Author: jwithrow

A large percentage of the people running our institutions are actually at war with reality...

That’s what my old friend Christian Nix said to me last week. I had the privilege of chatting with him on his Expat Phyles podcast… and it was a wide-ranging conversation. I’ll share it with you once the podcast is edited and published.

I met Christian – Tain, as his friends call him – five or six years ago within what used to be called the Agora network. Agora is the ancient Greek word for “gathering place” or “marketplace”.

I don’t believe that name is used to refer to the network much today, but the Agora still exists. It’s the largest financial publishing network on the planet. Except it’s decentralized.

Continue reading “On the Agora, economics, and moral philosophy”

We’ve been talking about real estate as an asset class all week. Today I’d like to wrap up our discussion by zooming out and looking at the big picture.

In every developed industrial country there is a glass ceiling of-sorts hanging over top of the middle class. This is certainly true in the U.S. Here’s what I mean…

When we add up all of the taxes across all levels of government, the average middle class person likely pays out half of their income in taxes each year.

It starts with the taxes that are typically withheld from our paychecks every two weeks. The Federal Income Tax… State Income Tax… Social Security Tax… the Medicare Tax – these taxes are each taken right out of our paycheck before we ever see the money.

Then we have to pay sales taxes on every good or service we purchase. And we pay excise taxes on things like gasoline and alcoholic beverages. We also have to pay property taxes on any real estate we own. Then we pay taxes and registration fees on our vehicles. 

These are taxes that virtually all middle class people pay – year in, year out.

Then if we happen to make any money on our investments, we’re required to pay taxes on our capital gains. Unless we defer those gains through a qualified retirement account. If that’s the case, we’ll be on the hook for normal income taxes on our money down the road.

If we were to add up the dollar amount of all these taxes each year, I bet it would equate to roughly half of our income. Which begs the question – how does one get ahead this way?

That’s the glass ceiling.

Continue reading “Shatter the Glass Ceiling with Real Estate”

Yesterday we talked about why the “nest egg” approach to retirement doesn’t work. And to illustrate, we showed how a retiree creating $70,000 a year in income from a $1 million nest egg would be completely broke in twelve to sixteen years.

A big part of the problem is that taxes eat into a significant portion of the nest egg. In our example we assumed a 15 percent tax rate. That required our retiree to sell $83,000 in assets each year just to get the $70,000 in income.

This is why I see real estate – old fashioned rental real estate – as the best vehicle for building income. It’s an incredibly tax-advantaged asset.

That’s because for every property we buy, the Internal Revenue Service (IRS) says we can “depreciate” a fixed percentage of its total value every year.

In other words, we can write off a portion of the property’s value against our income every year… even though we didn’t lose the money.

So depreciation is a phantom loss. Just for tax purposes.

And that’s just one element to it.

Continue reading “Why real estate is a better way”

“A healthy nest egg can provide a solid foundation for a fulfilling retirement, allowing you to pursue your dreams and create lasting memories.”

This quote highlights the promise of the “nest egg” approach to retirement perfectly. We’re talking about the traditional model that’s been widely accepted since the early 1980s.

This approach says that we should pour our savings into financial assets to work up to this mythical retirement number.

The idea is that we build financial assets and hope our returns get us up to a big enough number that we can live comfortably in retirement. Then, we draw down our assets to create income for ourselves after we quit working.

That is to say, we sell off our stocks and funds and use that money to live on.

The problem is, this approach puts us on a see-saw. It forces us to choose between assets and income. When our assets are going up, we don’t have the income. Then when we want the income, our assets have to come down.

Plus, this model pits us squarely against the tax code. It doesn’t matter if our financial assets are in 401(k)s, IRAs, or regular brokerage accounts—they are going to get taxed in the end.

I’d like to use an example to illustrate just how fragile this is.

Let’s assume we work up to $1 million dollars. Just for easy numbers. We get to retirement with a million-dollar nest egg—plus, we have a little Social Security money coming in. So we say, “You know what, I want to draw $70,000 a year from my nest egg to live comfortably. That will supplement my Social Security”.

Keep in mind, to get that $70,000 we have to sell our financial assets. Which means we have to pay taxes on the proceeds.

Now, let’s assume a conservative tax rate of 15 percent. At that rate, we have to sell about $83,000 worth of assets to get our $70,000 in income for the year. The other $13,000 goes to taxes.

