JoshLewis

The Definite Cost of Inaction Vs. The Likely Outcome of Proactive Planning

If you have listened to the radio show over the last several weeks you have heard Doug and I discuss the joint consultations we have been conducting with listeners. Our objective is to help those who have seen massive increases in their real estate equity during the housing boom get their portfolios properly balanced and leveraged to minimize interest costs, increase tax efficiency and ultimately maximize wealth.

Interestingly, a common theme that we have seen during these sessions is the difficulty people have in overcoming their own inertia. Many of the folks we have met with have become quite comfortable with their 401k savings and the large equity position in their homes. Even when presented with the reality that their savings won’t be enough to replace their income in retirement and that home equity will only be a benefit if the home is sold or a reverse mortgage is put in place, many people simply can not get themselves to take proactive steps now to insure the retirement that they want. They come up with a number of reasons why it’s safer, easier or just more comfortable to continue on their current path than to step outside of their comfort zone and pursue a proven plan to achieve financial independence.

The best examples of this phenomenon are two women we met with who are in remarkably similar circumstances. The first, who I’ll call Claire, owns her home and enjoys a great fixed rate with a loan balance of only 30% of her homes value. On the negative side, she owes $30,000 in student loans taken out for her daughter’s education and has accumulated only $70,000 in retirement savings. Her objective is to retire in 5-10 years.

The second lady, who we will call Jane, owns her residence with a loan balance of roughly 35% of her homes value. She has great terms on this loan and also owns 2 additional rental properties free and clear. On the negative side of the ledger, she is facing $75-100,000 in tuition for her two children in the next 7 years. She has only $60,000 in total savings and currently carries $35,000 in high rate consumer debt. To top it off, the free and clear properties are only generating $1800 income per month despite the fact that there is $500,000 in equity in the two properties. After expenses, the equity tied up in those two pieces of property is generating less than 3% per year. Jane has targeted retiring in 15 years.

Upon review, Claire and Jane appear to be in very similar circumstances. They own their homes with large equity positions. They have debts and obligations that aren’t accounted for in their current plans and they have assets that are underperforming and underutilized. But, there is one huge difference between these two women and in the end the difference will be significant.

We presented Claire with a retirement roadmap that charted a course from where she is today, unable to generate an income sufficient to allow her to stop working, to where she would like to be in 10 years, retired and enjoying her golden years. When she reviewed the plan Claire could only see the possible pitfalls that might prevent her from reaching her goals if she implemented the plan.

Jane was given a similar plan reallocating assets from home equity to retirement and brokerage accounts, paying off high rate debt and setting aside funds for college education. Instead of focusing on all of the what-if scenarios that could prevent her from reaching her goals, Jane reached the one obvious conclusion. If she continues on her current path, she will continue having a tough time making ends meet. She will take on excessive debt to fund the college accounts and she won’t be able to reach her retirement objectives. In the end, she will be forced to take action, not out of choice and opportunity, but out of need.

Instead of waiting until she is forced into action, Jane chose to proactively plan the future she wants. Soon, Jane will not have to worry about the headaches of being a property manager. She will have over $400,000 in retirement savings and fully funded education accounts for her children. Her cash flow will be enough to allow her to make regular contributions to her 401k and still have money left at the end of the month. At retirement in 15 years, she will likely have built a nest egg of over $1.5 million dollars which will provide the income she needs to live her desired lifestyle.

Sadly, Claire has chosen the path of least resistance. She could not overcome her fears of the unknown despite the fact that her greatest fear should be of the known outcome of her current path. Ignoring the opportunity to eliminate all of her debt, fund her retirement accounts and increase her cash flow through optimal mortgage financing, Claire has chosen to stay the course.

This means she will struggle to pay down her debts, slowly add to her retirement accounts and find herself 10 years down the line with few options. At that point, she will be forced to sell her home and move to a lower cost area, removed from friends and family. This should allow her to pay off her debts and buy a smaller, less costly home in a less desirable part of the country. She won’t live out her days in poverty but she is passing up the opportunity to proactively create the retirement she desires.

On some level, each of us face this same decision. Do we procrastinate and stay on our current course or make a proactive choice to plan for the future that we want? Hopefully, when you read this you see more of yourself in Jane than Claire and you are making the decisions needed to get on the path to the financial life you desire and deserve.

If you would like an expert plan for managing your assets and liabilities to maximize cash flow and tax benefits to create the wealth you desire, call my offices today at 888-944-5674. Doug and I will spend some time learning about your situation and your goals. We will then prepare a roadmap charting your course to prosperity.