RPF0430-Retiring_Naval_Officer_and_Real_Estate
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00:00:31.500 | Today on Radical Personal Finance, we answer a question about how this listener, who's a retiring naval officer, can integrate real estate into their portfolio.
00:00:41.200 | Pat writes in and says this, "Joshua, I'm a fan of the show and a naval officer.
00:00:45.900 | I have some questions on overall investing strategy.
00:00:49.200 | I have close to 17 years in the Navy and will likely retire at 20 with a full pension, which would be about $55,000 per year before taxes.
00:00:59.100 | And I currently have $440,000 in retirement savings for my wife and me split between Roths and the TSP.
00:01:07.800 | We have over $140,000 in college savings for my two children, 8 and 10 years old.
00:01:13.400 | We plan on also transferring my GI bill, which will essentially pay for one of their college educations.
00:01:18.700 | And we have about $30,000 in taxable accounts.
00:01:22.500 | We are selling our house in Norfolk, Virginia this year.
00:01:25.700 | It's been a rental for five years, but we are moving from Tampa to Jacksonville, where I will take command of a destroyer there.
00:01:31.900 | So my question, I am looking at getting into real estate investing and slowing down retirement savings over the next five years,
00:01:38.400 | from about $25,000 per year to $12,000 per year, maxing out Roths and putting the minimum in the TSP.
00:01:45.700 | I'm curious to hear your take on my overall situation and real estate investing writ large.
00:01:51.300 | Ideally, we'd put about $40,000 to $50,000 into things this year, either buy and hold type rental properties or a flip,
00:01:58.400 | and then snowball any earnings plus about $30,000 annually over the next four years until I retire to set up passive income sources.
00:02:06.000 | Thanks. Well, Pat, what a phenomenal situation you are in.
00:02:12.200 | This is a prime example of how to effectively use the military finance system to set up a truly extraordinary life.
00:02:24.000 | You've done a phenomenal job of maxing out retirement savings as an early year and in the early years,
00:02:29.700 | maxing out all your college savings, taking advantage of your opportunities there.
00:02:34.300 | And when you retire, it's hard for me to overemphasize how valuable this pension is going to be for you.
00:02:41.500 | My hat's off to you and to your wife for all of the great work that you've done in establishing yourself.
00:02:47.300 | There is not a chance in the world that you're not going to be set financially for the rest of your life.
00:02:55.000 | Now, let me give you some ideas about how to expand that and how real estate can fit into that.
00:03:03.900 | Before we go, well, let's start let's let's start there. Let's talk about why real estate.
00:03:08.000 | Why would you choose a real estate? In my mind, there are a few major reasons for anybody to choose to invest in real estate.
00:03:16.800 | The number one reason is to and by number one, I mean one of three that I have on my list, not necessarily the most important.
00:03:25.000 | Just that these are three valuable reasons that real estate really speaks to.
00:03:29.700 | Number one, real estate gives you the opportunity to set up a potentially very stable source of cash flow.
00:03:38.700 | Real estate allows you to diversify your income stream so that you can have greater confidence in your income streams.
00:03:46.000 | This can be very valuable, especially for somebody who doesn't have a pension.
00:03:50.000 | See, you already have a stable income flow.
00:03:52.700 | And so this will be less important to you than it would be to somebody who was, say, entirely invested in stocks.
00:04:01.500 | By having real estate, you have a tangible asset, a physical tangible asset that is probably non-correlated to the ups and downs of the major stock markets.
00:04:12.200 | And so by having a tangible asset that you can look, that you can see, that you can touch, that you can really understand,
00:04:19.200 | and a tangible asset that throws off cash flow for you systematically, steadily, regularly,
00:04:24.700 | that can give you a great deal of confidence to sit tight in your portfolio through the tough times,
00:04:29.200 | which is the major thing that you need to do to be a good investor in stocks.
00:04:32.700 | Now, likely you've already learned how to do that by accumulating this much money.
00:04:36.200 | And by being, I'm sure, a very disciplined person as a commanding officer in the Navy,
00:04:41.200 | you've probably already learned how to sit through the tough times.
00:04:43.700 | But that's one major benefit of real estate.
00:04:46.700 | Another major benefit of real estate is that real estate provides for you a valuable mixture of a job and a business.
00:04:56.200 | Sorry, a business and an investment.
00:04:59.700 | Excuse me. A business and an investment.
00:05:03.700 | Real estate is an investment because it requires capital.
00:05:06.700 | And depending on how you deploy that capital, it can grow or it can decrease.
00:05:12.700 | But it's not a pure investment.
