Probably, you grew up with your parents stressing the importance of you getting a good job with good benefits, and a retirement plan is always falling into the category of “good benefits”. Starting your 401(k) or IRA is a modern American right of passage. You are officially a responsible adult planning for your future 30 years in advance. This is top tier “adulting”.
News flash, we, at Dwellynn, are here to tell you that the traditional 401(k) retirement may be damaging your retirement plans of watching the sunrise on the beach or the sunset in the mountains, even before those plans are finalized.
Most articles or blogs that were written over the past 30 years that go over how to save for retirement, will encourage you to maximize the contributions that you make to your 401(k) to help ensure that you are saving, to receive tax deductions, and to possibly get the company you work for to match your 40(k) contributions (aka “free” money).
To be clear, we are not saying that 401(k)s are inherently bad retirement models; however, there are several major issues that we want to raise about 401(k)s.
2/3 of 401(k) accounts were directly or indirectly invested in equities at the end of 2015, according to the Employee Benefit Research Institute, consisting of mutual funds and other pooled investments. This means that more than likely, your retirement savings are tied to market volatility, political climates, and market sentiment, amongst other things.
Your investment options may be fully valued or, even worse, overvalued at the time the contributions are made.
It's highly unlikely that the portfolio managers who currently manage your investment options will be the same portfolio managers managing them 10 or more years from now, meaning the “long-term” investing strategy for your retirement savings may change as often as the portfolio manager changes.
401(k) plans come with many compliance issues that need to be monitored with constant oversight and administration costs, creating participant fees, asset-based charges, and other fees.
You create an enormous tax liability on deferred taxes.
There are many perks of investing in real estate vs a 401(k): higher returns, appreciating tangible assets, no hidden fees, predictable cash, forced asset appreciation, and inflation hedging.
With a self-directed IRA, you have significantly more control over the type of investments that you fund through your retirement plan. With a self-directed IRA, you can passively invest in multi-family syndication deals by simply choosing a syndication deal and having the custodian of your IRA to invest the capital for you. The returns that you make from investing in multifamily syndication will be put right back into your IRA account, and you can roll it over into your next investment.
Two Different Scenarios: 401(k) vs Investing in Syndications
Scenario #1: You put $100,000 into your 401(k) and add $10,000/year for 30 years with average annual returns of 7%
When you retire after 30 years you will have around $1.8 million in retirement savings
When you take into consideration an average inflation rate of 3.22%/year, your retirement fund will be worth less than $900,000 in today’s money
Scenario #2: You put $100,000 into your self-directed IRA to invest in real estate syndication deals, with 5-year hold times and 2x equity multiples
With a 2x equity multiple [EM] and a 5 year hold time, every 5 years you will have doubled your initial investment.
When you retire after 30 years you will have around $6.4 million in retirement savings, without taking into account the additional $10,000/year that you put into your retirement savings. If you include the additional $10,000/year, you’d have an additional $50,000 to invest every 5 years, which will bring your total retirement savings to around $9.5 million.
The Winner: Real Estate Investing for Retirement
As you see, $100,000 + $10,000/year goes A LOT further if that money is invested in real estate syndications, as opposed to just sitting in a 401(k). The difference between the two scenarios is $7.7 million in retirement savings. Of course, this is a simple projection that doesn’t take into account major market shifts or failed syndication deals that may impact your earnings and annual returns, however, if you took just half of the $7.7 million difference between the two scenarios, you’d still be looking at $3,850,000 more in your retirement savings through investing in real estate syndications.
If you paid close attention to the scenarios, both scenarios assumed 30-year timeframes for investing in your retirement plan. This means the longer you wait to decide to invest in real estate, the older you will be when you reach your retirement plan goals. The difference between a few years can be hundreds of thousands of dollars, so it is very beneficial for you to do your research, ask as many questions as you need, and educate yourself on real estate investing and multifamily syndication deals so that you can jump-start your retirement savings plan.