When was the last time you took an in-depth look at your current retirement strategy? Are you confident that the plan you have in place is going to come through in the end? If you answered yes, let me be the first to congratulate you. However, I am willing to bet there is a larger contingent that is less confident in their retirement strategy. If you are the latter, it’s time you stopped leaving your retirement up to chance. Let me explain.
It’s a sad truth, but a reality nonetheless: the majority of Americans are nowhere near being ready to retire comfortably and on their own terms. According to a report conducted by the Economic Policy Institute (EPI) last year, an estimated 41% of households aged 55-64 have no retirement savings at all. What’s even scarier is that a great deal of those who have implemented their own retirement strategy are only slightly better off. According to the same EPI report, the average household aged 56-61 has managed to scrimp together somewhere in the neighborhood of $163,577 specifically designated for retirement. And while that number may sound like a lot to the untrained ear, it’s far from a comfortable amount to retire on. In fact, over the span of a 20-year retirement, $163,577 amounts to just $8,178 a year, or $681 a month, of income. Does that sound like an amount you would be comfortable living off of in your golden years? Probably not.
The $163,577 most baby boomers have managed to save for retirement is nowhere near the amount they will need to retire comfortably. Data presented by the latest Merrill Lynch Finances in Retirement Survey suggests as much: the average cost of retirement has risen to $738,400. That equates to roughly $36,920 a year, or about $3,076 a month. And remember, that’s just an average — those that have grown accustom to the finer things in life will need more to maintain their current lifestyle.
It’s worth noting, however, that many Americans may not be able to get to the number identified by the EPI report with their 401(k) alone. According to Fidelity’s most recent retirement analysis, the average American’s 401(k) rests comfortably around $92,500. What’s more, that number represents an all-time high, or $4,300 more than last year. However, despite being higher than it has ever been, most 401(k) retirement plans aren’t going to be able to supplement their holder’s golden years sufficiently. As I said before, the average cost of retirement has risen to $738,400, so most retirement accounts have a long way to go before their owner’s can feel comfortable about retiring.
Despite the average 401(k) being higher than it has ever been before, you could very easily argue that average isn’t good enough. In fact, most retirement plans won’t be sufficient enough to support retirees in their golden years. That said, it’s time for most Americans to reevaluate their retirement strategy. It’s time to face reality: most American’s won’t be able to retire on their own terms with nothing more than a 401(k). Instead, more people need to start looking for a different retirement strategy.
I am convinced that the best retirement strategy is real estate. Nothing, as far as I am concerned, can supplement your golden years quite like a well-devised real estate portfolio. A properly assembled rental portfolio can produce significant cash flow well into retirement, and passively might I add. That’s right, provided you put in the work up front, there is no reason you can’t sit back and collect rent checks when you are retired. If that’s not an encouraging retirement strategy, I don’t know what is.
What’s more, it’s entirely possible to self-direct your existing retirement funds into real estate. And while not all retirement funds can be self-directed (check with your custodian to see if yours is), those that can may be used to purchase real estate. Now, there are a few rules and regulations to regard. For instance, you can’t buy property to live in yourself, nor can you buy it to rent out to linear family members. However, you can buy property to rent out to almost anyone else who is qualified.
The powers that be have essentially made it possible for people that have been putting money into select retirement accounts their entire lives to invest their money how they see fit, and real estate is one of those options. Just know that there are a lot of rules and regulations that apply, so check with a professional before you decide to make the leap yourself. Most notably, any profits you make from self-directing your retirement account must be returned to the same account from which it was derived.
Let’s assume you decide to self-direct your retirement account: How will self-directing your retirement funds into rental properties compare to a traditional retirement strategy?
As I said before, the average household aged 56-61 has saved about $163,577 for retirement. And, again, over the course of a 20-year retirement, that number equates to about $681 a month. Now, consider the average amount apartments are renting for across the country. According to Yardi Matrix’s monthly survey of 121 markets, “apartment rents averaged a $3 gain up to $1,314 month-to-month across the country.” That means a single rental property could replace the amount the average 401(k) will supply retirees every month, and then some.
Of course, you need to take into account the mortgage you will take on. In acquiring a property to rent out, you assume responsibility for the mortgage, so it’s not like you aren’t without any debt obligations of your own. However, it’s entirely possible to pay down the mortgage with the rent you receive from tenants. That’s right, you can build equity by using other people’s money. And that’s not all. When the mortgage is eventually paid off, you will be able to return even more money to your retirement account every month.
Perhaps even more importantly, you don’t have to stop at just one property. I maintain that a well-devised rental portfolio full of cash flowing properties is a great retirement strategy. And to see to it that you aren’t bogged down by becoming a landlord, I highly recommend enlisting the services of a property management company. That way, you can consistently add more properties to your portfolio without increasing your work load. And while you will incur a small fee for their services, I maintain that it’s well worth it to be able to increase your property holdings.
With a good property manager on your side, it’s conceivable that you will be able to sit back and collect rent checks without doing a thing. They will take care of everything from routine maintenance to finding tenants. And therein lies the secret to a great retirement strategy: making money passively. That way, your golden years won’t depend on a finite amount of savings that can dry up in a moment’s notice, but rather cash flowing properties with limitless income potential. Think about what you could do with a whole portfolio of cash flowing rental properties; I bet it sounds a lot more appealing than a retirement account that may or may not accommodate the lifestyle you desire when you retire.