Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

Here's How To View Real Estate As Part Of Your Retirement Strategy

• Ari Taublieb, CFP®, MBA • Episode 193

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Real estate can be a wonderful investment, but don't let your net worth trick you.

Many clients want to downsize and then determine they love their home and don't want to move.

Understand the role of your home in relation to your overall financial strategy.

In this episode, I tell the real story of my parents and other clients who wish they viewed real estate differently ahead of their retirement.

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

Your home might be a valuable retirement asset to help create income, but it also might be tricking you, and the reason I say that is because my parents have a home that they currently live in. They have a really healthy net worth, but it's tricking them because they never plan to sell their home. They love their home. They live in Malibu, california. It's a beautiful home. Now many of you know the story, but they were burned by four financial advisors, which is why I became a financial advisor. Now they're currently in their home with no intention to ever sell it, because they love where they live. But having a healthy net worth and a healthy home value does not mean that you can create any income with it in retirement. So I'm going to walk you through how should you view your home in retirement both the mortgage interest, the equity of the home, how could you possibly use it to create a better retirement, but also helping you understand do you even need to worry about net worth and how does that actually impact your retirement strategy? So, if you don't already know, my name is Ari Taublieb. I'm a certified financial planner, I'm the host of the Early Retirement Podcast right here and I'm the vice of the Early Retirement Podcast right here, and I'm the vice president here at Root. Now what I'm going to be going over today there are going to be a few visuals. So if you're just listening through iTunes or Spotify or Google or iHeartRadio I know all of you are listening everywhere Well, that's totally fine and you can certainly do so, but there might be a few spots where you go ooh, I don't know exactly what you're referencing there. I will do my best to explain it, but there might be a few visuals you want to see. So, with that being said, I like to start by always going over a comment of the week, a review of the week, before hopping right into the content. Now the reason I want to start with this image that I have up on my screen right now and you can see it here Once again, if you're just listening on the podcast app, I will explain it for you which.

Speaker 1:

This comes from another financial advisor. He shows two balance sheets here. So, person A they have $5,000 in their checking account, $25,000 in their savings, $400,000 of investments so IRAs, brokerage accounts, roth IRAs, 401ks, things like that and they have $500,000 of home value equity of their home. So their total assets is $930,000. But you can see they have a credit card with $1,000, so not a huge credit card bill and a mortgage with $429,000. So they have a significant mortgage with a liability total of $430,000. Their net worth is $500,000 when you take all of their assets minus their liabilities. Okay, so just keep that in mind.

Speaker 1:

So person B has checkings of $2,000, savings of $3,000, investments of $10,000. So that's $390,000 fewer than person A, but their home value is $770,000. That's $270,000 higher than person A. Person B has credit cards of $35,000 and a mortgage with $150,000. So their total assets are $785,000 and liabilities is $185,000. So the difference in net worth is the first person person A has a net worth of $500,000 and person B has a net worth of $600,000.

Speaker 1:

So I hope what you're seeing right here is person B. They have a higher net worth. It is $600,000. But what you can also see is they only have $10,000 of investments IRAs, 401ks, roth IRAs and this advisor illustrated it this way, wisely, to show that net worth does not tell the whole story. My parents fall in this category, where their home is worth $6 million, they have a significant mortgage on it, but the level of investments they have is minimal compared to traditional retirees. So here's someone on the right person B who's going well. I've got my home value and it is significant where, if they wanted to sell and downsize, there might be a few hundred thousand dollars that could actually help create income in retirement. But right now they just have a high net worth a higher net worth than person A. But person A might be in a more comfortable position. Now some of you are going to be like no, how do they have a home value of 500,000 with a mortgage of 429,000? Just an example here to illustrate that net worth is something you want to consider. It's just another metric, but it's not the reason to give you confidence in retirement or not give you confidence.

Speaker 1:

I have a client that's retired with $500,000 and they're in a wonderful spot because they have a healthy pension that covers all of their needs. They're not big spenders. I have other clients that want to spend $60,000 a month. That's me being okay. Some of these characters I work with are in Malibu, okay, and I'm okay with that. Just so you guys know, I'll tell my client great, you want to spend $60,000 a month. Be my guest. Here's how much income I need to be coming in and here's how much I need your assets to be growing by, and they're like great, I like working, so I'm going to keep doing it.

