Did you know it’s not preordained that you must lose money in the stock market? If you use the strategies of indexing and resetting you can grow your money without the risk of stock market losses. Enjoy this quick video explaining these two powerful yet little used strategies and let us know if we can help further.
Well, if you have not heard yet my new book launches on Monday, Dec. 7th. I am so excited to have this book available to everyone as there is great information inside.
Want to know more about “Wealth Without Stocks or Mutual Funds“? We have some pre-launch videos talking about the book that you can view here. Also, the website is just chocked full of information; each chapter is discussed so you have an idea of what is covered, resources for you to tap into, additional training, and so much more!
And the best thing… there is a special bonus for those who purchase the book (Paperback or Kindle) from Amazon.com during our Launch Promotion. I will share the link to that Special Bonus on Monday.
We look forward to hearing from you! All of us at Perpetual Wealth Systems is ready to provide you will any follow up support needed to actually implement the strategies and information in the book to help you and your family.
PS: Here is the latest video but you can watch all of them here
When you set up an individual retirement account, you’re usually given a list of investment choices — mostly stock-based funds, and some bond funds. Many financial professionals call this a self-directed IRA, but it’s really just a multiple-choice IRA: “You can invest in anything you like, as long as we approve it and control the funds.”
However, a real self-directed IRA can be set up with an administrator who is approved to handle nontraditional investments, such as real estate, private loans, tax liens, limited liability corporations, options and other non-stock and non-bond investments. These IRA are for the active and educated investor, not for the investor who just wants to put money away and turn the management over to brokers or financial advisers. It’s more work, but the potential with this type of account is tremendous.
Let’s consider a few hypothetical investments.
- If you bought a home for $50,000 using funds from your self-directed IRA and leased the property out for $900 a month, your net cash flow wouldn’t be taxable. If your net monthly positive cash flow was $550 (a reasonable figure), your $6,600 would either be tax-deferred or tax-free depending on the type of IRA you had used (traditional or Roth) to purchase the property. If you leased it for five years, that would mean $33,000 of positive cash flow would be in your IRA tax-free — plus, you still own the home. If you sold the home for $80,000, your net profit would be tax-deferred as well. In five years, you would have made $33,000 in cash flow plus $30,000 in appreciation, for a total of $63,000 of nontaxable profit in your IRA. And, yes, you can still take advantage of these types of deals.
- You could buy a fixer upper for $50,000 and put $25,000 in repairs for a total investment of $75,000. If you flipped that property for $110,000 and netted $105,000 after sale expenses, that would be a $30,000 profit. That profit will be tax-deferred — and you can repeat the process. If you had flipped the property outside of your IRA, you would be subject to short-term capital gains taxes, payable at your ordinary income level. You would have had to give $10,000 to Uncle Sam, and you’d have been left with just $20,000 after tax profit.
A More Complicated Scenario
You could buy a property and sell it with a wraparound mortgage. Let’s say you find a fixer-upper where the seller is willing to take a small down payment and carry the balance of his equity in a note and mortgage. The seller will take a payment for his equity for a number of years. Say the purchase price is $100,000, and your down payment (from your IRA) is $10,000. You have a $90,000 mortgage payable to the seller with a 30-year amortization at 5 percent, with a five-year balloon payment, giving you a principle and interest payment of $483.
You later sell with these terms:
- $125,000 purchase price.
- $20,000 down payment (giving your IRA the $10,000 investment back plus a $10,000 profit).
- $105,000 wraparound mortgage payable to you with a 30-year amortization at 7 percent, with a four-year balloon payment, giving you a $699 payment coming in every month.
- You are responsible for the underlying payment of $483, giving you a positive cash flow of $216 per month or $2,592 per year. This will be a four-year net cash flow of $10,368, plus the $10,000 profit up front.
- Also in four years, you will still be owed $100,000 but will only owe the underlying seller $84,000, giving you another profit on the back side of the sale of $16,000.
Let’s do a little back-of-the-envelope calculating to see if it’s worth your time to get educated on the ins and outs of this type of transaction. The profit over four years is $10,000 up front (the difference between the down payment you made and the down payment collected upon sale), $10,368 of positive cash flow and $16,000 of back end profit when loans are paid off for a $36,368 net profit for our IRA on a $10,000 investment that we received back in the first 90 days.
