Will my traditional retirement accounts be enough, and can real estate investing on the side speed that up?
Oct 28, 2024Did you know that the 401(k) wasn’t invented until the late 1970s? It was created as companies were phasing out defined benefit plans and set pensions, turning more to employee-funded plans that offered tax benefits to people saving for retirement. When pensions started going the way of upside down Jello fruit mold, employers started using the 401(k)s as a way to incentivize people to stay with their company by promising to match a percentage of the employee’s own retirement contributions. Golden watches gave way to golden handcuffs, as employees tried to save their way to funding their own retirement. That first generation of workers who came up through the launch of the 401(k) is just now retiring. So, we really don’t have a long history at all of the 401(k) or understanding if they work for the masses.
Individual retirement accounts (IRAs) share a similar history. They were launched in the 1970s as a tax-preferred savings plan for people without pensions. Given the recency of both IRAs and 401(k) accounts, it is astounding how they symbolize the “traditional” gold standard in retirement planning. In fact, these accounts are in their infancy in terms of funding actual retirements.
Today, the average retirement age in the U.S. is between 62 and 66, with life expectancy averaging approximately 74.8 years for men and 80.2 years for women. That means the average American man would need to prepare for approximately 8-12 years of retirement, and the average American woman would need to prepare for approximately 14-18 years of retirement.
Many of us have, tragically, known someone who worked well past age 66 and passed away while still working full-time. The golden age of living off your pension, driving around in an RV with the grandkids, and cruising around the world as a fit and active retiree is difficult for many people to imagine if their retirement accounts simply are not enough to live off the interest plus Social Security. Add the astounding speed with which the cost of living is increasing in comparison to salaries, and we have a situation where people’s savings simply can’t keep pace with what they need to retire comfortably with time left to enjoy it.
For many executive women, we came of age in our careers in an era when contributing to a 401(k), Roth IRA, and/or traditional IRA was preached as the one and only “reliable” way to prepare for retirement. I once went to a retirement party where the person’s words of wisdom to those gathered was a little rhyme he heard early on: “Put as much as can be in your TSP” (the government’s retirement savings plan). That person retired, had his cake in the office, had a massive shindig at a restaurant with speeches, colleagues, a lovely dinner with colleagues and friends . . . and then returned to full-time work less than a year later. The reality is that retirement just isn’t as attainable as we have been led to believe.
Traditional retirement accounts and good old-fashioned savings can’t be the only lifeboat for retirement. Real estate investing can supplement and diversify traditional retirement savings. Just like holding different types of stocks, bonds, and mutual funds helps diversify your investments, real estate can help diversify your portfolio by:
- becoming another stream of income in addition to your job;
- growing money based on a market not directly tied to the stock market or an individual company; and
- allowing you to collect rent from tenants (if doing long-term or short-term rentals) who pay down the debt for you while the property appreciates, as real estate has historically done as an asset class over time.
This last point is perhaps the most important. For stocks, bonds, and mutual funds, you make money by those assets appreciating over time in the market. For real estate, in contrast, you make money not only from the property appreciating over time, but also by having another person pay you every single month that you hold the asset. This, in combination with the ability to fund real estate through a loan rather than your own money, means that you are truly using someone else’s money (the tenant’s) to buy the asset, giving you more and more equity in that asset while the value of the property appreciates. No one is going to pay you every month that you hold a stock or bond. That’s why real estate is one of the fastest and most common ways to snowball wealth. Not all assets appreciate, which is why not all real estate builds wealth. But the basic concept is that people leverage debt to buy assets that someone else then pays them to use, and the asset is held until it has appreciated above the purchase price.
Real estate is not risk-free. Nor is investing in the stock market. Nor is owning a business. Nor is putting money under your mattress. But real estate can become an anchor in a diversified strategy that allows you to build wealth, not be so reliant on a sole source of income, and prepare for a full retirement you can actually experience.
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