Prices started rising in what would be the first of a long cycle of up a bunch, down a bit, up a bunch more, etc. I’m not sure it was indeed a paradigm shift as a matter of fact, but to them that’s exactly what it was. One of ‘em was so put out by what he saw through the rest of the 70’s he retired earlier than planned, headin’ back home to Wyoming.

Having just turned 25 in the summer of ‘76 when this new reality shifted into overdrive, I can attest to the wonder we all felt. We spelled wonder — bewilderment.

Runaway appreciation had arrived big time.

Those who adjusted to the new reality did exceedingly well. Those who didn’t? From the mid-1970’s to 200? they literally left million$ on the table.

So when the title of tonight’s piece asks, “How’d WE get where we are today?” I’m pretty much talkin’ ’bout you and the mouse in your pocket.

For many of those who began investing on or before say, 2002, some decades before that, this adjustment has been painful. Capital growth has been the engine driving real estate investment portfolios since Ford was in the White House. Those who made proper and prudent use of their capital in order to best take advantage of the almost guaranteed annual appreciation, made impressive strides increasing their net worth. (He said with equally impressive understatement.)

They’d buy an income property for around $40,000 in spring of 1976, sell for around $78,000 in the early summer of 1978. At 20% down plus closing costs, their total capital outlay to buy had been roughly $9,000 or so. The net check at sale just 26 months later was, give or take, almost $40,000! They did it again, this time acquiring much more property — maybe $150,000 +/-.

Then the cycle turned on ‘em. It was just as vicious as the upswing had been exciting. But most just rode it out ’till around the end of ‘84 or so, when interest rates had begun to show they were happily headed for single digit status again.

Happy days.

As we all know, this cycle repeated itself such that investors accepted it as the norm — or worse — their birthright. Then the current market correction hit with brutal force.

But, as most of our grandmas told us, there is almost always good to be found in bad times.

Grab yer pencil and paper cuz here it comes.

If you’ve owned your income property long enough to have seen your equity grow impressively, you also know it’s still much larger than when you started, even now.

This is good news, people.

You can take advantage of this monster shift in the fabric of the real estate investment universe. This shift has blessed us — again, that’s you and the mouse in your pocket — with a once in a lifetime opportunity.

Many are now able to adjust their previously executed investment plans, to increase the potential income when they reach retirement. Between the silly low interest rates, and the textbook positive price/rent ratios available in excellent locations, you can double or even triple what your retirement cash flow might’ve been.

I mean this in a completely literal sense.

Your window of opportunity is open — for how long is anyone’s guess. Cracked crystal ball and all.

The Perfect Storm for which many of you have been waiting is here.

Interest rates? Low 5’s. Prices/Rent ratios? Good enough to yield cash on cash of 7-10% using just 20% down payments. Location quality? Let’s not mince words, OK? There’s not one income property I’m talkin’ about here in which I wouldn’t be happy to let my 79 year old mother to live in by herself. No ambiguity whatsoever. And for the record, I love Mom a whole lot.

It’s my professional, experiential opinion that those who missed out on almost 40 years of healthy appreciation, will not have been as disappointed as today’s investors who miss out on the current window of opportunity.

It’s that good.

Please don’t mistake my appraisal of today’s real estate investment atmosphere as an easy road to huge retirement income. It’s not. But those who carefully construct a truly Purposeful Plan will indeed give themselves the opportunity, the likelihood of enjoying a magnificently abundant retirement.

Am I talkin’ to you and the mouse in your pocket?

If so, gimme a call at 619 889-7100 and we’ll see what’s possible together. Have a good one.

You may be surprised, or not, to learn that much of the time my counsel is to stand pat, or almost. For the record, ‘Doing something‘ isn’t a Plan. I read everything I can about the economy and real estate in general, and have frequent conversations with those in the business for whom I hold well earned respect. Allow me some relatively unfiltered PlainSpeak today.

I think interest rates for income property will remain attractively low ’till at least the end of this year. I strongly suspect they’ll hang around ’till through 2011. It’s maybe 50/50 for 2012, though my experiences says not to count on that in real terms.