The Dodd-Frank Act mandates certain disclosure and actions be taken if you deal with private mortgages and financing. Get qualified help. Balloon mortgages are not acceptable anymore when selling to an ordinary buyer, but could be fine if you are selling to another investor.
In a transaction like this one, you would use borrowed money in the form of a seller-held mortgage. This would make some of your profit taxable out of the IRA, but the rest of the money would get to stay there tax-deferred. Your IRA can borrow money, but it has to be non-recourse debt, which means there are no personal guarantees on the money you borrow. If you don’t pay the seller, his or her only recourse is to foreclose on the house; he can’t come after the IRA or you personally for any deficiencies. Consult a highly knowledgeable real estate professional and an attorney to help you set this up properly. You should do research and get more training on these types of deals as well.
Some Limits Apply
There are some things you are not allowed to do with your IRA. Among them:
- You can’t invest in collectibles such as stamps, coins, comics or baseball cards.
- You can’t self-deal, which means no loaning money to yourself.
- You can’t loan money nor do business with IRA money with anyone in your direct linear family chain, such as your spouse, children, grandchildren and parents. Your IRA may do business with family members not in your direct lineage, such as siblings, aunts and uncles).
Several companies offer self-directed IRAs; two of the bigger ones are Equity Trust and Entrust. Before you go this route, it is important to do your homework on which is a good fit for you and what you are trying to accomplish. But if you’re up for the challenge of nontraditional investments, you should take a close look at this fantastic opportunity to be fully in control of your IRA.
If you can master these seven gears of riches you will own a rock solid financial fortress that runs like a well-oiled machine.
Most of my clients are not balanced when we first meet. When you can appropriately balance these 7 gears they will feed off of each other and you could have a wealth creation perpetual machine. How are your 7 gears working together?
- Income from job and/or business is your life blood to live your life and pay all your bills. I don’t feel we were put on this earth just to live, pay bills, and die so this cash flow must be large enough to pay your bills and live a certain lifestyle with options such as vacations, nice home, automobiles etc. When your cash flow is weak you cannot plug up your wealth drains nor can you fill in the other 6 gears. You should be working toward a results driven income so you are not limited by other people’s opinions of what income you should make. One of my mentors told me years ago that profits are better than wages. He was so right and for many reasons.We will be exploring several ways to immediately increase your income in future articles. I want to give you several options to make extra money and for some of you that might lead to an entirely new career in the future. There are millions of families whose lives would be greatly influenced for the better if they just brought in an extra $1,000 to $2,000 of monthly income.
- Investments are the second critical gear and there is a seemingly endless supply of places you can invest money that could make you wealthy and other seemingly endless supply of places that could also take all your money and leave you poor. The secret is to find a few core investments that you understand very well and work those investments. Become an expert at even one or two solid investments and focus your efforts in those areas. One of the biggest mistakes people make is to put all or most of their efforts to just their investment gear and little effort into the other main gears or drains of their financial life.
- Cash on hand is seemingly self explanatory and is not a difficult concept. However, even though it is a simple concept many people focus on putting so much into investments that if a short term cash need arises they might not be able to satisfy that need. They also might be able to satisfy the need but at a cost of selling investments at losses or incurring penalties and fees to get their cash needs met. Cash set aside is usually thought to be low interest bearing but that does not have to be the case. There are great financial vehicles out there that will allow you quick access to cash while still giving you a decent return on your cash as it sits in the account.
- Guaranteed income is the income we can count on after our job or business income either goes away completely or drops significantly. Do you know how much income you need every month to live your current lifestyle? Would you like to live even better? Most retirement accounts such as IRA’s and 401k’s make no guarantees on how much monthly income they will provide in your retirement years. Do you have a pension? How much will you receive from Social Security? Will Social Security be there in the future for your retirement years? The Social Security Administration’s own web page says that if you retire after a certain year you will only qualify for 77% of the current amount given to you as your projected retirement account. A successful and abundant retirement will require safe and stable income.
- Debt elimination or reduction will be critical to a worry free life and retirement. If you have a $2,500 house payment and $2,000 of that amount goes toward principal and interest you will have $2,000 more net cash flow if you can pay that home off in full. You will learn how to do that faster and easier than you ever thought possible in future articles.
