Does your 401k send you checks every month? – My properties do...

125 Replies

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Haha! On that note, I stopped contributing to my 401k last month to help save for REI.

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@Account Closed

A 401k plan provides several tax benefits, including deferral of taxes, potential employer match, and the possibility of lowering your overall marginal tax rate. On the front end, you essentially get between a 30-100% automatic ROI depending on your tax rate and whether your employer matches.

Sure, most conventional 401k plans have limited investment choices, but that does not have to be the case long term.  If you use an employer plan to sock away some real capital, when you change jobs or retire, you can move that 401k to a self-directed plan, and then invest those tax-sheltered dollars into non-traditional assets such as real estate, notes, etc.

Use wisely, even a basic employer 401k can put you well ahead.  Educate yourself.

@Mike Wright my retirement funds hardly "just sit there".      And it is a retirement fund,not intended to provide cash in your pocket until you reach age 59 1/2.      In the meantime, if you are using it wisely, it should be growing like a weed !  

@Brian Eastman provides wisdom. Remember, a 401(k) is only a tool. It could be highly effective if used properly. Also, please consider that while some people might be able to forgo a 401(k) in the pursuit of cash flow or other, most would benefit from the Safety net. If the above average investor is passionate, knowledgeable, and determined enough, then that investor might not need a 401(k). The average investor might be active for a few years and would lose in the long run if he or she decided to not contribute early and consistently. Compound interest is a beautiful thing. Lastly, the below average investor will greatly benefit from having the Safetynet and he or she is not likely to foresee when they lose the energy passion or determination to do to continue the real estate venture. Even the highly active and highly motivated investor might become ill or other and not be able to actively pursue real estate. A safety net is rarely a bad thing.

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@Brian Eastman provides wisdom. Remember, a 401(k) is only a tool. It can be highly effective if used correctly. While some may not need a 401(k), compound interest is nothing to snuff that. Love me some compound interest. Ideally you could do both. Realistically, I will always make sure I have a safety net. Who knows when I could become sick or a family member requires my time and energy because they become sick or I simply lose all interest in real estate.

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You don't have to save for retirement OR invest in real estate, you can do both, assuming you have enough funds. There are advantages, and disadvantages, to both methods of investing.

I believe @Brian Eastman is pointing out that it’s not either/or, one can do both.

All depends on who’s considering the advice...

For most people starting out investing in stocks or REI, when their savings/investing budget might only be $100 or $200/month... at age 18, 22, 30 whatever... participation in a 401k knowing it's highly likely they won't work for the same employer in 5 years, making those funds available for SDIRA, is a much more practical way to proceed.

Most people won't be able to save $100/month into cash for a REI down payment, values are increasing too fast... and a first time investor would likely not save to make their first investment an OOS turnkey or a cash flow only rental. And even if they went this route how will they cover the first big expense that comes along when their probably barely net cash flow positive?

Frankly, I'm not saying that either one is better. The 401(k), however, needs less hands-on. I'm saying for the highly motivated person either could work. I just caution those who might miss an opportunity with their 401(k). The people who are most likely to lose the energy to keep going with their real estate journey are those who do not foresee that they will lose the energy and motivation. Each person should just educate themselves about both options and make the best choice for them. I tend to air on the side of caution and longevity. But that's not for everyone and I will definitely not be getting rich quick. I apologize for the double post above, I'm not sure if it was my error or bigger pockets.

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@Account Closed , My 401(k) value has tripled in the last four years. When I was younger, I maxxed it out as early in the year as I could, to take maximum advantage. Once my husband because self-employed, we rolled everything into a Self Directed Solo 401(k). I receive checks every month from the Private Loans and Syndication deals I'm participating in. It goes back into the 401(k) so I'm not living off the proceeds currently. 

Contributing to a 401 up to the company match is a no-brainer.  98% on your money (assuming 2% fees) and it's truly passive, but you have to wait to withdraw it.   Your 401 will  never flood or sneak cats in to pee everywhere.  It won't give you a sob story as to why your 'dividend' check will be late or not at all that month, it won't skip and you won't have to evict it.

