Thursday, March 01, 2007

Lessons From My Dad - Create Guaranteed Income Streams

As we have been working through the estate of my father, I continue to learn more about investing and retirement finances. My Dad was a pretty smart guy. In retirement, he was receiving 10% more guaranteed income than in his final job. He did it by creating multiple guaranteed streams of income during retirement. There first three streams are ones that people typically get. The last two streams are significant ones he created from real estate investments.

Pension - He receive a small pension from his final job with the government. The monthly pension amount essentially covered his retiree health insurance payments. This was 10.3% of his retirement income.

Money Market Interest - He kept earned a little bit from money market accounts which maximized his return on waiting cash. 2.7% of retirement income.

Social Security - Since Dad retired at 72, he did not start taking social security payments until 70, the maximum age one can start the payments. As a result, he received the maximum social security payment. When he passed away, the payment amount was transferred to my mother.

As it turned out, Dad was ahead of his time. When he retired, the common recommendation was to begin social security payments at 62, to maximize one's total payments. The current recommendation is for married couples to wait until 70, the latest age possible. This is because the lifespan of one of the couple is usually past the break even age of 80.

Social security payments were 42.5% of my parent's retirement income.

Rental Income - Dad had invested in a very successful joint venture real estate partnership. The monthly payments were 36.6% of their retirement income

Mortgage Interest - For one of the properties Dad sold, he was the first mortgage provider. As a result, he received a payment from the buyer every month for 7.9% of their retirement income.

As one can see, without the real estate investment income, my parent's retirement income would have been reduced by 44.5%. Quite a difference in income. My parents also had investments in stocks, but they never spent any that component since their guaranteed streams of income were more than sufficient.

I now understand why Dad was always encouraging me to invest in real estate.

For more on Crossing Generations , check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC


Empty Spaces Inc. said...

I spent $4k and attended a russ whitney seminar in 99. the ONLY thing i learnt was that if you do nothing except buy 2 houses and rent them out for 30 years and have the tenants pay them off for you, you'll have a secure retirement.

your dad really was ahead of his time.

Bill said...

Personally, I don't like guaranteed income. I have a couple reasons for this. First, nothing is really guaranteed. Pensions depend on the company's ability able to make the payments (just ask airline employees). Social Security is subject to the whim of politicians (think the 1987 reform). Even rental income requires having tenants.

Second, guaranteed income is really expensive. For example, consider an immediate annuity. If I bought a simple immediate annuity today, it would pay me 5.5% of principal amount annually. In comparison, the average return from the stock market is twice that AND I get to keep my principal.

I guess it just boils down to a personal decision. How much is having guaranteed income worth to you? If having that kind of guarantee will help you sleep better at night (and you're willing/able to pay the hefty premium), go for it. As for me, I can stomach the volatility of the stock market, even after Wednesday's 3% drop.

Super Saver said...

Empty Spaces,

Thanks for your comments. I am gaining more appreciation for real estate as I review Dad's finances.


Thanks also for your comments.

Agree that nothing is "guaranteed" except for death and taxes:-) I also do not consider annuities a particularly good deal. However, I still consider having a portfolio of steady income (i.e. pension, social security, rents, interest) to be a relatively good strategy.

By the way, I don't disagree with you on investing in the stock market. 80% of my retirement funds are invested there.