Walkin’ the Talk – What I Told My Own Daughter To Do

by | BiggerPockets.com

Sunday morning found me havin’ breakfast with my newlywed daughter and her wicked cool hubby. They’re both anomalies in this economy. Within a reasonable time both of them found jobs completely congruent with their degrees. In a year or so they went from starving students to, “I think we’re gettin’ outa hand with the whole sushi thing, Honey”. 🙂 For 27/26 year olds, they’ve adjusted well. They both abhor debt. I’m the poster child for OldSchool and I was counseling them some of their debt could wait to be paid off in favor of more pressing issues.

I’ve been subtly and not so subtly pressin’ for a meeting with ’em to talk about their own Purposeful Plan. So when they called out of the blue, Sunday, I knew it was my turn at bat.

So, what’d I tell ’em?

Note: I’m gonna change some their personal numbers/data to protect their privacy.

Jim is as smart as he is cool. An engineer now, he worked his way through college as a Costco butcher. He was head of the department shortly after graduation. His new engineering job? Took a pay cut. 🙂 He had a 5-figure 401k when he left Cosco, which was very recent.

Told him to gut it. Pay the taxes/penalty and shake the dust off his sandals. He’s opted to take the after tax net and pay off his student loans, along with a very small amount of plastic. This will immediately eliminate roughly $500/mo in outgo. Sweet.

Nicole will now be able to save her entire after tax paycheck each month. Jim will add the $500 a month in payments he’s not payin’ now. This will get them enough to buy a duplex or 2 on 1 with an FHA loan.  It’ll take roughly ’till spring to save the money.

They’ll get the new property, which will cost them roughly $1,800/mo before tax benefits. The immediate tax deductions will amount to about $18,000 a year, resulting in a tax savings of, give or take $5-6,000 a year. This means their monthly nut for the duplex will hover around $1,300/mo +/-. The duplex will run them in the neighborhood of $375-425,000.

Then they’ll redirect Nicole’s entire take-home pay to the monthly duplex loan payment. Assuming they’ll pay the top of the price range, $425,000 — and that FHA interest will still be about 4.5% (A silly assumption, I know, but my crystal ball is still in the shop. So using current rates will hafta do.) Within five short years this will result in a loan balance of around $273,000 — not bad considering it will have started at just over $410,000. 🙂

Also, this strategy will very quickly eliminate FHA’s mutual mortgage insurance, a .55% add-on. FHA experts may wanna chime in on this, but I’m pretty sure once they get the loan balance demonstrably below 80% of market value, they can lose the mortgage insurance.

In just five years this results in a loan balance of about $273,000. If they chose to sell at that point, their net check would be somewhere in the neighborhood of $110-115,000. That number assumes they enjoyed an annual appreciation rate of from 0% to 0% for the holding period. 🙂

More on that later.

Once the smoke clears on the duplex purchase, they’ll be budgeting for their own EIUL. I’ve advised them to acquire a premium of $1,000/mo — they’re to keep that payment level for the next 30 years, when they’ll be 56/57 years old. The income from that point, if they choose to pull the trigger at that point, their annual income would easily be in excess of $100,00 — tax free, by the way — from the EIUL alone. 🙂

If indeed they sell the duplex after five years (a totally arbitrary holding period), they’ll have created two baskets for the price of one. Half the proceeds will be tax free. That’d be from the ‘primary residence’ half. ‘Course who knows what the dang law will be by then? The other half of their net equity will be considered long term capital gain, as per the internal revenue code. (Section 1231)

They can take the residence half and buy a new place — NOT a duplex — or not — their choice. The investment half of the proceeds can be sent outa state using a tax deferred exchange per Section 1031 of the IRC. It’ll buy a Texas duplex with cash flow from the get go.

See what they’ve done? In five years they will have turned $15-20,000 into over five times that amount — and without any help from appreciation whatsoever. Furthermore, they’ve now established the foundation for building a real estate investment portfolio that will have the potential to generate another six figures in retirement income in the next 15-30 years. Why the rather large range? Simple — there’s no tellin’ how slowly or quickly Jim’s paycheck will increase as the years go by. If we go by his track record, he’ll rise faster than most. Of course, the economy is the ultimate arbiter, isn’t it?

Here’s what I see for them, conservatively, 30 years from today.

They’ll have the option to retire with over $200,000 a year. Over $100,000 of that will be tax free forever. Give or take 35-45% of the real estate cash flow will be tax sheltered. For how long will be anyone’s guess — but it’s reasonable to predict the first decade or so of their retirement would produce tax shelter.

