Where Would You Be Today If… Some Possible Answers

Posted @ 12:10 am - Filed under 1031 Exchanges, 401(k)'s & IRA's, Capital Growth, Depreciation, EIUL, Market Correction, Purposeful Planning, Real Estate Investing, Retirement Income, San Diego Property Owners, Selling Income Property, Tax Shelter, Texas

Yesterday I asked four simple questions — all starting with ‘Where would you be today if…’

The following are very credible answers to those questions. They’re by no means the only credible answers. We’ve been comfortable with them.

Let’s begin. All time periods will begin in 1995. The 10-15 year window works well with that starting point. And yeah, the pics are simply to give you a quick break. This is a long one, but worth it.

1. Where would you be today if you’d invested in real estate 10-15 years ago when you first had the capital to make it happen?

Let’s say you live in San Diego and begin investing with $50,000 13 years ago in 1995. You’d have held that property ’till the end of 2001. Then you’d have executed a tax deferred (1031) exchange into more San Diego income property. Then in the first quarter of 2003 ditto. One last time in late spring of 2005. But this time Outa Dodge and into a proven growth region positioned for the long haul.

Holy crap on a cracker Batman! He’s sure doin’ a lotta 1031’s isn’t he? And they’re darn close together too. You bet. Remember, I was there — been there, lived that. When ya buy somethin’ for $175,000 and 13 months later it’s easily worth $275,000 it’s time to exchange — if capital growth is the driving force of your Purposeful Plan. Duh. In San Diego this happened over and over.

That ‘What If’ is worth about $500,000 minimum. Argue if you must, but we did it over and over. It wasn’t even difficult. Cartoonish appreciation is a wonderful thing. Please ignore Captain Obvious dramatically rollin’ his eyes in the background. Sometimes he’s such a drama queen.

2. Where would you be today if you’d stopped putting all your savings into your 401(k). (Exception: dollar for dollar company match.)

Let’s say you’ve been puttin’ an average of $8,000 annually since 1995 into your 401(k). Let’s say $3,000 of that was matched dollar fer dollar by your employer. You’ve put $143,000 into your 401(k) since ‘95. (This takes into account the $3,000 annual employer match.) If you’ve made what the latest study says you have, it grew to about $175,000 — and according to the most recent credible 20 year study, that’s a generous figure. Of course, you’ve now lost at least 30-35% of that this year. Let’s say you lost 1/3. That leaves you with, again, being generous, about $120,000 or so. Again, generous.

Which brings us to the third question.

3. Where would you be today if you’d taken that money and put it into EIUL’s.

If you’d invested just the $3,000 amount matched, and put the remaining $5,000 a year into an EIUL, you would’ve been better off. Not even close. Using the returns for the last half century of the S & P index used, and discounting that annual return for front loaded fees, your return up the end of 2007 would’ve been roughly $86,000 or so. It would’ve grown by just 2% this year. Why? ‘Cuz even when the market shows a loss, you’d of been credited with a growth rate of 2%. That puts it at $88,000 at the end of this year. Oh sure, now you payin’ attention. The money you left in the 401(k)? It went to about $96,000 by the end of ‘07. Then it lost about 1/3 of that this year, so the balance is now around $65,000 or so.

Doin’ it the way the gov’t wants you to resulted in $120,000. Doing it the way I’ve been advising our clients results in a total balance between the two of about $153,000 or so.

Put differently, you were 27.5% better off going your own way with any money over your employer’s dollar fer dollar match. And yes, the $5,000 into the EIUL every year was after tax money. When you retire? The income provided by your 401(k) is taxed to the max. The income generated from your EIUL? Tax free for life.

This one isn’t even close, people. Questions 2 & 3 work together for many. But only if there’s a dollar for dollar match by your employer.

4. Where would you be today if you’d gotten Outa Dodge 12 months ago and traded into a growth region.

Let me make an assumption here. I’m using San Diego property, ‘cuz, well ‘cuz I love to keep puttin’ reality in front of my favorite investors. I love San Diegans. I are one for Heaven’s sake. But I digress.

Assumptions: You own a La Mesa (SD County) duplex, acquired for about $210,000 in 1999. Factoring in the results of the current correction, it’s worth last October, give or take, was $480,000. Your loan balance is roughly $138,000. If you exchanged it into an outa state growth region back then, your net exchangeable equity would’ve been around $300,000 or so.

Using our secret sauce of down payment diversification, you’d have gone from owning less than half a million bucks worth of moribund San Diego income property, to about $1.7 Million of property in one or two growth regions — back then? Probably in Texas.

The areas of Texas I’m thinkin’ of have risen in value about 4% since then. Uh, just wondering out loud here — how much has yer La Mesa duplex gone up in value since last October? That wasn’t fair, was it?

That La Mesa duplex is currently worth around $450-465,000 — a distinct loss in value. Oops.

Your capital growth rate has gone from a negative percentage, to 20%+. Dunno ’bout you, but it works for me. The first 12 months made the following differences.

Instead of losing another $15-30,000 in value staying in La Mesa (San Diego) you made almost $70,000. Even using the new math, that’s an $85-100,000 turn around in just a year.

Then there’s the tax shelter. You’ve gone from a paltry $6-8,000/yr to $40-50,000/yr. If you earn $100,000 or less at work, you’ll be able to use $25,000 of this shelter annually. As a California taxpayer, that translates into annual tax savings of around $8,500 or so. That’s compared to the $2,500 you’ve been saving on the duplex — close to a fourfold increase.

Wonder what one could do with an extra $500 a month in their paycheck? We like those kinda questions, don’t we?

Now to my favoritest part. Let’s review.

1. If you’d started investing in San Diego real estate in 1995 you’d be up at least $500,000.

2. If you’ve insisted on puttin’ all your savings into your company’s 401(k) you now have roughly
$120,000 or so.

OR

3. You followed our advice and only put the amount matched dollar for dollar by your employer,
putting the remainder in an EIUL. This proved preferable, resulting in give or take, $153,000.

4. I’m not even gonna include the huge increase in tax savings on this one. We’ll just use the nearly
$70,000 in capital growth outa San Diego, and the $15-30,000 you didn’t lose by Gettin’ Outa Dodge! Didn’t think I was gonna get that in tonight, did ya? Oh ye of little faith.

And just for giggles…

Where would you be today if you’d done everything we’ve advised here, since 1995?

All we have to do is change the $300,000 we exchanged in #4 to the half a million bucks ya would’ve had fer sure if you’d adhered to what we’d have told you to do in #1. I won’t do all the math, but you get the gist. Your net worth would now be literally hundreds of thousands of dollars more than it is now. Your tax shelter would be easily more than an order of magnitude more than you have now. Your retirement income would have already been increased by around $4,000 monthly.

Please, make me stop.

Imagine being 35 years old in 1995, and retiring in 2020, at 60. Your retirement income will easily be well into six figures annually, and most if not all of it will either be tax sheltered or tax free.

It’s called Purposeful Planning — and it’s incredibly powerful. It feeds on itself. The longer it’s used the more productively powerful it becomes. Employ it. Contact me by whatever means you choose and let’s find out where you are now. We’ll take the rest a step at a time. Have a good one.

This entry was posted on Wednesday, October 15th, 2008 at 12:10 am and is filed under 1031 Exchanges, 401(k)'s & IRA's, Capital Growth, Depreciation, EIUL, Market Correction, Purposeful Planning, Real Estate Investing, Retirement Income, San Diego Property Owners, Selling Income Property, Tax Shelter, Texas. 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.