A Real World Case Study

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What investors really enjoy is a real world case study. Here’s one using a couple for whom I just generated a Purposeful Plan.

Transcript: Let’s do a case study today and talk about people that actually exist, what they’re going to do and what is probably going to be the outcome for them, and how long of a period of time. We have Millie and Jim. Between them, they make about a hundred thousand dollar a year or maybe a little bit more. They have about twenty thousand dollars in the bank, and they have the ability to make payments of about a thousand dollar a month, depending on what they’re doing. That would be the max. The first thing I told them was that based on their ages, they’re thirty and they’re thirty-one years old, that David Shafer said that for five hundred dollars a month, they will get at age sixty and sixty-one a tax-free income of about a hundred to a hundred and ten thousand dollars a year until they’re ninety. Again, that’s tax-free. Now, they live in California, and to get a hundred thousand dollars a year after tax in California, and remember they’re going to be retired when they do this, so they won’t have deductions for kids. The IRS hasn’t given us deductions for grandkids yet so that’s off the table. They will have paid off their house. At least most people try to, right? They really don’t have any tax shelter or whatsoever. At least we have to look at it the way it is now and project that to be the case thirty years from now, which means that if they wanted to get that hundred thousand plus after tax, they would have to make somewhere between a hundred and thirty-five and a hundred and fifty-five thousand gross. Well, this will get them a hundred to a hundred and ten thousand dollars tax-free for the first thirty years of retirement. That won’t include any note investments they might make. It doesn’t include anything they’ve done in their IRA or 401(k), or maybe they have a small business later in life and they have a solo 401(k). We’ll talk about that at another time. The bottom line is what this will do is it will give them a base retirement income over and above anything else of around eighty five hundred to nine thousand dollars a month, all of which, again, by Internal Revenue Code definition, is tax-free. Now, what they can do over time is that they’re going to be like everybody else. They’re going to start a family. They’ve already got a house. They’ve only had it for less than three years. They’re making those payments. They can grow a family in there before they decide to move on. What they’re going to do is they’re going to save their money. Now, let’s fast-forward ten years. They’ve got two or three kids. They’re feeling a little cramped. They’re in a three-bedroom but it’s a small three-bedroom. They’ve got two baths but again it’s small, and they want to move to a little bit more square footage. Now, Jim’s making a lot more money than he was. Molly quit her job and she’s using her degree in childcare that she got in college to open up a home-based business of taking care of kids. Now, between them, remember, they’re forty and forty-one now, they’re doing around a hundred and thirty to a hundred and fifty thousand dollars a year. He’s been saving, saving, saving. They established, both of them, Roth IRAs back when they first me when they were thirty and thirty-one. They don’t have an employer-based 401(k) between them. They got rid of that. Do you know how I know they got rid of it? Because that’s the way Jim financed the down payment for their house a decade earlier. All right. For ten years, they’ve been averaging eleven thousand dollars split equally between each of them, self-directed Roth IRA. Over ten years, they each have over fifty-five grand, about fifty-five thousand dollars. They are not accredited investors, so they just buy discounted notes outside of my fund and they both own two notes in their IRA, and those two notes are making them about five or six hundred a month that go to their IRAs each month separately, never to be taxed. They’ve got that going for them. The only real estate they have is the house they’ve been living in. Jim and Molly have been very seriously and with great motivation paying down that loan with extra money every month. Now, the house that they paid under three-fifty is now worth about five hundred thousand dollars. It hasn’t gone up like most people think Southern California does, but a decade is a long time, and besides they’ve paid down their original loan of over three hundred and thirty thousand. They only owe right now about a hundred and fifty. By the time they sell their property and pay all the closing cost, pay off the hundred fifty, they’re going to have about three hundred and twenty or thirty thousand in cash. Now, they’re going to get Molly a two- or three-year-old used car with twenty or thirty of it, so they’re going to keep three hundred of it and they’re going to figure out from that. They’re going to take two hundred of it to put as down payment and closing on the bigger house