Retiring At A Far Reduced Income When Retired Is Simply Not Required

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Since the mid-70s when I made the switch from houses to investment real estate, it’s been one of the longest held mantras.“Remember”, they begin, “When you hit retirement you’ll be in a lower tax bracket.” These are the experts who’ve been advising the very same folks who’re the targets of this nugget of wisdom. I wonder how many of their clients ever ask the guy, why the rate should be lower. Could it be due to creating a retirement income so far below what they made on the job that a lower rate was inevitable? If so, why have they been payin’ this ‘expert’ to get them to that pitiful end game?

But, as I implore my clients, don’t let me get away with sayin’ something like that without backin’ it up.

Given a fair time period allotted to investing for your retirement, say 15-35 years for most of us, what is reasonable to expect when it’s time to pull the retirement trigger? That one question alone causes more heated debates, especially online, than almost any other investment topic. At least in my experience it does. Don’t know about you, but arriving at retirement with a Social Security check in one hand, and $25,000 a year from a pension, or annuity, or whatever, in the other hand? I don’t think I’d be much inclined to be a happy camper.

Frankly, when the Firestones hit the pavement, why, when given enough time, and capital, shouldn’t the typical couple be able to retire on more than they made on their jobs? When we pose this query to the Wall Street crowd, the charts and graphs come out, augmented by the sound and fury of the talking head, which ends up sayin’ not much, but very impressively. Meanwhile, back at Retirement Ranch, the couple who asked the question retires with the aforementioned coupla checks, and a somewhat crotchety disposition.

What to do?

As an example, allow me to use a (real life) young couple, both gainfully employed, and with solid jobs. They’re both 20-something, and have saved their money like Grandma in 1933. They live in a modest condo purchased not long ago, and bought an equally modest income property, using the minimum down payment, 25%. It closed recently. They’ve never stopped saving, having chosen to live below their means, but comfortably. They’re about to acquire another modest investment property. At that point they’ll have a nice cash reserve, and will continue saving towards another investment. They’ll save ’til they have the down and closing costs. It’ll take as long as it takes.

Between them, Denny and Anna make about $180,000 a year before taxes. I won’t take the time and space to go into minute detail here, but suffice to say, they’ll have paid off their first two small properties in about a decade. They’ll use a combination of cash flow and a budgeted amount of money each month to make this happen. They’ll be 30-something. Their real estate investment portfolio will have a net worth a few Big Macs over $500,000 — assuming not a whit of appreciation, ever. The cash flow will be roughly $37,000 a year — again, assuming no increase in NOI, ever.

‘Course, that’s not all they’ll be doing in those 10 years.

They stopped wasting money via contributions to their 401Ks, last year. Between ’em that’s around $2,000 monthly. We’ll take the after tax version of that amount, let’s call it $1,300, and put it into an EIUL. (You can search for it here on BP, or on my site.) In approximately 30 years, when they’ll be 50-something, they can, if so inclined, trigger the income feature of that policy, ensuring a six figure tax free income for virtually the rest of their lives. I’m doing this with my own daughter, who’s their age. She and my son-in-law will generate the same results, with just $1,000 a month in premiums, adjusted for inflation as time passes.

Back to their income property.

It’ll take many years of saving to produce the required down payment and closing costs for their next (3rd) purchase. Let’s say they buy their third property seven years after closing the second. But wait, just three years later they’re free ‘n clear on their first two properties. Oh my, what to do?

First, let’s all agree that my crystal ball is as cracked as everyone else’s. After all, who among us knows what our economy or the real estate industry in general will look like in the next 7-10 years. I know I don’t have a clue. Do you? 🙂

In their mid-late 30’s they’ll have the option to either trade the first two properties, if they’re worth significantly more than they paid — OR — refinance them with 65% LTVs (loan to value), which would generate about $325,000 minus loan costs. Let’s call it a net of $315,000, a conservative figure. If the refi is the strategic path I’ve chosen for them, it is very likely cuz the properties either maintained their values or went up modestly. No need for a tax deferred exchange. (Never force a 1031 exchange. The decision to execute one should be a no-brainer, or don’t do it.)

If there’s been little or no appreciation in value, then let’s explore what they might do with the newly acquired cash.

They’ll probably acquire four more small income props. This will necessitate them adding about $28,000 or so from their personal coffers, but that won’t be a problem. Their cash reserve account is still stocked bountifully.

NOTE: Never, as in never, ever, short change your cash reserves. How seriously do I treat cash reserves for clients? If they don’t have enough by my judgment, I won’t work with them. No exceptions. What’s enough? It allows me to sleep at night.

They’d still be lookin’ forward to being 40 years old at this point. They would then own seven small, but productive and well located income properties. Sometime in the following 10-15 years they’ll have paid off all seven loans. The results of that accomplishment will be twofold.

1. The net worth of those seven properties will approximate $1.8 million.

2. The pre-tax cash flow will be around $130,000 annually.

Add to this the completely tax free yearly income of at least $100,000 from their EIUL.

In other words . . . 

A young, but wise couple, through living comfortably yet wisely, saving like crazy people, managed to secure a retirement income of about $230,000 a year, nearly half of which is not just after tax, but tax free. It’s more than 25% greater than what they were earning when just beginning. But, some will ask, what about when they’re in their 40’s and 50’s, and earning far more than they did in their 20’s? What if, like most folks, their job income was double what they made 20 to 30 years earlier?

I dunno, but a quiet voice in my head tells me they’d buy more property, while simultaneously beefin’ up their EIUL. After all, isn’t $300,000 a year in retirement income better than $230,000? 🙂

Wouldn’t you if you were them?

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. The very next time I read a blog, I hope that it does not fail me as much as this particular one. After all, I know it was my choice to read, however I truly thought you would have something helpful to talk about. All I hear is a bunch of complaining about something you could possibly fix if you weren’t too busy seeking attention.

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