Which Retirement Income Option Would You Have Taken?
The elephant in the room whenever two real estate investors are talkin’ real estate is, duh, retirement. That elephant is ever present in a world class website dedicated to real estate investing like BiggerPockets. Over 110,000 members speaks for itself. Experience tells me that well over 90% of those members are doin’ their level best to ensure a superior retirement at least in part by way of real estate income property. Thing is, what defines a decent to way cool retirement income?
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An Example From my Own Family
He’s approaching 80. His family lives in the house bought when JFK was in office. As they grew, so did the house, which is now about twice the square footage as when first purchased. Talk about Old School, right? He’s a retired professional who rose through the ranks through great work ethic and his ability to never stop learning. His career was an inspiration to me and countless others. One wonders though, if time travel was available, what he’d have chosen as a path to retirement? Remember, in say 1965 when he was 30-ish, pensions were more or less the rule. That year the median household income in the U.S. was $6,900. Let’s assume I came to him in 1965 with two separate strategies for retirement, and that he had to pick one and live with it.
His salary that year was $7,000. The first option would be a guaranteed retirement income at 65 — starting in 2000 — of five times his current income before taxes. It would include his home being debt free at retirement. This would include a bank account of $50,000 as a cash reserve.
He takes a bit over $4,000 from his savings account and buys the duplex for sale a couple neighborhoods over. In the next 35 years he takes what the market gives him, whatever that might be. As a time traveler I’m not allowed to tell him what I know will happen. He must make his decision based upon the fundamentals as he sees ’em, good, bad, ugly — or just outright inaccurate. His call. I am able to give him my opinion of the results of this approach alluding only to principles of investing — NOT future appreciation or rent increases.
We’re pretty much security oriented, aren’t we? So was he, as his choice was the guaranteed income that was quintuple his salary at 30 years old. How can we blame him for that choice? 20/20 hindsight is a wonderful thing, isn’t it? We now know that in the 35 years from 1965 ’til 2000, real state values and rents went berserk. That first duplex in Plan #2? By 2000 it’d gone from around $20,000 to more than 10 times that much. Today? Even after the infamous mother of all bubbles, its value is easily 15-17 times what he originally paid. ‘Course, that’s barely the tip of the iceberg, as he woulda been smart enough to sell/exchange when the market screamed for him to do so.
His Probable Path
He would’ve exchanged into at least double if not triple the property in around 1976 or so. In his region, SoCal, he certainly would’ve exchanged again no later than the end of 1978, as appreciation was insane from the end of 1975 through the fall of 1979. The recession of the early 80s would’ve completely stalled his plan. Then around the middle or end of 1986 he surely would’ve exchanged into even more property. This would’ve been repeated in the late winter/early spring of 1989. At that point in time he’d of been 54 years old and in his prime earning years — which in fact and in real life he was. His equity at that time would easily have been in the range of $1.5-2 Million. The last decade, 1990-2000 would be used to finish paying off all existing loans with the combination of cash flow and disposable after tax job income. His cash flow at retirement — 2000 — would easily fall into the range of about $7-10,000 monthly, before taxes, but with whatever tax shelter remained. It’s also possible he could’ve decided to enter retirement with a last grand exchange, but that’s unlikely.
If we take the bottom end of that range, $84,000 a year, and that’s even conservative for me, that means his income would at worst be 2.4 times the guaranteed amount for which he opted. In point fact, I can tell you with confidence that his real income would’ve exceeded $100,000 even if he’d of screwed up like Hogan’s goat. I know that from both personal experience and experience with clients. Experience, by the way, that didn’t really begin ’til more than a decade after this guy’s sojourn would’ve begun. Yet in 25 years — 1977-2002 — I saw many people who created nearly twice that income and net worth.
Let’s Circle Back to the Original Question
Which option would you have taken? Thing is, I don’t allow myself the luxury of including/predicting any appreciation in property value or any increases in Net Operating Income. Ever. Yet history amply demonstrates that over the long haul — I don’t know how to get rich quick — even if we assume no value or rent increases, real estate investors end up with retirement incomes 2-10 times higher than their counterparts who opted for the ‘security’ of a relatively guaranteed income. Before some out there respond with a comment pointing out how Captain Obvious this is, here’s some thoughts to ponder.
If it’s so transparently obvious, why are so many opting for the so-called ‘sure thing’ of company retirement plans and Social Security? It’s clearly NOT all that Captain Obvious when we consider the last 50 years of known behavior on this topic. Add to the mix all the options available today that were only dreamed of in 1965, and the gap between the two approaches becomes akin to the Grand Canyon.
The option — and you do have a choice — is to either take real control of your retirement, or take the route allowing others to dictate what you can and cannot do, and when/how you can and cannot do it. As in this real life example, the end game often defines the stark difference between a magnificently abundant retirement and a life sentence.
When we reach retirement the die will have been cast. Hindsight will be of no value. Learn from those who chose unwisely.
Photo: Joel Bedford