Personal Finance

The 4 Pillars of Wealth: How to Retire With More Income Than You Ever Made at Work

Expertise: Personal Development, Personal Finance, Mortgages & Creative Financing, Real Estate News & Commentary, Business Management, Real Estate Investing Basics, Flipping Houses
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So often while at various seminars, conventions, and events, I get asked questions about my basic approach to investing for retirement. It’s a fairly simple philosophy, though often the execution is not quite as easy as “simple” might suggest, if you know what I mean. I came to call it purposeful planning.

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It’s taken decades for the approach to get where it is today. I began calling the basic factors the 4 Pillars long ago. Here they are:

  1. Real Estate
  2. EIUL (if the client has enough time to make it effective)
  3. Notes in a Roth Envelope
  4. Notes in the Client’s Personal Investment Portfolio

It’s important to point out that the 4 Pillars are almost never treated as stand alone parts of the comprehensive plan. In fact, what ensures measurably superior performance is the tenacious and consistent combining of multiple investment strategies in order to create synergistic results. We’ll explore that in depth in an upcoming post.


It stands for Equity Indexed Universal Life, and it’s really just a life insurance policy. The structure is very different from a conventional life insurance policy in that it’s meant to provide tax-free income in retirement for many, many years, not a one-time death benefit to a spouse or kids. No need to get into the weeds here. Suffice it to say the vast majority of my clients who’re able to incorporate these policies into their overall plan will make more money in retirement utilizing this one vehicle than 95% of successful real estate investors pocket, after tax, after 15-30 years of investing.

Here’s a very recent example.

A male client, 43, just started an EIUL for himself. Its timeline is the shortest that's practically possible, 14 years. His premium, indexed to inflation, is $750 monthly. At age 57 he'll receive an annual tax free income of just over $92,000 'til he's 80. What real estate investor do you know who does that from real estate investing alone, in retirement, and after tax?

It's also important to bear in mind that we often use after-tax and tax-free profits from the sale of buy ‘n hold real estate to fund EIULs. Remember, whenever you can combine two or more strategies prudently, the synergistic result will often show itself in high income and/or net worth.

NOTE: Whenever I refer my clients to the expert I use for these policies, I make no money, directly, or indirectly. It’s the right thing to tell them, so I do. For the record, I also recommend this approach to my own family.


Real Estate

Here’s something that’s sure to surprise many. In the end, the total of all income in your retirement will effectively turn your view of cash flow from income property to that of “spending” money. The real value? It’ll end up being the Bank of (your family name here). How do I mean that?

Let’s say you retire with $1-2 million of free ‘n clear residential income properties. Likely it’ll be a collection of 1-4 unit properties. We tend to change our outlook in retirement, don’t we? The transition usually takes us from hard work and sacrifice to figuring out which destination will be the next for our never ending vacation.

Remember, the foundational belief driving your plan is that your income in retirement should be more than you ever made on the job. Why on earth would anyone be content, much less excited, about arriving at retirement with income so low their tax bracket drops?!

Think about it. If you began with your retirement plan, whatever it was when you were 30ish, and retire at around 65 or so, that’s 35 years. That’s long enough to start a family and have your kids start their family, with their kids in school already. Think of all the cars you drove for an extra 2-4 years in order to make your retirement a priority. All the times you took less expensive vacations—or no vacation at all. Those times you sent out for pizza instead goin’ out for a nice steak dinner.

Yet you’re supposed to retire at a lower tax bracket, for Heaven’s sake? After 35 YEARS of very serious investing? Tell me, how does that work? Seems to me one must try to get such lackluster results. OK, rant over. 🙂

This is all to say that since you retired with $1-2 million worth of free ‘n clear income producing real estate, that equity will act forever more as your family's bank. For example, you need half a million bucks in the next several weeks? Not a problem. Refinance for tax-free cash with a loan to value of just 25-50%. Have the opportunity to buy that mountain cabin by the lake you've always coveted? Boom! You now own it.

Related: Can Buy & Hold Real Estate Fund a Comfortable Retirement? Check Out the Numbers!

But what about the cash flow the loan now uses every month? Again, relatively speaking you don’t care a whole bunch. That $500,000 loan at today’s rates will cost you around $32,000 a year in cash flow. But now you have the cabin free ‘n clear and three more sources income, two of ’em tax-free by tax code definition. You didn’t “spend” anything really. You merely reassigned half a million bucks in equity to a different property.


