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My wife and I are in our later 30s and make about $100,000 per year from salary. We also net about $40,000 from rental properties that we have purchased over the past several years. Our essential monthly expenses are about $2500.

We've been diligently contributing to our retirement accounts (401(k)s and Roth IRAs) for about a decade. We have about $120,000 total in retirement savings currently.

My question is: Should we keep putting money into the retirement accounts? The $40,000 that we get from rental properties would already be enough for us to retire on if we wanted (not that we plan to retire anytime soon), so my thinking is that it's silly to keep putting money into retirement accounts where we can't touch it (without steep penalties) for another ~20 years. On the other hand, the idea of stopping retirement contributions feels wrong because we've been trained (by ourselves and by financial advisors) to feel irresponsible if we were to stop making retirement accounts a priority.

Another part of my reasoning is that instead of continuing to put money into retirement accounts, we can redirect the money into buying more rental properties. Doing so will expand the passive rental income we can rely on for retirement, with the bonus that neither the principal (i.e., the money we spend buying properties) nor the interest (the rental property income) will be locked up in a retirement account.

I realize that the 401(k)s give us tax benefits, but saving a few thousand dollars a year in taxes by funneling some income into 401(k)s doesn't seem that significant in our current situation.

Our employers do an 8 percent match on the 401(k)s as long as we put in 1 percent, so we'd keep doing that, but I don't see a reason to put in more or to keep doing the Roths.

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    Note that you can take out part or all of your contributions anytime penaltyfree from a Roth, after it existed for five years. Not that you would, as all gains will be tax-free, but you could. – Aganju Mar 24 at 1:31
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    @BobBaerker So simple and impossible at the same time. – Hart CO Mar 24 at 1:45
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    your employer gives your 8% for 1% of yours? that's very nice! – njzk2 Mar 24 at 3:51
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    I see a potential problem with relying almost exclusively on rental income in retirement. Suppose the housing market in your area tanks, as it did in Detroit? – jamesqf Mar 24 at 4:19
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    Read How to retire early without penalty? to understand why the 401(k) are IRA are not locked until age X. – JTP - Apologise to Monica Mar 24 at 16:22
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First, if you structured your rental properties correctly and had a Self-directed 401(k) you could each be contributing over $56,000 a year into it under various characterizations. As you mentioned, you are only making $40,000 and will never max it out, but you already indicated a desire to expand. It may be obvious to some, but there is still $40,000 that you can defer taxes on. Right now if you are maxing the 401(k) contribution out, you are deferring $19,000, each.

The 401(k) contribution limit is $19,000 from income, and the rest from employer contribution. The 8% match is the employer contribution and is often linked to the income max. So your employer is only giving a max of $1,520 (let me know if I get that right), meaning that $35280 can be put away ($56,000-$19,000-$1520 = $35280) by having a self directed 401(k) in the entity governing your real estate holdings and making employer contributions from that. As a reminder, all these limits are doubled for married couples so its $70,560 annually, which you two aren't even close to.

We have about $120,000 total in retirement savings currently.

Second, $120,000 is a privileged situation when compared to the rest of the planet, but are you in the business of comparing yourself to the rest of the planet or in the business of making money for comfortable retirement and generational wealth. If the latter, then $120,000 is nothing to brag about 🤷‍♂️The goal is millions.

Third, you presented a question of retirement OR reinvesting, when its AND reinvesting. Ideally you reach the actual max for retirement contributions and have other accounts you are funding. You want flexibility, liquidity, and keeping your productivity and efforts as your own and not giving an undue cut of that to other entities.

Fund the savings account. Get above the $ thresholds for banks to start treating you better. Many services become free. They'll even court your business with the latest consumer electronics, for free. So the conspicuous consumption you would actually save up for now no longer even cost you anything.

Fund the non-tax deferred brokerage account. Same situation as the banks. It gets better as you get richer.

You want to buy more houses? You can do that with the cash. You can also borrow against a 401(k), as well as your existing properties, at the lowest interest rates imaginable. So now the government is cutting your capital in half, and you get to deduct the interest.

Try to enjoy yourself.

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    They aren't going to be contributing $56k times two per year from a stream of rental income that's $40k per year. But the solo 401(k) isn't important, since with $120k cumulative over a decade, they clearly haven't been maxing out even the employee contribution limit. The access a solo 401(k) gives to a much wider range of investments is actually far more important to OP than the possibility of self-employment employer-side contributions. – Ben Voigt Mar 24 at 1:28
  • @BenVoigt right they can aim to get it up to $35,280 times two per year, as they already have desire to expand their real estate empire. – CQM Mar 24 at 1:54
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    The bank thing shocked me. When I passed whatever threshold it was they started waiving normally expensive bank fees and almost giving me free money. It's a different world when you have 6 figures sitting in an account. – Mark Henderson Mar 24 at 8:03
  • @MarkHenderson its great, the bank is still making more money from these deposits, but now the amount they make covers the static costs they incur, so they don't need to pass those down to you. – CQM Mar 24 at 17:33
  • Yeah. Never forget that bank accounts cost money - REGARDLESS how much is in them. Basically if you talk to a bank representative he gets paid the same. Which makes small "money running through" accounts extremely costly compared to accounts with large amounts in them. – TomTom Apr 17 at 7:14
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Whoa. The real estate is a business, not a retirement. Totally different.

