Over the years most of us have heard from our company’s HR person about investing in the company 401(k) plan, and if we are smart and start investing in it in our 20’s we’ll be millionaires by the time we retire. For many Americans a 401(k) is the primary savings vehicle for retirement. However, returns on 401(k) accounts are falling short for many people, then calculate in all of the fees that are charged, and the 401k route might not look so appealing

Consider this scenario…You have a 401(k) that is assessed 2 percent in annual fees and has an annual gross return of 7 percent. When you calculate this out you would lose almost two-thirds of what you would have had without the assessed fee.

Savvy investors believe that the real rate of return for good, non-leveraged properties is around 7 percent after inflation. Of course riskier projects yield higher rates of return. From 1978 to 2004, real estate had an average return of 8.6 percent. Real estate investing returns typically yield a higher rate than that of stocks and business ownership and also acquire long term appreciation. One of the nice things about real estate investing is that it is a tangible good; therefore it feels more real than just a paper stock certificate or 401(k) account summary you receive in the mail each quarter. If you are investing in a stock or business ownership then you always run the risk of the business going bankrupt. With real estate investing you have more control!


A great website to look over historical average real estate investment returns is: http://www.ncreif.org/property-index-returns.aspx

NCREIF U.S. National Property Index Returns

Image courtesy of National Council of Real Estate Investment Fiduciaries (NCREIF)

While everyone’s financial needs are different, make sure to figure out what you currently need on a monthly basis for income, and then compare that to what you estimate you will need upon retirement. Just don’t forget to factor in for inflation! In the United States, the federal government has kept inflation within a range of 2-4 percent for many years and most factor in the annual inflation rate to be 4 percent.

So, let’s break it down and do a sample retirement calculation. Let’s take a hypothetical case of Bob who is a 40-year old earning approximately $45,000 per year after taxes.

  • Bob is planning to retire at age 65
  • Bob thinks that he could live comfortably with $40,000 of annual retirement income (that’s in today’s dollars and not adjusted up for inflation)
  • Bob currently has $100,000 between investments and savings
  • Factoring in the 25 years that Bob has until retirement (between age 40 to 65), Bob wants to earn a 6 percent annualized rate of return on his investments
  • No company pension plan is offered through Bob’s employer
  • When considering the amount that Bob will earn through Social Security benefits according to the SSA website the value is about $1,300 per month

With the $40,000 that Bob estimated that he would need to live off on an annual basis throughout his retirement years, this works out to about $3,300 per month. If Bob receives his social security benefits as projected then we can subtract the $1,300 per month from the $3,300 resulting in $2,000 per month or $24,000 per year in additional funds needed to live off of. If Bob has $100,000 in investments and savings that don’t yield a high return back then he will only get be able to utilize that money for four years after retirement, figuring that he needs $24,000 per year in additional funds. If Bob invests that $100,000 (or a smaller portion of that) in real estate then he can yield higher returns. Not only can he flip the properties but if he holds the properties for the long term and rents them out then he can realize the monthly rental income to put towards his savings. If Bob holds those properties for the next 25 years and has a 30-year mortgage on each of them then he will have only 5 years left after he retires in order to fully have them paid off and realize 100% profit. It is my hope that this little exercise has provided you with a lot of insight as to what you need to have invested in order to enjoy a comfortable retirement.

One of the nice things about real estate investing is that if you have rental properties they do bring in a monthly income (as long as you have tenants). Is your savings for retirement better off in a bank generating a low yield, or invested it in real estate and putting your money to work for you? If you purchased a house now as an investment you could have it paid off before your retirement years, and realize the majority of rent on a monthly basis (less real estate taxes, property manager expenses and any repairs). Rental income is a great scenario to consider for additional income throughout your golden years. 

While there really is no magic number that would guarantee a comfortable retirement, it is all dependent upon your desired standard of living, target retirement age and your expenses (including medical costs). Whether living off of the cash flows from you rentals, or cashing in your investment portfolio, you too can live the carefree lifestyle that you deserve!

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