Road To Recovery — How To Begin Making Up Lost Ground

Let’s dive in with an example. Chuck and Suzy Greene until recently had just short of half a million in their 401k. Now? Try about $325,000. There’s no medicine that makes that go down easily. It hurts. Fortunately for the Greene’s they’re 22 years from retirement. If they don’t reassess the strategy which jettisoned almost 40% of their retirement capital into the financial ether, their future may not be any different than their experience up ’till now.

They followed what Chuck’s company advisor suggested, which was — a diversified portfolio of mutual funds designed for the long run, blah blah blah — follow the bouncing ball. I again remind readers the average American, upon reaching their 60th birthday has less than $100,000 available for retirement. So when you know someone who’s the exception, realize that 80% of Americans who aren’t the exception simply don’t care. They’ve been bent over the bar, and wanna know what strategy will help them get where they’d like to go — that is, a retirement including something other than working 30 hours a week.

Since this couple has over 20 years ’till retirement, they need first to recover lost capital, then continue on the path of growth. That’s much more easily said than done. If you’ve learned anything from current events it should be that we never know what might be around the corner. So, what do we know?

We know that folks will always need a place to live. We know they want it to be in a safe location.

Putting your retirement capital in vehicles directly meeting that demand is attractive on several levels, not to mention the land under which said vehicles operate, which is the poster child for the concept, Finite Supply. But how is that accomplished?

Let’s not make this any more complicated than need be.

Here’s the first thing the Greene’s must do is take control of their qualified retirement plan. This is accomplished by ‘calling the guy’, the pro who will guide them into a self-directed IRA. (I can help get ya to that guy) Once that task is completed, the second step, investing in ‘growth region’ real estate, can be addressed. Investing in real estate through IRA’s is done every day, all over the country. The down payments lenders require are larger — usually 25-30% or so. The interest rates are also a tad higher than what ‘people’ get, but eminently doable.

The loans are what’s known in lending as ‘non-recourse’. This simply means the lender will be able to look solely to the real estate as security. Chuck and Suzy don’t hafta worry about being held financially responsible on a personal level.

Furthermore, the ‘dividends’ (cash flow) generated by these investments will generally fall in the range of 5-10% annually. That range is hardly what they’ve been used to in the stock market. If the property, over the long run, appreciates, their capital will grow at just over three times the rate at which the property’s value rises. For instance — if it goes up 3.34% the first year, their capital, at 30% down + closing costs will have grown by an annual rate of 10%. This doesn’t take into account the tax sheltered cash flow received by the plan. Even at a relatively low rate of 6.5% (cash on cash) this ups your annual capital growth rate to over 16%.

Remember now, that’s at an appreciation rate of less than 3.5%. And yeah, I know, prices are falling. Not everywhere though, Chicken Little. As I’ve been saying for quite some time, regions exist where values have either given up very little ground, held firm, or increased. These are the locations that will eventually produce the best long term returns.

Because of the prudent leverage available to the Greene’s IRA, their capital will be able to grow at a potential rate of 10-20% annually, based on the less than impressive appreciation of barely more than 3%. This is a reasonable expectation. Even if it takes awhile to begin appreciating, think about the cash flow, year after year, at a rate their 401k hasn’t averaged in growth. Stock dividends? Sorry, I don’t do standup routines.

With less than $240,000 they can acquire small income properties valued at around $725,000 and spinning off around $15,000+ every year in cash flow. Let’s pause here to reflect on what that means to the Greenes. 5 years of cash flow (Sans the interest received once it was inside the IRA.), comes in at just under $77,000. The principal reduction of the loans will contribute an additional equity of $30,000 — which brings the return for 5 years to just under $107,000 — without a dime of appreciation the entire time.

That turns out to be a nifty 7.5% annual return — again, without one red cent of appreciation. Add a lousy annual value increase of 3% and the Greene’s capital growth rate now exceeds 14%. Like my dear departed great-uncle used to say, “Let me riddle ya this. What are the odds mutual funds produce a return equal to the cash flow alone?”

Yeah, that’s what I thought too.

This is how a Purposeful Plan evolves into a workable real life reality — or in this case a solution. By the way, and just for the record — if they do happen to experience an average of 3% annual boost in value, they will have pretty much regained the money lost in the stock market. Meanwhile, the remaining $100,000 which was left inside the IRA, wasn’t buried in the backyard. It could’ve been invested in something paying monthly payments, and yielding 6-12% annual return.

Part II will discuss how, when, and where to reroute 401k money to an alternative vehicle before it ever gets to the 401k. OR How to avoid $1 Million in taxes while securing a far more reliable income AND avoiding losses during down cycles. Oh, now yer payin’ attention.

Pay attention to this too, OK? Contact me to find out how to begin making progress again toward the retirement for which you’ve planned all along.

Related posts:

1. Over 50 And Going Down The Wrong Road To Retirement? There’s Time — Smile
2. First Baby Boomer Applies For Social Security — Let The Games Begin
3. What’s Up In Texas? We Are — It’s Boots On The Ground Time Again + A Seminar
4. Makin’ Up For Lost Time OR Why Becoming A Fix & Flipper Probably Ain’t For You
5. How To Begin Investing In Real Estate