Dear Marketwatch,
I am 38 and wonder if I will ever be able to retire. In 2020, I bought a $649,000 house at a 25% discount. In 2022 I sold it for $1.3 million, took that money and paid cash. My total monthly housing costs are still $1,500 (tax, insurance, HOA, utilities, etc). I didn’t have a car until recently and now have a $1,000 payment for the next 5 years.
My bonus income is $150,000. I have $150,000 in a traditional IRA, $50,000 in a Roth, and $50,000 in my company 401(k) (20% Roth, 80% traditional). I am currently maxing out my contribution, have an employer match of $4,000/year plus an additional $8,000/year in the company after-tax 401(k). I have about $1,300 a month in additional income. Am I saving enough? Would I be better off buying an income generating home and cutting back on my retirement savings?
Staff!
To see: I’m 36 with $435,000 and want to retire early – ‘the sooner the better’ – but without a frugal lifestyle
Dear reader,
First, kudos for being in your 30s, having saved so much, thinking deeply about your financial decisions, and really keeping an eye on your retirement security. That in itself is a huge achievement.
You are very lucky to be in a position where you earn the salary you deserve and have the accounts and employer matches that are offered to you. It’s a situation not many young Americans find themselves in, and you should absolutely take full advantage of it. With the country moving in a way that private sector pensions are being phased out, Social Security is in the midst of some kind of change (Congress has never faltered, but it needs help right now) and retirees are largely responsible for their own retirement income, the sooner employees think about the finances behind their retirement, the better. A 401(k), an employer match and a nice salary are important ingredients.
You ask if you’re saving enough, but the truth is there’s really no way to know what “enough” is right now. You’re 38, so unless you’re planning to retire significantly earlier than a traditional retirement somewhere in your 60s, you probably don’t know what your expenses will be when you retire. No one can know for sure what housing, utilities, car payments, health care, emergencies, and so on will cost 20 or 30 years from now. You can try to figure out what you’d like in retirement income each year, factor in inflation, and work backwards to find a number to aim for, but that figure will likely change several times between now and when you’re actually close to retirement. retires.
Check out MarketWatch’s column “Retirement Hacks” for useful advice for your own pension savings
That said, at this point in your journey to retirement, the focus should be on saving, saving, saving, as much as you can without completely depriving yourself in the present. It looks like you do.
If by income-producing real estate you mean a focus on rental income, that’s certainly a way to bring in extra money, but it often involves a lot of work. There are months when you might not make any money if you have job openings, and then there are the less than ideal times when you pay for repairs, replacements and so on. Rental income is a great way to make money — many people who retire early use it as one of their main sources of retirement income — but it’s more intensive than putting cash into a 401(k) or IRA. You also need to find reliable and responsible tenants, because the opposite can cause you a lot of headaches as a landlord.
If you go that route, plan to have extra cash on hand in case you need to fix something and, if you decide to eventually buy multiple properties, consider hiring a trusted manager to handle day-to-day running. to help preserve things. Before buying any property, make sure you look at the “bones” of the house or building and get the details about the roof, plumbing, history of the property and so on.
You shouldn’t cut back too much on your retirement savings in lieu of rental housing. Ideally, you would take some of that profit and put it in an account for the future. But I will say, you may still want to diversify the types of accounts you have for the future.
Also see: Should you retire as a landlord?
You mention that you have Roth and traditional accounts. That’s great because tax spreading is a huge benefit in retirement. It gives you the ability to choose how you acquire your retirement income, and therefore how much tax you might face, and that’s powerful. But it’s not the only tool. Diversifying the types of accounts you have also helps. For example, you have a 401(k) and IRAs, but those accounts have restrictions, such as that the account holder must be 59 ½ years old to withdraw freely (Roths does allow investor contributions to be distributed penalty-free, but there are other recording rules to keep in mind).
Instead of putting all of your retirement money into retirement accounts, you might want to try a brokerage account. These are taxable, but there are fewer rules for benefits and that can help if you do retire earlier.
For now, keep up the good work. The fact that you are already so invested in your pension security is a very good sign.
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