401K: Continue Contributions or Stop?
Rental Property Investor · East Grand Forks, MN · Member since 2018 · 10 posts · 21 votes
I recently purchased my first rental property with no money down. I did so by necessity as I am cash broke! However, I do put a substantial amount of money into my 401K account every pay check. I have always been relying on having a very nice nest egg waiting for me when I retire, but like many of you, am starting to realize that I don't want to wait until I am 65 to enjoy it.
For the last 10 years I have been so focused on building up my 401K, but now for the 1st time I am really considering stopping all contributions to focus on real estate investing. I ran the calculations and found that my projected 401K value when I retire will be cut in half if I stop contributing now (age 36) and leave what I have in there.
I'm looking for advice! Have any of you taken the plunge yet, how has your experience been? Any recommendations??? Thank you!!!
Matt
@Matt Hangsleben this is a tough question. I stopped contributing to mine years ago when I learned at a financial education seminar that if the employer doesn't match, it doesn't make sense to keep contributing to the max amount. If your employer matches, I would continue to contribute, but lower the contribution. If you do that, however, you need to take the additional monies that you now have (after taxes now) and put it into a fund that you will use for some other investment. It's far too easy to spend it. The idea is that through your real estate and other investments, you won't even have to dip into that 401(K) later on, so the fact that it will be far less won't be an issue. But that really depends on how you plan to ramp up your investing. If I were you (and I did this) I would consult with a registered investment adviser about overall wealth planning and your goals...and I don't mean a financial advisor..there is a difference. You don't want someone trying to sell you products, you want someone trying to help you analyze your current status, where you want to go and how much you will need.
@Matt Hangsleben
My employer matches 5%, so I allocate 5%, that’s it! I had the same thoughts, and take the extra money that would have been going to 401 and use towards buying new rentals that cash flow.
Here’s perspective, you’re approx 30 years away from retirement eligibility. How many assets could you own, possibly free and clear, in 30 years vs stock piling cash...
@Chris Sukala Have you already paid the taxes on your botched 401(k) rollover? You may be able to qualify for a hardship waiver offered by the IRS. For starters, check this article:
https://www.kitces.com/blog/rev-proc-2016-47-self-...
(This is not advice; just information).
Another option, which is not as well known as 401k and Roth IRA is cash value life insurance that grows with the stock market but does not go down when there's a market crash or decline. You can contribute and use the money for whatever you want and it's liquid (you can touch the money without the 10% penalty). I am not an expert on that but I can refer you to one if that is of interest to you.
Cash value life insurance is not an investment, it is a rip off. The fees will eat up most of your earnings. You should never combine life insurance and investments, buy enough cheap term insurance to protect your family but keep your investments separate, you will do much better.
@Harrison Sharp Why is it horrible advice? It’s about opportunity cost. If you can take your money and make a much better return than do it. Being a slave to Wallstreet is horrible advice. He gets zero match. I too do a 401k up to 6% but I get a 75% match up to 6%. I like to control my money.
Withdrawing your 401k is about the dumbest thing you can do, you'll have a 10% haircut off the top and then you'll have a large amount of taxable income on your tax return next year so set aside another 20-25% for that. In what world is it good advice to recommend taking a guaranteed 30% loss before you even are able to get another investment? Also 401k loans are risky as well, even if you get the interest, if you leave the company you're at you have to pay back the entirety of the loan within a short time period, again hope you have cash set aside for that... the better advice would just be to keep his money in the 401k, start contributing to a roth 401k instead of traditional and lower the amount, and then saving additional money on the side for real estate.
And as far as your tax and market timing points... Most people aren't in a higher tax bracket when they retire unless you've built up a massive real estate portfolio that is cash flowing a ton with paid off properties. I agree the market could be overpriced right now, but trying to time the stock market is a fools game. He's dollar cost averaging every paycheck and thus limiting his exposure to large drops assuming he continues to do so during a correction. Additionally, we just saw a 20% pullback in December, why not get in now? That could have been the selloff that was coming. Everyone is terrified of another 2008 and those events simply don't happen very often. What we just saw in a 20% pullback are more normal and par for the course.
