Make no mistake about it, the 401k investment vehicle is an excellent choice as a means to save for retirement. After all, the more money we have after quitting our jobs, the more lifestyle flexibility we'll enjoy.
But, the main problem with a 401k lies with its restrictions. Though there are backdoors and other loopholes to access your 401k money before retirement, the money isn't as easily available.
And, it grows more slowly over time.
Real estate, on the other hand, offers much more flexibility for the motivated investor, and in strong markets, stands to build wealth much more quickly than a 401k.
Why Is Real Estate Better Than A 401k?
The potential of real estate beats that of a 401k for several reasons:
1) Real estate puts you in control. Consider this: Given less than 15% of Americans have or will receive pensions, they are no longer a part of most American's retirement plan.
And, we had no control over this change in the landscape.
401ks give us a little more control in terms of how much we contribute (which historically is NOT much), but we also have very little control over the mountains of bureaucracy and regulations that govern those investments.
I addition, the average 401(k) balance is too low. According to Vanguard, here are the discouraging numbers that reveal just how little money we tend to save in our 401ks.
Real estate, on the other hand, puts us into a position of control. Though we cannot control the laws and regulations that govern real estate, we can actively pick and chose our future much more actively.
How does real estate put us into a position of control?
- We can pick and choose strong markets (more on this below)
- We can add value through specific improvements and renovations
- We can rent properties and build long-term passive income
- We can sell almost instantly when the market is right
401ks don't offer this level of control or flexibility.
2) Strong real estate markets exist in the United States. The mainstream media and the real estate industry tend to focus on strong demand, job growth, and weak inventory as drivers for higher property prices.
Where are the hottest areas to start investing in property?
According to Trulia, the top 5 real estate markets in 2020+ are:
- Colorado Springs, CO
- Grand Rapids, MI
- Jacksonville, FL
- Bakersfield, CA
- Austin, TX
What makes these markets so hot? Four key areas account for these cities being top choices for property investors:
- Employment economy over the past several years (aka: Job growth)
- The relative share of the population that is young (early 30s)
- Housing supply that does not exceed demand, including the relationship between families moving into, rather than out of, the area
- The affordability cost of homes for first-time buyers
In strong real estate markets, the potential for real estate to appreciate in value offers investors an incredible opportunity to explode their wealth. Here are more of the top cities and states to buy real estate.
For example, here's a graph of San Francisco's single-family house price over the years. A 401k can't keep up with this kind of growth.
Though risks do exist for real estate, motivated real estate investors can strike while the iron is hot in 2020 by getting in early in rising housing markets throughout the United States.
3) Fees eat away at 401ks. Do you know how much in mutual fund fees you are paying a year?
I always figured that from a percentage point of view, my mutual fund fees were small. But, when you take a small percentage multiplied by a big enough number, the absolute dollar amount starts adding up.
As you can see in the picture above, I’m paying $1,748.34 a year in fees across four mutual funds. In 20 years, I will have paid roughly $84,000 in fees based on only this amount.
The second portion of the above chart shines a light on the specific fund that costs the most. In my case, it is the Fidelity Blue Chip Growth Fund with a 0.74% expense ratio.
Real estate stands as a more lucrative option than 401ks for many investors who take an active role in their future wealth. And in stronger markets, we build wealth more quickly and minimize government
Invest On The Best Real Estate Crowdfunding Platform
With real estate crowdfunding, you don’t need to risk $100,000 or more to invest in commercial real estate. Instead, you can invest as little as $1,000 and be much better diversified.
The best real estate crowdfunding platform today is Fundrise. I've worked with them extensively and believe their eREIT funds are the best out there. It's free to sign up and explore.
Take Control Of Your 401k Or Real Estate Investments To Build Wealth
Regardless of the type of investments you choose, take control and be active and disciplined.
It is unsurprising that roughly 66% of Americans are overweight and the median retirement savings for all families is less than $10,000. Our lack of discipline is literally ruining our lives.
How can we take control of our investment future? Your 401k is the low-hanging fruit that answers this question the best, and it's also the investment platform that's the most easily available.
- Adopt a personal forced retirement savings system where your company automatically deducts money from your paycheck for retirement, much like how payroll taxes are automatically deducted.
- Your goal is to minimize your taxable income, allow your investments to compound tax-deferred for as long as possible, and then build a large enough after-tax portfolio to give yourself options to change jobs, take a break, be a stay at home parent, or retire before 59.5.
- After you have contributed a maximum to your 401k every year, try and contribute at least 20% of your after-tax income after 401k contribution to your savings or retirement portfolio accounts.
- Challenge yourself to raise your after-tax and 401k contribution savings percent to 50%. It won’t be easy, but if you practice raising your savings rate by 1% a month until it hurts, you’ll find it easier than you think.
Recommendation To Build Wealth
A One-Stop Shop for Money Management: Sign up for Empower the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After bringing in all of your financial accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing.
I’ve been using Personal Capital now Empower since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has a total of $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.