Investor · Oceanside, CA · Member since 2017 · 26 posts · 8 votes
I am 30 years old and I have always put 5% towards my 401(k) (my employer matches 25 cents on the dollar) and both my wife and I max out our Roth IRAs each year ($5,500 each).
One of my big goals is to retire early and I see REI being a part of that solution. These retirement accounts are designed to start using the funds at 59-1/2 years old. I hope to be semi-retired well before that age and will need other sources of income outside of these retirement accounts to make that happen (ergo the pursuit of REI).
My big question is... Should I reduce the amount of money I am putting towards these tax-advantaged retirement accounts so that I can accelerate my savings for my first REI deal?
It's pretty hard to beat an instant 25% ROI plus the tax benefits you get with a 401k. That being said, I don't have one because I'm self employed and I can do better on my own with my own investments. For most people though, it's a great investment relative to what they can personally achieve given their skill sets. If you can do better with real estate, then perhaps you should save the cash and invest it actively?
My personal opinion, if you and your wife both make good money and you're able to save extra cash, then the $5,500 per year each won't make a huge difference. If you're bad with your personal finances (please don't take offense, this is just a hypothetical) and the $11k per year is probably close to all you'll be able to save, then I think you might need to restructure your budgets and increase your savings (I assume this isn't the case, you're on BP and looking to invest. My bet is that you're better with money than most). I've done finance for many years, looked at enough credit apps and income statements to see lots of high income earners that spend as much or more than what they currently make. If you're able to save a good chunk of cash each year, keep the retirement savings going and take advantage of that compound effect. Either way, I'm sure you'll be just fine.
There are companies out there that let you purchase investment properties through your 401k. It's a win win if you have a decent amount saved up in your account.
@P.J. Bremner Thanks for the feedback. Historically my wife and I have lived pretty frugally and are good savers. But we just had or first child and most likely she is going to be a stay at home mom. While I am super exited to give her this opportunity, it will cut down on how much we save each month for investments. Which is kind of sparking my thought of saving less for retirement, to try to develop other investments that could create opportunity for early retirement.
You may want to consider cutting back on your 401k contributions to the amount that your employer will provide a match. You can then use the difference to save for investing in real estate.
It's not necessarily an "either-or" question. IRAs and 401(k)s can both be invested in real estate - provided the plan allows it. The better vehicle is a 401(k) plan designed for those with some self-employment income and no full-time employees. Otherwise, an IRA held at a custodian that allows RE investments can be used.
A fundamental difference between IRAs and 401(k)s is that a 401(k) must be sponsored by a business, hence the requirement for self-employment income. Once such a plan is formed, pre-tax IRA funds can be rolled-over to it tax-free and invested in real estate (or just about anything else). Roth IRA funds cannot be rolled over to a 401k.
It's OK to have a spouse or partner in the business, so long as there are no full time (>1,000 hrs) employees over age 21.
Whether a 401k or IRA are used the are that investors must be aware of. While those can seem daunting, they are easily navigated if you know the basics.