To keep our example here simple, let’s assume our tax rate stays the same for the rest of our life. If we run the numbers, that means we can sell $83,000 worth of assets each year for exactly twelve years. That’s it. After twelve years, we are out of money.

But wait a minute… sharp readers may point out that I’m assuming no return on investment in this example. That’s correct. But I have bad news for you – it doesn’t get much better.

Let’s suppose we can generate a consistent 4% annual return on our $1 million nest egg. If we can pull this off – without having any down years – then we’ll only have gone through about half our nest egg after ten years.

After that we’ll have seven more years to burn through the rest. By Year Sixteen we’ll only have $72,000 left. By Year Seventeen, we’re completely broke.

The following graphic shows the calculations:

To be fair, we’ll be far more comfortable with our finances for a little while in this scenario. That’s because our nest egg will produce over $20,000 a year in interest income for us for ten years.

But notice how it snowballs in the wrong direction after that. It quickly gets to the point where we can’t afford any emergencies. We can’t afford to really do anything but just try to maintain our standard of living.

To me, this makes no sense. Not when there’s a better way.

If all we are really trying to do here is make sure we have enough income to live on in retirement, why take the round-about way to income? Why not just build the income streams in our working years?

Personally, I would rather have assets and income. And I would like my income to go up when my assets go up. I want the two on the same team.

And that’s exactly what rental real estate can do for us. More on that tomorrow…

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

“Ninety percent of all millionaires become so through owning real estate.” -Andrew Carnegie

We spent last week talking about building financial security and ultimately financial independence. The key here is that we need to have a system in place. As we discussed, chasing piecemeal investments is likely to keep us stuck on the treadmill.

When we talk about financial independence, we’re talking about a situation where our investments throw off enough cash flow to replace our active income. This isn’t something a 401k can do for us. So when we left off on Thursday, I suggested that rental real estate was the best vehicle to get there.

Simply put, real estate is a tried and true asset class. It’s largely timeless. The above quote from Andrew Carnegie over one hundred years ago highlights that.

I was thinking about this more over the weekend…

The early hints of summer are upon us up here in the mountains of Virginia. Green has gradually engulfed the cliffs that rise majestically above the meandering Jackson River below.

Continue reading “On real estate, cash flow, and timelessness…”

Yesterday we talked about some common financial mistakes. I made them all.

The root cause of my problem came from chasing “piecemeal” investments. These are investment ideas I came across that certainly sounded good… but I had no rhyme, reason, or strategy guiding my decisions.

That experience forced me to develop a comprehensive investment system and stick to it. This is critical if our goal is financial independence.

For me, it all started with an honest and thorough assessment of the monetary system and the macroeconomic climate. This sounds like a simple thing… but the current monetary system is rather insidious. That’s because our money loses purchasing power year after year.  

As Tom Dyson pointed out in our membership call last month, this makes it very difficult to plan. This is why Tom’s philosophy centers around owning energy.

So understanding the monetary system and the macroeconomic climate is critical. And we can use that knowledge to construct a strategic asset allocation model.

Asset allocation is all about financial security. It’s about strategically allocating capital to a wide range of assets. Cash, gold, stocks, bonds, Bitcoin, real estate, private notes, and early stage investments are the main assets on my radar.

This is how we achieve true diversification. The key here is that our asset allocation model becomes our reserve. We can instantly turn most of these assets into cash in the event of an emergency. They are our safety net. 

However, to my way of thinking, our asset portfolio is not our retirement savings. In fact, I reject the idea of retirement entirely.

Think about it this way: the traditional approach to retirement promotes the “nest egg” model, the idea that we need to pour our savings into financial assets to work up to this mythical retirement number. “What’s Your Number?” I remember old commercials promoting that slogan.

The idea was that we build financial assets and hope our returns get us up to a big enough number that we can live comfortably in retirement. Then, we draw down our assets to create income for ourselves after we quit working. That is to say, we sell off our stocks and funds and use that money to live on.

Notice how it’s always a choice between assets and income?

When our assets are going up, we don’t have the income. Then when we want the income, our assets have to come down.

And it gets worse.

This approach pits us against the tax code. It doesn’t matter if our financial assets are in 401(k)s, IRAs, or regular brokerage accounts—they are going to get taxed in the end, and tax rates could very well go up in the coming years. That’s not a bad bet.

So the traditional approach puts us on an unstable see-saw. We constantly have to choose between having assets or having income.

Personally, I would rather have assets and income. And I would like my income to go up when my assets go up. I want the two on the same team.

