I think we are doing ok. We are near 50, have about 5 years left on payments on the house, and 8 years left on some farmland. We’ve got ??? in 401Ks and another XXXXX in mutual funds with a stock broker. All together we are worth about @##$$ net.
Not sure if I want to give those numbers, nor am I sure I need to. My new job provides a pension, though I have to work at least 15 years to make it worth anything. There is no 401K match with the organization, but I can contibute to one if I want.
Here’s the question for opinions: Should I contribute to the 401K, or should I take that $17500 (soon to be ~$23000)/year and put it to a sweet retirement home property that I would enjoy?
I could do either. THere are advantages/disadvantages to both. Doing the 401K reduces my taxable income, but I can’t use it until I’m 59. Buying the property doesn’t give me the break on taxable income but allows me to enjoy the property before I’m half dead. I can presumably sell it for at least what I paid for it (probably more).
I’d like to do both, but don’t think that is really practical (doable, maybe, but not practical). Is there anything I should consider that would tell me I should NOT buy the property and just continue to stockpile my 401K.
From an investment and net worth standpoint, you’re taking a hit in a few ways. Investments in securities are going to outperform real estate over the long run (and by this, even a 15-year window should be long enough to see a big difference in return). You’re also investing in the real estate with after-tax dollars, so it becomes more expensive in that sense. And real estate is less liquid and more expensive to sell.
But money decisions aren’t just about net worth.
My advice would be to make sure you know how much you will need to live on during retirement. Use that to set the target dollar value in your retirement investments (which would include the 401k and brokerage account). Now you know how much money can be diverted from retirement savings toward lifestyle expenses. If that amount is high enough, then you’ll know whether you can afford what you want to do.
Be careful about buying a recreation/retirement property. I’ve read a lot of real estate advice columns in which people are desperately trying to sell or even donate them with no success.
Also, if you choose to buy a property that’s on the ocean, you may regret it if a bad storm comes along.
Depending on where you want to retire to, you may be able to rent out the property in for now. If you pick the right spot, you can defray a lot of you costs and let other people pay for your retirement home.
If you tell us the numbers, to say, the nearest 100k, and tell us what kind of lifestyle you expect to have in retirement, you'll get better advice. But I'd say basically that you should treat buying a second home/recreation property as you would buying a really expensive car or boat. Which is to say, in the Susie Orman way. If your current savings + current retirement accounts (with a *realistic* rate of return, not the inflated numbers most pension plans use) + expected value of the pension leave you enough in retirement, then go ahead. If not, focus on your retirement account as that gives you much more flexibility. Maybe your health or family’s health won’t allow you to live in your second home as a retirement home. Or maybe you just won’t want to by that point.
I get that you don’t want to put off a recreation property until retirement - you want to enjoy it now - there is definitely value in that - it’s just not easily measured in hard dollars.
So, make really sure you are on track for retirement, and keep putting some away into Mr. 401K. IF you can make it to retirement without maxing out, and putting in the over-50 extra.
As for the property, don’t think of it PRIMARILY as an investment.
though I’m a bit reticent; here are some (not entirely accurate) numbers:
$300K in 401s
$400K in brokerage
$60K condo rented out (nets $2000/year on a good year)
Owe:
$40K on $200k house
$40K on $150k farm land (rent of $8000/year pays for mortgage entirely)
Expected pension from current job after 15 years (should everything work well) ~$18000/year…plus whatever SS we may get…plus rental incomes…plus interest off of above investments
I could afford to continue to max out the 401K, though its less attractive since there isnt a company match. Or I could take the same cash and pay off a 15 year loan on ~$160,000 lake front property.
Thats kind of the dilemma. I don’t know if what I have saved up is truly that good or enough. I like the idea of having more money when I’m older…but I’m also aware of close family that died with a lot of money in the bank and never enjoyed it. So I’m trying to guard against being too miserly and not enjoying the opportunity of ownership of a nice piece of property.
It would be nice if I could get educated opinions from unbiased people that can say I have enough saved…or I definitely don’t have enough saved. Which is why I thought of the Dope.
