Terry Moore

Terry Moore has helped more than 300 investors succeed in the last generation. Terry has climbed Mt. Kilimanjaro, been married 36 years, and is a CCIM, certified commercial investment member. Nationally he’s in the top 5% of investment brokers. He is an owner of ACI Apartments, in the top five most productive income property brokers [...]


Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
April 16, 2019
Terry Moore: How to Use Rental Real Estate to Build Legacy Wealth

Top apartment broker Terry Moore, CCIM talks about using rental real estate not just to build wealth, but also to create a life worth imitating. Joe and Big Al answer your questions: can excess scholarship money be contributed to a Roth IRA? Will stock and bond income affect Social Security benefits? The fellas also do a couple of retirement assessments on the fly to help listeners generate and maximize retirement income while minimizing taxes.

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Show Notes

  • (00:48) Terry Moore, CCIM – Using Rental Real Estate to Build Legacy Wealth
  • (11:31) Terry Moore, CCIM – Using Rental Real Estate to Build Legacy Wealth (part 2)
  • (21:02) Can Excess Scholarship Money Be Contributed to a Roth IRA?
  • (24:32) Will My Income From Stocks and Bonds Affect My Social Security Benefits?
  • (27:38) What Are My Real Taxes and Penalties and How Can I Generate Retirement Income?
  • (37:19) Joe and Big Al Do a Full Retirement Plan Assessment
  • (45:28) “When I listen to YMYW I Stay Laser-Focused on My Retirement Goals”


How can you use rental real estate to create wealth, even if you’re in an expensive and high-demand area like Southern California? Today on Your Money, Your Wealth®, Terry Moore, CCIM talks with Big Al Clopine about his new book, Building Legacy Wealth: Top San Diego Apartment Broker Shows How to Build Wealth Through Low-Risk Investment Property and Live a Life Worth Imitating. Plus, Joe and Big Al answer your money questions: can excess scholarship money be contributed to a Roth IRA? Will stock and bond income affect Social Security benefits? The fellas also do a couple of retirement assessments on the fly to help you generate and maximize retirement income while minimizing taxes. I’m producer Andi Last, with Joe Anderson CFP®, our guest, Terry Moore, and Big Al Clopine, CPA.

:48 – Terry Moore, CCIM – Using Rental Real Estate to Build Legacy Wealth

Al: Welcome Terry. How are you doing?

Terry: Alan, It’s great to be with you.

Al: Well we wanted to do this for you, I’ll tell you why, because first of all, you and I have done business together. So I’ve met you…

Terry: Starting like 20 years ago.

Al: Yeah something like that, so I think I met you –

Terry: When we were young before either one of us had any silver hair. We were dumb then, but hopefully, we’re wiser now.

Al: Yeah we were kind of starry-eyed and I think you and I made some good decisions and made some not so good. But you and I met at a seminar, you were teaching on small apartment investments in San Diego, and I bought one through you and sold one through you, and it was a great experience, and so I really want to sort of get into that. But what really kind of prompted me to have you on the air is you just wrote this book called Building Legacy Wealth. And I would love to find out, first of all, what made you write the book?

Terry: Well Al, I was fortunate in that I get to give talks from time to time to some people around here who think I know what I’m doing after 25 years. And over about a three or four month period, I got three or four invitations, and I said, “you know, I think I actually have something worthwhile to say.” My best male friend had invited me to write a book and we had nothing in common to write about, but I came home one night and said, “Honey I think I’m ready to write the book.” And she said, “what? You’re going to write a get rich book on real estate?” “No, no, no, that’s too small a topic. Money is a great slave, and it’s a terrible master. I don’t want to write a get rich book. I want to write a book about legacy.” And legacy is more important than wealth, because legacy, Al, is what you leave behind. It’s not just “the stuff,” it’s the investment in people. And having written the book, I now understand the cost of writing a book. A lot of people read the book, they want to know how to build wealth. Making your money multiply is a good thing, but money alone is too small a goal. Legacy is a bigger goal. People will read the book to learn about wealth, and that’s the meat – but the seasoning, the reason that I wrote the book, is legacy.

Al: I read a lot of real estate books, I know you have as well. In some cases, some of the books kind of pay lip service maybe at the end, that maybe you should have a greater purpose, giving some back to society. But in your book, you actually kind of started with the building legacy – so tell us about that.

Terry: Sure. I built the book around somebody who lived legacy wealth. And I met this lady and we helped her, ultimately, buy and sell about 15 apartment buildings. She not just made money, but she made a difference. Not just for herself and her family, but she helped her tenants. Jeannie modeled how to have a life worth imitating. And I’ve served a couple of hundred people now, and I wanted to encourage people not just to make money with real estate. Drunken fools make money in Southern California. But how to pass their values on to the kids, how to be a long-lasting beneficial impact to those around them.

Al: Yeah I think that it’s one thing to try to build wealth for your family and make money, and that’s a good thing, I’m not saying that’s a bad thing, but I think if you have a greater purpose in why you’re doing this, I think you’re much more likely to be successful. Because Terry is you know, real estate is not quite like the infomercials make it sound to be – it’s a little bit more difficult and things happen, and sometimes they’re not that great.

