Transcript:
Easan Arulanantham:
I’m about to retire, I have a large portion of my assets in a rental property. And then I have a smaller amount. It’s kind of my retirement accounts, you know, what do I do with this rental property? Do I keep it? Do I sell it? You know, what do I do?
Tom Vaughan:
Yeah. So I’ll give kind of a bottom line answer. And then we’ll look at a little example here, because we do get asked this again, quite often. And so let’s say that we do your financial plan and run your Monte Carlo simulation. And we ignore the value of your property, you know, we may be count the rental income, but we look at your assets, your incomes, your amount of money you want to spend to live off of, and it works, then you don’t have to sell your property, right. On the other hand, if we run the plan, and it doesn’t work, and MonteCarlo simulation says, Oh, this is going to be a problem, then we need to consider selling the property, at least at some point in time. Yeah. And so I think one of the things we have to think about here is that these questions that come up, sometimes people are kind of guessing at the right answer. We’re using this Monte Carlo simulation, which I think gives us a lot more information to find the right answer. So let’s just look at, you know, a sample situation here, we’ll try to show you that as far as that goes. Okay, so we’ve got somebody here, this is kind of a net worth statement comes out of our financial planning software, they got $398,000. This is Ron and April, right sample situation. And we’ve got this scenario where we have a million and a half dollars, in other assets, a million dollars of which is in that, you know, rental property, right. And so we then go and we want to run a Monte Carlo simulation. And again, behind the scenes here, we have all their assets, which we just looked at, but we also have their outside incomes, how much is coming in rental income, how much is coming in. So security, pensions, and we have how much they want to spend, you know, basic expenditures, travel, medical costs, you know, buy when they want to buy a car, all those things are built into this. And we’ll run this Monte Carlo simulation. When I push this button, the computer is going to run the plan 1000 times. And it’s basically going to go to a scenario where you look at it and say, All right, how many of those times did it work. And so the computer’s randomly moving amongst these different variables like inflation, and the stock market gains or losses, and this bond market gains or losses, right, and those types of things. And this is a great way of looking at so when we push the button, we ended up with a scenario with the screen spaghetti and red spaghetti. And how did it work? Alright, so it comes out with a 48% probability of success, right?
Easan Arulanantham:
Yeah, that’s pretty rough. I’m, I’m not looking to retire if I’m just going to be a coin flip.
Tom Vaughan:
Now, we didn’t count their property. Right. And so one of the things that has happened, especially recently, and especially around here, is that the rents have not kept up with the valuation grow. So maybe you’re only getting less than 2% of the value of the property in rents each year. Right. So it’s a kind of an underperforming asset, as an income Yeah, over performing as an appreciation as doing great. The problem with that is that you can’t eat the appreciation, right? That’s what my saying, you know, I can eat the income that comes out of that. And I got my other assets that I could live off of, right. But that only adds up to 48%. Probability success. Yeah, that’s not good enough. So I need to sell that place, potentially, right. If I want my retirement to work, or change my plan, yep, you know, cut back my expenses dramatically, and have a different lifestyle, right. And that’s possible, too. I’ve seen people do that. But let’s just take a look at what happens in as MonteCarlo situation, if we do sell the property. So here we have, you know, Ron, and April, we’ve got their list of assets. And you can see here with this big red arrow, we now are putting in a sale of this property. And let’s just say after taxes 800,000. So that’s now coming into this diversified portfolio. Right. And that’s, that’s cool. And so what we get then is another chance to run Monte Carlo simulation with a different situation with this 800,000 in there. And when we run that kind of pushed the button, we ended up again with this green spaghetti 96% probability of success.
Easan Arulanantham:
Yeah, that’s that’s a great retirement, though, right?
Tom Vaughan:
So it just went from a retirement that won’t work to retirement that will work by selling their rental property. Right now, we can test that we can look at selling the property in a couple of years or five years. If you think it’s still gonna appreciate. You know, there’s all kinds of different things that we can do here and kind of a what if scenarios, but overall the concept Kept of keeping a rental or not keeping a rental. This is to me one of the better ways to answer right? I’m not going to gas, I’m not going to get a spreadsheet. I can’t do MonteCarlo simulation very well, without this particular type of program. I’m not going to get out of pencil a calculator and try to figure it out. This is the better way to do it. As far as that goes, as far as I’m concerned. Just, you know, honestly, we used to do financial plans on a yellow legal pad and an HP 12. See, that’s what we did. And so I know what that’s like. And I know how much better this information is and how much better the advice is now, versus you know, what we used to do as far as that goes, so
yeah, so one thing you can think about is this retirement even though you lost 200,000 in net worth, from expenses for the seller, and, you know, you gotta pay taxes, you have to pay closing costs, maybe you need to do some renovations to the house to get for it to be up for sale. And so even with that you’re doubling your college success percentage, even though you lost 200,000 net worth.