That said, I am about 94% in RE, but there is a place for 401s, 403s, TSPs, etc up to the match at least.  At least we're having first world problems - which is better to invest in?:)   

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In general the 401k seeks like a bad idea for most people. Reason why I say that is because most people are not high income wage earners and/or they don't have the discipline to invest. For the high income wage earner contributing the max amount in a 401k for 30 years or more they will have a comfortable retirement. Problem is most people are the 40k- 70k (relative to your area of the country) wage earners and most don't start until their late 20s or even sometime in their 30s. Then if they get lucky they may have around 1 million in the 401k at age 60 or 65. Then after all those years of saving it is generally recommended they take out 4% or so per year depending upon what year you plan to die...better hope you don't live longer and outlive your money. Also have to take into account for inflation. That 4% you plan to live on will not spend the same as it would today in 30 or more years from now. I have made a lot of generalizations here but having said all that it seems a combination of 401k investing and REI would be a good strategy. Maybe use the 401k as a safety net. It has always made more sense to me to create income streams. Who really wants to wait until 65 or 70 to start receiving income from all their investments.

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@Account Closed

I mean, yes, in theory you're right.  But it's certainly not an either/or scenario.  Although most people do choose only 401K because they don't have enough disposable to income to even max out their 401K let alone think about putting it elsewhere.  The high income earners are generally the ones that are able to use both real estate and 401K and de-prioritize the 401K side of things somewhat.  Not maxing out your tax advantaged investment vehicles if you're able to is dumb for anyone, in my opinion.  Because I'm 1099 my max 401K tax advantaged contribution is upwards of $50K/year.  Unless I get really tricky with my numbers there's no way Uncle Sam isn't going to get a huge chunk of that money, even if put into real estate due to the limits of passive losses, etc.  I continue to max out my tax advantaged accounts every year, and rather than putting the rest in taxable accounts, I put that into real estate.  So I'm diversifying by default.  

Real estate is great, and I believe in all of the benefits therein.  But having a boat load of money in a 401K account growing tax free with very little risk, for 30 years as a hedge of sorts until I need/want it is also a pretty good deal.  Am I putting twice as much money every year into real estate endeavors versus what I put into my 401K?  Absolutely.  But to say that 401Ks serve no purpose or are a foolish use of money is kinda ridiculous and is divorced from reality somewhat.  For many that's the only kind of savings they're able to do, and even then they can only wrap their head around it because they get the added benefit of employer match and tax benefits.  That's unfortunate, yes.  But not everyone is making six figures.  I think everyone should own some real estate.  But if you're making $30K and have two kids as a single mom, I'm not going to poo-poo you for putting a couple grand a year in a 401K rather than dabbling in real estate, since the 401K is zero-effort and all reward.  Long term would real estate yield greater dividends and immediate access to those funds?  Potentially.  But the 401K is for later, much later.  

And I think that's the heart of your misunderstanding.  People are planning to use 401Ks for retirement specifically.  As in, they plan to work till normal retirement age and sock away as much as they potentially can.  Lots of us here aren't planning to work till traditional retirement ages hence the real estate and focus on cashflow.  But even I, as a high income individual, am not willing to forego the benefits and hedge aspect of the 401K contributions every year.  My game plan is to retire at or around 40 with enough rental cashflow to pay my expenses and live a reasonable low-cost lifestyle.  And to keep contributing to my 401K since there will be a benefit to doing so tax-wise.  But by the time I'm 59 1/2 I may find that I won't need that money at all for myself.  Which would be great.  Will I kick myself for not dumping every dime into real estate when I had the chance?  Maybe, maybe not.  But I doubt it.  Because I'll be sitting there, financially independent, with a million or more (having grown tax free from a few hundred thousand) in retirement accounts that I can choose to use or not use.  Or to pass down to family.  Again, I see your point and that's why we're all here, we like real estate for what it offers.  But that doesn't negate the benefits of what a 401K offers.  And especially to those that aren't as fortunate as us to have enough income to invest in real estate.  I choose to take the best of both investment vehicles because luckily I have that option. 

