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You are here: Home / Archives for Retirement Freedom

June 3, 2014 by Peter Maclennan Leave a Comment

Generational Wealth

Generational wealth - child running in a park

Bank of America just released the results of their latest Merrill Edge Report. In it they surveyed the “mass affluent”, those with between $50,000 and $250,000 of investable household assets. According to the survey, the Mass Affluent were more afraid of not having enough money throughout their retirement, than they were of losing their job, public speaking, or of going to the dentist.

These families are fearful that they will not have enough assets to last their lifetime. They are not able to even consider the lifetime of their children.

Wealth that Lasts

A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous. – Proverbs 13:22

Can you imagine creating an inheritance that will endure past your lifetime, past the lifetime of your children, and onto that of your grandchildren? How do we create something of lasting value that will transfer from our children along to our grandchildren?

Leverage Helps

While perusing the list of billionaires over at Forbes.com I noticed that 9 out of the 10 wealthiest individuals had started or grown companies. The lone exception was Christy Walton whose father-in-law Sam Walton founded Wal-Mart.

Unfortunately, for most of us “working stiffs” we are trading our labor or time for money. The problem with this model is that we only have a limited amount of time and labor. I have not figured out how to be in two places at once. I cannot simultaneously sit at my office computer and show property to clients across town. I am limited in my abilities, my time, and in my knowledge.

In one of his books, Robert Kioysaki expresses the idea of leverage. Leverage is using the efforts, time, or money of someone else to advance your cause. A non-profit can leverage connections in the community to advance their cause. An entrepreneur can leverage the time of his employees to solve people’s problems. A real estate investor can leverage a bank’s money to buy a bigger property.

Entrepreneurs and business owners leverage the skills, knowledge, and time of their employees to create a product or service that benefits more customers than the entrepreneur could benefit on his or her own. Collectively the entrepreneur’s business is better able to bless more people than they would if they were a disjointed entity.

Real Estate Leverage

One of the tools at the disposal of a real estate investor is leverage through the prudent use of debt. Many banks and individuals will lend money to an investor if the loan is adequately secured by real estate. A real estate investor can take a much smaller investment of say $100,000 and leverage that into the purchase of a property of $400,000. This can benefit an investor if the property appreciates. A 5% growth in value on a $400,000 property is $20,000. This means that the investor’s equity just grew by 20% ($20,000/$100,000 = 20%).

Warning: Leverage is a two-edged sword and can multiply losses as well. Be careful.

Principal reduction on the mortgage is a benefit received by the investor when the tenant’s rent helps to pay the monthly mortgage payment. Each month a small portion of the mortgage balance is paid down building up the investor’s equity regardless of what the market value of the property does.

Passive Income

Because rent is earned regardless of whether the landlord/investor is at the property, it allows an investor to generate “passive” income. (Real estate is rarely truly passive income. Work needs to be done to maintain a property.) As long as the tenant occupies the property or is bound by the lease, the investor is entitled to rental income.

Creation of Generational Wealth

Leverage and passive income allow an investor to build wealth that is exponentially greater than their individual earning capacity. Real estate assets purchased with debt, build equity as the mortgage is repaid with tenant rents. Rental income allows the investor to have multiple streams of income without cloning himself. Whether the income comes from a business or from real estate rents, it allows the investor to build wealth that can be passed along to their heirs.

To start building wealth with real estate that can outlast you and be passed along to your children, please give me a call at (925) 385-8798.

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Filed Under: Benefits of Real Estate Investing, Real Estate Investing, Retirement Freedom Tagged With: Investment Property, Real Estate Investing

February 3, 2010 by Peter Maclennan 1 Comment

Social Security and Your Retirement

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.

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Filed Under: Real Estate Investing, Retirement Freedom Tagged With: Real Estate Investing, Retirement Freedom, Retirement Strategy, Social Security Benefits

January 19, 2010 by Peter Maclennan Leave a Comment

Advice for Future Retirees From Current Retirees

The New York Times’ Bucks Blog is relating the details of a Merrill Lynch Affluent Insight survey that asked What Retirees Would Have Done Differently.

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.

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Filed Under: Retirement Freedom Tagged With: Retirement, Retirement Freedom

July 17, 2009 by Peter Maclennan Leave a Comment

Accumulation and Income

As an investor makes plans for Retirement Freedom, they should keep in mind where they are in the wealth building process.

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.

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Filed Under: Real Estate Investing, Retirement Freedom Tagged With: Accumulation Phase, Investment Income, Retirement, Retirement Freedom

June 18, 2009 by Peter Maclennan Leave a Comment

What is Your “Why?”

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)

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Filed Under: Real Estate Investing, Retirement Freedom Tagged With: Investment Property, Real Estate Investing, Real Estate Investors, Retirement Freedom

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