they’re buying. Now, as they do that, they know that their payments are going to go up a little bit, but he’s already making four figures more per month than when he started, by about maybe twelve hundred, okay. Her home-based business is also free and clear stuff. By the time she’s set up her home-based business and got it going full-blast in a year or two, she stopped giving to her Roth IRA and started giving over the fifty-five hundred dollars to her new solo 401(k) because she’s a small business owner, and a solo 401(k) was created specifically for small business owners. She takes everything over fifty-five hundred, which in her case is fifty-five hundred from seventeen-five. She can take twelve thousand dollars a year after tax and put that into her solo 401(k) on the Roth side, and yes, a solo 401(k) has both sides, a Roth and traditional side. But she knows never to mess with the traditional side because she wants her retirement income, whatever it is that generates when she retires at sixty from that Roth side to be tax-free. She doesn’t want it to be taxed. What she does is she puts in twelve thousand. Now, her business, even though it makes about fifty, fifty-five, sixty thousand a year, really only nets her around three thousand a month, about thirty-six thousand dollars. That’s her net. She gives a total of seventeen-five to various, to Roth accounts. She still has her fifty-five hundred a year going to her Roth IRA and she has the balance of the seventeen-five allowable maximum contribution going to the solo, so there you get your seventeen-five. However, she’s allowed to take profit sharing of up to nine thousand dollars, maybe more, but we’re just going to say nine, into her solo. Now, she has to pay taxes on that. That’s not after tax. That’s nine thousand; now she’s put in at total of seventeen-five and another nine, twenty-six thousand five hundred. Because they have savings because they live frugally, every year, most every year … Some years cost more than others. Life happens. Again, that’s why we have the bumper sticker, right? They can take whatever is not invested in her solo and the Roth IRA, and they can put in up to fifty-one thousand total of all contributions into her solo on the Roth side. But they can’t put in fifty-one if she only made thirty-six. So she’s putting in twenty-six five, she’s got another ninety-five hundred. They can afford it from savings most years. She puts it in. Can you see how this is going to grow like crazy? Now, her solo 401(k) Roth is buying notes just like both of their Roth IRAs are buying notes, over and over, so every single year between the two of them … Let’s recount the math of how many notes they’re buying and what amounts and what values. Every year they’re putting in eleven thousand into their IRAs. That’s the most they can put, fifty-five hundred apiece. Every year, she’s putting no less than twenty-five thousand total into her solo 401(k) Roth, sometimes more. Let’s just count to twenty. Between them, they’re doing thirty-one thousand dollars a year, which buys at least a note every year, year in and year out. Those three Roth entities are developing payments every year that go up every year, because every year they’re buying more notes. More notes mean more payments. They’re getting up to the point by around their fifth year where they have bought literally over a hundred thousand dollars in purchase price and they’re making who knows by then a thousand thirteen, probably no more than fifteen hundred dollars a month in payments, none of which is being taxed. By their fifth year, every year their payments are buying a note, and you see how this is multiplying. Here’s what happens. They’re going to do this until they’re fifty-nine and a half. Now, it turns out for them, they’re really only going to do her business for twenty years until she’s fifty because she ended up getting tired of the childcare as much as she loved kids. He said enough is enough, and she sold her business for not very much because most people pick their childcare by the nanny, right? They don’t pick it by brand name. She made a little bit of money and she kept it for herself, and they bought whatever they bought, okay? Here’s the bottom line. They bought the new house using two hundred of their three hundred from the sale. They didn’t know any taxes because they had lived in that house for ten years and it wasn’t subject to taxes. They took the hundred thousand and they bought, when they were forty and forty-one, a duplex in Texas. Now they had a separate investment in real estate. They had three entities that had been buying notes, all of it tax-free from every viewpoint, going in, making profits, getting interest payments, and coming out, none of it taxed because the money that went in had already been taxed before it went in. Now, they pay off that duplex and they paid off that duplex in ten years or less, the same way they knocked that loan on their first house, okay? Not rocket science. What they did now, they’re fifty, they’ve got ten years before they want to retire. They paid that, at fifty years old, they’ve