Baby Boomer Retirement Planning – The Basics by Bill Roberts

Retirement Planning is like planning for a trip. You can’t really do much planning if you don’t know where you want to end up. Just putting a little money aside with the idea that you’ll need it when you retire is kind of like just driving around aimlessly, you’ll end up somewhere, but not necessarily where you want to be.

So if we can agree that isn’t the best approach, then what is?

Well, the process is quite simple. You start by creating a budget of your living expenses that you’ll have when you retire. I wrote a couple of posts on this subject:

Fun With Ken and Barbie

Fun With Ken and Barbie, Part 2

Apples and Oranges

Now you need to adjust this number for the future because no matter what we do, the dollar is going to be worth less tomorrow than it is today. I like to use a 5% per year factor to make today’s apples equal tomorrow’s oranges.  This isn’t rocket science and we’re not going to be accurate to six decimal places so I would just multiply the number of years until you expect to retire by 5% (i.e. 10 years times 5% equals 50%) then add that percentage to your answer. So if you need $10,000 per month now, you’ll need $15,000 per month in 10 years.

Now we know how much we will need. Let’s compare that with what we know we’ll have:

Social security                           $ 2,500.00 per month

Company retirement plan           $ 2,500.00 per month

IRA                                          $ 1,250.00 per month

Total                                        $ 6,250.00 per month


Uh oh. It looks like we’ll be a little short. But don’t worry, we still have options:

  • First option: Work ‘til you die.
  • Second option: have more money to retire on.

I’m going to assume that you have selected the second option. So the question is what can you do to have more $$ to retire on?

I believe in the real estate market. I don’t believe in the stock market. I think that your IRA invested in real estate will be worth more in ten or fifteen years than it would be if you leave it where it is now. On average mutual funds historically yield about 8% per annum in earnings and growth combined. When you start drawing down your IRA for living expenses (this is called a distribution) it will affect the continued growth of the IRA. If your IRA is invested in annuities, stocks, and mutual funds or money market instruments it won’t be very big when you retire and your distributions will probably consume ALL of the account’s annual growth. It will stagnate or even grow smaller as you take out money to live on.


We will now compare the difference between the two scenarios, a traditional custodian where you invest in equities, funds, or money markets and a custodian that allows real estate based investments. The “assumptions” will be the same:

  • $50,000 current balance
  • $5,000 per year additional contribution (“catch up”)
  • All transactions are at the beginning of each year
  • 10 years before beginning distribution.

IRA at Traditional Custodian

Year  Beginning $$  Contribution  Balance w/ROI  Anticipated Monthly Distribution
1  $      50,000.00  $        5,000.00  $      59,400.00  $                396.00
2  $      59,400.00  $        5,000.00  $      69,552.00  $                463.68
3  $      69,552.00  $        5,000.00  $      80,516.16  $                536.77
4  $      80,516.16  $        5,000.00  $      92,357.45  $                615.72
5  $      92,357.45  $        5,000.00  $    105,146.05  $                700.97
6  $    105,146.05  $        5,000.00  $    118,957.73  $                793.05
7  $    118,957.73  $        5,000.00  $    133,874.35  $                892.50
8  $    133,874.35  $        5,000.00  $    149,984.30  $                999.90
9  $    149,984.30  $        5,000.00  $    167,383.04  $              1,115.89
10  $    167,383.04  $        5,000.00  $    186,173.69  $              1,241.16

Compare that to a real estate investment that grows 5% per annum (for inflation), but you only put 25% down. This gives you a 5% return on your investment PLUS a 15% return on the portion financed. Your actual yield is approximately 20% PLUS you may have income from the investment and more growth based on improvements to the property and enhanced demand for the neighborhood. The upside potential is tremendous.

Now all this is great, but your IRA custodian won’t let you invest in real estate.

Of course they won’t.  The custodian is associated with the company that invests your funds and they are an insurance company, stock broker or mutual fund company. What you need is a custodian that will allow you to invest in real estate.

