Purposefully Planning Your Retirement – What Is Time To You?

by | BiggerPockets.com

Over the last 35+ years I’ve spoken with literally hundreds of people convinced they were seriously preparing for retirement. The problem for many is one of scale. For a couple in their 40s who make $80,000 yearly between them, $250,000 is one heckuva lotta money. Yet, if they’re 45, retiring at 65, turning that  amount into $1 million would require 20 consecutive years of just under 7.2% annual yield. No losing years allowed. ‘Course, they’re gonna have a down year or two, right? That means a few months to a few years on the ol’ treadmill catchin’ up to where they were when Murphy showed up. At that point, more likely than not, double digit returns would be needed to arrive at the coveted million dollar mark.

A million bucks at retirement probably ain’t gonna cut it for most retirees.

Think about it. For those getting their income from 401s and IRAs, two things sober ’em up big time, and quickly.

1.  Every single dollar coming out of their plan is taxed.

2.  If they were 65 today, the 10 year treasury bond would yield them exactly $19,000 a year plus two $5 foot-longs at Subway — before taxes.

The same million bucks in debt free real estate?

Well located real estate, assuming no increase ever, as in never-ever, in net operating income (NOI), the income would be roughly $60-80,000/yr give or take. $1,000/mo into an EIUL from 28 years old ’til 58, with inflation adjustments of about 2% annually on the premiums, will get my own daughter and her newish hubby around $100,000 annually — tax free — ’til they die.

The combination of those two investment vehicles, wisely used, with careful and Purposeful Planning, will slaughter, literally, the anemic performance of a million bucks in the average couple’s 401k or IRA.

Thing is, Purposeful long term real estate investing is relatively rare. This is especially true when compared to those with the ‘qualified retirement plans’ at work. Seems most everybody has one, but they’ll quickly tell us how the performance has been mediocre at best, and dismal at worst. What TV does with real estate is Barnum and Bailey. There’s the required flipper. Then they find a property. Then there’s some false drama created to keep us coming back after the commercials. Then they make a profit. Then it’s time for the new Netflix movie that came in the mail today.

The Takeaway

Your 401k or IRA ain’t gonna get ya there, regardless of what you’ve been told. The next person who tells me about the six figure retirement income they’re enjoying, courtesy of their 401 or IRA — will be the first. They gotta be out there, but I’ve yet to meet one.

Are you gonna be the exception proving the rule? Not freakin’ likely.

Marshal your capital, and commit to learning about how to invest in real estate, long term. Don’t travel the road most are on, it’s a dead end. There are thousands of Americans thinkin’ they’ve succeeded with their retirement plans, solely due to the fact they’re nest egg requires two commas. They were woefully misled, but after the last guest at the retirement party leaves, it’s a bit late.

Now, it might not be too late, IF, that million bucks can be extracted tax free. Alas, a pipe dream for most.

What’s that I see comin’ round the corner? Another birthday?

Time . . . is . . . not . . . your . . . friend.

About Author

Jeff Brown

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

20 Comments

  1. Learning this lesson now after 20 years of putting into my 401k/IRA’s. Still working for the company so I can’t take mine out but I did lower my contribution to just what they match. But the wife got layed off so we are going to put hers to good use buying some buy and holds. Just trying to figure out the best stratagie to take it out of the 401k, do we cash out and pay the penalties or convert to self directed IRA or what? We want to use the income from the buy and holds to keep her out of work so self directed won’t work there, but also hate the see the balance get killed if we cash it out. THANKS for the article to get my wheels spinning this morning!

  2. Good article and I couldn’t agree more. I took the hit from taking part of my 401k and bought a couple of properties to rent and one to flip. Now my net worth, even after paying the tax and penalty) is about the same as the amount I took out of my 401k, BUT it is all now mine and I’m getting a good return 11% on my rentals (more if I cash out) and some leftover to look for my next deal. The people that tell you 401k are great are the mutual funds that are making money. However, I must admit it was the 20 years of paying into that I was able to have the chuck of money so…make the decision that works best for you.

    • Jeff Brown

      Hey Michael — If you’d saved enough from Day 1 to get your foot in the door, you’d of been miles ahead of where you are now. Still, what you just did says volumes about your intestinal fortitude. You’re a great, ongoing case study of how one can slaughter the performance of their 401k with what’s left after taxes and penalties via their exit from the plan. I’d love to talk with you about your new and improved plan. Sounds like you’re already kickin’ butt and takin’ names, and I’m impressed. Great job, Michael — your a solid role model for those searching for a better, more reliable retirement plan.

