Retirement Planning is Broken

Suggesting a Better Path to Securing Your Financial Future and Creating Generational Wealth

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For decades investors have planned for retirement based on a fundamental saving principle that no longer holds true. Most investors have not fully grasped the negative effects that extremely low interest rates will have on their retirement. Savvy informed investors now realize that there is a better and more reliable path to financial security and creating generational wealth.

Low Interest Rates Are a Big Problem.

For well over a century Americans have been taught that saving for retirement has meant building a portfolio of roughly 60% stocks and 40% bonds over the course of our working life. The premise was that stock values might fluctuate in the short-term but over the long-term they will appreciate and deliver strong gains. At the same time bonds would produce consistent returns albeit at a lower rate. The problem is that US bond yields both nominal and real (i.e. net of inflation) have been persistently declining since 1981. At that time the nominal yield on a 10-year US Treasury note was 15%. Even factoring out the high inflation of the time the yield was ~10%. Fast forward to today and the yield on this same bond is ~1.6%. Net of inflation the rate is Zero. The severe decline has eroded the very premise retirement planning is built on. Unfortunately for retirement planners — it gets worse. Going forward most economic experts predict rates will be heading even lower. Government bond rates in other advanced economies are now negative — meaning investors are paying the government to hold their money. Both the current Fed chair Jay Powell and former fed chair Alan Greenspan have commented that it is only a matter of time before we see these same negative rates in the US.

The effect of very low interest rates for those saving for retirement are dire — and the impact will be felt in both bonds and stocks. On the bonds side, years of potential gains from this portion of investors’ holdings simply will never materialize. Unfortunately, even as many investors recognize this problem they are then forced to make a painful choice: either plan to retire with less funds and live more frugally or try to compensate for this gap by shifting more assets away from the safety of bonds and into the greater risk and volatility of stocks. We see this happening in spectacular fashion right now. Everywhere you look in the world there is uncertainty and concern: from the US Presidency, to trade wars with China, to slowing world economies and much more. Historically Wall Street hates uncertainty. Yet in the face of mountains of it, the S&P is again hitting all-time highs. This push toward greater risk is particularly problematic for those who have already stopped working or would like to do so in the near future. 10+years into a bull market, raises the prospects that hundreds of thousands of baby boomers may well retire in the teeth of the next bear. So the negative effects of low yields on bonds create spill-over risk for stocks.

Taken a step further, low interest rates and the absence of any kind of significant yield from bonds creates an even greater problem for investors and their families once retirement arrives. Historically investors have been urged to follow the practice of building as a nest egg as large as we possibly can during our working years. When we stop working, we’re instructed to shift the funds into the safety and stable income generated by bonds. Then over the course of our remaining years we are to rely on this income augmented by a modest annual draw on the principal of our stocks. However, low-to-negative interest rates have essentially broken the fundamental thinking around this kind of planning and then managing retirement. What we’re left with now is an uncomfortable game of chicken. Upon retirement we will be called upon to ration what will be a shrinking amount of savings over the course of our remaining lifetime. Retirees trying to maintain the level of living that that have become accustomed will be forced to at the same time to be sure not to outlive their savings. Naturally the longer you expect to be retired, the more peril involved in this balancing act.

A Better Path

At OpenPath, we see that investing in multifamily real estate can play an important role in insuring your family’s financial future. As many real estate investors know, a carefully selected and managed portfolio of multifamily real estate serves both as a stable tax-efficient income generator and an appreciating asset providing long-term capital gains.

Instead of amassing a portfolio of largely stocks and bonds with all the inherent problems we discussed and then trying to successfully manage this dwindling amount across the end of your life, we see a better path for investors.

