This is a post I began writing in June 2009. I thought it still had merit and should be shared.

Social Security’s Inadequacy

According to the 2009 Social Security Trustees’ report if you plan to live for the next 19 years, your Social Security benefits will be dependent on the income tax deduction from those in the workforce. Projected demand for Social Security benefits between now and 2016 will surpass any excess and begin to deplete the “trust” account held on the Treasury Department’s books.

The trust fund will be totally depleted by the year 2037 according to projections. This will require a decrease in Social Security Benefits or an increase in taxes to cover this shortfall.

Bruce Bartlett, a former Treasury Department economist, writes in The 81% Tax Increase:

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled “Social Security trust fund.”

The problem is that by law 100% of these “assets” are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth.

This fact is documented in the budget, which says on page 345: “The existence of large trust fund balances … does not, by itself, increase the government’s ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole.”

Prudently including Social Security benefits should be a part of a plan to achieve Retirement Freedom. However, to rely solely upon Social Security will most likely produce a pauper’s retirement.

Real Estate Investments for Retirement Income

There is hope to counteract the pauper’s fate provided by Social Security. Purchasing real estate in growth regions, using prudent leverage can produce solid retirement income.

The Benefit of Control

Social Security’s weakness for an investor is the lack of control. The average U.S. citizen does not have control over how the funds are invested or whether they are invested at all.

Investment property offers an investor much more control. An investor can choose where to invest, what type of property to buy, whether to use debt or not, how a property is managed, and when to pull money out of the investment.

The Benefit of Capital Growth

Social Security benefits are similar to the returns of annuity. When an investor buys an annuity they plunk down a pile of cash and expect to earn a specified payment over time. The amount of return is solely dependent on how much cash is invested up front.

Social Security pays retirees the same way. Retiree benefits are dependent upon their contributions during their working years.

Real estate investing offers the ability for investment growth. An investor may start with $50,000 initially invested. Over time with prudent choices based on prudent advice, $50,000 may grow to $200,000. Invested wisely $200,000 can generate a lot more income than $50,000.

The Benefit of Tax Shelter

Social Security benefits may be taxable depending on retirement income.

Real estate investors use favorable tax laws to provide greater after tax cash flow from their investments and other sources of  income. More cash flow allows greater freedom to pursue their dream retirement.

I would love to hear your thoughts on social security and real estate. Which do you think is better?

If your ready to free yourself from dependency on the government’s handout for your retirement goals, contact us for your free consultation.

Topping both advice categories, for people between 10 and 15 years from retirement and those more than 15 years away, was “build a plan around what is most important to you in retirement.”

The Bank of America press release states:

Retirees who wished they had focused more on their “life goals” indicated that they would have spent more time determining how they wanted to live in their retirement years (38%) and based their retirement income needs not just on a number that would sustain them but on one that would help them live their ideal lifestyle during these years (13%).

Retirement Lifestyle

This survey serves as a reminder that retirement freedom requires planning and foresight.

Some retirees fail to imagine what their ideal retirement entails and are disappointed when they reach retirement. Simply “not working” does not a good retirement make.

Thinking about what you want in a retirement lifestyle allows you to plan accordingly. It also allows you to plan for the economic means (money) to accomplish the ideal retirement lifestyle.

Investors, generally, can be put into one of two phases depending upon their financial needs and their employment status. I will call these the Accumulation and Income Phases.

Accumulation Phase

During the Accumulation Phase an investor is not trying to live off of their investments. Usually, the investor has a source of employment that generates their investing capital and supports their daily needs.

At this point it vital that the investor attempt to gather and grow assets. These assets need to be as large as possible to create as large an income as possible.

Appreciation is a key ingredient in a successful Accumulation Phase. Appreciation is the growth in value of real estate.

Imagine that you will earn a return of 7% on your assets once you retire. Would you rather retire with assets worth $500,000 or $5,000,000 ?

Income Phase

Once you have quit your day job, retirees need their investments to support their lifestyle. Consequently, income is more important than growth during this phase.

A transition to properties that will generate regular cash flow should be executed prior to your transition from 9-5 to retirement. Hopefully, much of this income is sheltered from the IRS through depreciation.

Why Accumulation and Income Matter

So what? Why should you care?

Your investing phase will determine the types of real estate investments you should consider.

An apartment building that will appreciate slowly over the next 5-10 years and throws off tons of cash flow may not be the best investment if you need to accumulate wealth. It may be the perfect investment for someone in the income phase of their wealth planning.

A four-plex that is break even on cash flow, but will appreciate by 15% in the next 5-10 years isn’t a great fit for someone who needs to survive off of their investment income. It may fit well into the accumulation plans of someone starting out on their journey to Retirement Freedom.