Speaker 1:

Other people go no 60,000 a month. I don't even know what I would do with that. That would not add value to my quality of my life. And that's where I say great, like, maybe you don't need to keep working, maybe you can stop working. So I want to make sure that no one's working longer than they need to. So this is the first example, just hopefully helpful to wrap your brain around. Okay, how do I think through this? We're going to get to some specifics in a second. But the next thing I want to show you guys, because I get a lot of comments on YouTube. Some of the comments I get, as you guys can imagine.

Speaker 1:

Once again, I'll use the word characters, okay, so this is coming from Dave D-E-Boy5726. He says if you don't have three million, don't retire. You'll be back to work real fast. Now that might have happened to Dave D-E-Boy5726. Maybe he doesn't have 3 million and he realized he wanted to spend way more when he retired and his assets went down too quickly Because maybe he retired early let's say 55, and he realized that healthcare costs were more than he thought Travel was going to be to the extent that he maybe was not expecting, and at the same time markets were going down, and so now maybe he spent too quickly and now he has to go back to work. But that could have been his situation.

Speaker 1:

I see that. I see people come to me that retire early. But they retire too early, run the risk of running out, and that's why not everyone loves me in the advisor world. But I will joke and say I'm the meanest financial advisor because I just don't want you to run the risk of running out. I want you to get the most out of your money. I don't want you working longer than you need, but I will be the first person to say I need you to work two more years so you can actually spend what you want the rest of your life without run the risk of going hey, did I retire too early? Run the risk of going, hey, did I retire too early? And what if markets do this? And so I'll be the first to say that, and I'll be the next person to say why on earth are you working? You told me you didn't have children and you don't want to die with $10 million. So if you don't fly first class, I'm going to be pissed, because you told me this is what you wanted to do. I will do both sides.

Speaker 1:

Now the important thing to understand once again, you don't need a million dollars or 2 million or 3 million or 5 million. You need to replace your income. That is how retirement works. So my parents have a very healthy home, high net worth, but once again, it's not going to create income. They don't want to sell it, they enjoy that property. So for people like you, if you're listening right now, here's when real estate is used as an asset.

Speaker 1:

So there's a few situations. The first one is are you planning to sell your home at any point? Because if you plan to sell your home and just so you know, there's a capital gains exclusion. So if you bought your home for $500,000 and you sell it for a million and you're a married couple, that $500,000 of gains that's just completely tax-free. You don't have to worry about that Anything above that, then there's capital gains at the traditional 15%. So it depends on your income for mostly 15%. So if you bought a home for $500,000. And now it's a million dollars and you sell it. Well, there's gonna be commissions and taxes and things that. Let's assume you're walking away with $800,000. Well, if you walk away with $800,000, which is very conservative, it would be more than that just hypothetical here, hyperbole, shoot me. Okay, so $800,000.

Speaker 1:

Now what you can choose to do is buy a home and you can say do I get a mortgage? Do I buy it outright? But if you buy a home for $400,000, well, that's $400,000 that just went to your investments. That can create income. So maybe it makes sense to use real estate as an asset. But the first question to ask yourself is where do I want to live in retirement? What does my lifestyle look like? Not letting.

Speaker 1:

What a lot of people do is go well, I'm going to sell this home and downsize so I have more income in retirement. And there was one case with a client that I said you could do that, but you're okay if you don't sell the home. And they're like wait, so I don't have to. I go no-transcript. They thought they needed more income. So that's why you want to make sure you're thinking through this properly.

Speaker 1:

Now some of you go well, I want to rent it out. You can absolutely rent out your property. You could buy a new property. You can get really creative here, but I don't want you to make this mistake because I see it more often than you could imagine and I see a lot of situations. The main situation I'll see is someone goes Ari, you know, I think I'm going to maybe travel, and if I do extensive travel, I want to rent out my property. I say great, go rent it out. And they're like I think you could bring in 3000 a month. I go awesome, that's 36,000 a year. I go what is the total cost? You're putting in? Like what I already put most of the costs in? They're like. I'm like no, what are the costs? For example, upkeep, you know, cleaning roof leaks, that kind of thing. They go okay, probably in the range of 1000 or so a month on average. I go okay.