Another option, which is not as well known as 401k and Roth IRA is cash value life insurance that grows with the stock market but does not go down when there's a market crash or decline. You can contribute and use the money for whatever you want and it's liquid (you can touch the money without the 10% penalty). I am not an expert on that but I can refer you to one if that is of interest to you.
Cash value life insurance is not an investment, it is a rip off. The fees will eat up most of your earnings. You should never combine life insurance and investments, buy enough cheap term insurance to protect your family but keep your investments separate, you will do much better.
This. Cash value life insurance is a complete scam unless you're in a very specific situation and are doing literally everything else. These guys just sell on fear and charge massive fees for below average returns
@Matt Hangsleben
I too just considered this situation. I was putting in 10% and my employer was matching 5% I decided to lower my contribution to 5%.
It hasn't been a long enough time period to tell you it's worth it or not.
I would recommend running some numbers to see what would fit your situation.
@Matt , I just turned 40 and continue to max out my ROTH and my wife’s, the only reason is it’s withdrawn without taxes later on. I don’t want to have all my income taxed. As for a 401k, I contribute to the max of my employer as well. I’ve had a majority of my properties owner financed with 0 down as well. It’s a personal choice of course but I find nothing wrong with having multiple sources of income when I choose to retire! Feel free to reach out if you’d like to chat more. Good luck to you!
John
I am 60 years old and I just got done blowing up my 401k to get a 4unit. I’d continue to invest up to the match point. My accountant always told me anything above match.... start a Roth. Investment and insurance is a scam. Buy term insurance and invest the difference was a old A.L. Williams line when they began blowing up the insurance industry! I personally have decided to avoid the stock market and build a stream of income off of rentals, SS and a couple nice safe annuities! I know your young and at a completely different stage of life. My 401k through the years helped me purchase my house and my investment property. So I don’t think you want to give up on it. I would definitely run the numbers with a professional. I have assembled a team (accountant, lawyer, realtor, financial planner, mentors, etc.) that help me analyze these tough financial choices.
@Chris Szepessy we’re on the same boat
@Harrison Sharp Opportunity cost. I took the haircut, I argue the stock market is due for a haircut also. I have used the cash flow from deal one to buy deal two and then deal three and deal four.... I have $1500 a month in net cash flow now. Opportunity cost. I'll also note my LLC reduced my taxable income. If he takes a loan and leaves the company he doesn't "have to" pay it back, they take the secured portion to pay off the loan and you pay taxes on it. These Wallstreet companies sure have done a number on people. If you can't do what I did by knowing the difference between a good deal and a bad deal then I agree with you, leave it and work till your're older than you would be if you controlled more of your money.
@Harrison Sharp I do want to genuinely thank you for providing your rationale for why you think my post was horrible advice. For real, calling it horrible without justification would not be fair, so thank you. And it may be bad advice for most people. I argue the people on BP are not most people. If they have watched all the podcasts I have, read Rich Dad Poor Dad, The Richest Man in Babylon, and Secrets of the Millionaire Mind, I think they are well prepared and are within their right to creatively use their own money.
I don’t disagree that most people here aren’t the norm. Your advice might be fine if they can find returns of 20% and stack them. However, even most people here wouldn’t be able to do that and eating ~30% of your cash to put into another investment vehicle in order to hopefully make up those returns doesn’t make a ton of sense from a numbers standpoint. Better just to diversify by keeping your 401k, stop your contributions, and start putting that money toward cash for a down payment
@Matt Hangsleben
You need to go consult with a CFP, certified financial planner. Doesn’t matter if the CFP is considered a “financial advisor” or “registered investment advisor”. Your question is specific to you and your situation and needs to be analyzed in a framework of your overall financial picture, and more important based on what your goals are. However, even if your employer doesn’t match that doesn’t mean the answer automatically is “don’t contribute”.
There is no clear cut winner on this issue. After all it is a personal finance decision.
What has not been brought up: why so cash broke? Why not cut every extra expense for a while and do both?