Do you need help evaluating which phase you are in? Do you need assistance making the transition from one phase of investing to the next? If so click the link below to give us a call, we would love to chat with you.

Why?

Spend much time around children and you will inevitably here the question “Why?”.

“Why do we have to go now?” “Why is the sky blue?” “Why did Johnny hit me?” “Why can’t I have candy?”

A Key to Understanding

While many adults find incessant “why’s” bothersome and tiring, for children it is a key to understanding.

Their young minds are still grasping the world. They are learning how it works. They are learning to make decisions and choices for themselves and understanding the world around them is key that.

“Why” allows children and adults to understand the reasoning and the logic behind the actions in the world around them.

The Importance of Why

Imagine for a moment that James asked Andrew for a wrench. Andrew goes to the toolbox and comes back with a hammer. What would James think? What would James think of Andrew?

Now, imagine that James asks Andrew for a wrench. Andrew asks why? James’ reply is, “I need to pound a nail into a board.” Andrew goes to the toolbox and comes back with a hammer.

Now, what would James think?

Understanding the why allows Andrew to fetch the correct tool for the job. The hammer makes James’ task easier and helps him to accomplish his goal.

Andrew gave James not what he “wanted”, but what he needed.

What is Your Why?

What is it that you need? What is the reason behind your desire to invest in real estate?

What benefits are you seeking to gain by investing in real estate? Are you looking for cash flow to replace your income? Do you need appreciation to bolster your nest egg?

Each individual has different goals, dreams, fears, and finances. Unique desires require a Charted Course specified to your situation.

The same real estate investment may not benefit you the same way it benefits your neighbor/friend/sibling. It may not be what your journey to Retirement Freedom needs.

Sitting down with a real estate investment counselor or advisor that knows the right questions to ask can make all the difference in the world. They should ask questions first, and help you arrive at solutions only after understanding your “Why”.

(Photo:  Blue sky 2 by Fabio Marini)

There are three reasons:

1.  Diversification sucks.  There I have said it.  There is an open secret in the investment world that diversification is for suckers or at least for folks that will never capture wealth.  You see, mutual funds were invented as a marketing strategy.  After academic finance disclosed you could reduce risk (variance) by diversification, astute Wall Street companies knew they could market this to average folks.  Previous to mutual funds and the idea of diversification the average person felt that investing in the stock market was akin to gambling and shied away from it.  But those folks in Wall Street knew a good marketing opportunity when they see one and ran with it.

Warren Buffet is quoted as saying “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

In the video below Buffet recomends applying intensity to your investing strategy to get above average returns.

If you are ready to apply intensity to your real estate investments on your way to Retirement Freedom, call us at (925) 324-8626.

When I was in the seventh grade, I had a youth leader that was a little on the wild side. His antics endeared him to the guys in the group. He would jokingly try and take corners at double the posted speed. He would also do a “Seat Belt Check” where he slammed on the breaks. If you were not wearing a seat belt, you might end up with a bruise.

On a straight section of the road, it was not uncommon for this youth leader to release the wheel and let the car go where it felt like. As a passenger, you knew that things were completely beyond your control.

Letting Go of the Wheel: Investing in the Stock Market

A wise professor shared with me the reason he had chosen to invest in real estate over stocks and bonds. Control.

He realized early on that he could not control the stock market. For him the stock market involved too much risk. CEO’s, Boards of Directors, and investment fund managers had more control than he did in which direction a stock’s value went from day to day.

The daily decisions that make a companies stock price fluctuate are beyond the control of the individual investor. Marketing, product design, research and development, employee compensation, customer base, and resource allocation cannot be easily influenced by the individual stock investor.

Investing in the stock market resembles letting go of the wheel. You have surrendered control of your money to the whims of the market and management.

For Those Who Like to Drive: Real Estate Investing

Real estate investing is for those who like to take a more active role in their march towards Retirement Freedom.

As the owner of an investment property, you can choose the management team. The management team will be hired and fired based on their performance. The management team answers to you as the property owner.

“Location, location, location,” is the mantra of real estate. Your choice of location will allow you to control your customers (tenants), pricing (rent), and product (house, apartment, etc.).

As in all investing, some things will be beyond your control. Your success will be greatly dependent upon the property’s ability to attract good tenants that pay a fair rent and build wealth for you.

Real estate investing places you firmly in the driver’s seat on your way to Retirement Freedom.

Passenger or Driver?

Which would you rather be, a passenger or a driver?

If you are comfortable with having your investments at the mercy of the market and company management, then stocks may be for you.

For those who want to drive, give Maclennan Investment Group a call at (925) 324-8626.

Maximizing as many of these benefits as possible will help you on your way to retirement freedom.

Cash Flow Before Taxes

When you own a rental property the goal is for the rent on that property to pay all of the property expenses so that nothing comes out of your pocket. Any income from rents above expenses is cash flow.