This bodes well for folks who’re in the enviable position of highish equity, but underperforming property(s). If that describes your current reality, run, don’t walk to the nearest phone/computer and call/email me. There’s an 80% chance you should be movin’ that equity to a far more productive region — and should begin that process around 4:30 yesterday afternoon.

If your portfolio isn’t located in one of the ’safe’ regions, you have roughly 6-18 months to make your move. Again, I think six months is probably in the bag, but anything after that is crystal balling at best. Once rates go up, buyers for these underperforming income properties will evaporate.

Those real estate investors lose — as in their retirement just became problematical.

The mindset of the vast majority of investors the last 50 years has been one of inevitability. That is, ‘I invest regularly, therefore if I do it for a long enough period of time, my retirement will take care of itself.’

Those who continue with that approach, in my opinion, will be sorely disappointed — maybe even bordering on panic — as their rapidly oncoming ‘retirement date’ becomes an ever shrinking dot on the timeline horizon.

Americans have been conditioned to believe that if they put a $5 bill into the ‘investment machine’ $6 dollars will emerge in a reasonable amount of time. Is there anyone left who believes that these days?

To the contrary, millions have learned that sometimes their $5 investment comes back as $3 — or less. The lesson to be learned here, is that nothing, as in zilch, nada, zero, bubkus, is automatic when investing. Though most understand this innately, most don’t seem to invest with that truth firmly in their consciousness.

Somehow the ‘lizard brain’ says money goes in, more money comes out.

Enter Purposeful Planning

If planning accomplishes anything, it’s that we have a point B — which is preferred over the current point A. I know how elementary that reads, but the fact is, most folks’ retirement ‘Plan’ consists of automatic paycheck contributions to something at work. Wanna really raise some blood pressure? Ask ‘em how their plan at the office has been workin’ out for ‘em lately.

I don’t hafta ask that question most of the time — they volunteer their sharp disappointment early on in our conversation.

PlainSpeak — Even a relatively inferior plan — executed well — is better than no plan. Those who still operate on the premise that “puttin’ away money for retirement” will, by the benevolent nature of the universe, result in a workable retirement, are doomed to the whole 9-5 thing for a lot longer than they ever envisioned.

More and more people are now takin’ direct control of how they’re gonna get from today to retirement — an excellent move. Blindly checkin’ boxes at work hasn’t been, um, productive so far.

BawldGuy PlainSpeak

My experience, beginning at the dinner table at 16, listening to Dad talk about his company and the local real estate market, doesn’t include anything remotely akin to what we’re dealin’ with now. That said, unlike the last few down-cycles, this one offers a unique opportunity for regular folk to turn lemons into lemonade. Here’s what I mean in outline form.

1. — Fully 33 of my 40+ years in the biz have come with interest rates of 7%+. Borrowing money to acquire investment property at rates beginning with a ‘5′ is literally unprecedented in my adult lifetime — until recently. Grab as much of it as you can — then pay it off as quickly as humanly possible.

2. There will be no return to the normal we used to know. Those rules no longer apply. Real expertise, knowledge, and experience are now necessary to reach retirement with much more than Social Security.

3. More than ever before, real estate investors must divorce themselves from the idea they hafta be able to drive by their income properties. That drive for many will end up costing them thousands of dollars a gallon when all is said and done.

4. Regardless of what Grandpa has told you, time is not, in today’s reality, your friend. The sooner you realize that truth and alter your investment behavior to align with it, the better off you’ll be in retirement.

5. There is a growing minority who will profoundly benefit from buying some, if not all of their income properties for cash — using no leverage whatsoever. That approach used during the previous ‘norm’ was not nearly as fruitful as the employment of prudently applied leverage. It’s now a very effective tool for many now — though not all.

6. When this 6-18 month window closes, those who took advantage decisively will reap inordinate cash flow benefits in years to come. Those who don’t? They’ll be among one of the fastest growin’ classes in America — workin’ seniors. Most of ‘em over 70.

I realize this isn’t what most would like to hear, but as the title says, it’s PlainSpeak. Am I hitting some sore spots in your status quo? If so, call me at 619 889-7100. We’ll figure things out — both of us usin’ PlainSpeak. Have a good one.