Terry: Yep, I’m not sure how far you’ve gotten into the book, but one of the most important pages is one that says, “you should not be a landlord if:” And it’s if you’re a bigot, and if you’ve got some other issues. I describe landlording as “face to face capitalism.” When the lady in #3 loses her job, when the couple in #4 get divorced, the landlord knows about it. And some people hate the fact that you’re dealing with real people, but other people relish it, and they like to be able to make a difference in people’s lives. And it’s relatively easy to help folks who are not making $100,000. What to many investors would be a small amount of money can make a big difference in somebody’s lifestyle. And if your wife spends $10,000 for appliances, the neighbors wouldn’t think that’s unusual. If somebody spends $10,000 to make an apartment better, the family that lives here will benefit from that for $10,000 or $15,000 and that upgrade will make money for the landlady as well. And face to face capitalism involves making choices that make a difference one resident family at a time – and it’s a long-lasting impact.

Al: Yeah, well said. You’ve picked, obviously, real estate as the vehicle for building legacy wealth, and of course, there are different choices: there’s residential properties, industrial office, retail, and then you picked a residential, and then you further kind of focused it into small apartments. So talk to us about why you think small apartments are maybe the best way to go between all of those choices?

Terry: One of my mentors said, “there are a million ways to make a million bucks,” and I’m not going to say this is the best, I’m going to say this is a low-risk escalator to wealth. And there are a couple of things that make Southern California residential real estate very safe and highly likely to give appreciation. In 40 states, they build enough housing for their families, for the young households who don’t have college degrees. In Houston, for example – and Houston has 1/4th the population of the state of California – but Houston has built more apartments and condos than the entire state of California in the last decade. So rents are cheap in Houston, apartments are cheap in Houston, and the things that I suggest here won’t work all that well in Houston. But Southern California, we have a screaming need, and not much new production. Government policies in California have meant we’ve built half as much housing, particularly rental housing, for the people in the lower half of the income scale. And that’s horrible if you write rent checks. It’s great if you receive rent checks. For each of our listeners, no matter where they are, the scariest zip code within 25 miles probably has 96% occupancy. What I’m saying is there’s very little vacancy risk. And the nice thing about apartments is you can buy used apartments, you clean them up, you paint them up and fix them up, it’s pretty easy to spend $10,000 on apartments, raise the rent $100 – $1,200 a year – that’s a 12% return right there. And the people who are listening, if they spend $10,000 to improve apartments, they’ll increase the value of the apartments 15 or maybe $20,000 a year. And a lot of people who’ve invested in real estate, maybe they had a house or a home or condo or something like that, if they sell it and pay the tax, they give a third of their profit away. If they trade up and get bigger units, in effect, the tax-deferred exchange, as you well know, gives them an advantage where they get all their capital working for them. They don’t give a third of their profit away, and they can buy a bigger building, and under the current tax laws, you can trade up, trade up, trade up, trade up, and when you eventually pass, you disinherit the IRS. You disinherit the California Franchise Tax Board, unless your estate is more than $23 million. This is a low-risk escalator to wealth, and it’s because of the special things in California that take the risk away.

Al: Yeah, and I think for our listeners that are throughout the country, we kind of want to make it clear that your strategies, although they could potentially work anywhere, they’re going to work best in areas where there’s not enough housing for the demand. And certainly, Southern California is part of that. And I would say, Terry, a lot of books that I’ve read are just the opposite. They’re books about going into areas where it’s really good cash flow. And not a lot of books have been written in areas like San Diego, like Los Angeles, like Orange County, like San Francisco, where there’s a huge need, but there’s not enough housing to go around yet.

Terry: There’s another right way to do it, and that is you buy in the 40 states that population is not, at best, growing as fast as the national average, or worse, falling behind the national average. And most people live in states that are holding their own or not quite holding their own. A lot of people say, “get great cash flow,” and that’s the way most people make their wealth. In the coastal cities, in the cities where the environmentalists and the NIMBYs have a bigger impact, and that could be Boulder, Colorado, where there are artificial restrictions on new construction of rentals. The bad news about supply-constrained states is lots of people want to be there. But essentially, if you get in on this, you’re probably going to have faster than average appreciation. One of my other smart clients bought in Tucson. I don’t want to tell you the pain he went through, but ten years later he sold it at a loss. The market went kaflooey, it was overbuilding. His vacancy tripled and quadrupled. And this $300 an hour guy gave up 30 weekends with his family trying to fix a hole in the leaky bucket. At the same time, he had a smaller less glamorous building in an ordinary zip code in San Diego. And that one tripled its equity. And his younger son spent five hours a month managing that, while Dad was spending three weekends a month for a year trying to solve a problem in Tucson. After 10 years he gave up and lost money. Tucson was the place where you had high cash flow in good years, and in bad years you had negative cash flow. It’s a risk/reward thing. This is low-risk and low cash flow but can be greater appreciation in the long run.