Yes, owning real estate does have expenses. If the property is financed, you will owe the lender payments of principal and interest. Uncle Sam wants his cut and demands property taxes. The property will need insurance, it may need repairs over time, and property management. Other possible expenses include utilities, landscaping, accounting, and  legal fees.

Principal Reduction

If your rental property is financed with a traditional mortgage that combines payments of principal and interest, each payment will increase your equity in the property. This is probably best illustrated by the formula below.

Property Value – Loan Principal = Owner’s Equity

All things remaining equal, as the loan’s principal balance is reduced your equity in the property increases.

The benefit is realized when it is time to execute a sale according to your retirement strategy.The sale will realize a higher proceeds for you to roll into your next investment.

Depreciation

The IRS defines depreciation as:

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

The IRS allows you to deduct wear and tear of your rental property.

This is what might be called a “phantom” expense. The IRS allows you to deduct it from income taxes, although you may never have to actually pay for anything with cash.

This deduction can be used to offset other income. (Disclaimer: You should contact a tax attorney, CPA, or  tax professional to see how this deduction would affect your personal situation.)

Appreciation

The final benefit of real estate is appreciation. Appreciation is the increase in value of a property.

All investments have a risk that they may go down in value. Real estate is no different. The current market proves that.

Jokingly some have said that, “God isn’t making any more dirt.” While it may not be entirely accurate, the prinicple is true.

There is a limited supply of real estate in the world, nation, state, county, city, and school district where you live. Scarcity tends to drive prices higher. Real estate has historically risen in value as a longer term investment.

An Appealing Investment

Investing in real estate has four benefits of cash flow before taxes, principal reduction, depreciation, and appreciation that set it apart from other investment vehicles.

If you are tired of being subject to the whims of the stock market, real estate investing may be for you. Real estate offers you a measure of control over your investments and the outcome of the results.

Merriam-Webster defines “freedom” as:

the quality or state of being free: as a: the absence of necessity, coercion, or constraint in choice or action b: liberation from slavery or restraint or from the power of another : independence c: the quality or state of being exempt or released usually from something onerous <freedom from care> d: ease, facility <spoke the language with freedom> e: the quality of being frank, open, or outspoken <answered with freedom> f: improper familiarity g: boldness of conception or execution h: unrestricted use <gave him the freedom of their home>

As the definition states freedom is the ability to do what you want, when you want to.

Now of course there are wise limits on the nature of freedom. I am not “free” to take another person’s property or life. That would be a violation of their freedom to use their own property.

Retirement Freedom

The American Dream entails the dream of “Retirement”. That time in your life when the necessity of a 9-5 job is gone. You are free of the tyranny of a boss, commute, and cubicle.

A good definition of Retirement Freedom is having the ability to invest your time, efforts, finances, and energy into the activities you choose.

This freedom varies from one person to the next. It could be vacations with your grandkids, that cruise to Europe, a home in the mountains, time to serve at your church, or the time to work in your garden.

This freedom is made possible due to the accumulation of wealth you have made during your working years. Your wealth is now working for YOU!

The years of saving and investing have finally paid off, allowing you to live off of the income your investments provide.

The Math of Retirement Freedom

How much do you need to live the retirement you have hoped for?

If you don’t have the luxury of a corporate pension plan, you will need to live off of your investment income alone.

Assume that your investments provide a conservative 5% return per year (for every $100 invested you get $5 of income per year), you will need about 20 times your expected income to live without putting your retirement at risk.

In order to maintain the same lifestyle you currently have, you will need almost 20 times your current income. Multiply your current income by 20.

Here’s some numbers:

• If you make $50,000/year you will need approximately $1,000,000 of savings at retirement.
• If you make $75,000/year you will need approximately $1,500,000 of savings at retirement.
• If you make $100,000/year you will need approximately $2,000,000 of savings at retirement.
• If you make $200,000/year you will need approximately $4,000,000 of savings at retirement.

This is just to maintain your current lifestyle. That does not include your trip to the Bahamas, the tour of the Holy Land, or the lake house you wanted.

What did you come up with? How many dollars will it take for you to retire?

The Path to Retirement Freedom

But how will you get that place of wealth?

There’s always the stock market. How is your 401k doing these days? Seems like this route is entirely outside of your control. You have no way to control whether the market goes up one day or down another.

You could rely on the government. How well will Social Security benefits allow you to live out your final days with family and friends? Does that allow you to live out your dreams?

The lottery is a possibility, but not very likely.

You have heard about real estate investing, but don’t know where to begin. Your friend owns some rental homes. The ability to control your own investments is appealing.

If this is the case, give Maclennan Investment Group a call at (925) 324-8626. Let us show you another path to retirement freedom.