I recently dropped my contribution amount down to maximum match requirements. IMO anymore than that is a hindrance to active investors as available 401k investments are extremely limited In many cases. Also keep in mind at today’s stock market valuations, the returns on money’s invested could return next to zero over the next 20 years due to overvaluation . Just as RE investors don’t purchase over priced houses/properties, we shouldn’t invest in over priced companies/equities either. Look at the Shiller PE http://www.multpl.com/shiller-pe/, It’s a great indication of where we are at with stock market valuations. For me my cash can be better utilized in other investments for maximum returns.
Thank you to everyone who posted in this thread there is some great info here.
This kind of discussion always concerns me. Of course you can make very good money in real estate - probably better than equities - if you know what you are doing and are willing and able to work hard at it. But it is not as easy as so many posters, and TV shows, portray. It seems like every one I talk with, when they find out I do a bit of RE investing, says ‘ yea I am/want/plan to do that also’. They really have no idea what they might be getting into. And to make blanket statements that people should cash out 401k assets to invest in real estate is misleading at best, in my opinion. In addition there is a lot of value in balance, as some posters have already mentioned. Some RE, some equities, some short term liquid savings. No one knows what the future holds.
And by the way, how in the world would ANYONE know what the next 20 years holds for corporate earnings and the related value of public companies!
@Harrison Sharp Why is it horrible advice? It’s about opportunity cost. If you can take your money and make a much better return than do it. Being a slave to Wallstreet is horrible advice. He gets zero match. I too do a 401k up to 6% but I get a 75% match up to 6%. I like to control my money.
Withdrawing your 401k is about the dumbest thing you can do, you'll have a 10% haircut off the top and then you'll have a large amount of taxable income on your tax return next year so set aside another 20-25% for that. In what world is it good advice to recommend taking a guaranteed 30% loss before you even are able to get another investment? Also 401k loans are risky as well, even if you get the interest, if you leave the company you're at you have to pay back the entirety of the loan within a short time period, again hope you have cash set aside for that... the better advice would just be to keep his money in the 401k, start contributing to a roth 401k instead of traditional and lower the amount, and then saving additional money on the side for real estate.
And as far as your tax and market timing points... Most people aren't in a higher tax bracket when they retire unless you've built up a massive real estate portfolio that is cash flowing a ton with paid off properties. I agree the market could be overpriced right now, but trying to time the stock market is a fools game. He's dollar cost averaging every paycheck and thus limiting his exposure to large drops assuming he continues to do so during a correction. Additionally, we just saw a 20% pullback in December, why not get in now? That could have been the selloff that was coming. Everyone is terrified of another 2008 and those events simply don't happen very often. What we just saw in a 20% pullback are more normal and par for the course.
I emptied my 401K and IRA twice so far and it has played a key role in allowing me to reach the point where I am now...which is financial independence (ie, I could quit my job right now if I wanted). Without using the funds from these accounts, I'm pretty sure I would have missed out on some really good opportunities and my financial picture would be no where close to what it is right now....let alone financially independent.
However, with that said. I still agree 100% with the advice above. When I think back about how lucky I was with the timing of the investment as well as being presented with the opportunity, I can't help but think emptying my retirement accounts like that was pretty reckless. Luckily for me, it worked out quite well....and if anyone is thinking about doing the same thing, please consider where we are in the current real estate cycle. I made my investments during a red-hot California and Asia real estate market and my timing was very lucky. Doing the same thing right now at the crest of the current cycle would be an absolute terrible move in all 50 states, Asia, and Europe. In fact, it's a pretty reckless move at all points in the cycle.
Also, someone else mentioned perhaps parking your money in the AHP fund as an alternative to CD's or other low-risk investments. Don't let the liquidity terms fool you. This is not a low-risk, money-market type of investment that happens to earn double-digits. You are assuming equity-like risk without any of the upside. Your returns are capped at 12% in the previous fund, and in the current offering, I believe it is capped at 10%. These are good coupon rates for debt-style investments, but the AHP investment is structured as an equity investment. The sponsors are earning 30-35%.....i.e., they are taking substantial risks. And usually, equity investments are structured so that the majority of profits above and beyond the preferred return goes to the investors. AHP is structured so that 100% goes to the sponsor. Also, flexible liquidity can be good, but there is also a very big downside to this....though I imagine there is something in the agreement where the sponsor can freeze redemptions in certain situations.
