I’ve written a series of posts about 401k’s with the intention of encouraging each and every one of you to assess why you are choosing to ‘invest’ in your 401k over-and-above any other investment choice.
I received a comment from Timmers that I wanted to address here because he raises some interesting points … I will break up his comment into the relevant pieces:
As a person who invests in both 401k and Roth IRA as well as residential real estate …
Let’s stop it right there and understand that we are talking about three totally different things here:
1. 401k is not an ‘investment’ as I have previously defined it … it is a limited, tax-efficient savings strategy with benefits (e.g. employer match). Limited because the underlying investments are usually (not always) costly and relatively inefficient ‘products’ packaged for the employer by their 401k provider.
2. A ROTH IRA is not an ‘investment’ … it is a tax-advantaged vehicle in which it may be possible to make investments. Interestingly, you can usually use one to invest in a wide variety of means including: funds, stocks, real-estate.
3. Residential real-estate may be a good or bad investments, depending upon where, when and how you buy … coming off the top of the ‘bubble-and-bust cycle’, I doubt whether I need to explain this further, here. However, it is important to realize that residential real-estate is not the only form of real-estate investment available to you.
Anyhow, on with Timmers’ comment:
… I have to also add one other Major argument for real estate as a retirement strategy. That is, if investing right and long-term, real estate is much more of a sustainable investment. That is, if you have held it long enough to pay down the mortgage, you simply can live off of the rental income. After drawing out the rental income for one year—guess what? It hasn’t gone down in price but usually up—at least maintaining parity with inflation if not more (sometime much more if you invest right). AND…(the best yet)….you still have the same amount of money available to you as the year before plus a little more (if you haver raised the rent).
This is a masterful strategy of the Making Money 301 kind i.e. something that you want to consider when you have already made your pile of money and are considering (a) how to keep your principle (‘nest egg’) safe and (b) have a safe amount that you can withdraw to live off every year without worrying about inflation OR your money running out.
However, paying off the principle as a Making Money 201 strategy (i.e. building your ‘nest egg’) may not be wise as you then need to think about what you are going to do with the excess cash that the property is spinning off … you will need to invest elsewhere anyway.
That is, the simple difference between real-estate as a wealth-building activity and a wealth-sustaining activity is how much equity you allow yourself to have in each property that you own:
i) Wealth-building: more properties, with less equity in each.
ii) Wealth-preserving: fewer properties, with more equity in each.
Finally, Timmers switches back to 401k’s:
The problem with 401K investments is that unless you have enough to live off of the dividends (out of the question for the vast majority of people), you are drawing down your investment every year. It is not sustainable like real estate. Granted, you must maintain your residences, which is an ongoing cost, but a smart investor always plans for the major repairs/renovations and has money set aside for the smaller ones. To be honest, I am so tired of the constant 24/7 blather of the stock market investment complex that has its tentacles in every media outlet. They want to keep spinning a song that hasn’t produced for most mainstream investors the past ten years (but has for their jobs and income). I am grateful for AJC’s contrarian and no-nonsense approach to most of their blather.
To this, I can only say ‘thanks’ and add some recent comments from the Tycoon Report:
If this market were a horse, I think we would have shot it already to spare it further misery … we have to readjust our perspective of the US equity markets. This is not a buy and hold the S&P 500/DOW 30 market, and it probably won’t be so again until about 2015 – 2018. This is a sector driven market brought about by a slowdown in profit growth and driven by spiraling commodity costs. Index investors get crushed in markets such as these …
If you are a diversify-and-save-via-your-401k kind of ‘investor’, this Kind of makes you sick, doesn’t it?