Speaker 1:

So you're taking home $24,000 a year from this property. How much is it appreciating by? They're like what I go. How much is it going up in value by? They go well, historically about 4% per year. I go okay, that's fine. So $24,000 a year, that's almost like the dividend.

Speaker 1:

$24,000 is coming in automatically and they said it's growing, not a ton, but it's growing. So maybe they're all in return, call it. Your total return is in the range of 8% and that was the case for them. So 8% was the total return of their property and I asked them how much time and energy and hassle does this take? And they go well.

Speaker 1:

Sometimes the property manager doesn't do a great job so I have to worry and check in on that. I go well. What if you could generate 6%? But it caused no hassle at all. It's just coming through your investments properly through dividends and interest and things like that. They go well. I don't know. I kind of like the 8% or so that you shared that I'm getting right now. I go great. Then maybe we stick with that and maybe for you it's worth having to deal with the property manager and be traveling worrying about the roof that might leak Because some people want that extra 2%. I have other clients that go. Am I going to be okay if I get 6% instead of 8%? I'm like yes, they're like well, then I don't want to worry about that stuff. I want to go travel and do what I want to do.

Speaker 1:

So it's not me saying real estate's good or bad. This is me saying I want you to start thinking through how much time and energy and hassle. What returns are you looking for? Because anyone can say maximize return. Well, if you really want to maximize your return, go work 30 more years Like your return will be awesome. But that's not the point of this. The point is understanding when can you start to scale back and do what you actually want to do? So equity in the home, rental properties that's how I want you to think about it.

Speaker 1:

In terms of write-offs, some people go well, ari, I don't want to pay off my home in full because I've got mortgage interest. I get to write that off. I've got property taxes. I know I can only do up to $10,000, but it's a really helpful thing for my tax situation because of the healthy income I'm in. I said great, what about when you retire next year and your income is practically zero? They're like what are you asking? I go well, if your income is zero and we need to create income, but you have a brokerage account, yes, you can still keep that mortgage and we can write off interest. Is it as valuable because you're not in a healthy tax bracket? No, it's not as valuable, meaning it's not saving us as much in taxes.

Speaker 1:

But how much better would you be sleeping if you didn't have a mortgage? And they're like what did you just say, yeah, how much better would you be sleeping if you didn't have a mortgage? And they're like what did you just say, yeah, how much better would you be sleeping if there's just no mortgage? They're like, to be honest, I would be sleeping better because it's just kind of our last big debt, last big expense, and I said, okay, good to know, I don't want you to do, I don't want you to pay it off. And they're like well, why'd you bring it up? Then I go well, I want to quantify so you can understand the magnitude If you did pay it off in full.

Speaker 1:

They're like, well, I'd have to sell a lot of investments to do that. I said, yes, you would, and here's what it would do. And they go. Well, you know, and I showed them and I said here's the impact. And they go. Well, that's bigger than I thought. I Just seeing this on paper, I'd still be okay. Could I do better if maybe I left my 5% mortgage rate just as is and invested the rest? Yes, but I think I just would feel a lot better.

Speaker 1:

And so my job is to show my clients hey, here's the magnitude. If I did this for you, it would save you about $70,000 over the course of your lifetime. And some clients look at that and hear it and go not a big deal, I mean. And some clients look at that and hear it and go not a big deal, I mean it's a lot of money, but over the course of my entire life, you know what? I'd just rather pay that thing off. Other clients go well, that's an eight hundred thousand dollar decision by me keeping the mortgage or paying it off. So I'm gonna keep it because I understand that's gonna mean I'm gonna have a very different retirement and it's completely based on your mortgage, your interest rate, where you're at in life.

Speaker 1:

So, regarding your personal mortgage, should you keep it? Should you invest the rest? How do you think through that? That is an exercise and I actually have a video dedicated to that, so I will link that right here if you want to see a full case study of how I approach that. Now, that's, of course, if you're watching on YouTube, on the podcast app. I know you can't hear me or see me point at anything, but I'll reference it in the description as well.