- Long term care or home health care in your older years. Most people’s plan for dealing with long term care boils down to one word……..Hope! Hope is not a strategy but there are strategies that are little known that can aid you should you ever need extra money for long term care or home health care. If this one gear falters it can systematically destroy all the other gears you have been working so hard to build. The average cost for care varies by state and even by city. Many times, by simply reallocating existing assets you can control the potential back breaker of long term care or home health care without expensive long term care policies
- Estate or legacy is what you would like to leave behind in this world after you move on to the next one. Would you like to give family more options in their lives as far as education or opportunity? Do you have a special cause or foundation you would like to help long after you’re gone from this life? Would you like to make sure that all your hard work doesn’t go to Uncle Sam after you pass away or to a greedy court system? A proper estate plan is critical to closing out your financial life and leaving a positive influence behind generations after you’re gone from this world. If you want to determine who is entitled to what than a simple estate plan is a must.
We are going to show you how to build out all your 7 gears of riches while at the same time plugging up your 4 main wealth drains. You hold in your hands a completely new way to look at money and wealth. We can’t wait to continue to add more articles as the weeks and months pass!
There is a big misconception in the financial world and among consumers today that all interest is the same: that, for example, a 6 percent mortgage is the same as a 6 percent line of credit. That’s not true, because the type of interest you are paying and how it is calculated are just as important.
Most U.S. mortgages are financed with fully amortizing loans. This means that a monthly payment to pay off the loan is based on the interest rate, the amount and the term. For example, if you borrow $200,000 using this kind of loan, your payment based on a 6 percent rate and 30-year amortization schedule is $1,075.
You may have heard that just one extra payment a year toward the principal of such a loan will pay it off about 10 years sooner. Homeowners have many reasons not to do this. They don’t want to tie up that extra $1,075 in their house. They receive no immediate benefit. They would rather keep their $1,075. They want to spend it on something they probably don’t need and won’t want three months after they buy it. They reason that they will sell their home in eight years anyway, so it doesn’t matter. Or they believe interest rates are so low now that they should borrow as much as they can, and invest all of their money rather than paying down debt, because they will come out ahead that way.
That last argument is seriously flawed.
Reduce the Finance Charge
In home equity lines of credit — also called HELOCs — the interest rate is less important than the finance charge. Finance charges on lines of credit are figured on average daily balance for the month. For example, when the 30-day finance period closes, your bank calculates that you had an average daily balance of $50,000 and the interest was 6 percent, so you will pay $8.22 per day in finance charges. Your interest charges for the month total $247, so your total payment might be around $325 because the bank will also require some money toward the principal. Simple enough, right?
What happens if on the first day you pay $5,000 on the principal? Your balance is now $45,000, so your 6 percent rate now produces a finance charge of $7.40 per day or $222 for the month. You consider that $5,000 as a pay-down, but your bank considers that $5,000 as your payment for the month.
Where do we get the $5,000? How about if you used your paycheck? Too many Americans let their pay sit in checking accounts until they pay bills. Why let that money sit there earning zero (or very little) interest? Let that income sit in your revolving line of credit to reduce or cancel finance charges.
If the line of credit is properly set up, would you be able to access your funds by writing a check? Absolutely! Would you have immediate access to any extra loan pay-downs, such as the $5,000 in the example above? Absolutely! Would the time that your money sat inside the line of credit affect your finance charge to your favor? Absolutely!
Make Every Penny Count
Let’s go back to that example. You pay down $5,000 on your line of credit — but only for 20 days, until you need most of the money to pay bills. The money then gets withdrawn (borrowed again). Your average daily balance and finance charge have been reduced. This is making every penny count by earning or canceling interest every day.
The next step is to leave some discretionary income in the line of credit. Over time, your line of credit will fall dramatically and seemingly without effort. When you balance goes down to $40,000 and all the bills are paid for the month, you can borrow $10,000 from the line of credit and send it to your first mortgage as loan pay-down? You should and do it as often as possible.
You are systematically transferring your debt from front-end-loaded amortized debt to average daily balance debt. Every time you do this, your will increase the port of your regular mortgage payment that goes towards the principal and reduce how much goes toward interest. In this was, you can use the principles of interest cancellation (and some of your discretionary income) to pay off mortgages, cars and any other amortized loan in a fraction of the scheduled time. I’ve had many clients take almost-new 30-year mortgages, and using this program, put themselves on pace to pay them off in six to 12 years without it affecting their lifestyle.
Many Australians open big lines of credit to buy their homes and pay their mortgages off in a fraction of the time it takes most Americans.
