Why You Need to Create Your Own Retirement System
A Broken Retirement System
The reason why you need to create your own system for retirement is that the current retirement system does not work for you, it works for your employer.
No one is going to look out for you more than you. NO ONE.
If you want to get a good look at what things really look like I recommend watching a docuseries called Money Explained, the specific episode is called Retirement.
Our current retirement system has slowly devolved from a great system to a terrible one that is only beneficial to employers and the top 1%.
As explained in the docuseries, back in the 70s there was a golden age of retirement. Most people retired comfortably with a pension and social security. Pensions were very common back then and they incentivized loyalty among employees that worked for one company for a long period.
That’s when something changed. The 401k was introduced.
The founder of the 401k always meant for it to be a supplement in retirement, not a substitute for pensions. He envisioned the retirement system as a stool with three legs. One leg was your pension, one leg was social security, and the other was the newly introduced 401k.
With these three legs of retirement, most retirees were able to retire in peace and enjoy what was left of their lives without the worry or stress of finances.
The real problem started when companies started to see that it would be cheaper for them to pay in toward a 401k, where they match a small percentage, and the market would take care of the rest and allow the portfolio to grow This was a much cheaper option than paying out pension checks for the rest of someone’s life.
After this happened, as the baby boomer generation started to get older, we saw another threat to retirement lurking within social security. There was a growing population, bigger than any before, getting closer and closer to retirement. Fears started to grow on whether or not there would be enough retirement for future generations with fewer people working and paying into the social security system.
So now, that leaves our current population with a stool that is wobbling on one and a half legs when the ideal system was intended to be sturdy on three.
Here are some numbers that will get the blood boiling:
The average social security check, according to Bankrate.com, as of March 2022, was $1,536.94.
That’s $18,443.28 a year.
The average 401k balance, according to PersonalCapital.com, between the ages of 55 and 64, is $171,623.
Now let’s say that you go by the 4% rule of investing that says that taking into account market volatility over the last 100 years, you should, in theory, be able to take out up to 4% of your stock market portfolio safely and you should be able to live off of the funds for the rest of your life. This is because market growth, even accounting for recessions, should be able to allow your portfolio to grow at a safe return, over the long term.
If you took 4% per year out of a portfolio worth $171,000, that would be $6,840. Divide that number by 12 and you get a monthly distribution of $570.
That would be conservative, assuming that some of your holdings pay dividends. Let’s assume that you have a 2.5% dividend yield, which is the average yield in the S&P 500, and if you were not able to reinvest that because of living expenses, that would be an additional $4,275 a year, or $356.25 a month.
Now let’s add up the numbers here:
$1,536.94 for social security,
$570 for capital gains on your stock market portfolio,
And an additional $365.25 a month in dividend income.
That comes out to $2,463.19 a month. Go you!
That does not include taxes, by the way! Although they would be in lower brackets, at that income level, reducing it any further would be stressful.
Even at 10%, you’re looking at a post-tax income of $2,216.87.
Even assuming that you have no debt whatsoever, and live a frugal lifestyle, there are a couple of things that still frighten me about this number.
The first is that all housing expenses go up, whether you rent or own. Even if you own, insurance and property taxes will always go up. And any increases in the market may not keep up with the pace. If you rent, the rent will surely go up with the market over time.
The other is that when you get older, medical costs increase. More trips to the doctor, and more types of prescriptions that may also be more expensive. Some sources say that healthcare can cost several thousands of dollars a year on healthcare, per person. That can quickly erode your retirement funds.
Our current retirement system is just not working. That is why you have to create your own retirement system that works for you and not your employer.
Real Estate to the Rescue
Real estate is an asset that has grown through appreciation as well as income through rental income.
With the same $171,000 in your 401k, you could use it as down payments on three different properties at $65,000 down payment each. That would be enough to buy three $260,000 properties. Depending on your strategy of investing, whether it be single-family or multi-family, you could be looking at a few hundred dollars a door per month in cash flow.
I have a duplex that is now worth $250,000 and it pays me between $600 and $800 a month in cash flow, depending on the month with utilities and maintenance. If you were able to buy three of these properties then your monthly cash flow would be between $1,800 and $2,400 a month.
This would already beat the 401k return of the combined capital gains and dividend income of $935.25.
Also, real estate is a great hedge against inflation and is historically safer than the stock market. After a recession, your equity in the property may have been eroded due to market volatility, but your income is pretty stable as long as there is demand for rentals in your area.
With the stock market, if your equity is eroded due to market volatility, the way it did in 2008 and 2009, you could be looking at losses as much as 60% or more, depending on your exposure to the market.
This means that your dividend income and your ability to live off of capital gains will also decrease by that amount whereas real estate markets are slower to react and your income is also backed by leases. You know that as long as the tenant does not get evicted, your income is steady for however long the lease is for.
Closing Thoughts
I believe in a diversified portfolio. I invest in real estate, stocks, and cryptocurrency. There are pros and cons to all of them.
The main point of this article is to show how relying on your employer’s 401k contributions is not a good enough retirement strategy. I believe that everyone should invest what they can when they can but I certainly believe that the foundation of any good retirement portfolio is real estate because of its ability to scale and sturdy income streams.
Investing in real estate is, and will most likely continue to be, one of the best decisions I have ever made. As I build more equity in my current properties because of appreciation I am already looking into increasing my income by selling and upgrading into bigger properties with more units, thus increasing my cash flow per door, all without adding any of my current savings to the transaction.
My property grows by a percentage every year that is based on the value of my home, NOT based on the amount of money tied up in it. This is what makes real estate such a great investment, especially for retirees.
I currently have a TSP from my service in the United States Navy. Although I cannot continue to contribute to it, I know that it will grow over time and I will be able to access it when I turn 59 and a half. When that happens, I plan to be indifferent to the amount it has grown to, because I never want to have to rely on that account to fund my retirement. I hope that it will be a great way to splurge on my family and contribute to enriching our experience together through travel and other great experiences.
The day I started educating myself on building a portfolio of real estate is the day that I took control over my future. I hope you decide to do the same. I hope that you found this educational and inspiring to take the next step into creating your retirement portfolio through real estate.
