(Seeking Perspective) Shut Off 401K Investing

Property Manager · Nashville, TN · Member since 2025 · 66 posts · 35 votes

1y

Hey Paul! Your portfolio is something that many people desire. Congrats! I cashed out a portion of my retirement funds to get into real estate. Even though there were tax implications, I think it will serve me well in the long run. That being said, a 401K match is an automatic return of 50-100%. I would have a hard time giving that up. Additionally, your retirement accounts offer some protection from potential lawsuits. Might be a good idea to keep some money in retirement accounts. Inflation will always eat away at the value of the dollar, so 10K a month won't provide you the same lifestyle in 20 years that it does right now. You're in good shape anyway you slice it! Just playing a little devils advocate.

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James Mc Ree

Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 934 votes

1y

Keep contributing to the 401k up to the limit of the match assuming the match is 25%+. Not only is it free money, but you probably can't beat that return.

Research the 55 year old 401k exemption. You can withdraw from your 401k starting in the year you turn 55 if you qualify.

I am following a plan similar to yours. I went full time into real estate in 2023. So far, so good, but it is early.

I recommend modeling your family budget for a year and conservstively project project your income, investment growth and expenses conservatively out to at least 80 years old. Establish a wide safety buffer so you aren't broke at 80. This is your error margin. Then, actively track and adjust as need. The model won't be perfect, but should be a very helpful decision maker for when you can safely leave your W2 and establish your budget going forward.

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Max GallagherBusiness Member

Financial Advisor, CFP · Member since 2018 · 18 posts · 27 votes

1y

Paul - Firstly, congratulations on accumulating a strong (and diversified) financial foundation. You're at the net worth level now where detailed investment and tax analysis can have large impacts to your overall ability to retire and spend.

A few quick notes before I go into more detail on how I approach situations like this:

- As mentioned in other replies, a 401(k) match should (almost) always be taken advantage of. It's a guaranteed rate of return above and beyond anything you can get in the market or real estate.

- The 4% rule is a helpful benchmark but leaves a LOT to be desired in terms of projecting retirement income from a liquid portfolio. It will depend on your goals (leave a large inheritance versus spending your money over your lifetime) but your portfolio likely will be generating average returns in the 6-8% range while retired and if you're only withdrawing 4%, even after factoring in inflation you're really not spending down your nest egg. You can likely withdrawal more than 4% without having any concerns of running out of money. Detailed financial planning analysis can hone in on the actual number with a high degree of accuracy.

One of the things I love most about this community is that people are not afraid to challenge the status quo (ie. the smart thing to do is contribute to your 401k). While I certainly think that reducing retirement account contributions and investing in real estate could be a great option for an early retirement, it requires honest conversations and detailed projections around your current portfolio's performance and expected rate of return on future acquisitions. I say this because every investment is an opportunity cost, and if you're going to take money out of stocks (whether in a brokerage account or 401k) that could be earning 8-10%, you should have confidence that your acquisitions are going to perform better to account for the additional risk.

Performing "better" should also be analyzed on an after-tax basis. Understanding the tax benefits of pre-tax contributions, cost recovery, real estate professional status, legacy goals, etc are all part of the equation and should be considered.

I know I didn't give you a direct answer to your question but the reality is that we're just at the tip of the iceberg. Anybody who says this is a good or bad idea without any more information isn't doing you any good. Let me know if you'd like to chat further about this and put some projections together.

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Josh St LaurentBusiness Member

Financial Advisor · Stateline, NV · Member since 2023 · 131 posts · 122 votes

1y

@Paul Novak you've already gotten some solid advice in this thread so I'll keep it short and sweet.

Get your 401k match at a minimum. Think of it this way, you put in $100 and so does your company. 100% return (You doubled your money). Don't pass up free money.

I admire your two-pronged approach between RE and traditional stock market investments. Why not marry the two? Look into self-directed IRAs, this allows you to buy property with your IRAs without taking money out.

Leverage the equity in your properties to buy more RE. The 558k in equity could be your down payment and renovation budget for your next property or properties.

Use tax strategies on your existing property to offset your W2 income and keep more of your paycheck now.

I don't think this needs to be an either-or approach. You can invest in RE and fund Roth IRAs and 401ks. Diversification is also good in case the stock or RE market goes down.

That's the 30,000 foot view, but if we can answer any more questions, just ask. There's a wealth of knowledge in this thread and on BP in general!

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Jose Remor

Rental Property Investor · Greenville, SC · Member since 2024 · 15 posts · 8 votes

1y

Hi Paul,

I'm in a very similar position as you and decided to shutdown 401k a year ago. After couple more books and learning I restarted my investments to the limit of my W-2 employer match. I see others suggested that in some other answers as well and I believe it's a good strategy.

Check your options to use 401k self managed to invest in real estate. Your results stays locked in the 401k but worth it.

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Jonathan Bock

Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes

1y

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.

Good for you Paul! You're a business owner now nothing wrong with that.

You may have some wonderful years for Roth conversions if you do end up going full time in your RE biz.

Best of luck as you focus and grow!

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Amir Khan

Investor · Coppell, TX · Member since 2018 · 311 posts · 166 votes

1y

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.