To accomplish this, I use my asset allocation model as a jump-off point to build passive income. That is to say, once I’ve built my asset base up to a reasonable level, I shift my focus to building passive income.

The key here is to acquire assets that throw off cash flow. This way we put assets and income on the same team. When our assets go up, so does our income. And when we want more income… we just buy more assets. It’s a far more robust approach.

And guess what? We’re no longer talking about traditional retirement here.

If we can work up to having monthly income that supports all our needs and wants… Well, we can retire any time we want. It doesn’t matter if we are 65 or 45. All we have to do is build up the income.

So what about taxes?

This is why I see real estate – old fashioned rental real estate – as the best vehicle for building income.

Real estate is an incredibly tax-advantaged asset. By default, we shouldn’t owe any taxes on our rental income. And that’s 100% by the book. It’s all baked right into the tax code.

I’ll leave it there for today. Next week we’ll talk about how to real estate can help us achieve financial independence much faster than we might think possible.

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

Our program within The Phoenician League walks members through the steps of implementing everything that we’ve been discussing in these pages. And we have a great support system in place. We’re all walking the same journey together.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

The true purpose of money is to acquire assets.

That’s the key lesson in the classic board game Monopoly. If we acquire assets, we will always have the financial means to take care of ourselves and our families. That’s even if our active income were to go away.

If we accept this statement as true, the only remaining question becomes: what assets should we acquire?

Our core focus in these pages is how to get our personal finances right given the shifting macroeconomic climate we find ourselves in. My belief is that simply funneling a little money into 401k funds won’t cut it anymore.

So what’s the solution? Here we run into the information problem.

It’s funny… it used to be that a lack of information was one of our biggest challenges. Before the internet, finding information was much more difficult and time-consuming.

Today we have the opposite problem. We are inundated with incredible amounts of information all day, every day.

And if we go online and search for investment ideas and strategies, we are going to find an avalanche of what I call piecemeal investment advice.

There are plenty of services that focus on buying stocks or bonds in a particular sector or market. There are also scores of trading systems out there. They all promise to help us line our pockets with big gains.

To be sure, some of these services are decent. But none of them provide a comprehensive approach to finance.

They don’t provide an integrated system for becoming financially independent. Nor do they help us implement a complimentary tax strategy to maximize our investment returns. Most of the time they’ll keep mum on the tax issue for liability purposes.

I spent the first ten years of my professional life chasing these kind of piecemeal investments.

I would stumble upon a few stock ideas that I liked, so I would buy them. Then I would hear about a great set-up in the corporate bond space, so I would buy it. Then I would learn about a new approach to trading options, so I would try it out.

As a result, I was always bouncing from one thing to another. There was no structure or system to it. And taxes were an afterthought. When it came time to file my tax return, I just hoped for the best.

And I made all the common mistakes along the way.

I’ve poured too much money into short-term speculations that went nowhere. I’ve watched one of my stocks go from $7 a share to $80 a share… only to ride the elevator all the way back down to $10 per share. That wiped out nearly all my gains.

And because I didn’t have a tax strategy in place, one year I found myself having to dip into my individual retirement account (IRA) early. I took out a sizeable withdrawal to cover myself. Then the Internal Revenue Service (IRS) hit me with a 10 percent early withdrawal fee for my efforts.

I had to pay income taxes and a big penalty on the money I took out. You just can’t get financially independent by making mistakes like that.

As a result, I spent nearly ten years in corporate banking for my first career… and I walked away with almost nothing to show for it.

That’s because I squandered my savings on short-term speculations and piecemeal investments. Sure, I made a little money on some ideas. But that was often offset by losing money in other areas.

Needless to say, I didn’t start to see any real financial results until I wised up and developed a comprehensive investment strategy. Once I got my system in place, the rest was history. Results came far faster than I ever thought possible.

And here’s the thing – nothing about it is overly difficult or complex. I’ll share with you my system and how to implement it tomorrow.

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

The art of economics consists of looking not merely at the immediate but at the longer effects of any act or policy. It consists in tracing the consequences of that policy not merely for one group but for all groups.

This is the key lesson found in Henry Hazlitt’s masterpiece Economics in One Lesson. This book is required reading for anyone who fancies themselves an educated person. I learned far more about economics from this one short book than I ever did from my university economics courses.

What Hazlitt’s talking about here is the importance of understanding second order effects. That is to say, we need to consider the indirect consequences of a policy or decision to truly get a feel for its effectiveness.

