I talk to a lot of 30-somethings, and most of ’em have a few things in common. They’re making nice money at work. They’re married, and their spouse also gets paid pretty well. They bought their first home. They both give generously to their respective work-related 401k plans. They live below their means. They’re savers. They’ve seen in real-time how their parents’ retirement or looming retirement isn’t anywhere near what was anticipated.
Let’s take a composite couple from my own files in this age group and financial status, see where they are today and where they might be at around 60 years old. Again, I’m purposefully ensuring this composite couple represents who I work with much of the time—speaking of that specific age group for this post—not some amazing couple making half a million a year, with a million each already in their 401k accounts. For the record, the age range of 90% of my clientele is roughly 25-57 years old. Likely the biggest group’s members are in their 40s.
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Today’s Reality: A Financial Snapshot
Doyle and Marian (how are those for old school names?) are 37 and 35 years old. He works as an engineer in the private sector whose contracts are largely with the military, earning around $120,000 annually plus small bonuses. She’s a buyer’s agent for a local stud real estate agent’s team. The team leader allows her to work very flexible hours and days due to having a couple kids, 5 and 9.
She also has a Masters Degree in Computer Science, an industry she had to leave due to the hours involved. After getting her feet wet in real estate, she averages about 1.5 sales monthly, with an average sales price of about $350,000 or so. The last three years, she’s averaged just over $75,000 in pretax income. Working in an office with over 350 agents, she also started a small company that troubleshoots and fixes computers for agents, not to mention keeping her team leader’s computers healthy and well maintained for free. So far this year, she’s made almost $20,000 doing that. Let’s assume that results in a computer income of around $30,000 yearly.
- Total annual pretax income: $120,000 + $5,000 bonus + $75,000 + $30,000 = $230,000.
- After-tax income: $160,000 more or less.
- Total cash required yearly to live, including everything we can imagine: $80,000.
- Money available for retirement investing: $50,000+ per year.
- Money they’ve managed to save in the last few years due to their wise budgeting: $130,000
Doyle’s been maxing out on his firm’s 401k plan, at around $18,000 a year. His current balance is $150k or so. He’s put an end to that recently due to his well founded anticipation of an overdue downturn and the fact he can do far better with less risk elsewhere. Less invested cash than the after tax version of that will be redirected to an EIUL, which will be structured to begin paying out when Marian hits 60 and will continue paying ’til she’s 90.
Let’s Talk About Marian’s Solo 401k
She’s going to take about $20,000/year and contribute it to the Roth side of her Solo 401k. (You must be an independent contractor or a small business owner to have a Solo. There are exceptions, but they don’t apply here.) She’ll do this for 25 years—or until she’s around 60 years old. From day one, the Solo will invest in discounted notes secured by homes around the country. They’ll be first position and have a minimum of 25% equity behind the actual loan balance at the time of purchase, usually more. We’ll compound those contributions at 10% annually.
Wait just a freakin’ minute here—10%? Are you kiddin’ me?!!
If you’ve read me before on discounted notes, feel free to skip the next couple paragraphs. This spring marked the 41st anniversary of my first discounted note purchase. That’s a long dang time, right? In that time, I’ve never—as in, never, ever—had a note, not one, that from the first day in ’til the last day out didn’t produce a yield of a minimum of 10% annually. That’s history, people, not a silly spreadsheet projection. There literally hasn’t been one exception since that first note investment back in May of 1976. Oh, and yes, I did have to foreclose on several over that time.
In fact, there were many times I ended up with more money in foreclosure from the sale of the property than if they’d merely paid what was owed. No, really. Also, a brief note on the foreclosure scenario: If anyone tells you that foreclosure can be avoided by simply doing your due diligence expertly, either they’re massively ignorant or they think you are. Studies have shown conclusively that when a couple with FICO scores both over 800 lose their jobs, their FICO scores still can’t make their next house payment. Who knew?
Takeaway: Over the long haul you will foreclose, no debate, period.
How Does $20,000/Year for 25 Years End Up?
As it turns out, pretty freakin’ good. Her Solo 401k balance at retirement will be about $1,967,000. Experience tells me it’ll likely be a bit more, but at that amount, using a 10% cash-on-cash annual return, she’ll enjoy an annual income, tax-free, just short of $200,000. Now for those who’re screaming that there’s no way to know if 10% cash on cash will be reality 25 years from now, I agree. Merely pointing to over four decades of experience when yields never dropped below that figure isn’t in any way evidence it will continue for another several decades. The past, much to the chagrin of many, simply doesn’t necessarily predict the future. That lesson is best learned early and followed closely. Even if she should only get a cash-on-cash 6% yield at that point, her tax-free income from that source alone would still be over $100,000.
Marian’s EIUL: A Life Insurance Policy Structured for Tax-Free Income
I asked my EIUL expert, Dave Shafer, to let me know two separate figures for tax-free income. The first would be using the government’s required yield guideline. The other would be using the midpoint between the government guideline and what’s actually happened empirically the last 25 years. Here’s how the policy would be set up in general.
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It would use $6,000 up front as a “jump starter.” That doesn’t seem like much, but over a long time, it actually makes a pretty big difference. The monthly premium would be $750. Voluntarily, Doyle and Marian would raise the premium each year, using inflation as a guide. You’re going to get clipped by inflation either on your premiums or your retirement income. Choose your premiums if you can.
The ultimate tax-free income from their EIUL would be in the range of $72,000 to $86,000 yearly. The reason for the spread is simple. The government recently required the use of no more than roughly 7.1% annual yield in calculating policy income. However, the index Dave uses the last few years has produced, historically, not projected, around 9.24% annual yield. This was for the most recent 25 years, not a small time sample.
Where Are They So Far?
Without a dollar invested into any income property yet and no personally owned discounted notes or note investment group shares, they’ve set themselves up for around $270,000/year or so, both sources completely tax-free. Next week, we’ll examine what they decide to do in the real estate investment arena. They’ll be making solid use of the tax code to maximize their return in a compressed timeline. At the end of that timeline, they’ll also be able to begin their privately owned discounted note portfolio. We’ll begin applying real synergy to their purposeful plan.
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