Check the podcast show notes at YourMoneyYourWealth.com for a transcript of this interview, and to download Big Al’s 10 Tips for Real Estate Investors white paper for free. Learn what you need to consider before you invest in real estate, understand the finances of real estate investing, what you need to know about using leverage, and much more. Download 10 Tips for Real Estate Investors from the podcast show notes at YourMoneyYourWealth.com. Now, more with Terry Moore, CCIM.

11:31 – Terry Moore, CCIM – Using Rental Real Estate to Build Legacy Wealth (part 2)

Al: So let’s say we have listeners in Southern California or San Francisco, for example. How would they go about getting started? What are some of the things that they should be looking at in terms of small apartment investing?

Terry: You could buy a condo for $50,000, but if you’re going to buy a four-plex in Southern California you probably need $200,000 down, maybe more. You need reasonable credit. There’s a separate 15-minute segment we could do about how loans are figured. But the short story is, the way that you and I succeeded Alan, was we bought a building with fixable problems. And the fixable problems have to add value. So if you’ve got a bad sewer system and you fix a sewer system, you can’t raise the rents. If it’s poorly managed and you get it managed well, you get more. If it’s got ugly as homemade sin paint and you paint it attract colors, you’ll get more. So you need to pick a situation with a fixable problem where you fix it, you get higher rent. And income property, you get paid as a multiple of your income. So it’s not, “I spent $10,000 and it’s going can take me 8 years to get it back.” That’s true and that’s irrelevant. You spent $10,000, you get $1,200 of income and you sell it for 15 times the annual income.

Al: I think that’s a good point Terry because the values on these properties are based upon cash flow, not what the person sold next door – although that’s maybe part of it. But the value of these apartments are based upon cash flow.

Terry: And here’s something, Alan, that I frankly didn’t completely understand when you and I first started doing business. A sage investor boiled it down, he said, “invest where you wouldn’t live and live where you wouldn’t invest.” Huh? I thought the right thing for real estate was location, location, location. If your kids you’re going to go to school there, yes, you want your kids to go to the best possible schools. But you know what? As a landlord, you don’t make more money because your tenant’s kids go to great schools, you pay more for a dollar that comes from a place with great schools, but you don’t make more. In investment real estate – this sounds crazy but it’s true – in investment real estate, it’s not location, location, location, it’s leverage, leverage, leverage. In the beach, you may have to put 2/3rds, down you may borrow 1/3. And the inland, you put 1/3 down, you borrow 2/3rds. When you get through doing the math, you make twice as much money being inland because the leverage multiplies the equity. And related to that, if you invest in a working-class neighborhood, that doesn’t make you a slumlord. If you don’t fix things that are broken, you’re a slumlord. The tenant’s income doesn’t make you a slumlord. Your behavior makes you a slumlord. And you could be a great landlord – and people really appreciate it when they’re in the lower half of the income scale and you treat them with courtesy and respect. That’s part of the legacy thing again. It’s not just getting wealthy, it’s leading a life worth imitating. And they’re all tied in together.

Al: Yeah, I think that’s well said, Terry. What would be an expectation for a down payment? Is it the 33% or 1/3 as you mentioned in neighborhoods that are not quite as good, and then nicer neighborhoods that might be more like 60 or even 67%? Is that what you’re seeing right now?

Terry: Yes. Essentially, the way the banks make the loan is they look at income, and they are more cautious than the seller, the brokers, and since they’re loaning other people’s money, we want them to be cautious. But they will put in higher repair and maintenance expenses than most owners think is necessary. If it’s a brand new building, they will say, “well you should set aside $250 per unit per year because eventually, you’ll need a roof. Eventually, you’ll need windows. Eventually, you need a parking lot.” They will put in a bunch of cushion. And then after they have made it as cautious as they know how, then they will say (I’m going to speak like a banker): Mr. Clopine, this building will generate $120,000 worth of cash flow, so we’ll only make you a loan that requires $100,000 of debt repayment. So they want $120 of cash flow for every $100 of mortgage repayment. They call that a 1.2 debt coverage ratio. And the way that works out is, in ordinary neighborhoods, somebody will have to put a third down. In fancy, glamorous, bragging-rights neighborhoods, they have to put more down. Why is that? Fancier, it should be easier. Well, the fancier areas might sell for $400,000 a unit, and you might be paying 18 times the annual rents. And the humbler neighborhoods might sell for $200,000 a unit and they might sell for 12 or 14 times the annual rent. By the time you do the math, the bank makes a much bigger loan in the fancier areas, but the bank wants $120 worth of cash flow no matter where you are. And if you pay a premium for a fancy area, that makes you make a bigger down payment. Some people really, really think they want the fancier areas but they won’t pay what it costs. And what it costs is a bigger down payment, less leverage.

Al: What do you define as a small apartment. How many units?

Terry: Most of our clients are buying or selling four units or bigger. And that could be an $800,000,000 purchase in San Diego. I was looking at something in an expensive suburb of Tulsa that was $70,000 a unit. In many places, a hundred unit building is a small building, but in Southern California, because of our zoning and other issues, four-plexes and above are small buildings.