The 401(k) is a trust account that is absolutely protected. It cannot be sued out from under you. You cannot lose it in bankruptcy; it cannot be garnished or attached (until you are near retirement and you reach a point where withdrawals are compulsory). The only way you can lose it is if you are willfully stupid in a moment of weakness, and collectors are pretty good at tricking you there.

Investmentwise, a university endowment is a sure thing over 30+ years. A 401(k) invested the same way over the same period is the same sure thing. The only risk is misinvesting, or being duped by brokers into wasting capital on sales loads and high expense ratios. (My institution has about 1.5% total expenses on their endowment; my donor fund has about 0.65% and my IRAs/401(k) have about 0.2% because I'm a sharper investor than a committee).

The problem with your 401(k) and IRAs is they are not nearly sufficient for a decent retirement. A sustainable withdrawal rate is 5-8% a year out of that; can you really retire on $6000-10,000/year?

Real estate is a wild ride. I imagine your investments are leveraged? That means the potential swings in asset value could greatly outrange the capital you sank. This works in your favor more often than not. But another real estate dip - and I do expect one - could put you deep in the hole. You can find yourself with upside-down properties and banks calling notes. Depending on your private capitalization and how events turn, you could actually go bankrupt. That can happen.

In that case, don't you dare think about cashing out any 401(k)s or IRAs (if IRAs are protected in your jurisdiction).

The other thing is that endowment-strategy investing is a surer thing that houses - which might explain why university endowments are in 60-70% in the stock market and typically 0-10% in real estate (and only that for diversification).

I would be moving as much profit from the real estate business to the 401(k) as I possibly could. That protects/checkpoints that money. Even if the real estate business takes you into bankruptcy, the 401(k) is fully shielded and that money can't be yanked back out, (unless the creditor can prove you drew so much out of the business that you undercapitalized it; leaving it unable to fund its foreseeable needs).]


Since you are not so concerned about the tax benefits; I would use Roth 401Ks, Roth IRAs and/or "back door Roth". This is even better; you pay taxes on the money today; then pay no taxes whatsoever on final withdrawal. That really matters when the investment may be worth 5-10 times more. What's more, you are able to pull the corpus (initial contribution amount) back out without any penalties or taxes at all - so that portion is able to function as an emergency fund.

Even more, Roths let you contribute more total money. Imagine a single deposit, your combined Fed and State bracket is 25% and your investment increases 10x over the years.

  • In an IRA you earn $6000, contribute $6000 of tax-unpaid money, withdraw $60,000 of tax-unpaid money, pay $15,000 in taxes on it, giving $45,000 of tax-paid money.
  • In a Roth you earn $8000 of tax-unpaid money, pay $2000 taxes, contribute $6000 tax-paid money, withdraw $60,000, keeping $60,000 of tax-paid money.

So instead of $6000 you get to contribute $8000 of tax-unpaid money (33% more). And in the end, instead of $45k tax-paid, you get $60k tax paid (33% more). Why not just contribute $8000 to the Trad IRA? You can't because of contribution limits. The Roth lets you snake in e.g. 33% more capital into the account. Roths are really quite amazing.

  • Ok, good stuff in your answer, but 5-8% is not a remotely sustainable withdrawal rate. Especially for the multi-decade retirement that is possible. Backtested and Monte Carlo studies show sustainable withdrawal rates are 4% or 3% depending on how likely you want it to be that your money doesn't run out. – T. M. Mar 24 at 16:28
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    @T.M. My basis for that is managing endowments under UPMIFA rules, where 4-7% is presumed prudent. To be more precise, 4% is considered quite conservative, and 7% is the upper limit beyond which you'll need to justify yourself. Endowments are to be sustained in perpetuity, whereas retirement accounts should exhaust the day you die... a retirement should burn harder, so I bumped it 1%. – Harper - Reinstate Monica Mar 24 at 16:38
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    A major difference with endowments is there is an ongoing attempt to grow the endowment through future contributions. That I believe is what allows them to go higher than a truly sustainable withdrawal. Anyway your point about 100k not being remotely enough for a reasonable retirement stands, and is even stronger with more conservative withdrawal rates. – T. M. Mar 24 at 16:53
  • "corpus" seems to be an Indian term? I'm not aware of it being used that way in the US. We usually just call them contributions, especially when talking about withdrawing said contributions from a Roth IRA. – stannius Mar 25 at 18:05
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    @stannius sorry, it's a term from endowments that means "the initial contributions". It's no longer used in endowments, because it's stupid for a food bank to stop serving food to the needy just because the market is in a downturn and their endowment is below the original donor value. – Harper - Reinstate Monica Mar 25 at 18:49
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Ultimately, it's just a matter of your retirement goals and preferences.