But I can certainly understand why many people find real estate a daunting endeavor and would rather throw their money into a 401K, let it grow, and then let that be their paycheck later in life.  Whereas a lot of us here are choosing to invest in real estate now to replace our paycheck now and not later.  It's a philosophical difference maybe, but neither are wrong necessarily.  I agree that everyone should be open to real estate if it's an option for them, but advising against investing in 401K at all for anyone but the most experienced investor is dangerous, in my opinion.  I have friends and cousins that make considerably less than I do and know that I'm doing real estate.  But I've never once tried to sell them on the idea because our goals and financial situations are all so wildly different.  Blanket advice has no purpose in that scenario.  And if they're putting money in a 401K I'm certainly not going to dissuade them.  Because quite frankly, it's not just "sitting there."  The money is working for you, silently, every day, in the background of life, without you being involved.  Real estate isn't nearly as passive, of course, and for some that's enough to just choose one path.  Will that mean they won't be able to retire early or replace their paycheck with cashflow?  Sure.  But again, everyone's goals and life experiences are different.  But yes, in the highly self-selected group here, if you're a high income individual and you're not at least dabbling in real estate on some level then you're leaving money on the table.  But you're preaching to the choir.  And you're also missing the benefits of traditional 401K investment vehicles, which I'm sure most of us here still employ at least somewhat in our long term strategies. 

And for the people you mention that put money in 401K and won't have enough in retirement at all, I doubt real estate would improve their situation that dramatically.  Some people choose to be spenders, and they'll always be spenders.  If they make $100, they'll spend $99.  Unless they experience a fundamental shift in their line of thinking, they'll never be able to comfortably retire anyway.  Having enough for retirement is more than half mind-set and spending habits.  If you don't have that part locked down, no investment vehicle is going to be a magic bullet.  Now if they only spend $35 of that $100 they earn then they'd have some room to experiment and create additional income streams.  But 99% of the world doesn't think that way, and unfortunately that's the way it's been forever.  Would I love to gently give them advice for how to improve their station in life and long term goals?  Sure, but that's not my place nor is it feasible.  You can't change people who don't want to change.  So to me, the average Joe that's putting money into a 401K isn't losing out on any opportunity because if they didn't put it in there they'd just find an excuse to spend it on something else more than likely.  It's a sad reality.  But most of us here have that complexity cornered already, hence why we're here to begin with. For those of us that are not here or don't have healthy saving, spending and investing habits, it's going to be a tough slog any way you slice it.  So I'm okay with them thinking 401K is a good idea, because it's not a bad one.  

I do both.

1 appealing factor for 401k investors is that the barrier of entry is low.  As all of bp knows the barrier of entry for real estate is relatively high compared to 401ks.  

Another way to look at it:  if your dollars are working for you, do you want them all working in the same place?  I prefer diversification.

I have been fortunate enough to fire my employer this year (I'm 29) because of my Cashflow from real estate. If I was to only invest in my 401k I would still be an employee. My monthly income from real estate is more than my 401k's estimated monthly retirement payout if I had kept everything status quo. To me, the stock market is a giant roulette wheel and I don't like to gamble.

@Account Closed

I used my SOLO 401K for private lending and the returns have been great. I hold rentals outside of my retirement account to have cash flow to live on. I personally don't like the idea of holding RE inside of a retirement account. Before I did that I would consider the stock market BUT prices are very high right now. 

Originally posted by @Account Closed , My 401(k) value has tripled in the last four years. When I was younger, I maxxed it out as early in the year as I could, to take maximum advantage. Once my husband because self-employed, we rolled everything into a Self Directed Solo 401(k). I receive checks every month from the Private Loans and Syndication deals I'm participating in. It goes back into the 401(k) so I'm not living off the proceeds currently. 

 I'm guessing that your 401k *isn't* in the stock market but that it is in real estate. 

My point to the lurkers is to take your 401k that actually *is* just sitting there and place it in real estate where you can have the best of both worlds. Most people who have 401ks do not realize that they can do such. People on BP are educated, lurkers are still getting their education.

By the way, when a tenant burns down a house, my insurance builds me a brand new house, try doing that with the stocks in a 401k   ;-)

Actually, the tripled part was in the stock market. I caught a HUGE tech wave headed north. I fully acknowledge that it was completely out of my control, though. And you are so right, if they would have "burned down" my insurance company would not have bought or built me a new one...

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