For aging baby boomers, long-term care and home health care are huge concerns, and these concerns form the last part in a series of articles covering what I call the “six circles of wealth.” These six circles break down your personal finance and wealth creation efforts. The goal is to have all of the circles spin at the same time, creating synergy and powerful momentum for your money.
Very few of my clients have all the circles covered, which means your wealth will take longer to grow and be open to much more risk than is necessary. So far, I have covered the first four: income and cash flow, investments, guaranteed income and cash and liquidity. This article discusses the last two: long-term care and your estate.
The only circle that can cannibalize the others is long-term care. It is also the circle that is most neglected, and most people’s plan for dealing with it is hope and prayer. Most people say “I won’t get that bad where I need a facility or a nurse to come in and help me” or “my family will help me with all of my needs” and even “if I get that bad, just pull the plug or shoot me and put me out of my misery.” Do any of these sound familiar?
Long-term care facilities average $7,200 a month, and according to Genworth Financial, costs are increasing more than 4 percent a year. How long could your nest egg last paying out more than $80,000 per year in today’s dollars? Many people might consider buying a long-term care insurance policy. The American Association of Long-Term Care Insurance says a policy for a 55-year-old costs $723 to $1,590 a year, depending upon benefits — and these figures are from 2009. As with most insurance, if you never need it, your family will not get your premiums back after you pass away.
Asset Reduction Via Estate Planning
One alternative is estate planning, which needs to be done with a quality legal firm that specializes in estate planning and elder law. There are ways to structure your estate that will lessen any blow that you might incur from the cost of long-term care. These usually involve getting rid of assets via gifts and trusts — years before you need long-term care — so when you have to sell off assets before Medicare kicks in its contribution for long-term care, you don’t have many assets left to sell.
This type of planning is controversial because it is seen as pushing the tab on the government even if you have the ability to pay for yourself. So unless you were smart enough to have a quality life insurance product that you bought many years ago, you could be leave nothing behind for your family. Since the traditional financial world tells us to buy term insurance and not whole life, most people will stop paying for expensive term policies as they age because the cost becomes prohibitive. Thus when they are faced with long-term care issues, they must cannibalize their estate or reduce the estate before they have need long-term care. My job isn’t to pass judgment but to pass along the information and let your conscience be your guide.
Asset-Based Long-Term Care
Another alternative is to allocate some of your funds into products that are built to help you with the cost of long-term care. Asset-based long-term care might be as simple as putting some of your money inside of a properly structured annuity. Let’s say you spend $150,000 on a long-term care annuity where you were credited with a 3-1 benefit ratio. Your $150,000 buys you $450,000 of long-term care protection if and when you need the coverage.
What if you never need the coverage and pass away at home in your bed? Then the $150,000 in that account will be part of your estate and given to your family, plus a small rate of growth. Maybe only 3 percent growth, but remember you are not doing this for growth. You have other circles of wealth that are concerned with growth and returns. This is a long-term care and estate planning strategy. You sleep well at night and maintain control of your cash, and if you never need the benefit, your family receives the money plus growth.
Whole Life Insurance
Many of our clients in their 40s, 50s and even into their 60s also set up a high-quality whole life insurance policy. This provides the estate guarantee they want for their kids and grand-kids so if they need to sell off assets to pay for care, they still leave behind their legacy for their family.
One of my favorite books is by Harvey Mackay is called “Dig Your Well Before You’re Thirsty.” These words are even truer when dealing with long term care and your legacy.
Check out The Perpetual Wealth System to learn more!
Currently, over 928,000 properties in the country are in some form of foreclosure, according to RealtyTrac, and there lie opportunities for the savvy investor.
The fact that a property is a foreclosure doesn’t make it a good or bad deal. A foreclosure is just a legal process that transfers title from the owner back to the lender due to non-payment of the debt obligation. There are four main stages:
- The pre-foreclosure stage usually begins when the first payment is missed from the borrower to the lender. That official clock starts with the notice of default. During this stage, you would buy from the owner and not the bank.
- The foreclosure auction stage is also called the sheriff sale or trustee sale, depending on if you live in a mortgage state or a trust deed state. The process is usually four to six months along and the property goes tot he highest bidder at a public auction, usually for all cash.
- Many states have a redemption stage, where the borrower can pay off the balance on the mortgage (or an amount agreed to by the lender) and get the property back out of foreclosure. This stage requires you to buy from the owner and not the lender.