This sounds perfectly logical. I doubt anyone would argue against its merit.

The problem is, second order effects typically aren’t immediately visible to us. Thus, people tend to focus only on the short term, direct results of a given policy or action – what they can see. Then they tend to ignore the indirect consequences that occur down the road. Out of sight, out of mind.

That being the case, I’ll share with you how I came to understand the importance of second order effects… and why they are often ignored.

My first career was in corporate banking. I got my start in the loss mitigation division of a major U.S. bank. And we were tasked with cleaning up the mortgage crisis in the wake of the 2008 fiasco.

For context, it’s estimated that around ten million homes in the U.S. went into foreclosure as a result of the financial crisis. The movie The Big Short does a pretty good job of telling that story.

But here’s the thing – the U.S. government decided that it was bad optics to allow so many foreclosures to happen. So the various government departments and government-sponsored entities involved in the mortgage market (HUD/FHA, VA, USDA, Fannie Mae/Freddie Mac) each developed loan modification guidelines for their mortgage products. Then they asked the banks to make them a priority.

The idea was that the banks could modify the loans for those who qualified per the new guidelines. Doing so would bring the mortgage current and stop foreclosure proceedings.

And the government entities even incentivized the banks to do as many modifications as possible. They agreed to pay the banks a flat fee for every modification completed.

Of course this sounded great to everybody. Let’s stop the foreclosures and let people stay in their homes. That’s how they sold the initiative.

Now, I worked in the HUD/FHA loss mitigation division within the bank. HUD refers to the Department of Housing and Urban Development. FHA stands for the Federal Housing Administration.

These two departments were instrumental in enabling people to buy a home with very little money down.

Per underwriting guidelines, homebuyers must put 20% on real estate purchases. But those who qualify for HUD/FHA loans can buy homes with just 3.5% down. That’s because the FHA backstops these loans by providing mortgage insurance to the lenders. The insurance protects the lender in case the borrower defaults.

So the bank instructed my group to comb through our entire portfolio of HUD/FHA loans and modify as many of them as we could. The modification process was as follows…

First, we took the past-due balance, including late payment fees and attorney fees, and we recapitalized it back into the mortgage. That means we added these fees to the mortgage’s principal balance. We basically stuck them at the end of the loan. This brought the loan current.

Next we dropped the interest rate to whatever the FHA’s floor rate was for the day. And then we re-amortized the mortgage back out to thirty years. That’s regardless of how many years the borrower had left on their loan.

Often this process would reduce the borrower’s monthly payment. They always saw that as a great deal. They went from nearly losing their home to having their house payment reduced. What’s not to like?

But here’s the thing I started to notice… 

Sometimes these modifications would increase the mortgage balance materially. That’s because we were writing all the outstanding fees into the loan itself.

After I saw that happen a few times something important occurred to me. We weren’t comparing the new mortgage balance to the home’s market value before proceeding with these modifications. That wasn’t part of the process.

And if we remember, housing prices collapsed in light of the crisis. On the national level, U.S. homes fell by about 30% on average. But the decline was much worse in certain cities.

So many of our modifications likely made the homeowners severely underwater on their mortgage. They were walking out of the deal owing more on their home than it was worth.

I couldn’t help but wonder – were we setting people up to fail?

What if something happened and they needed to sell their house quickly in the coming years? They wouldn’t be able to. They were now stuck with an overvalued mortgage.

I brought this up at one of our morning meetings. I asked if we were assessing valuations at any point in the process. And I asked if we were going to track these modified mortgages to see how they perform in the years ahead. I figured that was the only way to know if these efforts were in fact successful.

Management didn’t like these questions. Those were things for the “higher ups” to worry about, they told me. My job was to get the modifications done.

That’s when I learned the hard way that nobody cared about the second order effects. They didn’t care if our modification initiative was successful long term.

For the government, they just wanted the foreclosure numbers to come way down. Then they could talk about how they saved the day.

And for the banks, they wanted to collect as much revenue from the government incentives as possible. I’m sure they were thinking about the massive bonuses they’d be able to pay themselves that year.

This single lesson likely changed the course of my professional life. Once I saw that nobody cared about the second order effects of what they were doing, I realized that I didn’t want to work in corporate banking much longer.