Notes in Your Own Name

The crucial difference between discounted notes owned personally and notes in a Roth envelop isn’t just the tax issue. Discounted notes you own personally, or notes in a group investment in which you’re a member, generate periodic payments and profits that can be redirected as you see fit inside your own overall Plan. Since you don’t need the after tax note income ’til retirement, the combining of the note strategy with your buy ‘n hold real estate strategy can speed up your timeline significantly.

Here’s an example from my files.

A client has a buncha rentals generating roughly $5,000/mo. in sheltered cash flow.

If made free ‘n clear, his cash flow would almost triple. The reason it wouldn’t jump the usual 4-5 times is ‘cuz nearly 2/3 of his loans are 10-15 year amortizations. (You don’t wanna use loans amortized over periods shorter than 30 years. Why? Simple, if times turn tough, you’re saddled with the much higher payment on the 10-15 year loans. But with 30 year loans, you have the option to treat them as if they’re 10-15 year loans, but can adjust back to the much lower 30-year payment if things go south for a while.) His cash flow would be around $14,000 monthly, or $168,000 a year.

Not too shabby, right? Well, maybe, and then again, maybe not.

If at retirement he chose to refinance his $2 million of rentals for, say, $1,125,000, all of which would be tax free. He’d be keeping $500,000 in rentals debt-free in the process. His cash flow would go from $14,000/mo to roughly $8,000. Let’s assume he took out $125,000 for his own fun ‘n games and invested the rest mostly into first position discounted notes and a distinct minority into non-performing notes for the expressed purpose of foreclosing/fixing up/selling for much larger profits.

What Might Happen?

First we’d need to figure out a predictably reliable annual yield over the long haul. In this case my experience says 15% would be attainable without much pressure. The first position discounted notes would all have warranties, so the capital would be safe. The current cash on cash return on those notes is running around 12%. Then there’s the built-in profit thanks to the discount paid at the point of purchase. That can be anywhere from 10-50%, but mostly in the middle or lower. When those notes pay off early, and the vast majority do, that profit ups the yield on that note handsomely.

However, it’s long before retirement that notes held in your own name can really add significant velocity to the growth in your real estate/note portfolio’s net worth and overall income. Here are just two examples to ponder.

  1. Take the after tax payment(s) each month, and apply it to a strategically chosen income property loan. Not only will that loan be paid off considerably earlier, but it’s happening in part, sometimes totally via money from other people. Clients often have the ability to pay off loans using only the cash flow from all their properties and notes, no family budget money.
  2. The client can sometimes fund their EIUL (see below) once they realize the waste of time represented by their employer-sponsored 401k. 🙂 Again, creating significant retirement income, in this case tax-free, using other’s money.

Regardless of how the investor uses the after-tax payments, what’s happening like clockwork is the organic growth of the note portfolio itself. The notes pay off randomly, producing a long term capital gain (IF held for over a year). That gain is taxed at far lower rates than income tax rates. The investor then takes the original capital + the after tax profits and buys more notes, usually with larger monthly payments, and bigger balances on them. Do that for 10-35 years, and you’ll understand why folks get excited about notes.


Notes in a Roth Envelope

Many ask me what’s the big difference, except for the fact that they’re not taxable. Let’s list ’em.

  1. We can’t touch the income ’til we’re 59.5 years old without paying through the nose.
  2. The payments can’t be redirected to help any other part of your purposeful plan. They must remain inside the Roth.
  3. If our Roth borrows from the outside to buy more notes, those profits/yield are treated differently. (Ask your tax guy.)

Over 90% of the time, those three things shouldn’t stop you from buying discounted notes from inside your self-directed Roth.

Let’s set up a scenario and see what’s possible.

A 39 year old investor has $100,000 inside their Roth IRA. She buys roughly $125,000 in note balances, likely representing 3-4 separate notes. Let’s say it’s three. The total monthly payments add up to about $1,000. Each year she dutifully contributes $5,500 to the plan. After a couple years, her Roth has accumulated around $35,000 or so. She buys another note. Her payments now add up to around $1,350 monthly. The third year she finds her Roth now has $21,700 — 12 payments + her $5,500 contribution. She buys another note. Her payments have now grown to roughly $1,565 a month, or $18,780 yearly. She makes her fourth $5,500 contribution, which means she then has around $24,280 to buy another discounted note.