Al: And in terms of valuation, you mentioned multipliers based upon rent: gross rent multiplier. So is that what you’re seeing right now in certain neighborhoods, 12 to 14 times gross rents, and other, nicer neighborhoods, 18 times? Is that what the current market is in San Diego?

Terry: Yeah, it’s going to vary. You’ve got listeners in different states, and what’s true in Southern California is going to seem crazy to people in the Central time zone or in the south.

Al: Yeah, because Terry, most of the books that I’ve read that are based upon cash flow areas tell you 8 times gross rent multipliers, so 12 to 14 to 18 sounds pretty pricey.

Terry: Yeah my Grandpa told me that too. I read that book, I dusted it off in the library. That was a wonderful time, and in our lifetime it actually existed before you and I shook hands. But in Southern California, when the safer places get higher prices, you may be able to buy in Tulsa, in Birmingham, in Des Moines, in Boise, you might get that. I don’t think so, but it might be possible. So part of it is, you’ve got to figure out your risk/reward. If you want cash flow, forget any state that touches the saltwater. When you take those states off, that’s when you get the potentially high cash flow and the risk that Dan Developer can buy a field from Farmer Jones and 120 days later, he can have flooded the market and you’re trapped – and there’s nothing you can do about it. Because if Developer Dan puts up a couple of hundred units, every landlord in that metro suffers for a year or two, until the overbuilding gets absorbed. If you’re in a place that restricts development, whether it’s by topography, or not in my backyard NIMBYs, or politics, or some other way, you’re going to be safe. And Dan Developer essentially can’t overbuild. The government will put enough restrictions in to stop it. In San Diego County, to build new apartments, it’s $30,000 to $80,000 per unit in fees. And this $100,000 a year neighborhood outside Tulsa, you could buy the building for $70,000 a unit. And about a third of the zip codes in Southern California, the fees to the government are $70,000. No sticks, no bricks, no stucco, no plumber, no roofer. $70,000 in fees. Welcome to Southern California, here’s your newcomer tax. That’s part of the reason we don’t build as much here as in most other places.

Al: Fantastic information. Terry, you’re the author of Building Legacy Wealth, it’s a fantastic book. And where can people get the book?

Terry: On Amazon. I have a website, SanDiegoApartmentBroker.com, but Amazon is cleaner, easier.

Al: Terry thanks again so much for joining us.

Terry: It’s a pleasure to be with you, Alan. I wish you the best. I hope 2019 is your best year so far.

Al: Well thanks and back atcha.

Now it’s time for your money questions. If you’ve got one, scroll down YourMoneyYourWealth.com and click Ask Joe and Al On Air to send the fellas an email or a voice message right through the site, just like Thomas did:

21:02 – Can Excess Scholarship Money Be Contributed to a Roth IRA?

Thomas: “Hi Joe and Big Al. This is Thomas from the middle of Missouri. I have a question regarding my 16-year-old stepson’s 1098-T for his scholarships. It said on there that his total scholarships and grants were $10,723 and his tuition and fees were $7,281, meaning had more scholarships than tuition – $3,442, to be exact. Because of that, can he contribute that $3,442 to a Roth IRA? We were looking at the rules and we thought that that counted as earned income. And since it counts as earned income can it then be put in the Roth? He also had $62.57 of unearned income on his savings account, so we did not file a tax return for him because it was under $12,000. Were we correct about that? Thanks.”

Thomas: “Hi Joe and Big Al. This is Thomas from the middle of Missouri. I have a question regarding my 16-year-old stepson’s 1098-T for his scholarships. It said on there that his total scholarships and grants were $10,723 and his tuition and fees were $7,281, meaning had more scholarships than tuition – $3,442, to be exact. Because of that, can he contribute that $3,442 to a Roth IRA? We were looking at the rules and we thought that that counted as earned income. And since it counts as earned income can it then be put in the Roth? He also had $62.57 of unearned income on his savings account, so we did not file a tax return for him because it was under $12,000. Were we correct about that? Thanks.”

Joe: Did you hear the little baby?

Andi: I don’t think that was the 16-year-old.

Joe: I don’t know, Thomas, he’s got the kid right there in his hands. What did you file again? Let me start and you get in the weeds. Here’s the rule when it comes to contributions to retirement accounts. If it is earned income, then yes, you can use it. But Alan’s probably going to say he doesn’t believe that it earned income.

Al: That’s because it’s not. It is not earned income. There could be an exception, although I doubt it with a 16-year-old. But if you are in college and it’s like a work-study program and you’re getting that, basically, along with the scholarship, then some of that could be considered earned income. That is one situation where that’s true, but that’s probably not the situation here. The rule is this: if your scholarship is greater than your tuition and fees, then it is taxable income. It’s not earned income, it’s taxable income. And to further define that, that’s when scholarships exceed tuition and fees, not including room and board, but it does include books, supplies, and equipment required for courses at your institution. So at any rate, it is income, but it’s not earned income.