How different would your retirement or life after work be if you had built a portfolio of assets that was generating income equivalent to your current cost of living? Put more simply, what if you stopped working and still had the same income as you do now? What if at the same time you enjoyed the added security of holding the underlying properties that continue to appreciate in value. This steady stream of income would give retired investors the freedom to enjoy the same style of living that they did while working. It could afford them the opportunity to travel more frequently (and more comfortably). Income secure retirees could pursue a long held passion — perhaps in the arts or becoming an active donor in your favorite causes. A reliable, strong post work income would enable investors to help their children pay for a wedding or buy a first house. All of these things might feel tenuous if you found yourself in retirement grappling with an ever dwindling bank account. Lastly, what would it mean for your children and generations to come if these income producing assets would then in turn be passed on to them?

In short, the fundamental tenets of how we have always saved for retirement are now broken and have likely changed forever. Yet for most people — even wealthier individuals — the way we invest for the future has not changed much at all. Multifamily real estate can enable a truly worry-free retirement and path to generational wealth creation that stocks and bonds can not provide — at least not anymore.

Generate a Strong Income Even When You Are No Longer Working

How to Get Started; A Simple Example

What can you do now to put this plan for an empowered financially secure future into action? The first thing you can do is to commit to diversifying your financial holdings away from the low-to-no returns of bonds and away from the risk and uncertainty of equities (especially if this is concentrated in one sector like tech). Make a plan to build a portfolio of passive income producing investments in multifamily real estate. You can do this with an investment firm like OpenPath or other similar companies — just make sure you work with a reputable partner.

How much should you invest in real estate? I recommend allocating a third to half of your investable assets to real estate. Start by reallocating bonds and large single stock positions. Another more tangible way to plan for the right level of real estate you should hold is to think about the amount of take home income (after taxes and other deductions) that you currently enjoy. How much real estate would it take to generate that kind of income — even after you stopped working? To get a rough number start with this absolute number and divide it by 7%. (For example let’s say you needed $400K in take home income —again post tax and deductibles. In this case: $400,000 / .07 = $5,714,285. Assuming a 7% annual yield or income from real estate, which can be expected from a good firm, that’s how much you will need to own in order to generate $400K in annual income. That might seem like a big number but you don’t need to get there overnight. Better yet, you will find it possible to get there faster than you think. How? If you were able to invest $250K in each of four multifamily offerings each year for the next two and a half years you would find yourself at that point with take home income of ~$175K/year. Assuming for the next four to five years you were reinvesting this income and any capital gains (based on 2X multiple on equity over four to five years), you would find at that time your real estate investments generating ~$350K per year and now covering almost all of your current living expenses. At that time you may very well feel comfortable in leaving full-time work or at the very least scaling back knowing that if you were able to continue reinvesting all of the proceeds from you real estate, that in another few years you would be generating $700,000/year in take home income. In a relatively short period of 6–10 years you would have met and then greatly exceeded your annual income needs via passive investments in multifamily real estate. You will have completely secured your financial future and created generational wealth in the process.

The key is getting started sooner than later and allowing the gains to work in your favor. Of course, you don’t need to commit to $250K/offering. The point is to begin reallocating your assets now at whatever level makes sense for you based on your situation and goals and committing to building a multifamily real estate portfolio over the next few years. In a relatively short time you will be duly rewarded and even surprised by the level of financial security your portfolio now provides.

If you have questions on any of this or would like to get more specifics about how to leverage multifamily real estate to generate income and build family wealth., please feel free to reach out to me at any time. David at OpenPathInvestments dot com.

A couple other posts that I think you will like:

“My Next Google: A perspective from employee 75

“Recession? What Should Multifamily Investor Expect Now?”

What’s with that Inverted Yield Curve? A Sports Analogy Can Help” — NYT

Note: Note: I am a partner and investor with OpenPath Investments, a social impact real estate investment firm. OpenPath investment opportunities are for accredited investors. The numbers used in the above example are for illustrative purposes. Actual results from OpenPath real estate investments can vary. I am not a CPA or professional financial advisor. All opinions are my own.

[1] For more on this read Summit Trail Advisors Senior Advisor Series — Negative Rates and this Axios’s piece: The End of Money As We Know It

Written by

Investor, Partner, Advisor. First Google Advertising Exec (2000–07), ex-Chicagoan. Now at OpenPath Investments & FullCycle Climate Partners

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