Related: How Much Do I Need to Retire?

And so on, and so forth.

At the end of the fourth year she’s still just 43 years old, which still leaves her just over 16 years to keep building the Roth’s note portfolio. Now, imagine what happens when these notes start paying off randomly, and without the profits ever being taxed. Since the current average life of a first position note is around 6-9 years, you can see the possibilities. If it took a decade for her first purchases to pay off, she’d be reinvesting around $170-200,000 dollars into more notes. Given today’s yield, ‘cuz only the Lord knows what’ll it might be 10 years down the road, those new notes would add another $20,000 or so in annual income to the Roth. This would, of course, be on top of the payments on the notes that haven’t paid off yet.

At some point the income will allow her to buy a new note every nine months, then every six months, then every quarter, for Heaven’s sake. In just the last decade before she turned 59.5, she’d be able to add, at the very least, $50,000 in tax free income. However, since many notes will have paid off during that time period, it’s easily plausible that number would be significantly higher.

I used a Roth IRA ‘cuz it allows the smallest annual taxpayer contribution. Think for a minute how much she woulda had if she'd been an independent contractor or small business owner. She would have qualified for a Solo 401k, self-directed. The contributions on that are literally almost 10 times that of Roth IRAs. 🙂

Again, next week we’ll look into one or two ongoing purposeful plans of real people. We’ll examine in depth the way and reason why they’re combining multiple strategies to accomplish their main retirement goal.

What’s your favorite method of building income for retirement?

Let me know with a comment, and let’s talk!