Joe: Thomas, man, he’s on it. He also had $62.57 of unearned income in a savings account. Do you think he’s an engineer? (laughs)

Al: Could be. Well you know Turbo Tax, for whatever reason, it rounds to the nearest dollar except for interest and dividends – it does the pennies. I’ve never understood why that’s true.

Joe: So explain this. So he’s like, he didn’t file a tax return for him because it was under $12,000. Why is that $12,000 an important figure?

Al: Well that’s the amount of the standard deduction for a single taxpayer. But if your son is a dependent, then it’s different rules. In fact, the standard deduction – I don’t have it in front of me right now, but it’s your earned income up to that point. But if it’s unearned income, which the $3,442 and the $62.57 (laughs) let’s get that in – that would be unearned income, and then I forget – there’s a limit there but that would probably be over the limit. So a return would need to be filed for the child. That’s my final answer.

Joe: All right Thomas. Hopefully, that helps.

24:32 – Will My Income From Stocks and Bonds Affect My Social Security Benefits?

Joe: Terry from Wisconsin Terry writes in, “I’m thinking about starting to collect Social Security this year. I have a large amount of income from stocks and bonds – over $40,000 annually. Well that income affect the total Social Security payments?” All right. You know what Andi, can we send Terry our Social Security guide?

Andi: The handbook? Yeah. Easy.

Joe: The handbook. Because with Terry, we need more information. You can do the math with the Social Security guide that we’re going to send you. There are two different questions kind of wrapped up into this one and people get a little bit confused. So one is that if you claim your Social Security benefits early and you have earned income, then there’s a threshold of earned income that you can make before they reduce your overall benefit. And that number is about $18,000 – seventeen and a half.

Al: Yeah 17 and change. And so, full retirement age right now is age 66, it will be phasing up to 67. So in other words, if you claim those benefits before those ages, whichever one applies to you based upon your birth date, then yeah, you’ve got to look at your earned income and you may lose some of your payments – although I know what you’re going to say, you don’t really lose them. They get recalculated back into the pot for when you actually do take the benefits.

Joe: Second thing is that, will that income affect the total Social Security payments in regards to maybe taxes? Well, $40,000 of income from stocks and bonds is not calculated as earned income. So Terry, if you do claim your benefits early and you have $40,000 of unearned income, it’s not going to actually reduce the overall benefit, so you can go ahead and claim and not necessarily worry about it – if you understand that you will receive a reduction in benefit anyway by taking it early. But we’re all under several assumptions here, because I don’t know how old Terry is, I don’t know when Terry is going to – he wants to collect, or she wants to collect this year, but we don’t know her age or what other income sources or whatever. So the handbook will help Terry out… It’s like Pat. I don’t know if Terry’s a boy or a girl. (laughs)

Al: It’s hard to say.

Joe: Remember Pat?

Al: Yes.

Andi: From Saturday Night Live.

Joe: So it could be taxed, so $40,000, the likelihood of it being taxed is very high.

Al: And it depends whether you’re married or single because there are different numbers there.

Joe: So we will send Terry the Social Security Handbook, and then we can also… didn’t we do a TV show or something like that? Maybe send a video.

Andi: Social Security Secrets.

Joe: Yes, the secrets of Social Security.

Al: Season Five, I think. (laughs) We’ve done it five years now. And we’ve done radio – I think when they first invented radio we were pretty much on. (laughs)

Andi: (laughs) You and Marconi.

27:38 – What Are My Real Taxes and Penalties and How Can I Generate Retirement Income?

Al: We’ve got some longer ones here.

Joe: Yeah we’ve got some people that want us to construct a whole financial plan.

Al: On the air. Can we do it?

Joe: Yeah. I haven’t read any of this but we’ll skim through it, let’s go. All right, what do we got? We got Mike from Ohio. Mike says writes in, “I would first like to say how much I enjoy your YouTube episodes and I would like also to take advantage of your request to “send us your retirement questions.” OK so here you go Mike, he’s sending us a retirement question. Mikey is 57, wife 56. They live in Ohio where the cost of living is on the low side. “I retired from my account manager position in August 2017 after 35 years due to health and stress reasons. I now drive for a company full time while my wife is still employed as a bank branch manager. I’ve never really had a dedicated financial advisor, but I do my homework to the best of my ability. Here are my accounts.” So he retired a little early, wife still working full time and now he’s driving. I wonder if he’s doing Mr. Lyft or Mr. Uber. UPS?

Al: Could be or could be Amazon delivery, maybe?

Andi: Long haul trucking? (laughs)

Al: (laughs) Could be. Okay. So he retired, he’s still working, so he’s semi-retired, he changed out of a stressful job into something that is not as stressful.

Joe: All right so he bought a fixed annuity. Couple hundred thousand dollars there. He’s thinking about activating that at 62. That’s going to provide him about $1,400 a month. He’s got, “rolled my 401(k) into this in 2017 $70,000, 2-year rollover annuity Lincoln Financial, one year preferred trigger at 17.5 and 2-year caps at 22.15. I purchased this ten years ago.” Okay.

