13 Years To Retirement — Implode Annuity & Invest?
Posted @ 6:24 pm - Filed under Financial Planning, Real Estate Investing, Purposeful Planning
A recent referral finds Josh and I involved with a local family. The main players are the father ‘Don Sr.’, a 75 year old ball of fire, and his son ‘Don’ and daughter-in-law ‘Diane’. Dad has been told he has less of a life expectancy than he should because of ongoing health problems. His agenda is to provide, at his passing, the largest estate possible for his heirs.
His son has some cash, but Dad has the lion’s share. They’ll combine the total of just short of $300,000 to invest in real estate, in order to grow the capital for the future of his kids. Dad’s providing his cash via some annuities he acquired, which will involve paying some significant penalties. He’s wanting to understand why I would tell him to pay them, and invest — the crucial question. Note: Dad doesn’t need the income, as he is a triple-dipper with income aplenty.
The penalties will total nearly $100,000! OMG! Relax, it’s not nearly as ominous as it might first appear. Let’s take a look.
With their cash on hand they’ll be able to combine forces for about $2MIL in purchases, with allows for a healthy cash reserve (Sominex) account of $50,000. The properties will be in various growth regions.
Don Sr. wants to leave his family a healthy estate. He’s not satisfied with it’s current status, and why should he be? There’s nothing in his estate except his home that’s an appreciating asset. We’re now looking at how long it might take to make up for almost a hundred grand in penalties incurred while accessing his capital.
If, in the next five years his properties grow at an annual pace of only 3%, his investments will then be worth just under $2,320,000 — a gain of over $300,000.
Now tell me how worried he is about regaining his lost ‘penalty’ capital. If his properties rise by only 5% a year, (remember, these are areas in high demand) his investments will have grown to just over $2,550,000 — over a half million dollar gain.
Can we please stop crying about the lousy hundred grand now? 
Over the next 13 years the original capital will grow significantly — enough to retire on easily. How easily? That requires a crystal ball, and mine’s a little foggy these days. Suffice to say, if the next 13 years are like any 13 you may choose at random over the last half century, they’ll be more than ok.
Don Sr.’s kids will be taken care of for life. We’ll have to wait and see at what level. Of course, everything’s relative. Don Jr. will retire several years before his sister. But compare what would have happened had Dad just sat on his annuities. His invested capital would have kept generating income while he was alive. But it wouldn’t have appreciated a penny. Annuities aren’t, for the most part, meant to grow, but rather behave like a sleeping, sated lion after a kill. They’re simply not growth vehicles. They’re for cash flow. Even if he and Don Jr.’s real estate investments start out somewhat slowly, they’ll eventually go up in value over 13 years. This will result in the benefit he’s hoping to generate for his kids.
Nobody will be complaining about the hundred grand it cost to pull the orginal capital from Dad’s annuities at that point.
And for the record, Don Sr. now completely understands why that hundred grand, though an impressive figure now, won’t matter a hill of beans when his kids hit retirement age. Like I said, he’s a ball of fire.
This entry was posted on Saturday, June 23rd, 2007 at 6:24 pm and is filed under Financial Planning, Real Estate Investing, Purposeful Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.