Many Americans believe their 401(k) plan is enough to secure a comfortable retirement. As long as they contribute a fraction of their paycheck every month, they'll enjoy the best years of their lives without fear of financial instability. Unfortunately, this fantasy is far from the truth and counterintuitive to wealth creation.
To provide context, the median 401(k) balance among those 65 and older stands at just $60,700. Some people are resourceful and can live on this amount of money for the rest of their lives, but it's not the "gainfully unemployed" existence that many retirees envision for themselves. In other words, a 401(k) isn't the perfect retirement plan.
Real estate investors have an advantage, as they've invested their money in a tangible asset: property. They can expect to earn a source of income from their rentals — a sum that helps supplement their retirement savings.
More than this, savvy investors can avoid some of the most common mistakes among retirees if they manage their assets correctly. So what are these mistakes, and how can you prepare yourself for an unpredictable future? We'll answer these questions and others like them, walking you through what you need to know.
1. Dependence on Social Security Checks
Naturally, you expect a certain amount of support from Social Security, having paid Social Security taxes for so long. It's a common mindset among retirees, and it makes sense. Unfortunately, the average retired person receives less than $17,000 a year from Social Security, according to data from June 2018.
While that money may help to supplement your retirement savings, it's not enough to live on. You can't realistically depend on Social Security checks to keep you comfortable in your later years. You'll have far more stability when you rely on your real estate investments to provide a steady stream of income.
2. Overconfidence in 401(k)s and Delayed Saving
Though the average 401(k) at retirement is less than $100,000, many retirees are confident in their plan. They trust their 401(k) and believe it's their best course of action, with no comparable alternatives. More than this, they delay saving and make preparations for retirement later rather than sooner.
Real estate is an effective solution to this problem. Retirees who would otherwise procrastinate with their retirement savings enjoy a form of passive income. Many investors delegate their responsibilities to a property manager, allowing them to reap the rewards of real estate with minimal effort.
3. Inability to Maintain and Pay Taxes on Property
You may find you're unable to take care of your house as you get older. Maintenance demands a substantial amount of work, and it's hard to shovel snow, rake leaves and clear the gutters when you're in your 60s and 70s. The additional pressure of property taxes is also difficult to manage in many states.
With real estate, you have tangible assets which serve a purpose. You can sell your current home and transition to another, smaller property which is easier to maintain. Better yet, if you own a rental property in a state like Louisiana or Alabama, making the move may save you a significant sum in property taxes.
4. Early Withdrawal From Retirement Accounts
Retirees who tap their retirement accounts too early can cost themselves a considerable amount of money. While you're allowed to withdraw from your retirement account a little earlier than expected, you may have to pay a 10% early withdrawal penalty. You'll also have to pay income tax on the amount if it's a 401(k).
You're more likely to avoid this kind of uncomfortable situation when you invest in real estate. The income you earn from your rental properties will assist in supplementing your retirement savings — as mentioned earlier — which alleviates some of the financial pressures of living without a job.
5. Underestimation of the Length of Retirement
You can't predict how long you'll spend in retirement with any degree of accuracy. At most, you have the average life expectancies of men and women to go on, which provide a general idea of how much you should save. If you retire at 65, you'll need around 20 years of savings. But, again, you're making an estimation.
Instead of predicting the amount of money you'll need, you can depend on the passive income you earn from your rental properties. Whether you live to 85 or 100 years old, you'll have support from your investments. It's an essential consideration for any retiree.
The First Step Toward a Secure Future
If you're not confident in your 401(k) and you're interested in real estate, you should research the subject in greater detail and explore your available options. With time and effort, you'll build lasting wealth that sustains your lifestyle long into retirement. Take the first step toward a secure future today.
Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.