Following Traditional Retirement Investment Strategies May Not Help You Achieve Your Dreams

Our traditional education system teaches us many valuable skills, but not how to effectively plan for retirement.  And let’s face it, our education system also lacks in providing many of the essential life and leadership skills needed once you’re out in the working world.

Finding and navigating the many retirement investments strategies available is a time-consuming, multi-step process and something that is certainly not a focus of school curriculums.  Many people aspire to retire earlier than their peers and at a relatively young age, but that doesn’t just happen.  It takes years of careful planning to be able to retire early.

Not only should you start saving and investing from a young age, but you should also make sure you invest in accounts that you can access when you need them. Funding a 401(k) or IRA, for example, may make sense for some because of the tax benefits it provides you today. But you cannot use any of these plans without penalty until the age of 59½. If you want to retire at 50, you need another source of income that you can rely on.

Deferring Taxes Until You Retire Isn’t Always the Best Approach

The traditional retirement investment strategies we’re given that focus on deferring taxes until retirement isn’t always the best advice for everyone.  This ‘cookie-cutter’ approach to investing works for those that plan to be an employee for the duration of their career, retire at a traditional retirement age and live on income that is more than likely lower than what they’ve been living on during their working years.

For decades we’ve been told to save our hard-earned money, invest as much as we can in 401(k)s, IRAs, 403(b)s, TSPs, etc. in order to lower taxable income today, knowing that we will need to pay those taxes at the time of retirement.  The thought process in this seemingly logical argument is that you would be earning less income during retirement and thereby in a lower tax bracket, owing less in taxes in the future.

This methodology is highly contingent on two things:  1) future tax rates and 2) planning to retire on less income than what you earned during your working years. 

First let’s discuss tax rates.  Tax rates in the future are almost as unpredictable as market values and have been at historic lows for over 80 years.  Giving ‘blanket’ retirement advice like this could be detrimental to millions of people entering retirement with rising future tax rates.

This is where investing in real estate is hugely beneficial. These investments allow different types of tax deferrals, or in some cases, tax deductions.  A tax deferral is simply putting off the taxes owed today until a later time.  A tax deduction is an actual reduction on the amount of taxes owed, meaning you keep more of the money you earn. 

Not only does real estate provide a way to balance out your portfolio, it also helps reduce your tax burden through the many deductions available exclusively to this asset class. 

Next, let’s talk about retirement income.  While many may be content retiring on less income than what they earned in their working years, there are others that would prefer to continue growing their income and wealth throughout their entire life.  Achieving this goal could result in retirees being in a higher tax bracket during retirement years. Real estate, as discussed above, provides many different ways for reducing or deferring taxes indefinitely to lessen your tax burden.

The Power of Depreciation

If you haven't thought about your retirement strategy lately, maybe it's time to do so. When planning for retirement, there are many investment approaches and savings strategies that you can implement. Although real estate is one of the most powerful sectors, it is often overlooked in typical retirement portfolio planning.

One of the most popular non-traditional asset classes for retirement is real estate. And because it’s a tangible asset, it’s easy to understand how it can pay out dividends to investors in the form of cash flow from the ongoing operations and a profit split when the property is sold. 

A lesser-known benefit to real estate investing is depreciation.  This deduction can be taken against a real estate asset due to the loss in value that occurs over time from normal wear and tear.  Real estate investors who own rental properties can take a depreciation deduction against the income generated by the property. That means it reduces your taxable income and potentially reduces your tax liability.

Conclusion

In the past, the adage was that you should generally put as much money as possible into your 401(k) and tax-deductible IRA during your working years to save and reduce your tax burden during your retirement years. The idea was to take a deduction during your working years when your tax rate was higher and take that money out of your tax-deferred accounts in retirement when your tax rate was lower.

That's still true for some that plan to retire and live on less than what they made during their working years.  But there are others that aspire to make more money during their retirement, and this strategy will not work for them.  Earning more during retirement years will put you in a higher tax bracket making old-school tax deferral strategies less effective and even detrimental to your long-term success in retirement.

Real estate is an excellent retirement investment strategy that can help you balance out your portfolio and mitigate your overall risk.  Take time to educate yourself on how this powerful tool works and align it to your investment goals. 

Our team can help you navigate the world of passive real estate investing.  Schedule a call today or fill out our investor form so we can connect to answer your questions.