00:05:15.200 | It's a lot more work to invest in real estate than it is to buy mutual funds inside of your TSP and Roth IRA accounts.
00:05:23.200 | You have to go and find the deals. You have to put them together.
00:05:25.700 | You have to perhaps rehab a house if you're investing in individual rental houses.
00:05:29.700 | You have to manage tenants or you have to hire that done.
00:05:32.700 | And so it's not a pure investment, but neither is it a pure business.
00:05:37.700 | There are components of both.
00:05:38.700 | And this is a huge advantage of real estate because especially for somebody like you,
00:05:42.700 | real estate can give you the opportunity to have some of the benefits of both.
00:05:47.200 | You get potentially higher – something to do with your time, a business that leads to potentially higher gains because it's not a pure investment.
00:05:54.200 | But it's also less work than many other businesses.
00:05:58.200 | So that's a benefit of real estate.
00:05:59.700 | Now the third thing is that real estate, because much of real estate is local, real estate can be a less efficient market than some other markets.
00:06:08.200 | And so you have the opportunity to apply your sweat and your hard work in a local market to find deals or to put together deals or to maximize the value of a property,
00:06:17.700 | leading to potentially higher gains and higher returns in your investment activities.
00:06:23.200 | So these are some major benefits of real estate.
00:06:25.700 | The question is, do you need those benefits?
00:06:29.200 | And are you willing to pay those costs?
00:06:32.200 | You don't particularly need, from a financial planning standpoint, a diversified income stream unless you need to spend substantially more than your pension provides for you
00:06:45.200 | and you don't wish to tap any of these other sources of money at an early age.
00:06:51.200 | Because you have a steady $55,000 per year of income coming in from the pension, that can provide a very comfortable lifestyle in many places,
00:07:00.700 | depending on where you choose to settle down and the needs that you have financially.
00:07:06.200 | If you need to spend double that, then of course you'll need to arrange a source of cash flow.
00:07:10.700 | Now I don't know how much you're spending right now.
00:07:13.200 | My guess would be, if you're living on a naval officer's income and if you've been saving this out of your income,
00:07:20.200 | it's hard for me to see that, unless your wife is also earning a secondary income that's quite large,
00:07:25.200 | it's hard for me to see how you would have been able to save and accumulate this much money and be living on much more than $50,000-$55,000 per year.
00:07:33.700 | But I'm hypothesizing there, I can't prove that.
00:07:37.700 | But let's assume for a moment that you can live on $55,000 per year or less,
00:07:45.700 | especially given the fact that you've got kids college taken care of,
00:07:48.700 | especially given the fact that you'll have medical benefits that other people don't have,
00:07:52.700 | and you have this stable source of income.
00:07:54.200 | Well, in that scenario, you don't need more income from real estate.
00:07:59.200 | What about the mixture of job and business?
00:08:01.200 | Well, here you've got to consider, what is the lifestyle that you're looking to create after your retirement from the Navy?
00:08:09.200 | Are you looking to just work a little bit?
00:08:11.200 | Is this type of work well-suited to you?
00:08:13.200 | You clearly have a little bit of experience with your rental house in Virginia,
00:08:16.200 | so therefore you should know what you're getting into.
00:08:19.200 | Is this well-suited to you?
00:08:20.700 | Or would you like something that's potentially more exciting?
00:08:24.200 | Potentially, would you like to do more work?
00:08:27.200 | Be involved in things that have a bigger opportunity?
00:08:31.200 | Only you are going to know that.
00:08:33.200 | And with regard to the efficiency or inefficiency of the market,
00:08:36.200 | you should know what you're getting into there.
00:08:38.200 | I have no problem with real estate.
00:08:40.200 | I think it could work well.
00:08:42.200 | But I do want to make sure that you have a clear understanding of the numbers that you're facing in your situation.
00:08:49.200 | I've learned that it's very easy for people to underestimate the future value of their investments,
00:08:56.700 | especially when they've been in the accumulation phase,
00:08:59.700 | where they've been working very hard just simply to save
00:09:03.200 | and haven't really sat down and calculated how much their investments could very reasonably grow to.
00:09:09.700 | So let's put some numbers to your situation.
00:09:11.700 | First, college savings.
00:09:12.700 | You have an 8- and a 10-year-old.
00:09:15.700 | You have $140,000 saved in their savings accounts.
00:09:20.700 | If we assume that you're going to invest for another six years,
00:09:24.700 | that'll put your 10-year-old at the age of 16, which will be possibly, you might have longer,
00:09:29.700 | but I want to be very conservative here, six more years, beginning with $140,000 in today's dollars.