If your goal is to keep acquiring additional rental properties then contributing to 401k beyond employer match at this point doesn't make much sense. If you imagine getting out of the landlord business in retirement you might want to max out Roth IRA contributions each year now to help normalize tax burden on years with big capital gains when you sell property.

Personally, I view my traditional retirement accounts as a way to diversify. I just don't want to be tied too heavily to my local real estate market. If your rentals aren't spread across the nation, remember that local housing markets can take a nasty turn pretty quickly. However unlikely that is, it sticks in my mind as a reason to keep investing elsewhere. I also re-evaluate frequently, you don't have to do one or the other and stick with it. My local housing market is starting to cool after a very hot streak, so I intend to wait to buy any more rentals and therefore have been putting more in 401k and CD's recently.

Don't forget to budget the big-ticket items when evaluating your rental income. Roofs, HVAC systems, sewer mains, etc. They can throw off rental income pretty significantly year over year, so for retirement planning evaluate estimated average income including those infrequent but large rental expenses.

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You should try creating a financial plan that specifies when you want to retire, and what income and expenses you will have throughout retirement. It appears that your main current assets are the rental properties. The issue with relying on this income is that it's an undiversified investment subject to swings in the local property market as well as building-specific issues. Do you really want your retirement livelihood to be dependent on finding good tenants for the rest of your life? It would be good to also calculate your current equity in the properties and how much income that could generate if placed in diversified investments.

Consider the expense side carefully; you say $2500/month, but are you accounting for expenses that may grow faster than inflation and/or lose a current employer contribution, such as health care? You don't mention children, but if there is any chance you want them then that would change everything.

Also note that contributions (as opposed to earnings) can be withdrawn from Roth IRAs at any time without taxes or penalties, making them a savings vehicle with very little downside.

  • The problem with this is that over time - if you are in an affluent situation like he is - your plans change. When I Was young, I wanted a car and a decent appartment when I retire. Now I look at yachts and have a number of sports cars. Situations change. – TomTom Apr 17 at 7:16
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The fact that you pay taxes at the end on IRAs and 401(k)s is extremely powerful. On a 401(k) or deductible IRA you can think of it like you keep the money you would have paid in taxes, invest it, and keep (taxably) the returns. This assumes your tax bracket is the same in retirement as it is today. Over 30 or 50 years that is enormous.

It depends on your investment philosophy. If you believe real estate is the place to be, you have a hard time being there in IRAs and 401(k)s. Even if I were into real estate like you, I would want to diversify into at least an S&P 500 stock fund. It is clear that assuming you can wait to 59 1/2 for the money. IRAs and 401(k)s are the way to go for this part of your portfolio. If you want to own only real estate, you shouldn't put any more into your 401(k) than gets matched. The match is free money, so is hard to turn down.

It is important to recognize the difference in scale between the balance in the account and the income it can produce. A typical rule of thumb is that an account can throw off 4% of the principal forever, adjusted for inflation. That says 120k can give you about 5k in income. You can adjust the 4% to your taste, but the fact is that 120k sounds large but is not. It can certainly be a part of the income to support you.

Although taxes are important, it comes down to return on capital after taxes. If you can make more in real estate than in the stock market, you should do that. If you can fund all the good real estate opportunities you can find, putting the rest in a 401(k) is a good idea.

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You are currently making $140,000 per year ($100k wage income and $40k rental income). That puts you in the 22% tax bracket assuming you are filing married filing jointly. When you retire, you plan to live off of just the $40k rental income. Under current tax rules, with the standard deduction of $24k and the 10% tax bracket on the next 19k, your tax bracket withdrawing would be either 10% or 12%. So even if you withdraw early and pay the 10% penalty, you would at worst break even or save a little. But if you can put off withdrawals until age 59, which you should be able to do if you can live of just the rental income, then at that point you'll be withdrawing without the penalty, and you'll only pay regular income taxes on the withdrawal. That's like a 50% off sale on earning money!

  • there are a lot of deductions from rental income... Amortization of the property is a big one... – sofa general Apr 4 at 22:08
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    @sofageneral - you mean 'depreciation'? Amortization = paying down principal. Not a deduction. – JTP - Apologise to Monica Apr 5 at 19:33
  • You are correct. I did mean depreciation. That's a big tax shield on a rental property. You can depreciate any reasonable upgrades too. – sofa general Apr 5 at 19:34
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Netting $40,000 a year in rent.

