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You are here: Home / Archives for Retirement

October 9, 2012 by Peter Maclennan Leave a Comment

Investment Choices and Timing

When do you need your retirement income? Ten, 15, 20, or 30 years from now?

I read an article about how Canadian pension funds are switching their investment models. The major change is to a model centered around liability driven investments (LDI). Pension funds take money in, but don’t need to pay that money out until 20 or 30 years down the road, when the pensioner retires. Consequently, LDI investing seeks to buy longer duration investments that match the timing of cash disbursements to retirees.

Another interesting tidbit from the article is that Canadian pension funds are targeting long-term returns of 6% per year. This is in contrast to U.S. pension funds which average a target return of 8% annually and European funds which target 5% per year.

Investment Choices

I think it is very interesting that the pension fund managers (arguably some of the smartest investors in the world) are moving away from traditional stocks and bonds.

One of the advantages of stocks and bonds is liquidity or the ability to quickly sell the investment and convert it to cash. Because of the liquidity of stocks and bonds, it is also more volatile and subject to pricing fluctuations.

Pension funds are investing for the long term 15-30 years down the road. They don’t need the liquidity that stocks and bonds provide. Consequently, they are also avoiding the volatility of the market while still able to generate their target returns.

Retirement Investors

If you need money in the near term, less than a year or two, the liquidity of stocks and bonds may make them advantageous.

However, your retirement funds are probably going to be used in 15-30 years just like the pension funds. Consequently, liquidity is not a primary concern. Longer term investments, like real estate, make sense for retirement accounts. Retirement investors can forego the volatility of stocks and bonds, and pursue longer term gains with a vehicle that matches their investment horizon.

What do you think? Is this a strategy you would put in place?

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

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

May 8, 2009 by Peter Maclennan Leave a Comment

Taking Control of Your Investments

Have you ever been in a car when someone releases the steering wheel?

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.

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

May 7, 2009 by Peter Maclennan 1 Comment

Four Benefits of Real Estate Investing

Real estate is an excellent tool to build and accumulate wealth. There are four benefits to real estate that can make it more appealing than other investment opportunities.

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.

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Filed Under: Benefits of Real Estate Investing, Real Estate Investing, Retirement Freedom Tagged With: Depreciation, Principal Reduction, Retirement, Retirement Freedom, Retirement Strategy

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