Al: It’s all you. (laughs)

Joe: Let’s see. He’s got $60,000 in a few different accounts it at Ed Jones, Roth IRA. “We both have a frozen pension which will generate $1,500 a month at age 60. My goal would be at least $5,000 a month at 66 and 65 years of age. The questions that I have: what are my real after-tax penalty numbers? What do I do with $125,000 to generate income? Thanks in advance.” All right Al, do you got your calculator, do you got a pen, piece of paper? We gonna take some notes here.

Al: I don’t have the calculator but I got the pen and paper.

Joe: Okay so he’s got $200,000 in a fixed annuity.

Al: Yeah, so that one he’s thinking of turning the income on, so that’s an income stream, and you rounded to $1,400 a month. All right cool.

Joe: So he “rolled my 401(k) into this,” so he had a 401(k) of $200,000, bought this fixed income annuity at Georgia Pacific. He’s 57 and at 62 it’s gonna give him $1,400 a month. Then he’s got $70,000 – it’s a 2-year rollover annuity. Not sure what a 2-year-old rollover annuity is, but he’s got $70,000 in another one, one year preferred trigger at 17 and a half and two-year caps 22.15, purchased this ten years ago. No idea what he’s talking about there.

Al: Okay well we’re assuming the cash surrender value is $70,000.

Joe: All right. And then he’s got $36,000 at Ed Jones, conservative bucket. He’s got 18, call it $19,000 at Huntington Bank. It’s a 401(k) with a 6% match. That’s his wife’s 401(k). He’s got $10,000 in a Roth. $370 in a Principal 401(k) with a 3% employer match.

Al: Okay. So I think that’s where he gets the $125,000. So he wants to know how to clear, what the $500,000 is – what the after-tax number penalty, and what to do with the $125,000 to generate income.

Joe: OK so they both have frozen pensions of $1,400 so that’s going to give them $3,000 a month.

Al: Yeah I don’t know whether that’s $1,400 between the two of them or whether that’s each. Not really sure.

Joe: So let’s just call it $1,400, it’s frozen pension. She works for the bank. He worked for something else, he got out. Let’s just call it total. So that’s gonna give them $3,000. So we need to create $2,000 a month, $24,000 a year to get him to his goal. “My goal is to be at least $5,000 clear a month at age 66 and 65.” Well, let’s talk about Social Security there.

Al: Yeah it’s not here.

Joe: It’s not here. I don’t know, what do you think? Social Security probably $1,200 apiece? That’s another $24,000, Al. Then you’re good. Then you take that $125,000 and then you use a globally diversified portfolio. Hopefully, you get 5 or 6%, and then you’d pull out another, I don’t know, you could probably pull on another $4,000 of income from that.

Al: Right. Yeah, so it sounds like he probably wants to retire before full retirement age. So then there would be a step period without Social Security potentially. So then you’d have to look at the $125,000 – could you work that out so you wouldn’t completely run through it while you’re waiting for Social Security? Or you take Social Security early. You could look at that, that could happen as early as age 62.

Joe: Yeah. But let’s say if he does, he’s got this 120. Because everything he’s doing, he’s looking for income. He’s buying these annuities, and it’s like, “Okay I’m turning this annuity, and I’m turning this annuity on, and turning this annuity on,” and so on. So I think he’d be happy with just a fairly large fixed income stream for the rest of his life. Because that’s what his plan is already doing. So if let’s say he burns through the $125,000, or maybe he burns through $100,000 over a four or five year period and keeps $25,000 sitting in cash, maybe he pushes out his Social Security so that’s going to be a lot larger benefit, he turns on a couple of these annuities. Plus his pension plan? I don’t know, probably give him 6, $7,000 a month.

Al: Yeah. And that would get him there. The pension and the annuity probably would not have a cost of living. So that’s an issue. Also if you could do that plan, you don’t really have any liquidity leftover – so if you have emergencies you’re kind of out of luck. You’ve got income, yes. But you may not have much to deal with whatever life throws at you. So I think you have to be aware of that too. I think probably if it were me, I would probably – I basically like that idea. But I would stop at the point where I felt like if I wanted a certain emergency fund, let’s just say it’s $30,000, $50,000, whatever the number is, I would want to make sure I had at least that, and then maybe if I then I was out of resources I might start Social Security at that point.

Joe: Yeah. I mean, to be honest with you, I don’t like the plan at all. But if that’s what he’s already thinking and that’s what he’s doing that’s how to enhance it. I would kind of start over and say, “What do I have in total assets and how much money can I save now until age 65?” He’s still working, wife still working. They can continue to plow money in, have a low-cost, globally diversified portfolio let’s say over the next – what is he, 55? 57? So he’s got 10 years, the total liquid assets they have is about $350,000, roughly, give or take.

Al: Yeah counting the annuity.

Joe: So let’s say in 10 years that 350 doubles, plus if he can save. So now he’s got $800,000 if he saves a couple of bucks. So now he’s close to a million dollars at age 67. So now with that liquidity that he’s built up over time, so he can maybe take a little bit more, push out Social Security to age 70. And so now he’s living off of 700, that’s 28, 30… I don’t know, you probably have the same income stream as what he’s currently doing here, but he’s got a heck of a lot more liquidity.

