$1 Million in the Bank and Starving to DeathPosted on April 8, 2014 by
Just met with a guy who has a very interesting story that you’re not going to believe: He has $1 million in the bank, but doesn’t have enough money to buy food! He’s practically starving to death.
This guy worked hard, saved hard and invested wisely his entire life. When he retired, he had $1 million in liquid capital. To keep his money safe – the volatility of the stock market scares him – he invested his money in bank CD’s paying 3.6% interest. Last year, when the CD’s matured, he was forced to roll his retirement money into new CD’s with a dismal 0.6% interest rate.
Here’s the thing: These days, this guy’s investment doesn’t earn him enough to live on – he’s forced to exist like a pauper. He said, “Once I became a millionaire, I thought I’d never want for anything. I couldn’t have been more wrong!”
Before your dumbfounded look affixes to your face forever, fully understand this man’s predicament. He and his wife have $1 million cash, but they don’t want to spend any of this principal. Their retirement goal is to live off the interest the $1 million generates.
So here’s the question: How much is their sizable nest egg making them? You’d think big bucks, right? Believe it or not, it’s only $6,017 per year – PER YEAR! That’s right: they’re loaning their bank $1 million, and in return their bank is paying them only $6,017 a year in interest.
How high on the hog can you live if your yearly income is only $6,017? Will you go on lots of cruises? Nope! Have lots of fancy dinners out? Uh-uh! Maybe you’ll have a big long Cadillac in the driveway? Not a chance!
Let’s play a game of What If. Instead of this retiree having $1,000,000 cash in the bank, what if his money was invested in real estate – single-family rental properties, to be precise. Let’s say he bought 12 nice three-bedroom, two-bath brick ranch houses for $83,300 each. In this area, a house like this will rent for $875 per month.
These 12 houses would earn him $10,500 each month. Now subtract 35% for expenses (property taxes, insurance, repairs, vacancies and management). His net monthly income would be $6,825. This equates to $81,900 per year.
As a retiree, what would you rather earn on your million dollars: $6,017 per year or $81,900 per year? When I was in school – when it came to money – more was always better than less!
One more thing to consider: With $1 million in the bank earning 0.6% interest, and a yearly inflation rate of 3%, how much buying power would your $1 million have at the end of the year? How does $976,262 grab you? Carrying this forward, after ten years, your $1 million will only have $786,438 of buying power. Inflation eats at cash like a cancer! On the other hand, inflation increases the value of real estate and the amount you can charge for rents.
Hope this helps you to understand why real estate can be a better capital asset than cash!