Frank and Marian – A Case Study – Countin’ Down 22 Years

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Let’s set up the known facts, OK? We have a 42 year old family man with a wife his age. Marian makes $70,000 — Frank makes just over $80,000 a year. Marian owns their home. They have a rental home, owned by Frank, in a nearby neighborhood. It closed escrow 10 days ago, and has been turned into a delayed exchange. They have cash reserves, what I’ve called a ‘Sominex Account’ — a generous amount — a good thing.

Marian has a couple IRAs with a buncha cash — well over $200,000. She’s in the process of converting them to self-directed status. Frank also has an IRA but not nearly as robust. His capital has gone into real estate — with the exception of a self-directed IRA and another plan with his employer. The second plan is being vetted currently by my in-house specialist as to its ability to convert to self-directed status.

The Purposeful Plan

He’d like the option to retire at 62, or almost 20 years from now, and they both agree sooner would be better. Um, yeah.

Here’s the outline of how they’re gonna start down the road to retirement.

  • Frank executes a tax deferred exchange per Section 1031 of the IRC
  • He then acquires a couple cash flowing duplexes outa state w/20% down payment
  • Marian does her version of that, buying two duplexes with her IRA capital
  • They apply both after tax cash flow & other available cash to loan balance reduction
  • They will purchase an EIUL — creating a stand-alone basket of tax free income
  • With funds they both control in their IRAs, they partner with others in short term real estate rehab projects
  • Frank converts his existing one or both existing IRAs to Roth.

The Assumptions

1. There will be no projected appreciation used in any analysis — period.

2. Net Operating Income won’t rise for the entire lifespan of the Plan.

3. All four duplexes will be free and clear at or before retirement commences.

4. The EIUL income stream won’t be triggered until/unless they choose to.

5. Their primary residence will be debt free in 20 years or less.

6. Social Security will exist only in stories told to their grandchildren & history books.

7. We reserve the option of exchanging as opportunities present themselves.

8. Neither of them will ever make a penny more at their jobs than they are now.

Potential Challenges

The primary, but almost unavoidable speed bump here, is that they’ll arrive at retirement with a six figure income — and just a few years before their tax shelter expires. This cannot be ignored. That’s how Grandpa got nailed back in the day. In a strategy I coined as Grandpa Economics many moons ago, arriving at retirement with a free ‘n clear home, a pension, Social Security, and no tax shelter whatsoever, doesn’t work too well. In fact, I’ve often referred to it as a life sentence, not a retirement.

BawldGuy Axiom: We retire on after tax income. Ignore that little factoid at your peril.

Sometimes, simply due to the investor’s status quo at the beginning, combined with current macro-economic realities, acquiring future tax shelter becomes problematic. It will depend upon the market not only recovering completely at some point, and/or trading into properties for which they now can’t afford. Time will tell, so we do what’s possible, when it’s possible. On the positive side, they should have more income at retirement as they made on their jobs, but with far less living expenses. This will account for roughly $25,000 yearly — the equivalent to an annual $25,000 tax credit. The difference between them and ‘Grandpa’ is that their overall income will be larger by a factor of 4-6 times.

Upon retirement, their cash flow from the duplexes, if they’ve not traded any or all of ’em, will be roughly $6,000 monthly — about 40-50% of which will be tax sheltered for 7-10 years, depending on exactly when they retire.


At 50, Marian will make five $20,000 annual payments into her EIUL, spaced out over four years and a day. This will result in the following tax free income options — all of which will continue ’till she’s 90.

  • If she opts for income at 65 — just under $20,000 a year.
  • At 70 she’ll have $34,000 a year.
  • And at 75 she’ll be able to pull just under $58,000 yearly.
  • In all scenarios any cash value left over at death will not be taxed.

Frank’s Roth

The Plan calls for him to initially invest in partnerships whose agenda will be to acquire, rehab, and sell bank owned homes. In roughly 3-6 years he’ll have the option, if he’s so inclined, to eschew partnerships and do the rehabs himself, as he’ll have slowly but surely built himself a relatively impressive treasury. Over 20 years he’ll amass enough capital in the Roth to generate quite a tax free income basket. Conservatively, I’d say in the range of $400,000 or so.

Again, depending upon the level of success he experiences, at some point, either along the way, or at retirement, he’ll have the option of acquiring long term, predictable income. Let’s be conservative here and say he’ll use most of that capital to invest in the long term income, leaving a prudent amount intact as cash reserves. That capital should produce another $6,000 monthly — tax free due to the Roth status.

Let’s Look At the Results

From this year’s investments through Franks exchange and Marian’s IRA acquisitions, they’ll have created $6,000 a month in cash flow, likely a bit more.

They’ll have eliminated approximately $25,000 a year in housing expenses —  likely more, as they’ve indicated they’ll probably sell their home at that point and pay cash for a smaller place. Their current home is somewhat large for a two person family.

Marian’s tax free EIUL income can be triggered from age 65-75 — her choice, depending upon circumstances and their ‘retirement fun’ agenda at the time. It’ll be $20-58,000 yearly. Again, I’ll remind you it’s tax free, including any left to heirs.

Frank’s Roth strategy will generate roughly $6-8,000 a month in tax free income upon retirement. If he chooses, this can be increased or decreased pretty much as he likes, subject to Roth rules.

They’ll retire at 62 or sooner with an income of roughly $12,000 a month. They’ll have no mortgage on wherever they’re living at that point.  Three years, eight years, or 13 years later, they have the choice of adding another $20-58,000 in tax free annual income.

Notice that the predictable tax shelter problem is solved in large part by the Plan’s insistence on much of their income being tax free by definition. Sometimes ya hafta come through the side door. In their case, 50% of their initial retirement income will be tax free — works for me. Also, when they decide to pull the trigger on Marian’s EIUL, all of that new income will be, you guessed it, tax free.

I construct clients’ Purposeful Plans with the assets, capital, and earning capacity they bring to the table. Some can do more or less than others, which is how life works. I think you’ll agree, Frank and Marian will do just fine following this Plan.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

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