Today’s article is inspired by Kevin at Invest it Wisely. He wrote a great article on Challenging your Personal Beliefs. The premise is to take a concept that you hold near and dear to your heart and think about doing the opposite to see if you can learn something from the exercise. Some of the most effective teams I’ve been on have had left brained and right brained thinkers on it, so I’m confident that this topic is worthwhile exploring.
It reminded me of an Episode of Sienfeld where George Costanza decides his life is the complete opposite of what he expected. His remedy was to start doing the opposite of what his instincts told him to do. It’s one of my all time favorite episodes.
Today, I thought I’d explore the following opposite mindset. I have contributed to my 401K since the day I got out of college. Let’s turn the clock back 15 years and pretend I never contributed to my 401K..what would be different?
- I would have no personal retirement fund, but I do have a company pension.
- I would have paid off my house 5 years ago.
- I would have had cash to invest in a business.
- I’d pay more in taxes and I’d lose my company match.
Let’s pick a business concept that is easy to grasp, real estate. If in the last 5 years, I would have taken the money I put in my 401K and used it as a 5 or 10% down payment for a rental property, I could have a number of rentals under my belt by now. Yes, I would have lost some money on my purchases in 2006 and maybe 2007 BUT it would have been much less than I lost in stocks. In the meantime I still would have rental income generating positive cash flow from the investment. Rental property generally doesn’t sell for more than the income potential, so I feel confident that even at the inflated prices, I’d still be making a profit. Plus in 2009 and 2010, I would have snatched up some foreclosures to make up the difference in my losses from the boom time.
I also think it’s a lot easier to calculate how many rental units you’d need to replace your income because rents will increase with inflation. Right now, I have no clue if my 401K balance will be enough to live off of come 2035. If I could replace my income with a rental property today, I’d feel very confident that I could continue to rely on it as the years go by.
In a lot of ways, rental income is a much less volatile way to invest in your retirement than the stock market. Sure, property values go up and down, but if you’re in a good neighborhood, rental income doesn’t yo-yo like my portoflio did.
The other huge benefit is that I can choose to cash out and sell a property at any time without an early withdrawl penalty. I can also choose to sell my home and live in one of my apartments if times got tough. Because it’s a business, I can also write off my taxes, insurance, expenses, mileage, depreciation and repairs to these properties. Although I’m buying with after tax dollars, I see tax benefits on the back end with all the write off options. Once you get a handful of units under your belt, you quit your day job and become a property manager/house flipper. You retire from the rate race 20 years before your peers. Yes, rentals can be a lot of work, but at least you work for yourself and on your own terms.
So what do you say, are you ready to ditch your 401K yet?
I personally am getting to the point where I want to take a portion of my future savings and invest it into something that’s in my control. I don’t feel like I can control the outcome of stocks as much as I can control the revenue from a side jig. I don’t know if I’d ever want the headaches of being a slum lord again. Someday I hope to have extra cash for something like this, but right now, reducing debt is a whole lot easier than dreaming up a business plan, so that’s what I’m doing. Once the easy stuff is done, I’ll start thinking more strategically.
Would I have been better off not contributing to my 401K? Probably not. I don’t think I could have done my day job, a side jig, started a family and moved my mother to town all in the last 5 years. It looks good on paper, but just having money taken out of my paycheck is a lot less work.