7 Expectations of Real Estate Investors — Beware of Potential

10 Ways To Delay or Diminish Your Retirement

The ‘Old Normal’ — Sore Elbows and Adapting

You may get a hold of me by calling 619 889-7100. I’d love to talk with you, as my daily fix is a must. Have a good one.

I never know when that elusive little factoid will show up, but in so many of my initial few conversations with clients, they pop up without warning.

Here are some recent examples.

Reserves? We have give or take $500,000 in the stock market — most, if not all of which will not carry with it much if any capital gains taxes.

Do we own anything else? Oh yeah, almost forgot. There’s the two free and clear homes Uncle Doug left me last December. They’re worth about $100,000 apiece.

And this year’s favorite so far — Anything I’ve left out? My new job starts next month, and I”ll be makin’ just under $100,000 more than I am now.

Over a period of 15-30 years, any one of those ‘factoids’ will make a huge positive impact on what those folks would’ve been able to do otherwise. In one case, the first example, they’ll be able to increase their retirement income by something like $5-7,000 — wait for it — a month. Most likely a conservative figure.

Most people I talk with, maybe 2/3, underestimate what’s possible for them, given their circumstances. I mention it only to illustrate the importance of talking with someone who has the answers to questions you don’t know to ask. It’s not uncommon for real estate investors to learn that an option they thought was completely unavailable was actually on their menu.

It goes both ways.

Nearly half the time it’s my job to tell investors to just keep doin’ what they’ve been doin’. Don’t rock the boat. Stand pat for now, and we’ll talk in a year or two. It’s been my experience people often think others are doin’ so much better than they are, when the truth is, they’re smokin’ most of their peers when it comes to investing for their retirement.

Maybe my favorite conversation of this type came several years ago — a soft spoken 74 year old woman, whose husband had passed away two years earlier. Her only surviving family, three nephews, had been urging her to sell her entire real estate investment portfolio. Why? She had all the money she’d ever need, and they wanted what they could get — and sooner rather than later. They knew they were in the will, and wanted it now.

After very carefully analyzing her portfolio I asked her the most important question: Is that what wanna do? Since I modeled this blog to remind readers of the genteel streets of Mayberry, I won’t repeat her reply. Suffice to say, the opinion she held of her nephews wasn’t in the neighborhood of flattering. She’d included them in her will, to keep some peace with her two younger brothers, though most of her estate wasn’t headed their way.

Her husband had done wonderfully well in building their portfolio, while ensuring she’d always have more than enough after tax income to live out her days. The fact was, even though she paid for herself and a couple lifelong girlfriends to go on rather pricey cruises each year, she still was unable to spend all the after tax income generated from her properties. Not even close.

Selling her properties only made financial sense for her nephews, (pause) and me. She laughed like a schoolgirl at that observation. It was best for her to simply enjoy herself and not think about it a second longer.

She was happy to hear a seasoned pro tell her how well her husband had done for her, both in income, tax shelter, and structure. She thanked me for my time, chuckling as she added, “I think they’ll hafta wait ’till I’m gone.”

Knowing your whole story is mission critical for the serious real estate investor. This is especially true of those who’re either just beginning, or started not long ago. Mistakes made now, especially mistakes of omission, will have dramatic ramifications when it comes time to retire. The old saying, “Ya can’t unring a bell” has a sorta counterpart saying that follows — “Ya can’t ring a bell today that only coulda been rung 10-20 years ago.”

BawldGuy Axiom: Assume there are answers to questions for which you don’t know to ask that will come back to haunt you in years to come. So often it’s not the mistakes we make that do the most damage, but the opportunities we might’ve grabbed, but never knew existed — forever gone.

Wanna find out about your options? Know your whole story? Call me at 619 889-7100 and we’ll figure it out. Have a good one.

First thing we should do is lay out what Gross Rent even means. It refers to the gross scheduled rent of a given property, which will also generally include laundry income if applicable. It should be understood that it’s virtually universal that you’ll be referring to a year’s income — not a month’s. I say that, but there are places that will use monthly income, a pain in the rear end if there ever was one. Numbers are almost always computed using annual figures when producing an analysis on residential income properties. That’s not to say using monthly figures won’t work, but it’s a lot more work than necessary.

