Re: Creating a retirement fund - Posted by Frank Chin
Posted by Frank Chin on May 21, 2006 at 08:53:21:
Inflation, and health costs are the two big “unknowns” in retire planning. For this reason, I did not count on a fixed percent (5%) for a certain target fund amount ($1,000,000).
I watched my dad and his contemporaries plan for retirement, and in the late 1960’s, when some of his freinds retired young, $100,000 was considered a “princely” sum. Back then, you can live on $5,000/year, collecting 5% on $100,000 in CD’s.
Fast forward 30 years, and you’ll find the amount revised upward ten fold to $1,000,000, and retirement planners would tell you that you’ll probably need several million, at least $2,000,000 minimum.
Rather than basing retirement on a percentage of fixed target, I did something similar to dealmaker. I see that a free and clear 3 family house in NYC would earn me 25% or more of what I need, currently around $2,500/month, after taxes, utlitlies and insurance. Four of these would equal $10,000.
I know of a local retired grocer, who owns two “2 families”, and one large “3 family”, all free and clear. He lives in one of the two 2 families rent free and DOES NOT rent out the other unit, using it for grandchildren to visit. The other two nets him over $5,000/month, more than enough live on, he says.
There’s two schools of thought on retired people based on one’s lifestyle.
One is a quiet lifestyle like my dad and the grocer. The children are grown, they do not vacation much, collect social security. For this group, I see them comfortably living at less than $5,000/month. They tell me being able to relax at home, no worries, is the best retirement.
Before my dad was bedridden, and hired an attendant during the day, I was shocked that he told me his monthly expenses were below $1,000.00. Living in a free an clear property helped. He does not own a car, depending on neighbors for shopping or walking to neighborhood stores. For years, he bragged that “not having a car” paid for his retirement. He tells he his grocery bills runs around $300, $400 tops, a month. Add electric bill of $50 to $75.00, the basic phone bill (he refuses to pay for touch tone), insurance, and now medical expenses off $200.00/month, he merely needed $1,000.00/month.
The local grocer told me that what he make on rent is more than enough for his needs.
On the other extreme, some active retiress plan to travel, and enjoy the early part of their retirement much more. I can see that they would need at least $10,000/month, or perhaps more.
One nice thing about basing retirement on rentals is that it is “inflation” adjusted. As my dad owned a commercial property, commercial rents went up about three fold from the 1960’s to the 1980’s, and again three fold from the 1980’s when he retired to today. Indeed, went up ten fold from the 1960’s to today.
Someone with $100,000 retiring in the 1960’s making 5% on it would not see his “passive” income going up ten fold, or three fold from the 1980’s.
Further, I see no need to “sell the property” at retirement, if one owns some small commercial properties, with minor property management help. Lessee’s of commercial properties pay RE taxes, fuel, and do maintenance. Not only does it take inflation out of net rents collected, they provide property management services.
With the proper type of tenants, turnover can be kept to a minimum, unlike residential tenants that move about every other year.
I see my dad retiring very well on ONE commercial property. And because he had other savings and social security, he banked his rent checks for the last 20 years after the property was free and clear. And then, it was only a 5% mortgage of $15,000 before it was paid off!! Just putting the rent away alone added another million or two to his net worth.
As for myself, I accumulated a nice 401K nest egg that would certainly exceed $1,000,000 by retirement, but it’ll be for pocket change by then. I don’t expect $1,000,000 to support myself at retirement.
One other important element in retirement planning is insurance, and for someone with wealth, “long term care insurance” is worth a look. A major illness, and a stay a nursing home facilty a $300/day would quickly wipe it out.
While my dad was smart enough to get “Blue Cross” to supplement medicare, after a mjor operation, he stayed at a nursing facility where “Blue Cross” only covered the first TWO MONTHS of rehab, and he was on his own for the third month, at $300.00/day, when he insisted on “checking himself out”. Said he didn’t like the food. I thought it wasn’t bad as I ate his dinners during my visits, bringing him real food from the Chinese takeout. The split pea was so delicious, that the staff gave me several bowls that was left over!!
He could have paid a small amount to Blue Cross for what they call “endorsement H”, which would have covered it all. He has since bought the coverage.
John, basing retirement on “passive income” of only 1MM, ignoring inflation, is asking for trouble, and even 5MM would be inadequate if you live a retirement of 30 or more years. Factor in either an active lifestyle, or major medical bills, certainly is inadequate.
One other point.
Many on this board deride “collecting rent”, pointing out the quick profits of flips.
I have to say watching my dad the last several years is that it’s awfully hard doing flips hooked up to an oxygen tank, with an attendant helping you shower.
Rents checks - NO PROBLEM. I can even help to pick it up!!
Do all your flips young, and get a commercial property. Teach your kids how to collect the rent checks while your attendant help you shower.