Here's a comment on a post I wrote Friday titled Trusted Friends or Profit-Driven Giants. It questioned the role banks play in our lives and whether they are really the trusted advisors that they portray themselves as being or if they're just profit-minded organizations (I think the latter). Dustin from Financial Freedom 4 All left a lengthy and thoughtful comment that I wanted to share with you all:
This is why I am becoming leery of traditional retirement accounts. You are limited to options that your broker or bank can make significant money. Stock, bonds, mutual funds, and CDs. Sometimes, they will even let you invest in real estate, but they crank up the fees to cover the seemingly invisible money they make by handling your money through traditional investments. I am looking to manage five IRAs in the near future, and I just do not see much of a point in earning what will likely be about 8% in the long run, and potentially much less in the short term... just to pad the wallets of banks.
IRAs can wholly own an LLC with you as the manager. You have one asset in your IRA, and you pay a smaller annual fee to keep it. Then, you can make all sorts of investments in things like tax liens and real estate. Three of the IRAs will be Coverdell ESAs for my children, and I would like for them to each $100,000+ when they are ready for college. I think I could easily do this. My oldest will not be in that ballpark for at least ten years, and my middle child will be there in about twelve. My youngest has a ways to go at seventeen years. I think I could get by with a pretty small amount of capital to invest in the accounts, and then purchase two to three real estate rentals for each account.
The other two IRAs will be Roth IRAs for myself and my wife. We have 34 years until we could withdrawal funds from those, and I would like to have their value be near $1,000,000 each by that time. I think that this could easily be done with real estate properties, and we could have about 5-7 residential properties in each account that could get to that value. However, I think I would like to have a couple of commercial properties and a couple residential properties. Those will not really need to be that aggressive, as I feel $1,000,000 is fairly conservative for 34 years.
On the personal front I would like to have about $1,000,000 in value in a real estate LLC in about ten years. I think it is highly doable. I would need a greater number of properties to pull this off as I would not have much time for appreciation and building equity. And hopefully, I could have about $10,000 in cash flow from this, per month, within the next five years.
I have always been a little bit concerned with the potential conflicts of interest between banking institutions and their customers. The customers want to create a lot of value, and the banks want to keep it. Sure, they will help you get going in the direction that you would like... but they are going to make more than you, if they have their way.
I have a three pronged approach to handling my retirement. First of all, I want to make sure my kids' education is covered, and that is vital to my retirement because I cannot live by either paying loans for their education, or worse, having them live with me forever ;). Next, slow and steady growth in tax-free Roth IRAs. I hope to have a high net worth by the time I retire, and I still hope to be bringing in a lot of money. I think having tax free money, as opposed to tax-deferred money, is the way to go in my situation. Third, I have a power packed, aggressive approach for the ability to "retire" early. Sure, I will never really retire, but I want that flexibility.
You can't say he doesn't have a plan! ;-)
For me, personally, I'm not going this far. I invest primarily in index funds and am ok with an 8% to 12% annual return. And I don't think I have a problem with my brokers -- I keep a pretty close eye on them. Besides, there are issues with real estate too (liquidity, diversification, time to manage, etc.) that I simply don't want to deal with (I do own PART of a real estate LLC, but just a fraction). I'm not saying Dustin's plan isn't a good one, it just won't work for me.
How about you? What do you think of his plan? Are you thinking of anything like it to help fund your retirement?
I used to own residential rental real estate. It was a good way to make money based just on my time & risk (I bought each property with no money down). However, as my family grew and my role in the company I work for grew, I sold the real estate. The freedom of not having the obligation to keep the tenants satisfied was great! I used the proceeds to pay off my home morgage & used the saved mortgage payments to put my daughter through college.
In contrast, my employer has put my retirement money in trust at a local bank. It's been invested quite soundly and has averaged over 10% annually over the past 10 years (pretty good considering the tech bubble burst in the early 2000's). I don't need to do anything to see this increase. In a few years, when I reach age 59.5, I plan to just leave it right there. When I retire, I plan to have them send me a monthly check & increase it each year.
Yes real estate is a good investment, but managing it yourself constitutes a second job. I've seen both sides & prefer the lazy approach.
Posted by: Gary Wallin | February 13, 2006 at 04:06 PM