Now this isn’t impossible, but it is a little more difficult than signing up with Fidelity or somebody like that. But it is well worth the effort.

The Self-Directed IRA

If You Haven’t Saved Enough Money to Retire You Better Read This

What you need to do is to sign up with a custodian that allows self-directed IRAs.

Once your self-directed IRA is established you can roll over your existing IRA into your new IRA. Then you will need an LLC with a special operating agreement (that satisfies the IRS) to hold your IRA real estate investments. The whole process to establish your IRA and setup your LLC will cost from one thousand dollars to five thousand dollars depending on who you get to do it.
Once this is complete it will give you “check book” control of your IRA investments.

Now you want to aggressively put your money into good growth potential investment property. You want to be aggressive because you know that if your IRA doesn’t grow fast enough and big enough you won’t be able to retire.

A nice side benefit of having your real estate portfolio in your IRA is that you no longer need to do §1031 exchanges. You can just sell and keep all the profit in your IRA. Understand that your IRA grows tax free or tax deferred (depending on whether it is a Roth or Traditional IRA) and therefore a §1031 tax deferred exchange is not necessary.

After that, we will purchase additional properties utilizing cash flow and cash-out financing. Remember, this is an aggressive approach because we don’t have that many years to build up enough money in our IRA to guarantee a comfortable retirement.

IRA Funds Invested In Real Estate

Year  Beginning $$  Contribution  Balance w/ROI  Anticipated Monthly $$
1  $      50,000.00  $        5,000.00  $      66,000.00  $                  1,100.00
2  $      66,000.00  $        5,000.00  $      85,200.00  $                  1,420.00
3  $      85,200.00  $        5,000.00  $    108,240.00  $                  1,804.00
4  $    108,240.00  $        5,000.00  $    135,888.00  $                  2,264.80
5  $    135,888.00  $        5,000.00  $    169,065.60  $                  2,817.76
6  $    169,065.60  $        5,000.00  $    208,878.72  $                  3,481.31
7  $    208,878.72  $        5,000.00  $    256,654.46  $                  4,277.57
8  $    256,654.46  $        5,000.00  $    313,985.36  $                  5,233.09
9  $    313,985.36  $        5,000.00  $    382,782.43  $                  6,379.71
10  $    382,782.43  $        5,000.00  $    465,338.91  $                  7,755.65

Now this looks pretty good, but it has some inherent flaws. We have NOT accounted for cash flow and we haven’t specified what we are going to do with the additional contributions other than improve our property.

To maximize the return, the only “logical” thing to do with this money and with our increased “equity” position would be to buy additional properties or “trade up” to a bigger property. Rather than make “projections” here, I will let you imagine what you could accomplish if you moved up to a million dollar property in year five.

We will also need to “manage” our cash between transactions. We cannot afford to leave it in the bank at 2% or 3% if we expect to average 20% return on our investment. There are ways to do this. A good real estate retirement specialist can help you with this.

But if we did nothing more we are looking at 5 times the monthly distribution than what we could expect from the traditional IRA.

The Big Day Approaches

Once we are approaching retirement, we want to sell our residential income property (because it is “management intensive”) and use the proceeds to build a commercial strip center. This will give us continued growth and good cash flow with much less demands on our time for management.

Self-Directed IRA Real Estate Investment Program

Now as you can see, with aggressive investing in real estate with your Self-Directed IRA you should be able to reach (and even exceed) your retirement goals.

If you need help setting up your self-directed IRA, contact Bill Roberts at Brooks and Dunphy Financial (619) 244-4610. We provide everything you need to get started for $1495.00. including an LLC with the required operating agreement, the custodian that allows a self-directed IRA, the instructions to fund your LLC, registration with the IRS, and a bank account. Then all you need to do is buy something. We can help with that too.

If you need ideas on making a few extra bucks take a look at this.

Bill Roberts - "Baby Boomer" Retirement Planner (Brooks and Dunphy Real Estate): Services in Oceanside, CA

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