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.
    Jeffrey Gordon Investor from Spokane, Washington
    Replied over 5 years ago
    nice, i like the lastest version of the 4 pillars! keep pounding Jeff, that dull roar off in the horizon is the equity market chewing up investors! j
    Jeff Brown from San Diego, CA
    Replied over 5 years ago
    Yup, been there, seen that. 🙂
    Geoffrey W. Investor from Denton, Texas
    Replied over 5 years ago
    Great explanation and very inspirational, Jeff! I’ve heard each of these strategies explained separately, but never as together or like an integrated plan that you described. The Solo 401k comment made a lightbulb go off for me as well! Good stuff!
    Nick B. Investor from North Richland Hills, Texas
    Replied over 5 years ago
    Jeff, How does EIUL work in your example above? $750x12x14 = $126000 total contributions. How does it generate $92000 income for the next 23 years (total of $2,116,000)? What happens after that client reaches the age of 80? Thanks Nick
    Jeff Brown from San Diego, CA
    Replied over 5 years ago
    Hey Nick — That’s a question for the expert to whom I refer my clients, David Shafer. I’ll give him a heads up and he’ll likely come on board to give you a solid, detailed answer.
    David Shafer from Bartlett, New Hampshire
    Replied over 5 years ago
    Nick B. I think there was a mistake in the post. The client was taking distributions at 67 not 57. Or at least that is what makes sense mathematically. Total premiums were $187,000. Rate of return was 8.5% [no longer can illustrate that high even though the 25 year look back is 9.2%]. Has a bonus every year after year 10. Distributions were to age 90. At age 90 there is still death benefit for an heir. Policy is in force until death. Hope this helps.
    Katie Rogers from Santa Barbara, California
    Replied over 5 years ago
    Those are really optimistic projections. My policy premiums started at a level 20% of my income with similar projections. However, projections and reality turned out to be very far apart. My policy also has some great features not found in today’s policies like a fixed rate of interest when borrowing, as well as a guaranteed fixed rate of earned interest. I have gotten a lot of benefit from this policy over the years, however because reality is so different from the projections, the annual income will be far less than anticipated. Therefore I worry about modern policies which are considerably more expensive than my policy with fewer attractive features.
    Nick B. Investor from North Richland Hills, Texas
    Replied over 5 years ago
    David, Total premiums for 24 years is $216000. If the growth rate was 8.5%, then after 24 years of compounding the account is worth $644,256 according to this calculator ( $92K is 14% of $644K. Does it mean that the policy starts paying 14% at the age of 67? Is this 14% guaranteed? Thanks Nick
    John D. from Fremont, California
    Replied over 5 years ago
    Nick, I would be skeptical if even the 8.5% were guaranteed but will wait for David or Jeff to respond
    Nick Sundstrom from Denver, Colorado
    Replied over 5 years ago
    Hey Nick B. – With cash value life insurance, which is what UL’s are, your paying premiums to first cover the cost of insurance. You have to remember this is an insurance product after all. The remaining portion of the premiums are then invested into sub-accounts (mutual funds). The IRS limits how much ‘extra’ can be invested. I won’t even attempt to tell you how that’s done, but you can look at IRC 7702 & 7702A if you’d like. Because the withdrawals can be made tax free they’re not going to let you stuff an unlimited amount in there. Also, these types of policies are typically buying annual renewable term life inside of them for insurance purposes. This means that as you get older, the cost of insurance is going to go up (generally speaking), which means the ‘extra’ premium being invested is going to be less. The idea/hope is to start building up a large enough cash position inside the account that the amount of insurance you’re buying is less. For example, for a $100,000 on day one, you’re buying $100,000 of insurance. However after say, 10 years of premium payments being invested the cash balance is now $30,000; now you’re only buying $70,000 worth of insurance, albeit at a likely higher rate because you’re older. I’m simplifying this to get the gist across, but what I’m trying to say is the calculation is not a simple as running a Time Value of Money calculation. If you want to get a better feel for how the funds could accumulate inside these policies, I would talk with an insurance professional and have them run you a projection. They can do this in a matter of minutes. Hope that helps! Nick Sundstrom
    Gautam Venkatesan Investor from Dallas, Texas
    Replied over 5 years ago
    Jeff – this is such a boring plan! No wonder it works! 🙂
    Jeff Brown from San Diego, CA
    Replied over 5 years ago
    You’re killin’ me, Smalls. 🙂
    Replied over 5 years ago
    This is very interesting and inspirational. I have alos heard of these strategies before but never explained thoroughly like this post. Thank you for this post. I have a similar blog for real estate:
    Randy Stubbs from West End, North Carolina
    Replied over 5 years ago
    Jeff, I need more education on what you wrote about (its blowing my mind right now). Where can I find out more about this? I’m tired of the rat race way of scrimping for a measly income at retirement. I need a smart vehicle that I can drive worry free into retirement (on top of real estate investing). Thanks for your article.
    Atul Saxena Structural Engineer from Sugar Land, Texas
    Replied over 5 years ago
    Very interesting article. I am a new investor and am not familiar with lots of the terms and do not know much about Notes. Can you point me to where I can learn little bit more about these methods in detail and become more familiar? Once again, thanks for a informative post.
    Michael S. Helton Real Estate Redeveloper from Reno, NV
    Replied over 5 years ago
    After reading this article my head hurts…but in a good way! @jeff brown, you definitely gave me some things to think about.
    Katie Rogers from Santa Barbara, California
    Replied over 5 years ago
    I would be extremely careful about that life insurance. I actually have one of those policies. I have had it many, many years and it has served me well. However, insurance companies no longer sell that exact product. What they do offer is far riskier, with much lower performance. My pillar is made of rock. Today’s life insurance pillars are made of sand.
    Kyle N. Construction Project Manager from Freeport, Illinois
    Replied over 5 years ago
    Jeff- Wow! This blew my mind! I thought I knew what I was talking about when it came to retirement investing, but I’ve never even considered EIUL (or knew what it was) or notes. Can you direct me to some more information on how to get an education on note investing? I’m very interested in that aspect. Thank you for opening my eyes!
    JP Hill
    Replied over 5 years ago
    Thanks for posting a good informative article. And thanks to all who asked questions above. I’m following this thread and interested in the answers to those quotations. JP
    Brett S. Investor from Plainwell, Michigan
    Replied over 5 years ago
    A multitude of wise men often say (including Buffet): Don’t invest in anything you don’t understand. Complexity benefits the salesman, not the consumer. Invest in real estate and the stock market using the simplest, lowest fee products available (off-MLS listings and Vanguard mutual funds). Not only that, only need life insurance for a very short period of time – which is between when you have children and when you don’t have a good net worth established. If you have no kids your spouse will work / remarry and if you have a decent net worth your family can utilize that instead. If you must buy, by the most basic, cheapest policy you can. Just say no to complex financial products.
    Glen Fuller
    Replied about 5 years ago
    I agree with Brett S 100%…very good advice Brett from one savvy investor to another!