Posted by: Bart Schroeder on: June 7, 2009
I’ve heard this question often enough that it’s time to formulate a standard answer. Your financial planner should be able to put together a comprehensive plan that would consider the amount of investments you have in IRA’s, 401K plans, potential amounts from Social Security and, of course real estate. I like being able to do this myself, at the expense of some accuracy. I do my own using some simple tables and my calculator and then, submit it to my financial planner for further verification. To answer the question, I would do the following: First you need to come up with how much income you’ll need when you retire. You take your current gross income, and apply the factors I’ve outlined below. You have to make a guess at what inflation will be between now and the time you retire. Since nobody knows for sure, the only reasonable thing to do is take a low rate of inflation and a high rate of inflation. Let’s use 3% and 6%. Those inputs, together with a range of short to long term scenarios, say 10 to 25 years, yields the following factors which can be used to estimate the size of a retirement “kitty” needed.
|
|
10 Years |
15 Years |
20 Years |
25 Years |
|
3% |
1.34 |
1.56 |
1.81 |
2.09 |
|
6% |
1.79 |
2.40 |
3.21 |
4.29 |
Now that you’ve addressed the question of “how much”, it’s time to focus on the “what”. In my next post on this subject, I’ll talk about ways to put that “kitty” to work.
Posted by: Bart Schroeder on: May 19, 2009
If you are looking to buy your first home, here are some ideas to consider. A home gives you a place to live, pride of ownership, tax deductions, and with a little planning, it can become an additional retirement tool. Of course, you will want your home to fit your needs, but also consider some other ideas to make it a good investment.
Find the neighborhood that you like and then complete a rent survey as if you were going to rent it out immediately. Do a rent survey of the area by looking at ads in the classified section of the newspaper and determine what the rents for a similar property are. With interest rates below 6%, you need to secure monthly rents of about .006% times the value of your home. As an example, a $200,000 home should rent for about $1,200 a month. If the rents seem OK and the home is located in a growth area, it will probably be a good investment.
Then consider the following strategy: After you have purchased your first home, live it in for one or more years, then purchase a second home. Your first home is usually purchased with little or no money down. There are many first time homebuyer loan programs to take advantage of. Your second home can also be purchased with no money down. Normally, this is done by securing an 80% first mortgage and a 20% second mortgage. Then, rent out the first home. Yes, you will probably have a negative cash flow for a year or two, but liken it to a contribution to a 401K or IRA. You are using these funds for the same reason, saving for your retirement. In the third to fifth year, purchase the next property to reside in and convert the second to a rental as well. Since you can obtain the best interest rates as an owner-occupant, it is to your advantage to utilize this type of financing.
Under current tax rules, if you live in your home for 2 years or more, you can rent it for three years, sell it, within the three years and enjoy beneficial tax treatment. You will be subject to recapture on depreciation, but this can be a great way to get mostly tax free money to invest in other rentals.