Speaker 1:

Now, regarding how to think through the home and this is the biggest thing that I want you to take away from this episode is. It's very common. Someone comes and goes yeah, I've got this home, I don't know, should I downsize, should I rent? How much home can I buy? What? If it turns out I want to be a big traveler in retirement. I have episodes on renting in retirement. I've done almost every episode that I can think of.

Speaker 1:

But when it comes to your home, your property, start with what would you love in retirement, not what you could get away with. Okay, I hear that too often. I think I could get away with $8,000 a month in retirement. Retirement is not about getting away with anything. Retirement is about saying how much would you love to spend and what do you need to do to be able to do that?

Speaker 1:

I have one client. She is lovely and she's like I want to downsize. There's a true story. She's like I want to downsize because this home's too big. We have four kids and now they're all out of the home and we don't need this level of home.

Speaker 1:

I said okay, and so we went through some planning projections over a year. They were spending in retirement not big spenders and we had a meeting and they said Ari, I'm thinking I don't want to sell my home anymore. I said, well, it might be a problem because when we first started discussing planning and how much you want to spend, selling your home was a big part of the strategy. So by you now saying I no longer want to sell it, that's okay, it's your money. I'm just the guide here. Here's the impact it would have on your retirement plan. And they said yep, totally get that. I'm like why are you so confident? Because when we first started speaking you weren't that confident. They said turns out, I want to spend way less in retirement. I over projected.

Speaker 1:

I thought I wanted to take five trips a year, big international trips, luxury travel. Turns out I'm a homebody and I thought I wanted to do that, but that's only because I was working and for so many years I wasn't able to travel. And now that I've had the chance to, turns out, I like traveling, but not to the degree I thought. And so the reason I'm telling you this story is because this client and you know who you are and you're probably listening, because I know you still listen to the podcast is your retirement for a lot of you. You're like I know exactly what I want to do. Others of you go you know what. I kind of think I know, but I don't know exactly, and so I need you to be connecting all of the gaps of what retirement looks like to you.

Speaker 1:

The first five years, 10 years, 15 years, 20 years. You might want to do extensive travel the first five years. Then it might come down. In the next 10 years you might do less. Then big medical expenses might occur. So we need enough assets to protect that.

Speaker 1:

So the home is not just a retirement asset. My parents have a once again beautiful home. They're the most amazing people ever. I grew up here. I was very fortunate, but there was always stress in the household. They were great at making money very different from a financial strategy. So they're working in their 70s. I'm really lucky because they love what they do and they wouldn't be doing truthfully. But they would feel a lot better if they knew that they could actually have additional income where work was truly optional and that's why I do what I do.

Speaker 1:

So I have two ways I work with clients. Number one I work with clients one-on-one Now, not me personally, but my team and you don't want to work with me personally. I can promise you that because all I'm doing all day, every day, is making videos and podcasts and I have a few clients very minor that I brought on early on. But aside from that, I'm making videos, growing the business, trying to create ways and train advisors in early retirement planning, because there's more nuance involved with healthcare and tax planning specifically. So that's what I'm doing. I want your advisor just watching your money all day, every day.

Speaker 1:

What makes Root unique is most firms. Their advisor is spending a quarter of their week talking to new clients. I don't want the person you're working with talking to new clients. I want them watching your money all day, and so I want to make sure that when you know if you're working with Root, you're getting an advisor dedicated to you who's joining us because they're listening to the podcast and YouTube channel going. That's the type of planning I want to do.

Speaker 1:

My firm doesn't let me. I've got, you know, 300 clients. I work till 8 pm. I don't have any healthy work life balance, but I tell my clients they're supposed to, so I kind of feel like a hypocrite. I want advisors coming from Vanguard and Schwab and Fidelity going. I want to work for you. So you're working with one of my advisors and that's how we do our best work for clients on an ongoing basis.

