The traditional retirement plan that most employers offer is the 401(k). It is a tax-advantaged plan that allows an employee to contribute up to a certain dollar amount each year. In many cases the employer will match up to a certain percentage. Furthermore, the plan can be broken down to 2 basic types: Roth and Traditional. For the Roth account you pay taxes now and not later. In the Traditional account you pay taxes later when you withdraw.
Similar to the 401(k) plan is an Individual Retirement Account or IRA. This account has a smaller allowable contribution each year but is not tied to an employer. It can also be broken down into Roth and Traditional.
Both these retirement accounts are touted relentlessly in the personal finance space. Are they still a good idea or should we consider other options?
Life in the 70’s
The IRA and 401(k) were both created in the 70’s. Every time I think of the 70’s I think of Rock and Roll. The Rolling Stones, Led Zeppelin and Lynyrd Skynyrd. Times seemed a lot simpler then based on stories my parents told and what I have seen on TV. There were no computers like the ones today and I imagine everyone in the working world was dressed up like in Mad Men.
Wage earners fared a lot better than they do today and job-hopping was just starting out. The Baby Boomers still were ingrained with the “company man” mentality from the 50’s. Thus the creation of the retirement accounts made sense. Stay with the company and be taken care of at age 65.
Present Day
50 years later the landscape is a lot different. Recently we had 40 million people lose their job and are currently being held afloat by the printing presses of the Federal Reserve. This will not last forever and the longer it does last, the less valuable the dollar will be in the future.
The dollar has already lost a lot of its purchasing power since the 1970’s and wages have not kept up. The amount of bills to be paid just for basic living keeps people stuck in the rat race.
Employers and employees are no longer loyal to each other after the fallout of the 2008 recession and job-hopping is on the rise. The 401(k) plan can be rolled over into a new employer’s plan, but does it make sense to have this plan nowadays? Turn your money over to Wall Street and hope for the best in 40 years? The money can go into one their mutual funds where they take fees out of you. Or maybe you are savvy and know that a better strategy is to put it into a low-cost index fund like the Vanguard S&P 500. Either way, you can be rest assured that all eyes are on how to get more of that retirement money.
Why Cash Flow is Important
Having researched personal finance for many years I have come to realize that a lot of Americans are just one pink slip away from financial ruin. That ranges from someone who works at McDonalds to a doctor. Yes, even people who make a lot of money find themselves leveraged with debt to keep up with the Joneses. If they lose their job, the bills will start piling up.
Cash flow is important because it is what pays the bills and funds your life. Most people have one source of cash flow: their job. The old way of thinking about retirement is that you work your job, save in a retirement account, and retire when you are 65. You hope that you will have enough to survive. Another common thing that retirement planning might rationalize is that you will downsize in retirement and spend less money than you do when you are working. Does that sound appealing? Working 40-50 years just to live on less?
I would challenge anyone reading this to think of retirement differently moving forward. Think in terms of cash flow. Here is an example. If your monthly expenses are $5,000 then your cash flow needs to be equivalent to that to sustain your life. If you have $5,000 in passive cash flow, then you can technically retire at any age because your investments will provide for you. Obviously, the earlier you achieve this the better, and you do not necessarily need to retire. You can continue to strengthen the cash flow with investments and maybe do something that you like better than your current job.
Passive Income > Expenses
Today there are more options than ever with the internet readily available. Having an online business is a great way to generate income and if done right, can be passive. Investing in real estate is another option for passive investment. Owning cash flowing real estate is a great way to have passive income exceed expenses.
Whatever path you decide to pursue for retirement, the goal should be to have your investment income exceed your expenses. Traditional retirement plans lock up your money for 30+ years and you have no access to it until you retire. Maybe it is good for some people that do not possess the ability to control their spending, but I believe that it is better to control your money.
If you design your retirement based on passive income exceeding expenses, there is no predetermined date for the retirement. Instead of 65 it could be 35 or 45. I doubt anyone would really retire that early, but the point is that they would be in a better spot if say something like the coronavirus hit and suddenly 40 million people are unemployed. The person that can retire or is financially free can survive the storm more easily.
Bottom Line
I personally am choosing real estate as a retirement tool. I plan on investing in multifamily assets that provide passive income to fund my lifestyle. I have been doing the research for over 10 years and I feel confident in this asset class.
Retirement does not have to be some dream far in the future. I also think of retirement a little differently. I do not think that someone would ever really want to retire in the traditional sense. I took 4 months off a couple of years ago as sort of a retirement trial run. The first month was great. The second month was good. The third month I was bored and started missing workouts even though I had all day, and by the fourth month I was ready to go back to work.
Instead, I think of retirement in terms of financial freedom—if I wanted to take a month off I could. I think retirement planning should be shifted to lifestyle planning. What kind of lifestyle do you want to live? Build towards that.
