SS income, and the grand total is $170,000 +/-. At least $110,000 of which is either tax sheltered or tax free in nature. Put differently, only $60,000 or so will even be taxable.
In other words, they’re retiring with more annual income than they ever once earned in their adult lives. The numbers used here are not extraordinary by any definition. It also assumes, as I’ve already mentioned, good, bad, and ugly years.
BawldGuy Takeaway: Those who say your income at retirement will decrease are assuming you didn’t know your head from a hole in the ground. They’re sayin’ you’ll just Gump yer way into a life sentence of fixed income prison — living out your days in a cell you constructed.
Worse still, they’re tellin’ you to prepare for it.
They begin their diatribes by saying your income tax bracket will be lower than in your working years. Geez, how do I address that shibboleth? Let me count the ways.
1. It could be lower cuz your retirement income is pathetically low when compared to your working years. Duh. See Grandpa economics.
2. It could actually be reduced due to excellent execution of your Purposeful Plan which resulted in more income than your job ever provided, but more tax shelter and tax free income too.
3. What really rankles is how they blithely assume you’ll fail miserably in Planning and executing that plan for a magnificently abundant retirement. It’s as if they want you to ready yourself for a financially imprisoned lifestyle.
If you’re say, 28-45 or so, what are your thoughts? Do you have a Plan? Are you executing it? What say you?
Your retirement depends wholly upon the decisions you make early on. Even a boring vanilla Plan with excellent execution, given 20-35 years, will prevail.
The real myth is that a magnificently abundant retirement is only a dream.
It’s a dream alright, but one you can make true through your persistent adherence to the principles that will surely get you there. There’s nothing magical about it. You don’t hafta be a Prince or a Princess to make it happen.
When a farmer plants wheat in the spring he’s not shocked when harvesting wheat in autumn. Purposeful Planning is analogous. Some years yield bumper crops, some are disappointing, but over the long haul, we reap what we sow.
Stop listening to those telling you your retirement will be less than total financial freedom. You can do it, and I can help — it’s all I do.
Call me at 619 889-7100. Have a good one.
Related posts:
- Myth: Your Marginal Income Tax Rate Will Fall In Retirement
- Myth: Your Marginal Tax Rate Will Fall In Retirement
- Over 50? Smile — You Can Still Generate Retirement Income Through Real Estate
- Retirement Income Through Real Estate Investment
- Real Estate Investors — Is Your Addiction To Cash Flow Lowering Potential Retirement Income?
About BawldGuy
Except when they are leveraged 80%, he loses his job,or gets hurt or sick and they lose their income.(don’t see many other high paying jobs out there for a guy managing a meat department-certainly npwhere near 90K);preschool teachers fetch just about minimum wage.
The tenants move out and/or trash the place and his Sominex account goes bye bye.
He is then underemployed or is on disability or workman’s comp bringing in less than half of his previous income.
Then they have to cash out that EIUL-oh wait those surrender charges are brutal.
I would propose that the above scenario is as (if not more) likely then your 170K a year retirement.
JIm — For the most part we’re not in disagreement.
Some folks shouldn’t be investors. It’s called risk capital for very good reasons. My crystal ball is as reliable as the next guy’s.
Experience has taught me your scenario is by far in the tiny minority. It does happen though, sure enough.
Surrender charges on EIULs should be addressed by Dave Shafer. I think you may have either overstated it, or it depends upon the timing of the withdrawal.
Where we disagree is the belief your scenario is more likely. If that was the case, the fact the biggest percentage of wealth in the country comes from real estate wouldn’t be true. With the market correction more folks are entering the investment side of real estate than ever before. They’re not doing so cuz they believe your scenario is more likely.
The last time I had a tenant ‘trash’ a place? Carter was in office. I know what I’m doing, and so do the pros I hire to manage.