00:09:35.700 | And if you can average a nominal rate of 6% rate of return on their investments over the next six years,
00:09:42.200 | without putting any more contributions into those accounts,
00:09:45.200 | you'll be just under $200,000 in value at the end of six years.
00:09:51.200 | $198,592 is what the financial calculator spits out when you put that math in.
00:09:56.200 | That's a couple hundred thousand dollars.
00:09:58.700 | So you've got college well-squared away here, especially when you factor that in to a GI bill.
00:10:04.700 | When you've got a GI bill that can pay for one of your children's education by your transferring it to them,
00:10:10.200 | you are well settled for college education.
00:10:14.200 | I would encourage you to minimize additional savings there if you haven't already.
00:10:18.700 | What about your retirement dollars?
00:10:20.700 | Well, I don't know your age, but let's assume that you're currently about 40 years old.
00:10:24.200 | You've been in the Navy about 17 years and you're working out through 20.
00:10:27.700 | It would be common in your situation that you'd be about 40 years old at this time.
00:10:32.200 | If we fast forward and say what $440,000 of retirement savings could grow to over the next 20 years,
00:10:41.200 | putting you at about age 60.
00:10:43.200 | Well, starting with $440,000 in 20 years, 6% interest per year, no further contributions.
00:10:49.700 | We're talking at the age of 60 of your having a portfolio of about $1,411,000.
00:10:55.200 | So call it a million and a half bucks.
00:10:57.700 | That's a lot of money.
00:11:00.200 | Especially, that's a lot of money, when you can add that to the pension that you already have.
00:11:09.200 | That pension is so, so valuable from the perspective of retirement savings.
00:11:15.200 | Now, what could you do with this amount of money if you could let it sit for longer?
00:11:25.200 | In a situation like yours, I could very conceivably see how, unless you're planning on starting a horse farm
00:11:34.200 | and spending $300,000 a year for the rest of your life, I could very conceivably see how you might never actually need the retirement money.
00:11:44.200 | The money that's already in your retirement plans.
00:11:47.200 | If you follow your plan here of pulling back on retirement accounts,
00:11:50.200 | focusing on setting aside cash to start new businesses such as real estate, etc.,
00:11:56.200 | when you get out of the Navy in three or four years, and if you have that pension as a backup, you might never need this money.
00:12:04.200 | So what would it be worth in 60 years at about age 100?
00:12:11.200 | Well, if we take $440,000, we grow it at 6% per year.
00:12:15.200 | Very conservative. 6% per year.
00:12:17.200 | No additional contributions.
00:12:20.200 | For 60 years, you wind up with a potential future value of about $14,500,000.
00:12:28.200 | That's also assuming no distributions from the account.
00:12:31.200 | So over $14 million.
00:12:35.200 | That is a huge potential asset.
00:12:38.200 | My reason for going through these numbers is to hopefully change your perspective
00:12:42.200 | and help you to start to think differently than you're currently used to thinking.
00:12:48.200 | My guess is that your mindset up till now has been discipline, frugality, hard work, and systematic savings.
00:12:57.200 | As it should have been.
00:13:00.200 | That mindset has worked.
00:13:02.200 | And that mindset has set you up in a place where you could conceivably live just about any lifestyle you could imagine for yourself
00:13:09.200 | and be very comfortable.
00:13:13.200 | The question is, will that mindset get you to where you want to go in the future?
00:13:20.200 | It might.
00:13:21.200 | And here's where I'm limited in email.
00:13:23.200 | I don't know what your personal goals and dreams are.
00:13:27.200 | So all I can do is answer how I would answer, how I would be in this situation,
00:13:31.200 | given my perspective and my outlook on life.
00:13:36.200 | If I were in your shoes, I would consider real estate investing.
00:13:41.200 | But I would desire to go far beyond real estate investing in my thinking.
00:13:47.200 | And I would say, how can I use the skills and talents and abilities that I've accumulated thus far in my life
00:13:54.200 | to make a significant impact on the world?
00:14:02.200 | This will largely have to do with your philosophy.
00:14:04.200 | But I don't personally ascribe much value to the philosophy of, hey, you've worked and worked and worked,
00:14:09.200 | and now the benefit of having worked and worked and worked is that you can quit working.
00:14:13.200 | I don't work in order to quit working.
00:14:16.200 | I think that's a terrible philosophy.
00:14:19.200 | Work is valuable.
00:14:21.200 | Work is beneficial.
00:14:23.200 | You work as an expression of something deeper.
