Sample Investment Strategies

Supplementing Retirement & Leaving a Legacy

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STRATEGY: Convert retirement savings into rental properties, use cash flow from 401(k) PLUS rental properties for retirement living expenses, leave wealth in properties as legacy for heirs.

The traditional method of financing retirement through 401(k), IRA, and TSP account has a major disadvantage - the need to essentially guess how long you'll live and make withdrawals with the hope that you don't run out of wealth before you die. As retirement goes on, your 401(k) balance continues to deplete.

Real estate investments can help to mitigate this problem. You use cash flows from rental properties for your living expenses throughout retirement, while your investment is likely actually increasing in value! When you die, you can pass your properties along to your heirs, or donate them to a charitable organization.

Let's consider an example.

Suppose you are 57 years old, hoping to retire by 60 years old. You have $2 million saved in a 401(k), and you hope to have about $14,000 in monthly cash flow during your retirement years.

You decide to move half of your 401(k) savings ($1M) into a Self-directed IRA (SDIRA) and purchase 4 fourplexes. You pay 40% down on each property because you want to reduce your debt payments each month so you can get the cash flow that you need. Each month, your cash flow is approximately $5600 after all operating, debt, and management expenses. For the first three years, you save your cash flows in your SDIRA to build a healthy reserve for future capital expenditures and other unexpected expenses. You now have about $200,000 cash reserves when you start retirement at age 60.


You plan to withdraw 5% of your 401(k) annually in retirement, increasing by 3% annually to account for inflation, and you continue earning 5% on your retirement account throughout retirement. Your marginal tax rate is 12%. 


Here is your estimate of your retirement cash flow:

401(k) withdrawals:                               $4,839              taxed as ordinary income

Social Security:                                     $3,500.             portion taxed as ordinary income

Rental Property Cash Flows:               $6,056              not taxed - passive loss due to depreciation expense

Total Retirement Cash Flows:  $14,396 each month in Year 1

Here's the huge benefit:

By age 79, your retirement account savings are spent. While your 401(k) is depleting each month, your real estate investment is actually increasing in value! This is because your tenants are paying down your mortgage principal each month PLUS your property value is likely increasing (appreciation) as well. As an added bonus, you can expect that your cash flows will actually be increasing as well, as rents increase over time. So you are continuing to grow your wealth during retirement to leave a legacy.

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By age 87 (30 years later), your portfolio will be paid off, and your cash flows have increased by over $7200 a month because you are no longer making a debt payment. If you assume a modest 2% appreciation rate, your portfolio is now worth nearly $4,500,000 debt-free!

When you die, your heirs can inherit your properties at a stepped-up cost basis. If they want to hold onto the properties, their cost basis is the value of the portfolio when you died. But if they would rather sell them, they won't need to pay capital gains tax on the depreciation recapture or the appreciation you experienced before your death. Donating your portfolio to a charitable organization would have a similar situation.


(This is a hypothetical situation and is not intended to be financial advice. Consult your CPA regarding all tax implications and retirement account rules.)