A different way to look at "retirement" and how to get there

18 Replies

I wanted to look at this topic a little differently then previous posters.  It seems that everyone pushes the 401k save for your "old" self when you hit 62 mindset. This is assuming you want to "work" until you are 62. In my discussions with my financial adviser we worked out the number of needing 2.5 million when I retire to have a monthly income of $5,000. They are ballpark figures but I feel they are critical in this discussion.

If I am working until 62 to retire with 5k a month..........when each property I currently own generates a couple hundred a month in cash flow........isn't the goal then to hit 5k a month in income?  Forget the 401k, employer match, etc. The goal is consistent income each month to "retire". Why not get there early by breaking free of the over marketed and over pushed 401k? I think the key is STRICT money management.

I recently cut my 401k contribution in half so I could save the other 50% of my contribution to buy rentals. The price to rent ratio really favors investors in my market so $250/door cash flow is fairly easy to achieve if you know where/how to invest. I have enough in my 401k if I cashed it out that I could buy 2 properties in cash. Each one would yield $500/month cash flow with no debt service....I would be 20% of the way to my "retirement" monthly income goal. I work and save for 10-15 more years continually saving and investing in properties that by the time I am 40ish (27 now) I have exceed the 5k a month income and can "retire." I feel that active cash flow investing would get individuals to their monthly income goals much quicker then 401k type investing. Has anyone committed fully and done this?  Thoughts?

We just started "recontributing" a larger amount to my husband TSP Roth from 200 to about $1000 a month. To be brutally honest I am only doing so because I need reserve amounts to continue aggressively investing in real estate. I might as well have these accounts making a good return. I would not give up a free employer match BUT we both don't get one. I don't qualify till 1 year of employment.

With a degree in finance and a MBA I understand the important of ROTH accounts. That being said, Iike everything in life you need to understand the tools and apply them as best for you! Right now our houses are returning 25 - 42%  (before expensives after mortgage/taxes/insurance) returns depending on if you include principle pay down. That being said our retirement accounts are not making that much. A lot of the time retirement accounts are pushed because if not people won't save. We save 35-50% of our income and have at least 25% equity in our portfolio. So for us, self managing our future is serving us well!

For us retirement is our houses! Yes we put money into the market because we need reserves and its stupid to not stretch every penny possible. On the other hand, if we divided in the beginning we wouldn't have conquered. So look at your strategy. If you are are planning for long term, that is the KEY. If you are squandering it, with the thought that you will invest but never do! than you need to get back with the normal plan! 

The key is to be successful, ethical and LEGAL :)

@Eddie Werner  So you only plan to draw 2.5% per year from your $2.5M nest egg? First of all I think Required minimum withdrawals are more than that. Second whats the plan? Invest it all in short term T bills? (and even those rates will be higher in the future). So to start with the comparison is not fair. You could easily draw 5% and be okay.  Secondly 401K is one of the few tax write-offs for higher income individuals. So just for that its worth it to me. Then there is company match in many cases.

Not saying rentals are a bad retirement plan. They surely are. But 401K's have their place in it also. A good retirement will have several independent sources of income. IRA's, Social Security, Rental Income all play a role.

@Eddie Werner  

There are a lot of different takes on this topic, with varying application to specific situations.  A person's age, income, tax bracket and goals all fall into play and there is no one set answer.

It seems from this thread that we are comparing a conventional market based 401k to investing in real estate, and that is like comparing a Yugo to a Porsche.

If you are stuck in an employer plan, then you do not have much in the way of investment options. If however, you already have significant tax deferred savings in a former employer 401k or an IRA, then you can have the best of both worlds - a tax sheltered retirement plan that can invest in real estate. That would be a self directed IRA or Solo 401k, perhaps with a Roth focus.

For those who are actively investing in real estate - flipping, wholesaling, etc - and creating earned income as a result, there can be benefits to establishing a self directed Solo 401k that allows you to take the earned income from those activities and shelter some into a plan to reduce your tax profile.  This does not apply to passive rental earnings, however.

So, lots of ways to look at these topics, and lots of ways where a careful planning of investment and tax strategies can put more money in your pocket.

@Brian Eastman  

I was wondering if you could comment on an exercise I recently did in excel. I haven't fixed the Roth issue that someone else pointed out, yet, but I think that the results are still very interesting. You seem to know a lot about the use of the solo 401k/SD IRA.

Can Someone Check My Math

Dont forget you can also use your IRA to buy rental properties at an arm lengths transaction deferring gains for years it is a a little complicated but not too bad

Originally posted by @Eddie Werner :

I recently cut my 401k contribution in half so I could save the other 50% of my contribution to buy rentals. The price to rent ratio really favors investors in my market so $250/door cash flow is fairly easy to achieve if you know where/how to invest. I have enough in my 401k if I cashed it out that I could buy 2 properties in cash. Each one would yield $500/month cash flow with no debt service....I would be 20% of the way to my "retirement" monthly income goal. I work and save for 10-15 more years continually saving and investing in properties that by the time I am 40ish (27 now) I have exceed the 5k a month income and can "retire." I feel that active cash flow investing would get individuals to their monthly income goals much quicker then 401k type investing. Has anyone committed fully and done this?  Thoughts?

I don't think cashing out and buying properties is going to be a good strategy due to the tax hit you will take - your highest income bracket(or could easily bump up to the next one) + state taxes + a 10% penalty.  However it can be useful for a couple of reasons.  First it is a good source of reserves for qualifying for loans.  The other is 50K(if your balance is at least 100K) can be used as a loan itself.  