00:14:27.200 | And then you accumulate the money and the capital and the things that accrue,
00:14:31.200 | and you reinvest those for a greater purpose.
00:14:36.200 | If I were you, I would do a comprehensive inventory of my life,
00:14:42.200 | comprehensive inventory of my skills, of my interests, of the things that are important to me,
00:14:47.200 | of my philosophy, of my ideology,
00:14:50.200 | and try to understand how those skills can be put together in an area that it would be very important to me
00:14:57.200 | to make a change in the world.
00:15:00.200 | This is what wealthy people do.
00:15:02.200 | Wealthy people, once they reach the point of having enough,
00:15:06.200 | have to look and say, "How do I invest this money into something that goes beyond my personal needs?"
00:15:11.200 | You and your children are going to be fine.
00:15:15.200 | So what do you do from here?
00:15:18.200 | The only possible outcome is for you to choose to invest your time and your talents and your treasure
00:15:25.200 | into something that goes beyond you, into something that goes beyond consumption.
00:15:33.200 | You should design what you do after the Navy in a way that will fit that,
00:15:43.200 | not in a way that will just sound great from a purely investment standpoint.
00:15:47.200 | Here are a few examples.
00:15:49.200 | If I had spent 17 years in the Navy and I were working as a captain on a destroyer or a commanding officer,
00:15:59.200 | if you're taking command of a destroyer in the Navy,
00:16:03.200 | that would indicate to me that you are a skilled leader,
00:16:08.200 | and especially that you're a skilled leader of young people, predominantly young men.
00:16:15.200 | There is such a dearth of good male leadership for young men.
00:16:19.200 | If I were in your shoes, it's a real burden for me to work with men.
00:16:23.200 | If I were in your shoes, that would be something that I would be paying a lot of attention to.
00:16:28.200 | And I would say, "How can I put this skill that I've developed over 20 years in the Navy
00:16:32.200 | to work in an area that will make a difference on society and a difference on culture?"
00:16:40.200 | One possible way to do that would be in real estate.
00:16:43.200 | After all, if you have a real estate investment business, you have the potential to hire people to work for you.
00:16:49.200 | You have the potential to mentor people in that business.
00:16:53.200 | You could, after you became a skillful and knowledgeable investor, you could pass that along.
00:16:57.200 | But if it were me, I would be looking beyond real estate,
00:17:00.200 | because the concern of real estate is that it ties up a lot of capital without the ability to impact a lot of lives.
00:17:05.200 | Yes, you can impact the lives of your renters.
00:17:07.200 | Yes, you can impact the lives of some people to fix up your properties.
00:17:11.200 | But it doesn't go beyond that.
00:17:13.200 | If it were me, I would be looking at businesses.
00:17:16.200 | I would be trying to understand, "What business could I start or create here in the local area
00:17:21.200 | that would give me the opportunity in the context of business to hire young people
00:17:27.200 | and seek to train them and to mold them and to shape their character?"
00:17:32.200 | That could come in the context of business.
00:17:35.200 | A friend of mine and a client of mine owns a blue-collar business.
00:17:39.200 | He has this blue-collar business where he has the ability to hire lots of young men to do this wrench-turning blue-collar business.
00:17:47.200 | He has 30 or 40 young men that work for him.
00:17:50.200 | He has the opportunity as their boss to sow into their lives, to teach them the basics of personal character,
00:17:55.200 | personal integrity, to teach them basic finances, to, in many ways, step in and serve as a father
00:18:01.200 | to, in this business, primarily young men who've been without a father.
00:18:08.200 | It's powerful as far as the potential impact.
00:18:12.200 | Does something like that call out to you?
00:18:14.200 | Or what about getting involved in something where you can get involved as a coach?
00:18:22.200 | Perhaps this is also on your list, but if I were looking at real estate and I said, "Okay, real estate's good.
00:18:27.200 | It's going to take a little bit of my time," I would also be looking and saying, "Would I be interested in working as a coach?
00:18:32.200 | Do you have an interest in sports or an interest in a particular hobby or avocation
00:18:36.200 | where you can get involved and coach young people to build that character and those skills in them?
00:18:45.200 | Or is there an opportunity for you in an organization, something like the Boy Scouts or similar organizations?
00:18:53.200 | Is there an opportunity for you to get involved and to work in an organization like that?
00:18:57.200 | Can you take your leadership skills and use it in a multiplicative way?"
00:19:03.200 | Let's use Boy Scouts as an example or the competing versions of those now.
00:19:09.200 | If you were to use an organization like Boy Scouts and you were to get involved, you can do that.
