“I saved up $1 million, but I only got $40,000 a year.”
That’s it figurative T-shirts worn by the average retiree.
actually, It’s worse than that. average retiree old man Between the ages of 65 and 74, you won’t have $1 million saved as a nest egg. they have $609,230and that’s the mean, not the median. You can see that the median value is quite low.
Based on traditional 4% rulethe average retiree earns just $24,369 a year from their nest egg. Don’t blow the party’s kazoo all at once.
All of this means that in the traditional retirement model, just It doesn’t work well. To be honest, I’m bad at math.
I can do better, and so can you.
The root of the paper asset problem: volatility
Stocks perform well in the long run cute Also as an asset class. The S&P 500 averages approximately Annual return rate 10% Over the past century.
But “average” doesn’t mean “stable,” “reliable,” or “predictable.” In years (and decades) it runs badly and loses huge amounts of money.
When Bill Bengen first developed the 4% rule return In the 1990s, he did that by looking back at stock and bond returns. every 30 years in modern history. He focused on the worst 30-year period at the time, and how much money retirees could withdraw in their first year of retirement without depleting their nest egg during that worst 30-year period. I calculated that. (There were other implications, but I don’t want to read papers about economic theory.)
Conclusion: He determined that 4% was a safe exit rate based on the worst-case scenario. Retirees who withdraw 4% of their nest egg in the first year of retirement and then adjust upward by inflation each year thereafter have little risk of running out of money over a 30-year retirement (assuming historical returns continue). ).
The result for most retirees: Saving too much.
Let’s think about it: Retirees earn an average of 10% every year Invest in their stocks but withdraw only 4%.
Retirees plan for the absolute worst-case scenario to avoid the risk of running out of money. this That means most of them die with much more money than they have. actually need.
I don’t want to rush to save money just to save money. above 1 million dollars just You’ll only make $40,000 with it. I don’t think you either.
How real estate can help
SparkRental’s Real Estate Investment Club holds a variety of meetings and reviews. passive investing monthly. We aim to earn 10% to 12% interest on real estate bond investments and 15% or more annual returns on stock investments.
Interest is collected in real time every month. Returns from real estate stock investments are a combination of profits (dividends) and final sales profits.
“Yes, but what about the risks of that investment?” Don’t high returns come with high risks? ”
Not necessarily. in fact, In financial terminology, there is a term called “asymmetric return” which describes a high-yield, low-risk investment. If you’re an experienced real estate investor, you know what I’m talking about.
ask someone who has it turned over 300 homes talk about the risk of reversing profits. actually, I did that. The operator says, “The win rate for flips is 93% to 95%. We can’t predict every problem, so sometimes we miss it. But if you do 70-90 flips a year like we do,the average of profits is inevitable”
Our co-investment club invested in the operator for a bond that would pay 10% interest. The note is backed by a personal guarantee from a multimillionaire, a corporate guarantee from his company that owns real estate worth more than $15 million, and a first lien with a LTV of less than 50%.
Does that seem like a high-risk investment?
Retirees can live on 10% of that income (as part of a diversified portfolio)of course). And that changes the calculation of retirement benefits. Instead of saving $1 million to earn $40,000, you only need to save $400,000.
Avoiding a series of return risks
of maximum Stock risks arise from market crashes immediately after retirement. if crash If you retire too early, you may end up selling too many stocks when prices are low, and you won’t have enough money left over to restore your portfolio once stocks start rising again.
Financial geeks call this “series of return risks:” The timing of the crash is just as important as the long-term average return.
This can be avoided by simply Don’t sell stocks even if the stock market crashes right after you retire. This means you need to have enough money to get by from other sources for the first few years of retirement. event of bear market.
My approach: Real estate for now, stocks for later life and inheritance
You see: stocks make money. for It’s a good long-term investment, but you can’t predict what will happen in a given year. I can almost certainly say that my stock investments will do well 30 years from now, but I don’t know what they will do in the next three years.
It will be comfortable sell stocks inside me later life cover my living expenses. And when I kick the bucket, they will bring the inheritance directly to my daughter. But I also want to build predictable passive income and wealth in the short and medium term.
Our co-investment club invests in mixture of private partnershippaper money, debt funds, equity funds, real estate syndicates, etc. some people pay strong Get instant income, including outlined notes. We just invested in a land flipping fund that gives us a 16% annual return.
largely of The syndicate pays solid distributions quarterly. Return in cash Between 4% and 8%. Some sell to cash out profits over the next few years. Other companies refinance to repay initial capital while continuing to pay us distributions. Some growth-oriented investments pay no distributions for the first year or two.
of end Result: I’m not worried about a “safe withdrawal rate” or the 4% rule. Now we’re earning even more than that in real time.
And by “now” it also includes the not-so-strong markets we live in at this moment. While the past two years have been tough for many real estate investors, we are still doing well. Imagine how you could do that in a decent market.
Tip: Avoid downside risk
When you look By working together as a club to invest, we focus on downside risks.
There is no shortage of real estate investments that promise returns of 15% or more. However, some of them Some carry high risk, while others carry low or moderate risk.
If you want to build a viable portfolio, Additional downside risk protection. From there, you’ll have a retirement plan that is the envy of those who follow the 4% rule.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