Frankly? I think they’ll do markedly better than that on the real estate side. But I said I was being conservative. Either way, you can clearly see they have an excellent chance for a magnificently abundant retirement. Remember, they have some connections in the real estate investment world.

Haven’t talked about kids here, but if they do have kids, we’ll get them their own EIULs immediately. Why? How ’bout 18 years of guaranteed no losses? They’ll be ready for college at that age, and will have the option to trigger income or tuition money. Either way there will be no taxes whatsoever. When they graduate college they can then take out more cash, if it’s available, opt to continue the income, or simply take over paying the premiums themselves. All the options are on their side of the table. Sweet.

This Purposeful Plan is for my own daughter. Wanna know if an advisor believes what he says? Find out what he’s havin’ his own immediate family doing. What I told my daughter is not one inch different than what I’ve told dozens of couples this year alone.

Though some have opined gutting a 401k is extreme, I respectfully disagree — extremely. As I was tellin’ them over breakfast Sunday, “If you generate tax savings of $3,000 a year through your annual contributions to the 401k, you’ll have saved a total of $90,000 in 30 years. If you’re a world class stock picker and end up with $2 million 30 years hence, and get a 6% yield (don’t laugh), that $120,000/yr will quickly turn into a whole lotta $80,000 after state/fed income taxes. Furthermore, are you willing to wager you’ll not have some bad years on the way to retirement — or worse yet, after retirement? That’s $40,000 a year in taxes. In other words, in five years you’ll have paid over twice in income taxes in five short years than you saved in 30 years.”

I then asked the question I’ve often asked clients — “Why would you do that to yourself on purpose?”

Um, they wouldn’t.

Would love to hear your thoughts. Have a good one.

About Author

Jeff Brown

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


  1. Jeff,
    I think I missed one of your assumptions. They buy a duplex for 425k and it only costs them 1800/mo? Are you subtracting rent from the total cost? I guess I just missed how that factors into your calculation. BTW, great post for those looking to start their purposeful plan with little to start with.


  2. Jeff,
    Thank you for introducing me to EIULs. My son is 6 months old and I want to set up one for him, also for my wife and I (34, 31). Is there a product/company you recommend? Is World Financial Group any good?

  3. Jeff Brown

    Good to hear, Anson. Don’t do this yourself. I have an in-house, slam dunk expert who does all my clients’ EIULs. I don’t make a penny from it. 🙂 His name is David Shafer. You can contact him through his site. http://bit.ly/asLctj

    Tell Dave I sent you. He also contributes more or less regularly on my own blog.

    Don’t hesitate to contact me with any questions — good luck.

  4. Angie Menegay on

    Hi Jeff,
    I’m a bit lost on the math of this paragraph: “Then they’ll redirect Nicole’s entire take-home pay to the monthly duplex loan payment. Assuming they’ll pay the top of the price range, $425,000 — and that FHA interest will still be about 4.5% (A silly assumption, I know, but my crystal ball is still in the shop. So using current rates will hafta do.) Within five short years this will result in a loan balance of around $273,000 — not bad considering it will have started at just over $410,000. ” ==> How much down payment is she putting in? I assume you meant the loan amount is about $410K? So how can the balance end up at $273K in 5 years?

  5. Jeff Brown

    Hey Angie — Sorry I didn’t make it more clear. Nicole will redirect her entire take-home paycheck towards the loan, by adding it to each monthly payment. That’s a lotta money each month, which is why the balance will go down from over $400,000 to about $273,000 in about five years or so.

    In other words, in addition to the scheduled payment which pays down the loan very slowly in the first years, she’ll be adding her paycheck each month to the payment.

    Make sense?

  6. Jeff,
    I liked reading a post w/ a more numerical analysis then most. Alas, I’m young and naive so I didn’t understand some things.
    Could you explain the concept of an EIUL? I wikipedia’d it but am still a bit confused – is this a policy that can only be drawn from after retirement?
    Also, in your calculations for post retirement income of $100-$200k are you factoring in that daughter/son-in-law will be reinvesting in cash flowing properties periodically? Or does this all stem from the profits from the sale of the initial duplex being put into said EIUL?

    I’m looking forward to hearing more about the Purposeful Plans I’ve been reading about on your website. Looking forward to “meeting” you as well via our phone chat


  7. A very nice post. And having these guidelines for a smart and brilliant young couple will definitely take them together a long way from their petty debts to owning properties (and probably businesses) and taking whatever life has to offer them. I will personally note your ideas in here as well as they help me too as well. I’m sure anyone who is able to read this will benefit from it. Thanks for sharing.

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