Social securiy as the biggest part of your income?
Well my friends I do not think any of you are ever going to be financially free if you continue to follow the old American dream that tells you to work hard, save your money, and hope you die before that hard earned money runs out. As always financial planner only have one way of looking at the world. That is the view in which they can sell you things like stocks and bonds.
There was an article I read in Dallas a few weeks back by Scott burns that I would like to talk to you all about. I don’t have a problem with the point of the argument because I actually agree with what the author is suggesting in the end game. I do, however, have a problem with the way the author is suggesting the get through the problem to the end game. So bear with me a second while I do something I am not fond of and that is reading something out to you. Here is the situation:
There is an American family and the man of the house makes about one hundred thousand dollars a year and his wife is bringing home about thirty thousand dollars a year. He goes on to say that the man is very sure that his current job will no longer be around this time next year and his wife is getting very tired of her job as a real estate agent. This means that 2009 is going to be the year to retire whether they are ready for it or not and they sure or very NOT ready to retire yet. John, the husband, has two hundred thousand in his company’s 401K account, and the couple has been able to save ten thousand dollars in their bank account. They also have another hundred thousand dollars in mutual funds and taxable accounts. On top of all that, their house is now worth eight hundred thousand dollars, which is double the initial purchase price, and they only owe another two hundred thousand before the house is theirs.
Lets stop right there folks. They have an eight hundred thousand dollar home and only owe two hundred thousand dollars on it. That means that they have built up six hundred thousand dollars worth of equity. Can you see why they should have money in real estate? Together they are worth about three hundred thousand dollars in savings and invested income that they have gathered over forty years of work. Over a short ten years their house has earned more for them than they could have saved in several life times. The article goes on and says:
No one would consider them poor but they are about to run into a major drop in their standard of living. Using the ESP security planner, the lifetime savings security planner, John learns that their total income in 2009 will only be thirty-nine thousand dollars. While it will rise to a maximum of fifty-six thousand dollars in a few years, it is still a significant drop from the one hundred and thirty thousand dollars they earned this year. More than half of the thirty-nine thousand dollars will come from social security benefits of twenty-one thousand dollars.
Are you hearing this folks? Do you realize that they have eight hundred and fifty thousand dollars? Not everyone has that much but they do and they are only going to make thirty-nine thousand dollars a year with twenty-one of it coming from social security. They are only going to make eighteen thousand dollars a year on eight hundred and fifty thousand dollars. That is a 2% percent return. The number will rise up to fifty-six thousand in a few years but that is only when John’s wife starts getting her social security benefits.
Folks, when we go into a real estate deal we always make sure that the cash flow is going to be between ten and fifteen percent. We never go below ten because we will not allow ourselves to buy that deal and we will not go above fifteen percent because that deal has too much equity and we would rather sell the deal. So, getting an average of twelve percent rate of return on eight-hundred and fifty thousand dollars, this couple would make one hundred and two thousand dollars a year TAX FREE. They would not have to pay the taxes because the rental income is off set by the depreciation of their investments. So instead of living on thirty-nine thousand a year, would you think it would be better to live on one hundred and twenty three thousand dollars a year (I forgot to add in the social security benefits)?
That would just be the cash flow alone! If done correctly, real estate doubles in value every two to four years. If you do nothing then the house is going to double in ten years. So look what that means. That eight hundred thousand would turn into one million and six thousand dollars in two to four years. That would get them one hundred and fifty thousand dollars a year, twenty thousand more than they were making when they were working for a living. It’s that simple folks. There is no arguing that because it is a fact. We do it all the time here at Lifestyles and anyone who wants to do it does it. But all of these financial planners are getting 99% of everyone out their to plan their lives around their social security benefits at the end of their lives. Does that make any sense to anyone? I want to know…I really do people.