Al: Yeah and many more options.

Joe: Right. And at that point, if you want to take some of that and annuitize it, but he’s already bought these insurance products at fairly all-time low interest rates. I get that, “I was working a stressful job, get me the hell out of here and I’m really enjoying myself driving around.” But if you’re still making income, your wife is still working, might as well take a look and say what are you truly spending? You want to spend $60,000 a year, what’s the most effective way to do that? What’s the safest way to do it? And then what’s going to give you the most options? So Mike from Ohio, appreciate you calling in or writing in or whatever you did for us to talk to you. Hopefully, that helps.

Get some strategies for generating income in your retirement. Check the podcast show notes at YourMoneyYourWealth.com to download your free guide to Retirement Income Strategies. And since our ulterior motive is for YMYW to be your home for all things related to your financial life in retirement, you can also check out the Your Money, Your Wealth® TV episode on generating a Steady Stream of Retirement Income, right there in the podcast show notes too.

Now, let’s listen as Joe and Big Al do another complete retirement assessment for a listener, right off the tops of their heads.

37:19 – Joe and Big Al Do a Full Retirement Plan Assessment

Pat from San Diego writes in, “Hi Joe and Big Al. My husband and I attended one of Joe’s free 3-hour retirement courses at SDSU. We laughed, we cried, we thoroughly enjoyed learning about the trials and tribulations of retirement. Joe is very entertaining.” Thank you, Pat. “But most of all you opened our eyes to Roth IRA conversions. Since the class I have been listening to the past Your Money, Your Wealth® podcasts and am hopeful to have my questions answered by the big guns: Joe and Big Al. Here’s our situation.” OK. There is, Pat, what is this, 11 bullet points.

Al: There are sixteen bullet points and six questions.

Joe: I gotta get tight here.

Al: Yeah you do.
Joe: OK we’re gonna have rapid fire through this here. OK. So they plan to retire from the federal government at age 62 come hell or high water. Got a TSP account, 750 on it. Have a pension $42,000 a year. Social Security is going to be $24,000 at 62. Call it about $36,000 at full retirement age. “Husband who is two years older than I am is no longer working since his business plummeted due to a broken ankle.” Jeez, that sucks. “He has $200,000 in his IRA.” OK. Are you with me Al? 750, 850, 950, let’s just call it a million bucks. They’re gonna have 40, 50, 60, $70,000 of fixed income thus far, just from her. His Social Security is going to be $1,200 a month. So now we’re up to how much in fixed income at full retirement age? 40, 50, 60, 70, $80,000 give or take? All right. So “we owe $128,000 on a rental property with the interest rate of 5.65. We pay an extra $170 a month for that. If we pay the rental off, we would clear conservatively about $1,200 a month but the HOA fees are always increasing. We still owe $280,000 on our house with an interest rate of 3.5. We each also have Roth IRA’s, $35,000 each with a total of $70,000. We own some BD stock which was a gift from my husband’s parents many moons ago. It’s worth about $100,000. We also an acre of property in Oregon purchased for $30,000 many, many moons ago. How many moons is many, many moons?

Al: Well, a moon is a month. So many, many is probably… 50?

Joe: Is that how you still keep time, Al?

Al: (laughs) Yeah. By moon time. Yeah. I’m probably about 8,000 moons old.

Joe: That’s awesome. Okay. “We have a modified endowment contract.” They bought a MEC. Why the hell would you do… $70,000, it’s worth $90,000 today.” Okay. I wonder what the death benefit is. “We estimated our expenditures to be about $4,250 a month.

Andi: $4,520 a month.

Joe: Well, I’m dyslexic.

Andi: That’s why I’m helping.

Joe: Okay. Is that what that means, when you kind of get numbers screwed up when you read out loud? (laughs)

Al: I think so. I think that’s what they call it.

Joe: All right. “So based on my pension alone, our shortfall is $3,700 minus $4,520 equals $820 a month, which doesn’t even take into account the federal and state income taxes. We are estimating another $510 a month for taxes given our current situation. So this gives us a – $1,300 a month shortfall.” Pat’s questions: if we cash in the MEC and sell BD stock we can pay off the rental so that income from the rental would make up much of our shortfall. Total income would be $54.4K. Could we convert over $20,000 from the TSP to the Roth and still stay in that 12-15% tax bracket?” Yeah, I think you could probably do more because you’re missing the deduction there. Depending on what other income sources are, but if I’ve got $54,000 of income minus 25, that gets us $25,000. The top of the 12% tax bracket is $80,000, roughly. So you could convert a lot more to stay in the top of that bracket. But the MEC is gonna be ordinary income, so she put in 70 that’s 90, that’s $20,000.

