I’m 38 and wondering if I’ll ever be able to retire. In 2020, I bought a $649,000 home at a 25% discount. In 2022 I sold it for $1.3 million, took that money and reduced the cash payment. My total monthly housing expenses are still $1,500 (taxes, insurance, HOA, utilities, etc.). I didn’t have a car until recently and now have a $1,000 payment for the next 5 years.
My income with bonus is $150,000. I have $150,000 in a traditional IRA, $50,000 in a Roth, and $50,000 in my 401(k) company (20% Roth, 80% traditional). Currently in the process of maximizing my contribution, I’ve put an Employer Match of $4,000/year and an additional $8,000/year after-tax 401(k) into the company. I have about $1,300 a month in extra income. Am I saving enough? Would I be better off buying an income-generating property and cutting back on my retirement savings?
See: I’m 36 years old with $435,000 and want to retire early – “the sooner the better” – but without a frugal lifestyle
First of all, kudos for being in your 30s, having saved so much, thinking carefully about your financial decisions, and really keeping an eye on your retirement savings. That alone is a huge achievement.
You are very fortunate to be in a position where you will earn the salary that you deserve and have the accounts and employer matches that are being offered to you. It’s a situation not many young Americans find themselves in, and you should definitely take full advantage of it. As the country moves toward phasing out private-sector pensions, Social Security is in the midst of something of a shift (Congress has never let it falter, but it needs help right now) and retirees are largely to blame for it own retirement income, the sooner workers start thinking about the finances behind their retirement, the better. A 401(k), an employer match and a good salary are the most important ingredients.
They ask if you’re saving enough, but to be honest there’s really no way of knowing what “enough” is right now. You’re 38 years old, so unless you plan on retiring much earlier than a traditional pension sometime in your 60s, you probably don’t know what your expenses will be in retirement. No one can know for sure what homes, utilities, car payments, health care, emergencies, etc. will cost 20 or 30 years from now. You can try to calculate what you want in retirement income each year, factor in inflation, and work backwards to find a number to aim for, but that number will change between now and when you’re actually close to retirement , probably change several times .
Check out the MarketWatch column “Retirement Hacks” for actionable advice for your own retirement savings journey
That being said, at this point in your retirement journey, the focus should be on saving, saving, saving as much as possible without completely depriving yourself in the present. It seems you do.
If by income-generating real estate you mean a focus on rental income, it’s definitely an opportunity to make extra money, but it often involves a lot of work. There are months when you might not be making any money if you have vacancies, and then there are those less-than-ideal times when you’re paying for repairs, replacements, and so on. Rental income is a great way to make money — many people who retire early use it as one of their main sources of income for retirement — but it’s more intense than stashing cash in a 401(k) or IRA. You also need to find reliable and responsible tenants because doing the opposite can give you a big headache as a landlord.
If you go this route, plan on having extra cash on hand in case you need to fix something, and if you decide to eventually acquire multiple properties, consider hiring a trusted manager to help you manage the day-to-day running of the business to maintain. Before buying any property, be sure to look at the “bones” of the house or building and find out about the roof, the pipes, the history of the property and so on.
Instead of renting property, you shouldn’t cut back on your retirement savings too much. Ideally, you take a portion of that profit and put it in an account for future use. But I will say that you might want to diversify the types of accounts you have going forward anyway.
See also: Should You Be a Retired Landlord?
You mention that you have Roth and traditional accounts. That’s great, because tax diversification is a huge benefit in retirement. It gives you the ability to choose how you get your retirement income and what tax bill you might face, and it’s powerful. But it’s not the only tool. Diversifying the types of accounts you have also helps. For example, you have a 401(k) and IRAs, but these accounts have restrictions such that the account holder must be 59 ½ to freely withdraw from them (Roths allows investor contributions to be distributed without penalty, but it allows others to do so payout rules to be observed).
Instead of putting all your retirement money into retirement accounts, you might want to try a brokerage account. These are taxable, but there are fewer rules on distributions, and that could help if you do decide to retire early.
For now, keep up the good work. The fact that you have already invested in your retirement provision in this way is a very good sign.
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