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Have you ever heard a financial planner encourage you to “build a nest egg” as the primary or exclusive investment/retirement-planning strategy?
Have you ever thought about what exactly that means and who really benefits from that advice?
I contend in this post that the beneficiary is….how shall I put this delicately….Not You. (And, as always, I put forward an alternative) 🙂
This concept, if we are to be blunt and honest about it, typically means that you should work your whole life and continually put money aside in the form of savings, traditional retirement plans, maybe some mutual funds, etc (all investments over which you have little control) and gradually amass a finite sum of money until you turn 65. Then….“retire” on less money than you were making before, live off of your “nest egg” and pray that you die before it runs out!
Sound like an enticing thing to strive your whole life to achieve?
No?
Then why do so many people pursue that path?
Why do so few people question it?
And if it doesn’t serve your interests, then whose interests does it serve?
Financial Planners (most of whom work for large financial institutions) typically get paid either per trade or as a flat fee based on the amount of money they have under management for you. Their incentive is to convince you to allow them to manage/invest as much of your net worth as possible.
They are further incentivized to convince you to buy specific financial products (often ones where they make especially high commissions, such as mutual funds created by their own company, etc).
Similarly, bankers have an interest in convincing you to “save” (not under your mattress of course, but in a savings account at their bank or a CD) because they can pay you a low interest rate and lend the money out to someone else at a higher interest rate and make money off the margin.
The Nest Egg discourse which is promoted by billions of advertising dollars from many of the largest financial institutions is primarily oriented towards convincing you of three things:
You should surrender your money to someone else and let them invest it or manage it or hold it for you (do not try to directly own or control your own assets).
You should continue giving more and more (ideally all) of your net worth to your financial planner (or banker) to manage/hold/invest for you over the course of your life.
This is the only retirement planning strategy, so do not deviate from this or question this. After all, what irresponsible maniac wouldn’t want to build a Nest Egg, especially since all of these major financial institutions are collectively advocating it?
Ever wonder why your financial planner doesn’t recommend you buy deeded, freehold investment property?
They don’t make a commission on it. In addition to that, they make less money when you re-allocate your money and the total amount under their management declines.
(Notice I specified “deeded, freehold investment property” in my question. Sure they might support you “investing in real estate” by purchasing a REIT or buying stock in homebuilding companies, but those are securities where they make a commission and you do not directly control the asset….big advantage for them, and big reduction in benefits for you).
When you buy deeded, freehold investment properties, you own and control your own hard asset. While it is always possible that the value of the property could decline, the point here is that the asset cannot evaporate overnight — a crooked money manager cannot run off with it and an amateur (or seasoned) stockbroker cannot invest it in the next Enron.
Residential Investment property, assuming you buy it right, also produces “passive residual income”. When you take your gross monthly rent and subtract all your expenses (taxes, insurance, property management, HOA if any, mortgage payment if any, and factor in an allowance for maintenance and vacancy), the amount of net monthly income you are left with is called your “positive cash flow”.
Your positive cash flow is “passive” because you don’t have to actively work for it and it is “residual” because it flows to you each month (not a one time payment but recurring), hence creating a predictable “stream” of income that can be used to cover a percentage of your living expenses each month.
As you continue buying rental properties you continually increase the size of the passive residual “stream” that flows to you each month from your real estate.
The goal of most of our clients is to continue building their portfolios of investment properties until their positive cash flow covers all of the expenses for their ideal lifestyle. At this point they can "retire" (often in their 30s if they start early and buy right) and have their positive cash flow cover their expenses so they don’t have to work.
To conclude and reiterate the distinction here: Your portfolio of cash flow properties (your "Goose that Lays Golden Eggs") produces streams of passive residual income that flow to you each month so you are not depleting a finite sum of money (Nest Egg).
In fact, once your real estate portfolio is properly built, your "Goose that lays Golden Eggs" can not only finance your lifestyle for the rest of your life....but it can then be passed on to your heirs, or your favorite charity, and continue producing passive residual income for generations.
We are not a tax professionals, this is not tax or legal advice, and tax laws are constantly being changed and revised and may change the day after you read this. So, this is for informational purposes only, and it is your duty to consult with your own tax professional about your individual situation and the most updated applicable laws before attempting to implement any of the content in this post.
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