This may end up being one of my favorite case studies. It’s an ongoing file. I’ll be changing names, and some facts that won’t change any outcomes in order to maintain their privacy. These are real folk, wicked smart, and just now writing the first few chapters of their family’s story. I really like ’em.
Dave and Nicki are both in their early 30’s, both professionals making six figures, and the proud parents of two month old Langley, their first child.
Between them they’re putting in over $2,000 monthly into their 401k’s. After comparing two scenarios — A) Continuing the status quo, i.e. the current monthly contributions to qualified retirement plans. OR B) Gut his plan (hers too if I had my way), pay the taxes/penalty, and leave that flawed strategy in the dust. I’ve recommended Plan B, which they’re considering. First step in the process was hittin’ up their accountant for advice.
I’ll give ya three guesses as to what he told ’em, and the first two don’t count. 🙂
To quote Dave, the guy was “quite adamant” about not doing this. I’m guessin’ Dave buffered the guy’s response a bit. The accountant calculated that the net would only be half of the money taken out, after taxes/penalty was paid. I’m not sure of that, but we’ll use it just the same. I’m bettin’ their accountant is a real pro, knows his stuff, and has their best interests at heart.
He’s just dead wrong in this case, in my professional opinion.
Anywho, with that money, they’d be able to buy a couple income properties. They’d hafta add a bit to make it work, but not all that much. The props would cash flow from Day 1 easily. Giving them a 15-25 year window to pay them off, the debt free cash flow would be in excess of $3,000 monthly between the two properties.
Then there’s the question of the $2,000 a month no longer being shoveled into the 401k. What to do? Hey, I has a idear, let’s pile that money into an EIUL — duh. Here’s how it works out.
Note: Dave puts $24,000 yearly into the EIUL for 20 years, then let’s it simmer another five years. That’s the same amount he was puttin’ into his qualified plan at work. That puts him at 57 years old. He then pulls the ‘income trigger’ and starts collecting tax free income.
Some time in the 15-25 year window, the duplexes were paid off. The timing is up to Dave and Nicki, of course. The income, assuming no increase in NOI (Net Operating Income) would be just over $37,000 a year, around $3,000 monthly.
At the end of 25 years, about age 57, the EIUL is triggered, and the annual tax free income from that comes to $168,000. Again, don’t pass over it — tax free.
I Double-Dare Ya
I’m gonna skip tryin’ to explain to those who’ll immediately start complaining about losing all those years of tax savings derived from the annual 401k contributions. I’m sure, given the results of my strategy, Dave ‘n Nicki would be more than content allowing you to have all of it. 🙂 But here’s my challenge to those who remain in the 401k camp.
Please show me how you’re gonna generate $205,000 a year from your 401k in the next 25 years — roughly 92% of which will be after tax income.
What must happen on 401k scenario
In order to generate an income at retirement of $205,000, and assuming a yield of 6%, (which btw, is 2% more than the gods of Wall Street predict most of the time) Dave ‘n Nicki would have to have built up their 401k to to — wait for it — here it comes — a skosh over $3.4 Million. Oh, wait. That entire yield is completely taxable. Think at least $4 Million to net the same as the strategy I’ve recommended.
Really? Who’s raisin’ their hand to claim they’re gonna make that happen in their 401k?
Even without one measly losing year in the next 25, does anyone seriously think they’re gonna be the one in 10,000 (probably more like 1 in 100,000) who ends up with $4 Million in their 401k? If you can do that, tell us your secret cuz there’re 70,000+ readers here who we be all ears.
All this and this income will merely be in addition to what the remainder of their plan generates. If they follow the plan and are as disciplined as they’ve obviously been up to this point, they’d have to screw up not to end up within shoutin’ distance of a $300,000/yr retirement income — the majority of which will be after tax money.
So, like I was sayin’ — gut your freakin’ 401k/IRA and get serious about your retirement. 🙂