Long Beach Real Estate-Long Beach Condos

Welcome back for the second installment of Move Your ASS-ets Long Beach.  In the opening chapter, we discussed Depression Economics which was a study of the investment habits of the "Greatest Generation".  Today we're going to talk about their kids, The Baby Boomers (those born in 1946-1964).

Baby Boomers have had a profound impact on America, as consumers.  One economist described that impact like "watching a basketball pass through a python".  Everything the Boomers touch goes up in price.  Look at all of the elementary schools built in the 50s and 60s.  The cost of a college education skyrocketed from 1975-1995 because of their impact.  Housing rose during the 80s as they bought their nests, stocks in the 90s as they invested their 401-k accounts, and real estate in the first half of this decade as they purchased their vacation/retirement homes.  Health care has steadily increased in costs during the past 15 years as the Boomers have aged and acquired aches and pains.

Now, the Boomers are getting ready to retire and everyone is concerned that they'll drain the Social Security system.  I wouldn't be too concerned about that..  The government saw that problem way back in 1978 when they amended the IRS code to allow for tax-deferred retirement plans under section 401-k.  Additional provisions were made for non-profit workers with 403-b plans.  Hailed as the answer to corporate pensions, the 401-k plans, sometimes called thrift and savings plans, allow a worker to contribute a portion of his earnings, on a pre-tax basis, to a self-managed account.  It was the perfect tax break for the "working man" and encouraged savings for a consumptive generation (The Boomers).  The savings can't be withdrawn without a penalty and taxation until you are 59.5 years of age.  At 70.5 years, a person MUST start withdrawing from the account.

That is just what the government wants.  It allowed the government to "bank" taxes to supplement a dwindling social security system.  It further sets up a potential benefit reduction for middle income retirees (which I believe is coming).  The government will harvest taxes in the next 40 years and potentially reduce benefits to retirees who draw on those accounts.  It is essentially the perfect storm and it was carefully constructed to deal with the Boomer retirement problem.

Here is the problem you face today.  If you've been a diligent saver, using the IRAs and 401-k plans, you could potentially pay a huge amount of taxes in your retirement. You see, your account has been growing in a tax advantaged account; many of you have a sizable fortune in those plans.  The government stand to profit well off of your thriftiness. 

Let's look at the Tale Of Two Boomers:

Patrick is 60 years old and just retired from General Electric.  He carefully saved an average of  $6,000/year and invested those proceeds carefully through his 401-k plan at work.  His sister, Kathleen, did the same with her job at Citibank.  They both started the plan in 1980 and by 1995, had grown their accounts to $170,000.  Patrick persisted in his plan and his account has grown to $800,000.  He thinks that he can live off the 8% return of $64,000 his nest-egg will produce. 

Kathleen, however, took the road less traveled.  Sensing a potential tax increase, she withdrew half of her account in 1995 and paid close to 45% in taxes and penalties.  She ended up with only $95,000.  Kathleen, however, chose to buy an Individual Retirement Apartment Complex or IRAC  (my idea of a play on words) in Long Beach.  In 1996, prices were on the cheap and she was able to secure an eight-unit complex for $350,000.  The rents almost covered the mortgage but she got a depreciation tax break so things worked out okay. 

Rents rose and prices did, too.  She sold that IRAC in 2001 for $450,000 and leveraged her profits, using a 1031 exchange into a 16-unit complex for $990,000.  Rents rose and so did the value.  Kathleen sold the complex for $1,400,000 and exchanged into another IRAC in 2004.  This time, she bought 24 units in Los Angeles for $1,950,000 with a $1,250,000 loan against the property.  She was just breaking even at about $650/unit but believed with the $100,000 in cash that she had, she could improve the property and get close to $800/month by the time she retired. 

Kathleen was right, of course.  She receives an average of $900 per unit today and it looks like she'll be able to hike the rent next year.  That extra $250 per unit per month is all profit as the loan and expenses are covered at $650/month.  Multiply $250 by the 24 units and you'll see that Kathleen receives about $72,000 annually, $6,000 more than her big brother.

Here's the kick in the gut to Patrick.  He pays taxes on his $64,000; most of Kathleen's income is sheltered by the depreciation allowance for her property and will be for the next 24 years.  Patrick is required to start depleting his account and paying taxes on the principal in ten years;  Kathleen will most likely exchange into a bigger property, resetting the depreciation clock and living out her years without giving the government a dime of her retirement money.

If the Greatest Generation were debt-retirers,  the Boomers are debt users.  However, the debt they use is for mostly depreciating assets like cars and furniture.  Boomer Economics is represented by the false security of the nest-egg of the 401-k.  What most don't realize is that the government fully intends to confiscate massive amounts of those nest eggs for the next 40 years. 

In my next chapter, I'll discuss Millennial Economics in general and the specific changes that have set up the next wave of economic activity.  It's pretty mind-blowing and explains why so many 30 year olds are asset heavy and in business for themselves.

Move Your ASSets Long Beach!  A Series

Part One:       Depression Economics

Part Two:       Boomer Economics

Part Three:    Millennial Economics

Part Four:      The Worst Investment and You Probably Own It

Part Five:        A Strategic Solution For Financial Freedom

Part Six:          Recommendations For Action

Article written by Brian Brady,  America's Most Opinionated Mortgage Broker.  He can be contacted at 858-699-4590

Related Posts