  3. Excellent article! It certainly sounds like an EIUL is the best way to set up my son (now 26) for his retirement as a gift from dear ol’ mom (now 48). What happens if I die before the 30 years are up and I can’t make the $1000/mo premium payment. Does he take over the payments, and what happens to the policy if he can’t make the payments?

  4. Great info. 401s and IRAs are so common, most people just start putting money into them without considering alternatives, the best one being real estate. I’ve read so many stories of people near retirement age loosing their jobs, not having enough saved up and, consequently, loosing their homes. It’s heartbreaking. Hopefully young people take note and focus on the future as much as they focus on getting through the next week.

  5. Jeff,

    When I read your first column where you talked about liquidating the 401k completely and reinvesting the capital, I thought you were insane! And now, after a phone call with you and your buddy Dave, I’m:
    * looking at a first quote for an EIUL, deciding what to fiddle with
    * shopping around for some dividend paying, dividend growing long term stocks as a 2nd source of income
    * checking out the rental market in my area and planning my first investment

    It’s shocking but thank goodness there are people like you and Dave out there that preach the unheard truth. My 201k (401k with 50% drop in value) is providing me enough capital to get into real retirement planning!

      • What aspect of the stock part do you disagree with? I think the idea of putting some money into long term dividend paying stocks is another valid way to generate some future, possible inflation resistant income.

        • Jeff Brown

          Dividends come and go, as do companies, even blue chippers. It’s too risky, imo. Frankly, if a real estate investor can’t slaughter stock dividends with their cash flow, even in down times, something’s wrong.

          But again, it’s one of those things about which we can agree to disagree.

  6. Daniel Mina

    EIUL seems great until you hear some horror stories. Maybe someone can address my concerns about them:
    EIUL is cool in that you earn either 0% – cap rate (generally 12-15% depending on insurance company used). The problem is that when you have consecutive 0% years, premiums and fees are still taken out. Even a bit more frightening about them is that premiums can get seriously high especially if you live longer than you expect. $100,000 per year+ premiums if your well into your 80s? Im being told you have to pay these premiums or you forfeit all the benefits/value is you don’t pay. Insurance companies have a way to cap these really high premiums, but it comes at a cost of course. Instead of getting lump sum payment to your heirs at death, if you choose to cap the premium, your given the option of heirs receiving the payment…over 30 yrs (at something like 1% interest). That doesn’t sound that great now. Anyone able to address these points?

    • Daniel, maybe I can help. All permanent life insurance whether it is whole life, variable universal life or equity indexed universal life is structured to have cash value accumulate inside the policy to cover the increasing costs of insurance as you age. This is the only way it could work; as you can imagine what it would cost to provide say $1MM of insurance for a 88 year old. What happens is that you are paying for insurance that is based on the difference between the cash value and the death benefit. In other words if you have $1MM of death benefit and $700,000 of cash value, your insurance costs are based on $300,000 of insurance. So in the early years you are paying for a lot of insurance, while in the later years you have high cash values that limit the amount of insurance required and therefore the cost. Now what folks like me do, is to decrease the death benefit [and therefore the cost of insurance] down as low as the IRS rules allow. A properly structured EIUL will have reduced death benefit, therefore reduced insurance costs [and overall costs which are tied to the size of the death benefit]. The other item going on in these policies is that the expenses are mostly taken out in the first 10-15 years of a policy, so as you age and start to take money out of the policy, there are little, if any, expenses to drag down the internal rates of return. Finally, as you take money out, these policies decrease the death benefit to keep the amount of actual insurance you pay for at a minimum during those later years of the policy. A good agent, that knows what he/she is doing. can create an illustration for you that will demonstrate how all these items work on a year to year basis along with demonstrating the expenses.

    • One further comment. Horror stories are told about every financial product. In the insurance industry there are a fair share of horror stories, mostly about folks who didn’t know what they doing when structuring life insurance of all types or actual malfeasance from the agent or company. But, very few insurers would create a product with a known defect because they would end up bankrupt when the lawsuits hit. EIULs are great products for tax free retirement income and were designed by the companies to accomplish that goal. They work as advertised. But, as in all of the financial services industry, make sure you are dealing with an experienced and ethical agent for best results. I don’t know how many times I have had calls from someone who “bought” their policy from a relative or friend who took advantage of them and sold them a improperly structured EIUL or an EIUL from a poor performing EIUL/

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