It’s no secret that America is facing an astronomical challenge when it comes to retirement. People are living longer than ever, and most of our country’s citizens won’t have enough income to sustain themselves after they retire. 30 years ago employees could count on Social Security and a nice company pension plan to get them through retirement. Sadly, today, that is no longer the case. Pension plans are going extinct, and Social Security has numerous issues. It is realistic to expect that benefit payouts are likely to decrease as a proportion of one’s total retirement income needs. That means that we are going to be more accountable than ever for our own retirement income. That is a scary proposition for many people, but it doesn’t have to be.
If you listen to the mainstream media, they are going to tell you to put money in your company sponsored 401(k) or an individual retirement account (IRA), both of which are good options. For instance, if your company offers a 401(k) with a company match, you should be maxing that out. Realistically, though, unless you have been making regular, and substantial, contributions to these retirement accounts since you were in your 20’s, you’re still unlikely to have enough money saved up to retire with the same or better lifestyle you have today. What often gets overlooked is the impact inflation has on your nest egg. If you think you’re making a 7 percent return in your retirement account, it really is more like 4 percent, after you factor in inflation.
Beyond inflation, average life expectancy keeps increasing. Today’s average life expectancy is around 78 years. If you are planning to retire in 20 years life expectancy might be 85 years or more. We continue to make medical breakthroughs every year that help push life expectancy farther and farther out. Since we are talking about medical breakthroughs, it also warrants talking about those costs. Medical costs are not cheap, and they somehow keep increasing far beyond the pace of inflation. So not only do we need to account for living longer, but also the medical costs associated with that. In addition, while the average life expectancy might be 85 years when you retire, do you really want to plan on just living till you’re 85? What happens if year 85 comes, and your nest egg is gone? We need to have income streams that last as long as we do.
While retirement funds and social security certainly have their place, overlooked by most people is what could easily be argued as the best retirement investment vehicle out there—single family rental homes. Rental properties have a number of traits that make them incredible vehicles for retirement planning.
Rental properties provide owners with a steady stream of income. Your tenants pay rent each month, you pay your expenses, and what’s left over is cash flow in your pocket. The beauty with rental properties as a retirement vehicle is that the longer you have the properties, the more cash flow they tend to generate—an income stream that truly grows with you. Rental prices increase over time, so unlike many other types of retirement investments inflation is pretty much negated. The real kicker is, eventually you will pay off your mortgage, eliminating your largest expense—leaving you with an even larger stream of income each month. It doesn’t really matter how long you live—the income stream is there as long as you own the property.
Beyond the monthly revenue stream rental properties create, as you pay down mortgages and the property increases in value, your equity position in the property grows. In the event of a medical emergency, for example, you could leverage that equity or flat out sell the property to get the funds you need.
Most people aspire to leave something for their kids and grandkids when they pass on. Real estate happens to be one of the best things you can give your descendants. When you pass away you’ll know that your family will be taken care of. They can either enjoy the monthly income stream you had during your retirement years, and then pass it on to their children and so on. Or they can sell the property and use the funds for something else.
Earlier, we touched on how most American’s who are actually saving for retirement are doing so using traditional retirement accounts like 401(k)s and IRAs. There is nothing inherently wrong with saving inside those vehicles—the fact you are saving at all gives you a step up on the average citizen. That being said, stocks and mutual fund investments are missing many of the advantages that you get with rental properties. If you are excited about these advantages, but already have all your savings tied up in an IRA, it’s still possible to invest in rental properties using those funds. Self-Directed IRAs allow you to purchase non-traditional investments inside an IRA account. There are rules and regulations regarding these types of investments, however, it can be done. There are a number of companies out there that can assist you, and they have made the process easier than ever.
According to the latest Retirement Confidence Survey, only 13 percent of Americans say they are very confident that they will have enough money for retirement. If you happen to be in the other 87 percent, take a closer look at rental properties as a means to ensure you are taken care of in your retirement years. No other investment out there provides the income, growth & tax benefits you get with rental real estate.