It also opened my eyes to just how negligent the government and major financial institutions are when it comes to economics. I suppose that’s why we’re in the position we’re in today…

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

“The Maronite Church is an ancient Christian community with a unique spiritual heritage rooted in the Syriac tradition.”

In the spirit of our discussion on the ancient Phoenicians last week, I attended a traditional Lebanese festival over the weekend. The Maronite Church in a neighboring town hosted the event… and the turn-out was great.

Here’s a snapshot of the scene walking in:

Here we can see the walkway lined with tents and vendors. In the background we can see a majestic bell tower. It rises above the beautiful stone walls that encircle the Maronite Church’s campus.

Walking through the arched doorways beneath the bell tower leads to a circular courtyard. It connects the church itself with the dining hall and the office facilities.

A beautiful fountain sits in the middle of the courtyard. And over the weekend this area featured traditional Lebanese music and dance performances.

Here’s a look at the courtyard:

Continue reading “The spirit of the ancient Phoenicians is alive and well…”

Americans of all ages, all conditions, and all dispositions constantly form aAmericans of all ages, all conditions, and all dispositions constantly form associations… The Americans make associations to give entertainment, to found seminaries, to build inns, to construct churches, to diffuse books… Wherever at the end of some new undertaking you see the government in France, or a man of rank in England, in the United States you will be sure to find an association.

I love this quote by Alexis de Tocqueville. It speaks to the principles of private association and mutuality that were so prevalent in 19th century America.

We’ve been talking all week about the historical influences that underpin our new investment membership The Phoenician League. And today we’ll wrap up our discussion by assessing the mindset that was core to the American experiment.

19th century America featured a robust network of mutual aid societies. This is a topic that I’ve only learned about through independent study. My public school textbooks failed to mention anything about it.

What’s forgotten is that mutual aid societies were the backbone of American society before the Welfare State. They provided safety nets just as the Welfare State does today… but these networks were so much more than that.

Many of these networks employed their own doctors full-time. They called them “lodge doctors”. The lodge doctors were always on call for the society’s members. How’s that for personalized medicine?

And that’s just the start…

These mutual aid networks also built orphanages and retirement homes. And they ran job exchanges and trade skill programs.

These items are each critical to civilized society. And they were all handled by private associations in this country.

That’s because Americans knew that it was people in the local community who were responsible for their own civil functions. The government had nothing to do with them. This is what de Tocqueville’s quote above refers to.

And here’s the beautiful part about it all – mutual aid membership was 100% voluntary. Nobody was forced to support these networks. They had to stand on their own merit. And if members didn’t like the direction things were going, they could opt-out at any time.

Compare that to the government model today. We are all forced to support all government programs with our tax payments – even if we don’t believe in them personally.

To me, the big takeaway is this: Private associations have been foundational to the human experience for most of our history. They may have declined in popularity over the last one hundred years or so… but I think we’re waking up to the fact that they are still important.

And that’s why we’ve formed The Phoenician League. We’re taking the lessons we’ve learned from the ancient Phoenicians, the Hanseatic League, and 19th century America’s mutual aid networks, and we’re packaging them all into a modern membership.

The crux of our membership is financial in nature. We have a comprehensive financial training program in place. And we maintain a professional investment portfolio. Anyone can piggyback on the investments we present.

What’s more, we get members plugged into a nationwide real estate network. And we connect everyone with the trusted professionals they need to get ahead financially. CPAs… estate planning and asset protection attorneys… LLC specialists… lenders… brokers… property managers – we can provide introductions to all of them.

We also host members only discussion calls every month. This is a forum where we can share ideas, insight, and strategies.

And we often invite experts in certain fields to join us on these calls. This gives us the opportunity to ask very specific questions and get direct, unfiltered answers.

The Phoenician League’s core goal is to help all members achieve financial independence. We all walk that journey together.

At the same time, our ethos is so much more than that. We are reviving the spirit of private association and mutuality that was once far more prevalent in our world.

If any of this sounds interesting or worthwhile to you, please sign up for our membership’s wait list. You can do so right here: The Phoenician League Waiting List

We’ll be opening our doors to new members for just the third time very soon. And we’ll give everybody on our wait list advanced notice and attention when we do. I believe we’ll be able to offer everyone on the wait list a material discount on membership fees as well.

Looking ahead to next week – I’m planning to attend a traditional Lebanese festival over the weekend. In the spirit of the ancient Phoenicians, I’ll report back to you with my thoughts on the experience Monday afternoon.

Have a great weekend.

-Joe Withrow