Do you own your residence?  Would you consider converting it to a rental?  If you are willing to move every couple years, "house hacking" can be a great way to get started.

@Elizabeth Colegrove

My market averages a 30% return on rentals as well so I definitely see the upside to continuing my acquisitions and deploying more capital to ramp up.  My plan is more long term but not as long term as 401k inventors will be waiting to retire. 

Like you mentioned, the key is strict money management.  When I get my paycheck a certain percentage goes IMMEDIATELY into an account for buying my next rental.  If someone doesn't have the self control and financial understanding to do this then they probably should keep using their 401k (or other autopilot-type retirement plan) as a retirement method.  I think for those who understand the end goal is monthly cash flow you can get there a lot quicker and "retire" well before 62.  Thanks for your comment.

@Anish Tolia  

I have a different financial belief of how to get to retirement and what age retirement should happen.  People view 401k type plans as the bedrock of retirement investing that stipulates they need to work 30-40 years and then they can retire.  I think it is foolish that the majority of citizens just buy into this plan and accept they will have to work until 62.  It is a mindset change I am writing about that understanding other ways to accomplish monthly income goals that will give anyone more freedom to do what they want with their time.

For me personally I don't think I will see anything from Social Security so when I see that taken out of my paycheck I just view it as funding my parents and grandparents SS check.  There has also been a lot of talk about the government having access to individual's retirement savings in the past few weeks.  This is something I will be looking into more but the more I look at the local and national economy it makes more sense for me to break free of this traditional mindset and focus on achieving the goal of monthly cash flow.

Real estate is intimidating to a lot of people and I think BP is really starting to turn that around.  If someone isn't comfortable with this type of investing or doesn't understand it then they should stick with more traditional methods.  The more I run the numbers and analyze my time frame RE is making more and more sense as the end goal.

I think it is a big mistake not to invest in a 401K or TSP for a maximum employer match. Most employer matches are an immediate 100% return on your investment. You can then diversify any additional savings into real estate investment funds.

@Eddie Werner  Dont get me wrong. I like rentals. I own a bunch of them. But I wouldnt go stopping or cashing out my 401K now to buy more. In fact I try to keep any asset class limited to about 20% of net worth. Real Estate is not risk free. Neither are stocks. I still think a diversified portfolio maximizes your probability of meeting the goal. As for when to retire? Depends on what that word means to you. I could retire today if all I wanted to do was live in a low cost area with a fully paid off home and have a modest life. If I want total freedom to do anything I want, then not yet. But I dont live life waiting to retire. If you hate your job that much you should get another one. Life is being lived NOW and always will.

I'm all in on Real Estate and had the ability to be semi-retired at age 32 where my passive income exceeded my fixed expenses.  I don't understand why so many people continue the rat race and work 40 hour weeks for 40 years to hopefully be able to retire and barely make ends meet.  There is a better way, People.

We do both.  My wife has a 401K and contributes to it at the company match level.  We are using it as a back up source of income in the future.  Personally I don't believe the concept of a total number 20-40 years can possibly predict what you will need. 

We plan to make cashflow from rentals to replace our paychecks +30%, then we can safely retire.

@Brian Eastman

@Anish Tolia

I am referring to a general retirement account where someone just contributes a percentage to the fund and doesn't really monitor or care about it because they have bought into the "retire at 62 mindset" and if they put so much in they don't have to worry about retirement  Both of you seem to be financially educated so you take more control of your options and do what is right for you personally.  There is a severe lack of financial guidance when it comes to retirement funds.  It's on the news fairly often and always amazes me how many people just assume this type of account will take care of them later in life.

I believe if individuals understand the end goal of passive income they can earn greater returns and stability by actively investing in cash flowing properties.  This does takes a great deal of education and commitment.  I am curious to find if anyone is doing this like @Rocky V. and what other people think about the topic.

@Tom Giles

I have never heard of anyone matching 100%.....that is quite impressive.  If that a certain industry or just your company?

@Jesse T.

The tax hit is really what has been preventing me from doing this.  We do own our primary residence.  It will eventually be a rental.  Ideally, when I can get the cash flow to be a decent amount from paying down the debt it will make sense to rent it and have that cover most of our mortgage on the next house.

@Eddie Werner  

My present TSP match is dollar for dollar up to 5% of my base pay. My prior private sector 401K match was dollar for dollar up to 6% of my base pay. Both equates to a an immediate 100% return on my investment. Yes I agree that many plans offer a smaller match as low as 50% match for the employee investment, up to 4-6% of base pay. That is still an immediate 50% return on investment, not too shabby. If the employer does not offer a match then I would stay away from their investment plan and I would not invest any more in the employer plan than the maximum employer match unless it is a fantastic plan.

While I continue to fund IRA's and 401K's real estate is my primary focus for retirement as well. First I plan on having enough properties for them to pay for all my children to go to college and then I plan on them funding most of my retirement. I am also a believer that I will never meet my retirement goals by investing in the markets alone. I want to have more of a hand in controlling my own destiny, for me real estate is that hand.

@Jeff G.

I agree, having control is critical.  Instead of dumping money into retirement accounts that fuel wall street people could be mastering ways to create cash flow.  I think Grant Cardone said it best during the BP podcast 108....."master one vehicle and go all in.  No technology or new industry will ever make real estate obsolete."

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