In well over four decades of experience in the business, I’ve seen many stats that’ve stopped me in my tracks. Things like an FHA interest rate of 16.5%. A one year appreciation rate of just under 50%. Or, more recently many of the stats related to the recent bubble. However, the most recent stat riveting my attention has been the velocity of Boomer generation retirement. They’re retiring at about 10,000 every 24 hours, and will continue to do so ’til around 2030!
Don’t gloss over that fact. Ponder it for a few moments, and let it sink in. Every month about 300,000 Boomers are retiring. That’s over 3.6 million a year, and it’s been happening for awhile now. Thing is, for the most part, I’d guess maybe 80% of ‘em — and I believe that’s being hospitable — aren’t retiring ‘well’ as Grandpa used to say.
Not retiring well?
Let’s look at some facts.
- 74% of those currently working in America fully expect to keep working in retirement. In other words, retirement apparently doesn’t mean stop working. Some will be by choice, most won’t.
- 56% of Americans will retire with unpaid debt. Gotta believe that wasn’t part of the ‘plan’.
- 88% of Americans are almost resigned to retiring at a level of income they never believed would happen to them. Far to little.
- 83% of Boomers expect to have to work in retirement.
I could go on for another page, but you get the picture. One of the stats I uncovered in researching this was a shock to me. Were you aware that approximately 75% of all Americans claim their Social Security income at age 62?! Holy freakin’ cow! That’s 3 outa 4 of us perceiving the need to grab the lower income at 62, instead of waiting for the higher income a few years later. Wonder where their plan went awry?
Why are these stats the new reality?
First off, that subject is a thick book, right? I get that for sure. But let’s be real, ok? Boomers have been heavily relying on Wall Street and their expert advice in the building of their retirement via the employer sponsored 401k. Normally I’d be a smart aleck at this point and ask how’s that been workin’ out for ‘em so far, but they — and likely you — already know. They’re now feelin’ the pain and constant anxiety that accompanies the realization that retirement has become a pipe dream.
The average 58 year old American male has less than $100,000 in their 401k at work. So can we please stop the embarrassingly stoopid debate about how great Boomers have done in the stock market compared to real estate? It’s a bad joke, people. It simply hasn’t worked, which doesn’t mean it couldn’t with better advice. What it does mean is that listening to the experts provided by employers has proven toxic to the average American worker — period. A real estate investor throwing darts at a local map of small rental properties while blindfolded would retire infinitely better than the typical American has listening to the experts re: the stock market.
The other reason is that Boomers, when confronted with the reality of a bad or even indefinitely postponed retirement, suddenly come to the stark realization that time is no longer their friend. With 10 years or less ’til retirement, real estate becomes less and less attractive as a vehicle. Why invest in real estate, even at 50% down — IF that much capital is even available — if you know there’s no way imaginable the debt could be eliminated in time? And there it is yet again. Extending the day of retirement in order to take the additional years paying off income property debt. For most it’s a no-brainer pass. So what’s the alternative?
Notes at a discount, that’s what.
On the practical side there’s no debt incurred, therefore no debt to pay off. What that creates is what I’ve come to call a Positive Catch 22. That is, not only will you have avoided a monthly payment goin’ out, you’ll have one comin’ in. Instead of sending money into a black hole every month, you’ll enjoy monthly payments into one of your bank accounts. Let’s take a 57 year old with $200,000 in their retirement plan. If they cash it out, they’ll not only pay a buncha income taxes, but a penalty too. Let’s be draconian and say that amount is halved by the government, leaving them just $100,000. (For the record, there are times when the option of taking the money and payin’ the consequences isn’t an option.) Here’s what’s likely to happen.
NOTE: Before I go on, it’s crucial to understand I’m definitely not advising everyone to eschew real estate for notes. That would be foolish on its face. I’m dealing here with a specific demographic, Boomers, who’ve for the most part simply ignored everything but their employers’ 401k plans. I’m still very strong on investing in real estate AND notes for those with enough time to make multiple strategies yield the synergistic results time allows. Most Boomers don’t have the luxury of time.
If they buy a ‘first position’ note secured by real estate, at say, 55¢ on the dollar, they now own a $180,000 note. The income will vary, of course, but let’s say it brings in $13,000 yearly, principal and interest. That’s 13% cash on cash. If you’d left the $200,000 in the retirement account, that’d be a 6.5% annual return. Studies done the last 20 years show empirically that the average American doesn’t even do 4% annually over the long haul.
But let’s keep goin’ here. Let’s say this note does what the typical note does, which is get paid off in roughly nine years. Let’s say the after tax note payment boils down to approximately $750 a month. If our guy has $150,000 left on his home’s loan, at 4%, with a payment of around $955/mo., and he adds that $750 each payment, what might happen?
Well son of a gun, in just eight years and nine months he’s paid of his home’s loan in full. Will wonders never cease? He did that with over a year to go before his scheduled retirement. That’s almost $1,000 a month he’ll NOT be spending in retirement. A few months later his first note investment pays off, puttin’ roughly $155,000 in his Levis, give or take, before taxes. He’ll pay taxes at the cap gains rate of around 15%. This nets him around $147,000 or so. He then rinses and repeats, buyin’ another discounted note. This one might cost him a bit more, let’s say it’s 58¢ on the dollar. It yields him just over $19,000 yearly, before taxes, a pre-tax raise of over $6,000.
For those keepin’ score, that’s a 46% raise. Not bad, eh? ‘Course, he’s gotta pay taxes on that money, which yields him in the neighborhood of $13,000 annually, or what he used to make before taxes. In the nine years to that point he’s collected $117,000 in pre-tax payments.
Oh, and he paid off his freakin’ home loan. He certainly wouldn’t of done that with his employer’s 401k, that’s a lock. In retirement he’d of eliminated at least one payment of $1,000 monthly, forever. His after tax income from the note portfolio is over $1,000 a month. That’s an effective $25,000 a year in his pockets directly due to gutting his so-called qualified retirement plan. When it pays off, and who knows when that’ll be, he’ll get yet another raise. That’ll happen over and over, predictably, though randomly.
Even if he ended up doubling his $200,000 over that same 10 year period, something which history says is highly unlikely, what would Wall Street yield him in retirement? Using their own info, that’d be about 4% yield, or around $16,000 a year, pre-tax, roughly $11,000 after tax.
Here’s the huge difference. That figure won’t change much, if at all. Furthermore, his $400,000 will remain static. Well, not really. See, the gubmint will show up shortly after he turns 70, tellin’ him he’s not takin’ enough out of his retirement plan, forcing him to begin eatin’ into his principal. Oops. At that point he’ll find himself in the race nobody enters intentionally. The race between what comes first, death — or runnin’ outa money? There’s no winner in that race that I can discern. You?
Tax wise this example is just about the worst I could manage. If he’d found a way to make use of either a Roth IRA or a Solo 401k, he’d of done FAR better in terms of spendable after tax retirement income. But even though we made him completely naked in terms of taxation here, look how much better off he was, even though we had him slaughtered on Day 1 by halving his nest egg.
The takeaway here isn’t that notes rock, though they clearly do.
Boomers need to come to terms with the deadly reality of how worthless most of their work based 401k plans are to them. ‘Til that reality hits them, their retirement will not be what they envisioned, and that’s being kind. They’ve been sold a bill of goods that simply hasn’t worked. Hasn’t worked? That’s about as watered down as I can put it. Here’s how a physicist might say it —
“You’d be attached to another object by an incline plane wrapped helically around an axis.” (Credit: Sheldon Cooper
Photo Credit: Adventures with my dogs