(Seeking Perspective) Shut Off 401K Investing

[Paul Novak]

I'm looking for some perspective from others in the BP community. I am 39 years old, and I recently shut off my wife and my 401K contributions. We also stopped investing in Roth IRA's. The only money we have going into the market is in our HSA. We have shifted all our investing to real estate. To take it a step further we have been taking loans from our 401K's to help support down payments on rental properties. Below is my logic and strategy.

Our combined 401K balances are $550K and Roth IRA's are $55K. No one knows what the future holds but assuming a 7% return over the next 20 years those accounts will grow in total to $2.4M. If my retirement goal is to generate $10K per month following the 4% rule I would need $2.5M to retire. With my current balances that would be enough to get there only looking at those two retirement accounts. I also have $50K in a taxable brokerage account and another $20K in an HSA which will continue to grow.

The main part of my portfolio I have been working to grow is my real estate portfolio. Currently the portfolio is 5 properties, 7 doors, valued at $1.2M with $558K equity. This portfolio is currently generating $4,425 per month cashflow. My goal over the next two years is to buy an additional two properties. Once I acquire them, I feel confident that I can generate $11K per month cashflow provided they are paid off in full. This will take me an additional 4-6 years to accomplish. At which point I will have exceeded my retirement income goal without even factoring in my retirement accounts.

My logic is that I want my wife and I to have the ability to retire early. I feel this will be possible somewhere between my mid to late 40's. If I do, I need income to get me to 59 ½ because I can't access my retirement accounts until that age. I understand that I can use the principle from my Roth IRA's but for the most part that money is locked away without paying penalties to access it. By investing in real estate, I can use the cashflow now. By shifting all that money, we were investing in our retirement accounts to real estate it has significantly increased the speed at which we are growing. If I am putting that money to work with investments and not spending it what's the difference if I use it for real estate to fuel my retirement or my 401K. Don't get me wrong I am sure I will put my money to good use in the future, but my thoughts are if my real estate portfolio can fund my lifestyle in retirement why do I even need the additional $2.4M dollars when I turn 59 ½? At that point I am delaying retirement just to grow my accounts to a size larger than I need, that doesn't make sense to me.

I understand that by stopping those tax advantaged accounts I could be missing out on additional growth over the long run. My wife and I are also missing out on free money with our company matches in our 401K’s. For me I feel shifting to real estate is the right play which is why we made the pivot last summer, but I am open to other perspectives. I am sure there are things I am not thinking. If anyone has any other tips and tricks or things they have learned through experience I would be happy to get your thoughts.

[Amir Khan]

Quote from @Paul Novak:

I'm looking for some perspective from others in the BP community. I am 39 years old, and I recently shut off my wife and my 401K contributions. We also stopped investing in Roth IRA's. The only money we have going into the market is in our HSA. We have shifted all our investing to real estate. To take it a step further we have been taking loans from our 401K's to help support down payments on rental properties. Below is my logic and strategy.

Our combined 401K balances are $550K and Roth IRA's are $55K. No one knows what the future holds but assuming a 7% return over the next 20 years those accounts will grow in total to $2.4M. If my retirement goal is to generate $10K per month following the 4% rule I would need $2.5M to retire. With my current balances that would be enough to get there only looking at those two retirement accounts. I also have $50K in a taxable brokerage account and another $20K in an HSA which will continue to grow.

The main part of my portfolio I have been working to grow is my real estate portfolio. Currently the portfolio is 5 properties, 7 doors, valued at $1.2M with $558K equity. This portfolio is currently generating $4,425 per month cashflow. My goal over the next two years is to buy an additional two properties. Once I acquire them, I feel confident that I can generate $11K per month cashflow provided they are paid off in full. This will take me an additional 4-6 years to accomplish. At which point I will have exceeded my retirement income goal without even factoring in my retirement accounts.

My logic is that I want my wife and I to have the ability to retire early. I feel this will be possible somewhere between my mid to late 40's. If I do, I need income to get me to 59 ½ because I can't access my retirement accounts until that age. I understand that I can use the principle from my Roth IRA's but for the most part that money is locked away without paying penalties to access it. By investing in real estate, I can use the cashflow now. By shifting all that money, we were investing in our retirement accounts to real estate it has significantly increased the speed at which we are growing. If I am putting that money to work with investments and not spending it what's the difference if I use it for real estate to fuel my retirement or my 401K. Don't get me wrong I am sure I will put my money to good use in the future, but my thoughts are if my real estate portfolio can fund my lifestyle in retirement why do I even need the additional $2.4M dollars when I turn 59 ½? At that point I am delaying retirement just to grow my accounts to a size larger than I need, that doesn't make sense to me.

I understand that by stopping those tax advantaged accounts I could be missing out on additional growth over the long run. My wife and I are also missing out on free money with our company matches in our 401K’s. For me I feel shifting to real estate is the right play which is why we made the pivot last summer, but I am open to other perspectives. I am sure there are things I am not thinking. If anyone has any other tips and tricks or things they have learned through experience I would be happy to get your thoughts.

@Paul Novak You've received some good advise here. 

One option to reach (or exceed) your goal of passive $10,000/month income is investing in real estate as a private money lender. This is a passive way of earning with real estate-based security, protection and insurance.

If you have $550K in your retirement account to invest, you can achieve $12,011/month in passive monthly income. This means you will need about 18+ loans each at $30K earning you monthly passive income (with double digit returns). 

You will need to roll over your retirement funds into a self-directed IRA account (funds would be lent from there and returned back there). This income projection also assumes all funds are deployed all at once, you can always deploy it in a staggered manner to gradually reach your desired passive income goal. DM me if you need more information about this strategy.