Property vs 401K

[Beendare]

Hard to say, but at the end of last year only 0.8% (280K) of the 35M people who hold 401-K’s at Fidelity had a balance of $1M or more.

In 1Q22, Redfin reported 8.2% of U.S. homes (12M) were worth $1M or more. That statistic doesn’t account for the amount of equity in those homes, but I would bet that there are more millionaires from home ownership than 401-K’s just on relative scale. And that doesn’t account for investor real estate.

I think we both agree… RE has been a great investment….but it takes some expertise and timing now is not what it was in the past due to a couple factors.

I converted a bunch of stock investment to rental homes in 2009-2010….because I ran the numbers and could get 15%+ on my money right out of the gate. Thats not happening now.

Yeah, there are always diamonds in the rough to find- a buddy just flipped a home for a $260k profit- but he knows the market, knows the business and worked hard to find the right opportunity.

A 401k is more of a do nothing investment.

 

[Dos Perros]

You should make sure the other plans aren't charging you administrative fees. They generally aren't a lot, but my last employer's 401k was charging something like ~$60/yr in fees once I wasn't an employee anymore.

Yup I've looked at that. I have my current 401k with my current employer, can't really get around that, and then a main rollover one with Schwab which is pretty damn low cost, and then this other one which is sort of a robo investor that is more experimental (it's pretty low cost, or at least costs baked in). My wife is in a similar boat. When we leave current jobs we'll roll over to Schwab.

 

[Hnthrdr]

I wholeheartedly agree that RE is the best way for us little people to become millionaires. But there is a difference between investor real estate which produces positive cash flow and 2nd homes which are generally cash flow negative. One is a good investment, the other isn't.

But one is my happy place (2nd home) and one pain in a place that I don’t want to mention (sometimes) hahaha I agree investment properties take work! Some more than others. Right now trying to figure out how to tax advantage the cabin and have a few ideas, but once again it is more work. Oh and unless you have a condo or super low maintenance second home it’s a ton of work too. I’m constantly cutting trees and staining logs and cleaning and painting and fixing, ect…. I enjoy it more because I enjoy the place but it’s not stream fishing or hunting predators or exploring which I enjoy more…

 

[Hnthrdr]

Real estate is a very lucrative investment. Because of the fact that landed properties continue to appreciate in the long run.

Sometimes… there have been periods in history with almost zero appreciation for decades. The last 20 years really last 7 is sort of an anomaly… and location is probably still king

 

[MattB]

I always wonder about these statistics. How can Fidelity account for the fact that people have 401k's spread all over? I've been working 18 years and have even done some consolidation yet I have 3 different 401k's or Rollover IRA's. My wife has 3 (although 2 are at the same institution). Any one of those institutions would significantly underestimate our retirement position because they only have a piece of it.

They don’t. It is just one data point, but Fidelity is the largest 401-K provider and they do know what they have.

 

[Tourguide]

I'm in the same boat. Just bought a couple acres of commercial property bordering the property my shop is on, much better than watching my 25 years of 401k investments tank... always remember, they aren't making any more property either..

 

[MattB]

Agreed, while technically part of your net worth, it's treated more like a consumption item.

The person who lives in a million dollar house probably isn't going to give up their lifestyle to fund their retirement by selling the house and downgrading their residence. They need money outside of the house.

I partially agree. Many people downsize later in life (e.g. once kids leave the house), so they can generate some level of liquidity from their residence. Some areas provide tax incentives to encourage people to trade down.

While I personally exclude my primary residence from my net worth for conservatism, it still has an economic value. It can also be borrowed against via mortgage, equity line, or reverse mortgages later in life to provide liquidity.

One thing few think about but that we did when we were valuing high net worth individuals’ assets for lending purposes was to estimate and exclude the tax liability associated with those assets. For example, you will still need to pay income taxes on 401-K distributions, equity sales in taxable accounts, or if you sell your primary residence. The point being a dollar of net worth doesn’t necessarily translate to a dollar of liquidity upon sale once taxes are accounted for.

 

[SDHNTR]

This. One can get a job, set up his 401k and contribute, and just work and live his life with minimal attention and effort and eventually be set. It's not sexy, or sophisticated, no grind, no hustle, but it's an easy button for sure. I have spent the time saved having fun. A wiser me would have spent the time saved setting up a side hustle or two, but I wouldn't trade the memories for anything.

Warren Buffet recently said it best. Owning real estate is a business. There is nothing passive about it.

 

[Hooknbullet2]

Your personal residence is a liability. It costs you money.

An investment property is an asset that makes you money. Not only does it make you money, it does so tax deferred the same as a 401k. But different from a 401k as you get the cash from your real estate investments every month.

Buying a fun property or 2nd home that doesn’t generate income is just buying another liability.

I purchase investment properties continuously and they have out performed the stock market EVERY year.

I don‘t own a fun property or 2nd home.

 

[MattB]

Warren Buffet recently said it best. Owning real estate is a business. There is nothing passive about it.

If you hire quality property managers and give them a high enough $ threshold for repairs, it can be pretty passive. I probably spend less than 8 hours/year on our rentals including tax prep.

 

[sodaksooner]

Roll your old 401k's to a Traditional IRA, then backdoor.

Backdoor Roth IRA: Definition, Rules and How To Open One - NerdWallet

A backdoor Roth IRA lets you convert a traditional IRA into a Roth IRA, which could save on taxes. Backdoor Roths are an option if your income is too high for a Roth IRA.

www.nerdwallet.com

FWIW, we have consolidated all of our old 401k's to Traditional IRA's for ease of management, increased investment options, and reduced fees. Else, we'd probably have double the amount of open investment accounts right now between current 401k's, HSA's, and Roths.

Did this too. Much easier to manage. I didn't have much in old ones as I didn't save well early on and made some stupid decisions with debt, but you sure aren't limited on investments. I typically have any dividends, etc, roll into a money market account and every few years pick up some shares of something else. I don't max my 401K, but probably will this year for the first time, however, I am only technically a few years from being able to retire.

 

[jimh406]

It’s a bad idea to convert a 401K to real estate based on what I know. Depending on your age, you might consider a Roth which will grow tax free. Also, if you look, you’ll note the housing market is at a high point with interest rates also very high. You might also change ideas of where you might want to live due to fluctuations on your choices and what effect the political trends have on the areas you are interested in.

Do look at the 401K rules once you reach 55 because they change … or at least used to.

Do make sure sure you are sufficiently diversified in your 401K elections. No charge mutual funds with a few market segments. Do your own research, but based on what I’ve found you can start with 5 or so. They will fluctuate at different rates. In hind sight, I should have done more diversification when I was still working although doing the comparisons … I didn’t lose that much.

Of course, if you are a full time stock trader who is good at it, you might outperform mutual funds, but that’s only a tiny segment of the population. Also, most 401Ks won’t let you trade very much without fees.

Good luck.

 

[FluffFire]

Don't count out a Roth IRA account, if you don't already have one.