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.

Plan #1

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.

Plan #2

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.

Human Nature

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

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. It seems like a no brainier to many of us who are investing in Real Estate. I try to mention the advantages of long term rentals in retirement or investing blogs and I get completely ignored or even harsh comments on how dumb I am. People have been programmed for so long to accept the traditional retirement route that it is hard for them to consider anything else.

    • Good article Jeff! And yes, Mark, isn’t it ridiculous how quickly people shoot down real estate. They quickly point out the negatives of debt, risk, fees, and other issues. And yet it seems pretty ridiculous and patently obvious that they are repeating the sales talk of their financial advisor. We need low cost index funds! Pay it no mind that they haven’t built wealth for anyone yet.

  2. Jeff Brown

    Hey Guys — Having been a kid when he bought his first (and last) home, I might approach walking in his shoes with a different question. Let’s say you were 30 in 1965, and a few years earlier you’d bought your home somewhere in the range of $10-15,000. Here’s the question: What do you think of my prediction that your home, with the improvements you’ve added, will be worth well over $120,000 in 1985?

    It’s my contention folks would’ve more easily bought into hover cars by then. Also, ask yourself if you’d have opted for quintuple the salary you earned at 30 years old. If you were makin’ say, $40,000 — that’s mean your choice would’ve been to retire with $200,000. Put that way it’s pretty enticing, isn’t it?

  3. Enjoyed the article, Jeff. I am actually on the cusp of a pretty similar dilemma as we speak. I have worked for the state of New York for 24 years. It guarantees, if I stay 37.5 years total, a pension of 75% of my best average salary for my lifetime, with an option to take a slightly reduced payout for the longer of my life/ my wife’s (she can collect if I predecease her). I just started three years ago investing in rentals. I have a duplex and a SFH and am looking at a cash-flow 4-plex right now. I see the potential, but I haven’t replaced my income yet, let alone my pension. Thing is, though we both have agreed to move out of state once I retire, my wife is getting very itchy to go now (she is becoming less enamored of the winters here.) I am trying to decide – what do I have to do to prepare to jump ship. Your article comes at a good time.


  4. Good article Jeff. I’m working both ends… 20 yr Military retirement, and up to 5 SFR’s at 45 yrs. old. I’m not using a sophisticated strategy at this point. Just buying, holding, and renting. I need to start exploring some ways to limit taxes later on.

    Thanks, Steve

  5. I think there is room for both strategies. Eric and Steve are good examples, as they have a government pension in addition to cash flowing rental properties. This is the best of both worlds. I am 33 and have most of my investments in equities. I’m now looking to expand into real estate for all the reasons you mentioned above, and others. But I don’t regret not getting started earlier, as having funds in 401ks and IRAs will give me a different set of options down the road (no pension for me, unfortunately).

    In the mean time, I want to build a few rentals to add some cash flow. In the long term, I would love to own multiple properties free and clear so I can live off the rental income.

  6. Chris Clothier

    Jeff –

    I love reading your articles. Everything is always so up front and in your face – which, we really, really need more of in today’s society. There is no beating around the bush that when we reach retirement age we are either ready or we are not. I, for one, do not plan on moving back in with my kids during retirement or leaning on them to take care of me!

    Thanks for doing such a great job with all of your articles.


    • Jeff Brown

      Hey Chris — You’re doin’ the same thing using your own style. I know you very likely get calls like I do, from folks who’ve suddenly realized they have X years before retirement, and their current path just ain’t gonna get it done.

      There’s nothin’ subtle in the realization that time is no longer your friend. 🙂

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