refined that house, that duplex, and they took out two hundred and ten thousand dollars cash. Well, why would you do that, Jeff? You’re not going to know, Jeff, the interest rates weren’t five like they were when they started. Let’s say they’re seven. Do you think the rents are the same ten years from now? Let’s say they are, because that’s the way I do stuff. We’re not going to assume values or rents went up. There’s still cash flow. Where are we borrowing seventy percent of the value? Now they’ve got two hundred and ten thousand dollars. Well, they do what you and I would do. They take ten thousand dollars to have a nice vacation, and where there’s a beach and palm trees and drinks with umbrellas in them. You know you and I would do the same. They take two hundred thousand dollars and they buy another duplex, and the reason they did that is because they took the other hundred thousand. At this time, they’re still happy with the home they bought ten years earlier. They take the hundred thousand and now they buy a hundred thousand worth of notes in their own names. That makes them around twelve, thirteen thousand dollars a year. They’re netting now at about eight thousand a year. They take the eight thousand plus the cash flow, and you got it, they’re paying of that note. He’s adding from his salary, which keeps going up, okay. He’s now, along with the money that he’s making at work, the note income outside of the IRS and the Roth, and his cash flow, he pays off that duplex in ten years. Meanwhile, back at note ranch in their own name. At least one of those two or three or four notes they bought paid off. He only had to pay capital gains tax at fifteen percent whereupon he bought bigger notes. Now, he wasn’t making twelve or thirteen. He was making fourteen, fifteen, sixteen thousand dollars a year, and if more of them paid off, he’d be having more. He has a free and clear duplex that’s giving him somewhere between sixteen and twenty thousand a year like clockwork. He’s got his own personal note portfolio in Jim and Millie’s name that’s making them maybe fifteen hundred dollars a month gross before taxes. He’s got three Roth accounts that have been buying notes for twenty years, buying notes with the payments from those notes, and having notes turnover every five, ten, eleven, twelve years, whenever they did randomly, never being taxed on the profit, and buying more notes with that. In twenty years, if they don’t have a hundred thousand dollars, something was really screwed up. They’re going to have a lot more than that, but a hundred thousand a year tax-free is what they’re going to have from those three entities, and that’s the worst-case scenario. That’s my thirty-eight years of experience with notes. Now, they retire at sixty. What does it look like? They have a free and clear duplex giving them twenty grand. That’s spending money, right? People say well, why do they even have it? It’s the bank of Jim and Millie. If anything happens, they need a quick couple of hundred thousand dollars, not going to have a tax impact of any kind, they make a call to their lender, they get two hundred thousand three or four weeks later. Boom, it’s there. Whether the reason is sad or happy, they have two hundred thousand just like that. They didn’t disturb anything. Who cares about the twenty thousand? Here’s why they don’t care. They’re getting a hundred thousand tax-free every year from their Roth notes, and those notes inside those ROTH’s. They keep paying off. They keep not being taxed on the profits. They buy bigger notes that have higher monthly payments and it doesn’t make a hundred anymore. They retire by the time they hit sixty-five at significantly and measurably more than a hundred thousand a year tax-free, and they keep getting those random raises until they’re off, they’re gone. Now, the EIUL is giving them a hundred to a hundred and ten at age sixty, tax-free, until they’re ninety. Let’s call it the bottom-end, a hundred. From notes in their ROTH’s and from their EIUL which they paid consistently with great discipline, they’re making two hundred thousand dollars a year tax-free by Internal Revenue Code definition. They’re making twenty grand a year for spending money. They’ve got sixteen hundred and fifty plus dollars a month for spending money. That’s going out on dates with each other, having a good time and having these vacations. That’s nothing money, all right? They have their own portfolio that they had going for about ten years that when they retired was another fifteen, twenty grand, twenty-five by the time they got to fifty, easily. That’s only going to get bigger. The only difference is the interest they get paid on those payments are taxable as if they’re not retired, like they have a job, just like they got a job. That’s the rate the interest is paid. Then they have more money as those get paid off. They’re retiring with about seventeen thousand dollars a month tax-free, about forty thousand dollars a year taxable, and they don’t have to do another thing. Works for me. How about you?

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