Al: And the BD stock, it was inherited. We don’t know what the tax basis was. Whatever the basis, well actually, whatever the cost basis was. I’m sorry. Whatever the fair market value was at the date of inheritance is your cost basis. So let’s just say it was $80,000, then you’d have a $60,000 capital gains. So there are taxes on both of those, but I would say – I’ll let you talk about the MEC. The stock I would sell that, because you’ve got a lot of risk in a single company and that’s $100,000, that’s a lot of money.

Joe: But it’s many, many moons ago. And it’s worth $100,000, so…

Andi: But it also says it was a gift. It doesn’t say inherited. Does that make a difference?

Joe: Yes. It would carry over the mom and dad’s basis so if it was a gift the basis is probably nothing.

Al: It could be low. Yeah.

Joe: So you sell that, $100,000, that’s an all capital gain.

Al: Yeah I’d still do it though.

Joe: But yeah, you might want to look at staggering that a little bit, but it depends. I guess a bigger question is, does she sell the stock and blow out of the MEC to pay off the rental?
Al: Yeah that’s really the question. So in the case of the MEC, there’s ordinary income of $20,000. In the case of the stock, there are capital gains, but we don’t know how much it is because it’s whatever the cost basis was of your parents.

Joe: So let’s just say if it was cash that she had, would you advise – how would someone look at it to see to pay off a rental? Are we looking for growth or are we looking for income? And you have to look at the cap rate to decide this, right? So you have to look at the market value of what the property is, what the debt, is what the equity is, and what the income is you’re receiving. And so it’s like, “well let me pay off the debt with all this extra cash flow just to create a 2% rate of return.”

Al: And Pat did not mention any assets outside of retirement. So if that’s the case, then let’s just say you can generate a couple hundred thousand dollars by doing this, minus the taxes, whatever they are you, probably want to set it aside for an emergency fund. I agree with the Roth conversions, but you’re gonna need some tax money to pay for the Roth conversions. You may want to set aside for flexibility, you want to retire in a couple years and you want to have a little fun, you want to go on some trips then you don’t necessarily want to always pull this out of your 401(k)s and things like that. And so having some flexibility there is probably a better idea than paying off the mortgage.

Joe: “Does it make sense to push out Social Security to age 70 to do more conversions?” Yeah, I think she’s got enough fixed income, you push out Social Security to age 70, listen to Al’s advice, maybe not pay off the mortgage – you have that liquidity to give you more options. “#3, are we going overboard on the amount of conversions?” No. I mean, you’re staying in the 12% tax bracket. You got any other comments on that?

Al: Yeah. You may even want to push it more, actually. It takes a little bit of math to figure out what bracket you’re going to be in at age 70 and a half with the required minimum distributions. But given that we’re in low tax brackets now because of the new lower rates, you might want to go up even into the next bracket.

Joe: “#2, the second scenario is that we just leave the rental alone.” I think we already answered that and kind of, “take our Social Security to make up the shortfall, but we still want to cash in the MEC for something with better returns. We want to wait until we’re in a lower tax bracket to get rid of it.” Yeah, that makes sense because that’s ordinary income tax to you. “When we sell the BD stock do we have to pay capital gains,” yes. On her husband’s rollover IRA, “can we convert it to a Roth IRA?” The answer is yes. But then again, it’s still taxable, so you kind of take a look at what tax bracket that you’re in. So there’s a really good – I mean she’s on it, man. A lot of good questions there, appreciate you going to the class, Pat. I’m glad you thought I was hilarious. Most people think I’m a pain in the ass.

45:28 – “When I listen to YMYW I Stay Laser-Focused on My Retirement Goals”

Joe: This is Zach. He goes Hi Joe and Al, I wanted to share my secret for saving for retirement. I notice that when I religiously listen to the Your Money, Your Wealth® podcast I stay laser-focused on my retirement goals and sock away money. When I miss a few episodes, that’s when I tend to go astray and start charging stuff to credit cards. My point is, you guys offer great tips and advice, but the best benefit to listening to your show is the weekly motivation to save and invest, keep up the great work.” Zach, thank you very much for that, that means a lot to big Al and myself here. And I guess that’s the goal of the show.

Al: It is. We try to have fun, but we try to educate also.

Joe: Yeah. And I think if you just can listen to a couple of minutes and say, “oh shoot,” right? “I gotta continue to think about my future self. I gotta save a little bit, try to figure out a couple of different strategies, am I doing the right things?” and just get a refresher every couple of weeks, and if we can motivate you to stay on track, I guess that’s all we can ask for. That’s it for us today, hopefully you enjoyed the show. Andi Last, you did a fabulous job as always. Big Al, you were phenomenal, just in the way you navigated the show.

Al: And, as well, as you did, sir Joe Anderson.

Joe: Oh, thank you. All right. We’ll see you next week.


Stick around for a quick Derail from today’s show at the end of this episode, if you’re into that kind of thing. Special thanks to today’s guest, Terry Moore. Visit the podcast show notes at YourMoneyYourWealth.com for links to Terry’s websites and his book, Building Legacy Wealth: Top San Diego Apartment Broker Shows How to Build Wealth Through Low-Risk Investment Property and Live a Life Worth Imitating.

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.