00:19:13.200 | You can get involved in a paid position, which would bring extra income in for you,
00:19:18.200 | and that puts you in a position where you can leverage your skill and your ability and your talents across the lives of many young men.
00:19:25.200 | If you can back that up with your real estate business or other businesses, you have the opportunity to provide options for these men.
00:19:38.200 | If I were in your shoes, that's what I would be thinking about is, "How can I take my skills?"
00:19:43.200 | You've already covered as much money for yourself. You're not going to need much more money than you've got.
00:19:48.200 | How can you take those skills now and leverage them?
00:19:52.200 | I think of a story that I read that really impacted me, just how fantastic it was of a man who was involved and went to an inner-city church.
00:20:03.200 | He started a landscaping business exclusively so that he could have the opportunity to hire young inner-city men to work in his landscaping business on Saturdays.
00:20:14.200 | He'd pick them up at 6 in the morning on Saturday, do a good, long, hard day's work, give them an opportunity for gainful employment, pay them well,
00:20:21.200 | have opportunities to encourage them and spend time with them.
00:20:24.200 | This was a dramatic, dramatic benefit and blessing in their lives.
00:20:30.200 | I would love to do something like that someday. I haven't seen that it's been appropriate for me to do right now, but I look for the options.
00:20:36.200 | I look for the ways to integrate things like that.
00:20:40.200 | Someone like you should be spending your time not thinking about the finances.
00:20:46.200 | You've squared that away.
00:20:48.200 | You need to be thinking about the things that go beyond the money, and you need to get very clear on that.
00:20:56.200 | I beg you, please do not waste the skill and the talent and the capacity and the character that you've built and formed or had forged in you over the last 20 or 30 years of your work.
00:21:12.200 | Do not waste that with a self-centered retirement.
00:21:19.200 | Sketch out a plan for the next 60 plus years of your life that will leave you putting an impact, an imprint on the lives of other people.
00:21:33.200 | I don't know enough about you to tell you how to do that.
00:21:38.200 | Real estate might serve that, or real estate might be a total distraction.
00:21:45.200 | If you found, for example, that a business that you were starting or a nonprofit charitable organization that you were getting involved in,
00:21:53.200 | if you found that real estate were to interfere with that, let's say you found an organization, you got involved at the local level,
00:22:03.200 | you became the executive director of this local organization, maybe it's something involving your experience in the Navy with water sports and something that you care deeply about,
00:22:11.200 | whether that's an environmental cause or, again, my burden is for young men, to see young men strengthened.
00:22:18.200 | How could you do that?
00:22:20.200 | You say, "Okay, I see this opportunity."
00:22:22.200 | You get involved. You work as an executive director of this organization.
00:22:26.200 | Well, you'll make $100,000 a year working as the executive director of the organization.
00:22:31.200 | If it's a reasonable organization.
00:22:33.200 | If not, you can build it up to be that.
00:22:35.200 | So the financial benefit, you don't need the money from real estate is my point.
00:22:39.200 | You would have income that you could earn from the work that you're doing.
00:22:44.200 | In that type of situation, real estate might be a distraction.
00:22:47.200 | It might take you away from your primary cause and you're better off just leaving your passive investments, your mutual funds,
00:22:52.200 | just leaving those alone to grow and pouring yourself into the organization.
00:22:57.200 | That would be how I would approach it, how I would think it through.
00:23:02.200 | So choose an area post-Navy for you to focus on to make a serious contribution of your time and your energy and your talent and your skill.
00:23:15.200 | Spend your time thinking about that, not just about the dollars and cents.
00:23:22.200 | You might need a little bit of time after the Navy to figure out what that is.
00:23:26.200 | You might need to take a year off.
00:23:28.200 | If you take a year off and your children are 13 and 11 years old, that would be a great time to pull them out of school.
00:23:34.200 | Maybe you take a year and travel with them or go on an adventure, go serve on a foreign mission somewhere.
00:23:41.200 | I don't know what you're into.
00:23:42.200 | Maybe you just need some time to sit at a beach resort and recover.
00:23:45.200 | You wouldn't want to be near a beach after living in the Navy.
00:23:48.200 | Maybe you need some time to sit at a mountain resort and recover after 20 years of every moment of your day being scheduled
00:23:54.200 | and being responsible for the lives of dozens or hundreds of men and women and billions of dollars of equipment.
00:24:00.200 | So take a year.
00:24:03.200 | But then get very, very serious on designing not the finances.
00:24:08.200 | You've done what you need to do there.
00:24:11.200 | But designing the days and the impact of your life for the next 60 years so that you can build something that outlasts you.