Understanding The End Game — Retirement Is ALL About Safe, Reliable Income

First some housekeeping. Part II of the series began yesterday will be published tomorrow.

For readers unaware of my photo policy, it’s been called, um, different. Photos here very rarely have anything whatsoever to do with the content. They’re there for my enjoyment and hopefully yours. There’s usually a theme, but I don’t even hold myself to that. OK, I should start writin’ now.

What matters most when implementing a Purposeful Plan is the thought process preceding it. That process involves the application and integration of several principles and concepts. The foundation though is the all encompassing drive for safe, reliable retirement income, preferably as sheltered from governmental taxation as possible, given the individual investor’s unique circumstances.

Many who like real estate as both a capital growth and cash flow vehicle, fail to clearly understand what roll both approaches play in their retirement. Possibly the #1 myth is that buying real estate for cash flow is always the way to go. It’s that attitude which has led many an investor to mediocre retirement income, and/or the forbearance of millions of dollars in net worth. It’s the latter you can blame for most of the disappointment when talking ’bout retirement income.

Maximizing your retirement income through real estate investing is all about timing.

When all is said and done, cash flow, income, how ever you choose to put it, is nothing if not a yield on capital. The amount of the cash flow will be in direct proportion to the size of the basket holding all the cash heretofore referred to as capital. A huge basket of cash, benefits from the same yield more or less as the pathetic basket. 7% is 7% no matter how ya slice it. ‘Course, 7% on a $3 Million basket of cash is a RETIREMENT. 7% on $300,000 is a kinda sorta supplement to your part time job and your Social Security check. Well, ya may not wanna count on that whole Social Security thing.

Since the above is inescapably true, and there’s nothing any of us can do about it, there follows a chronology — one that’s been working predictably well for centuries. Here’s how it works.

First, you take the basket you have today, and make it bigger for as long as you can.

Then, you take the aforementioned new and improved bigger basket, withdraw it from the capital growth column, and slide it smoothly into the cash flow — OK, retirement income column.

By investing at the outset in cash flow, you defeat capital growth, guaranteeing yourself a far smaller income when you reach retirement. Here’s a real life example. I pinky swear this happened.

Several years ago a small local contractor responded to some marketing I’d done. He was in his 40′s and doing fairly well for himself. He owned two duplexes not far from my office. We set a time to meet in my office. His 71 year old dad came with him. Anywho, about 15 minutes into our meeting the dad, a very nice man, announced he’d heard enough. When I asked him if I’d said anything to offend him, he said no, not in any way. In fact he complemented me on the depth of information I’d presented to he and his son.

He then lamented I hadn’t included the fact that retiring with any debt at all was to be avoided at all costs — without exception. Out of respect, I listened intently. Then asked him if he’d favor me with his story.

He had invested in a local well located fourplex back when Moses was still in short pants, and paid it off over 30 years. He was pretty dang proud of that. “In fact” he said, “that’s why my retirement has been so comfortable. The $30,000 a year I get from that free and clear property, plus my free and clear home, and my monthly government check? How could I have done any better with debt?”

I then asked if he’d allow me to answer. He said he wouldn’t have it any other way. He was eager to here what I had to say. You couldn’t help but like the old guy. He reminded me of my own grandpa, who wouldn’t say the word ‘debt’ in church, ‘cuz it was a four letter word. But that’s a whole ‘nother story.

When I told him there were investors who’d begun after he had, and were now retired on more than $30,000 a month, he became very still, very quiet. I asked him if it was alright if I asked him a few questions, and he said of course. It was at this point I glanced over at my assistant who looked like she wasn’t breathing. She knew what my questions might be, and she wanted to be anywhere else but in that conference room. We still laugh about it when we run into each other.

Question: How much of the income from your free and clear fourplex is tax sheltered?

Answer: Uh, how’s that relevant? Translation: Not one red cent.

Question: How old is your free and clear house, and how much must you spend each year to maintain it?

Answer: It’s a fine home in perfect condition. Translation: It’s in perfect condition ‘cuz it sucks up my time and money like a turbo charged Dyson.

Question: Do you currently have any kind of tax shelter whatsoever?

Answer: Don’t need any, ‘cuz I don’t try to keep up with the Jones’s. Translation: It’s a good thing I live in San Diego. Otherwise I couldn’t pretend to be on vacation twice a year.

The last question was indirectly meant to instruct his son.

Question: If you’d have executed a tax deferred exchange back in 1976, and once again in 1985, would you have been able to retire with a significantly larger, tax sheltered income?

Answer: Debt is to be avoided. Exchanging at that point would’ve made no common sense. Translation: Of course I’d of been far better off, but I’d sooner walk into hell naked and smothered in butter than admit how my attitude toward debt has affected my retirement.

Got a call from his son a couple days later. Seems he’d decided to move to his wife’s hometown, somewhere in the northwest, and start a contracting business there. Never heard from him again. He was as nice as his dad, a real gentleman.

What I’d like you to take from that experience is this: The one who arrives at retirement day with the biggest basket of cash, wins. Those who insist on putting the cart before the horse by going for cash flow before that day will learn the truth about their misguided strategy far too late.

BawldGuy Axiom: The yield on a basket of capital doesn’t know or care how big the basket is. Only the recipient of that yield cares — Cares a great deal.

Let’s talk about your basket of capital! Whether it’s time for growth or cash flow, doing it with a Purposeful Plan will give you a head start. Have a good one.

Related posts:

1. Retirement Income Is The Goal — Where’s The ‘How To’ Manual?
2. What Planning For Retirement Is All About — Income
3. You Can’t Go Back In Time, So You Better Get It Right Today — Retirement Income
4. Understanding What’s Important — It’s Usually Not a Bunch of Cash Flow
5. Chasing Discounts Is Often The Way To A Discounted Retirement Income