Still Believe Your 401k is the Main Path For Wealthy Retirement? Think Again.

Let us share a little secret. Your 401K/IRA is virtually guaranteed to let you down when it comes to the income on which you’re relying for retirement. You’ve been led down a path where you’ve read that the 401k is enough. Ironically, these so-called ‘qualified plans’ are in reality very well designed future streams of income — for the Treasury Department — not you. This is especially true, often painfully so, for Boomers. It’s a classic bait ‘n switch play.

The taxpayer  is attracted to the bait of some cheap, but helpful (not much) tax savings — now. Let’s say you’re contributing $10,000 a year to your company’s 401k qualified plan. You’re pleased with the 20-30% or so in tax savings each year. (Depending upon your marginal rate and the state in which you reside.) We’ll say it’s the top of the range, 30%, or $3,000. This means from age 35 when you began, until 65 when you retired to make it work. During that 30 year period you saved (rounded up), $100,000 in taxes. If you made about 7.33% average annual return, you won’t, but we’ll say you did, your balance at 65 would be $1 million. Again you won’t do that, but we’ll say you did.

For as long as I can remember, Wall Street types have been telling us to expect to live on a yield of around 4% of what we have at retirement. One wonders what they’re telling those who retired recently? They’re not making 4%. In fact, given that the yield on the 30 year bond is now at 3.04%, there is much disappointment out there. Imagine spending 30 years diligently putting in your $10,000, for the truly enviable privilege of making just over $30,000 a year upon retiring — before taxes that is. Oops. Wasn’t that $100,000 in tax savings over the last 30 years worth it?! Gimme a break.

Before you begin thinkin’ you’re the exception, and you may be, here’s what the average 58 year old American man has in his 401k: Less than $70,000!!!

1 in 4 Americans are worried that they won’t have enough to retire on. That’s a significant number but it should be higher.  Most should be worried about their retirement if they are relying entirely on their 401k.

Here’s another example.  Let’s say you have been investing in your 401k(s) since your late 20s. So far, a person in this scenario amassed around $385,000 in total 401k funds. If they were to take half out this year and half next month, the net after taxes/penalty(s) would probably be in the neighborhood of about $200,000.  Experience says it could be less, but unlikely to be much more. Add to that their savings in excess of cash reserves, and maybe some home equity, and they will have gathered roughly $280-295k.

Yes, the tax/penalty hit was brutal.  But facing this now is still favorable to the disappoint you would face at retirement!

Say you bought four modest income producing properties in a healthy county. You locked in historically low interest rates on all of them, around 5% or even less.  Remember, the interest rate is at historic lows right now. Long before you retired, you’d combined the properties’ cash flow with disposable after tax income from your job.

20 years pass and you’re 65 — ready to retire

It took you about 15 years to pay them off. You could have done it sooner, but you were pretty conservative with your income. In the immediate five years before retiring, the cash flow from properties now debt free, accumulated at approximately $75,000 annually. Much of that was tax sheltered. In other words, in the immediate five years prior to retiring, you stockpiled $250-300k in cash- after taxes.

Oh, and that income? It was projected to be the same in year 5, 10, 15, 20, and beyond as it was the day you acquired the units. The NOI is the same $75,000 it was 20 years earlier. They’re free and clear of debt, so your net worth in these properties is a cool million bucks. We also assumed they’d never go up in value.

Let’s Review

In order to equal that in your 401k, you’d first have to get your invested cash in the stock market up to $1 million or so. You can’t afford many, if any losing years. Good luck with that!  You would also have to earn 7.5% — year in and year out. That is not realistic.

OR . . .

You gather your available capital, follow the above real estate investment scenario, and make retirement income of $75,000 a year, while sporting $1 million in equity. If you think the projection of flat rents for two decades along with no appreciation in value for the same 20 years isn’t conservative enough, I don’t know what else to say. In no 20 year period in our lifetimes has real estate values failed to go up, net. Nor have rents been anything but higher over the same stretch.

Either way, the person who chooses to invest in income producing real estate investments is almost guaranteed to retire with a relatively highly secure income — with a million dollar equity available if life makes it necessary.

Don’t make the mistake of thinking your 401k is the only and best option for you.  Diversify your retirement strategy with real estate investments.  At Invest Now, we are available to sit down with you and discuss your long term goals and the path you need to take to get there.  We can offer you guidance on every step of investing in a cash flow properties, from financing to rehabbing to property management.  By making smart decisions before retirement age, you will be in a position to retire early and enjoy your retirement doing the things you really love- whether that is traveling the world or sailing with the grandkids.