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Samuel RichardsonPro Member

Member since 2024 · 11 posts · 12 votes

1y

Some great advice so far from others. Only thing I would want to put on your radar is maybe increasing your taxable account balance as well. Maybe you divert a little on what you were going to allocate to real estate to that. That will help you diversify and also give you optionality when head winds come. You would essentially then have 3 buckets. Tax Deferred, Taxable and Real Estate. You can use the tax code to your advantage and pull different levers when you need to. I think this will give you additional freedom and safety potentially.

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Paul Novak

OP

Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes

1y

Quote from @Andrew Kubik:

Hey Paul! Your portfolio is something that many people desire. Congrats! I cashed out a portion of my retirement funds to get into real estate. Even though there were tax implications, I think it will serve me well in the long run. That being said, a 401K match is an automatic return of 50-100%. I would have a hard time giving that up. Additionally, your retirement accounts offer some protection from potential lawsuits. Might be a good idea to keep some money in retirement accounts. Inflation will always eat away at the value of the dollar, so 10K a month won't provide you the same lifestyle in 20 years that it does right now. You're in good shape anyway you slice it! Just playing a little devils advocate.

Andrew, thanks for reaching out and providing your perspective. I agree with your comment about inflation. While I am not banking on it I do think with inflation will come rent increases that will help hedge against it. For example one property I purchased 4 years ago was a two family townhouse. I had rents set at $1,000 per unit and they are now up to $1,275 and $1,300. Now I think expecting that type of rent growth to continue is foolish as the market went through some crazy times over the past 4 years that isn't likely to continue but I do hope to continue to get some growth over time.

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Paul Novak

OP

Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes

1y

Quote from @James Mc Ree:

Keep contributing to the 401k up to the limit of the match assuming the match is 25%+. Not only is it free money, but you probably can't beat that return.

Research the 55 year old 401k exemption. You can withdraw from your 401k starting in the year you turn 55 if you qualify.

I am following a plan similar to yours. I went full time into real estate in 2023. So far, so good, but it is early.

I recommend modeling your family budget for a year and conservstively project project your income, investment growth and expenses conservatively out to at least 80 years old. Establish a wide safety buffer so you aren't broke at 80. This is your error margin. Then, actively track and adjust as need. The model won't be perfect, but should be a very helpful decision maker for when you can safely leave your W2 and establish your budget going forward.

James, Thanks for sharing the 55 year old 401K exemption. I will have to check that out as that isn't something I know much about. As for our current expenses we are comfortable at $8,000 per month. The one wild card is what healthcare will cost us in retirement, especially if we retire early. For that reason I keep maxing out my HSA. If we can get our rental portfolio to cash flow $11K a month I feel like that is a good enough buffer even if we account for inflation. One thing I plan to offset my healthcare costs with is paying off my primary residence. That accounts for $940 per month of my $8,000 expenses.

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Todd Goedeke

Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes

1y

@Paul Novak to give you another perspective, more information is needed.
Can either you or your wife take an inservice distribution from your 401k?

Are you aware that in certain instances you can use a cost segregation deduction to offset W-2 income or income attributed from a retirement plan distribution?

You can increase the cash flow of your RE portfolio by triple net leasing a 2 family duplex ( new construction)and earning 15%+ cash on cash.

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

1y

I want the control of being able to use money now while I am in great physical shape to do many activities.

You have a healthy balance in your retirement account plans and they will continue to grow until you reach 59.5

Investing in real estate instead of a retirement account plan gives you the ability to use money now without limits and without a fear of a penalty while you are in great shape to do more activities than you will be able to when you are in your 60's.

I 100% support your decision.

You may also want to look into 72T for an early withdrawal without a penalty.

Best of luck

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Jason MalabuteBusiness Member

Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 898 votes

1y

Make sure you’re at least getting the full 401k match since that’s essentially free money. You can also look into self-directed IRAs if you want to combine real estate with retirement investing. On top of that, use the equity you already have and smart tax strategies to keep more cash in your pocket. It doesn’t need to be a choice between real estate and the stock market—you can diversify and do both.

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Jeremy Horton

Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes

1y

This is an interesting idea - the whole more usable money now deal compared to money later

I wonder if it would make sense to continue to contribute the max to your 401k (not sure what your income is, but this saves you thousands on taxes) and get the free company match. The returns here are going to be hard to beat.

Now when you quit or retire - can you roll your 401k over to a SDIRA then invest in Real estate within the IRA? Hmmmm - seems like you lose some of the tax advantages of RE - depreciation, mortgage interest deductions etc. Seems odd

Have you ran a thorough analysis on your "cashflow"? Is the cashflow profit, after PITI, after budgeting for CapEx, vacancy, repairs/maintenance? Do the properties have any deferred maintenance?

Do you want to own properties in retirement? It's far from passive imo - BUT this can be a good thing too. If you own several and you or your spouse actively participates and is a REP - you can take advantage of major tax deductions (so you can keep more of that income)

Then you have dividend index funds as another choice - where you can make 4-5%+ with zero work.

I don't know - there's a lot of options out there. I may take a really good look at everything before you make a decision and stop contributing to that 401k.

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(Seeking Perspective) Shut Off 401K Investing

(Seeking Perspective) Shut Off 401K Investing

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