You Can’t Get There by Saving

Many of us were raised to believe that our jobs provided the entire financial roadmap: work for 40 years, retire at 65, then enjoy the golden years. However, the harsh truth is that depending solely on your salary to achieve financial freedom rarely works in today’s economy. If you want financial independence, you’ll need to think beyond your paycheck and explore other ways to build wealth.

Saving Your Way to Financial Independence

Achieving financial independence through saving alone is nearly impossible; an example makes clear why this approach so often falls short.

Assumptions:

• You work for 40 years (for example, from age 25 to age 65)
• You want to generate a $200,000/Yr income when you retire
• I will not consider inflation or taxes to keep the example simple.
• I will assume you invest in financial instruments that achieve 4% annual growth.

Using the popular 4% withdrawal rule (not withdrawing more than 4% of your savings each year) and assuming 4% annual portfolio growth, how much do you need to accumulate by age 65? Based on the calculations below, you would need to save about $52,617 per year, starting year one.

• FV = PMT × [((1 + r)^n − 1) / r]
• Given r = 4%, n = 40, FV = 5,000,000 (You need to save $5M by the time you retire)
• Annuity factor = ((1 + 4%)^40 − 1) / 4% ≈ 95.03
• PMT = 5,000,000 / 95.03 ≈ 52,617 per year

Saving $52,617/Yr every single year, from the first year you work until 40 years later, and always achieving 4% compounded growth is extremely difficult. Plus, if you include inflation and market crashes (which are inevitable over a 40-year period), this is almost impossible. You simply can’t achieve financial independence by saving money.

An Achievable Solution

Assumptions:

• You will need $200,000/Yr or about $17,000/Mo to sustain your standard of living.
• Since 2015, the property segment we target has had 9%/Yr appreciation and 7%/Yr rent growth so I will use these factors in my calculations.
• Like in my previous example, I will not consider inflation or taxes to keep the example simple. However, rents have historically kept pace with inflation, so inflation is generally not a significant consideration for investment real estate.
• I will assume that the average price of each property is $400,000 and will not consider appreciation for purchasing additional properties.
• I will assume that your only acquisition cost is a 25% down payment (plus a $300,000 mortgage).
• I will assume that there is no principal pay down for the loan; the payoff will always be $300,000

Cost to Acquire the First Property

• $400,000 x 25% = $100,000

How many years will you need to hold the property until a 75% cash-out refinance yields the $112,500 for the down payment on your next property?

• After one year: $400,000 x (1 + 9%)^1 x 75% – 300,000 ≈ $27,000
• After year two: $400,000 x (1 + 9%)^2 x 75% – 300,000 ≈ $56,430
• After year three: $400,000 x (1 + 9%)^3 x 75% – 300,000 ≈ $88,509
• After year four: $400,000 x (1 + 9%)^4 x 75% – 300,000 ≈ $123,474

So, between years three and four, a 75% cash-out refinance will yield enough cash for a down payment on your next property.

Many of our clients, myself included, have used cash-out refinancing to grow their portfolios with little additional cash. This is the power of compound growth through appreciation. Here is an example property where I did a cash out refinance to add to my portfolio.

How many properties will you need (to reach $17,000/Mo)?

I assumed:

• Initial rent: $2,000/month
• Expenses: $2,000/month (constant because the single largest expense is debt service, which is fixed for the life of the loan)
• Projected rent growth. I’ve reduced the rent growth rate in later years to account for future uncertainty.
• Years 1–20: +7% per year
• Years 21–29: +5% per year.
• Year 30 onward: +4% per year

Let me know if you want the detailed calculations, but here are the number of properties you need to own today if you want to retire in:

After year 10:

• Rent = $3,934/month
• Expenses: $2,000/month
• Cash Flow = $1,934/month
• Number of properties needed $17,000 / $1,934 ≈ 9

After year 20:

• Rent = $7,739/month
• Expenses: $2,000/month
• Cash Flow = $5,739/month
• Number of properties needed $17,000 / $5,739 ≈ 3

After year 30 (Ignoring that the mortgage will be paid off in year 30 so cash flow will increase significantly):

• Rent = $12,487/month
• Expenses: $2,000/month
• Cash Flow = $10,487/month
• Number of properties needed $17,000 / $10,487 ≈ 2

You can either save $52,617 per year for 40 years, or you can own 9 properties today and retire in 10 years (or own 3 and retire in 20 years).

Summary

“I will wait until…” Timing the market does not work. Time in the (right) market and rapid rent growth and appreciation enable you to create the financial independence you want with the least capital.

Relying on a savings-and-drawdown strategy leaves you exposed to inflation, market swings, and the challenge of always picking the right stocks or bonds. No one does that flawlessly for decades. One misstep can wipe out a large part of your nest egg, yet you’d still need to draw from what’s left. And if you or your spouse outlive your money, you risk running out of resources at the very time you’re least able to replace them.

Real estate—when purchased in the right city and positioned for the right tenant segment—avoids those risks. For example, during the 2008 financial crisis, our clients experienced zero rent declines and zero vacancies. Even as property values dropped by 50% or more, rental income held steady because of the tenant base we focus on.

The longer you wait to invest, the longer it will take to reach true financial independence.