A San Diego duplex might have gross annual income of $25,000, which, when multiplied by say, 13, would result in a ‘value’ of $325,000. We’d say that property had an asking price of 13 X Gross. In Texas, that same property would sell for something like 8-9 X Gross if it was new or newer.

Like everything else in real estate, knowing if you’re comparing apples to apples is a big help — an abuse of understatement for sure. Using GRM to compare various investments is like choosing a wife from a catalogue — don’t do it if you can avoid it.

See, GRMs are often lies, wrapped in half truths, tied with a bow made of the erroneous inferences of the investor/analyst.

Experienced real estate investors don’t buy properties based on the GRM — period, not ever, end of sentence, amen. Why? Simple — two props can have the same annual rent, but entirely different expense numbers. Wouldn’t you rather pay for net income rather than gross? Hollywood has been puttin’ the screws to naive actors for decades, by offering them a percentage of the gross.

Income property is all about the NOI — NOT the gross.

But let’s assume you’re comparing two almost clone-like properties, a block or two apart. Using GRM will give you a decent apples to apples idea of which one is the better buy. UNLESS, that is, you discover one is paying to heat the water in all four units of the fourplex, while the other sports separate water heaters for each unit, with tenants paying to heat their own water. If you’re unaware of that little factoid, you’ll assign roughly the same value to each, when nothing could be further from the truth. How much does that matter?

Let’s arbitrarily say it takes $15/month/unit to heat water for owner-paid property. That’s $720 a year directly off your NOI. If the Capitalization Rate is 8%, that means by definition that fourplex is worth roughly $9,000 less than the other one. But wait, it gets worse.

If your Plan called for applying some/all of your cash flow to reducing your loan’s balance, that’s $720 a year that will still be taking interest outa your pocket. Each year it’s another $720, adding insult to injury. How much does that matter? Well, over time it can make a discernible impact. Let’s take a look.

That lousy ‘little’ $15 a month per unit to heat water means that over a five year period your loan balance will be over $4,100 higher than it could’ve been. Just $15.

Over time, and multiplied over several properties, that one little analytical mistake could literally cost you an entire property you won’t be acquiring when you decide to exchange up. The equity simply won’t be there. But you’ll feel good cuz you’ll know your tenants showered with hot water, right?

Region to region, GRMs will vary wildly to say the least. For example, I’ll be speaking with San Diego duplex owners who’ll be asking somebody to invest anywhere from $325-450,000 for their two units. (Not my clients, mind you.) If it’s offered at $400,000 with an annual gross income of $30,000, the GRM would then be 13.34. (13.34 X $30,000)

Compare that to a duplex in Texas which is new, not 50+ years old, has the same income, same quality of location, yet sells for just over $250,000. Which one do you wanna own? Don’t answer, it’s a rhetorical question. That’s why, in a nutshell, you won’t see me representing buyers trying to acquire San Diego income property. It just doesn’t make sense when compared to other regions. Besides, I hafta sleep too.

Using the GRM of a property to assess its value is playing with fire. Any analysis limited to that approach should be seen as a rule of thumb at best, and a sucker bet at worst. It’s a lie from the start, especially when used in comparative analysis. Bottom line? If you’re serious about arriving at any kind of a credibly reliable value, DO NOT use this approach.

The current atmosphere is often confusing enough without going out of your way to muddy the waters even more. The sad thing is, there are far too many ‘real estate investors’ using this method of valuation in their decision making process. It’s one of the quickest ways I know to buying a pig in a poke.

Put more clearly — GRM is for wannabes and amateurs, and the pros know this.

Thanks to one of my favorite readers, ‘AI”, for her suggestion I write on this topic. She knows all about this stuff — how to use it, and it’s pitfalls.

Lookin’ to get out of your own version of Dodge City? Gimme a call so we can cuss and discuss your particulars. I’m at 619 889-7100. Have a good one.

Anywho, I was thinkin’ today that it’s times like we’re currently fightin’ our way through that people often begin worrying about what the other guy might get, instead of keepin’ to their own knittin’.

Therefore, I thought it would be timely to refer you to a post I wrote in 2008, about how sometimes we tend to Look Through the Wrong End of the Telescope.