- The bank-owned stage is also known as “real-estate owned” or REO. Nobody won the bid at the auction (usually nobody bid), so the property reverts back to the lender, which can sell it to a private owner; either as an owner occupant or an investor.
Each stage offers a chance to buy a bargain property—and a different strategy. Let’s assume you find an opportunity to buy a property that is worth $100,000 for $70,000. Here’s what you need to know:
- There is always risk when you invest in anything, and the way to lessen the risk is to be educated. Many quality books and seminars are available. Unfortunately, there are also overpriced packages sold by some people who have never really done much foreclosure investing.
- Verify the after-repaired value of the property. This is done with comparable sales from the multiple listing service, online services such as Zillow or a list of recent sold comparable sales from a broker or title company. One of my earliest mentors told me “until you know value, you know nothing.”
- Have a good idea of the cost of your funds, closing costs, repair costs, maintenance, utilities and selling or leasing costs. If you don’t account for those, you are in for a poor investment decision.
- Understand your exit strategy (a lease or sale) and rehabilitate accordingly. A home kept for rental should not be as heavily repaired as a flip house.
- Understand that you will rehab for profit, not for a “flip this house” series.
- Understand the timetable of your state foreclosure process.
- Decide which stage of the foreclosure process you will focus on. Generally, to save time and leverage other people’s assets, that will be the real estate owned, or bank-owned stage. In this stage, you will almost always deal with the REO agent who is generally a real estate agent with a niche business in dealing with banks to sell their foreclosure inventory. Develop a great relationship with the REO agent because they can be a constant source of good deals for your investment portfolio.
There are also several important “Don’ts”
- Don’t take any broker’s or seller’s word for the condition, comparable homes or clear title; get pro’s to help you. As Ronald Reagan famously said, “Trust, but verify.”
- Don’t get emotionally attached to any real estate investment, even if it is a foreclosure. Investing successfully in real estate is about numbers and nothing more.
- Don’t spend all your time on one prospect. Make several offers at once and word your agreements with an easy out clause if you get more than one accepted (or be prepared to buy more than one).
- Don’t forget you must know more than the other professionals involved to be successful. I know how to finance a property dozens of ways, so many times I can see a deal where many others don’t because they only know one or two ways.
Real estate investing, and more specifically, foreclosure investing, is a unique opportunity to acquire hard assets for deep discounts picking up instant equity that has the chance to grow or you could choose to covert to cash as fast as possible.
Learn a valuable lesson from the last real estate crash and don’t over-leverage properties. If you get stuck in another market crash, you could be on the hook with over-leveraged properties sucking you dry. Cash is king, but right behind that in real estate is “equity position.”
With some good education, foreclosure investing might be a great add0on to your wealth building efforts. Not everyone is wired to be a real estate investor but if you thing you are, move forward with education and action.
*If you are interested in working with John or are a real estate investor; check out Perpetual Real Estate Machine.
**John has a special training for those interested in foreclosure investing. Check out his Foreclosure Course and take advantage of John’s many years of experience in real estate sales, investing, flipping and more…
Cash is an essential part of a solid financial fortress. Even the sound of the word evokes an all-over body tingling to most people. The adage that “cash is king” is true, and this is especially true if that cash is used to buy distressed assets at a huge discount. The longer the sales cycle for an asset, the more valuable cash becomes. When you sell stocks, the money usually clears the next day. There is no costly waiting time, as there is when you sell a property or even a business.
When you sell long-sales-cycle assets, then cash can become an invaluable negotiating tool, depending on the sales situation of the seller. Many people will tell you not to keep much money in cash because you will make no money on the cash (or at least very little). This is a shortsighted view. Having cash in a bank, in cash-value life insurance and even a safe deposit box is invaluable because you can access the money immediately without having to sell an asset at a loss.
A $200,000 House for $100,000 — Today Only
Let’s say you receive a call from your neighbor, who must sell his house immediately. You are familiar with the house and are very confident that it would sell for $200,000 on the open market given time. Your neighbor is pressed for time, due a new job, a new life or whatever. He tells you that he needs to close in three days, and if you can make that happen, he will sell the property to you for $100,000, which represents a 50 percent discount. (I have bought many properties at 20 to 50 percent discounts — as have many people all over the country.) Could you make that happen if you received that call today? If you had the cash, you could write up a purchase agreement and send it to a title company with a rush close. You then wire your funds to the title company and sign some documents and presto you own a $200,000 house for $100,000, which means you have a $100,000 equity profit. Equity profit is not cash profit, but it is real wealth that you can convert back to cash if you so choose.
