Creating the perfect retirement plan varies from person to person. This week we look at a couple with multiple rental properties funding a large portion of their retirement plan.
The situation
Patrick, 63, and Tracy, 51, describe themselves as “conservative and wanting to protect their money,” while creating their vision for retirement. Tracy enjoys numbers and accounting but wrote in to What’s The Plan for confirmation that they are making smart financial decisions. Patrick retired at the beginning of the year, and Tracy is looking forward to retiring in the next five years.
Together the couple has six rentals in Colorado Springs. Their goal is for these properties to collectively generate $5,000 in revenue each month. They have a $2 million umbrella liability policy but have not established an LLC. One of the questions at the top of the list for Tracy and Patrick is whether they should pay off the rental mortgages first or keep their money invested. The threat of a stock market plunge has the couple uneasy.
Patrick currently has $255,856 in his employer’s 401(k) and Tracy has $215,465 in her 401(k) account. These funds are split between traditional and Roth accounts. Tracy is currently contributing $13,000 per year to her retirement savings. Together they have $174,269 in accounts at Schwab, also split between traditional and Roth accounts. They also have a $24,364 fixed annuity, and very little liquid savings. Patrick receives $2,642 from his pension per month after taxes and Tracy will receive $1,431 from her pension at age 57. Tracy will also receive an additional pension at age 60 of $1,000.
Tracy and Patrick are one another’s beneficiary, should anything happen to either party. Patrick is very concerned with making sure his children from a previous marriage are taken care of in the event he dies first and Tracy were to remarry. Patrick was clear: “I want to make sure Tracy has everything she needs but still watch out for my children.”
Recommendations
Patrick and Tracy are doing an excellent job, but should really consider running the rentals more like a business. I recommend they work with their attorney to set up an LLC for all the business dealing with these properties. Thus far they have used every spare dollar of the rental cash flow to pay down debt and a few major expenses. To operate more like a business, I recommend a “reserve study” to determine how much of the rental cash flow to set aside for expensive maintenance like the useful life of the carpet, roofs, appliances, etc.
The interest rates on the properties are so low that paying the properties off right now while Tracy is working is not the best option. Once Tracy retires, this would be worth revisiting. The couple should invest all their accounts conservatively, and take advantage of Tracy’s 401(k) now. I recommend building up their reserves so they can pay off the properties when Tracy retires.
Our calculations show that the couple can spend approximately $8,450 per month, after taxes and adjusted for inflation, beginning when Tracy’s is 57. This projection is based on Patrick and Tracy claiming Social Security as they each turn 70, net income from their rentals and drawing on their IRAs and 401(k)s. This income is projected to last until Tracy is 95.
I recommend Patrick and Tracy explore with their attorney a Qualified Terminable Interest Property (QTIP) Trust. This could allow Patrick to take care of Tracy as well as have the ability to control what happens to the remaining assets at Tracy’s death. This may provide some peace of mind for Patrick knowing he is taking care of everyone in his family to the best of his ability.
Keep up the good work, and enjoy your time together with your children and grandchildren!
Pam Dumonceau has 21 years of experience in the financial planning industry. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
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Names and identifying information are changed to protect confidentiality.