You can never really say when you have enough saved. There’s too many unknown variables, like what the market will do during your retirement, how long you’ll live, etc., that can easily multiply or divide the amount you’ll need. It’s all probabilistic, and therefore ultimately about your risk preferences. I’m no expert, but it sounds to me like you’re somewhere in the vast swath of where a reasonable person can feel comfortable, depending on their risk preferences. I think to say more than that would require a lot more information from you about your lifestyle, health, and all the rest.
As to the recreation/retirement property, is the plan to rent it out? That makes a huge difference in whether it makes sense as a financial decision.
If possible do both, but I would max the 401k first.
Keep in mind a few things (I am not a financial adviser)
Any real estate would be purchased with after tax money, which presumably is at a tax rate now that is higher than you expect to be during retirement. That is the draw of a 401k. While it is only tax deferred, you wont be paying taxes at >25% and instead will pay taxes after retirement at a rate that (for most) will be <25%, hence the value proposition on top of the fact that you are simply putting money away.
A company match is a nice to have but IMO should have no bearing on 401k investment.
Possibly, though I think for practical purposes (and to be a bit more conservative) I’m going to assume I would not rent it out. Any rental income that results would be a welcome surprise.
There are retirement calculators all over the web. You need to sit down with one and determine exactly what your total monthly expenses will be in retirement, and then add up all of the income you will be receiving, including a calculation of what your 401k will provide (using a conservative growth value like 4%). Once you compare your future income to your future expenses, it should be clear whether you have enough to put into a property. The numbers you provided look like they could go either way depending on your expenditures. You have good savings, and the pension will help considerably, but you don’t have so much that you can just sit back and relax.
Do not assume that you won’t live long enough to need the retirement money. This is one of the biggest mistakes that people make with money, and one that is almost impossible to correct once you reach retirement age.
A company match is a guaranteed 100% return on your investment, in addition to any returns that you might earn on the money. It is one of the best investments that exists anywhere.
So a net worth of about $1 million right now. If it were me I’d say you can afford a $200k vacation home if you wanted. I take the “look at how many hotel nights that is” view, but I don’t think you’d go broke if you bought it.
I certainly wouldn’t stop contributing to my 401k though - max that baby out, even if it is just pulling from your taxable account into your 401k. I can’t imagine that you need anywhere near 400k in taxable accounts even if you do lose your job or have something unexpected come up.
My parents live on a lake, my mother just turned 70 and my Dad is 68, soon to be 69. They are selling it - they can’t do the work.
Lakeshore is a TON of work - putting in the dock, taking out the dock, putting in the boat, dealing with weeds, with debris blown in - if this isn’t maintained lakeshore, consider how many years you’ll have it in retirement. If you are retiring at 68, it won’t be many. And with that in mind, I’d get a vacation property now and not wait.
The properties I’m looking at generally don’t have structures on them. I don’t really want much on them mainly because I don’t want to do a lot of upkeep until (and if) I’m ready to live there more permanently. I would be perfectly content now, just pitching a tent or dragging a small trailer there on a few weekends a year. I think if I lived there, I wouldn’t put in a dock, or have a boat…though I don’t really know. I’m more of a relaxing, canoe camper type than a party ski boat type. Just having a yard and maintaining a fire pit near the shore sounds pretty nice to me.
Thanks all so far for the thoughts. It really is helping me out.
By the way, I am thinking this is more like a retirement property that I can use as recreation until that day comes.
So the concept comes up of whether I should wait until retirement to buy a place, or do it now when interest rates are probably lower and the cost is presumably lower.
Buying now though means I can at least enjoy it a bit before I’m 15 years closer to death:rolleyes:
If you’re just going to pitch a tent or bring a trailer, can’t you do that on state campground or someone else’s land? What advantage is there in owning the land yourself?
If your mortgage on land alone is going to be even close to $20k/yr, you’re taking a hell of a speculation risk on the land, IMO. Plus, wow, $2k/weekend @ 10 weekends a yr to drag a trailer or tent just for the pleasure of owning it ? Ouch.
You should diversify your investments. You should not borrow more than you can afford to lose. Remember that leverage works both ways and transaction costs can be a killer taxes also hurt try to use pre-tax income.
I would only consider property if : you have an want risk or you can find a property you can easily pay off, which will give inflation adjusted rental payments into retirement.
Also remember properties get old and require maintenance to be rent able, which means the rental return you get will be less in the future potentially in real terms.
Unless you’re already loaded, then just do whatever, obviously.