That money in the bank or your insurance policy — earning .05 percent to 5 percent — has the chance to close to double in 60 to 90 days when you resell the property. Any real estate investor will tell you that to convert that house back to cash will require some holding expenses, a little fix up and selling expenses. When the home resells, you might net $80,000 of profit. The original $100,000 of seed capital goes back into the bank or your cash value life insurance policy along with some interest that you should pay yourself for the loan. Now you are free to do as you wish with the $80,000. Depending on what funds you used to close on the property, you will probably owe short-term capital gains taxes. You could also choose to hold the property and possibly obtain a mortgage from a bank or private lender to pull back out much of your cash. Then you could rent, rent to own, or equity share that property and sell out later for hopefully more money and at a more beneficial tax rate.
Fast access to cash — combined with some education on how to buy distressed assets — can pay off handsomely. If you had all your money tied up in the market or fixed-income assets, then you could not take advantage of that unique opportunity that came knocking on your door.
Waiting for the Opportunity
That $100,000 of cash will buy every $100,000 or less asset on the market (property or business for sale) and it will buy most $110,000 assets, some $125,000 assets, a few $150,000 assets and the occasional $200,000 asset because you can solve problems quickly with that fast cash. Rates of return are not always figured out inside of the product you are in but rather what can you do with that cash when the right opportunity presents itself.
What if it took two years for that opportunity to present itself? Would it still be OK to keep that safe money parked and available at a low rate of return? Of course it would! Never make the mistake of thinking that all your money needs to be invested or in fixed-income assets such as bonds or annuities. Maybe you could educate yourself on how the distressed real estate and note markets work and spend a little time and effort on taking advantage of that market.
Cash parked in a safe, easy-access place would also allow you to take advantage of the next stock market downturn. If you had cash and guts in 2007 and ’08 and decided to take that cash and invest in great companies that are way down due to more of the market than anything internal to the company, you would have made a killing. So when is the next market downturn? Nobody knows, but it is just a matter of time and those with cash and those who are willing to buy when blood is in the streets always create fortunes.
Life is not just about knowledge but requires action as well. Please complete this life changing exercise before you read any further. Add up all the payments you have ever made in your life to a bank or finance company on every debt you have ever had during your life. This is on cars, real estate, business loans, business equipment, student loans, boats; anything motorized, etc. Now whatever that figure is for you (it will be largely a figure of age and income) double that number. So if your figure is $1,000,000 in total payments your number would be $2,000,000. Why do we double that figure? By giving up control of all your money in the form of monthly payments for all those years you turned over the growing power of that money to the bank. Depending on your age, even if you had kept that money and received even a modest interest rate of 4% to 6% your money would have easily doubled once and for many of you doubled a couple of times. Now that we have your “money lost” figure you need to add up your “money kept and invested”. To get that figure simply add up all the money you have saved up in your IRA’s, 401k and other retirement accounts. Grab your most recent statements and add them up quickly.
This entire exercise can be done in 10 minutes and I challenge you to do it before you read one more word or at least immediately after you’re done. How much have you saved and invested for retirement? Now which of those two totals is bigger, the money paid to the bank figure or the money for your retirement figure? Now ask yourself who is getting rich with that personal finance model. The answer is very apparent and that is the banks and Wall Street who love this business model. You borrow money your whole life and don’t care as long as the interest is low. This keeps you in financial bondage to the banks. Then whatever money you are able to put away is put inside of qualified plans and then given to Wall Street. Wall Street is flat out drunk with money and has been for many decades.
When I do this exercise in front of a room it produces laughter from the crowd because they are realizing that the monthly payments have deprived us of most of the wealth in our lives. My average participant might tell me $2,000,000 given in payments and lost growth and $70,000 saved for retirement. Which figure would you prefer to have for yourself? This is math that any fifth grader can do and makes sense to anyone who has an open mind.
