The False Promise of a 401K!

For most, the retirement strategy which relies on the pretax savings and the compound interest you get from your traditional 401K will fall short as a sole source for retirement income. Further investments are required for most to retire while living the lifestyle they have grown accustomed to. And as we have seen in the past, the stock market doesn't always preform like you want it to. That makes things even tougher as you get to retirement age.

As we age, for most of us, we see our incomes peak from 45 to 55. For top earners their income will tend to rise through their late 50’s. As you age your lifestyle tends to improve with your income. That luxury vacation to Italy, the car that impresses, the more frequent trips with family and friends, the vacation home, etc. tend to increase in your late 40’s, on into your late 60’s. You definitely want that fun to continue well into your retirement years, and it’s always disappointing when it can’t, due to a shortfall in savings. The point here is to create a life plan, an investment strategy, that allows you to transition in your late 50’s or early 60's to the lifestyle you have become accustom to and want to continue living. See this Forbes report on Income Peaking for context for the above.

So what is the false promise I’m referring to, and how do I get to critical mass which will support the lifestyle I want to live as long as I want to live it? You will need to save and invest beyond a 401K to achieve this goal. Now, in my opinion, you should invest in a 401K early in your career and you should max it out, especially if you have a company that provides a matching option. That’s free money. This is a critical component of your strategy toward independence. The point is that for the majority of us who don’t make it into the board room in our career, the income disparity between those executives in the boardroom and those just outside the door, is massive and the gap is only getting larger. You have to make every dollar you have to invest count. Your base salary, bonuses, and 401K investments, will not be enough to get you to where you want to be. My father always said, it’s not your first job that makes you wealthy, it’s your second. What he meant is, create passive income or start a small business as two examples which will add to your wealth beyond your day job and sustain you into your years of “Freedom”. Again, if you have a good day job, starting your own business is tough and probably to risky for most of us in Corporate America once you get started. You don't have the time. So the alternative is to create passive income beyond your investments in Stocks.

One really good option is Income Property Investing or Real Estate! Real Estate provides you with diversification, passive income, it creates generational wealth, and is part of all high net worth investment strategies that will get you to critical mass and beyond.

Let’s provide a little more context for the reasons why the wealthy invest in Real Estate and how it’s significantly different as an investment class than stocks.

Now, I’m not talking about your home or your vacation home. I’m talking about income properties that throw off cash monthly as passive income that the owner receives. I don’t view a home you live in that you don’t intend to sell, or a vacation properly you don’t rent out, as an asset. I see them as a monthly expense you pay the bank to live in your home, and a vacation home helps to improve your quality of life. So in terms of an investment, your primary home and your vacation home are more like liabilities, and they detract from creating wealth beyond your income from your job and your investments in stocks. Yes they are assets that have value and you can sell them, but why do you want to work your hole career to sell them or move to afford retirement? Live the lifestyle you want.

Income Property investing has so many benefits over Stocks. Here are 5 high level reasons that I will highlight:

1). You have an Asset backing your money which will never go to $0 and has a built in floor which is the value of the land and or the buildings. Stocks can go to $0, which I have experienced.

2). Real Estate works off a leveraged return which means you are making money on other people's money. Your return is based on the income yes but you also make money on the appreciation of the property's value.

3). You have the tax benefit of depreciation.

4). You can insure the property which is another way you can protect your asset.

5). You can form a corporation to further protect you, your investments and to transfer that wealth in a tax advantaged way to your children when you're ready.

If you truly want to achieve your goals look to create passive income as part of your investment strategy! The wealthy know this. You need a strategy beyond the false promise of a 401K as the source of income that will take care of you in retirement. You will need to think well beyond a 401k to achieve critical mass. Income property investing is one of those great options you can work on while still at your day job and a great way to achieve your goals.

If you like what you read, you now understand the need you have to invest well beyond a 401K, then it’s time to include Real Estate in your investment strategy. Take the next step and read this blog on “Why and How to get started as a Real Estate Investor!”