Speaker 1:

If you don't have $2 million yet, you will one day, but you don't have it yet. Or you're listening going look, I get this, but I want to be my own advisor. This is my thing. I want to run my own projections. Maybe I want to work with you guys long term, but for now, I think I just need to get my hands on that software you use and understand. Yep, what role does my home play? What about rental income? How does all this work? For 300 bucks, you can go and access my academy. I'll link this in the description as well. This is not one-on-one guidance with me. This, you have me giving you guidance with custom videos to how to actually execute your retirement strategy. So, yes, you have me along the way, but it's mainly you going through, putting in your own figures and data, and you can link in real accounts through Vanguard and Fidelity, so you don't have to do it manually. Now, if you're worried for any security purposes, you can do it manually, but you don't have to. So you can have a lot of fun in there and it might give you everything you need.

Speaker 1:

And some clients go, ari, you know, I thought I maybe wanted to work with you long-term and I saw the value. But I did this and, to be honest, it was sufficient for me. Some of you go through the academy and go look, I just have more questions going through this and that's why I need to work with someone. So, hiring an advisor I don't believe everyone needs an advisor. It's about timing and experience and what you're looking for, and I only let people move forward with us when they're like I'm over the moon, this is what I'm looking for and what I need. So I want to make sure you guys, no matter where you're at in life, you can get guidance.

Speaker 1:

I originally started this academy just fun fact here. I started this because I'd get a lot of questions from current clients going hey, you know, I have a friend, they don't have 2 million bucks, but they want to get help. I go okay, maybe talk to this person, and that person I referred them to was nice, but they'd come back. The client they're like all right, what the heck I'm like? What do you mean? They're like well, the person you just referred me to. They just told us what a Roth conversion is.

Speaker 1:

I'm like, oh, they didn't like go through the. Hey, should I do a conversion? Or prioritize healthcare subsidies or impact on capital gains? They go. No, none of that I go. Oh, so what I realized is that a lot of advisors are not just going to the depth that I like to go to. Now, I love this stuff. So I just kind of assumed is what every advisor does. And now I'm realizing more and more it's less the case. If an advisor is like I do everything, it's like well, hard to focus on anything, so I do early retirement planning.

Speaker 1:

Now, as a lot of you know, a lot of my clients don't actually retire early. They just go really good to know, don't need to keep working. A lot of clients go yep, I know I'm in a good spot and I don't know why I would work, so I'm going to volunteer. So I have everyone do different things. But some of my clients come and they go hey, I want to optimize to the nth degree. What should I do? I go great, I need you to bring in this amount of income to make sure we're maxing out social security for the 35 highest years. I need you at a minimum to bring in X amount of dollars so I can max out your Roth, and I want you to do these things. So some clients, I go to that level of degree. So I want you guys to know, no matter where you're at. I want to give you a helpful resource In this academy I built to give originally to children of clients.

Speaker 1:

I would just give it to them and they would go. This is really helpful and I go. Maybe other people could. So all of my ideas are coming from and it's not me sitting down going like maybe I create this academy. It's like no, I just I want to help as much as I can and so I'm just always trying to think of new ways to do that.

Speaker 1:

A lot of you also have noticed if you have purchased the academy, inside of there there's an option to book a one-on-one call with me. The reason I have that it's sold out at the moment, but that is for clients that go look, I just need like a one-time optimization session In there. You can find that it's sold out. But if you purchase the Academy, you go through it fully and you still want a one-on-one call with me, but you don't feel like you need long-term guidance, you can see there's an option for that and there's instructions if you wanna apply for that. So that is all for today's episode, hopefully helpful.

Speaker 1:

Just wanna give you some thoughts regarding home net worth, things like that. If anything, I hope I'm eliminating head trash for you, which is a common thing, where people go well, I don't have a million bucks, maybe I can't retire. Nope, get that thought out of your head. Some of you go yeah, I've got this home, but you know, my net worth is just so high I think I can retire whenever I want. It's like nope, you don't have enough income to create in retirement. So hopefully this was helpful and I'll see you guys next time.

Speaker 1:

Thank you for listening to another episode of the early retirement show. If you have a question that you want answered in a future episode, you can always go to my website, early retirement podcastpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.