@Dmitriy Fomichenko
Dmitriy...properly structured whole life insurance following the Infinite Banking Concept is not a scam...you are right, it is not an investment, but it can certainly include investments. It is a way to store liquidity and then finance things in life, such as real estate.
I have total access to my money in my policies, whereas solo 401ks and qualified plans have so many restrictions. You should really educate yourself about it. Thanks,
@Harrison Sharp
Harrison, if you plan to buy real estate, you should really look into Nelson Nash Infinite Banking Concept. It will change entirely the way you think.
Make you sure you are educated before you make these statements.
I was the same way 5 years ago. Thanks,
@Tony Kim I loved reading about your story. I too think you should be aware of your market and the real estate market as whole. I do not, however, think now is a bad time to invest everywhere, even with tax implications for “emptying” your 401k. I can take 30k right now (no loans) all day everyday and turn it into $700 a month in cashflow. Sure, even my market may pullback and the properties can be bought for say all in at 20k in a few years with some kind of major pullback. I suspect in that type of market the 401k takes a major hit too. Using my way I have cashflow and am in better position to capitalize on even cheaper properties than the other guy would with too many eggs in the 401k basket. To each his/her own. The expression “how can I” coupled with the above books I referenced, all the podcasts, and these forums have forever changed my trajectory. I am forever grateful.
This is a really great thread, because there are so many perspectives and if you just pull the *facts* from those perspectives, you can learn a ton and apply that knowledge to your situation. Your goals, your vision for your life, your risk tolerance, how active you want to be with your investments, and so on, and so on. Look at YOU first, then look at the numbers.
For me, I was really down on my career, burnt out, and I started to read about real estate and it just clicked. I wanted financial freedom. I wanted to invest for the cash flow, but also for the fun of buying the assets, managing the improvement and value-add of those assets, and the rush of finding the next deal. For that, I needed cash. I borrowed the max from my 401k and used it for the down payment on my first rental property. It was a good BRRRR deal. After fixing it up, renting it out, and refinancing, I have less than $10k invested and earning a cash-on-cash return of 22% after expenses. The cash that I pulled out on the refi led to 3 more properties. I'm still paying 7% on my 401k loan, but making far higher rate of return on my real estate and I'm enjoying the hell out of it. I also stopped contributing (I got no match) so I could put the extra money into my real estate funds.
So I was willing to take a moderate risk with the 401k loan because I wanted to jump in to real estate and do the work and find the deals and learn how to rehab. I wanted to fully-immerse myself because I believe in it and I'm passionate about it.
Would I recommend everyone do what I did? Absolutely not. It would be terrible advice for someone who really doesn't want to spend time actively managing their assets. Like, if I didn't want to fully commit to being an active real-estate investor AND property manager, taking $ out of my 401k and abandoning it might have been a terrible decision.
Figure out what you really want, read up on how to get it, and the rest will follow.
@Tahra Wright
READ "THE MILLIONAIRE NEXT DOOR"
AND "THE AUTOMATIC MILLIONAIRE"
Please dont judge those lausy titles, they have giving me direction and im getting in it.
Joseph
Thank you everyone for the feedback. It's great to hear so many perspectives and it's good to have options! I think for now I will stop contributing but leave what's in there alone and start building up savings. I caught the Real Estate Fever after making my first purchase a month ago and cant stop searching for my next deal!!!
@Harrison Sharp I disagree cashing out your 401k is not the dumbest....if you employer has matched your contribution to a 401k the 30% tax isn’t that bad. For example if you have contributed 50k and your employer matched 50k you’ve already made a 100% return. Now you have 100k. And Uncle Sam takes 30k you still walk away with 70k. A 40%return, not even considering the gains or losses from the market. I will say if you’re not going to acquire a cash producing asset it is a dumb thing to do.
You should take 20% to 25% to invest in IRA or 401k/b. At retirement you should have 300,000 to 500,000 to play with.