That is nice!!

And contrary to what the gentleman above suggested, rental properties is not a business.

There are a number of fundamental flaws to the 401(k) concept.

  1. It is not a pension fund. You are not pooling your retirement risk with a large group of people of varying ages. As a result 401(k)s are at the mercy of the market. Depending on the economic conditions in the years prior to one's retirement (mainly in your early 40s to early 50s), one's mileage on the 401(k) will vary greatly.

  2. The main idea of 401(k) is super simple. Save a bunch of money regularly, and hope that it compounds at a good rate, and then have enough to have a good retirement. By the way, for an average person, making median income (median which is way lower than average... as there are a few super rich in there that pulls the average far above the median.), that NEVER happens. The median 401(k) at retirement is about $65,000

https://www.nerdwallet.com/article/investing/the-average-401k-balance-by-age

Even if you have the Fidelity average of $192,000, it is still far from enough.

https://www.cnbc.com/2018/09/12/how-much-money-americans-have-in-their-401k-accounts.html

  1. The investment guru. You have to be either a stockmarket guru, or an index fund buyer to have a hope making the market average or better.

  2. The draw down. The idea is you draw down 5% or so out of the account every year, and hope that the account replenishes itself sufficiently to last for the rest of your life. Well an interesting idea on paper, but what about market volatility? A 3 years long bear market, and your 200k 401(k) is done. Your 500k 401(k) is done. Even a million dollar 401(k) would still be severely strained.

You are far better off with real estate investments. Not only do rents rarely go down, they generally keep up well with inflation. This gives you a steady income for as long as you hold the property. And if that doesn't work out, you can reverse mortgage the thing, or outright sell it. Furthermore, real estate gives you the option to leverage. No one on this planet would lend you $400,000 to buy stock. But if you have 150,000, you can buy 550,000 place. And you can generate about 3000 a month (or more in rent). Obviously rental properties have a lot of hidden costs (taxes, maintenance and repairs) plus the risk of a bad tenant.

That said, you really should have multiple streams of revenue for a secure retirement.

  • Social security (if it is still there should at least pay for utilities and TV dinners)
  • 401(k) is a good component.... (for tax reasons)
  • Rental income is predictable and keeps up with inflation.

By the way.. according to the highly optimistic but standard 401(k) assumption of compounding at 8% a year... by the time you retire, your current 120k should be 650k... (whether you believe it or not.. is a matter of faith...)

If by stopping your 401(k) contribution, you can double your rental income to 80,000 a year (in 2019 dollar).... That would be 160,0000 in income per year, assuming a very modest 3% rental inflation per year, by the time you retire. Do you know how big a 401(k) you would need to get $160,000 in draw down per year? 3.2 million.... You have already diligently put money into 401(k) for 15 + years.. and you have 120,000. Do you think the next 20 years will get you to 1 million? or 3.2 million?

You do the projection.

  • Clearly, I am being down voted by the 401k industrial complex. I worked for a VERY large fortune 100 company. There was a class action law suit by the employees against the company on the selection of the retirement fund management company. Long story short, the fund management company gave my employer a "referral fee" per employee per year (essentially a kickback) for choosing them. As a result, all our funds always performed worse than the market in index for whatever it proclaimed to be. And yes the employees won. We got a few dollars in compensation... – sofa general Apr 5 at 13:56
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    I appreciate the delightful anecdote. My large employer pushed fees down and for the last 15 years, we've (my wife and I) paid .02% in annual expense. The low fee and generous match was a large part in my early retirement at 50. The first sentence of your comment sounds like conspiracy theorists. What is likely attracting the DVs is your tossing away the fact the real estate actually takes some effort. One can pay to sub it out, but it's not the passive investment that a 401(k) is. – JTP - Apologise to Monica Apr 5 at 19:32
  • @JoeTaxpayer: the 401k experiment has been going on for 40 years now. It is long enough to show that the percentage of people reaching the promise land, is a pitiful percentage of the total. And there is more than enough stats to back that point up. The 401k industrial complex solution is, double down, you just need to put away more. And that's just illogical. – sofa general Apr 5 at 19:37
  • In the kingdom of the blind, the one-eyed man is king. I admit we are fortunate. And that the industry has further to go. Much above .5% in expenses, I'll be the first to say deposit to the match and save elsewhere. – JTP - Apologise to Monica Apr 5 at 19:46
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    Understood. You give people far more credit for good decision making. As if having their funds readily available, anytime, were a good thing, and not a huge risk. You clearly have a different experience with this product and view it 180 degrees differently than I do. That's ok. I hope you hang around. Other views than the cluster of the crowd is always welcome. – JTP - Apologise to Monica Apr 5 at 19:54

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