Why invest in retirement?

Question

OK, I've got a small pension roll-over that I need to handle. So, I've been doing the research on solo401k's and SDIRA's. This may sound like a ridiculous question (and maybe it's youthful naivety) but I don't really understand the logic behind RE retirement investing.

Why should I sock my money into a 401k/IRA, which would require me to reinvest all of my cashflow into it, when I can invest in RE now and keep my cashflow for reinvesting in real time? I understand it’s pretax and you are able to leverage your money better. What I don’t understand is investing in something I won’t benefit from for another 34 years…

Its feels like I'm choosing between investing in an income stream now (and going forward) vs. investing in an enhanced lifestyle for the last 10-20 years of my life.

Any thoughts are appreciated.

Richard W. · Answer

If your company/organization provides matching funds, that is another advantage as well.

Jonathan K. · Answer

@Jenna Stonecipher  I'm guessing you're a recent college grad (or you discovered the fountain of youth!). It's important that you begin saving for your retirement ASAP. Your greatest asset is time, specifically the number of years of tax-deferred compounding that a 401K/IRA can grow.

Also note that many people in our country have been "forced" into retirement well before they'd otherwise choose to because employers are focused on cutting costs: the heads that roll  are the more experienced, higher paid people who healthcare costs more. High 40s, low 50s and beyond. Live below your means, start saving for retirement and for your RE dreams. This will help you control your own destiny (retire when you want to, not when someone else kicks you out the door).

As an asset class, equities tend to produce higher long-term annualized returns than real estate. As someone pointed out earlier, the returns since hitting bottom in 2009 have been phenomenal. Vanguard tends to have several low-cost mutual fund/index fund options to gain exposures to domestic and international equities, fixed income, etc. There are also real estate funds as well.

Shaun Reilly · Answer

There are times that it might make sense to cash out but many more where it makes sense to hold on to the tax deferred benefits and not pay to take it now.

While there are exemptions to some of the fees in general you will pay the taxes on the money as well as the 10% early distribution penalty.  So you are losing a lot of that money right off the bat.

It is a cost benefit analysis.  If you have something you can use the money with and you feel it is worth the taxes and penalties to access the money then you can do it, if you don't have something like that then keep it in a retirement account.  If you don't have something to use it for right now I'd say keep it in SOME type of IRA (even just a bank CD for now) to avoid the penalties until you have that opportunity, or you decide to go the Self Directed route and choose the best custodian (SDIRAs will have much higher fees so until you are sure that is what you want to do keep it traditional).

One thing I will say is that if you do go the SDIRA route I am not a big fan of holding rentals in it.  Lots of hassles since you are not supposed to do ANYTHING with it, including writing a check to pay for someone else doing work on it and other such benign things, and rentals have lots of tax advantages anyway.  If you have enough to do a rehab that can be pretty lucrative but if you do a lot of them you will be subject to things like UBIT (Without going into detail that is a tax on your tax advantage account because you are running a business out of it).

Best thing I have found is to do private lending out of it.  Find another investor you like and trust and lend them money for their projects at a rate that gives you a good profit and also is attractive for them.  If your funds are small right now you might have to 2nd's on things that might cover the down payment on a hard money or small commercial loan that will be in 1st position.  In this case you really want to vet out the person, but can be a way to grow the nest egg fairly fast.

Troy Fisher · Answer

Well, firstly you can spend your IRA funds prior to retirement, albeit, early withdrawals come with a (depending upon you tax situation) hefty 10% fee.  But there are a lot of exemptions:

http://www.irs.gov/Retirement-Plans/Plan-Participa...

I think a lot of people invest with their IRA's because it provides the comfort of mind of the future, there's less tax liability, and in most cases your IRA is going to be a little better protected from personal liability litigation.  Another reason that people invest with their IRA's is they have years of 401k plans to roll-over and it tends to be the largest asset that they own, or one of the most liquid.  But if you are just putting 5k/yr into an IRA it's going to take awhile to be able to invest quickly.  Better off to go with a more complicated Tax Entity.

Chris Masons · Answer

Hi Jenna,

Think of what these investment vehicles are intended for  "retirement" to give you security and cash flow when you are unable to work.

all these vehicles are designed to help you save as much as you can in a t ax advantaged way so that when you do retire you will have hopefully amassed as much money as you can.

While it is important to create multiple streams of income now to give you cashflow, it is equally important to do this now at an ealy age for retirement as well - time is on your side.

Personally I hold multi family investments outside my 401k and retirement accounts. I hold securities in my retirement accounts. I haev thought about buying an investment in a SDIRA but I self manage and like to do everuything myself so I think this would create complications.

It's good IMp to be well diversified own Real Estate as well as Blue chip stocks that pay a nice dividend,, bonds and other securities that give you a nice return.

best regards,

Chris

S Cain · Answer

When you originally started your investment and retirement planning, you may have figured how much retirement income you need on a monthly basis, what return you can expect and how many years you have left to work before you retire.All these considerations were entered into a retirement formula that tells you how much money you need to save each month so your retirement income goals are met. These projections are based on average or normal rates of return, savings and inflation.

S. Cain - http://shcainfunding.com/

Ben Kevan · Answer

I took a short hiatus from investing in a company provided 401k. During this time I saved up some money to put into leveraged real estate rental properties.

Over those years, the returns on my stocks have out weighed the returns on the properties (even considering the leveraged value of the RE assets).

Keep in mind, this is 2010+ where the market has done wonders.

You also have to take into account your tax rate. If you can put a few thousand away and that drops you an entire tax bracket, then why wouldn't you? If you're in a high tax bracket, why not put money away and use it when you're in a lower tax bracket (assuming we don't all get put into a 100% tax bracket at some point haha).

My plans are pretty straight forward. Try to get enough money in a 401k where I could 'comfortably' survive on a 6% interest return (anything greater would just be rolled back into the retirement account) while utilizing a different stream of cash (i.e., rental income, or other type of cashflow) for additional travel / trips / gifting money.

I currently have 4 units (2 duplexes) but want to hit the restart button and work on a different approach (more conservative and less leveraged).

Joshua Springer · Answer

Worst case scenario...most retirement funds are protected from legal issues.  Otherwise it's really a personal choice, sometimes even a calculated one.

Depending on your tax bracket, work match, potential average rate of return you could get a decent idea mathematically which one would be a better benefit...all using historical data not fluffy projections(imo).

In most projections I'm guessing real estate wins because you wouldn't be asking this questions if you weren't confident in present/future earnings...so again it comes to personal choice vs risk (all retirement in one basket).

Jenna Stonecipher · Answer

All great responses. Thank you!

Loren Whitney · Answer

This is a controversial subject but your logic is certainly valid. In order for IRA/401k savings to make sense, you have to look at the big picture but more importanly - YOUR big picture. Since everyone has a different financial situation, there is no single "right way" to save for retirement. That being said, you have funds in a tax-deferred plan now so you'll need to do some math and long term planning to see what suits your needs best.

Aside from the good points that Troy mentioned, here are a few specific reasons to use IRA/401k funds directly.

1. Tax deferred growth (no capital gains or 1031 on cash investments)

***This is the big one. The ability to buy-sell-buy-sell and snowball the balance is the main objective.

2. Tax-free distributions (If you have Roth funds)

3. More control over taxable distributions later in life.

4. Leveraged IRA/401k investments don't restrict your personal ability to borrow.

Why invest in retirement?

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