I think you’ll like it — it’s always been one of my favorites. If you have a question about what you should be doing with your real estate investment portfolio, or just wanna get started, gimme a buzz. 619 889-7100 will get you to there. Have a good one.

Look, if stocks are your thing, good on ya. But today’s post, though short and sweet will starkly draw the differences between the two.

Let’s do this the way Socrates might.

Which investment jumps with joy when the cash flow is 1% of the invested capital?

Which one delivers 3-10 times that cash flow with only 1/5 the invested capital?

Which one can ‘grow’ your capital from $55,000 to $250,000 in roughly 15 years or less without a day of appreciation?

Which one offers almost three decades of tax shelter?

Which one offers ‘leverage’ that makes ya feel like you’re in Vegas, riskin’ house payment money?

If you bought half a dozen income properties a decade ago using 20% down, what’s your equity worth now? Where would you be with stocks, having used the same amount of invested capital?

BawldGuy TakeAway: In San Diego, one of the highest priced regions in the country, residential income property included, you’d have spent just over $250,000 in down and closing 10 years ago. You’d still be ridin’ high, but on a lame nag.

Though you’d of ridden the emotional real estate roller coaster for sure, by 2004 your original capital would’ve been easily worth $1 Million. But then Murphy showed up with his Bad News Bears and spoiled the party. You hung tough. Ya weren’t gonna leave San Diego, cuz it always comes back stronger than before, right? Don’t feel like the Lone Ranger, cuz that’s how those in places like NoCal thought too. (Hello Palo Alto!)

Your cash flow has grown quite a bit, even with the market correction. Your buddies who went Wall Street’s way, aren’t doin’ so well. You? You’re not happy your two comma equity went bye-bye, but you’re making more monthly income than ever, and your money has actually grown. If you’d taken the ever growing cash flow and paid down your loan balance, you’d really be on top.

So What now?

Here’s what now — Get Outa Dodge, and get out around 4:30 yesterday afternoon! Put your local properties on the market, and move them to a region far more in keeping with your ultimate Plan. Stop fighting the tide. You’re gonna lose — you ARE losing. But you already know that, so let me show you a way to improve your status quo, big time. Some of you won’t be able to — most will though.

Stop managing tenants, increase cash flow significantly, and acquire property that isn’t older than you are. Take the increased cash flow and get yourself free and clear in a surprisingly short time period. Some of my clients will get that part done in 7-8 years. With the equity shown above, in a decade you should be showing cash flow of nearly $100,000 annually — assuming rents don’t go up a dime in the next 10 years. If rents do go up…

If this sounds like something you’d like to cautiously explore, gimme a call. Besides, I need the fix. 619 889-7100 will find me. Have a good one.

Thought I would talk a little about Charitable Remainder Trusts in response to BawldGuy’s post, “Retirement Dream a Nightmare….” First, some background in my involvement with CRTs. I will give you the full explanation in a later post, but for now I will tell you that I am a partner in a business that manages CRTs in order to create additional sources of income for non-profits. Currently, over 80% of real estate donations are not consummated because the non-profits don’t have the expertise or the structure to accept the donation.

The point of CRTs is not to dodge taxes, but to encourage donations of appreciated assets to non-profits. Hence, they rarely solve tax problems; merely create some tax advantages for the donor. Folks that push CRTs as a way to solve tax problems tend to create as many unintended problems as they solve.

Here are the general tax rules.

I am not an accountant so make sure you get advice from one before entering into a CRT. You can only deduct up to 30% of your gross adjusted income per year with a five-year carry forward. This limits your tax deduction to effectively 150% (5 X 30%) of your income. You may also avoid capital gains taxes by donating the property. Once you donate the property you can have the CRT pay you or your heirs either a certain amount per year for a fixed amount of time or a percentage of the donation per year. Generally, this is 5-7% of the asset value per year. If you attempt to set it up with a method that will obviously drain the entire asset value from the trust to you, then the IRS could invalidate the CRT, because the entire point of the CRT is to create a donation.

