Wait, You Mean I can Invest in Real Estate with My Retirement Funds with coffee cup

Investing in Real Estate vs. Relying on a 401k: Two Drastically Different Retirement Outcomes

Hey, what’s that I see there behind you? Is that an old 401k in the corner gathering dust?

Admit it. We all have old retirement accounts that aren’t performing at optimal levels but are gathering dust like those forgotten tchotchkes in our closets. The few times you are faced with the paltry growth, it’s easier just to turn a blind eye, close your browser tab, or toss that statement, rather than to do something about it.

Believe me, I speak from experience. As a serial job hopper the first several years out of college, my retirement funds were like a barnyard of unruly animals from Old MacDonald’s Farm – here a 401k, there an IRA, everywhere a pension and 403b.

It was a mess.

Rollover Central

One day, I finally said, enough is enough. I don’t want to be on the verge of retirement someday and still have to deal with a pocket of money here and a little bit there.

So, I did what it took to roll everything over and consolidate. And I tell you, never had I met with so many notaries in such a short amount of time. #hugyournotary

When all was said and done, I had rolled everything into a few core accounts. Now that I could see everything all in one place, I could really see the lackluster performance. Over the past few years, my returns in those accounts have been around 5%, on average. Which, admittedly, is better than a savings account or CD, but it’s certainly not going to get me to that beachfront-villa-on-a-private-island sort of life, if you know what I mean.

Using Retirement Funds to Invest in Real Estate

Then, the skies opened up, and I realized that I could use my retirement funds to invest in real estate. Say what?? It’s true. I’ll say it again. You can use your retirement funds to invest in real estate.

Wait, you’re thinking, aren’t there a bazillion rules to follow with retirement funds? I thought you couldn’t touch them with a ten-foot pole, or else you risk penalties, fees, and the infamous wrath of the IRS guy, right?

And that, right there, is why I think so many people have old retirement accounts sitting around gathering dust. From everything we’ve been taught, there are very strict rules about retirement funds, so it’s probably best to just leave them alone. Plus, it’ll be decades before I can touch that money, so…I’ll just leave it for now.

Let’s see exactly what “leaving it there for now” gets you, 30 years from now.

Hypothetical #1: Keep My Money Where It Is

Let’s do some quick math. Let’s say I have $100,000 in my retirement funds now. And let’s say that over the next few decades, I see about 7% returns annually. I’m able to add $10,000 a year, with compounding growth. In 30 years, when I’m nearing retirement age, I’ll have…drum roll please…about $1.8 million.

Not bad, right? See, you’re thinking, I’ll be fiiiiine.

But wait! You knew there would be more, right? Now let’s add inflation into the mix. With inflation sitting at an average of 3.22% per year, that means that prices will double every 22 years.

So when I retire, that $1.8 million will be worth less than $900,000 in today’s money. Now, ask me how much confidence I have in being able to live out my retirement years on $900,000. Eesh. #scarystuff

Enter: The Self-Directed IRA

This is why I was so excited to find out that I could invest in real estate with my retirement funds. With a self-directed IRA, I have way more control over the types of investments I can make. I’m not limited just to stocks, bonds, and mutual funds, though I could certainly keep investing in those if I wanted to.

Now, before you get too excited, there are limits. You can’t use a self-directed IRA to invest in a vacation home for yourself, for example.

Yes, I’m sure. I double checked that one.

However, you can invest in commercial real estate syndications, which, like investing in mutual funds, would be entirely passive. You simply choose a syndication or real estate fund you want to invest in, and you direct the custodian of your self-directed IRA account to invest the funds on your behalf. Any returns that you make on the investment go right back into the self-directed IRA account.

Hypothetical #2: Invest My Money In Real Estate Syndications

Now let’s apply the same hypothetical $100,000 to a self-directed IRA account, investing in real estate syndications. Let’s say the syndications I invest in each have a 5-year hold time, with a 2x equity multiple. That is, over the course of 5 years, I would double my initial investment (roughly 20% annual returns).

That means in 5 years, my $100,000 would turn into $200,000. And by the time 30 years comes around, my self-directed IRA account would have about $6.4 million.

In case you’re struggling with the math, that’s $4.6 million more than in the previous example.

But wait! That’s not counting the $10,000 I would be adding to the account per year, like in the previous example.* If I were to add that in, that means every 5 years, I would have an additional $50,000 to invest. Once I factor that in, I’d have over $9.5 million.

Don’t trust my math? That’s okay, me neither. Below are the returns plotted out on a timeline of 30 years, assuming the investments I choose all have an equity multiple of 2x over 5 years, or an average annual return of about 20%.

*Note: Being able to add $10,000 per year to your self-directed IRA account assumes that your employer’s 401k allows in-service rollovers. If this is not the case, you may only able to contribute $5,500 a year, which would make the total amount at the 30-year mark around $7.4M. Still not too bad, if you ask me.

I don’t know about you, but I’d take $9.5 million over $1.8 million any day.

Add to that the impact of all those real estate investments over 30 years. All the thousands of families that my money will help over that time, whose apartments I could help fix up, and whose communities I could help improve.

For me, the choice is easy. I choose real estate, every time. And it hasn’t let me down yet.

But the problem is, you can’t make that choice when you’re 65 years old. You have to make that choice now. If you close this article and decide to do nothing about it, procrastinating for another 5 years, you’re potentially missing out on hundreds of thousands of dollars.

The only person who will take care of the OLDER YOU someday is the YOUNGER YOU today.

Why am I choosing to take charge of my retirement funds now? Simple. For my children. If I only had $1.8 million in my bank account on the day I retire, chances are, those funds would run out. Or, at least, every credit card swipe would make me nervous about those funds running out, which would strain my relationship with my children, I’m sure of it, and that’s not the legacy I want to leave.

So, for my future self, I’m fighting through the sea of paperwork, learning the lingo, and doing whatever it takes today, so that I can be sure I’m living life on my terms. Now, and always.

Come join me, and let’s dust off those old 401k’s together.

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