Now to be fair very few people could afford to self finance their first car or house so the numbers get skewed because you most likely would not have the option of self financing those early items. However, that is not an excuse for not moving toward that goal of being self financed. Think of your life as a giant income wheel. Income comes into the wheel and most of it gets spit right back out the other side of the wheel. Your goal is to keep as much money as possible coming in on the wheel for your accounts and to stop the 4 massive wealth drains we all have during our lives. Yes, there are more than 4 wealth drains but these 4 are the biggest and must be stopped so you can grow wealth regardless of what happens to any market. We will be discussing these wealth drains in depth in future articles.
It’s important to understand that I am not advocating just paying cash for items like many gurus incessantly preach. I am talking about using your capital just like a major bank would use their capital. If you took out a loan from the bank would they be alright with you borrowing the money and not paying it back? Would they be happy with no interest paid to them? (Don’t get fooled by those 0% loan pitches because there is always a cost of money but sometimes it is hidden in the actual price and not the finance charges) The answer to both of those is, of course it wouldn’t be acceptable to not pay them back or not give them interest. Then it stands to reason that if you are acting as your own bank, why would it be acceptable to not pay yourself back or without interest? It is never acceptable just to pay cash (especially for anything over $10,000) and not pay the bank back even if you own the bank.
Last week, we talked about investing, the second circle of wealth in my series of “Six Absolute Necessities for Acquiring Long-Term Wealth.” The third is guaranteed income. When I study people with successful retirements, filled with abundance and options, almost all have things in common:
- They carry very little, if any, personal debt.
- They have stable, secure income from multiple sources that they can set their watch by every month
- Starting about 10 years before they retire, they begin shifting their assets from riskier investments to low- or no-risk income assets.
A mortgage is generally the biggest debt most of us have. Many argue that you should never pay off your house because the equity you put into it is tied up and not making you money. They might recommend borrowing as much as you can now because interest rates are low.
I say you can have the best of both worlds. First, pay off your mortgage before you retire. By adding small amounts directed to your principle every month, you will take months, even years off your payoff date. When your house is paid off, get the biggest equity line of credit you can. This way, if you see an attractive investment opportunity, you can put your equity to use, and if you don’t, you have removed the pressure of a big mortgage payment in retirement.
If you can pay off your mortgage while you are working, why not now shift that payment over to a solid savings or income product? This could work out to tens of thousands of extra dollars producing monthly income for when you retire.
An abundant retirement is about strong positive cash flow that you can count on for years to come. Do you have any idea how much money you need to retire every month? Do you know where you can get that income from? Do you have enough money for home health care or long-term care? Are you protected from big market downturns during your retirement years? How much will inflation eat into that monthly income needed?
All these questions must be part of an income plan. We calculate these for clients all over the country. First, know how much income you and your spouse will receive from Social Security when you retire. You can get an estimate from the Social Security Administration. If you believe that number is at risk because of issues with Social Security, you better start putting more away and growing it safely.
If you need $5,000 per month to retire and the Social Security for you and your spouse is only $3,500, then you have a $1,500 shortfall. Do you have a pension? How much will that be when you begin to draw it? Do you have a 401(k) or Individual Retirement Account? How long could that account last if you need to draw $1,500 a month — $18,000 in a year? Will you have to pay taxes on what you take out? If you have a 401(k) or traditional IRA, the answer is yes. If you lose 50 percent of your capital to a bear market, how long will you be able to get $18,000 per year?
As you get to be in what we call the “retirement danger zone,” which is 10 years before your projected retirement, you need to start shifting assets away from market risk and over to guaranteed products. A solid fixed indexed annuity with a long-term income rider might be a very good call. I wrote an article about the different types of annuities and how to purchase one that fits your needs.
A lifetime income rider (state and product variations exist) will guarantee that you have a certain amount of income (depending on how much you have in your annuity and at what age you start withdrawing) for you and your spouse’s life. If you live to be very old, your normal retirement funds might run out, but a lifetime income rider guarantees that income stream regardless of what happens to the underlying cash in the account. Also if you have five to 10 years, you have time for that income rider to grow. Many income riders offer 6 percent and more guaranteed growth every year.
When you purchase a $200,000 annuity, many companies might offer a 10 percent bonus on your initial purchase price so your starting amount would be $220,000. When you add compound growth at 6 percent over 10 years, your income rider would top $400,000. Then you would start to draw your lifetime income at 6 percent of the $400,000, giving you $24,000 a year income for you and your spouse’s life. Presto! You have filled your income gap. If you have the resources to purchase another annuity, you might get one with a cost of living clause to hedge against inflation.