As you see from the above, CRTs are hardly a tax panacea. It is also not a great tool for folks who are mostly dependent upon income from the asset they are thinking of donating. They are a great tool for both donating an asset and gaining tax benefits or tax benefits with additional lifetime income. To fully take advantage of CRTs you need to have a fairly substantial income emanating outside of the donated asset or plans to sell other large assets that you would like to offset taxes. It is perhaps best for those assets that you don’t want to manage and you have extracted the majority of benefits from. But, remember the object of the CRT is to donate assets, so that should be the overriding concern.

BawldGuy Here: As you can easily discern, the CRT definitely is not what most folks would or should describe as their Plan A for a retirement exist strategy. I’ll be talkin’ more about this later in the week. Also, I’ll be talking in some detail on this subject tomorrow on BiggerPockets.

Put more succinctly, I was the typical 20-something know-it-all whose real life lack of experience, expertise, and knowledge was nearly immeasurable.

Then several ’storms’ converged to enlighten me.

The starry-eyed optimism and unearned confidence of my early adult life was both a help and a hindrance. It helped as I forged ahead in things only a lack of fear made possible. It hindered cuz, well, ignorance and arrogance always hinder. Duh. So what were these storms?

I embarked upon an intense and extended period of education. The teachers were, with rare exception, not ivory tower professors. They were doing what I was doing — and with excellence.

I became a father — that should be self explanatory.

The disastrous inflation/recession of the early 80’s hit HARD and taught exceedingly well.

Grandma explained what she’d been tellin’ me for years — that the fundamentals, physics if you will, of economics would not be long mocked.

I learned a priceless lesson: ‘Adapt or perish’ wasn’t just a slogan.

In my experience, the principle of adaptation has two basic levels. 1) We must adapt to market changes, often temporary in duration, or if not, they’re generally not soul-wrenching events. (Captain Obvious now rollin’ his eyes.) 2) We must adapt to huge changes, often systemic in nature, that will make previously profitable strategies and/or endeavors disappear faster than steam.

An example of #1 would be temporary but problematic interest rate increases, or minor but irritating modifications of a particular tax law. An example of #2 might be TEFRA, an act passed by congress in 1986 which threw wrenches in all sorts of real estate investment strategies. It causes much grief and chaos in the years immediately following its passage. It decimated limited partnerships, a very popular investment vehicle of the time. Many said it took away much of what ERTA gave a couple years earlier.

If you’re over 40, and especially over 50, the big picture as it relates to your retirement income is now more important than ever. Specifically, that means the real estate goddess of forgiveness, appreciation, has been banished for the foreseeable future. Without the reasonable expectation of properties consistently moving up the value escalator, the real estate investor’s expertise and knowledge will be tested. Mistakes will now be punished — solid investing will be rewarded.

The ability for you to adapt to all the changes that have rained down on us in the midst of this perfect storm will, more likely than not, make or break the quality of your retirement. Those who’ve lost so much on Wall Street are acutely aware of this principle and how it will affect their future.

Be bold, but Plan — then do things on Purpose.

This is where Self-Directed IRAs, Solo 401Ks, and Roth IRAs come into play for so many of you. Best case scenario for many is a number of years on the treadmill playing catchup — making up for all the money lost. Be strong, and take heart — then make the decision to be an adapter. It could be the difference between the retirement for which you planned, and 10 more years on the job.

We’re not in Kansas any more, Toto — it’s back to the Old Normal.

Frankly, I’m thrilled the Old Normal has made a comeback. It’s the silver lining to all these storm clouds. Those who make Purposeful Planning the foundation for their retirement will reap the benefits. The next five years will see the amateurs left by the side of the road. Appreciation, the goddess of forgiveness has left the building.

Let’s talk. Contact me at 619 889-7100. Have a good one.

It always amazes me that folks can hold on to foolish ideas in their heads despite ample logical evidence of the foolishness of those ideas. For example, I constantly see referenced a couple of articles written by some Wall Street Lackeys about the superiority of stock investing over real estate investing. When you actually go to look at these articles, they are so poorly argued that it is amazing that the magazines that printed them would consider them fit to print in a financial oriented magazine. But, they get continually recycled.

For the record, historic research into internal rate of returns for investment real estate versus stocks demonstrate a huge advantage for real estate. This is not to say that fortunes can’t be made investing in stocks [Buffett, Lynch, etc.], only that arguing it is always better to invest in stocks over real estate is just dumb. I mean when you look at the wealth of super-wealthy people, on average, there is 3 times as much in investment real estate as stocks and bonds.

I bring this obvious point up to this crowd because the same Wall Street Lackeys continue to argue against life insurance as they do against real estate. Yet, when you actually look at who is buying large amounts of life insurance it is the Who’s Who of corporations, wealthy corporate executives [some of which sit atop corporations that hire people to tell others not to buy life insurance], and investors. Yep, even though they use the advantages of life insurance to reduce their own taxes, they still have the hired help tell people it is best to invest in mutual funds.

Like lemmings they chant the anti-life insurance mantra of too much expense, poorer returns, and it’s not an investment. So I thought we would explore the reality of those expenses and returns and let you decide where to put your money.

Let’s take a 45 year old man and that same $150,000 that was used in my last post. He is in good health. Let’s assume for this illustration that he will retire at social security retirement age [67] and will continue to pull out income until death [his cohorts life expectancy is 78 but we will add 6 years for our healthy specimen]. Further, let’s assume that the performance from the stock index that is producing the interest returns is 11% less, on average, than how it has performed over the last 30 years. [Thirty year look back is 9.26%, so I used 8.26%] We do this to stay away from being accused of overly aggressive assumptions.

The initial face value of the life insurance is $643,368. It rises to $802,237 during the 5 years of premium payments, where it stays until year 13. At year 13 it is lowered to $400,000 and starts to gradually rise until age 67 where it hits $608,012. This strategy is outlined in the earlier post. He is able to gain $52,257 of tax free annual income for 18 years. He still gets a death payout on top of that.

Let’s look at the internal rate of return [return minus all expenses] at various death ages. I will add in the cumulative odds of dying at each age as well as the total payout.

At age 50 he dies in a fiery car crash. 8% of men in his cohort will die by age 50: Internal Rate Of Return [after expenses] = 46.75% [It is a life insurance policy!] Total tax free payout $802,237.

At age 60 he dies of a massive heart attack. 15.1% of men in his cohort will die by age 60: IRR = 7.8% The total expenses has cost him .46% [8.26%- 7.8%]. Total payout = $431,272

He dies at age 70 from cancer. 28.9% of men in his cohort will die by age 70: IRR= 7.19% The total expenses has cost him 1.07%. Total payout is $209,028 in income and a death benefit of $546,940 or $755,968

He dies at age 80 from a stroke: 54.1% of men in his cohort will die by age 80: IRR= 7.16% The total expenses has cost him 1.1%. Total payout is $731,598 in income + $303,855 death benefit or a total of $1,035,453

He dies a happy and satisfied man at age 90: 96.3% of men in his cohort will die by age 90: IRR = 7.35%. The total expenses has cost him .91% Total payout is $940,626 in income + $390,924 in death benefit for a total tax free payout of $1,331,550.

OK, now let’s look at the expenses. As I have mentioned the majority of the expenses occur in the first 10 years of ownership. However as seen above, because it is life insurance, you aren’t effected by this front loading of fees.

The first year the expenses are like this:

Premium charge = $1,650 Cost of Insurance Charge = $668 Policy Issuance Charge = $2,625 Administration Charge = $60

These are not inconsequential charges. During the premium paying years the charges are essentially the same but for a small, incremental increase in insurance cost.

Year 6 charges:
Cost of Insurance = $959 Policy Issuance Charge = $2,625 Administrative Charge $60

The charges remain the same until year 11, where they decrease significantly:

Cost of Insurance = $1,497 Administrative Charge $60

From here on out there is the cost of insurance charge + administrative charge only.

Let’s look at age 60 for an example. Remember we lowered the face value to decrease cost of insurance expenses.

Cost of Insurance $389 Administrative Charge $60

With an accumulation value of $331,748 the total cost as expressed in percentage this year is .14%!

You tell me, are the expenses a big deal? Is the internal rate of return acceptable to get tax free income? Remember, my numbers are conservative both in rate of return and how long our friend will be around to collect that income! You put in $150,000 and get over $52K of tax free income for 18 years, plus a little kicker for your family at death. Now you see why I and BawldGuy are such big cheerleaders for this product!